Heathrow airport’s status as the world’s number one hub and a crucial driver of the UK economy is under scrutiny. After a summer of discontent when Ken Livingstone, London’s mayor, said the airport shamed London, many are questioning not only its management but its role in bringing business to the UK.

Ashley Steel, global chair of transport at advisory firm KPMG, says: “People should never underestimate the significant importance of all London airports – Heathrow in particular – as an economic driver not just for London but the whole UK. Business is often best done face-to-face. However, with air travel already tiring on the body, people will avoid making their trip or go elsewhere rather than face the current poor conditions at Heathrow.

“Terminal Five will bring some relief for British Airways’ passengers when it opens next year, but other passengers will continue to suffer for some while longer until the planned terminal upgrades are complete.”

She says the issues are as much to do with airspace and time waiting for a landing slot, coupled with often congested land-based transport into London and beyond adding to the frustration of passengers.

“There is no quick fix. Improvements at Heathrow will require a co-ordinated effort by airport owners, planners, government and the transport and building industries.”

No one is more aware of this than Mark Bullock, chief executive of the British Airports Authority Heathrow.

He says the UK cannot hope to maintain London’s status as a premier league business centre, supporting hundreds of thousands of jobs, without the world-class air links and market access that a global economy needs.

“Businesses will simply relocate out of the UK to cities that offer them better connectivity. In fact we are already seeing business and city leaders publicly complaining about the impact of the capacity constraints at Heathrow,” he says.

He adds: “As the UK’s only hub airport, Heathrow provides the vital arteries that link the UK to both existing markets and the new global economies such as India and China. About 85 per cent of the UK’s long-haul flights depart from Heathrow; Heathrow operates the UK’s only direct air links to emerging world cities such as Shanghai, Beijing, Mumbai, Delhi and Sao Paulo and more than half of all the UK’s air freight passes through Heathrow.”

Terminal Five, costing £4.3bn and scheduled to open in March next year, should go a long way to solving many of the airport’s problems.

T5 will comprise a main terminal building (T5A) and two smaller satellite buildings (T5B and T5C), although T5C is not set to open until 2010. All three buildings will be linked by an underground transit system.

Jonathan Counsell, British Airways’ head of development at T5, says the new terminal, in which it is investing £330m, will be far better able to match supply and demand.

“The new infrastructure is designed to take the volume we are putting through it,” he says.

He promises a reliable operation in which technology will play an important role. Passengers will see a significant difference in the departures area where 80 per cent will check in online or use self-service kiosks.

There will be 95 self-service kiosks, 96 bag drops and 54 traditional check-in desks. He says BA has worked closely with the BAA, which runs Heathrow and six other UK airports, on the number of security channels and has insisted on – and got – more. And BAA is committed to manning them, says Mr Counsell.

Christine Ourmières, Air France KLM general manager UK and Ireland, is confident that, following the opening of T5, “our subsequent move to T4 will have a considerable and positive impact on our customers”.

She says: “With our SkyTeam alliance partners, we plan to invest heavily in our new home in T4, so we are confident that we will fulfil our customers’ expectations and deliver the high level of service that is expected at an international airport.”

But headlines about poor punctuality, lost bags, an alleged conspiracy between two of the airport’s big airlines to fix prices, the loss of senior airport executives and the handling of environmental protesters camping out near the airport have dented public confidence.

Sometimes, it appears, only airport shoppers have a good word to say for it. Even then there is criticism. For years Heathrow has been accused of concentrating on retail activities – accounting for a third of turnover – at the expense of passenger facilities.

Some observers and analysts feel that for Heathrow to move forward, more competition is necessary.

The Competition Commission is considering a proposal to break up BAA’s ownership of Heathrow, Gatwick and Stansted, the three airports that dominate London.

Research suggests that for some types of journey, such as short-haul and leisure, passengers already switch among the three. Competing owners, the thinking is, would therefore have incentives to improve conditions to attract airlines and passengers.

But other aspects of Heathrow’s role, notably for long-haul flights and as a European hub, are less easily opened to competition. There is therefore a risk that more competition could encourage Heathrow to focus its efforts where it is most likely to lose business, at the expense of passengers who could less easily go elsewhere.

Beyond the competition issue, a far-reaching overhaul of the regulatory regime is needed, say critics.

This could look at whether different companies could operate and manage the airport terminals. It could also consider whether slots should be made more expensive to ease capacity by pricing out airlines for which it was no longer worthwhile. But these are not simple problems to solve and far-reaching negotiation and airline co-operation on a huge scale would be required.

In the meantime, Ferrovial, the Spanish construction group that bought BAA for £10.3bn last year, is expecting to spend £9.5bn on airports’ infrastructure over the next decade. It will make Heathrow a transformed airport by 2012.

That includes the construction of Terminal 5 and the planned Heathrow East development, initially budgeted at £1.5bn and set to replace ageing Terminal 1 and Terminal 2. Terminals 3 and 4 will also be sharply upgraded.

BAA has received outline planning permission for Heathrow East from the London Borough of Hillingdon and the mayor of London’s office. The first phase is scheduled to open in June 2012. T2 will be demolished at the end of next year and, when Heathrow East is completed, T1 will be mothballed.

Heathrow now handles about 67m passengers a year – a huge increase on its design capacity of 40m to 45m.

Demand is forecast to grow to 85m a year by 2018 but this excludes any potential impact of a Europe-US Open Skies agreement.

The first phase of T5 will add terminal capacity for an additional 30m, rising to about 35m when the second satellite opens in 2010.

Heathrow East will also be a 30m per year capacity passenger terminal. That is slightly less than the existing combined capacity of T1 and T2, which it replaces. The result is that Heathrow will have enough terminal capacity for about 90m passengers a year by 2012.

However, this slow pace of expansion may put it at a competitive disadvantage against other hubs.Dubai is growing all the time and the threat of increased competition looms large.

The $33bn airport city being built at Jebel Ali will eventually have six runways, three terminals and capacity for 120m passengers a year.

This dwarfs Heathrow’s planned 90m with T5. Jebel Ali would also allow Dubai to obtain more transit traffic from India and Africa. Passengers from these markets have usually transferred through Heathrow, Amsterdam, Frankfurt and Paris.

Investors would do well to watch airport developments in the Middle East carefully.

With the extra capacity planned in Dubai and other Gulf airports, Heathrow’s top-dog status as the world’s largest international transfer hub could face a serious challenge in years to come. Mark Bullock puts it more strongly: “Frankfurt Airport has three runways, Paris Charles de Gaulle has four and Amsterdam Schipol has five – all operating at less than 75 per cent capacity.”

Having no spare slots on Heathrow’s runways limits the routes it can offer, leads to more frequent delays and constrains the airport’s ability to cope with unforeseen disruption.

“This makes Heathrow very vulnerable to foreign competition. Without further growth, Heathrow will not be able to meet the demands of travellers and airlines will switch routes to Heathrow’s European competitors,” he says. “This is already happening – since 1990, the number of destinations served at Heathrow has fallen from 227 to 180. Over the same period, Frankfurt, Amsterdam and Paris have all increased their destinations significantly.“Without a third runway, this decline will continue and begin to have a serious effect on the economy.”

Big Numbers

Heathrow is the UK’s busiest airport with 67.7m passengers a year.

It is the world’s second busiest cargo port handling 1.3m tonnes annually.

Ninety airlines use it with total aircraft movements running at 469,560 a year to 186 destinations.

Number of aircraft stands: 264 (not including T5).

Employs: 68,000 (more than 4,500 are BAA employees).

Top 10 international destinations: New York, Dublin, Paris, Amsterdam, Frankfurt, Los Angeles, Hong Kong, Dubai, Madrid, Toronto.

Source: BAA

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