London Heathrow Airport - Assignment Example

London Heathrow Airport 1. Introduction Introduction London Heathrow Airport is located in West London, England, United Kingdom; and is known to be the busiest airport in the United Kingdom as well as the larger Europe, based on its passenger traffic that surpasses that of all the other airports in the region. The history of London Heathrow Airport dates from 1929 when Heathrow set out as a small airfield before the commencement of its development as a larger airfield in 1944 (Anderson 2014). Today, this airport has a major economic impact on the United Kingdom; hence its contribution and role in the UK economy cannot be underestimated. Structure of the report This report is mainly a critical appraisal of the operating and commercial performance of London Heathrow Airport. The main analysis of the report will inform on the current strengths, weaknesses and future prospects of the London Heathrow Airport while focusing on three major issues of interest. These include the ownership and organization of London Heathrow Airport, the traffic characteristics of the airport and the financial performance of the airport. In this regard therefore, this report comprises three major sections: Introduction, Main Analysis and Conclusion. 2. Main Analysis Ownership and organization Most of the airports around the world today are privately owned. Graham (2014, p. 8) notes that the airport sector “. . . has moved from an industry characterised by public sector ownership into an era of airport management, which is beginning to be dominated by private sector and global players.” The London Heathrow Airport is privately owned by Heathrow Airport Holdings Limited, which was previously known as BAA. The Heathrow Airport Holdings Limited has several shareholders including FGP Topco Limited, Qatar Holdings LLC, Caisse de depot et placement du Quebec, the Government of Singapore Investment Corporation, Alinda Capital Partners and China Investment Corporation; and is privately managed on behalf of these shareholders. Heathrow Airport Holdings Limited is thus an airport operator group (Anderson 2014). London Heathrow Airport does not have full autonomy from the government. There are several government rules, regulations and policies that affect this airport and which the airport must adhere to. For instance, the UK government in March 2013 developed the Aviation Policy Framework that mainly strategizes on how the UK aviation industry can grow and flourish in future for the good of the UK economy (Regeneris Consulting 2013). This policy also addresses the major issues of carbon emission and noise. Additionally, the 2003 UK government’s white paper: The Future of Aviation, sets out a development strategy of the aviation sector in the UK for the next 30 years. This comprises a policy framework that guides planning decisions in the aviation industry, including aspects of climate change, noise, master plans, and local air quality in airports, among others (UK Airport Consultative Committees 2012). Therefore, although London Heathrow Airport is privately owned, there are several government rules, regulations and processes that the airport must uphold. Apart from the government rules and regulations that apply to London Heathrow Airport, the UK government also plays a role in the development of Heathrow Airport. This is mainly through the government’s support and involvement in different projects that boost the development of the airport. For instance, in the 2003 White Paper: The Future of Air Transport, the government acknowledged the important benefits that London Heathrow holds to the UK economy, and in this regard, acknowledged the importance of adding capacity at Heathrow Airport through supporting the addition of a third runway in the airport and strategizing on how the airport could grow in the next 20 years (UK Airport Consultative Committees 2012). The new coalition government in the UK later dismissed the addition of a third runway, but promised to develop a high-speed rail network (Leigh Fisher Associates et al 2000). The London Heathrow Airport is subject to formal economic regulation by the UK Civil Aviation Authority (CAA) (Heathrow 2013). The role of the UK CAA in economic regulation of price-controlled airports such as the London Heathrow Airport is to promote the interests of airport users, ensure that airports in the UK are profitable and highly reliable and encourage airports to make adequate and timely investment so that they can efficiently handle the demand in the market (UK Civil Aviation Authority 2008). Mainly, the CAA performs this role through setting price controls among other conditions after every five years on the operations of the airport. The London Heathrow Airport has been designated by the UK government for such economic regulation by the CAA (Butcher 2014). Such economic regulation of Heathrow Airport puts a limit on the amount of revenue that the airport can collect from different charges, and it also provides the airport with several incentives to uphold efficient operations, invest in quality service delivery and excellent customer care (Civil Aviation Authority 2013). The London Heathrow Airport has experienced different changes both in its management and infrastructure. In the recent past, the airport has undergone massive renewal of its physical infrastructure. The old buildings in the airport have been refurbished; the different terminals in the airport have also been refurbished, even as terminal 2 is undergoing expansion. Besides the physical regeneration of the airport’s terminals and buildings, the management of the airport has also realigned airlines and performed a retail makeover in the airport for better shopping experience of the customers (Business Traveller n.d). There are plans to expand the airport in future, even though past plans for expansion were thwarted by civil and political opposition (British Chambers of Commerce 2009). This is intended to support a larger number of passengers and airlines in the airport. Additionally, the airport has recently adopted a balanced approach to noise pollution as a way of reducing the impact it has on the environment (Euractiv 2014). The implications that all these will have on the airport operator is that there will be increased efficiency, attraction of new customers and overall increase in the profitability of the airport. Traffic Characteristics In the year 2012, London Heathrow Airport had a total of 84 airlines with each serving more than 10,000 passengers, making it the busiest airport in London based on the large number of passengers. Overall, in this year, Heathrow Airport accommodated 52% of passengers in London while Gatwick and Stansted Airports accommodated 25% and 13% respectively as shown in Figure 1 below. Today however, Heathrow Airport has 80 airlines and serves 185 destinations in 84 countries. The most popular destinations include New York, Dubai, Dublin, Hong Kong and Frankfurt (Heathrow Airport 2015). Figure 1: Share of passengers among airports in London Source: CAA airport statistics In addition, London Heathrow Airport remains the biggest airport in London based on the air traffic movement (ATMs), as shown in Figure 2 below. In 2012, Heathrow Airport accounted for 48% of the ATMs of London, while Gatwick and Stansted accounted for 24% and 13% respectively (Civil Aviation Authority 2011). Figure 2: Share of ATMs among airports in London, 2001 – 2012 Source: CAA airport statistics In the year 2012 alone, London Heathrow Airport served a total of 70 million passengers. Each of the different airlines at this airport accounted for different percentages of passenger traffic of at this airport. British Airways (BA) and British Midland International (BMI) accounted for 45% of passenger traffic at Heathrow. Other airlines present at Heathrow Airport include Virgin Atlantic Airways (VAA), Iberia, Lufthansa, Aer Lingus, Kenya Airways, El Al, Cathay Pacific, American Airlines, Emirates, and Singapore Airlines among many other non-UK airlines that serve their home markets (Civil Aviation Authority 2011). Figure 3 below shows the passenger numbers by passenger airline alliance at Heathrow in the year 2012. In 2014 however, the number of passengers served by Heathrow increased to 73.4 million from 70 million in 2012, making 2014 the busiest year ever recorded in terms of passenger numbers (Heathrow Airport 2015). Figure 3: Passenger numbers by passenger airline at Heathrow, 2012 Source: CAA airport statistics In the past years, London Heathrow Airport has been successful in sustaining its passenger traffic as compared to other airlines in London. This is despite the economic challenges that the country experienced as a result of the economic recession. For instance, between the years 2007 and 2012, the passenger traffic of London Heathrow Airport experienced a 3% increase, as opposed to that of other airports in London, which experienced a 10% fall within the same period (Civil Aviation Authority 2011). Although Heathrow is the world’s busiest airport, it continues to face competition from other non-UK airports. Its main competitors include Amsterdam Schiphol, Frankfurt Main and Paris Charles Gaulle (BBC 2007). Although these airports do not match up to the passenger numbers of Heathrow, they have better developed runways. For instance, while Heathrow has only two runways, Amsterdam Schiphol has six runways, Frankfurt has four runways and Paris Charles Gaulle too has four runways (BBC 2007). The two runways of Heathrow Airport put it at a disadvantage as compared to its competitors as this constrains the number of airlines that can land and take off. According to Graham (2014, p. 1), “Each airport operator . . . all have to assume overall control and responsibility at the airport.” Therefore, the operator at Heathrow must take control and lobby for and facilitate the expansion of Heathrow Airport, as this is the only way that the airport can continue to compete favourably with its competitors in the European continent. The increase in passenger traffic in Heathrow Airport can be attributed to the business strategies that the airport employs. Heathrow Airport prioritizes customer service and considers itself a customer-oriented business that upholds a high level of dedication to the needs of its customers. The airport also struggles to ensure that its performance conforms to the standards set in the Service Quality Rebate Scheme (Heathrow Airport 2015). The CAA “. . . decided that . . . there should be rebates for users if certain service quality standards were not achieved” (Graham 2014, p. 117). The airport also ensures to publicly report monthly each year on its performance on the scheme. Additionally, there is public reporting of the airport’s financial figures on a quarterly basis. Furthermore, Heathrow reports annually on its sustainability performance and employ external and independent consultants to verify the data and performance of the airport and compare with the set targets (Heathrow Airport 2015). Therefore, this high level of transparency by the airport, coupled with quality services is highly attractive to new customers and strengthens customer loyalty. For this reason, Heathrow has successfully managed to beat competition in the market and remain the most competitive and profitable airport in London. Financial Performance The financial information of most airports is easily available today because of the shift from public ownership to privatization of most airports. Graham (2014, p.11) notes that “. . . because of government controls, it was sometimes very difficult to obtain financial accounts that gave a true indication of an airport’s financial and economic performance.” Nonetheless, the profitability of Heathrow Airport over the past five years has been increasing. Different factors such as operating costs, commercial revenue, aeronautical revenue and other income contribute to the overall profitability of an airport. Although there are fluctuations in these costs and income in Heathrow Airport, the profitability of the airport has continued to grow over the years. In the year 2014, the airport had an operating profit of 839 million Sterling Pounds; in 2013, it had 859 million Sterling Pounds; in 2012 the airport had an operating profit of 571.1 million Sterling Pounds; in 2011, it had 572.1 million Sterling Pounds while in 2010, the airport had an operating profit of 587.7 million Sterling Pounds (Heathrow Airport 2015). The airport’s aeronautical revenue in 2014, 2013, 2012, 2011 and 2010 was 1,706 million Sterling Pounds, 1,523 million Sterling Pounds, 1,280 million Sterling Pounds, 1,149 million Sterling Pounds and 991.3 million Sterling Pounds respectively (Heathrow Airport 2015). This indicates a growth in the airport’s aeronautical revenue over the past five years. On the other hand, the commercial revenue of Heathrow in 2014, 2013, 2012, 2011 and 2010 was 503 million Sterling Pounds, 491 million Sterling Pounds, 541.7 million Sterling Pounds, 518.6 million Sterling Pounds and 476.6 million Sterling Pounds (Heathrow Airport 2015). This indicates a fluctuation in the commercial revenue of the airport. Nonetheless, there are different valid factors that have contributed to these statistics over the 5-year period. The airport obtains its commercial revenue from retail concessions, car parking and property. The aeronautical revenue is on the other hand generated mainly from airport charges including aircraft parking fees, charges on departing passengers and charges on landing (Civil Aviation Authority 2011). With regard to costs Heathrow has experienced significant changes in its operating costs over the past few years. For instance, the airport’s operating costs in 2013 stood at 1,053 million Sterling Pounds and this shows a reduction by 1.4% from the cost of the previous year, 2012, which stood at 1,068 million Sterling Pounds (Heathrow Airport 2015). This reduction in cost within this period is attributed to lower reported general expenses. In 2014, the operating cost was 1,125 million Sterling Pounds; in 2013, it was 1,053 million Sterling Pounds; in 2012, it was 1,068 million Sterling Pounds; in 2011, it was 1,147.9 million Sterling Pounds and 1,107.4 million Sterling Pounds in 2010 (Heathrow Airport 2015). There are also fluctuations in the operating costs of this airport within this five-year period. This fluctuation can be attributed to the differences in employment costs, maintenance expenditure, utility costs, rents and rates and general expenses, among other costs of the company in each year within this period. A comparison can be made between the financial performance of Heathrow Airport and one of its major competitors in the European continent namely, Paris Charles Gaulle Airport. Between these two airports, Heathrow Airport registers the highest revenue, as it is larger and busier than Paris Charles Gaulle Airport. In 2013 and 2012, Paris Charles Gaulle Airport registered an operating profit of 657 and 652 million Euros respectively (Aeroports de Paris 2014). Heathrow on the other hand had 859 million Sterling Pounds in 2012 and 571.1 in 2012 (Heathrow Airport 2015). In addition, the operating cost of Paris Charles Gaulle increased in 2013 to 1,757 million Euros, registering a 3.4% increase from 2012 (Aeroports de Paris 2014). On the other hand, the operating costs of Heathrow decreased within this period by 1.4% from 1,068 million Sterling Pounds in 2012 to 1,053 million Sterling Pounds in 2013 (Heathrow Airport 2015). In this regard, the operating cost of Paris Charles Gaulle Airport was higher within this period as compared to that of Heathrow. However, the Paris Charles Gaulle Airport registered a slightly higher operating profit in 2012 as compared to Heathrow. This therefore, is an indication that the level of competition between these two airports is considerably high. Commitment to Environmental Protection The European Union (EU) in an attempt to promote environmental protection has set air quality guidelines that at least all of its member states must adhere to. Many parts of Europe experience challenges in keeping up with the EU’s air quality standards, especially when it comes to Nitrogen dioxide, which is considered to be a major pollutant. In the UK, the highest level of Nitrogen dioxide is in central London, while the area around Heathrow registers a lower concentration, even though this does not measure up to the EU air quality values (Heathrow Air Quality Strategy n.d). Apart from enhancing the economic and social aspects in the country, Heathrow airport remains highly committed to safeguarding the environment through different strategies that it adopts. Heathrow adopts an Air Quality Strategy that mainly aims at ensuring that the level of emissions from the airport’s operations is minimal. This airport has in the past taken important steps with regard to this strategy. For instance the management has ensured that old airlines replace their old aircraft with new ones and the adoption of low emitting models. Additionally, in order to encourage airlines to use cleaner aircraft, Heathrow airport has re-balanced its landing charges; and in order to discourage the use of auxiliary power units (APUs), which increase emission, the airport provides to aircrafts pre-conditioned air units for replacement with their APUs (Heathrow Air Quality Strategy n.d). Apart from air quality, Heathrow is also concerned with noise pollution, thus adopts a number of strategies to lessen this. For instance, four times in a year, the airport names and shames airlines that use noisy aircraft. The airport also restricts the number of night flights, as this may be disruptive to the surrounding community (EurActiv 2014). Overall, today, the management at Heathrow is credited with being receptive to the concerns of the surrounding community, especially on matters to do with the environment. The high level of commitment to environmental protection is a good course for Heathrow even as companies are encouraged to practice this in the current era of global warming and other environmental concerns. 3. Conclusion This analysis has mainly reflected on the great importance of Heathrow Airport to the overall UK economy. In the UK, Heathrow remains the only international “hub” airport, meaning that is large and has several routes. This is proven by the big number of passengers that this airport serves and its ranking as the busiest airport in London, the greater Europe and the world. This airport equally generates a high amount of revenue, and this benefits the UK’s economy. As large as it is, Heathrow is a major source of employment in the UK, as many people are employed to work in the airport in different positions. A major strength of London Heathrow Airport that has enabled it to grow and beat competition in the European market is its customer-centred approach. This airport highly values its customers and endeavours to provide the best and quality services to customers. This way, more new customers are attracted to the airport and the old customers are retained. This is why the passenger number of Heathrow will increase when that of other neighbouring airports is on a decrease. The fact that this is an international hub airport also puts Heathrow at a greater advantage as compared o the other smaller airports. On the other hand, a major weakness of Heathrow Airport is its lower number of runways. This is a major issue that puts this airport at risk of losing the competition with its competitors in the larger European continent who have more runways. With only two runways, one for landing and another for taking off, this puts a limit to the number of airlines that can use the airport. In future, it is highly necessary that Heathrow Airport undergoes an expansion. This expansion should involve upgrading of all the infrastructure of this airport and developing additional runways. It is only through this way that the airport will be capable of competing favourably in the market and beat all its rivals. The management of Heathrow has had the plan to build additional runways but their efforts were thwarted by civil and political opposition. It is therefore, a high time that the UK government and citizens support the move by Heathrow to build additional runways, since this will not only be beneficial to the airport but also the citizens and government of the UK. Works Cited Heathrow Air Quality Strategy 2011 – 2020 n.d, Accessed 30 March 2015 Aeroports de Paris 2014, “2013 full year results,” Accessed 26 March 2015 < http://www.aeroportsdeparis.fr/docs/default-source/groupe-fichiers/presse/cp_janvier-mars-2014/2014_02_19-presse-2013_full_year_result.pdf?> Anderson, I 2014, Heathrow: From Tents to Terminal 5. Amberley Publishing Limited, New York. 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Heathrow 2013, “A New Approach: Heathrow’s options for connecting the UK to growth,” Accessed 26 March 2015 < http://www.heathrowairport.com/static/Heathrow/Downloads/PDF/a-new-approach_LHR.pdf> Heathrow Airport 2015, “Financial Results,” Accessed 26 March 2015 < http://www.heathrowairport.com/about-us/investor-centre/results-and-performance/financial-results> Leigh Fisher Associates et al 2000, Improving Public Transportation Access to Large Airports. Transport Research Board, London. Regeneris Consulting 2013, “London Heathrow: Economic Impact Study,” Accessed 26 March 2013 < http://www.westlondon.com/wp-content/uploads/2013/09/130924-Regeneris-Final-Report-24th-Sep.pdf> UK Airport Consultative Committees n.d, “Airport Planning and Development,” Accessed 26 March 2015 < http://www.ukaccs.info/planning.htm> UK Civil Aviation Authority 2008, “Economic Regulation of Heathrow and Gatwick Airports, 2008-2013,” Accessed 26 March 2015 < http://www.caa.co.uk/docs/5/ergdocs/heathrowgatwickdecision_mar08.pdf> Read More