Manchester Airports Price Cap, 2003-2008:

CAA recommendations to the

Competition Commission
February 2002

ANNEX
Review of Manchesters traffic forecasts

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Review of Manchester Traffic Forecasts

Contents
Introduction
CAAs forecasting approach
Forecasting approach by Manchester
Longterm forecasts
Short and medium term forecasts
Comparison of Manchester and CAA Forecasts

Paragraph
1.1
1.3
1.9
1.13
1.19
1.21

Introduction
1.1

By their nature forecasts will evolve over time as new information becomes available
and this is especially true for air traffic forecasts at the present time. Manchester
Airport has not yet provided CAA with its definitive traffic forecasts, and this review
focuses on the forecasts underpinning its November 2001 projections. The CAA
expects that, as the impact of the September 11th attacks become clearer over the
next few months, revised forecasts from Manchester, the Competition Commissions
analysis and further CAA analysis will result in changes to the forecasts finally
adopted in setting the price caps.

1.2

The CAA has undertaken an initial review of the likely traffic growth at the
Manchester airport based on various sources, including Manchesters pre- and postSeptember 11th forecasts, forecasts by DTLR (previously the DETR), various
aviation bodies, and aircraft and engine manufacturers. While taking into
consideration these forecasts, the CAAs approach to forecasting traffic at UK
airports involves a combination of SPAM1 modelling, time series analysis, market
intelligence and judgement.

CAAs Forecasting Approach

1.3

Two of the key inputs in the CAA forecasting process are the estimates of the
growth in the (unconstrained) demand for air travel to and from the UK, and the
assessment of future capacities of UK airports. The latter entails considerations of
runway capacity, terminal capacity and other infrastructure constraints.

1.4

The passenger demand growth estimates are based on the (unconstrained) passenger
forecasts that were published in 2000 by the DTLR2 and the growth rates implied by

SPAM is the Second Passenger Access Model that was developed by the CAA/NATS. NATS holds the
intellectual property rights to the model, but the CAA is permitted on a memorandum of understanding to use
and adapt the model for non-commercial purposes.

DTLRs forecasts and the description of its forecasting methodology are available from DTLRs publication
Air Traffic Forecasts for the United Kingdom 2000.

DTLRs central scenario were adopted by the CAA as part of the inputs in its
forecasting process before September 11th.
1.5

Apart from BAAs London airports which CAA has for the most part relied on
BAAs capacity assessment, the assumptions about runway and terminal capacities of
all other airports largely correspond to the assumptions used in the base case of the
Regional Air Services Co-ordination (RASCO) exercise. These form part of the
inputs for CAAs pre-September SPAM modelling.

1.6

The events of September 11th have had a significant impact on the air transport
industry and have injected additional uncertainty into the short and medium term
outlook for the global economy. Apart from exacerbating the already weakening
world economy prior to the attacks, there are also substantial negative effects on
consumers confidence to fly. The CAAs approach to the forecasting of postSeptember traffic at Manchester airport is based on an assessment of the combined
effect of the economic and confidence to travel factors and on airlines response
strategies on travel demand.

1.7

The loss in travel propensities at Manchester airport in the domestic, European

scheduled, other international scheduled and charter markets due to the further
economic downturn is modelled by applying an income multiplier of 2.1 to the net
fall in the forecast of UK GDP growth rates.3

1.8

The negative impact on travel confidence is assumed by CAA to last for at least 16
months before demand begins to return to its previous trends in each of the market
segments (i.e. from the first half of 2003). Furthermore, the initial impact is assumed
to be the same as the percentage fall in traffic in November 2001 as compared with
the average growth rate between April and August 2001 in each traffic segment.
These assumptions on the duration and initial level of impact on confidence to fly
could be considered as conservative in comparison with the Gulf War experience
where demand was restored to its previous trends within 9-12 months.

Forecasting Approach by Manchester

1.9

The forecasting approach used by Manchester differs according to the length of the
forecast period. There are three different time periods, namely, the short term, the
intermediate term and the long term, and the overall planning process consists of
three stages:

Setting a long-term target for 2015 using modelling techniques;

Deriving short-term forecasts for the next three years using a bottom-up
analysis of airline plans;

3 The difference in the forecast UK GDP growth rates as published in the September 10th and November 12th
2001 issues of Consensus Forecasts.

Estimating the throughput for the intermediate term using interpolation from the
end of the short-term forecast period (currently 2004/05) to the 2015 target.

1.10

According to Manchester, performance is tracked against the long-term trend line

annually and short/medium term business growth forecasts are adjusted taking into
account actual outturn and the short-term targets. Manchester does not produce
forecasts of the total demand at UK airports; it relies on the published DTLR
projections.

1.11

However, Manchesters current long-term trend forecasts used in its financial

projections are based upon the 1997 forecasts published by DTLR4 and the base
traffic demand was calibrated using the 1996 CAA survey data. Consequently,
Manchester has stressed that its current short-term forecasts and long-term target
should be considered as provisional figures used to inform its business planning and
long-term aspiration and that these will be subject to revisions in the light of
Summer 2002 actual performance.

1.12

Manchesters forecasts concentrate on estimating future passenger throughput;

parameters such as ATMs and chargeable tonnages are derived subsequently and in a
less detailed manner. The forecasts do not take into account any constraints at
Manchester although the long-term forecasts do include assumptions about the level
of constraints at London airports.

Long Term Forecasts

1.13

The basic framework for Manchesters development is laid down in its Long Term
Business Strategy (LTBS). Manchesters long-term forecasts have been developed
under various assumptions about underlying market conditions and strategic choices
made by the airlines, which could make a significant difference to traffic growth at
individual airports. In developing its pre-September 11th long-term forecasts,
Manchester has tested a number of scenarios with various assumptions regarding
airport capacity and surface access constraints, low frills operators stimulation effects
at some regional airports, modal shift to rail, economic growth and diversion of
transfer passengers from Heathrow and Gatwick to other European hubs etc.

1.14

The key assumptions underpinning the scenario which Manchester considers to be

the most reasonable basis for its future development are as follows:

Passenger demand from regions outside the South-East is predicted to grow 1%

more quickly than that from within the South-East over the period to 2015;

No additional runway capacity at Heathrow and Gatwick before 2015;

Increasing road congestion in the London area;

Air Traffic Forecasts for the United Kingdom 1997, DETR.

Low-frills carriers stimulating the market by 4% above the 1997 DETR midpoint forecast;

The full development of low-frills hubs at Liverpool, Luton and Stansted;

Reduction in frequency of domestic air services from Heathrow to Manchester

and other regional airports;

Increased charges at Heathrow of 2;

Pressure on airline alliances to divert transfer traffic from London to other

European hubs, including Manchester;

1.15

The passenger throughput forecasts using the above scenario are produced using
three different forecasting procedures depending on the passenger type. According
to Manchester, international terminal and international interlining passengers are
forecast using a multinomial logit model called ARTFUL. However, domestic and
international-international interlining passengers and ATMs are forecast separately.

1.16

The process by which ARTFUL generates forecasts is summarised in the flow chart
at the end of this Annex. The model allocates aggregate forecasts by DTLR of UK
scheduled air traffic between the competing airports5 on the basis of surface access
time, service frequencies and fares; the charter algorithm uses access time only.

1.17

The frequency used in the model is related to but not the same as the physical
frequency of airline operations. Rather it is considered as a choice variable capturing
passenger perceptions of relative frequency levels at different airports.

1.18

Although ARTFUL is an iterative model, the strength of the frequency parameter

is such that traffic tends to converge more and more on London as the iterations
continue. Manchester has found that a total of three iterations including the initial
allocation tend to give the most credible results. There is no formal way of putting
constraints on airports in ARTFUL except by either capping frequency on particular
routes or raising fares before running the model. However, there is no internal
mechanism within ARTFUL that will guarantee that such adjustments will restrict
the total forecast frequency at an airport within its capacity limit. This has to be done
in an ex post trial-and-error manner.

Short- and Medium-Term Forecasts

1.19

Manchesters short-term forecasts are derived from a bottom-up approach based on

its market intelligence, knowledge of incumbent and potential new entrant airlines
development plans and statistical data.

Twelve UK airports are modelled in the present version of ARTFUL: Luton, Birmingham, Edinburgh, East
Midlands, Glasgow, Leeds/Bradford, Gatwick, Heathrow, Liverpool, Manchester, Newcastle, Stansted.

1.20

Throughput for the intermediate term is obtained by interpolating from the end of
the short-term forecast period to the long-term target in 2015. However, it is unclear
what method of interpolation Manchester has used in the various passenger
categories. Clearly the reliability of this method will depend not only on the forecast
levels of the end points of the interpolation period but also on whether any sudden
changes may occur which would disturb the continuity of traffic growth.

Comparison of Manchester and CAA Forecasts

1.21

The main differences between the forecasts by CAA and Manchester are laid out in
the main paper under paragraphs 13.16 to 13.24 and are illustrated in Figure 13.1.
Although the divergence in forecasts between CAA and Manchester narrows over
the forecasting period, in the short term, CAA forecasts suggest that Manchesters
post-September base case forecast could be understated by up to 13% by 2004/05.

1.22

In CAAs view, this understatement is mainly due to the overly pessimistic outlook
by Manchester in its European scheduled market and in the scope for recovery in the
North America and Rest of the World markets in 2003/04 and thereafter.
Manchesters forecast of only half of its 8% lost traffic in 2002/03 in its European
charter market would be recovered in 2003/04 also seems to be unduly conservative.

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Appendix 1: ARTFUL Forecasting Process

Aggregate UK Demand Forecasts
Passenger volumes by world region and journey purpose

Disaggregate by County
Apply county splits to aggregate forecasts

Disaggregate by Route
Apply route splits to county volumes

Forecast Airport Share Using Logit Model

Dpd = Demand from airport p to destination d,
K = Airport constant
T = Access time to airport
P = air fare
F = frequency of service

a) Scheduled Traffic

b) Charter Traffic

Calculate Demand
Dpd = f(K, T, P)

Is Dpd Threshold

Calculate Demand
Dpd = f(K, T)

No

Close route

Yes
Calculate Frequency:
F = pd+ pd Dpd

Recalculate Demand
Dpd = f(K, T, P, F)

Stop iteration ?
No
Yes
Model Output: Dpd, Fpd