Meridian Club Think Tank: Aviation and Airlines Held on Thursday 8 September 2011 Millbank Tower , London

Objectives 1. Identifying key issues facing the sector 2. Understand the external factors shaping the future of the industry

Senior buyers, with responsibility for air purchasing, met in central London in September under Chatham House rules, ensuring that all guests comments were unattributed. The session was moderated by respected aviation consultant John Strickland. Air Passenger Duty (APD) The UK governments continued refusal to accept the damage its aviation policies are doing to UK plc was one of the major themes to emerge from the latest World Travel Market Meridian Club Think Tank Airlines. Air Passenger Duty remains a major concern and is widely blamed for crippling any recovery in the tourist trade from the country. Leisure operators have to find ways to absorb the costs in order to remain not only competitive but also profitable. Business travellers are increasingly aware of the cost burden too, although the state of the global economy remains the main demand driver in this sector. One guest mentioned that the additional cost of APD might dissuade global blue-chip businesses from locating in London. With an eye on London 2012, it was felt that many visitors to the games might be deterred from revisiting the UK because of APD. More than one person mentioned that the Scottish and Northern Ireland parliaments were looking at whether APD could be devolved. Belfast Airport has struggled to maintain longhaul flights because departures from nearby airports in the Republic of Ireland were not taxed as heavily. One guest remarked An Irish couple flying from Dublin to New York pays 22 in taxes for the return journey; A British family from Belfast pays 120. Further concern highlighted that it becomes much more economically viable to take alternative routes of transport. One guest pointed out that cruise passengers departing from the UK do not pay an equivalent tax. He also mentioned APD should be TPD (Travel Passenger Duty) across all modes of transport, not just airlines. It was also widely felt that consumers are not fully aware of the APD levy that charged to fares/tour packages. Most Meridian Club members agreed that many air passengers are blaming the airlines and travel operators for the increased costs in flying. The general feeling

is the public needs to be educated and made aware that it is not the airlines that are making the profit on the increases but the government. The discussion also mentioned that consumers only understand fully when they get a refund as they only are refunded on the cost of the trip, not the tax they have to pay. All participants agreed that there needs to be more transparency to consumers. There was general agreement that APD is being used by the government as a cash cow to fund projects such as dealing with the consequences of the banking crises and not going into ecological projects such as alternative fuel research. A final question that was discussed was how can the travel community come together and act as a single voice for in order to be heard by the government?

Flight booking patterns Despite the fact that the UK emerged from recession last year, concerns over the slow pace of the economic recovery and tough public sector spending cuts by the UK Government have led many potential travellers to worry about their job and alter their budgets accordingly. Passengers and holiday makers have become very budget focused and holding off until late to try and get bargain deals. The delay in booking flights, particularly long haul flights, has affected availability. This has impacted flights, mainly due to yield and APD, resulting in higher costs for the consumer. However it was not all doom and gloom. Tour operators generally felt that the summer period was better than predicted as there was a large number of late deals across the travel market. Flights within Asia also ran to full capacity.

The future expansion of Heathrow The government also came under fire for its refusal to consider expanding airport capacity in the South East. It was felt that the third runway at Heathrow was off the agenda for political rather than economic reasons.

Air links are crucial for the UK's economic success. Heathrow is the UK's only international hub airport. One guest commented If we are to compete globally then we need an international airport hub that can provide the connections that people need. This includes business in the City of London as well as in the regions where transport infrastructure is one of the top key factors for businesses when deciding where they should locate. Many guests agreed that Heathrow's rival European hubs have more runways and capacity. These include Amsterdam, Paris, Madrid and Frankfurt. The United Arab Emirates plan to build 'Dubai World Central', a six-runway airport that aims to attract businesses to relocate. China is planning to open a new airport every month for the next 5 years. It was also felt that China is a key market for growth in terms of flight destinations, but currently, the UK only has a very tiny share of the market. None of these countries are making the commitment and investment without a strong business case that will include competing with Heathrow's position as a major international hub airport. Heathrow has slipped to fifth place in terms of non-stop destinations served behind Frankfurt, Paris, Amsterdam and Munich. Concerns were expressed that many major international airlines would rather use Frankfurt or Schipol as their European hub rather than take up available slots at Gatwick or Stansted. There is virtually no spare capacity at Heathrow, hence the need for a third runway. When asked their thoughts on alternative airports to Heathrow there was a lukewarm response. One guest commented Why does the government not get the message that many airlines do not want to use Gatwick as a 2nd airport to Heathrow? It was felt that even Manchester would have preference to Gatwick. Finally the conversation refocused on China and the opportunities for increased destination flights. One guest mentioned a strong draw of traffic being established between China and Africa. Some airlines are seeing opportunities for increased destinations such as links to Africa as many Chinese workers are based in Africa.

Alternative Fuel Meridian Club members discussed how airlines are pursuing alternative fuels to enhance energy supply security and as a potential additional means of reducing emissions typically associated with fossil fuels, including greenhouse gas (GHG) emissions.

China, one of the largest polluting countries, too is investing time and money for alterative fuels There was general agreement that income generated from APD should be used for research into alterative fuels instead of over Government projects such as the banking crisis.

Lobbing power of the UK Travel industry Many in the room agreed that the UK travel industrys inability to talk with a single voice on many issues such as APD and building a third runway at Heathrow was diluting its lobbying power. It was felt that there was a fragmented UK approach about coming together to lobby for APD legislation change. There was no consistency in policy formation with transport ministers and no cohesive messages to lobby government. It is increasingly clear that there is a need for the public and private sectors in the UK to work more closely together, as is the case in many other major tourism destinations. One guest mentioned that the UNWTO Ministers Summit, held in cooperation with World Travel Market, was set up four years ago to help the industry and politicians better understand each others needs. We will continue to press the UK government to listen not only to senior executives but also other countries which are feeling the impact of current policies.

Moving forward To close the session guests were asked to highlight their main concerns and likely impact of the future of the industry. Many in the room shared concerns of a possible double-dip recession; one guest commented We may not have seen the worst of the recession. We may see more future bankruptcies with travel. Also highlighted was the consumer confidence (or lack of) in the economy, fear of job losses impacting their decisions to travel. Fear of Increase in the number of consumers not looking to plan their holidays in advance and wait for last minute deals

Another guest focused on the likelihood of future mergers between airlines we could possibly see more mergers like British Airways and Iberia. In the Asian market it was felt that there is a stronger likelihood of consolidations, e.g. Japan. Low cost long haul flights: In the Asia Pacific region, there are two examples of low cost long-haul carriers in operation, with AirAsiaX and Jetstar. These two carriers are being closely watched and will spawn imitators. Even Southwest Airlines has hinted at the possible development of a long-haul offshoot. AirAsia Xs model is based on acquiring aircraft cheaply and flying them for up to 18 hours per day in a very high density configuration and developing its route network around low-cost airports. The carrier does not offer interlining or code sharing or other overheads that weigh down traditional airlines. It is felt that there is a strong appetite for low-cost, long-haul travel despite the tough economic conditions. Could this be a longterm viable strategy for operators? Is it economically viable and sustainable? Finally concern was expressed of expected APD increase by 25% by 2015 to further cripple any recovery in the tourist trade for UK.