Aviation White Paper Disaster
Last week we looked at the shocking discovery that the EIA’s International Energy Outlook 2001 was completely wrong in it’s analysis of some major oil provinces, worrying since it seems some people, even governments, actually believe these guys know what they are talking about and use their forecasts to develop policy. Now it’s time to look at another major report from a government agency.
In Dec 2003 the UK’s Department of Transport published their aviation white paper, The Future of Air Transport. It claims to “set out a strategic framework for the development of airport capacity in the United Kingdom over the next 30 years, against the wider context of the air transport sector.”
Whilst this government publication doesn’t expressly “authorise or preclude any particular development, it sets out a policy framework which will inform decisions on future planning applications against which the relevant public bodies, airport operators and airlines can plan ahead.” The paper also claims to “take account of all relevant factors.” Let’s take a closer look.
This is what the white paper says about the future passenger and freight:
- 32 million passengers at UK airports in 1970, 189 million in 2002, between 350 and 460 million forecast in 2020.
- 580 thousand tonnes of freight loaded/unloaded at UK airports in 1970, 2.2 million in 2002, 5 million forecast in 2010.
These graphs illustrate the magnitude of forecasted growth (the 2030 data points are also provided in the white paper):
Now remember what the whole purpose of this paper is, to set out a strategic framework for the development of airport capacity in the United Kingdom over the next 30 years.
It is on the back of these forecasted growth figures that the following work is currently being undertaken, planned or under consideration. I doubt this is an exhaustive list of new aviation projects; it’s just what I could find in 15 minutes:
Second runway at Stansted to open by 2011/12 £2.7bn Link
Crossrail 2013 £10bn (although it will serve more than just Heathrow!) Link
Heathrow terminal five to open 2008 £4.2bn (albeit approved before the white paper) Link
Third runway and sixth terminal at Heathrow to open by 2015/20 Link
New runway at Edinburgh to open by 2020 Link
Edinburgh airport rail link £0.5bn Link
New runway, runway extension and new terminal at Birmingham Link
A common theme running through these plans is that they are in response to increased traffic forecast in the government’s white paper. These forecasts are obviously proving to be highly influential so it would be wise to understand where they come from. Why does the government think air travel is going to double by 2030?
They have a model.
The long-term factors driving the increase in future demand for air travel in the UK were modelled using econometric techniques, i.e. statistical analysis of the determining factors using historic data. These factors included future growth in UK and world GDP, increased world trade, declining air fares, and exchange rates.
The white paper goes on to state the following underlying assumptions:
The long-term real GDP growth assumption for the UK used in calculating forecasts was 2.25 per cent per annum. World GDP was projected at higher rates in less developed and newly industrialised countries (such as China and Eastern Europe) than in OECD countries.
There were a number of assumptions underlying the input one per cent decrease in air fares per annum between 2000 and 2030. Aviation fuel prices were assumed to stabilise at $25 per barrel in real terms in year 2000 prices; no major changes were assumed in aircraft technology which might result in reduced operating costs or changes in regional jet use which might reduce air fairs; and it was assumed that the market would be increasingly competitive and deregulated.
John Hemming MP asked a parliamentary question dated 7th Dec 2005, what would happen if instead of air fares falling by 1% per year as the white paper assumes they actually held constant at 2005 prices in real terms. The response from Karen Buck (Parliamentary Under-Secretary, Department for Transport) was that the 2020 figure would fall from 401 to 301 million passengers explaining this was based on the simple assumption that a 10% rise in fares would lead to a 10% fall in demand
Parliamentary Question
Holding a degree in computational physics I know a thing or two about computer models. One thing I know is that no matter how sophisticated the model if the input assumptions are in error the output will also be in error. Garbage in, garbage out.
I propose that these three assumptions are in error, that:
- UK GDP growth over the next 25 years will average 2.25%
- Air fares will decrease at 1% in real terms for the next 25 years
- Aviation fuel prices will stabilise at $25 a barrel in 2000 prices
And I’ll admit I don’t know about the linear demand-price response, the government does not make a convincing case that future prices falls would be met with linear demand response.
Taking 1% real terms price falls pa (adds growth of 20%), 2.25% growth pa (adds growth of 60%) for 25 years, assuming as they do that the global average growth is higher than 2.25% (it’s not only UK citizens that fly through UK airports) and that linear demand-price response produces their forecast of a doubling by 2030. It’s that simple.
The assumptions in this white paper must be challenged and shown to be in error – this shouldn’t be hard to do. The price of oil is the glaringly obvious error, which also influences the other assumptions. Here is a graph of oil prices over the last three years, notice how the daily price (blue) has bounced up along the steadily rising 200 day price (red):
Over the last two years that oil prices were assumed to stabilise a little below their December 2003 level they have in fact doubled with every indication of continued rises, even OPEC don’t expect prices to fall below $50 whilst Goldman Sachs forecast an average of $68 in 2006 and even spikes over $100 (link). With such fuel price rises and fuel being such a large proportion of ticket cost this evidence makes it impossible for ticket prices to continue to fall in real terms. Many airlines have added significant fuel surcharges:
British Airways is to increase fuel surcharges on long-haul tickets bought in the UK for the fifth time in the past 18 months. The increase, taking effect from 12 September [2005], means customers will pay a £30 charge for a one-way ticket - up from £24 - and £60 on a return fare. Link
Four of the top six US airlines are operating under bankruptcy protection which does not seem the behaviour of an industry doubling its business in 25 years:
Two of the largest US airlines have filed for bankruptcy protection within minutes of each other. Delta and Northwest now aim to join United and US Airways, which are already operating under Chapter 11. Link
Oil prices also affect other businesses so if UK GDP growth was assumed to be an average 2.25% based on $25 oil, $60 oil must reduce that value. Gordon Brown was recently forced to half his growth forecast down to 1.75% though maintains (likely justified on further flawed assumptions) that growth will increase over 2% again in the future. Link.
Clearly the underlying assumptions are wrong, leaving us with another fundamentally flawed report which is influencing billions of pounds of expenditure.
The Millennium Dome is often described as a white elephant, that’s nothing compared with the acres of empty tarmac we’ll have if these plans are pursued. It is clear that the forecasted traffic growth in the white paper is wrong. This must be highlighted and the government must retract this forecast so we can stop wasting time and money on building things that don’t have a future.
The current position of justifying airport expansion of the basis of cheap oil is indefensible.
This post was written by Chris Vernon
This entry was posted on Saturday, December 17th, 2005 at 12:55 pm and is filed under Environment, Economy, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
December 17th, 2005 at 7:01 pm
Very well argued and well presented.
I think you are absolutely right and I suggest that you send an email with a lnk to this to every MP.
Best of luck
Paul
December 17th, 2005 at 7:58 pm
Very nice analysis Chris.
It seems the major uncertainty we have here is about the price elasticity of demand for air travel. In fact what’s probably the core question is the relative price elasticity of demand for air travel when compared to that of car/bus travel. We know ground travel (which is the bulk of oil demand in OECD countries) is very inelastic, implying that small reductions in supply require very large price increases in oil. Then the question is does that result in smaller or larger percentage decreases in air travel? Air travel seems to be made up of a mixture of somewhat inelastic things (eg wealthy business travelers), and perhaps more elastic things (vacations in Majorca versus Blackpool for median income families). Ultimately, it’s an empirical question I guess - might want to plot the historical percentage changes in air miles versus percantage changes in GDP and oil prices and see what the graphs say.
Stuart.
December 18th, 2005 at 8:23 am
32 million passengers at UK airports in 1970, 189 million in 2002, between 350 and 460 million forecast in 2020.
460?? In 2020? This is thousand 4,600 correct and those are people like Tony Blair and the other wealty elites? I feel airline will be the first thing to go come the slope. Its the canary in the mindshaft
December 19th, 2005 at 10:16 am
I responded to the public consultation of the Aviation white paper at the time. I was aware of Peak OIl at the time and asked the authors where the additinal jet fuel for these traffic levels was going to come from. It seems my comment was ignored.
December 21st, 2005 at 1:21 pm
All those acres of empty tarmac will provide the space required to park all the 4×4s that will soon be made redundant!
December 21st, 2005 at 1:47 pm
In the Pennsylvania Northeast our bi-county airport has nearly completed a major expansion with huge debt service requirements and the usual applause of the the growth lobby. To now say that this is a waste of public funds and that it may well be mothballed in 10 years or at least marginalized would mark one as a crazy person of luddite. Again I need point out just how difficult efforts at directing goverment planners and growth boosters attention to the coming energy famine is and will be as the struggle begin to turn public funds from infrastructure development for future growth to basic communal survival. Make no mistake this going to become very dangerous work. Rather than engaging it, seeing it to be damn near impossible, it may be prudent to let go and engage in individual preparation instead. We are entering a collective insane asylum as industrial society faces the facts of resource draw down and what that means for our financial/industrial society. Delusions are hard to let go for the psychotic patient and some fail and never return to reality. What happens to a whole way of life and the people accustomed to it when they are face an analogous situation ?
December 21st, 2005 at 1:55 pm
The driving force behind all governments and business leaders is the fear of the development of a “negative” attitude that leads to a lack of confidence. They believe, probably correctly, that this will initiate a recession much more quickly than it would otherwise. That is why all reports, submisisons and “analysis” delivered to government must be stupidly optimistic, even at the expense of reality. These folks are hoping beyond hope for a miracle that will save the day, or at the very least, delay it until they are no longer personally affected. This report shows how easily this is done. We see over and over that you can higher a professionally qualified person to support whatever position you want them to take. Sometimes you don’t even need to pay them as we all tend to rally to support whatever biases we learned in school or elsewhere. And if we all are not scared by the prospect of the end of cheap energy, then we really do not understand the problem.
In the question of airport development, it is unlikely any projects that are not now approved or begun will really get built. Some of the lead times for the UK will probably be overtaken by an energy based economic decline. Similar “happy happy” proposals being pushed here in Canada will probably suffer the same fate. We do need to try and push these issues into the public view in every way possible. Hopefully some real public discussion will result.
December 21st, 2005 at 3:22 pm
The growth in holiday travel has been a switch from staying in the UK and that is now complete. Working people just do not have much leave spare to increase the number of trips. The retired are just as likely to take longer trips instead of more.
Business travel can be a big waste of time and a real takeoff for video links should stabilize the amount to travel at around the current level.
If no new runways were built the market would ensure those who need to fly used them. The white elephant that was Stansted provided discounted fees to use up spare capacity. This will change and a natural rise in charges will lead to less low cost flights so reducing demand. Things only go wrong if you make new white elephants. Then growth has to be created to fill them.
December 22nd, 2005 at 5:48 pm
Airlines are generally used by the wealthier parts of society. Passengers using Stansted, the main budget airline airport which is due to gain a new runway by 2013, had an average income of £51,000 last year. Therefore demand is closely linked to disposable income, plus the property boom oversees. The Civil Aviation Authority (CAA) found that one in six passengers using Stansted was visiting a second home overseas.
There is sign that the Dft is going cold on airport expansion:
1. The environmental damage: Short haul passengers are using the equivalent of 40mpg gallons each, moreover burning Co2 at altitude is thought to be 2.7 times worse at high. Flying in a short haul plane is like driving a Hummer on your own. When you consider air journeys are up to several thousand miles, aviation is a significant and rising contributor to CHG.
2. The overall effect of the explosion in cheap air fares has been to suck money out of the economy. British tourists travelling abroad outnumbered foreign tourists coming to Britain by 2.5 to 1 last year, according to National Statistics. The tourism deficit, which is the difference between what British travellers spend abroad and foreign visitors spend here, has widened from £4.7bn in 1997 to £17.6bn last year. The aviation industry counters this and argues aviation is a driver of the world economy AKA Globalisation. Well, 20% of flights are business travellers, a lot of work could be done over the internet. Nevertheless, globalisation has brought jobs and also reduced jobs in the economy, just ask the manufacturing and agricultural sectors or Britain’s own tourist industry.
http://www.timesonline.co.uk/newspaper/0,,170-1938992,00.html
3. And finally there is considerable opposition to airport schemes, especially Stansted - which even the county council is against!
If the oil peak doesn’t reduce demand for aviation or climate change, government will.
December 24th, 2005 at 1:13 pm
Two particular assumptions in these figures really rile me, firstly the assumption that improvements to rail travel will not be sufficient to offset the demand for passenger air travel by any significant amount. This really does depend on the kind of economic instruments that this white paper itself supports to control the impact of aviation on the environment. Perhaps they should apply the same paradigm to reducing air travel itself?
Secondly, I believe that the figures themselves assume that the recommendations of the report are followed. We have a causal feedback loop here… building extra runways at existing airports lowers the operational cost of running the airport per customer, and consequently reduces the cost of air travel. It is assumed that this will in itself increase the demand for air travel!
-Adam
December 30th, 2005 at 7:01 pm
I would agree that the forecast vis-a-vis the future oil price seems wide of the mark and any price stabilised above +/- $50/barrel will almost certainly depress economic growth not just in the UK but throughout the ‘developed’ world, and will impact more than just the aviation/airline industry.
However, the argument that the UK Government is wasting and is likely to waste billions of pounds of public funds on unnecessary airport expansion is just not correct because the proposed expansion at Edinburgh, Heathrow, Stansted, Luton, Gatwick, etc., would all be funded by the private sector simply because these airports are all privately owned. Thus, if the business case stacks up, funding will be negotiated on a commercial basis ~ and if for any reason it doesn’t, then the airport companies concerned won’t spend the money (it’s doubtful that they’d even be able to raise the necessary capital or achieve the required return on investment anyway).
The various rail improvements (e.g. London’s “Crossrail”) are not directly linked to airport expansion and in any case, irrespective of whether these are funded via a Public/Private Partnership (PPP) any improvement/development of the UK’s rail infrastructure has got to be good both for UK plc and on environmental grounds.
I agree that for internal i.e. domestic air travel over sectors of up to about 250 miles, a reliable and high-speed rail alternative would be entirely viable but this is unlikely to be achieved without significantly increasing public investment (otherwise, the cost of long-distance rail travel simply increases to a point where the law of diminiishing returns kicks in) and if oil stays well above $50 the impact on HMG’s tax revenues will rule this option out notwithstanding G Brown’s ongoing impersonation of Mr Micawber…
Long-distance rail travel cannot however, compete with air travel to the Continent beyond 200 to 250 miles i.e. Paris/Brussels and maybe Amsterdam/Rotterdam simply because of capacity constraints through the Channel Tunnel and so there will remain a demand for flying to/from Continental Europe (and of course, to/from Eire, CIs, IoM, etc) together with long-haul, and with a population across Europe and N Amercia that will become increasingly older and indeed, retired, leisure activities (to which flying is very much associated) will remain a boom industry even if the growth figures used by HMG prove somehwat optimistic.
January 1st, 2006 at 2:21 pm
However, the argument that the UK Government is wasting and is likely to waste billions of pounds of public funds on unnecessary airport expansion is just not correct because the proposed expansion at Edinburgh, Heathrow, Stansted, Luton, Gatwick, etc., would all be funded by the private sector simply because these airports are all privately owned.
Hi Mike, I’m not arguing that the government is wasting public money. My point is that the government is justifying the expenditure. I don’t really care about where the money comes from only that money is being spent on something unnecessary because the government has said it is necessary.
May 9th, 2006 at 1:12 am
Many of the issues raised above have been lodged and accepted as admissible arguments by the private bills unit in the Scottish Parliament. The Edinburgh Airport Rail Link bill is about to enter consideration phase after objections have been raised about the sustainability of the airport and the long term economic viability of the proposed 8 railway tracks linking to the airport. (Estimated to see falling passenger numbers after only 10 years of operation) It will be interesting to see whether Holyrood is more enlightened than its southern neighbour in Westminster.
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