Heathrow airport, London’s largest air travel hub has been recently having its request for raising fees denied by the Civil Aviation Authority.
The request has likely been asked for due to the decreased demand the airport saw during the COVID-19 Pandemic. Overall, Heathrow lost £2.6 billion due to COVID, consequently, it has issued a request to increase its fees to recoup the lost revenue.
The Civil Aviation Authority decided to cap this at £300 million, the CAA stated that these funds should be used to “incentivise Heathrow Airport Limited to plan effectively, so it can reopen its terminals in a timely way for a summer recovery.”
The Civil Aviation Authorities involvement in the fees of Heathrow airport is a perfect example of price controls. The likelihood is that the CAA has had guided Heathrow to price its fees below the market equilibrium point to incentivise demand for its services.
However, due to COVID-19, this pricing strategy is unsustainable as a maximum price of such decreases investment into Heathrow airport and will also harm the airport financially as its supply and demand are in disequilibrium, causing decreased incentive for further investment.
Despite this decreased incentive, Heathrow airport has been told to try to generate funding by talking to investors, question is, who would invest in an airport that has so many issues?
One of these issues is of course the COVID-19 Pandemic. The new travel bans place the airport’s passenger numbers at their lowest point since the 1960s. The YoY figures for March show that there was an 83% decrease in 2021 compared to 2020, as shown in the diagram below.
This means that, because of decreased demand for COVID-19, Heathrow airport has to ration the market in an attempt to increase its revenue and squash its losses.
But, the increase in the fees harms consumers.
Reuters report that Heathrow’s landing fees are currently £21.08 per passenger, allowing for an increase by 1.4% or an extra 30p, thus making Heathrow airport “the most expensive hub airport in the world.”
This means that because of rationing, the average commuter or tourist will be forced to pay additional fees when flying, additionally, investors and other bankers who commute to London through Europe will have to pay additional fees.
But these individuals who can afford foreign holidays likely do not look at the fees, especially not rich bankers, so, why is this bad for business, and, is there a more long-term issue which the airport is facing?
Well, the problem lies in the fact that Heathrow HAS to ration the market, in other words, it cannot keep up with increasing demand.
Heathrow airport is long overdue for its expansion as one was originally planned all the way back in 2010, and even now in 2021, the soonest Heathrow will see a new runway will be in 2026 with the full expansion being complete by 2050.
This slow rate of expansion and lack of planning by the government is terrible for London as many, much larger, European airports are becoming much more popular.
Because of this, London will see a decrease in demand for its services as “Post-Brexit this makes the UK even less competitive and will drive traffic to other airports.”
So, because of Heathrow’s insufficient capacity, consumers and bankers alike have been forced to pay additional costs, especially concerning their time. London will likely also pay the price of a less attractive financial sector as her largest airport has been neglected over the years.
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Written by Hubert Kucharski
Research compiled by Billy Ryan