June 2016
SCOTTISH APD
CONSULTATION
Heathrow’s consultation response
Executive Summary
Heathrow Airport Limited welcomes the Scottish Government’s proposal to
reduce Air Passenger Duty (APD) by 50% in 2018, with a view to abolishing it
completely in the longer term.
The Scottish Government’s plans align with Heathrow’s long held position that
APD is a burden on competitiveness, tourism, investment and trade. To
determine what some of the potential impacts may be of the Scottish
Government reducing APD by 50%, Heathrow has commissioned some research
by Frontier Economics, which found that this proposal could:
 Reduce the cost of air travel to and from Scotland, which is a material benefit
for travellers. The estimated saving in lower fares alone could amount to a
benefit to passengers of £12m p.a. This reduction in cost will also lead to
wider benefits for the Scottish economy.
 Help the Scottish Government to achieve its key objectives in (i) generating
new direct connections; (ii) helping to sustain existing routes; and (iii)
increasing inbound tourism.
 Generate up to a 10% increase in point-to-point demand on Scottish routes to
Heathrow. Such an increase could lead to an additional 48,000 inbound
visitors to Scotland with an increase of £12.2m p.a. in inbound tourism
spending in Scotland.
However, Frontier Economics found that with capacity at Heathrow constrained,
the full benefit of the APD reduction (i.e. £12m benefit of fare savings to
passengers’ p.a. or the £12.2m in tourism benefits) may not be realised:
 This is because there is a clear limit to the amount of extra Scottish demand
that can be currently accommodated at Heathrow. Airlines at Heathrow may
be able to use larger aircraft or increase load factors on some Scottish routes,
but they will not be able to increase the frequency of flights, unless they
reduce the frequency on alternative routes, or cancel other routes altogether.
This is important because Heathrow is the number one destination for
Scotland’s major airports, demonstrating that Scottish passengers prefer to
travel to and via Heathrow.
 The Airports Commission confirmed that increasing capacity at Heathrow
would “drive significant connectivity benefits, delivering a much stronger longhaul network than would be seen at an expanded Gatwick, and would
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enhance access to this network from the rest of the UK by providing new slots
for flights from domestic destinations such as Scotland.” (Airports
Commission Final Report, p20). Therefore, only with an expanded Heathrow
can Scotland recognise the full extent of the benefits generated from a
reduction in, and the abolishment of, APD.
Heathrow urges the UK Government to match the reduction in APD in Scotland
to avoid distorting the market. This is especially the case in terms of connecting
passengers at Heathrow. For example:
 The Scottish Government’s proposed APD reduction would not impact directly
on tickets for passengers on Scottish routes who are connecting at Heathrow.
However, it would apply for passengers flying on Scottish routes via other
hubs such as Amsterdam, Paris and Dubai.
 Therefore, should airports and passengers across the UK operate on different
levels of APD as a result of this proposal; it will only improve the relative
attractiveness of flying from Scotland to and through international hub
airports, not Heathrow or the UK.
 This could have a significant impact on the frequency of flights from Scotland
to an international hub airport. Frontier’s analysis shows that domestically
located hub airports tend to provide greater frequency to their domestic
regions than internationally located hubs. In fact, at five of the largest hubs in
Europe, connections to their domestic airports are around 70% more frequent
on average. As a result, the benefits to Scotland are far greater if connecting
passengers are directed through Heathrow.
Context
The Scottish Government has set out its plans to reduce Air Passenger Duty
(APD) in Scotland by 50% in 2018, with a view to abolishing it completely in the
longer term. The associated decrease in ticket fares may imply an increase in
demand for travel to and from Scottish airports. In 2015, there were around 2.9
million passengers at Heathrow travelling to and from Scottish airports.
Therefore, given the importance of the Scottish market to Heathrow, Heathrow is
naturally an interested party. This note sets out Heathrow’s response to the
consultation.
Heathrow Airport is the number one destination for Scotland’s major airports:
 There were over 5,200 departures from Edinburgh to Heathrow in 2015,
which is nearly 800 departures more than to the number two airport, London
City.
 There were over 3,600 departures from Aberdeen to Heathrow in 2015. This
is around double the number of departures to the number two airport,
Manchester.
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 There were over 3,000 departures from Glasgow to Heathrow in 2015, which
is around 700 departures more than to Dublin and Gatwick in joint second
place.
It is likely that the true demand to use Heathrow on Scottish routes would be
even higher were it not for the existing runway constraints at Heathrow. New
routes are added from time to time, although this has to be at the expense of
frequencies on other routes. For example, in May 2016, British Airways (BA)
added a daily connection between Heathrow and Inverness.
Heathrow provides connectivity to and from Scotland in two main forms:
 Point-to-point connectivity: In 2015 around 1.9 million passengers flew pointto-point between Scotland and Heathrow; and
 One-stop connectivity to over 100 destinations around the rest of the world: In
2015 around 1 million passengers to or from Scotland connected at
Heathrow.
Scottish demand represents around 4% of all passengers at Heathrow. Given the
importance of the Scottish market, Heathrow is naturally interested in the Scottish
Government’s proposals to reduce APD.
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How the proposal would apply at Heathrow
As of 1 April 2016, the ‘reduced’ APD rates, which would be charged for
passengers in economy class seats, are as follows:
 £13 per passenger for passengers departing to destinations less than 2,000
miles from London; and
 £73 per passenger for passengers departing the UK to destinations greater
than 2,000 miles.1
The impact of the APD reduction on point-to-point demand is relatively
straightforward. APD will fall by £6.50 for passengers travelling in economy class
on Heathrow’s Scottish routes2.
However, the proposed 50% reduction in APD would not apply to passengers on
Scottish routes connecting at Heathrow. This is because for Scottish passengers
connecting at Heathrow to an international flight, APD is levied on the basis of
the final destination. For example, for a passenger flying from Edinburgh to
Beijing via Heathrow, the chargeable segment in the context of APD would be the
Heathrow-Beijing leg. Therefore, the 50% APD reduction in Scotland would not
apply. Also, for the reverse journey, international flights to domestic flights are
exempt from APD. Therefore, the reduction in APD will not have a direct impact
on ticket fares for connecting passengers at Heathrow. This is an important point
for Scottish passengers, because Heathrow is the number one destination for
Scotland’s major airports.
These points are discussed in more detail below.
The impact of the reduction in APD on point-to-point demand
Heathrow has made a high level estimate of how the 50% decrease in APD could
impact on point-to-point demand on its Scottish routes. (This is based on 2015
passenger data). In the first instance we have assumed for simplicity that the
reduction in APD would be passed through to passengers in the form of an
equivalent reduction in ticket fares, which is broadly to be expected given the
competitive nature of aviation markets.
If we assume a saving of £6.50 per passenger, which is conservative as this
does not take into account higher rates of APD paid by business class
passengers, then the 1.9m passengers on these routes would benefit directly to
the tune of £12m p.a. in lower fares.
1
Heathrow recognises that there are various ‘terms and conditions’. For example, there is a ‘standard’ rate
(which is double the ‘reduced’ rate) for passengers not flying in the lowest class of travel available on the
aircraft. Also there is a higher rate (at three times the ‘regular’ rate) for passengers flying in aircraft
weighting 20 tonnes or more equipped to carry fewer than 19 passengers. Also, different treatments apply
with respect to connecting passengers. For example, ‘international-to-international’ passengers, and
‘international-to-domestic’ passengers are exempt from APD, and for ‘domestic-to-international’ passengers,
APD is based on the final destination (and class of travel). Also, passengers flying from airports in the
Scottish Highlands and Islands region are exempt from APD.
2
In May 2016, BA started a new connection between Heathrow and Inverness. Passengers carried on flights
departing from airports in the Scottish Highlands and Islands region (which includes Inverness) are not
chargeable passengers. However, passengers carried on flights from other areas of the UK to airports in the
Scottish Highlands and Islands region are chargeable passengers and subject to APD at the appropriate
rate. This means that APD is not applicable for passengers flying from INV-LHR, but it is applicable for
passengers flying in the other direction. Therefore, APD for passengers flying from LHR-INV would
decrease by 50%.
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This reduction would further boost the demand to fly between Scotland and
Heathrow. The Exhibit below provides an overview of the calculations setting out
how the reduction in demand could affect point-to-point demand on the
Heathrow-Edinburgh route.
Exhibit 1.
The impact of a 50% reduction in APD on point-to-point
demand on the route LHR-EDI
Business
Leisure
To
Scotland
From
Scotland
To
Scotland
From
Scotland
Total
75,000
64,000
166,000
138,000
443,000
Average return
ticket fare**
£216
£216
£139
£139
Reduction based
on 50% APD
reduction***
£13
£13
£13
£13
New ticket fare
£203
£203
£126
£126
% change in ticket
fare
-6.0%
-6.0%
-9.4%
-9.4%
PED***
-0.70
-0.70
-1.52
-1.52
% increase in
demand
4.2%
4.2%
14.3%
14.3%
Extra trips
3,000
3,000
24,000
20,000
Return trips*
50,000
Source: Frontier analysis
Note:
*Passenger volumes are based on analysis of 2015 IATA PaxIS data. For simplicity it is assumed that
all point-point passengers make a return trip. The split between business versus leisure, and inbound
versus outbound is based on Table 3.1 from the 2014 CAA passenger survey data. This assumes that
the characteristics of point-to-point passengers flying on Scottish routes are the same as those
observed at the total airport level.
**Ticket fare data is also based on 2015 IATA PaxIS data. This reports average ticket fares on
different routes. Average ticket fares have then been ‘de-averaged’ to estimate separate average
ticket fares for business and leisure passengers. Based on CAA passenger survey data it is assumed
that ticket fares for passengers flying for business as their trip purpose are 56% greater than for
passengers flying for leisure as their trip purpose.
***The reduction in APD is based on a 2 x £6.50 reduction in the ‘reduced’ APD rate – i.e. reflecting
the reduction in both the inbound and outbound flight of the return trip. The reduced rate has been
used to be conservative.
****PED = Price elasticity of demand. This argues that a 1% change in price leads to an x% change in
demand. For business passengers, an elasticity of -0.7 is assumed, and for leisure passengers, an
elasticity of-1.52 is assumed. This is based on a review of own-price elasticities of demand from Gillen
et al 2002.
Trip numbers have been rounded to the nearest 1,000.
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Frontier’s analysis suggests that the 50% decrease in APD could lead to an 11%
increase in point-to-point demand on the Heathrow-Edinburgh route, which is
equivalent to around 50,000 extra return trips per annum. Performing the same
calculation for both Aberdeen and Glasgow leads to a grand total of around
90,000 extra return trips between Heathrow and Scotland per annum.3
Heathrow estimates that this could imply an increase in inbound tourism
spending in Scotland worth around £12 million per annum, taking into account
the increase in inbound trips and the average spend of visitors from England in
Aberdeen, Edinburgh and Glasgow, based on data from visitscotland.org.
Increasing inbound tourism spending is one of the Scottish Government’s key
objectives. This is summarised in the table below.
Exhibit 2.
Summary: The impact of a 50% reduction in APD on point-topoint demand on Scottish routes at Heathrow
Increase in
point to point
demand (%)
Increase in
point to point
demand
(round trips)
Equivalent
increase in
movements
per annum at
Heathrow*
Increase in
inbound
visitors to
Scotland
Increase in
inbound
tourism
spending in
Scotland**
Aberdeen
9%
20,000
338
11,000
£3.0m
Edinburgh
11%
50,000
844
27,000
£6.8m
Glasgow
7%
19,000
321
10,000
£2.4m
Total
10%
89,000
1,502
48,000
£12.2m
Source: Frontier analysis
Note:
*Based on 2015 passenger data from IATA PaxIS and 2015 schedules data from OAG Analyser, both
provided courtesy of Heathrow, it is estimated that there are 119 passengers per movement on short
haul movements at Heathrow. And it is assumed that each round trip equates to two passengers at
Heathrow.
**Based on 2014 data from visitscotland.org visitors from England spend £269 per trip in Aberdeen &
Grampian, £251 in Edinburgh and Lothians, and £236 in Greater Glasgow & Clyde Valley.
This increase in demand would be equivalent to around 1,500 extra movements
at Heathrow per annum, or around four extra movements per day. But as
Heathrow is runway-capacity constrained, it is difficult for airlines to increase
capacity to satisfy this extra demand.
3
The new BA connection between Heathrow and Inverness started in May 2016. Therefore, the 2015
passenger demand data does not include information on this route.
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Consequence of Heathrow capacity constraints
The reality is that Heathrow’s runway slots are currently capacity constrained.
Some increase in capacity may be achievable by airlines increasing the size of
aircraft they use on Scottish routes or increasing load factors, but increases in
frequencies or wholly new routes can only be introduced by reducing frequencies
on other destinations or cancelling them entirely. This is unattractive to airlines if
those established routes are also profitable.
Hence as a consequence of Heathrow’s capacity constraint it is unlikely that the
potential benefit to the Scottish economy and to passengers of reducing APD will
be fully realised.
While some extra point-to-point demand could, in principle, be accommodated at
other London airports, this is an imperfect alternative for many passengers to
accessing Heathrow directly, as Heathrow is the number one destination for
Scotland’s major airports and also the best connected airport in London with
respect to travel times to central London and the best placed to serve the
M3/M4/M40 corridor, which is a source of significant demand. Heathrow’s surface
access links means that it has the largest catchment area in terms of population
living within given drive time boundaries. Passengers may also prefer the
destinations and specific departure and arrival times Heathrow offers.
In addition, as the UK’s only hub airport Heathrow can provide higher frequency
services to Scotland than can be sustained at other airports, because point-topoint traffic combines with connecting passengers from Scotland using Heathrow
to connect to its long haul destinations, which means higher overall demand on
Scottish routes – and a more commercially viable operation for airlines.
Therefore, driving point-to-point traffic to other airports will lead to a worse quality
of service for passengers overall and will also reduce the extent to which the
economic benefits to Scotland of reducing APD can be fully achieved.
If Heathrow’s capacity was not constrained, then airlines would be more able to
accommodate this extra demand much more easily and the full benefit of the
inbound tourism spending in Scotland could be realised.
The impact of the reduction in APD on connecting demand at Heathrow
The Scottish Government’s proposed APD reduction would not impact directly on
ticket fares for passengers on Scottish routes connecting at Heathrow. But it
would apply for passengers flying on Scottish routes via other international hub
airports. For example, connecting via Amsterdam and Paris (both ‘Band A’
destinations) APD would be £6.50 cheaper for passengers flying in economy
class and connecting via Dubai (a ‘Band B’ destination) would be £36.50 cheaper
for passengers flying in economy class.
Having the option to fly via Heathrow and a number of internationally located
hubs provides passengers in Scotland with the benefits of competition and choice
on many one stop routes. For example, Edinburgh is connected to Heathrow, as
well as Schiphol, Paris Charles de Gaulle, Frankfurt, and Istanbul, amongst
others. Therefore, in principle, on many one stop routes, these hub airports, and
their network carriers are in competition with each other.
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The proposed reduction in APD improves the relative attractiveness of flying via
these internationally located hubs. However, there are significant benefits to
flying via a domestically located hub. Domestically located hubs in general tend
to provide greater frequency to their domestic regions than internationally located
hubs:
 Heathrow has analysed the frequencies provided by the network carriers at
five of the largest hubs in Europe. This is based on 2015 schedules data from
OAG and covers Heathrow in the UK, Paris Charles de Gaulle in France,
Frankfurt in Germany, Schiphol in the Netherlands and Madrid Barajas in
Spain. The purpose of the exercise is to assess whether those hubs provide
more frequent connections to their domestic regions than internationally
located hubs4.
 Heathrow has identified 25 regional airports in these countries that are
connected to their domestically located hub, and at least one other,
internationally located hub.
 For example, Hamburg is connected to Frankfurt, Heathrow, Paris Charles de
Gaulle, Schiphol and Madrid Barajas. Therefore, in principle these hub
airports and their network carriers are in competition with each other on a
number of one-stop connections. However, in 2015, there were 15 Lufthansa
departures per day from Hamburg to Frankfurt (the domestically located hub
in Germany), compared to around five KLM departures per day to Schiphol
(which was the most frequent connection to an internationally located hub).
This highlights the superior connectivity that Frankfurt, the domestically
located hub, provides to Hamburg.
 For 24 out of the 25 regional airports, for where there is an element of
overlap, the connection to the domestically hub is the most frequent
connection, typically around 70% more frequent on average.5 This is
summarised in the table below.
4
In the context of connecting passengers, this analysis focuses only on frequencies provided by the main
network carriers at each hub airport – i.e. that provide one-stop connectivity. For example, this does include
frequencies provided by low cost carriers such as Ryanair and easyJet because they tend not to provide
connecting services.
5
Incidentally, the ‘odd one out’ is Leeds/Bradford, where the connection to Schiphol is marginally more
frequent than the connection to Heathrow. However, Heathrow is capacity constrained, whereas the other
hub airports are not. If Heathrow were unconstrained, then frequencies would likely be higher.
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Exhibit 3.
Domestically located hubs provide greater frequency than
internationally located hubs
Countries
Number of airports that
are connected to the
domestically located hub
and at least one other
European hub
Number of routes
where the domestically
located hub provides
greatest frequency
Frequency via the
domestically located hub
relative to the most frequent
internationally located hub
(weighted average)*
UK (LHR)
6
5
153%
Germany (FRA)
8
8
178%
France (CDG)
6
6
153%
Spain (MAD)
5
5
209%
Total
25
24
172%
Source: Frontier analysis of 2015 OAG data, provided courtesy of Heathrow
Note:
This analysis only considers airports that had at least 365 departures in 2015 to their domestically
located hub and at least 365 departures in 2015 to at least one internationally located hub. This only
includes departures from the main network carrier / alliance at each hub (e.g.BA / oneworld at
Heathrow, Lufthansa / Star Alliance at Frankfurt, etc.). For example this would not include low cost
carriers because they do not provide connecting services.
*A figure of 172% means that connections to the domestically located hub are 72% more frequent, on
average, than connections to internationally located hubs.
In the context of one stop connectivity, frequency is important. Greater frequency
implies that passengers have greater choice to start their journey at a time that
suits them most and can be used to help passengers time their connections at
the hub more conveniently. For example, in 2015 there were 10 BA departures
per day on average from Edinburgh to Heathrow, equivalent to nearly one
departure per hour. However, there was just over one Turkish Airlines departure
per day on average from Edinburgh to Istanbul.
Heathrow’s analysis of the 2015 schedules data highlights that oneworld at
Heathrow provided Aberdeen, Edinburgh and Glasgow with over 80 ‘more
frequent’ one stop connections to long haul destinations. These are connections
that were available at Heathrow and at least one other, internationally located
hub, but where the frequency was greatest at Heathrow.6
In addition to these ‘more frequent’ one stop connections, oneworld at Heathrow
also provided Aberdeen with 10 ‘unique’ one stop connections to long haul
markets. These are connections that were only possible in one stop via Heathrow
and would have only been possible via other, internationally located hubs with at
least two stops required. This covers important markets in the USA such as
Austin, Baltimore and Phoenix.7
6
This analysis is based on 2015 OAG data. Therefore, it does not include Inverness (because the new BA
connection started in May 2016). Also, passengers departing Inverness are not subject to APD, meaning
that the benefit of the reduction in APD will be less pronounced for passengers on the Inverness route at
Heathrow, because it will only be enjoyed in one direction. Based on separate analysis of 2016 data,
Heathrow provides Inverness with 38 ‘unique’ one stop connections and 26 ‘more frequent’ connections.
7
The full list includes: Austin, Baltimore, Charlotte-Douglas, Las Vegas Phoenix, Raleigh/Durham and San
Diego in the USA, and Colombo in Sri Lanka, Hyderabad in India, and Nassau the Bahamas. In assessing
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These ‘unique’ and ‘more frequent’ connections are highlighted in the map below.
Exhibit 4.
Heathrow provides significant connectivity benefits to Scotland
Source: Frontier illustration
While Heathrow believes that an APD reduction in Scotland is generally a good
thing, the reality that the expected increase in demand from this reduction cannot
be met because of Heathrow’s capacity constraints could be damaging to the UK,
as it will lead to an increase in the attractiveness of international hubs. The
analysis above highlights that Heathrow provides significant connectivity benefits
to Scotland and that it would be preferable for Scottish demand to connect via its
domestic hub Heathrow, rather than internationally located hubs.
In conclusion, what is best for Scottish passengers is greater choice, not a
skewed or limited market. Therefore, Heathrow urges the UK Government to
match the Scottish Government’s reduction in APD across the UK and to also
expand Heathrow so the full benefit of the reduction in APD can be realised for
passengers and the entire UK economy. This would ensure that airports and
airlines can compete on a level playing field and ensure that Scottish passengers’
choice is not inadvertently curtailed or the UK market is not distorted, putting the
UK’s only hub airport at a disadvantage.
connectivity via other, internationally located hubs, Heathrow has only considered connections that are
provided by the same airline / alliance.
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