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Annex A - UK air travel forecasts

Introduction

1. The Department of the Environment, Transport and the Regions' (DETR) document 'Air Traffic Forecasts for the United Kingdom 2000', May 2000, presents the national forecasts for the future demand for air travel, by passenger numbers, at UK airports as a whole between 1998 and 2020. These forecasts are calculated for low, medium and high scenario cases.

2. The estimates are based on unconstrained airport and airspace capacity, and include UK and foreign passengers, broken down into business and leisure services, long-haul, short-haul and 'no-frills' carriers (NFCs). Traffic will be lower if capacity is constrained.

3. The separate Department for Transport (DfT) traffic forecasting model calculates the impact of alternative airport development scenarios up to 2030. The model distributes demand between individual airports and takes account of any capacity constraints faced by the airports.

The national forecasts

4. 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. Another key factor modelled in the forecasts is the onset of increasing market maturity which assumes that, over time, demand for air travel will grow more slowly than growth in GDP per person.

5. Future demand for air travel has a cyclical as well as a trend growth element. However, the modelling does not deal with any short-term factors like random shocks (11 September 2001, SARS virus, the second Gulf War etc), which temporarily affect demand for air travel.

Underlying assumptions

6. 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.

7. 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 fares; and it was assumed that the market would be increasingly competitive and deregulated.

Modelled effects on future prices

8. The future demand for air travel is dependent on assumptions made about the expected level of air fares in the future. Different assumptions produce different forecasts. For example, in a sensitivity test, the 'Air Traffic Forecasts for the United Kingdom 2000' suggests that a two per cent per annum reduction in fares would increase the mid-point estimate for demand in 2020 by 20 per cent.

9. In contrast, the central national forecast assumes that there will be a one per cent reduction in air fares in real terms between 2000 and 2020, which is a lower reduction than the historic trend over the last 30 years and more.

National demand forecasts

10. The graph in Chapter 1 shows the mid-point forecast for demand at UK airports in 2020 at 400 million passengers, rising to 500 million passengers by 2030. These figures relate to unconstrained passenger demand, i.e. before taking any account of capacity limitations at any individual airports and assuming there are no airspace constraints. The provision of the capacity supported by this White Paper, including new runways at Stansted and Heathrow, would permit around 470 million passengers by 2030.

Dealing with the environmental consequences of growth in demand

11. As the Government has a policy commitment for aviation to pay for its environmental impacts, modelling takes account of the effects of an economic instrument, such as a permit trading scheme, on future demand. An economic instrument would reduce the demand for flights as the cost base for the industry would be increased. In 'Air Traffic Forecasts for the United Kingdom 2000', we calculated that a notional 100 per cent fuel tax would lead to a ten per cent increase in airline costs (assuming fuel costs were ten per cent of airlines costs) - and a ten per cent increase in air fares, assuming the increased costs were passed through in full to passengers. This would then have the effect of reducing demand by ten per cent.

12. Since the national forecasts were published in May 2000, there appear to be factors at work leading to airline costs - and hence air fares - declining faster than was previously forecast; and their effect is sufficient to offset the fall in demand expected from the impact of any economic instruments. These factors are:

the 'no-frills' sector: The no frills sector (such as EasyJet and Ryanair) is expected to capture more of the mainstream domestic and short-haul markets. These airlines, with substantial lower costs and fares than traditional airlines, will contribute a large stimulus on the UK aviation market.

greater competitive pressure: It is expected that to ensure commercial survival, the cost base of the traditional scheduled airlines will need to be cut. The pressure to cut costs stems from the competitive threat of the NFCs.

liberalisation: In long-haul markets, it is expected that the liberalisation of current regulatory restrictions will represent an important cost driver. It is also believed that increased airline competition resulting from additional airport capacity will put downward pressure on costs.

Composition of demand

13. The composition of future demand in the national forecasts published in 2000, measured in million passengers per annum (mppa), showed that international traffic was expected to grow by 4.6 per cent per annum in the period to 2020 under the central forecasts. Short-haul traffic was expected to grow at 4.5 per cent per annum over the same period, slightly less than the long haul growth rate of five per cent per annum to 2020.

14. Domestic traffic was expected to grow on average by 3.5 per cent per annum. The corresponding growth rate for NFCs was 6.6 per cent per annum from 1998 to 2020 using the central forecast. Most of the NFC growth was assumed to occur between 1998 and 2005 at a rate of fifteen per cent per annum. This initial high growth rate accounts for the introduction of new routes but after 2005 it was assumed that the growth is essentially due to the expansion of passenger numbers on existing routes.

15. Leisure traffic (4.4 per cent per annum) was expected to grow more slowly than business traffic (5.5 per cent per annum), between 1998 and 2020. The higher demand from business passengers reflects the slower maturity in this market compared with the leisure market. Demand from foreign leisure passengers (4.9 per cent per annum) is forecast to grow faster than demand from UK leisure passengers (4.1 per cent per annum) up to 2020, reflecting higher economic growth rates for countries outside of Western Europe.

Recent developments

16. The number of passengers through UK airports by major traffic groups in recent years is given below:

Million passengers per annum

1998

1999

2000

2001

2002

Domestic Scheduled

31.6

31.1

30.4

28.7

28.1

Domestic NFC

2.0

4.0

5.8

8.6

13.0

TOTAL DOMESTIC

33.7

35.1

36.1

37.2

41.1

International NFC

5.7

8.7

12.4

15.8

22.4

TOTAL NO FRILLS

7.7

12.7

18.2

24.3

35.4

International Charter
o/w long-haul charter

34.7
3.8

35.4
3.7

36.5
3.4

37.3
3.1

38.2
2.9

International Scheduled
o/w long-haul scheduled

83.5
32.6

88.0
34.6

93.4
37.5

89.3
35.1

86.0
35.2

TOTAL INTERNATIONAL

123.9

132.1

142.3

142.4

146.6

TOTAL INT + DOMESTIC

157.6

167.2

178.4

179.6

187.7

Other (e.g. air taxis)

1.5

1.3

1.6

1.7

1.5

TOTAL PASSENGERS

159.1

168.5

180.1

181.3

189.1