Air industry allowed to spread its wings

SINNERS redeemed are a special pleasure. For decades the Civil Aviation Authority (CAA) was the enemy of the air traveller. It was that classic model of a regulator "captured" by those it was meant to be regulating. Specifically the large airlines, British Airways in particular, and the large airports, led by Heathrow, suppressed or neutered open skies over Britain ... or even over routes to foreign destinations.

The CAA used to be on the side of darkness - like the bad guys in Star Wars - but it has been converted. Now it favours competition and new entrants into a previously closed industry. The authority dates its conversion to 1993 when it relaxed the rules and permitted the low-cost, no-frills flights that have transformed everyone’s expectations. This unlocked latent demand. In 1990, six million plane journeys were taken by Brits; by 2004 this had leapt to a whisker under 30 million.

There is one simple test of how liberal an aviation trade person is. The shibboleth is the word "slots". These are the permissions to take off and land at an airport. They are highly prized at Heathrow, but less precious on Papa Westray.

If something is rare, then it needs to be priced to be rationed out. Slots are strange, intangible assets: no traveller ever sees one, balance sheets rarely ever reveal them - yet they are the crucial properties owned by airlines. They represent a huge bias towards the older airlines. BA is by far the greatest custodian of these rights. Many inherited from the defunct Imperial Airways, BOAC and BEA and even Dan Air. Take away its slots and BA would simply evaporate.

In its recently published report, the CAA argues that we should move towards an auctioning of these slots. Perhaps this sounds technical and obscure, but it is the essence of real competition in aviation.

We all know that Ryanair and the other low-cost airlines have opened up hundreds of routes, but note how they are almost all linking provincial locations and never metropolitan hub airports. The CAA says that regional airports have been the main beneficiary of the liberalisation of the rules. Its report is crafted in the opaque language of public bodies, but it cannot hide the vibrant nature of airports most of us had never heard of until a few years ago.

Look at the flight figures of Scotland’s two main airports, Edinburgh and Glasgow. Their flight numbers have jumped 141 per cent since 1990. Edinburgh carried 2.492 million passengers in 1990 and 7.995 million in 2004, an increase of 219 per cent. Glasgow carried 4.286 million in 1990 and 8.521 million in 2004, up 99 per cent. If other businesses in Scotland were to flourish in this manner, what a booming economy we would have. It is worth noting that those figures do not reflect investment or even subsidy. They illustrate the simple truth that lower fares generate greater traffic. Destinations previously ignored can become highly lucrative.

Scottish aviation is odd. With Turnhouse and Abbotsinch only 48 miles apart, it may have been wiser to have a single airport at Shotts serving all of the central belt. History has bequeathed us these two rivals. Prestwick Airport, on the Ayrshire coast is a curiosity often best explained as little more than a specially protected venture as it lay in the constituency of George Younger, once secretary of state. Now it has found profitable niches.

The CAA report observes that airports ceasing to be publicly owned has stirred them into being more lively and innovative. It ducks the question of why BAA, indeed a publicly quoted company, is still so near to a monopoly. The company owns Aberdeen, Edinburgh, Glasgow, Gatwick, Heathrow, Stansted and Southampton. I don’t doubt BAA sites are far more efficient than when they were nationalised, but is this not too dominant? You can’t compete with your colleagues other than in a charade sense.

Dundee airport is run by the city council. Could this be why it is so much less a place than Aberdeen airport. My favourite Scottish airport may be Inverness. It links to the world through its London routes but is its own hub for the Highlands and Islands, carrying everyone in the Hebrides to shop at the Marks & Spencer in Inverness.

Scotland carries its peculiarities. They have posh names but translate into plain English: "subsidies". Scottish Enterprise operates its well-intentioned "route development funds". If there was truth in its corporate flannel, it would be a superstar. It argues that 6.8 million of subsidy will generate 150 million in benefits and 600 tourism jobs. The reality is more humble. Of the 17 recipients of these subventions, seven have folded. Scottish Enterprise’s "help" can be the kiss of death.

Scotland also enjoys, or suffers, "public service obligation" routes. These are subsidies mostly for remote islands with cash from the Scottish Executive, Western Isles Council, Shetland and Orkney Councils. The CAA warns of the hazard of a "race to subsidy effect". What a breath of fresh air. The old-style CAA would have been busy urging more subsidies. Perhaps the Executive might consult the CAA’s team before subsidising the proposed tram-line from Waverley to Galashiels.

It is a great oddity that aviation fuel is untaxed. This is an interesting fiscal curio. The argument is that aviation fuel cannot be taxed as it would give an advantage to other nation’s airlines. Here is an example of a phenomenon I believe we will hear far more of in the future - "tax competition" between different jurisdictions.

The CAA says that, in principle, we all may prefer to travel on shorter routes by train, car or bus, but it does not detect strength from these rivals. If I wanted to travel between Edinburgh and London I regard the four hours on GNER as far more relaxing than hurtling out and then in from the airports.

Flying from London to Manchester strikes me as eccentric as well as expensive, but it shows how the railways have to market themselves far more. It is baffling that it is cheaper to fly than jump on the train at Euston.

I find this report on the emergent vitality of regional airports a comfort and a confirmation that "integrated" or "planned" transport fails. The experimentation of a more liberal market is far more successful. Some airlines may fail, but they are learning all the time and finding routes no central authority ever imagined.

John Blundell is the director general of the Institute of Economic Affairs