Who's asking 'why'?

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In another sign of the extent to which the Labour government is engaged in continuity politics rather than facilitating real change, it was announced this week that London City airport would be allowed to expand its number of flights, and that the government was ‘open’ to bids from other airports to increase the number of flights as well, and expand their facilities to permit that. It’s true, of course, that expansion of aviation will add to GDP growth (at least, to the extent that it doesn’t simply redirect expenditure from other sectors), but it highlights the danger of setting GDP growth as an over-riding objective, with no consideration as to whether it’s the ‘right type’ of economic growth, i.e. growth which meets other objectives, such as environmental ones. Balancing growth with meeting environmental obligations and targets is much, much harder. So hard, in fact, that it appears that they’re not even going to attempt it.

Here in Wales, the Welsh government seems to be similarly minded when it comes to Cardiff Airport, with its plans to pump in hundreds of millions of pounds in the coming years in an attempt to grow traffic from the airport. Interestingly, the Conservative opposition in the Senedd opposes this expenditure and proposes instead that the airport should be transferred back to private ownership. Given past experience – the airport was only taken back into public ownership because it was failing badly under its private owners – just how putting private owners back in charge would help is unclear, and the Tories’ proposal was remarkably light on detail in respect of that. There is only one way that I can think of in which private ownership of such a prime piece of land on the outskirts of Cardiff could turn a decent profit in the short to medium term, and that’s to close the airport and develop the land for other purposes. Perhaps that’s what the Tories want, but a call for a sell-off isn’t an entirely honest way of calling for closure.

What Wales needs in terms of airport coverage is something of a taboo subject. Because of the airport’s location, and the population distribution in Wales, it’s never likely to be able to compete with Manchester or Liverpool for travellers from the north of Wales, or with Birmingham for travellers from the Welsh midlands. And in the south-east of Wales, passengers have a realistic choice between Cardiff and Bristol, meaning that the only real ‘captive’ market, for which using Cardiff if flights are available will almost always make more sense than going elsewhere, is Glamorgan and most of Dyfed. It’s not a large market, but experience shows that it’s enough to sustain regular holiday flights to a range of popular destinations. Based on population growth, and assuming an increased level of affluence which has not exactly been visible recently, there is potential for slow but solid growth in the number of such flights and the range of destinations served.

However, a strategy based on a large and rapid increase in passenger numbers depends on rather more than that. Effectively, that means persuading carriers to use Cardiff instead of other airports (such as Bristol and Birmingham), either for existing flights or for any increase in flights in the future – and then persuading passengers, including those from outside Wales, to use those flights. The proposition that it could become a significant international airport with a large range of destinations being served depends on an increase in scheduled flights, rather than flights by holiday operators. It seems that the prestige of becoming that sort of international airport is what drives the Welsh government, and there are plenty of others as well who will argue that without that, Wales is somehow not a proper nation. But the extent to which becoming such an airport will drive wider economic growth is arguable at best; the idea seems to be based more on blind faith in ‘the markets’ than any real analysis of potential. For the foreseeable future, at least, it would also depend on an ongoing level of public subsidy – whether to the airport or to the carriers is irrelevant here – about which there is a lack of honesty and transparency. The latest £200 million will not be the last.

How do we measure ‘success’ for the airport? For UK Labour, it seems to be in terms of turnover and the contribution that makes to GDP; for Welsh Labour it’s the number of passengers and flights; for the Tories it’s eliminating any cost to the public purse, even if the logical conclusion is complete closure. None of those seem to be based on any thought-through assessment of whether Wales needs an airport in Cardiff, and for what. Yet the answer to those questions provides the only sound basis for assessing success. We are a small country – having pretensions beyond our capabilities is merely aping the UK’s approach. Maybe slow, organic growth serving the needs of passengers in a limited area of Wales should be enough.

Defining viability

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Flybe may be the first major company to be tipped over the edge by a drop in sales as a result of the coronavirus, but it won’t be the last.  And it seems that the probability of company failures is likely to mirror the probability of a fatal infection in humans, in that it is the most vulnerable which are most at risk.  Flybe was certainly in the vulnerable category anyway; how long the company would have survived even without the drop in revenue resulting from the virus is an open question.  We may well see coronavirus becoming another convenient excuse for failures which might well have happened anyway.

That makes it harder for government – whether in Cardiff or in London – to decide when and how to intervene to support failing companies.  Whilst it’s clear that government intervention is the only way of preventing some failures during the probable epidemic facing us, governments are historically not very good at identifying which companies are good bets and which are poor ones.  At the level of individual companies, that may not always matter a great deal – after all, if a company was a good bet, it would usually be able to obtain commercial finance, and needing government action to fill a commercial gap is a sure sign that the commercial case isn’t as strong as it might be.  Expecting the same proportion of success from government investment as one might expect from commercial investment is wholly unrealistic; the more marginal the cases being assisted, the greater the probability of failure, a point not well understood by some critics of government policy, especially here in Wales.

That’s no excuse, though, for throwing public money into hopeless cases, especially where the public purse ends up carrying all the risk and all the potential reward flows to the company’s owners.  At its simplest, a company which cannot sell a sufficient quantity of its goods or services at a high enough price to at least cover its costs and liabilities (and preferably to make a profit on top) is not viable, and tax payment holidays or government grants cannot change that underlying picture.  A company which claims that it would be viable if only it didn’t have to pay one or other form of tax really isn’t viable in the real world within which companies must operate.  From all the news stories which have appeared in recent months, I rather suspect that Flybe is not a viable proposition, with or without coronavirus.  On many – perhaps most – of its routes, it is simply not selling enough seats at a high enough price to cover its costs.  As with vulnerable humans, the virus has merely brought the end forward a little.  I’m not sure that some of the politicians bemoaning the impact on Cardiff Airport fully understand that economic reality.

The question that needs to be asked now is not ‘how do we rescue Flybe or find another operator to take over the routes?’ so much as ‘why is the demand for the routes being flown insufficient to cover the costs of operating them?’.  Paying people to run loss-making and environmentally damaging flights in order to boost the fortunes of a loss-making airport doesn’t immediately strike me as the best way of meeting what appears to be a very limited demand for travel between the relevant places.

Not a coherent policy

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For an independentista like myself, the question of devolving Air Passenger Duty (APD) is a complete no-brainer: of course, it (along with all other taxes) should be the responsibility of the Senedd rather than Westminster.  Supporting the criticism of foot-dragging by the UK Government which was made last week by the Welsh Finance Minister is easy enough.  Supporting the apparent policy of reducing the tax is, however, an entirely different question.

Clearly, the Welsh Government sees a reduction in the tax as being of economic benefit to Wales and a means of incentivising greater use of Cardiff airport.  Leaving aside the implicit assumption that ‘Wales’ is equivalent only to the southern part of the country (people living in the middle and north of Wales are likely to continue to find Liverpool, Manchester and Birmingham more convenient and attractive even if Cardiff does offer a small tax advantage), the issue is whether deliberately encouraging an increase in the number of flights taken is in line with the same government’s commitment to carbon reduction.  It clearly is not; increasing the volume of the most carbon-intensive form of transport is not compatible with a commitment to de-carbonising the economy.

The original purpose of APD wasn’t raising revenue at all, it was an early attempt at a ‘green’ tax on an environmentally costly mode of travel.  In practice, it’s a blunt and clumsy instrument which takes no account of the relative efficiency of different engines and aircraft and has had little effect on the continuing growth in air travel.  It’s a half-hearted attempt to address the anomaly under which no fuel duty is paid on aviation fuel (unlike other fuels), but imposing such a tax unilaterally would lead to even more environmentally damaging practices such as an increase in ‘tankering’ (where aircraft fuel tanks are filled with more fuel than required in low duty airports in order to avoid refuelling in high duty airports, and end up using more fuel in total to carry the extra weight).  Aviation taxation unquestionably needs to be reconsidered, but it’s hard to see what the Welsh Government acting alone could effectively do beyond a bit of tinkering at the edges – what’s needed is collective international action.

Merely reducing or abolishing the tax – which is what seems to be Welsh Government policy (aided and abetted apparently by opposition parties) – is encouraging a race to the bottom, in which airports in different tax jurisdictions compete to see who can do most to encourage carbon-intensive activity in pursuit of immediate economic benefit.  Joined-up thinking it is not.

Vanity headlines

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If there’s one thing that the Tories in the Assembly really like, it’s grabbing a dramatic headline about an alleged waste of money by the Labour Government.  And if there’s one thing that they avoid like the plague, it’s proposing constructive and helpful alternatives.  Their criticism last week of the expenditure by the Welsh Government on Cardiff Airport was a case in point.  Demanding that it be sold off unless it makes a profit (and if it ever did, I have no doubt that they’d demand that it also be sold off in order for that profit to end up in private rather than state hands) would take us back to where we were before the government bought the airport in the first place – it was failing, not least because it was suffering a serious lack of investment.  What they have not told us is what sort of future they see for the airport, although they leave the clear impression that they’d rather see it return to decline and failure in private hands than stand a chance of success following a reversal of the lack of private investment by the state.

The realities of geography don’t favour some of the wilder dreams of supporters of expanding the airport.  The catchment area for which Cardiff is the best and closest airport isn’t as large as that of its competitors – basically, it’s limited to Glamorgan and most of Dyfed.  Outside that area, Bristol, Birmingham and Liverpool are all potential – and in most cases, closer or more accessible – alternatives.  The idea that it can ever truly become an international airport serving the whole of Wales is a fantasy.  Expecting to be able to run a commercially-viable full range of international scheduled flights is unrealistic unless either the total number of passengers can be increased significantly (which would surely be contrary to environmental policy) or else passengers can be diverted from other airports which are currently more easily accessible to them.  If Cardiff airport did not exist, would anyone seriously suggest trying to establish a full international airport at that location as a commercial enterprise?  I doubt it.

At the other extreme, there are those who would argue that air travel is so damaging that we should be deliberately restricting flying, and that far from increasing capacity and competition we should be seeking to reduce capacity.  I find it difficult to imagine such a scenario gaining popular support at present, but under such conditions it would hard to see a future for Cardiff Airport at all. 

In between those options, the likeliest – almost by default – future for the airport is one based on slow organic growth, where the extent of that growth depends more on population changes and increasing affluence and is matched with appropriate investment in increased capacity, than on proactive government measures to promote and expand the airport at the expense of its competitors.  I find it hard to believe that the Tories actually want to see the airport fail and close (they certainly are never going to come out and say that), and maybe they even see its future in much the same way that I do.  What they fail to explain, however, is why private ownership would make that more likely to succeed than state ownership, when actual past experience demonstrates precisely the opposite.  Still, why let mere facts spoil a good headline?

The return of Air Wales?

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I referred yesterday to my scepticism about the proposal put forward by Plaid that Wales should have its own national airline, along with a network of regional airports across Wales.  There are a number of issues with this proposal, to my mind.

The first concerns general trends in the aviation industry.  It’s an industry which has certainly seen a great deal of growth in recent years, and that growth has been accompanied by falling prices.  And there is clearly scope for continuing growth into the future.  But that combination of growth and falling prices has been achieved by a mixture of consolidation of national airlines into multinational groups and the rise of cheap low-cost airlines.   There is a history of specifically Welsh airlines - we did, of course, have Cambrian Airways which was moderately successful, and which operated for almost 40 years before being swallowed up by BA in an earlier period of consolidation in 1974.  And we had Air Wales, in two different guises, both of which hit financial problems and eventually ceased operations, in the later instance citing spiralling costs and aggressive competition.  As a means of boosting the range of flights from Cardiff Wales airport, setting up a new state-run airline in a small country like Wales would be going against the flow, to say the least.  That isn’t a cast-iron reason for not doing it, but it’s a pretty good reason for exercising a great deal of caution.

Added to that is that the proposal seems to be based on a supply-led, rather than a demand-led, approach to increasing air traffic.  I don’t doubt that there are people in Wales who would like to be able to fly to an increased range of destinations from Cardiff airport, but at what point does that demand become sufficient to justify the prior expenditure on providing the capacity?  The experience of commercial operators who’ve tried starting new services from Cardiff Wales does not augur well.  A national airline looks like a potential way of diverting a large amount of government expenditure to a loss-making enterprise.  And that is in the context of a government which has little control over its own revenue streams and is legally obliged to balance its budget, meaning that significant investment in an airline would inevitably impact other services.

Underlying those problems is the question of the catchment area from which the demand arises.  I remember a comment on a previous post about expanding Cardiff Wales airport which came close to suggesting that I was being unpatriotic by not enthusiastically supporting expansion; but we need to have a degree of realism about the airport’s prospects.  The population in the catchment area which it is uniquely placed to serve is comparatively small, and is restricted to Cardiff, the Valleys and points west thereof (and we need to remember that parts of that catchment area are among the poorest parts of the UK, a factor which inevitably constrains the current demand for air travel).  For the North, the Canolbarth, and Gwent, there are equally accessible (or even more accessible) competitor airports, and that will remain true even after constructing improved communications routes between north and south.  Choice of airport isn’t just about having a wider range of destinations, or about price (let alone just about being patriotic); it’s also about convenience and ease of access.  The answer to the question ‘why haven’t we got direct regular flights from Cardiff to destination X?’ is because there is currently insufficient demand from within the unique catchment area to make such flights commercially viable (unless they are replacements for, rather than supplements to, existing flights to the same destinations from competing airports, and therefore able to draw on a wider catchment area).  Setting up a loss-making state-run airline is not the solution to that problem.

I don’t know what to make of the proposal for a network of regional airports across Wales as well as expanding the role of Cardiff.  If such airports are going to have their own short or medium haul flights, then they will be direct competitors to Cardiff, and if they’re seen as primarily the origin of ‘feeder’ flights into Cardiff, then they are just about the least efficient and most environmentally damaging method of transporting a (comparatively) small number of people around our country that I can think of.  This is exactly the problem with the current north-south air link – it benefits few and is viable only by the payment of a subsidy for each and every traveller.  Better by far to improve Wales’ internal surface transport (and especially rail), which was another of Plaid’s proposals and one which I would entirely endorse.

And that brings me on to my last, but far from least, point which is whether encouraging the growth of air traffic is a good thing anyway.  I don’t want to stop people enjoying foreign holidays (that would be hypocritical to say the least), nor do I want to create obstacles to foreign trade (although I do want to try and re-localise business as far as possible).  Both of those are likely to lead to slow organic growth in the number and range of flights available from Cardiff.  But actively encouraging the growth of air traffic goes beyond either of those objectives, and seems a strange policy to be coming from a party parading its environmental credentials.  Part of my support for the building of HS2 (which I know appears perverse to many independentistas) is that I see it as part of a high-speed pan-Europe rail network, and as an environmentally preferable alternative to increasing short haul air travel.  I want to see Wales benefitting from that alternative as well, rather than trying to block its development.

Setting up a national airline for Wales looks to me like a project aimed at boosting the semblance of statehood, at what is likely to be a high cost.  I’m more interested in attaining the substance of statehood.

Tax cuts aren't the same as devolution

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Not for the first time, bosses at Cardiff Airport have called for the devolution of air passenger duty.  Now, as a question of principle, I’m not going to disagree.  Since my starting point is that all taxes should be levied by the Assembly, not by Westminster, and that as long as the UK exists, financial transfers should be from devolved administrations to the centre rather than the other way around, I’m never going to disagree with the devolution of any taxation powers.

But I’m not sure that devolution of the tax is really what Roger Lewis is calling for here.  What he’s calling for is a cut in the tax; devolution is merely the perceived means to an end.  He clearly believes that the Welsh Government would be more likely to cut the tax than the UK Government.  He may well be right on that – but putting specific taxes in the hands of whichever administration is most likely to set the rate to the advantage of the organisation you represent isn’t the same as supporting devolution, let alone a particularly rational way of sharing powers across the UK, or of planning the public finances.

Personally, I’m not at all sure that cutting air passenger duty is the right thing to do.  It is clearly intended to boost traffic and passenger numbers at Cardiff airport – but is encouraging more flying really what we want to do?  For those running an airport, it might well be, but I’m not at all sure that it’s a good fit with the environmental policies being put forward by the government.

What does 'success' look like?

Tweet When the then Tory government nationalised Rolls-Royce in 1971 because the company was in deep financial trouble, one wag penned some new words to the tune of “the Red Flag”.

The People’s Flag is deepest blue

We’re buying up Rolls-Royce for you

But if it makes a profit then

We’ll flog the b*****s back again

The Tories’ call for the privatisation of Cardiff Airport doesn’t even have the merit of being able to sell it as a successful profitable company.  It’s based instead on little more than blind faith – the assumption that, as they put it, selling it off would “encourage private sector investment”.  That is, of course, precisely what was not happening before it was nationalised, and unsurprisingly, they offer no evidence that the situation would change if the airport were to be returned to the private sector.

That’s not to argue that the Welsh Government’s strategy for the airport is any better – not least because there’s no obvious sign that they have one.  When they bought the airport, they claimed that we needed to have more scheduled flights on which business people and inward investors could fly direct to Cardiff.  The immediate motivation for the Tories’ latest call is the continued drop in numbers of passengers using the airport – which they brand as some sort of failure.  But there’s nothing inherently unsuccessful about a fall in total passenger numbers (from holiday flights, for instance) if there were more scheduled flights to key capitals, if that’s what they are trying to achieve.

An opposition approach which concentrated on the lack of any obvious strategy for the airport, let alone any way of monitoring the success of such a strategy, would be a start.  Even better would be an approach which started to ask some fundamental questions about whether we should be encouraging more flying, whether having direct flights actually makes much difference to the Welsh economy, and whether simply moving flights to Cardiff from other airports by reducing Air Passenger Duty is worthwhile (all of which seem to be taken as read by the political consensus) would be even better.  These are open goals left by a government which seems not to know what ‘success’ might look like.

Simply arguing that success is measured in terms of total passenger numbers, accompanied by an expression of blind faith that that number would increase if only the airport were in private hands, is completing missing the point and resorting to dogma.  It’s certainly not constructive opposition.

Does a small tax really make so much difference?

Tweet Last week, a cross-party group of MPs urged the UK Government not to devolve Air Passenger Duty (APD).  No real surprise there – most MPs seem to be as strongly against devolving anything as I am in favour of devolving everything.  Taken in isolation, though, I find it hard to get as excited about APD as some do.  It’s a tiny part of total taxation revenue in the grand scheme of things, and the ability to vary it has little impact on total budget.  Insofar as it is a policy lever worth having, its value depends less on its revenue-raising ability than on its alleged impact on the success or otherwise of Cardiff airport.

On that point, I’m something of a sceptic. I’m simply not convinced that reducing the tax at one airport is going to result in the flow of business from elsewhere which others are predicting.

In a highly unusual show of unity by organisations which are usually at each other throats, four airlines joined forces a few months ago and commissioned a report from PricewaterhouseCoopers which argues that abolition of APD would benefit the UK economy.  It would also, of course, be of no small benefit to the airlines concerned. 

The argument put was that abolition of the tax would have a number of effects, including:

• making it cheaper for companies to physically visit their customers more often, thereby maintaining better relationships and selling more product
• making it cheaper for all of us as consumers to fly abroad on holiday and therefore encouraging us to fly more often
• encouraging airlines to invest in new and bigger aeroplanes and to open new routes.

The net effect, the report argues, would be to increase the U.K.’s GDP by around 0.45% in year one and by an average of 0.3% over three years.  Are they right? 

It’s an argument which has more than a little relevance for Wales given the suggestion that APD could be devolved.  (Although abolition of APD at UK level, should the airlines be successful with their proposal, would mean that Wales would have to set a negative air passenger duty if it wanted to use this tax for competitive advantage – in short, the government would have to pay us to fly.)

I don’t disagree entirely with the methodology used by the report.  There are however a number of caveats and unstated assumptions which are open to challenge, and which may affect the claimed benefits.  And I rather suspect that advocates of devolution of APD and subsequent slashing of the tax for flights from Cardiff are making very similar assumptions.

Firstly, it is effectively taken as read that globalisation is the way forward and that our economic model for the future should be based increasingly on travelling the world to sell our wares, rather than on a more localised approach to business.  And that, in turn, is based on the unstated assumption that fuel costs for transportation will remain at a low proportion of total costs.  In the short to medium term that may even be true; I’m far from convinced that it will be true in the longer term.

Secondly there is a question in my mind about the extent to which GDP really grows or is simply moved from one place to another.  If the sales made by jet-setting business people are truly “extra” then the overall world GDP does indeed grow; but if they simply replace goods currently being supplied from elsewhere, then we’re merely shifting someone else’s GDP to the UK.

Which brings me onto the third point – there is an implicit assumption that action by one country (or airport, in the case of the Cardiff proposals) to improve its competitive position at the expense of others does not provoke similar moves elsewhere.  It’s another example of the way in which tax reductions can simply lead to a race to the bottom.  And it’s a question which is equally valid in the case of any comparison between, say, Cardiff and Bristol airports.

The report also makes the point that air passenger duty is a regressive tax, which “impacts disproportionately on poorer households”, because the cost of an annual holiday in the sun represents a greater proportion of the disposable income of the lowest paid decile than of the income of the highest paid decile.  It’s true of course - in theory at least.  At a practical level I wonder how many people in that lowest paid decile can afford to fly anywhere anyway – with or without APD.  It also neatly skips over the corollary, which is that abolition of APD disproportionately favours those who can afford to fly off on holiday several times a year.

And somehow I rather doubt that the executives of the airlines commissioning this report would really support the abolition of all “regressive” taxes and their replacement with a more progressive income tax regime.  I suspect that their opposition to regressive taxes is confined to those taxes which are perceived to be limiting their own profits and salaries.

More generally, how desirable, in any event, is the expansion of air travel in policy terms?  Even if it does lead to a significant increase in GDP, is that enough of a justification?  Not all GDP is “good”; there are lots of things which are good for GDP but not necessarily desirable otherwise.  That’s a question which this report seems not even to ask.  And it's a question which those advocating a cut-price tax regime for Cardiff airport also seem not to be asking.

For Wales, see England?

Tweet The Conservative opposition in Cardiff Bay last week criticised the decision by the Welsh government to buy Cardiff airport, and claimed that the purchase was a mistake.  They would, presumably, have preferred the government to stand aside and allow private enterprise to preside over further, and probably terminal, decline.

The criticism by both the Conservatives and the Lib Dems of the lack of any clear direction on the part of the government as to what it intends to do with the airport has a little more validity – but only a little.  In fairness (?) to the Labour government in Cardiff, I don’t think they’ve ever claimed that the decision to purchase was part of any grand plan or strategy; it was a purely pragmatic and opportunistic response to the situation which developed.  They purchased an airport with no clear idea of what they were going to do with it; and it seems that they haven’t inherited any real plan from the previous owners either.

Given that background, the assertion by the government that that the purchase will lead to a turnaround is, at this stage, probably as baseless as the opposition’s criticism.  It owes more to aspiration than to any concrete plan.  But my concern is more about the language being used and what that reveals about the underlying attitudes of all concerned to the Welsh economy.

Referring to the airport as the “National Airport of Wales” as seems to be increasingly common, is one of those concerns.  It is in Wales, certainly, and is now owned by the nation; so in a purely semantic sense the description is true.  The idea however that an airport in the south-east corner of Wales ever can or will serve the whole of Wales in any meaningful way is patently nonsense.

At one level that may not actually matter too much.  To the extent that air connections are important (and that’s another argument entirely), what matters is that they’re available and accessible – not which side of the border they happen to sit.  The north of Wales will continue to be better served by airports to the east of Offa’s Dyke than the one in Cardiff; short of improvements to North-South communications in Wales on a scale which the government does not even seem to be contemplating, that will continue to be the case for the foreseeable future.

But at another level, it does matter.  Government spokespersons have talked about the airport being central to the “Welsh” economy; and about overseas investors not taking seriously any “nation” which does not have good air connections.  In both cases, the context suggests that the "nation" is "Greater Cardiff" rather than Wales as a whole.  It betrays yet again an obsession with growth in that corner of Wales rather than any attempt to distribute wealth more evenly across the nation.

It mirrors the attitude of the UK Government, which is quite happy to see growth and wealth concentrated in the South East corner of these islands.  It’s an attitude which most Welsh politicians rightly criticise.  But why are they then so keen to replicate it on a Welsh level?