Terminal rivalry: can intra-airport competition work at Heathrow and elsewhere?

What rivalry between airport terminals might look like

An aerial view of Heathrow Airport

British Airways’ parent company, IAG, has demanded that Heathrow be split up, with terminals run by rival operators. How might it work? And if it’s such a great idea, why has no-one done it before? These and other key questions answered.

A (very) brief history of UK airport ownership?

Until a decade ago, Heathrow, Gatwick and Stansted – London’s three biggest airports – were part of the same organisation, BAA, along with Scotland’s three largest: Edinburgh, Glasgow and Aberdeen.

After a Competition Commission inquiry found passengers were suffering from a lack of competition, BAA was ordered to sell off Gatwick and Stansted, as well as either Edinburgh or Glasgow (it chose Edinburgh).

In 2009, Gatwick was sold to Global Infrastructure Partners for £1.5bn. Four years later, Stansted was sold to the Manchester Airports Group (majority-owned by local authorities) for the same amount.

Manchester has since overtaken Stansted as Britain’s third-busiest airport.

Last year the top four UK airports were Heathrow (78 million passengers), Gatwick (46 million), Manchester (28 million) and Stansted (26 million).

With the addition of Luton, Southend and City airports, London is the world capital of aviation. Far more passengers fly to, from or through London than the city in second place, New York.

So there’s already healthy competition between London’s airports?

Stansted, Luton and Southend still have take-off and landing slots to offer, making it possible for them to compete against each other to attract airlines and their passengers. But Gatwick is rapidly running out of space, and the absence of any meaningful capacity at Heathrow makes it difficult for a free market to operate as it normally would for the benefit of airlines and their passengers. Heathrow cannot easily offer XYZ Airlines better terms than Gatwick because of the absence of slots, which are not allocated by the airport.

Assuming plans for a third runway at Heathrow go ahead, capacity will increase by about 50 per cent, facilitating more competition.

IAG — which owns Aer Lingus, Iberia and Vueling as well as British Airways — has appealed to the Civil Aviation Authority to meet its obligation to “promote economy and efficiency”. The airline consortium wants competition built into Heathrow’s expansion plans, with outside companies coming in to operate terminals.

How would that work?

Let’s assume that an expanded Heathrow is served by the existing four terminals (2, 3, 4 and 5) and a completely new facility, able to handle 30 million-plus passengers annually. Were the new terminal operated by a competitor, it could bid for business from British Airways (current tenant of Terminal 5), Star Alliance (Terminal 2) or big airlines such as Cathay Pacific, Emirates, Delta, Virgin Atlantic and Qatar Airways that are currently located variously in Terminals 3 and 4.

Airlines could negotiate on everything from passenger service fees and aircraft handling charges to the speed of security checks and quality of catering outlets.

Suppose Terminal 4 was sold off: the new owner could turn it into a low-cost facility, offering easyJet and other budget airlines cheaper deals than they might find at Heathrow’s other, better-connected terminals.

Are there any good examples of competition between terminals within the same airport?

Plenty of airports, such as Lisbon and Marseille, have no-frills terminals for budget airlines. But in each case the low-cost part is owned by the same entity as the main, full-service terminal, so competition does not exist in the normal sense.

New York JFK is the best example of large airports where airlines have built, developed and run their own terminals. They compete to deliver a better passenger experience, and, in the case of the TWA Flight Center, the aesthetic thrill of travelling through an architectural miracle. (Eero Saarinen’s futuristic masterpiece was built in 1962; it closed in 2001, the same year as TWA was taken over by American Airlines, and is being reborn as a hotel.)

Willie Walsh, chief executive of IAG, says: “Most major US airports have terminals owned or leased by airlines and there are European examples at Frankfurt and Munich airports.”

Heathrow disputes the validity of these comparisons, describing the need to connect through New York JFK as “misfortune”, and saying it has no wish to replicate that passenger experience. The airport also says that Munich and Frankfurt are dominated by Lufthansa, a state of affairs “against the interests of our passengers”.

For an objective view, I turned to the aviation analyst John Strickland, who says: “There are a number of cases of terminals being run by different operators, including airlines, at the same airport. However each case has its differences and opinion on what this actually means for competition differs widely.”

Why not try splitting up Heathrow or Gatwick right now, and see how it works out?

Two prime candidates for a sell-off could be Heathrow Terminal 2 and Gatwick North, the strongholds respectively of Star Alliance and easyJet. But suppose a new firm took over: what happens next? Each terminal is close to capacity, with very limited scope for poaching airlines from rival terminals.

They could compete for new airlines, but the shortage of slots would hamper this process. Only when a large amount of new capacity is created could the model be properly tested.

Has anyone suggested this before?

Yes. Ten years ago, the then-chief executive of BMI, Nigel Turner, demanded competition between individual terminals at Heathrow to mirror the intense rivalry between airlines. In March 2008, he told me: “BA, BMI, Virgin, easyJet and Ryanair have been knocking seven bells out of each other. Who benefits? The airlines? Maybe. But the consumers – definitely.

“If Terminal 1 competed against Terminal 3, you would get a far better Terminal 1 and a far better Terminal 3, as they fought for our business.”

But as the aviation analyst John Strickland says, that simple statement conceals a mass of complexity: “The dynamics of airline/airport relationships are very much in evolution. Planning horizons for airport infrastructure are much longer than for airline route and schedule decisions, and this creates inevitable tensions.

“At Heathrow the process has particular complexities as the future mix of airline business models could shift.

“The challenge lies in marrying adequate investor returns on infrastructure with acceptable user charges for airlines whilst fostering the desired outcome of competitive air services for travellers.”

His recipe for success? “A transparent and collaborative approach between airports and airlines.”