DfT modelling results

This note describes how the DfT modelling facilities (NAPALM, also known as SPASM) were used to help inform views about:

• passengers’ willingness to substitute between airports (including the size of the geographic markets surrounding Manchester and Stansted airports); and
• shadow prices that might arise at Manchester and Stansted airports in the future (which might help to inform views about when the operators of these airports might acquire market power).

The analysis is described further below, according to:

• Purpose;
• DfT modelling (NAPALM or SPASM);
• Airport substitutability;
• Shadow pricing; and
• Conclusions.

Purpose

We decided to draw on the work carried out by the DfT in September and October 2007, as part of its Consultation about adding capacity to Heathrow, to help us consider what might happen in the future. We used the results generated by DfT’s modelling facilities (NAPALM, previously known as SPASM) to consider the likely situations across a number of different scenarios, in terms of passengers numbers and potential pricing levels. A full description of NAPALM/SPASM can be found in the DfT publication ‘UK Air Passenger Demand and CO2 Forecasts, which is available on its website.

It was hoped that this modelling might help address some of the information gaps in the analysis carried out by CAA (based on customer survey) and Frontier Economics / easyJet (based on airline booking data). The underlying datasets inevitably represented incomplete information about potential future developments. In particular, they had not been developed for forecasting or scenario testing. Therefore, we wanted to see if NAPALM could provide additional information to help overcome some of the shortcomings of the other sources.

DfT modelling (NAPALM or SPASM)

The DfT modelling software (NAPALM or SPASM) is based on a whole journey generalised cost approach that combines:

• A calibrated model of how passengers choose between different airports;
• passenger demand information from CAA surveys and DfT's national forecasts;
• data on journey time from each UK zone to each modelled airport; and
• airport capacities

to forecast the share of passengers from each zone that would choose to travel from each modelled airport.

The calibrated model has the strong advantage that its parameters have been estimated to best fit the actual pattern of passengers' airport choices in its base year. The report referred to above contains a section on 'validation', demonstrating that the model is very successful in predicting the base year pattern of demand. This suggests confidence can be placed in its predictions of passengers' airport choices.

A key feature of this model is the ‘shadow cost’, which is a premium that NAPALM adds to the generalised cost of passengers using a capacity constrained airport to ensure that the ‘excess’ demand is curtailed to match the supply of facilities available. This premium represents an upper limit for the extra payment that the airport operator could charge per customer for using its facilities. A number of different capacity scenarios were considered for a number of airports.

For scenarios, the main one tested was capacity reductions against a baseline where no capacity was added in the South East beyond the current planning system. Other scenarios were also explored, which were the latest of those published by the DfT, including maximum use at Stansted airport and a second runway. The model runs were carried out for Birmingham airport, as well as Stansted and Manchester airports, to provide a control or sense check on the results generated.

In each case, the data described where passengers might travel from, including whether they would travel at all, if they were displaced by either reduced capacity or extra costs from their preferred airport. The capacity reductions were 10%, 20% and 50%. It was necessary to choose reasonably large capacity changes to generate meaningful trends given that some airports, such as Manchester, are not capacity constrained. For these airports, small capacity reductions had no impact on passenger behaviour. Further, the data generated for capacity constrained airports were subject to a margin of error of +/- 3%, which implied that only relatively large differences were meaningful. Accordingly, it was prudent to use the results to infer broad trends or orders of magnitude, instead of precise predictions.

Results

The volume of passengers and shadow costs were reported according to:

• Each airport in the model (31 in total);
• Each year until 2020; and
• Geographic regions of the customers’ origin.

Airport substitutability

Liverpool airport was found to be a good substitute for Manchester airport. There were some passengers willing to depart from East Midlands airport instead of Stansted airport. However, switching from Stansted airport to East Midlands airport only occurred as a last resort if there was no alternative capacity at the other London airports. Further, it tended to be restricted to passengers at Northern fringe of the South East region, instead of those from London or Essex. Therefore, while East Midlands is a possible substitute for Stansted airport, it did not seem like a very strong one from this analysis. Birmingham airport only acted as a limited substitute for other airports, since it is close to being capacity constrained itself.

Shadow pricing

The NAPALM modelling results clearly showed a shadow price emerging at Stansted airport in the next 5 years in the baseline case of no further capacity beyond the current planning system. The shadow price escalates quite rapidly, unless there is capacity expansion. However, there is sufficient capacity and no shadow price at Manchester airport until beyond 2020. Further, a 10 per cent capacity reduction at Manchester airport does not result in a shadow price for the time period considered.

Conclusions

The NAPALM modelling results support the view to some degree that Stansted airport is likely to acquire substantial market power. Without additional capacity in the next five years, the shadow costs indicated that the operator at Stansted airport could materially increases charges to its customers. The results also suggested that the strength of East Midlands airport for Stansted airport is perhaps not as strong as the CAA argued. The DfT used this information as one line of evidence, along with that provided by the CAA and airlines.