Highlands and Islands Airports Ltd

Presentation to SEAPLANE

Lerwick21st April 2005

HIAL’s Mission Our remit from the Scottish

Executive is: To maintain and operate 10

airports To support economic development

and social inclusion Links to work of stakeholders in

councils, HIE, Visit Scotland, SCDI, Chambers of Commerce etc

HIAL’s Strategic AimsMaintain and improve air connectivity by: Supporting existing levels of service Achieving new routes and frequencies

Provide a value for money operation for shareholder (Scottish Ministers)

Continue to develop partnerships that benefit the region

.

HIAL’s Organisation

ETLLD (Transport Group)

Scottish Ministers

HIAL Board

Managing Director

Management & Staff

Shareholder

Sponsor

.

Finance 2003/04

Total Cost of Operation £34.9 million

Revenue £9.8 millionGross Deficit £25.2 million Non cash and othercontributions £1.4 millionScottish Executive subsidy £23.7

million

HIAL Revenue 2003/04Total Revenue £9.8 million

69%3%

1%

15%

7%5%

Scheduled

Oil

Tour/charter

Other traffic

Property

Other

Revenue by Airport 2003/04

Total Revenue £9.8 million

1% 6%1%

42%

2%10%

13%

19%

1% 5%

Barra

Benbecula

Campbeltown

Inverness

Islay

Kirkwall

Stornoway

Sumburgh

Tiree

Wick

2003/04 Passengers by Airport

1% 4% 1%

51%

2%

12%

12%

13%

1%

3%

Barra

Benbecula

Campbeltown

Inverness

Islay

Kirkwall

Stornoway

Sumburgh

Tiree

Wick

934,000 Passengers

HIAL Operating Costs Meeting regulatory, safety and

security standards: Staff and training A new fire appliance is £350k

Maintain and replace infrastructure: A runway rehabilitation is £2-3

million Utility and PFI charges Route development discounts

Airport Operating Costs

Airport operating costs are driven by:RFF operating category - aircraft type determines infrastructure and minimum manning

Opening hours which determine total manning levels

Cost Per Passenger 2003/04

Airport Passengers

Revenue operating cost (£ million)

Subsidy per passenger

Inverness

484,000 £8.007 £8

Sumburgh

118,000 £5.336 £30

Benbecula

34,000 £1.996 £70

Tiree 5,500 £0.755 £131

Outcomes – Passenger Growth

Year Total Passengers

Growth

2000/01 782,000 -9%

2001/02 832,000 +6%

2002/03 864,000 +4%

2003/04 934,000 +8%

2004/05 1,027,000 +10%

Economic Impact2003/04 inbound cross-border passengers at Inverness spent circa £131 million in the region

Full economic assessment has been carried out by HIAL/INE at Inverness. Draft report stage

Scheduled air services bring major economic benefits to the region

New Routes for 2005

Eastern AirwaysWick-Aberdeen-Inverness (start Feb)

easyJetInverness-Belfast (start July)Inverness - Bristol (start July)

Another eight routes are in discussionCross-border and international destinations from Inverness

Route Marketing/Advertising

Primarily carried out by airlines

But supported by HIAL and partners (HIE, VisitScotland, councils)

HIAL also seeks to raise awareness of and uptake on services via:PR and media/internetPrint and broadcast advertising

Route Development Market

Route Development Fund support available for new cross-border and international routes Funded by Scottish Executive and

HIE Target routes include N of

England, Midlands, S of England, Ireland, Germany, Netherlands, Scandinavia, France…

Challenges to New Routes

Airlines considerationsRemoteness and small populationRoutes rely on inbound passengers

Market forcesCompetition across Europe for aircraft

Airlines need best yield from operations

Every new route has been hard won!

Inverness Airport Overview

Greatest development potential of HIAL’s 10 airports 20% growth rate in 2004/05 On target for circa 575,000 pax in

2004/05 40% growth between 2000 and 2004

300 scheduled flights per week Cross-border pax traffic is 70%

inbound Business to leisure split is 40/60

Fund objectives and Fund objectives and featuresfeatures The Scottish Route Development Fund was

established in November 2002 to develop direct business links and stimulate inbound tourism

These objectives are being pursued by investing in new routes which are likely to have the greatest economic benefits for the region

Development of new Continental European routes and key long haul services are the priority of the fund

However the fund also works toward the provision of more domestic services from smaller/underserved airports e.g Inverness.

Fund objectives and Fund objectives and featuresfeatures The fund operates by encouraging investment in the The fund operates by encouraging investment in the

development of new routes through incentivising airports. development of new routes through incentivising airports. This investment takes the This investment takes the form of discounts on charges form of discounts on charges levied by airports to airlineslevied by airports to airlines

Investment by the funds must be additional to incentives Investment by the funds must be additional to incentives currently offered by airport operators to attract new trafficcurrently offered by airport operators to attract new traffic

There is no direct contractual relationship between the There is no direct contractual relationship between the funds and any airlinefunds and any airline

Investment is time limited and can only be provided for a Investment is time limited and can only be provided for a maximum period of 3 yearsmaximum period of 3 years

The funds operate on the basis of risk sharing between the The funds operate on the basis of risk sharing between the parties, i.e. the airport, airline and the public sector parties, i.e. the airport, airline and the public sector

Investment in new routes is determined by the results Investment in new routes is determined by the results from the agreed Route and Economic appraisalsfrom the agreed Route and Economic appraisals

Fund set up – UK Fund set up – UK compliancecompliance

Fund set up as part of ongoing Scottish transport and economic policy development

No specific legislation required

Aviation matters in Scotland are ‘reserved’ by the UK government’s Department for Transport in London

Route development funds are now UK aviation policy following publication of the aviation White Paper in December 2003

Fund set up – EU Fund set up – EU compliance compliance

Informal discussions with European Commission with some advice given on aspects of public sector operational aid

Manchester ruling used as precedent for fund rules

Initial Charleroi ruling in February 2004 and detailed Charleroi ruling in April 2004 not in conflict with the structure of the Scottish fund

Charleroi detailed ruling provides more scope for public sector operational aid but it must be carefully structured

Funding mechanism Funding mechanism A total of £6.8 million was allocated for the

fund in Scotland for routes commencing in 2003/04.

The fund comprises:

£5.5 million via the Scottish Executive

£1 million from Scottish Enterprise

£300k from Highlands and Islands Enterprise.

In addition, the airports contribute marketing monies to the airlines for the promotion of new services

VisitScotland also works with airlines on marketing campaigns to promote the routes in the destination countries

Funding mechanism Funding mechanism Funds only paid to the airport when

passengers have been carried

Funds are paid on a per passenger carried basis on the production of invoices on a monthly basis from the airports

The invoices are subject to an audit to verify passenger numbers

Funds are only paid in arrears

Funds are capped at 75% load factor on an agreed frequency and capacity of aircraft

Funds can only be made available for a route for a period of up to 3 years

Economic appraisal Economic appraisal framework framework

Appraisal Framework

Business Efficiency Economic Structure Inbound Tourism Employment Impact

Social Impact

Journey Time Savings

Air Fare Savings

Day Return Trip

ConnectivityEconomic Clusters

Air Intensive Sectors

FDI Markets

Export Markets

Journey Time Savings

Air Fare Savings

Target Markets

Visitor Expenditure

Direct Employment

Tourism Induced Employment

The fund one year on - The fund one year on -

successes were deliveredsuccesses were delivered

Edinburgh• Newark• Cologne

Prestwick• Girona• Rome

• Bergamo• Skavsta

• Gothenburg

Glasgow• Dubai

Inverness• Birmingham

Sumburgh• Oslo

Aberdeen• Groningen

FAQs - Would success have FAQs - Would success have happened without happened without

intervention?intervention?No, for the following reasons:No, for the following reasons: Risk shareRisk share Puts pressure on the airports to offer their best Puts pressure on the airports to offer their best

dealdeal TimingTiming Potentially accelerates commencement of routePotentially accelerates commencement of route Gives the airlines reasons to seriously examine Gives the airlines reasons to seriously examine

the opportunities in Scotland the opportunities in Scotland

FAQs - Would success have FAQs - Would success have happened without happened without

intervention?intervention? Objectives alignmentObjectives alignment Airport operator objectives may not be fully Airport operator objectives may not be fully

aligned with those of the funds aligned with those of the funds Scotland finally has a say in the type of routes Scotland finally has a say in the type of routes

that could be attractedthat could be attracted

FAQs - Does public FAQs - Does public investment replace investment replace airport investment?airport investment?

Airports are involved in process in a transparent Airports are involved in process in a transparent mannermanner

Initiative pushes airports beyond where they Initiative pushes airports beyond where they would have gonewould have gone

Clarity on the benefits and costsClarity on the benefits and costs Basis for a better understanding of airport route Basis for a better understanding of airport route

development approach / strategydevelopment approach / strategy

FAQs - Does it distort the FAQs - Does it distort the market?market?

Demand in Scotland has been proven Demand in Scotland has been proven to exist, therefore rather than to exist, therefore rather than distorting the market, this initiative is distorting the market, this initiative is helping to correct market helping to correct market imperfectionsimperfections

Airlines are now more aware of the Airlines are now more aware of the opportunity that exists in Scotland opportunity that exists in Scotland than beforethan before

The initiative is helping to shift airline The initiative is helping to shift airline perceptions of the respective marketsperceptions of the respective markets

Summary Summary

The Scottish fund has been successful to date in The Scottish fund has been successful to date in meeting the initial objectivesmeeting the initial objectives

It shows the value of limited public sector It shows the value of limited public sector interventionintervention

Has shifted the perception of Scotland as a market Has shifted the perception of Scotland as a market place in its own rightplace in its own right

Will lead to significant demonstrable economic Will lead to significant demonstrable economic benefitsbenefits

Airlines and airports have embraced the concept of Airlines and airports have embraced the concept of the funds as true partnering and risk-sharing vehiclesthe funds as true partnering and risk-sharing vehicles

Regions can finally contribute to how air services Regions can finally contribute to how air services develop – without distorting the marketdevelop – without distorting the market

Thank You

Questions