Privatize the air!

A new paper from the free market, neoliberal think tank the Adam Smith Institute explains how we can boost competition in the aviation industry and why Boris and Hunt must commit to competition when expanding Heathrow.

• For the first time, there are multiple applications to build the new terminal at Heathrow Airport.

• Terminal competition — separate construction, ownership, and management for the new terminal at Heathrow — would encourage innovation and lower prices for passengers.

• Boris and Hunt must commit to competition in the £14bn+ expansion project.

• Landing and take-off slot auctions — ending the EU’s administrative allocation system that massively benefits incumbents — could enable 16 million more passengers a year, and raise billions of pounds, the ASI has calculated.

• Auctioning low-altitude airspace corridors for forthcoming forms of transport such as air taxis and autonomous freight drones.

The Adam Smith Institute today calls for a major shake up of competition in the aviation sector, including terminal competition for the first time in the UK, auctions for landing slots to break up cartels and monopolies in the industry and reduce prices for air passengers, and auctioning low-altitude airspace for air taxis and autonomous freight drones to enable the new technology.

The free market think tank explains that competition forces firms to innovate, reduce costs, and be responsive to provide greater consumer benefits. It ensures resources are put to best use. Monopolies lead to stagnation, laziness, overcharging, market manipulation, and higher prices for consumers.

Within aviation, competition has improved from the days of national carrier monopolies, allowing millions of people to fly regularly for their holidays, for work and to see their families. But there is still some way to boost competition and innovation. The free market think tank argues for three recommendations that could radically increase competition, keep the UK at the forefront of the aviation industry, and reduce prices for passengers.

1 - Terminal competition

As the issue of Heathrow Airport expansion makes its way into the Tory leadership debate, the Adam Smith Institute says that separate terminal ownership should be considered. A new terminal at Heathrow could be built and operated by a separate entity, creating competitive pressure to keep expansion and ongoing costs low for passengers. This is the model is used at many leading global airports, including JFK Airport in New York City. There are now two proposals for Heathrow expansion, but no tender-like process to decide which proposal to pursue.

As the sole owner of all the terminals at the congested global hub, Heathrow Airport Limited has substantial market power. HAL’s revenue is capped by the government to a proportion of their total assets. Therefore, the more they spend on expansion and maintenance the more profit they can make. This creates a perverse incentive to overspend and has led to accusations by major airlines of Heathrow ‘gold plating,’ including wanting to charge £74,000 to chop down a tree and £61,000 per car park space at Terminal 2. This results in among the highest costs of any airport in the world for airlines, passed onto consumers in higher ticket prices. Heathrow charges about £20 per departing passenger, and has the second highest operating expenditure per passenger of any major airport in the world. A separate terminal would reduce the ability of Heathrow to excessively charge and overspend.

2 - Slot auctions

The ability for a plane to take-off and land at a particular time — known as a ‘slot’ — is a valuable resource at a congested airport. But EU regulations require these to be given away for free. This system allows the old airlines to hoard slots, preventing new profitable competition in the airline industry. British Airways now has over half the slots at Heathrow Airport. With Heathrow now the government’s preferred expansion plan for a new runway, the of market control by a single airline becomes more stark.

The ASI argues that slot auctions would ensure lead to each slot being used most efficiently and provide opportunities for new and mid-sized carriers to expand; report author Matthew Lesh argues this would help increase market competition, encourage innovation, and avoid arbitrary decision making and political interference.

Slot auctions for Heathrow alone could provide an additional 16 million passengers and giving the country an extra £171.2m of economic benefit every year. This system, endorsed by the Competition and Markets Authority in 2018, would undermine the historic position of larger players and allow new entrants to expand, increasing airline  and increased competition for airlines.

3 - Privatise the air
Air taxis will soon be able to transport passengers from Heathrow Airport to the City of London in 8 minutes and from London to Brighton or Oxford in 23 minutes. Hundreds of hourly take-offs and landings could congest the skies, requiring allocation of scarce air corridors.

Bureaucratic allocation of access to congested airspace would be unresponsive to changing technology, entrench early movers, and lead to inefficient allocation.

The auctioning of rights to operate an aerial travel corridor, at a specific altitude over for a period of time, would deliver efficient use of the space, and raise substantial revenue.

Flying between 200ft to 5,000ft above ground, air taxis and freight could transform the economy in the UK and other developed countries; the global air taxi market has been estimated to become worth between $615 billion and $3 trillion by 2040.

Matthew Lesh, report author the ASI’s Head of Research said:

”From flying taxis to faster and further flights, the future of transport is going to be awesome. But we have to get the policy right to foster competition and innovation. We must not make the same mistakes as the past. The Department for Transport should carefully consider the potential for terminal competition at Heathrow Airport, particularly in the context of competing Development Consent Order applications. The Government should pursue slot auctions to ensure new capacity is used efficiency, delivering more passengers and a big boost to the economy. To prevent the mistakes of the past, the government should also auction airspace for air taxis and autonomous freight drones. This would ensure the increasingly congested space is put to its best use.”

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.

Internet red tape strangles free speech & the economy

A new paper by the Adam Smith Institute claims proposed online regulation is a serious threat to freedom of speech and entrepreneurship and argues for a sea change in the Government’s approach to technology post-Brexit:

UK politicians are becoming increasingly hostile to technology, undermining the free speech and innovation that is essential to economic progress

• The Government’s Online Harms White Paper, which creates a new online speech regulator, is a serious threat to a free internet

• Platforms—like Google, Facebook, and Mumsnet—must not be made liable for the speech of their users, as otherwise they will be forced to censor swaths of online speech

• Despite fears about ‘big tech monopolies,’ closer analysis reveals that there is intense competition in the sector, including substantial R&D investment

• New regulations would create barriers to entry that would hurt start-ups and entrench incumbents

• A global top 500 company is 10x as likely to set up in the go-getting USA, than over-regulated EU, the ASI has calculated

• The Government should embrace ‘permissionless innovation’ to encourage entrepreneurship

Technology is improving our lives, connecting people, creating communities, and contributing to Britain’s economy to the tune of £170bn a year. Internet companies alone are estimated to be responsible for 400,000 jobs and 80,000 businesses, and growing twice as fast as the rest of the economy in recent years. A new report, Safeguarding Progress: The risks of internet regulation, by the Adam Smith Institute makes the case for permissionless innovation to be put at the heart of the government’s approach to dealing with the digital economy.

Despite its positive contribution, the internet has been under attack from politicians of all stripes in recent months — from calls for companies to be broken up to the Online Harms White Paper which would create a new online censorship regulator, as well as privacy risks from demands to give security services access to encrypted private communications. The increasingly pessimistic rhetoric about new technologies risks undermining the sector.

The ASI has calculated that a large company is ten times more likely to develop in the United States than in highly-regulated Europe, after accounting for population differentials. The report argues Brexit provides the opportunity for the UK to diverge from the excessively precautionary approach of the European Union, therefore attracting substantial tech investment and creating jobs.

The report calls for a ‘permissionless innovation’ approach, meaning allowing entrepreneurs to experiment with new business models and technologies, and only intervening when there are clear, demonstrable harms to the public.

The ASI argues that the Government should adopt Five Principles for Permissionless Innovation in technology if it wants to achieve an keep an open internet, and our tech industry competitive:

1. Identify and remove barriers to entry and innovation;

2. Protect freedom of speech and entrepreneurship by retaining immunities for intermediaries from liability;

3. Rely on existing legal solutions, the common law, and competitive pressures to solve problems;

4. Push for industry self-regulation and best practices;

5. Adopt targeted, limited legal measures for truly hard problems based on evidence.

These principles are adapted from the work of Adam Thierer of the Mercatus Centre at George Mason University.

The report discusses two major regulatory issues facing the sector: liability exemptions for platform intermediates and competition issues.

The report argues that we should continue to see online platforms more as libraries than as publishers, with companies not liable for illegal activity of their users (although should continue best practice working with police and security forces) much like a library is not responsible for the content of the book on its shelves. The platform liability in the EU e-Commerce Directive and Section 230 in the US were fundamental to the development of the internet,

Laws forcing platforms to be liable for user content to restrict hate speech have prompted social media companies to engage in excessively risk-averse moderation, undermining freedom of expression. Threats of fines, jail time and website blocks have perverse, illiberal consequences. Liability would also, according to 72 per cent of tech investors, entrench the global tech giants who have the resources to comply by hiring moderators and developing AI.

Further, the report argues that claims that there is a lack of competition and innovation in the sector are a myth. Online firms compete (e.g. Facebook, Snapchat, Twitter, Tumblr, Netflix Fortnite, Amazon, TripAdvisor) for user attention and in specific product markets. They also heavily invest in R&D, which shows they are not lazy or stagnant as tends to happen in monopoly markets. History shows that concern about monopolies has been greatly exaggerated, as seen with the rise and fall of Myspace.

It is also argued that regulators should not intervene if there is harm to consumers demonstrated by excessive profiteering - that is not the case for tech firms that provide free services for consumers.

Nevertheless, new regulations, such as excessive data regulations, create barriers to entry and excessive costs. This is particularly harmful to startups and small-to-medium sized enterprises (SMEs) that have fewer resources for compliance. Eighty-one per cent of tech investors agreed that ‘policy and/or legislation in order to target specific companies (i.e. global giants) could lead to poor outcomes that inadvertently hurt or hinder tech startups’

Matthew Lesh, report co-author and the ASI’s Head of Research said:

“The UK Government is on the verge of making our internet the most censored and highly regulated of any Western democracy. This is a fundamental threat to our status as a free society and our global reputation as a liberal democracy. The creation of new online speech regulator, as proposed in the Online Harms White Paper, will not only make it harder for start-ups to establish and grow, it will undermine our core right to freedom of expression. Regulating the internet means crushing the internet and dismantling Britain's liberal freedoms.”

Philip Salter, report co-author and Founder of The Entrepreneurs Network:

"The growing burden of tech regulation risks strengthening the market position of tech giants by raising the barriers to entry. Treating platforms as publishers would hit startups hard. Facebook and Google can afford to hire an army of moderators, but their would-be competitors will struggle. While the Copyright Directive risks stymieing creativity, funding and innovation for disruptive tech entrepreneurs. Britain's tech sector is the envy of Europe. If we are to remain a world challenger, we need to up our game and factor in the significant cost of poorly targeted regulation."

Daniel Dyball, UK Executive Director at Internet Association, who represent leading global internet companies, said on the release of the ASI’s new report:

“This report highlights a number of important areas as we look towards the future of the internet and internet policy in the UK. Intermediary liability protections, for example, are fundamental to the success of the internet as we know it. Internet Association is committed to working with the government to find a regulatory framework that deals with genuine concerns about keeping people safe online, while retaining the significant economic and social benefits that internet companies provide to the UK.”

Jim Killock, Executive Director of digital rights organisation Open Rights Group said:

“This report is a timely reminder that regulation can have adverse consequences, especially for free expression. Regulation impacting free speech can have unintended consequences and needs to be cautious. The strong link between free expression and economic innovation is also well described. Policymakers should consider why the UK has lost sight of these important considerations in recent years."

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.