Transport

In 2019, Frontier was commissioned by Heathrow Airport to provide economic analysis of how capacity constraints were impacting passenger prices.

Our study calculated the ‘congestion premium’ on fares – the amount of extra money passengers were paying as a result of limited capacity.

Quantifying the congestion premium

Heathrow has been operating at full capacity since the mid-2000s. This has led to a ‘congestion premium’ – an increase in fares caused when demand for flights exceeds capacity.

Commissioned by Heathrow, Frontier led a comprehensive analysis to quantify this premium. We used three separate methods to do this, to ensure robust results:

• Econometric modelling
• Analysis of slot transfer prices
• Top-down analysis of passenger volumes.

The study aimed to provide new evidence for policy and decision makers, including the Civil Aviation Authority (CAA), about the extent of the congestion premium and its impact on passengers and airlines.

Our finding: passengers pay 25% more

Frontier’s analysis estimated that as a result of capacity constraints at Heathrow, passengers were paying around 25% more for an average fare. That equated to:

• an extra £34 on short-haul return flights
• an extra £200 on long-haul return flights
• a total premium of around £2 billion per year.

These figures were consistent across the three independent methods we used. This showed the premium was not a quirk of econometric analysis, but a reliable result that appeared as a clear pattern across a range of methodologies.

Making the case for expansion

Frontier’s study had significant implications for policy makers and the airport sector.

It demonstrated the exact financial burden of congestion on passengers and showed how expanding the airport could lower prices. This gave policy makers a new set of evidence-based, quantified insights into the consumer impact of expanding Heathrow.

Our findings continue to shape industry discussions about pricing, capacity and competition at the airport. After the report was published, the CAA commissioned a review and accepted our suggestions.

If you’re interested in finding more about how we explored these issues and how we helped our client, please contact media@frontier-economics.com or call +44 (0) 20 7031 7000.