Highlands and Islands Airports Ltd Presentation to SEAPLANE

1. Highlands and Islands Airports LtdPresentation to SEAPLANE Lerwick 21st April 2005

2. 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

3. HIAL’s Strategic Aims • Maintain 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

4. ETLLD (Transport Group) HIAL’s Organisation Scottish Ministers Shareholder Sponsor HIAL Board Managing Director Management & Staff .

5. Finance 2003/04 Total Cost of Operation £34.9 million Revenue £9.8 million Gross Deficit £25.2 million Non cash and other contributions £1.4 million Scottish Executive subsidy £23.7 million .

6. HIAL Revenue 2003/04

7. Revenue by Airport 2003/04

8. 2003/04 Passengers by Airport

9. 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

10. 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

11. Cost Per Passenger 2003/04

12. Outcomes – Passenger Growth

13. Economic Impact • 2003/04 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

14. New Routes for 2005 • Eastern Airways • Wick-Aberdeen-Inverness (start Feb) • easyJet • Inverness-Belfast (start July) • Inverness - Bristol (start July) • Another eight routes are in discussion • Cross-border and international destinations from Inverness

15. 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/internet • Print and broadcast advertising

16. 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…

17. Challenges to New Routes • Airlines considerations • Remoteness and small population • Routes rely on inbound passengers • Market forces • Competition across Europe for aircraft • Airlines need best yield from operations • Every new route has been hard won!

18. 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

19. Fund objectives and features • 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.

20. Fund objectives and features • The fund operates by encouraging investment in the development of new routes through incentivising airports. This investment takes the form of discounts on charges levied by airports to airlines • Investment by the funds must be additional to incentives currently offered by airport operators to attract new traffic • There is no direct contractual relationship between the funds and any airline • Investment is time limited and can only be provided for a maximum period of 3 years • The funds operate on the basis of risk sharing between the parties, i.e. the airport, airline and the public sector • Investment in new routes is determined by the results from the agreed Route and Economic appraisals

21. Fund set up – UK compliance • 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

22. Fund set up – EU 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

23. 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

24. 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

25. Economic appraisal framework Appraisal Framework Business Efficiency Economic Structure Inbound Tourism Employment Impact Social Impact Journey Time Savings Economic Clusters Journey Time Savings Direct Employment Connectivity Air Fare Savings Air Intensive Sectors Air Fare Savings Tourism Induced Employment Day Return Trip FDI Markets Target Markets Export Markets Visitor Expenditure

26. The fund one year on - successes were delivered • Inverness • Birmingham • Sumburgh • Oslo • Prestwick • Girona • Rome • Bergamo • Skavsta • Gothenburg • Aberdeen • Groningen • Edinburgh • Newark • Cologne • Glasgow • Dubai

27. FAQs - Would success have happened without intervention? No, for the following reasons: • Risk share • Puts pressure on the airports to offer their best deal • Timing • Potentially accelerates commencement of route • Gives the airlines reasons to seriously examine the opportunities in Scotland

28. FAQs - Would success have happened without intervention? • Objectives alignment • Airport operator objectives may not be fully aligned with those of the funds • Scotland finally has a say in the type of routes that could be attracted

29. FAQs - Does public investment replace airport investment? • Airports are involved in process in a transparent manner • Initiative pushes airports beyond where they would have gone • Clarity on the benefits and costs • Basis for a better understanding of airport route development approach / strategy

30. FAQs - Does it distort the market? • Demand in Scotland has been proven to exist, therefore rather than distorting the market, this initiative is helping to correct market imperfections • Airlines are now more aware of the opportunity that exists in Scotland than before • The initiative is helping to shift airline perceptions of the respective markets

31. Summary • The Scottish fund has been successful to date in meeting the initial objectives • It shows the value of limited public sector intervention • Has shifted the perception of Scotland as a market place in its own right • Will lead to significant demonstrable economic benefits • Airlines and airports have embraced the concept of the funds as true partnering and risk-sharing vehicles • Regions can finally contribute to how air services develop – without distorting the market

32. Thank You Questions