What Effect will the Stansted Expansion have on the Surrounding Business?

Joe Jones

CONTENTS

Terms of Reference

In this investigation I will be focusing on just the business aspects and effects of the proposed expansion to Stansted Airport, and the benefits this may have to certain business and also possible disadvantages. I will not be covering any social, political or environmental problems unless they have a direct effect on a business. Any issue that does not directly affect a business will be irrelevant to this investigation and therefore will not be involved.

Objectives

Through this investigation I am aiming to:

Specify what effects to business will occur if the expansion goes ahead.
Asses what these effects on both directly related and unrelated businesses will be, and what the specific business’s views are on these.
Identify why these effects may not occur, the possible reasons for this and the alternatives

Methodology

In order to achieve my objectives properly, much research is going to need to take place. I will conduct some of my own primary research which will involve creating a questionnaire and then asking some local businesses to complete it for me. The questionnaire will include questions which will give me information on the businesses views on the expansion’s effects on demand, profit, competition, customer base, employees and employee transport. Different businesses I am hoping to receive a completed questionnaire from include banks, estate agents, hotels, taxi firms and businesses in the airport itself. The data I will collect through primary research will be quantitative data with which I can create graphs in order to compare results and form an idea of trends. It’s important to remember however that these results are very time relative and could become of less value over time because situation and views will change with the changing economy and times.

I will also do some secondary research; this will consist of finding already collected data on the internet, in books or newspapers. With this I will see how other projects similar to this have affected business, or simply using already collected information on the Stansted expansion itself to forward my project. I may also be able to find information on a much more national basis, as the primary research I conduct will only be local, and will not represent the national view of the expansion. This qualitative information has to be carefully used as sometimes the sources could be bias or out-dated. The information collected will also not be directly relating to my investigation as it was gathered for other reasons, so I must ensure I analyse it properly, considering this.

Once the primary research and secondary research is completed I will combine and analyse them. I will compare the main worries or benefits that the businesses have to what I have found through the secondary research, and maybe pinpoint things that the businesses may have overlooked. I will also be able to compare the local, and the national effects of the expansion, using this research. I will then present my findings in an overall report showing the main benefits and disadvantages to businesses of the Stansted expansion proposal.

Primary Research

For my primary research I sent a questionnaire to 10 businesses in or around the airport that are likely to be affected by the expansion. This will give me realistic and relevant information on how the expansion will benefit the businesses, and what problems may also arise from it. I tried to make the questions as easy to understand as possible to make sure the answers are coherent in understanding and are not distorted through mislead answers.

The answers and results are presented in quantitative form and therefore are easy to compare and understand, but this does mean however businesses cannot give specific explanations, and any views held that are not represented in the possible answers I have given, will not be accounted for.

I have presented the results in the form of a graph to clearly show the trends of the business’ answers.

1. To what extent do you believe the expansion will effect your business?

The results of this question clearly show that most, if not all, businesses will be affected by the expansion of the airport in some way or another, therefore indicating that they all have a vested interest in it.

2. If at all, do you believe this will be a beneficial or problematic affect?

The results show that 66% of the businesses believed that the expansion will incur both positive and negative effects onto the businesses. These effects will be discussed in the following questions. It should be noticed that none of the businesses thought that they would only face negative effects from the expansion.

(It should also be noted that the business who, in the previous question answered ‘Don’t Know’ did not answer ...

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2. If at all, do you believe this will be a beneficial or problematic affect?

(It should also be noted that the business who, in the previous question answered ‘Don’t Know’ did not answer this question)

3. As a result of the expansion, will travel to work for your employees become easier/ cheaper?

The evidence in this pie chart shows that 70% businesses believe that transport to work will be affected positively through the expansion of the business, in terms of cost and ease of use. The airport’s expansion will probably mean an increase in the amount of Stansted Express train services running between the airport and other destinations, the same can also be said for the bus services. The increase in the amount of demand for these services could result in lowered price through economies of scale. However, 20% of businesses have opposite views, believing that transport will be more complicated and possibly more expensive. This could be due to the increased amount of congestion of cars travelling to the airport, and people wanting to use the services. This controversy is not surprising as these two problems are likely to occur, with the expected effects.

4. As a result of the expansion, do you believe lateness of employees will increase or decrease?

The graph shows that a majority of only 60% of the businesses believe the lateness of the employees to work will decrease as a result of the expansion on the airport. This could be due to the increased consistency of the train and bus services, and possibly an increase in their efficiency due to higher profits from the increase in demand. However, 40% think differently; that the expansion will cause their employee’s lateness rate to increase. This could be due again to the increased amount of congestion on the roads, or the amount of people using the public transportation services.

5. As a result of the expansion, do you believe your employment costs (recruitment/ wages) will rise?

Again the difference in the results is not very large. 50% of the businesses believe that employment costs will decrease, whether it is in recruitment or wages. Recruitment could decrease because of the increased amount of people moving into the area hoping for employment from the expansion, therefore potential candidates will not be as hard or costly to find. Also, the increase in the amount of people hoping for employment moving to the area will mean jobs are in higher demand, and wages can be lowered. However, 40% of businesses though employment costs would rise. This could be due to the increase in the amount of competition moving into the area to benefit from the expansion; therefore employees will also be in higher demand making the recruitment process more competitive and costs higher. Wages will also have to be higher to attract more candidates.

6. As a result of the expansion, will demand for your product rise?

The results shown in this graph clearly show that the expansion of the airport will not affect any of the businesses negatively in relation to demand. 70% of the businesses believe that it will actually prove to be beneficial to their demand levels; this is likely to be because of the increased amount of people moving through the area, or coming to live here, therefore increasing their customer base. 30% of businesses also however decided that it would not affect their demand at all. This is probably because their customers tend not to be those who would be users of the airport.

7. As a result of the expansion, do you believe your profits will increase?

Interestingly here some businesses have said that, despite demand growing, their profits are possibly going to fall. This could be due to the extra costs that the business will face in employment costs, travel costs or extra advertising because of increased competition. However, 60% of businesses still claimed that their profits will rise; this is no doubt due to the increase in demand from the extra people in the area. However it could also be due to taking advantage of the economies of scale opportunities they may face with increased demand. The next question addresses this.

8. If yes, do you believe this will be achieved through greater sales or cutting of costs?

The results show that 83% of the businesses who thought profits would rise, believe will be due to both cutting costs and greater sales. This will be a result of taking advantage of economies of scale through increased demand for the product, meaning that supply costs will be cut through buying in bulk; or through more possible output per employee.

9. As a result of the expansion, do you believe that your business will face more competition?

70% of the businesses believe that competition will increase through direct result of the expansion. This will be due to the increase in the amount of businesses moving into the area to cater for the increase in demand for certain products. This will mean they may have to lower prices, spend more on advertising or make their product somewhat more competitive through a specific USP, all of which will affect their overall profits. The customer will benefit however from the lowered price and greater amount of choice. The 30% who answered no (their business will not face more competition) are probably running businesses that are not catering for any need of a customer of the airport, and their market is therefore not expanding as a result of the expansion.

10. Do you believe this expansion will enable your business to expand further itself?

These results show that 70% of businesses believe the expansion will allow them to expand, even if it is only slightly. This will most likely be due to the increase in demand enabling them to expand due to higher profits, or expanding out of necessity to access the larger market and cope with it. For instance computerising the system they work on so the business managers can cope with the increase in customers, and employing people to look after it. The 40% of businesses who claimed a great amount of expansion is possible are most likely directly involved with the airport and only catering for customers ad employees using it. Those businesses that expansion will not be an option open to them as a result of the expansion; will be again those businesses whose customer base is not linked to that of the airport.

Evaluation of Primary Research

To summarise, it is important to notice that all businesses are going to be affected one way or another by the expansion on the airport, and therefore all have a vested interest in it. This effect may be one of a beneficial or problematic nature. With the huge increase of passengers and employees using the airport, demand for many of the businesses will be set to rise. However this increase in demand could be less favourable to profits because of the possible increase in competition, which will lead to an inevitable raise in human resource and marketing costs, to maintain their competitiveness.

Also, the expansion of the airport itself is likely to result giving businesses the option to expand themselves, to cater for the increase in demand, and the new needs of consumers that the expansion will produce.

I received answers from 10 businesses in and around the area of Stansted Airport. The range of businesses with which I made contact was varying in both type of business and location, however it is unlikely the situation of all business is represented in these results, and therefore the primary research is not something I can completely rely on when coming to a conclusion.

Secondary Research

This graph shows a clear rise in the amount of passengers for the next two decades, with actual numbers in 2005 reaching 228million. The growth rate is very steady with only a slight slump in the later 2020’s, however the rate of increase is still good. This is an obvious good sign as the increase in the size of the market through continuous market growth gives airlines a much larger customer base. This following graph goes back further and takes pinpoints reasons for more dramatic slumps that have occurred:

The only noticeable declines or slowing down of growth are the results of specific crises, similar to and including the attack on the World Trade Centre. However the most noticeable point in decline, with the slowest return to the earlier rate of growth, is the Oil Crisis in 1973, which essentially resulted in huge inflation within the oil industry. With the evident effect that the oil industry has on the Air Travel industry it will be important to consider its current state and future prospects.

This graph clearly shows a continuous increase in the price of oil for the next decade, with no apparent evidence that it will slow down. With this increase in oil prices the Airlines variable costs are bound to increase because of their oil usage. This increase in variable costs will most likely be covered by an increase in the airlines flight prices.

This table shows the price elasticity of demand for both ‘business’ and ‘leisure’ flights and overall measure. From the results we can determine that the demand for flights overall is certainly price elastic, therefore the increase in price of flights will affect the airline’s sales, specifically in leisure travel.

This is backed up also by the results of a poll stating that 78% of people consider the cost of travelling plays a part in how often they are able to visit close friends and family members abroad.

However, business flights are inelastic, although sales will go down, they will not go down at a rate that would be too effective to their profits if prices were raised. Therefore Stansted should try and attract as much of the business market as possible.

Another factor of cost increase to consider is the taxes put on air travel. The Government is trying the counter the current environmental problem by placing higher taxes on air travel therefore attempting to reduce the amount of flights. This tax is set to rise soon and again almost double in 2010, and probably carry on rising. This increase in tax is likely to be passed on to passengers, therefore adding even more onto the price, on top of the oil increases.

The director of the Gatwick Diamond Business Association (GDBA) stated that “This expansion is looking at increasing capacity by 10m passengers a year and that is going to bring substantial changes, meaning they could attract more business trade.” This is obvious great news for Stansted, with the apparent price in elasticity of the business flights, and the increasing oil prices.

He then went on to say the expansion will increase Stansted’s capacity by 10m a year and will therefore increase its competitiveness with Gatwick. For customers this will be beneficial as the airports and airlines may then drop their prices in order to be more competitive, and try to develop a strong sense of brand loyalty.

This chart shows the distribution of passengers flying from different airports:

It clearly shows that the London airports have a large majority of the market share and with the expansion of Stansted this is very likely to become even higher, with the increased amount of destinations.

Evaluation of Secondary Research

This research shows clearly that passenger numbers are expected to increase and that Stansted Airport’s market share is very likely to rise within the growing market for air travel, specifically with the South Eastern Airports having a large majority of the market share. This increase in passengers will bring a large increase of the amount of people going to and from the airport and requiring the different services to do so and be comfortable, therefore increasing demand for many different types of business in and around the Airport, specifically from passengers flying for business purposes.

Expansion at Stansted will however only have these desired effects if the airlines manage to keep their prices down, as this is evidently a price elastic business within leisure fliers who make up a large proportion of their customers, and with the impending taxation and oil price rises they must find a way to avoid the rise in variable costs affecting their product prices too much. This is especially important as there is a lot of competition from rival airports in the same area, Heathrow and Gatwick.

Evaluation of Research

The research I undertook shows some clear trends and results that represents clearly their feelings about the effect the expansion will have on them. Although, there are many issues that the business’ opinions are split upon, this shows that the effect of the expansion will differ from business to business, and therefore make the expansion a controversial issue. Yet many of the businesses agree on other factors such as employee travel costs, product demand, and competition. This makes concluding these areas much easier and the results much clearer. However, there are many different types of business and all in different locations and situations, whose position was not represented in the primary research I conducted. Therefore it is unlikely the conclusions I have come to, despite covering a majority of businesses, will be applicable to all businesses. Also the British economy is constantly changing and is not possible to predict accurately 100% of the time, therefore the elasticity measures and the forecasts made could be based upon inaccurate predictions and therefore rendering the analysis redundant.

Conclusions

The investigation I have conducted I believe clearly shows that the expansion is going to have a dramatic effect on the local economy of the Stansted area. The main effects to business I believe can be summed up in these three points:

An increase in demand will lead to higher sales and increased profits, also enabling them to expand and develop their services
The expansion will lead to more people moving into the area in search of jobs, therefore reducing human resources costs in both recruitment and pay. The increase in transport will also improve efficiency
Competition in the area increasing will lead to businesses having to boost their competitiveness and fight for their place in the market

This increase in business activity and success resulting from the expansion is likely to prove very beneficial for the local economy and its residents. With unemployment lowering due to the new jobs created and money circulation increasing due to increase in demand in the area, resident’s disposable income will increase. Therefore those businesses not directly connected to the airport, but in fact catering for the needs of the local community, will also receive greater demand for their goods as people have more flexibility with their money to buy luxury goods.

However these increases in demand for the products are only a desired prediction of the future based upon possible forecasts. The aviation industry is likely to hit a slump due to raising prices as a result of the economic downturn, oil prices and increased air travel taxation. With these many factors all contributing towards price increases, it is unlikely they will go unnoticed and therefore seriously harm their demand level.

It is also worth mentioning that an important reason for the increase in taxation was the amount of empty seats on flights, and the effect this waste of space has on the environment. The very fact that there are many empty seats questions the success of introducing more flights when all the seats aren’t being filled already.

So is an expansion really going to be beneficial to Stansted Airport? With the inevitable increase in prices being introduced into the evidently price elastic market, and seat capacity currently not being anywhere near 100%, it seems it may be an expansion to cater for nobody.

So overall I believe that the expansion of Stansted Airport, despite bringing great initial benefits to business with the initial influx of those looking for work and passengers not yet affected by the economic downturn, will eventually prove incredibly unprofitable for the airport. Over time the increase in demand that the businesses internal and external to the airport enjoyed will decline and sales will drop to previous levels, if not lower.

BIBLIOGRAPHY

Passenger Forecast:

Earlier Passenger Forecast:

Oil Prices Graph:

Elasticity Figures:

Poll on Visiting Family Members:

Air Tax Increase:

Director of GDBA quote:

Distribution of Passengers: