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As BAA defines it, indirect employment is those supported by the purchases o f goods and services by airport-related firms at Heathrow, which is, those firms providing direct on and direct Off-Airport employment. Purchases o f these firms can be sourced within the Study Area, the rest o f UK or abroad. For the purposes o f this study, it only concerns with the impact o f purchases and, therefore, indirect employment within the Study Area.

According to the definition, a detail estimate o f indirect employment (in the Study Area) would require knowledge of:

i. the value and type o f initial or first round purchases within the Study Area;

ii. the degree to which these first round purchases from Study Area firms lead to subsequent purchases within the Study Area; and

iii. how to convert from local expenditure/income figures into local employment.

The only way to achieve this thorough knowledge would be to conduct an in-depth survey o f Heathrow firms and their local suppliers. Rather than undertake a fiill scale survey which would have been very costly and would have encountered difficulties in obtaining the required detail and confidential information from a wide range o f suppliers, BAA develops what it calls a modified leakage approach.

By definition, leakage is the extent to which income ends up outside the Study Area and so reduces the indirect employment impact within it. Easily the most important leakage is at the first round stage, i.e. the proportion o f expenditure by directly airport related firms which is placed outside the Study Area. So long as reasonable information can be obtained on these first round effects, then some confidence can be placed in the ensuing employment estimates. BAA’s approach is, therefore, to concentrate on the major firms at Heathrow - in particular British Airways and BAA - to try and determine the value and types o f purchases being sourced locally. It attempts to estimate these first round purchases for the following groups o f firms:

(i) British Airways who account for around 76% o f all airline and 53% o f all direct On- Airport and so dominates the indirect employment impact o f Heathrow;

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(iii) BAA / HAL, the second major single employer, accounting for around 7% o f

Heathrow’s workforce and responsible for all the servicing o f Heathrow’s infrastructure; (iv) Concessions: firms providing duty free and duty paid shopping, catering and other retail

services at Heathrow (almost 10% o f Heathrow’s workforce); (v) Hotels: both on and o ff the airport site;

(vi) A ir F reight Agents: both on and o ff the airport site; and

(vii) In-flight C atering Services: o ff the airport site, as On-Airport in-flight catering is mainly provided by British Airways and therefore considered above.

The main source o f BAA purchase expenditure inputs are from British Airways, which provides a geographical pattern for the basis o f the purchases by BAA, other airlines as well as those firms which do not retain the location o f their supphers in such amenable form. The estimation o f first round purchases are listed in Table 6-1.

Tah/e 6-1 BAA Estim ates o f First R ound Purchases in Study Area, 1991

Type of Firm Value (millions) Percentage

British Airways 80.2 56.9% Other Airlines 12.2 8.7% BAA pic 11.5 8.2% C oncessions: - S h op s 14.8 10.5% C oncessions: - Catering 2.1 1.5% Hotels 13.4 9.5% Air Freight 2.5 1.8% In-Flight Catering 4.4 3.1% Total 141.0 100%

Source: BAA/1201 Table 4.11

Note: Columns m ay not sum due to rounding

Overall, BÆ4 estimates that about £141 millions has been spent in the Study Area by Heathrow related firms, o f which 65% is accounted for by BA and BAA o f which the information is reasonably accurate. For the remainder BAA acknowledges there is a considerable margin o f error, particularly where it has made a chain o f assumptions.^^

Having established the first round impact, BAA uses Input-Output analysis^'^ to trace linkages between industries and to estimate the impact o f second and subsequent rounds o f purchase. Lacking Input-Output information for the Study Area alone, BAA apphes national

Please see Appendix for details.

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relationships (from UK Input Output Tables) between initial injections o f expenditure - in this case the first round local purchases - and final local income from employment.

To convert from total local employment income to numbers employed, BAA divides total airport income impact by average gross annual earnings for the relevant industry group for the South East (figures calculated from the New Earnings Survey). The resulting estimate o f local indirect employment in the base year is 4,580.^^

Due to confidential nature o f the data, BAA has refused to release more details o f the calculations to LAHT5. Without the information on types o f purchases, types o f industries involved and amount o f expenditure spent on each type, it is virtually impossible to fiuther unravel the calculation procedure BAA uses, or to replicate it.

Under this circumstances, LAHT5 turns to the application o f employment multiplier. Deriving from BAA’s final employment estimates, LAHT5 found the implied multiplier between Direct and Indirect Employment to be between 0.077 and 0.085 depending on the actual categories of On-Airport employment BAA has included. For its estimation, LAHT5 adopts an Indirect employment multiplier^^ o f 0.08, implying that for every 100 direct jobs there would be 8 indirect jobs created through the airport purchases impacts in the local area. Applying this to its base year estimates o f Direct On and O ff Airport employment, LAHT5 envisages Indirect employment for the base year at 5,500.

6.2 Forecast

Forecasting indirect employment requires an assessment, firstly , o f how purchases are likely to grow in the future, and secondly, o f productivity growth in firms supplying inputs to Heathrow. In the absence o f any direct information from purchasers, BAA has assumed that purchases grow in proportion to traffic growth. To do this, BAA determines, by its judgement, as to which t>pes o f purchases are related to which element o f traffic growth. Most purchases are found to be unambiguously dependent on either ATM or passenger growth. For example, purchases o f aircraft parts are related to ATM growth, whereas foodstuffs, drink and tobacco are related to passenger growth. The grey area o f purchases influenced by more than one elements o f traffic growth has been related to the faster passenger growth to avoid underestimation.

It is the revised figure which BAA presents at T5 inquiry after raising its estimates in Off-airport employment and obtaining more information on Government Services expenses (See Appendix).

It is unclear whether LAHT5 includes Direct Off-Airport Employment in its base of Indirect Employment Multiplier (LAH/2010 para. 5.41)

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As with direct employment, the final employment impact is then derived by relating the assumed growth in purchases to the anticipated increase in labour productivity in each industry supplying these inputs. The productivity gain assumptions are derived firom an independent forecast by Cambridge Econometrics on output and employment by sector in the South East up to 2005.^^ The derived productivity growth factors vary between industries, but the average across all industries was 1.89% per annum.

Accordingly, BAA forecasts that indirect employment will decrease by 2016 to 3,230, a decrease o f 1,350 fi-om the base year without T5; on the other hand, it will maintain in approximate the same level at 4,590, an increase o f only 70 fi*om the base year, if T5 is developed (see Table 6-2).

Table 6-2 BAA an d LAHT5 Forecasts o f Indirect Em ploym ent E m ploym ent A s s e s s m e n t BAA LAH75 A b solu te

D ifference P ercen ta g e D ifference B a se Year Estimation 4,580 5,500 -920 -20.09% No 7 5 Forecast 3,230 5,200 -1,970 -60.99% With 7 5 Forecast 4,710 8,600 -3,890 -82.59% Overall 7 5 Impact 130 3,100 -2,970 -2284.62% Net 7 5 Impact 1,480 -300 -1,780 -120.27%

Source: forecast figures from BAA/45 Errata 2 & LAH2013A N.B. Percentage difference are calculated on BAA basis.

Without any data on the local purchases o f airport firms, LAHT5 have problem in pursuing more elaborated method as BAA’s to forecast future indirect employment. It resolves in the similar approach in base year estimation and applies the estimated multiplier on its Direct Employment forecast. The outcome is a marginal increase in No T5 scenario and a considerable rise if T5 is developed (see Table 6-2).