LAX_LHR, I understand your point there, although that already happens to an extent... Liverpool (as far as I understand it) did and still sometimes does act as a low cost alternative to Manchester, for example. And I'm sure the same could be said for Leeds
That's a different scenario. It was because back then, Low cost airlines used Liverpool as opposed to Manchester, that was an airline decision to operate as a 'low cost airline', not a government mandate like APD would be. Back then, it's like Manchester was Sainsburys and Liverpool was Aldi, and then the government stepping in and saying they will knock £5 of your bill if you choose to shop at Aldi. It's the airport/airline to try and offer the cheaper alternative, not the government.
Regards to Heathrow, how is it that APD works, I thought that, for example, if you flew NCL-LHR-NYC you would pay full rate?
That particular route would still pay full APD as its an ex-UK route, however, AMS-LHR-NYC or BOM-LHR-NYC wouldn't pay full APD, and those sorts of transfers are a large proportion of traffic into Heathrow. Similarly, passengers on the new SIN-MAN-IAH travelling SIN-IAH do not pay the UK APD.