Transport

Is Heathrow’s proposed third runway too long?


Opposition to a third runway at London Heathrow received a boost recently when Willie Walsh, Chief Executive of IAG, British Airways’ holding company, launched a blistering attack on the proposal by the Airports Commission that London Heathrow, and not London Gatwick, should have an extra runway.

For some time now, BA has been less than enthusiastic about the prospect of an additional runway at London Heathrow, their major base.  Such opposition is to be expected. A shortage of runway capacity in the face of considerable demand from passengers for the use of Heathrow, means that BA, and other airlines, are able to charge higher fares on average and capture scarcity rents. This makes BA one of the world’s more profitable legacy airlines. With an additional runway BA would face a financial pincer movement. Airport charges would increase to pay for the added airfield infrastructure, whilst more space would mean more competitors entering the market pushing down fare yields. BA’s profits would, most likely, plummet.

Nevertheless, does Willie Walsh have a point? He is quoted saying that “the price tag for the third runway is excessive and cannot be justified on any basis”. That price tag according to the Airport Commission’s estimate is £17.6 billion, a lot for a piece of infrastructure, even in this day and age. It is a cost estimate partly accounted for by construction of a 3,500 metre runway positioned to the north west of the airfield. A runway of that length has to be stretched over the M25 motorway (which is to run in a tunnel) and it also requires removal of a large energy-from-waste plant, currently sited on the west side of the M25, which, because of its regional significance, has to be replaced. According to the Commission, this would be a substantial exercise in its own right.

In 2010, when Gordon Brown’s Labour Government was in favour of Heathrow expansion, BAA – now renamed Heathrow Airport Holdings Ltd (HAH) – had backed the option of a 2,800 metres runway. In its 2014 submission to the Commission, they put forward a number of runway options, and while the latter option of the shorter runway was included again, this time around it was not their favoured one. This was partly because it provided less capacity than the chosen scheme. But what is surprising is that there has been little questioning or close economic scrutiny, of HAH’s preferred option (accepted by the Commission). Using HAH’s own figures, the longer runway provides small operational advantages at a considerable incremental cost. It is over 20 per cent more expensive, but adds less than 6 per cent to the maximum capacity of the airport, a capacity increase which would not be fully utilised for some years. Added construction complexities of the longer runway also delay extra capacity coming on stream by an additional year, assuming, of course, that construction goes to plan.

Why has HAH appeared to be rather cavalier with the large sums of money involved? HAH is a regulated utility, albeit in the private sector, and is permitted by its regulator, the Civil Aviation Authority (CAA), to pass-through to its airline customers, BA included, nearly all of its capital expenditure, much of it pre-funded by customers. Not only that, but a big project adds to the company’s Regulated Asset Base (RAB) and a larger RAB is attractive to a regulated utility for a number of reasons. The incentive structure, therefore, encourages the company to think big and, not for the first time, it has seized the moment.

Others bear the downsides of HAH’s grandeur (downsides which include delay before additional capacity comes on stream). Most insidious of all, the high infrastructure cost places the taxpayer at risk. This is because the reluctance of the powerful airline lobby to pick up the tab, for what is generally seen as a project very beneficial for the national economy, increases the likelihood that the government will be pressured into stepping into the breach (although state aid rules might frustrate such attempts). Willie Walsh is right, therefore, to be sceptical of the costs; the technicalities of what is proposed for Heathrow require further scrutiny.

Apart from seriously questioning the need for a longer runway in the light of its apparently poor incremental benefit-cost ratio and developments in aviation technology (modern aircraft generally have better airfield performance characteristics), further scrutiny might well cover the design details of the project. Tellingly, the Commission thought there was scope for significant savings in capital expenditure,[1] although this could be at the expense of the so-called ‘passenger experience’. However, before conducting this scrutiny it would be preferable to first change the incentives faced by HAH. Changes to the degree to which a project is pre-funded by its customers and to the extent to which costs are passed through to them, are likely to result in a more cost efficient HAH, one that even Willie Walsh might approve of.

Prof David Starkie is a visiting professor at the University of Applied Sciences, Bremen. He is the author of the IEA Discussion Paper ‘Transport Infrastructure: Adding Value’.







[1] See Table 11.3 in the Final Report

Member of the Advisory Committee

David Starkie is a senior associate at Case Associates, London. His many publications include  Aviation Markets: studies in competition and regulatory reform (Ashgate, 2008). David has advised governments and legislatures across the world on transport policy issues. He was economic advisor to the European Commission’s delegation at ICAO-related proceedings on aviation and the environment, Montreal and Washington DC 1995-97, and was on the Civil Aviation Authority’s expert panel for NATS price cap review 2006 and airport competition framework assessments 2010-11. More recently he was on the Airports Commission’s expert advisory panel. David is the author of the book The Motorway Age: How post-war governments reacted to rapid traffic growth.




 


3 thoughts on “Is Heathrow’s proposed third runway too long?”

  1. Posted 17/08/2015 at 13:08 | Permalink

    “Hello” Us residents are still here,
    I’m saddened as nothing is ever mentioned by our MPs and Business leaders about the residents of the CPO area, despite many articles written often barely mentioning those 750 residents who will lose their homes. Our house prices and lives are on hold & have been suppressed for years, due to the incompetence of MPs and not concerned in our insecurities. House prices have risen threefold in surrounding areas like Uxbridge, Hayes, Slough Etc. It’s great offering compensation but has anyone actually surveyed to see if one could purchase like for like with the 25% on offer, I suspect NOT. The Government and Heathrow need to get unpretentious, this area is blighted. The 25% offer is not enough to acquire a home in the current conditions. With fewer houses for sale in locality, residents won’t have adequate funds to purchase a home let alone find one, leaving residents no alternative but to move away, even those who work at Heathrow.

    Sir Howard Davis Recommends in his report that HAL should also be prepared to go further if it is to demonstrate a genuine commitment to a world-class compensation package that matches the scale of its business ambitions. Clearly he sees the 25% offer as insufficient. The (BCC) published its Autumn 2014 Statement submission, Is calling on the government to introduce new measures to accelerate the progress of infrastructure projects that are economically critical, both locally and nationally. Increase the compensation for people required to sell their home to make way for infrastructure projects.

    The BCC proposes to increase compensation to 50% above the open market value. This will better distribute the benefits of the development to those directly impacted and match international best practice.

    Garden Villages Recommendation Feb 2015: Another recommendation of 50% above the market value should be offered householders; this would be fair compensation for people requiring moving, permitting them to purchase an equivalent/better home or farm elsewhere if they wished or significant cash in hand, therefore reducing local opposition. It should reduce the likelihood of recourse to having to apply the compulsory purchase powers of the New Towns Act. The 2 articles above both recommends 50% above market value compensation leaves me with no doubt that Heathrow aren’t paying Wold Class Compensation at 25%. They need to understand the meaning of COMPENSATION.

  2. Posted 17/08/2015 at 22:56 | Permalink

    I have just been asked if I am Anonymous above/below ? The answer is no.
    Two hundred years ago the British Government outlawed foreign vessels turning up and buying African homes and people for profit.
    Now our own Conservative and Labour politicians are imposing New Age Slavery on the innocent Britons living in their homes affected by Heathrow expansion.
    “No ifs, No buts, No Third Runway” got Cameron elected but now his Etonian inbred traitors wish to sell their country folk to Chinese and Qatari investors.
    We are not to be sold to anyone.
    Slavery is dead.
    Long live Longford, Harlington, Harmondsworth and Sipson.
    We can shut Heathrow whenever we want.
    We’ve done it twice already.
    Bryan Tomlinson

  3. Posted 23/08/2015 at 08:46 | Permalink

    Although Heathrow Airport will enjoy substantial benefits from an additional runway they still refuse to pay for the infrastructure costs required to support the increased scale of operations. Unless Heathrow agrees to pay for the full cost of road and railway improvements as well as the the expense of mitigating higher levels of air pollution then the expansion should not be permitted.

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