Sat | Dec 3, 2016

Commission warns airport expansion cost to soar

Published:Wednesday | November 12, 2014 | 12:00 AMBy Peggy Hollinger
File An aerial view shows British Airways planes at Heathrow Airport in London, March 2010.

A new runway at Heathrow is likely to deliver significantly greater economic benefits to the United Kingdom (UK) than at Gatwick, although all options being considered by the government's independent airports commission will cost billions more than previously estimated.

The findings come in a detailed assessment of the three shortlisted candidates for relieving the crippling congestion at Britain's main airports.

The report is the latest update from the Airports Commission led by former CBI boss Sir Howard Davies, which kick-starts a four-month public consultation process before a final recommendation is made after the general election next year.

The report found that all three options would be sufficient to meet the UK's pressing need for new airport capacity. But it is Heathrow, whether by extending an existing runway or by adding a new, third, runway, which would deliver substantially greater transport and economic benefits.

These are estimated at £112-£211bn for a new runway or £101-£214bn if the existing runway is extended. Gatwick's economic benefits are estimated at £42-£127bn.

In Gatwick's favour the commission found that not only would its proposal be far cheaper, significantly fewer people would be affected by noise than if Heathrow was extended.

In its report, the commission estimated that capital and risk costs would be up to 40 per cent higher than put forward by the backers of each proposal. It also said each of the candidates had significantly underestimated the impact on airport charges, compared with its own analysis.

Heathrow's expansion would also create the greatest number of jobs. However, the commission said these results should be interpreted with caution, given the innovative methodology used, but they provide an indication of the scope for wider benefits to be felt throughout the economy, for example from enhanced productivity, trade or consumer spending, as a result of expansion.

The report also sought to look at the development of the aviation industry and how passengers would want to travel. It stressed that the UK had to maintain flexibility in its airport capacity to allow either for the further growth in passengers transferring through large hub airports or for the development of point-to-point travel, favoured by the low-cost operators.

"We have never said we don't need a hub; the issue is how big that hub should be and whether it should be biased towards low-cost point-to-point EasyJet and Ryan Air model, or towards the British Airways, American Airlines, KLM and Air France model," Sir Howard said on Tuesday in an interview with the 'BBC's Today' programme.

"Low-cost traffic has grown much more rapidly than full-service all-singing, all-dancing network airlines," he noted, saying that the consultation would call on businesses and airlines to "try and tease out how robust these different models will be".

"How they think the world will look in 20 years time is the tricky bit," Sir Howard said.

Jock Lowe, the former Concorde pilot who has proposed the extension of an existing runway at Heathrow, said he was not concerned by the discrepancy in costs identified by the commission. The assessment had applied a significantly higher contingency rate than each of the candidates. He was confident that the safety net built into his proposal would be sufficient but added: "If there are things we can change, we will change them. It is not a big issue."

Heathrow said it had applied a 15 per cent optimism bias for the capital cost of the project against the commission's 20 per cent.

The commission's findings are likely to intensify the already heated political debate about airport expansion in the southeast of England, particularly given the strong opposition of west London residents to the expansion of Heathrow.

It will raise concerns that the next government may abandon plans to expand airport capacity, yet again delaying a project which has been under consideration for more than 40 years.

Politicians are preparing for a fierce public debate over airport expansion, which most admit is necessary but which promises to be politically radioactive ahead of next year's general election. Each of the main parties is facing internal divisions over its stance on whether to back Gatwick or Heathrow.

Even before the report was released, British industry called on the government to ensure a decision would be taken when the commission issues its final recommendation in June. The business community has argued that trade is being held back by airport congestion which is limiting the expansion of air travel to new and growing markets.

"The Airports Commission should be confirmed as a permanent body now, until the next government acts on its recommendations," said Terry Scuoler, chief executive of the EEF manufacturers' lobby group. "There is no more long grass left for this issue to be kicked into."

Darren Caplan, head of the Airport Operators Association, said the aviation industry was worth some £52bn to the UK economy, but this could be at risk if growth was constrained by failure to address congestion. "We believe that politicians should support our sector by ... taking the long-awaited decision to expand runway capacity."

Heathrow Airport Limited has estimated its proposal for a third runway at close to £14.8bn, excluding government funding for improved road and rail links. The commission puts this figure at £18.6bn.

Heathrow Hub, an independent consortium, is proposing the extension of an existing runway at a comparable cost of £10.1bn, which the commission estimates at £13.5bn.

Gatwick, which is asking for a second runway, has priced its expansion at £7.4bn, against £9.3bn from the commission.

In his assessment Sir Howard reiterates the need for airport expansion in the southeast, and the likelihood that a second additional runway would be needed by 2050 or even earlier. Heathrow is already running at maximum capacity, while Gatwick is set to reach its limit by 2020. Sir Howard in December estimated that failure to address airport expansion could cost the UK economy up to £40bn over 60 years.

Heathrow is already set to lose its crown as the world's busiest hub for international passengers to Dubai, which has been expanding aggressively on the back of its rapidly growing Emirates airline.

Though the commission has said it will not make a final recommendation until June, many in the business and aviation community have already come out strongly in favour of expanding Heathrow.

The CBI in September said it was essential that Britain had a single hub airport with capacity to add flights. Willie Walsh, chief executive of IAG - parent to British Airways and Iberia - said last month there was no business case for Gatwick. However, it has faced strong local opposition as its flight paths are above areas of residential London and the noise from more flights is a serious concern.

Gatwick has drawn support from regional airports such as Birmingham, who argue that expanding Heathrow will impede competition and limit their ability to attract new airlines, routes and passengers. However, it has its local opponents as well.

Crispin Blunt, MP for Reigate, who heads up the Gatwick Co-ordination Group, which consists of backbench MPs around Gatwick, said: "The Gatwick Coordination Group (GCG) welcomes the . . . publication of the bid appraisals, as an opportunity for this debate to be properly had," describing expansion at Gatwick as a "developmental disaster ... (Its) proposal does not address the wider capital infrastructure requirements outside of the immediate perimeter of the airport, and a hub at Gatwick is plainly the wrong answer to the much broader question of UK airport capacity."

(c) The Financial Times Limited 2014