Airports Regulation

Overview

The current key issue is - Who pays for Heathrow's third runway? - assuming it is built - see further below.

Follow this link to read about these two previous important regulatory issues:

  • setting maximum landing charges for London's airports, and
  • forcing BAA plc, then the owner of Heathrow, to sell both Gatwick and Stansted.

By way of background, it is worth remembering that Heathrow's maximum charges include an allowed rate of return on most of its capital assets (its RAB - regulated asset base). This encourages capital investment and - since buying BAA in 2006 - new owner Ferrovial has tripled its RAB to £15bn., mainly financed by cheap debt. See also my Price Control web page.

Another London Runway?

It is generally accepted that the South-East of the UK needs significantly more airport capacity. (Clement Attlee's Labour Government first proposed a third Heathrow runway in 1949!) Heathrow is now operating at full capacity and Gatwick is close to capacity. But the expansion of Heathrow is phenomenally complex and expensive. The immediate effects, environmental in particular, fall largely on the local population while the wider economic benefits accrue to the country as a whole. The Government nevertheless announced in October 2016 that it would bring forward legislation which would permit the planning process for a third Heathrow runway to begin around a year later.

But Who pays? Apart from concerns about noise and pollution, one of the big issues facing the promoters of the third runway is who pays for the runway and associated infrastructure, whose cost might exceed £20 billion. The catch is that this investment will not generate income until the runway is available to passengers, which will not happen for several years. Someone therefore has to invest a lot of money well in advance of getting any return. There are four possibilities:

  • The investment (or at least the whole investment) is too risky for the owners of Heathrow (or their bankers). This airport invested £1.4bn in 2013-14 but £20bn is of a totally different magnitude. It is very hard to predict either traffic volumes or fares even in the short term, let alone over 10 or 20 years. Passenger numbers have certainly risen very quickly in recent years (by a factor 8 between 1980 and 2008) but you can't be sure what will happen in future, especially given concerns about climate change and pollution, let alone greater unpredictables such as wars and economic disasters. And who can be sure that each passenger would be willing to pay to fly in 10 or 20 years time? (Incidentally, a new runway has never been privately funded anywhere in the world.)
  • The Government/Taxpayer won't want to pay, especially in these austere times.
  • The Airlines can't be asked to pay because they can't be sure that they will be around to reap the benefit. It is currently illegal to pre-sell landing/take-off slots so no-one can give a cast-iron guarantee that any one airline will be able to occupy any particular slots in many years time. And EU rules anyway require 50% of new slots to be offered to new entrants. Airlines also have fairly highly-geared balance sheets - they often lease rather than rent their aircraft - so they can't easily borrow to fund any new risky investment.
  • So that leaves Current Passengers. Airlines may not be able to fund the investment themselves but they could be asked to pass the cost onto their customers through increased airfares. £20bn divided between Heathrow's 70+million passengers a year over 6 years would be around £50 each on top of the current £21 per passenger. This is quite an imposition especially as many of those passengers would never use the new runway. The likelihood, therefore, is that part of the cost will be borne by Heathrow's owners, and part by current passengers, with as much as possible borne by Heathrow as they will be building the runway and need to be incentivised to build quickly and efficiently.

[Note, though, that there have been recent reports that Heathrow is trying to reduce the cost of the new runway and associated infrastructure by c.£6 billion.]

The way in which the cost is shared is of vital importance to the airlines, and particularly to IAG/British Airways whose Chief Exec, Willie Walsh, opened hostilities in July 2015 by dismissing the third runway as 'a vanity project' whose costs would be 'outrageous'. He might be right about the cost - how can a runway + supporting infrastructure cost over £20bn? And maybe he genuinely doesn't want to see the runway built. He does, after all, have huge market power as IAG control over 50% of Heathrow's slots. So he won't want to see more competition at Heathrow which would reduce the value of his slots and force him to lower his fares. Also - less selfishly - he certainly won't want his passengers to have to pay for it in advance.

Notes

Heathrow's takeoff and landing slots are very valuable, selling for around £40m per pair in late 2015.

The airport handles c.480,000 plane movements (landings + takeoffs) a year, and its runways are 98% utilised.

Martin Stanley

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