GACC assesses Gatwick’s economic claims, and find them to be flimsy, at best

Date added: 27 September, 2014

In May 2014 Gatwick submitted to the Airports Commission their case for building a new runway, but this document has not been published. In July Gatwick published a document “Connecting Britain to the Future. Faster” which was said to be a summary of their case. On examination, however, it appears to be a collection of assertions chosen for their publicity value but with virtually no supporting evidence. That is particularly true for the claims that a new runway would create substantial economic benefits. GACC (Gatwick Area Conservation Campaign) has assessed the claims made. Many are shaky, at best. On the issue of the alleged benefit to the wider UK economy of £28 billion, from more trade, inward investment and inbound tourism, GACC points out that it is illogical to count the benefits of inbound tourism but not the cost of outbound. Official forecasts show that Gatwick in 2050 will handle around three outbound tourists for every one inbound. The main effect of building a new runway would be a net increase in tourist expenditure abroad, thus having a negative effect, not a positive benefit, for the UK economy. GACC: “If Gatwick Airport Ltd were using this document as a basis for a contract they could be sued for misrepresentation.”
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“If Gatwick Airport Ltd were using this document as a basis for a contract they could be sued for misrepresentation.”

“If Gatwick were using their claims to sell shares, they could be sued for issuing a ‘fraudulent prospectus’. ” Read study.

Would a new Gatwick runway bring substantial economic benefits?

An examination of claims made by Gatwick Airport Ltd

September 2014 by GACC (Gatwick Area Conservation Campaign)

In May 2014 Gatwick Airport Ltd (GAL) submitted to the Airports Commission their case for building a new runway. This was a 3,200 word document but it has not been published. Heathrow Airport has criticised Gatwick for not being prepared to reveal details of their proposal.

Instead in July GAL published a document Connecting Britain to the Future. Faster [1] which was said to be a summary of their case. On examination, however, it appears to be a collection of assertions chosen for their publicity value but with virtually no supporting evidence. That is particularly true for the claims that a new runway would create substantial economic benefits.

The purpose of this paper is to examine these claims.

Statement 1

The cost to the wider economy of failing to address the demand for growth could amount to £30-45 billion over 60 years.[2]

This statement is lifted directly from the Interim Report of the Airports Commission [3] but needs qualification:

It applies equally to a new runway at either Heathrow or Gatwick;
It is a cumulative figure over 60 years;
The Commission indicate that the cost would be higher after 2050 when the London airports become full. In the next 30 years the figure might average around £200 million a year – about 10p per head per week for the adult population;
It ignores the tax subsidy to aviation (see statement 5 below). Some years ago it was proved, using the Department for Transport computer model, that if air travel paid the same rate of tax as car travel there would be no need for any new runway, and no economic benefit in building one. [4]

Statement 2

Gatwick expansion will deliver around £90 billion of economic benefits to the UK, much higher than expansion at Heathrow …. .[5]

This figure, which has frequently been quoted in Gatwick’s runway publicity campaign, is suspect as it is far higher than the estimate made by the Airports Commission mentioned above. It is subject to all the same qualifications.

Some explanation of how the £90 billion is calculated is given in statements 3 – 6.

Statement 3

Expansion of Gatwick will enable an additional 45 million passengers every year to travel, on business, holiday or visit friends or relatives. Oxera estimates the monetary value placed by these individuals on their ability to travel to be £51 billion. This figure also captures the increase in airline competition and a corresponding reduction in airfares.[6]

No details are given of the calculations by the consultants Oxera [7] but the following comments can be made:

The extra 45 million passengers would not occur until Gatwick reaches full capacity of two runways, a good many years into the future;
In normal economics the value placed by individuals on the ability to travel is measured by the price they pay, and is thus already included in the figure given by the Airports Commission: to include them again is double counting;
The assumption that a new runway at Gatwick would increase competition and reduce fares is not valid: most competition is between airlines, not between airports. Moreover it ignores that fact that there will be ample competition from Stansted and Luton, so a new runway at Gatwick would make little difference;
The need to pay the cost of building a new runway would mean an increase in Gatwick air fares, not a reduction (see comments on statement 6 below).

Statement 4

Benefits to the wider UK economy = + £28 billion. These benefits are generated by increased levels of trade, inward investment and inbound tourism created by extra air travel to and from the UK.[8]

As has often been pointed out, it is illogical to count the benefits of inbound tourism but not the cost of outbound. Official forecasts show that Gatwick in 2050 will handle around three outbound tourists for every one inbound.[9] The main effect of building a new runway would be a net increase in tourist expenditure abroad, thus having a negative, not a positive, benefit for the UK economy.

Statement 5

Public accounts revenues to the Exchequer = + £15 billion. More air travellers will generate additional tax revenues for the Government, in the form of Air Passenger Duty, VAT and fuel duties.[10]

It is difficult to see how this statement can be justified. Airlines pay no fuel duty and no VAT. Based on Treasury figures it has been estimated that this results in a £12 billion a year loss of revenue. Air Passenger Duty brings in £3 billion a year. The result is a net loss to the Exchequer, a tax subsidy to aviation, of £9 billion a year.

Any increase in the number of passengers would tend to increase the size of this tax loss, or tax subsidy, proportionally.

Statement 6

Expansion at Gatwick will give a much greater stimulus to competition and can be expected to reduce air fares across the entire system to the benefit of all passengers. Airfares will be up to £30 billion lower over 60 years with a second runway at Gatwick.[11]

As noted in the comments on statement 3, the assumption about a greater stimulus to competition is flawed.

GAL’s claims about lower air fares all relate to the long term. They are calculated on an assumption that the cost of a new runway can be spread among the eventual 95 million passengers per year. But in the early years after a new runway was built, the extra traffic would be small, especially as Gatwick would face intense competition from Stansted (which would have no extra runway cost). It has been shown that in these circumstances the cost of a new runway would result in an increase in air fares of around £50 per return flight.[12]

Conclusion

GAL seem to be assuming that most members of the public find it difficult to envisage the difference between a million pounds and a billion pounds. But that is no excuse to make inaccurate statements. It is clear that the claims for economic benefits contained in Connecting Britain to the Future are seriously exaggerated.

If Gatwick Airport Ltd were using this document as a basis for a contract they could be sued for misrepresentation.

If Gatwick were seeking to sell shares on the basis of this document they could be sued for issuing a fraudulent prospectus.

GACC

September 2014

[1] http://gatwickairport.com/PublicationFiles/business_and_community/all_public_publications/2014/Connecting_Britain_to_the_Future._Faster.pdf

[2] Connecting Britain to the Future page 10. http://gatwickairport.com/PublicationFiles/business_and_community/all_public_publications/2014/Connecting_Britain_to_the_Future._Faster.pdf

[3] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/271231/airports-commission-interim-report.pdf page 10

[4] http://www.aef.org.uk/downloads/HiddenCost.pdf

[5] Ibid. Page 8

[6] Connecting Britain to the Future, page 22.

[7] Oxera are a firm of consultants often used by the aviation industry because they can be relied upon to produce the required conclusions.

[8] Connecting Britain to the Future, page 22.