Airports Commission assesses Gatwick’s runway would cost about £2 billion more, needing high landing charges
The Airports Commission’s consultation on their short-listed runway options contains a lot on the economics. While Gatwick airport has said their runway would cost the taxpayer nothing, and only cost about £7.4 billion, the Commission puts the cost higher. They estimate the work for the 2nd runway, with a 3rd terminal and all associated infrastructure, would cost up to £9.3 billion. The Commission’s higher figure reflects “in large part differing views of optimism bias and differing construction profiles.” Gatwick already has current debt of about. £1.5 billion made up of Class A bonds. It also has £300 million of revolving credit facilities. The Commission estimates Gatwick would need to raise additional equity of up to about. £3.7 billion and additional debt of up to about. £14.3 billion. “This level of finance is not unprecedented for infrastructure projects and airports. It is, however, significantly larger than the company’s financing to date and may be challenging.” Gatwick would also have to substantially raise its landing charges from £9 per passenger to up to £15-18 or up to £23. Like expensive Heathrow. Commission’s Gatwick document.
The Airports Commission document on Gatwick is
Below are some extracts from this long document, focusing on the cost and financing.
Gatwick Airport is currently privately owned and operated by Gatwick Airport Limited. It is predominantly financed through the long term bond market, with current debt of c. £1.5 billion made up of Class A bonds. It also has £300 million of revolving credit facilities. It has equity of c. £336 million in ordinary share capital. Its current capital structure is summarised in the Literature Review and Funding and Financing Report.
The construction of a second runway at Gatwick, together with a third terminal and all associated infrastructure, is estimated to cost up to £9.3 billion. This is higher than Gatwick Airport Ltd’s estimate of £7.4 billion, reflecting in large part differing views of optimism bias and differing construction profiles. These costs are, however, significantly lower than those of either of the Heathrow expansion schemes, both in quantum and in terms of cost per additional ATM of capacity.
The Gatwick Airport Second Runway scheme has been designed in such a way that the supporting infrastructure can be constructed in phases in line with increases in passenger demand. This spreads the cost over a longer period and allows for flexibility to manage differing levels of demand. In the Commission’s lower end scenarios, the final phase of construction may not be required to accommodate passenger demand before 2050. This would reduce the cost over this period by just under £2 billion.
Investment of this scale would entail increases in the airport’s charges to airlines. Gatwick Airport Ltd has estimated, for example, that per passenger charges would rise from £9 currently to £12-15 as a result of expansion. This is lower than the charges predicted by the Commission’s analysis, which indicate average charges rising to between £15 and £18, with peak charges of up to £23. As can be seen, the Commission’s estimates show significant potential variation reflecting the variation in passenger demand across its scenarios. In the upper end demand scenarios, charges would be close to Gatwick Airport Ltd’s own estimates, although still slightly higher, reflecting higher costs and a more conservative view of how the infrastructure delivery might be phased. Conversely, the higher end of the Commission’s predicted range of charges reflects lower estimated levels of demand leading to peak charges above £20 (roughly the current level of charges
The Commission’s assessment of potential financing approaches across a range of scenarios and sensitivities suggests that Gatwick Airport Ltd may have to raise additional equity of up to c. £3.7 billion and additional debt of up to c. £14.3 billion. This level of finance is not unprecedented for infrastructure projects and airports. It is, however, significantly larger than the company’s financing to date and may be challenging in a context where there is uncertainty around passenger demand forecasts and where the airport may need to raise its aero charges from £9 per passenger to up to c. £15-18 or more within a competitive environment.
Under Risk, Financing, the Gatwick document says:
“The RAB [Regulatory Asset Base] based approach under which Gatwick currently operates
provides a level of certainty to credit rating agencies and investors and would to an extent facilitate attraction of lower cost and longer term finance. The Commission’s cost and revenue estimates suggest that GAL [Gatwick Airport Ltd] may have to raise an additional c. £2.4 billion in equity and c. £10.4 billion of debt (under the Commission’s AoN-CC scenario) [which means Assessment of Need Carbon Capped], and potentially up to c. £3.7 billion additional equity and c. £14.3 billion additional debt. Taking into account the level of maturity of its current bonds this will require debt issuances of up to £2 billion in any given
year. This is significantly larger than the company’s bond issuances to date, and may require the airport to issue bonds in a number of currencies rather than just GBP [ £ ] bonds. However, this level of finance is not unprecedented for infrastructure projects and airports. The UK’s largest individual bond issuance for 2013 was £3.5 billion by Vodafone and the funding requirements for Gatwick Airport’s Second Runway are well within this range.”
Airports Commission Consultation
The main consultation document (94 pages):
Airports Commission on Gatwick (138 pages)
Airports Commission on Heathrow Hub – extended northern runway – ENR (144 pages):
Airports Commission on Heathrow Airport’s own runway scheme (144 pages):
The detailed technical documents supporting the runway schemes
Technical documents (over 50)
Heathrow and Gatwick new runway costs ‘underestimated’
Plans to build new runways at Heathrow and Gatwick will cost substantially more than the bidders have estimated, a report says.
The Airports Commission says a second runway at Gatwick would cost £2bn more than the bid suggests.
Two separate plans to expand Heathrow are predicted to cost £3-4bn more.
The commission has been tasked with weighing up where a new runway should be built to meet rising capacity demand in the South East of England.
However, the report does suggest that all three bids have underestimated the costs involved.
It also suggests that landing charges to airlines would need to increase in order to pay for the expansions.
The BBC’s transport correspondent Richard Westcott said higher landing charges could mean higher fares for passengers.
According to the commission’s analysis, Gatwick’s plan to add a second runway is the quietest and easiest to deliver.
But, expanding Heathrow is seen as more likely to deliver a bigger boost to the economy, and create more jobs
………(lots of the usual stuff )…………………….
Analysis: Richard Westcott, transport correspondent, BBC News @BBCWestcott
This report goes into a lot of technical detail about the pros and cons of each runway scheme. But, what it doesn’t do, what it can’t do really is quantify the politics of it all.
Heathrow splits MPs. Cabinet members like Justine Greening, Phillip Hammond and Vince Cable have spoken against expansion in the past. Officially, the Liberal Democrats don’t want any new runways at all, not unless another one is closed elsewhere.
Then, there’s the rumour that the Labour leader, Ed Miliband, was once prepared to resign as energy secretary over plans to expand Heathrow. Although, it’s thought his thinking may have changed recently.
Meanwhile, many business leaders support Heathrow and have told the chancellor as much.
And I haven’t even mentioned Boris Johnson, who’s regularly called Heathrow expansion a disaster… and he could well be one of the airport’s neighbouring MPs after the election.
Whatever Sir Howard Davies recommends, it’s the politicians that will have to deliver it. And, that’s the hard part.