Heathrow runway schemes to cost £3-4 bn more than forecast – benefits over 60 years hard to assess
The Airports Commission figures in their consultation documents show costs of building a runway would actually be considerably higher than any of the 3 scheme proposers have estimated. The Commission anticipates a Gatwick runway would cost £9.3 billion, not £7.4 billion the airport claims. The cost of the Heathrow Hub project (extending the northern runway westwards) would be more like £13.5 billion, not £10.1 billion. The cost of Heathrow’s north west runway scheme, destroying Harmondsworth, would be more like £18.6 billion, not Heathrow’s estimate of £14.8 billion (excluding £800m of surface access costs). Those sums would be for runway construction, new terminal and “all other required airport facilities.” The Commission says the higher cost estimates are due to “optimism bias and differing construction profiles.” The possible economic benefits depend on which of 5 scenarios is considered. This could be from £42-127 billion for Gatwick, from £101-214 billion for Heathrow Hub, and from £112-211 for a Heathrow north west runway,depending on the scenario (over 60 years starting in 2026).
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Runways at Heathrow and Gatwick will cost more than forecast
11.11.2014 (Telegraph)
By Nathalie Thomas, Transport and Leisure Editor
Adding runways at Heathrow and Gatwick will cost significantly more than forecast, the Airports Commission has determined, as it announced a public consultation on expansion on Tuesday.
The Commission insisted “no decision” had yet been made on the best location for a new runway in the South East of England, although its analysis has determined that Heathrow will deliver a greater benefit to the wider UK economy than Gatwick.
A second runway at Gatwick would offer an economic boost ranging between £42bn and £127bn, the Commission said, while expanding Heathrow could deliver wider benefits of as much as £214bn.
Two proposals to expand Heathrow have been short-listed by the Commission but those schemes will cost between £3bn and £4bn more than estimated, the inquiry body said.
Heathrow Airport had said it could build a third runway to the north-west of its two current air runways for £14.8bn, plus around £800m to improve road and rail connections. But the Commission has estimated that the bill could spiral to £18.6bn.
Heathrow Hub, a private company which has drawn up designs to extend Heathrow’s northern runway and effectively split it in two, had estimated the costs of its scheme at around £10.1bn but the Commission’s own detailed analysis, published alongside the public consultation on Tuesday, puts the total bill at £13.5m.
Gatwick, which had said it could build a second runway for £7.4bn, has under-estimated the cost of its plans by around £2bn the commission said. The Commission believes the true cost it closer to £9.3bn.
Announcing a national consultation, which will give the public a say on which airport to expand, Sir Howard Davies, said: “We have not yet taken a view on which proposal strikes the most effective balance between the assessment criteria. It is important first that we provide an opportunity for this evidence to be examined, challenged and improved. This consultation gives everyone with an interest in the issue of airport expansion that opportunity.”
The consultation will run for 12 weeks, ending on February 3rd 2015.
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Construction costs
The Airports Commission’s main consultation document
states on Gatwick:
“3.39
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.”
and on Heathrow Hub – extended northern runway (Page 65):
“3.92
The scheme is estimated to cost c. £13.5 billion, including the runway extension,
a new terminal and all other required airport facilities. This is higher than Heathrow
Hub Ltd’s estimate of c. £10.1 billion, reflecting in large part differing views of
optimism bias and differing construction profiles. These costs are lower than for the
Heathrow North West Runway scheme but still substantially higher than those of
the Gatwick Second Runway scheme.”
“3.93
Investment on this scale would entail increases in the airport’s charges to airlines.
Current airport charges at Heathrow are already comparatively high (£20 per
passenger), reflecting both the demand for slots and the high operating and
ongoing development costs for the airport of delivering a high quality and complex
hubbing product for their airline customers, in a relatively constrained site. These
charges would increase if the airport were to be developed, the extent of which
would be dependant in part on the demand scenario. Heathrow Hub Ltd estimate
an increase in charges per passenger to £22. This is noticeably lower than the
Commission’s estimates which indicate charges could rise to between £27-28, an
increase of around 40%, with peak charges of up to £30.”
“3.94
The Commission’s assessment of potential financing approaches, consistent with
Heathrow Hub Ltd’s proposals, assumes that the scheme will be purchased,
delivered and financed by Heathrow Airport Ltd. The Commission’s analysis
suggests that Heathrow Airport Ltd may have to raise additional equity of up to c.
£5.1 billion and additional debt of up to c. £24.9 billion. This will put the airport at the highest end of the range of financing for infrastructure projects in the UK and could make Heathrow Airport Ltd of comparable scale to Network Rail (with a long-term debt of c. £35 billion) and larger than National Grid (c. £25 billion). Raising this level of financing would be challenging; and there are risks associated with an increase of passenger aero charges to £27-28, significantly higher than current charges across the UK and globally, in a context where Heathrow must compete with other airport operators.”
and on Heathrow own plan, the north west runway (Page 81):
“3.143
The scheme is estimated to cost c. £18.6 billion including construction of the
new runway, a new terminal and all other required airport facilities. This is higher
than Heathrow Airport Ltd’s estimate of £14.8 billion (excluding £800m of surface
access costs), reflecting in large part differing views of optimism bias and differing
construction profiles. These costs are higher than for either of the other schemes,
mainly because of higher land acquisition and transit system costs.”
“3.144
Investment on this scale would entail increases in the airport’s charges to
airlines. Currently airport charges at Heathrow are already comparatively high
(£20), reflecting both the demand for slots and the high operating and ongoing
development costs for the airport of delivering a high quality and complex hubbing
product for their airline customers, in a relatively constrained site. These charges
would increase if the airport were to be developed, the extent of which would be
dependent in part on the demand scenario. Heathrow Airport Ltd estimate that
charges would peak at roughly £27 before returning to approximately current levels
by 2050. This is lower than the increases indicated by the Commission’s analysis,
which indicates charges rising to between £28 and £29, an increase of around
40%, with peak charges of up to £32.”
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Economic benefit
On the potential economic benefit of a new runway, the Airports Commission says of each of the 3 runway schemes in the main consultation document:
GATWICK
3.22
Differences in the scale and pattern of demand growth across the Commission’s
scenarios leads to a wide range in potential economic benefits. Under a carbon-
traded scenario transport economic efficiency benefits would range from
£44.1 billion under the low-cost is king scenario at the high end, to £3.7 billion
under the global fragmentation scenario at the low end. In addition, passengers
would benefit from reduced delays to the extent of £0.73 billion to £1.78 billion,
depending on the demand scenario under consideration.
3.23
In addition, the Commission has made a macroeconomic assessment of the GDP
benefits which might accrue from expanding Gatwick airport. This assessment,
which is based on modelling the operation of the economy as a whole, has been
specifically developed to support the Commission process and estimates that there
could be wider benefits within the economy ranging from £42-127 billion depending
on the scenario. 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. [£42 – 127 is over 60 years, starting in 2026].
HEATHROW HUB
3.72
Difference in the scale and pattern of demand growth across the Commission’s
scenarios leads to a wide range in potential economic benefits. Under a
carbon-traded scenario, transport economic efficiency benefits would range from
£36.7 billion under the low-cost is king scenario at the high end of the range to
£9.4 billion under the global fragmentation scenario at the low end of the range.
In addition, passengers would benefit from reduced delays to the extent of
£0.64 billion to £2.18 billion, depending on the demand scenario under consideration.
3.73
In addition, the Commission has made a macroeconomic assessment of the GDP
benefits which might accrue from expanding Heathrow airport. This assessment,
which is based on modelling the operation of the economy as a whole, has been
specifically developed to support the Commission process and estimates that
there could be wider benefits within the economy ranging from £101-214 billion
depending on the scenario. 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. [£101 – 214 is over 60 years, starting in 2026].
HEATHROW NORTH WEST RUNWAY
3.127
Differences in the scale and pattern of passenger demand across the Commission’s
scenarios leads to a wide range in potential economic benefits. Using a carbon-
traded scenario transport economic efficiency benefits would range from £42 billion
under the global growth scenario at the high end of the range, to £10.3 billion
under the global fragmentation scenario at the low end of the range. In addition,
passengers would benefit from reduced delays to the extent of £0.84 billion to
£2.36 billion, depending on the demand scenario under consideration.
3.128
In addition, the Commission has made a macroeconomic assessment of the GDP
benefits which might accrue from expanding Heathrow airport. This assessment,
which is based on modelling the operation of the economy as a whole, has been
specifically developed to support the Commission process and estimates that
there could be wider benefits within the economy ranging from £112-211 billion
depending on the scenario. 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. [£112 – 211 bllion is over 60 years, starting in 2026].
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