Britain will be £40bn better off if Gatwick Airport is chosen as the location for the UK’s next runway over rival Heathrow, according to claims published today.
Sir Roy McNulty, chairman of Gatwick, has branded Heathrow a “politically toxic” monopoly as Britain’s two busiest airports prepare to make their closing arguments in the battle over expansion rights. Both Heathrow and Gatwick will on Tuesday publish their final plans to the Airports Commission, an inquiry led by former Financial Services Authority chairman, Sir Howard Davies, into where best to build the next runway in the South East of England.
In an article published on The Telegraph’s website, Sir Roy launches a pre-emptive strike, claiming policymakers will hand Heathrow’s investors a “powerful monopoly” which will raise prices for passengers if the West London hub is permitted to build a third runway.
Sir Roy, who is a former chairman of Britain’s airports regulator, the Civil Aviation Authority, also casts doubt on the ability to deliver a third runway at Heathrow even if it is selected by the commission due to political sensitivities. Choosing Gatwick will lead to “more vigorous competition” in the market, more flights and lower fares for passengers, the airport chief argues. Gatwick is preparing to publish an impact study, drawn up by consultants at Oxera, which values the economic benefits of choosing its second runway plans over Heathrow expansion at £40bn over the next 60 years.
“Each time Heathrow has been chosen it has faced a political roadblock,” Sir Roy writes. “The reasons for that are very simple but worth restating. Heathrow is in the wrong place for expansion which makes it politically toxic. In the modern age it has not been considered acceptable to have another 270,000 flights a year over a central London flight path – with all the resulting noise and environmental impact – at a time when, today, noise at Heathrow is greater than all European airports combined.”
Gatwick claims it will be in a better position to cater for low cost airlines, the fastest growing segment of the market, than Heathrow, whose customers are predominantly legacy airlines which make use of transfer traffic to fill long and medium-haul flights.
The Airports Commission has short-listed three options: a second runway at Gatwick, Heathrow airport’s own expansion plans, and a maverick idea cooked up by former Concorde pilot Captain William “Jock” Lowe. The Heathrow Hub scheme involves extending the airport’s existing north runway and dividing it in two.
Heathrow Hub will also submit its final plans to the commission, which will include recommendations on how to avoid closing the M25 during the day while a new route for the trunk road is constructed.
Over the weekend, Heathrow launched a charm offensive with local communities, announcing a £550m noise insulation and property compensation fund to placate residents who are concerned over the impact of a third runway. Heathrow is proposing to buy around 750 properties, which will have be demolished if its third runway plans go ahead, at 25pc above their market value and pay for stamp duty and legal costs.
A spokesman for Heathrow last night dismissed Gatwick’s claims that Britain would be better off if the West Sussex airport is allowed to expand to two runways.
The spokesman said: “Heathrow supports competition and choice which is why we are not opposed to a second runway at Gatwick. Gatwick’s argument that in future passengers and airlines can have any choice as long as it’s Gatwick is the opposite of competition.
“Frontier Economics estimates that removing capacity constraints at Heathrow could cut average ticket prices by £95 today and by £300 in 2030. That price cut for UK passengers and business can only be delivered by expanding Heathrow.”
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Scale of taxpayer contribution needed for Heathrow or Gatwick runways shown up in KPMG report for Airports Commission. As much as £17.7 billion for Gatwick?
January 20, 2014
A report dated December 2013 by accountants, KPMG, for the Airports Commission, says a 3rd runway at Heathrow could require £11.5bn of government support, (ie. money from the taxpayer) while a 2nd runway at Gatwick may need as much as £17.7bn of taxpayer contributions. An airport in the Thames Estuary would need even more from the taxpayer – maybe £64 billion. The report contradict claims by airport operators that an extra runway could be financed either exclusively or predominantly by the private sector. Gatwick has said it could build a 2nd runway for £5bn to £9bn with no government aid. Heathrow has raised the prospect of £4bn to £6bn of taxpayer support to improve rail and road links, but has argued that a 3rd runway, at a cost of £17bn, would be largely funded by the private sector. The KPMG analysis also highlights the potential burden of building a new runway on passengers, who would pay higher ticket prices. KPMG says these would have to rise by 136% at Gatwick to repay the money borrowed. That would mean charges at Gatwick rising by 2.5% above inflation every year from 2019 to 2050. At Heathrow charges would need to rise by 13% initially and then by 2.5% above inflation. Repaying the money takes till 2050. Unless charges for passengers rise enough, the public (many of whom do not fly) will have to stump up the funds.
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On Gatwick’s 2nd runway plan, the KPMG report (Dec 2013) says (Page 18):
“The capital cost of developing the scheme is estimated at £16.6 billion (comprising £14 billion of on airport costs and £2.6 billion of off-airport (surface access) costs). Whilst this capital expenditure is spread over 21 years, and much of the cost is back-ended (the first five years sees only £0.9 billion expenditure), the anticipated revenue assumptions do not allow debt to be repaid as there is insufficient income to cover the interest on the debt. This is after assuming revenues are indexed at 2.5% from 2019 the period beyond the current regulated cap. Further, at four times the current RAB value, it seems unlikely that the RAB model could be used as an effective means for raising finance for this option.
In order to repay total debt by 2050, aero revenue charges would need to increase by 136% and rise by 2.5% inflation year on year from 2019 and that would give rise to peak borrowing of £13.2 billion.
Alternatively an initial rise of 209% with no further inflationary rise would also see a reduced debt of £8.5 billion fully repaid by 2050. However, that analysis assumes that the airport pays for 100% of the off-airport capital expenditure. Assuming that it makes no contribution to those off-airport costs the revenue is still insufficient to meet interest costs but the increase required to repay the on-airport related debt is a 112% increase in aero revenues from 2019 and indexed at 2.5% thereafter. In that case peak borrowing would be £11.1 billion which could be reduced to £6.9 billion if the initial rise in aero revenues were 171% with no inflationary rise thereafter. Any increase in revenue above that would theoretically allow a contribution to the off-airport capital expenditure.
Whilst the cost of this scheme is low in comparison to the brand new hub options, it is still too large under the revenue assumptions provided to repay the capital cost and would therefore need some form of revenue increase, subsidy or grant from Government. Without a clear economic rationale it is unlikely that the remainder of the funding would be attractive to external investors or third party debt providers so the extent of the Government subsidy may need to be sizeable. It is noteworthy that the cost of the scheme is a few billion pounds less than Crossrail which has some private sector contribution at the margins but is in essence wholly funded by Government.
To derive a proxy figure for potential Government subsidy to support the schemes (as an alternative to simply raising revenue) a breakeven analysis on the capital expenditure costs has been approximated. Reducing capital expenditure by £17.7 billion, the scheme is viable in the base case and this £17.7 billion is therefore an approximation of the level of Government support that might be required. The additional borrowing requirement would fall to a more manageable £1.7 billion.”
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Airports Commission – Interim Report – 0 Paper – High-level Commercial & Financial Assessment of Selected Potential Schemes – 10 December 2013. By KPMG
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