SSE tell Airports Commission robust evidence will be needed on financial viability of any new runway
The speech delivered by Sir Howard Davies, on 7 October 2013 was described as setting out the Airports Commission’s ‘Emerging Thinking’ on aviation capacity in the UK. It took the form of setting out some of the main arguments against increasing runway capacity in the UK, and it then dismissed each in turn – and stated that “Our provisional conclusion is that we will need some net additional runway capacity in the south east of England in the coming decades”. Stop Stansted Expansion has submitted their comments, which advise against building any new runway capacity. They argue that the speech contained very little in terms of hard evidence to support the conclusion favouring a new runway. SSE question the financial viability of a new runway, as there is already so much spare runway capacity, and say people will expect to see robust evidence to demonstrate the Commission’s grounds for its confidence that projects proposed have commercial viability. SSE also says the current DfT demand forecasts are not nearly strong enough – or reliable enough – to support a business case for a new runway.
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The Stop Stansted Expansion submission can be seen at SSE Submission to Airports Commission – Response to Emerging Thinking (7 pages)
http://www.stopstanstedexpansion.com
Concluding points
4.1 As pointed out in the Commission’s ‘Emerging Findings’ statement: ‘runways are expensive pieces of infrastructure’. We can, in fact, see that quite clearly from the costed proposals for new runways submitted to the Commission by airport operators and others. It is therefore valid to ask whether a new runway can be commercially justified in the foreseeable future because, if there are significant doubts about this, it would be irresponsible and quite wrong – once again – to create needless blight and uncertainty for local communities around airports in the south east.
4.2 If, in its interim report, the Commission recommends the development of an extra runway or runways in the south east, we will expect to see robust evidence to demonstrate the grounds for its confidence in the commercial viability of the proposed project(s) at this point in time.
4.3 Some insights into the rate of return required by investors in the UK airport sector can be obtained by considering the prices paid for UK airport infrastructure in recent years, most relevantly in the sale of Gatwick and Stansted airports by BAA, noting that both airports were sold in competitive, open market auctions. It is also important to note that, in both these cases, established cash generative businesses were being sold with significant revenue streams which would accrue to the purchaser immediately upon completion.
4.4 Achieving an acceptable risk:reward ratio will be far more challenging in the case of a new runway development (and even more so in the case of a new airport development) not least because any such project will be cash negative for at least a decade and during all that time the key parameters which will determine whether or not the investment will prove successful will be subject to change. There will be a high level of market risk as well as political risk, and there will be very significant environmental considerations which will affect risk in both of those areas.
4.5 As we have shown in section 3 above, it is by no means clear that there is sufficient market demand to justify to shareholders and other investors that an additional runway in the south east would be commercially viable in the period to 2050. The availability of surplus capacity at other airports – in the south east and elsewhere – provides scope for marginal pricing which could be used to attract airlines and passengers to a second or third choice airport, whilst at the same time undermining any competitor’s potential business case for additional runway capacity.
4.6 Turning to the political risk, even a cursory review of airports policy in the UK over the past few decades provides a clear demonstration that there is a high degree of political uncertainty and unpredictability associated with UK airports policy. BAA incurred costs of over £200m in seeking to implement the airport expansion policies set down in the 2003 Air Transport White Paper (‘ATWP’) – expenditure which subsequently had to be written off when political support for the expansionist policies set down in the ATWP was withdrawn.
4.7 Meanwhile, the ebb and flow of political and market circumstances has also taken its toll on local residents around UK airports, especially in the south east, with repeated periods of blight and uncertainty caused by major expansion proposals which invariably have come to nothing. This is at least partly because the business case for a new runway has never been particularly compelling whereas the environmental impacts of a new runway anywhere in the south east have always proved to be so immense as to be politically unacceptable.
4.8 Our considered assessment is that the current DfT demand forecasts are not nearly strong enough – or reliable enough – to support a business case for a new runway, especially when the downside political and market risks are taken into account as well as the downside risks in relation to meeting the UK’s legally binding climate change targets.
4.9 In conclusion, we do not expect any new runway to be built in the south east (or anywhere else in the UK) over the coming decades, and if the Commission recommends any additional runway or runways, this would simply create blight and uncertainty for no purpose.
Full text of the submission is at
SSE Submission to Airports Commission – Response to Emerging Thinking (7 pages)
Sir Howard Davies’ speech on 7th October is at https://www.gov.uk/government/news/aviation-capacity-in-the-uk-emerging-thinking