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18 November 2016

Heathrow Expansion—Getting It Right!

​Earlier this month the UK government approved the building of a third runway at London’s Heathrow Airport. The British would call it a milestone (poetically avoiding the metric system).

It is true that this was big news. Heathrow, ranks among the world’s busiest hubs. But it’s been pretty much running at full capacity for years. As a result, although it is still Europe’s biggest airport by passenger numbers, it has fallen behind key competitors in the range of its connections – especially to fast-growing developing markets.

Like many others, I have watched the Heathrow discussion for years. And I was always bemused by the small but vocal group who complained about the constant expansion of airports in the UK. The fact is, when Heathrow’s expansion goes ahead it will be the first new runway in the Southeast of the UK since the 1940s!

Getting the price tag right

Having waited so long for Heathrow to expand, many may be curious as to why the industry was not more jubilant. To be perfectly frank, the price tag attached to the new runway is just too expensive. Remember, aviation infrastructure is not subsidized.

Unlike trains, for example, airlines pay for the infrastructure that they use. So if Heathrow is planning to spend GBP 17 billion on a new runway, it will be the airlines that foot the bill. And that may mean passengers paying more, or investment by airlines has to be reduced. 

The government was clear and correct in setting the expectation that landing charges, paid by airlines, will not increase. But that’s only a part of the story. Landing charges are only a fraction of the overall cost of operation at Heathrow. And Heathrow, by the CAA’s calculation, ranks as the most expensive airport in the world to do business at. We need to keep our eye on more than landing charges for the third runway to be a cost-competitive investment.

If the airport and the airlines work closely together, I am confident that we can find solutions to bring the construction costs down to acceptable levels. But this requires a much more intense and transparent partnership dialogue than exists today.

Pre-funding is a non-starter

Along with agreeing on the costs of what will be built, there is also a need to agree on how it will be paid. You may have heard that airlines are balking at suggestions that the construction might be “pre-funded”. Pre-funding means that today’s travelers and airlines would pay more for services at Heathrow so that future travelers and airlines can benefit from improved facilities. And, as a concept, it’s a non-starter.

Those who drive would not accept to pay tolls until they can actually use the road that they are being charged for. And today’s users of Heathrow should not pay for benefits that will only be realized by future travelers. In the case of airlines, they certainly should not be made to pay to literally pave the way for future competitors to come in.

If we can get the costs right, there should be great opportunities to fund the construction through the many financial institutions that London plays host to – and which, incidentally, stand to benefit from the greater choice and connectivity offered by an expanded Heathrow.

The government estimates that the new runway will add GBP 61 billion to the UK economy. A first indication of that is the 77,000 jobs that it is expected to generate over the next 14 years. And let’s not forget that an expanding Heathrow in a Brexit-ing UK will send a strong signal that the UK is open for business. If we can get the costs and financing right we will all be jubilant—possibly even jumping for joy. But it will take some serious discussions before we get there!

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