Thursday, 17 April 2014

[Heathrow expansion] Yes, but that's not really a "cost", is it?

From This Is Money:

Failing to build a third runway at Heathrow will add £300 to the cost of an average return fare from the airport by 2030, according to a new study.

The report by consultancy Frontier Economics, commissioned by Heathrow, said there was no doubt the South East needed new airports.

And it warned costs would soar at Heathrow if no new runway was built, with demand for flights significantly outweighing supply...

The study also estimates that passengers are paying an extra £95 at present at Heathrow than they would if it had another runway.

Yes, let's assume that because demand has increased but supply is constrained, the amount which airlines can charge for tickets is £95 higher than it would be if there were more supply (more runways).

That's clearly a "cost" from the passenger's point of view.

But the total real "costs" to the airlines and airports are entirely unaffected by demand, their fixed overheads are unaffected and the per-plane cost (fuel, staffing) is also entirely unaffected.

So what this means is that airlines are making a £95 per passenger super-profit (also known as "rent").

It's the same when demand suddenly falls (post 9/11, for example) or when flights are halted because of bad weather or Icelandic volcanoes. The air travel industry's costs were largely unaffected but income fell, so they made losses.

The bitter irony here is that the NIMBYs and anti-expansion campaigners are doing whoever owns the scarce landing slots a huge favour.

Multiply that £95 by 95,000 passengers per day (half of arrivals+departures) times 363 days a year, that's a cool £3 billion extra rental-monopoly-artificial scarcity income.

Further irony is that Air Passenger Duty raises about £3 billion a year, so all the government is doing is clawing back the rental income (in a very crude and inefficient fashion). This duty is, from the point of view of the airlines a real cash "cost", but does not add much to ticket prices.


Ralph Musgrave said...

France has half the population density that we do. Put new airport hubs there, then the UK becomes a tranquil rural retreat, free of jet noise.

Mark Wadsworth said...

RN, we Londoners secretly like the aircraft noise, plus economically it does the London region a world of good, why hand over the money to the French?

Further, ex. Paris and London, population densities are roughly the same in UK and France.

James Higham said...

With a third runway, it would certainly be fun in the skies around Heathrow.

Mark Wadsworth said...

JH, I must admit, when I look up from my back garden, the sky seems pretty full of aeroplanes. I'm not sure how much more flights we can cram in with reasonable safety.

But that does not change the principle, if the sky was actually "full", then the rental element of ticket prices would be even bigger.

DBC Reed said...

Unfortunately Heathrow does not figure in the master-plan to fill in the Thames Estuary providing much needed residential building plots, a route for HS2 to connect up with HS1 and an airport plus seaport.