{"id":661,"date":"2016-11-25T16:23:21","date_gmt":"2016-11-25T14:23:21","guid":{"rendered":"http:\/\/www.aviationadvocacy.aero\/blog\/?p=661"},"modified":"2019-07-23T11:45:12","modified_gmt":"2019-07-23T09:45:12","slug":"heathrow-airport-what-is-not-being-said","status":"publish","type":"post","link":"https:\/\/www.aviationadvocacy.aero\/blog\/?p=661","title":{"rendered":"Heathrow Airport: What is not being said"},"content":{"rendered":"The announcement of the UK government\u2019s approval for a third runway at Heathrow last month was welcomed in a strangely subdued way. You would think that a decision that big, and that long in the making might have received more fanfare. But there are many hurdles to go through before the bulldozers can move in. Local residents, for one, will be doing everything they can to stop the expansion going ahead.\r\n\r\nThe airlines are nervous, judging by the press releases that followed the announcement. Indeed they did not really welcome the decision at all. One of their concerns is the cost – expected to be in the region of \u00a316 billion, more than doubling the value of the airport\u2019s current asset base \u2013 and who is going to pay. The expectation is that the cost of building the new runway will be recovered through landing fees. However it is still up for debate how much these charges will be and how exactly they will be distributed across airlines.\r\n\r\nAmongst the main concerns of the airlines when it comings to funding the new runway is the issue of pre-funding. This would allow Heathrow to recover at least some of the cost of building the new runway prior to it becoming operational. For the airlines, that is the worst of all worlds.\r\n\r\nPre-funding is a controversial topic. In a paper<\/a> last year, the UK CAA \u2013 the regulator responsible for setting Heathrow\u2019s charges \u2013 indicated that pre-funding was not off the table. There is also precedent here. Both Heathrow\u2019s Terminal 5 and the Northern Runway at Dublin Airport were part-financed through pre-funding.\r\n\r\nThe airlines argue that pre-funding this means that today\u2019s passengers (who are not using the new runway) are paying for benefits that will be accrued by future passengers using the runway. Replace the word \u2018passengers\u2019 with \u2018airlines\u2019 and you get what they\u2019re really trying to say. Pre-funding would benefit an airline like easyJet, which does not currently use Heathrow but has expansion plans for the new runway once it is built, at the expense of the existing airlines at\u00a0Heathrow such as British Airways and Virgin Atlantic.\r\n\r\nAlthough the CAA has yet to make a decision on pre-funding, it clearly sees benefits to such an approach. Amongst these are that it makes prices more stable (no sudden overnight increases when the runway becomes operational), thereby reducing demand risk. Pre-funding can also reduce the perceived risk of the project, in turn reducing the cost of financing it.\r\n\r\nThe other argument put forward by the CAA is that pre-funding is simply proxying\u00a0what we would see in a competitive market\u00a0where\u00a0capacity is constrained (as is the case at Heathrow). In\u00a0such cases, prices would rise thereby\u00a0providing the\u00a0means to ration capacity so that those that get the most value out of accessing the limited capacity (and are therefore willing to pay more) are able to do so. Higher\u00a0prices also act as a signal to the firm to expand its capacity, and the means to do so.\r\n\r\nThis sort of pricing is precisely what is not happening in the topsy-turvy world of airport charging. However, it is key to understanding some of the airlines\u2019 opposition to pre-funding. You see, while Heathrow\u2019s landing charges do not currently include an explicit premium to reflect the constrained capacity, the fares paid by passengers flying in or out of Heathrow do. This, in turn, reflects the value of those coveted landing slots owned by airlines. However, Heathrow Airport itself does not get the benefit of those higher fares.\r\n\r\nTo introduce pre-funding would be to transfer the capacity premium from the pocket of the airlines to the airport. And, were this not painful enough for the airlines, the value of those coveted landing slots (and therefore the premium that can be charged to passengers) is likely to decrease in the future as more slots become available. Plus British Airways, which currently has about 60% of the slots, will find it very difficult to maintain that percentage of slots once the new runway is built, thus opening a very valuable market up to its competitors.\r\n\r\nDon\u2019t expect the airlines to admit this during the consultation process. Instead, expect arguments about how Heathrow should we able to raise the necessary funds to construct the third runway on the capital markets (and at a lower overall cost than if pre-funding is used); that pre-funding weakens the incentives to ensure the runway is built efficiently; and that Heathrow should not be able to increase its charges above the current levels, anyway.\r\n\r\nThe Heathrow decision is timely. Europe is to soon start debating the amendments to the EU Airport Charges Directive. Right on cue, A4E has announced<\/a> it will be hosting a discussion on the need for meaningful consultation when setting airport charges. With representatives from an airport, airline and regulator it could be a good indication of the substance of the debate to come. Just don\u2019t mention the value of landing slots, or who owns them.","protected":false},"excerpt":{"rendered":"

The announcement of the UK government\u2019s approval for a third runway at Heathrow last month was welcomed in a strangely subdued way. You would think that a decision that big, and that long in the making might have received more fanfare. But there are many hurdles to go through before the bulldozers can move in. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15,11],"tags":[],"class_list":["post-661","post","type-post","status-publish","format-standard","hentry","category-airlines","category-airports"],"_links":{"self":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/661","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=661"}],"version-history":[{"count":1,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/661\/revisions"}],"predecessor-version":[{"id":662,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=\/wp\/v2\/posts\/661\/revisions\/662"}],"wp:attachment":[{"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=661"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=661"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aviationadvocacy.aero\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=661"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}