Debate Magazine

[Heathrow Expansion] Yes, but That's Not Really a "cost", is It?

Posted on the 17 April 2014 by Markwadsworth @Mark_Wadsworth
From This Is MoneyFailing 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.

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