Policy Research in Macroeconomics

Why the economic case for a 3rd runway at Heathrow STILL won’t fly

By Ann Pettifor and Jeremy Smith

Last Tuesday, 28th August, Ann was invited on to BBC Newsnight to debate the economic case for or against a third runway (R3) at Heathrow. At the last minute, Nick Clegg’s unrequited call for a wealth tax became the focus for the programme, leaving little chance to debate the Heathrow issue.

On the panel with Ann was Emma Duncan, Deputy Editor of The Economist.  She had that day announced her flightpath-to-Damascus conversion to the pro- R3 camp, joining Tim Yeo MP in what looks like an orchestrated campaign.  The Coalition Government has insisted that it is not for turning, for the moment, but there are strong hints that at least the Conservative Party proposes to change its position for the next election. So the issue will not go away, we can be sure.

We thought it worthwhile recording why – on economic as well as environmental grounds – we remain strongly against the Heathrow extension, and against building any new major airport in the London and south-east region.  We therefore also disagree with those who oppose the Heathrow extension but favour a major new airport in say the Thames Estuary.

We have set out the issues and arguments in the attached Prime Position Paper PDF:

Heathrow 3rd runway 03092012

In brief, Heathrow remains by far Europe’s biggest hub, and has excellent connections to most main buiness centres. Government and the industry can make (or ensure) the necessary changes in destinations where in the national economic interest.  Whilst other hubs have grown faster, there is no evidence that they have achieved better economic growth.  On the other hand, the aviaition industry is a major contributor to climate change, and exponential growth in air traffic is not viable.  We need to shift the strategy of Europe’s hubs from ceaseless growth and competition, to complementarity and using the strengths of each to common advantage.

Our main points in the include:

  • We need a planet on which economic life takes place, which means acknowledging the role played by greenhouse gas emissions in warming the planet, changing the climate and harming the life-chances of future generations.
  • In the UK aviation makes up a greater proportion of the country’s contribution to climate change than in any other major economy.
  • In contrast to other more sustainable sectors, the aviation industry receives enormous fiscal and financial advantages, including duty-free sales and tax-free fuel.
  • Heathrow remains the EU’s biggest hub airport already, by a significant margin.
  • Heathrow is the third largest airport in the world in passenger numbers, with 50% more passengers than New York, whose economy is also heavily dependent on FIRE sectors.
  • In terms of links to BRIC economies, Frankfurt, London and Paris are broadly similar, save for the German hub’s more numerous links to Russia, reflecting different foreign policy approaches to Russia.
  • The key question is not lack of capacity at Europe’s airports but how that capacity is used.
  • If a decade of major growth in passenger numbers were significant macro-economically, then France and the Netherlands (whose hubs have expanded rapidly) should be growing faster than the UK.
  • Yet, GDP growth rates for France, the Netherlands and UK are broadly similar to the UK, and currently around or below zero.
  • There are ways of addressing current destination patterns, without recourse to a major airport capacity increase.
  • Government should ensure business needs take priority where required.
  •  75% of London’s aviation demand is for leisure travel, and only 25% for business.
  • Leisure travel involves a net financial outflow as more Britons holiday abroad than vice versa.
  • The operator’s rationale for expansion is straightforward: BAA can only collect a rent fixed by the current capacity limit; it requires growth in capacity to enable it to increase income and reduce the overall Ferrovial/BAA £5bn debt mountain.
  • Looking to the future, Europe’s hubs will not grow indefinitely; they will need to co-exist and look at how best to complement each other.
  • A far more sensible strategy is to get agreement on cooperation which uses the strengths and roles of each hub to mutual advantage.

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