Heathrow and Gatwick expansion: cost predictions are £6 billion higher

Gatwick airport expansion plans

The cost of all three runway expansion schemes being considered by the Airports Commission in order to boost UK airport capacity are substantially higher than the bidding airports have estimated it says.

In all three scenarios the airport owners would have to substantially increase their debt levels according to a consultation document published by the Commission on November 11. In the case of Heathrow the Commission says it would need to raise additional equity of up to £5.1 billion and additional debt of up to £24.9 billion. This will put the airport at th
e highest end of the range of financing for infrastructure projects in the UK and could make Heathrow Airport Ltd of comparable scale to Network Rail (with a long- term debt of £35 billion) and larger than National Grid (£25 billion).

The commission’s cost estimates for all three runway options are as follows:

OPTION 1: The construction of a second runway at Gatwick

Gatwick airport expansion plansThe construction of a second runway at Gatwick, together with a third terminal and all associated infrastructure, is estimated by the Commission to cost up to £9.3 billion. This is higher than Gatwick Airport Ltd’s estimate of £7.4 billion but these costs are significantly lower than those of either of the Heathrow expansion schemes.

The Gatwick Airport Second Runway scheme has been designed in such a
 way that the supporting infrastructure can be constructed in phases in line with increases in passenger demand. This spreads the cost over a longer period and allows for flexibility to manage differing levels of demand. In the Commission’s lower end scenarios, the final phase of construction may not be required to accommodate passenger demand before 2050. This would reduce the cost over this period by just under £2 billion.

Investment of this scale would entail increases in the airport’s charges to airlines. Gatwick Airport Ltd has estimated, for example, that per passenger charges would rise from £9 currently to £12-15 as a result of expansion. This is lower than the charges predicted by the Commission’s analysis, which indicate average charges rising to between £15 and £18, with peak charges of up to £23. The Commission’s estimates show significant potential variation reflecting the variation in passenger demand across its scenarios. In the upper end demand scenarios, charges would be close to Gatwick Airport Ltd’s own estimates, although still slightly higher, reflecting higher costs and a more conservative view 
of how the infrastructure delivery might be phased. Conversely, the higher end of the Commission’s predicted range of charges reflects lower estimated levels of demand leading to peak charges above £20 (roughly the current level of charges at Heathrow).

The Commission’s assessment of potential financing approaches across a range of scenarios suggests that Gatwick Airport Ltd may have to raise additional equity of up to £3.7 billion and additional debt of up to £14.3 billion. It says this level of finance is not unprecedented for infrastructure projects and airports. 
It is, however, significantly larger than the company’s financing to date and may be challenging in a context where there is uncertainty around passenger demand forecasts and where the airport may need to raise its aero charges from £9 per passenger to up to £15-18 or more within a competitive environment.

OPTION 2: Extending Heathrow’s Northern Runway

Heathrow expansion plansThe cost of an extended Northern runway at Heathrow are estimated at £13.5 billion, including the runway extension,
a new terminal and all other required airport facilities. This is higher than Heathrow Hub Ltd’s estimate of £10.1 billion. These costs are lower than for the Heathrow North West Runway scheme but still substantially higher than those of the Gatwick Second Runway scheme.

Investment on this scale would entail increases in the airport’s charges to airlines. Current airport charges at Heathrow are already comparatively high (£20 per passenger), reflecting both the demand for slots and the high operating and ongoing development costs for the airport of delivering a high quality and complex hubbing product for their airline customers, in a relatively constrained site. These charges would increase if the airport were to be developed, the extent of which would be dependant in part on the demand scenario. Heathrow Hub Ltd estimate an increase in charges per passenger to £22. This is noticeably lower than the Commission’s estimates which indicate charges could rise to between £27-28, an increase of around 40%, with peak charges of up to £30.

The Commission’s assessment of potential financing approaches, consistent with Heathrow Hub Ltd’s proposals, assumes that the scheme will be purchased, delivered and financed by Heathrow Airport Ltd. The Commission’s analysis suggests that Heathrow Airport Ltd may have to raise additional equity of up to £5.1 billion and additional debt of up to £24.9 billion. This will put the airport at the highest end of the range of financing for infrastructure projects in the UK and could make Heathrow Airport Ltd of comparable scale to Network Rail (with a long- term debt of £35 billion) and larger than National Grid (£25 billion). Raising 
this level of financing would be challenging according to the Commission and there are risks associated with an increase of passenger aero charges to £27-28, significantly higher than current charges across the UK and globally, in a context where Heathrow must compete with other airport operators.

There are a number of options that may mitigate this risk including: different approaches to phasing delivery (as in Heathrow Hub Ltd’s proposal); smoothing the recovery of infrastructure costs over longer periods through a level of pre-funding; or even some level of public sector involvement, for example through commitments to deliver necessary surface access improvements or the provision of other Government measures that provide a degree of assurance to lenders and investors.

In addition to the above costs, the surface access capital expenditure interventions required to support expansion at Heathrow Airport are estimated to cost £6.3 billion for the ‘onsite’ surface transport option, which excludes construction of a hub station. If the ‘offsite’ hub station were included in this assessment, and Western Rail Access therefore not taken forward, the net additional estimated cost would be between £2.1 billion and £4.1 billion. This is discussed in further detail in the hub station surface access report referenced above.

The delivery risks associated with an extended runway at Heathrow Airport are substantial, but could be managed. The airport operator would need to work closely with local communities for any expansion at the site to be achievable
and the development of effective mechanisms to mitigate or compensate for environmental and community impacts would be crucial. This would be particularly important in respect of noise impacts of this scheme as these would be significant if left unmitigated.

Design, planning and construction risks associated with delivery include risks related to airspace redesign and the management of M25 works. These are not unusual for an infrastructure scheme of this scale and are considered manageable. The end-to-end runway configuration may require further exploration and testing
to satisfy the requirements of UK and international safety regulators, but the Commission’s view at this time is that this should be possible within the timescales required for planning and construction. Therefore, the Commission views 2026 as
a realistic runway opening date, and the risks to achievement of the Commission’s assessment that new capacity is needed by 2030 appear low. Many nearby local authorities strongly oppose expansion, as do a number of community organisations, although regional business groups are supportive.

OPTION 3: The Heathrow Airport North West Runway

The Heathrow Airport North West Runway scheme proposes the building of a new full length (3,500m) runway to the north west of the current northern runway at Heathrow.

The scheme is estimated to cost £18.6 billion including construction of the new runway, a new terminal and all other required airport facilities. This is higher than Heathrow Airport Ltd’s estimate of £14.8 billion (excluding £800m of surface access costs), reflecting in large part differing views of optimism bias and differing construction profiles. These costs are higher than for either of the other schemes, mainly because of higher land acquisition and transit system costs.

Investment on this scale would entail increases in the airport’s charges to 
airlines. Currently airport charges at Heathrow are already comparatively high (£20), reflecting both the demand for slots and the high operating and ongoing development costs for the airport of delivering a high quality and complex hubbing product for their airline customers, in a relatively constrained site. These charges would increase if the airport were to be developed, the extent of which would be dependent in part on the demand scenario. Heathrow Airport Ltd estimate that charges would peak at roughly £27 before returning to approximately current levels by 2050. This is lower than the increases indicated by the Commission’s analysis, which indicates charges rising to between £28 and £29, an increase of around 40%, with peak charges of up to £32.

The Commission’s assessment of potential financing approaches suggests that Heathrow Airport Ltd may have to raise additional equity of up to £8.4 billion and debt of up to £29.9 billion. This will put the airport at the highest end of the range of financing for infrastructure projects in the UK and could make Heathrow Airport Ltd of comparable scale to Network Rail (with a long-term debt of  £35 billion) and larger than National Grid (£25 billion). Raising this level of financing would 
be challenging; and there are risks associated with any increase of per passenger aeronautical charges to £30, significantly higher than current charges across the UK and globally, in a context where Heathrow must compete with other airport operators.

There are a number of options that may mitigate this risk including: different approaches to phasing delivery (as in Heathrow Airport Ltd’s proposal); smoothing the recovery of infrastructure costs over longer periods through a level of pre- funding; or even some level of public sector involvement, for example through commitments to deliver necessary surface access improvements or the provision of other Government measures that provide a degree of assurance to lenders and investors.

The surface access interventions required to support expansion at Heathrow are estimated to cost £5.7 billion.

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