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CE Delft report ‘The Economics of Heathrow Expansion’

14th July, 2008

A report by the respected dutch consultancy CE Delft shows claims about the economic benefits of Heathrow expansion to be unfounded and misleading.     

This study was commissioned by HACAN because it was the view of HACAN – shared by many others – that that the benefits of expansion claimed by industry and government are very doubtful.

The study was commissioned at this time (published Feb 2008) to in order to inform the government consultation on Heathrow expansion. While the study deals with specifics of Heathrow, its significance goes well beyond. Because Heathrow constitutes such a large proportion of the UK’s aviation and because its importance to the UK economy is constantly being asserted, the study analyses the economic of air travel generally. It is because of the broader analysis that we provide a summary on the AEF web site.

The terms of reference of the CE Delft report were:
* to assess the results of a 2006 report by Oxford Economic Forecasting (OEF) on the economic impact of aviation on the UK economy;
* to determine to what extent demand management may affect the economic impetus for airport expansion; and
* to determine the nature and level of competition between EU hub airports, and to consider whether that level of competition suggests the desirability of harmonising environmental legislation for European airports.

Oxford Economic Forecasting (OEF) report

Although couched in calm academic language, the CE Delft report is a devastating critique of the OEF report. [The latter was largely paid for by the aviation industry, but was nonetheless heavily used by the government to justify airport expansion.] In highly summarised form there are 5 main criticisms:

1. “A sector’s direct, indirect and induced employment levels and its ‘contribution’ to GDP are not valid indicators of its importance to the economy, nor in the case of aviation can they be used to substantiate the argument in favour of expanding runway capacity. In the absence of structural unemployment, if the aviation sector were to offer less employment, people would find jobs in other sectors, albeit at possibly slightly lower wages. Similarly, if consumers were unable to spend money on aviation, they would spend it in another sector, potentially deriving a slightly lower consumer surplus, but nonetheless still giving rise to indirect and induced employment. Not accounting for these alternatives significantly overstates the sector’s importance.”

2. “The OEF report discusses at length how aviation supports other parts of the economy. Many different indicators are presented, showing how aviation supports trade, investment, growth sectors, business efficiency and economic growth, but essentially they all relate to much the same process. .. Aviation opens up new markets .. The economy as a whole clearly benefits, but these benefits are not well expressed by the indicators presented. … Globalisation may or may not be beneficial for social welfare, but the benefits cannot be measured well by the amount of trade.”

3. “We note some peculiarities of OEF’s model and its underlying assumptions, and the implications of its results. A crucial input to OEF’s calculations is the number of additional business passengers that runway expansion will attract, because OEF assumes that only business passengers generate wider economic impacts. In estimating the impact of mixed-mode operation at Heathrow, OEF assumes that there will be, not 0.5 million additional business passengers in 2015 as forecast by the UK Department for Transport, but 3 million.”

4. “The OEF model estimates that the full implementation of the White Paper runway proposals would deliver an economic impact of around £ 120 per additional passenger or about £ 400 per additional business passenger (again, on the assumption that only business passengers cause wider economic impacts). This compares with an estimate of an additional consumer surplus of ‘perhaps £ 30 per additional passenger’ which OEF derives from DfT estimates. OEF assesses its estimate as ‘consistent with plausible analysis from other perspectives about the additional value of a business trip by air’. However, the direct economic value of a business trip is already captured by the willingness of business passengers to pay, and hence by the consumer surplus estimate of £ 30 over all passengers.”

5. “OEF’s results are presented in a potentially misleading manner. Although this is not always stated explicitly, the estimates of economic impacts presented are often upper limits, and so illustrate the maximum possible economic impact rather than the most likely or plausible outcome. For example, the illustrated impacts of the third-runway scenario are based on the highest passenger forecast scenario produced by DfT. A second example relates to the interpretation of the estimated cost of congestion (in itself another upper limit). Only a part of this cost can be attributed to insufficient runway capacity – queues for security checks and delays due to bad weather or industrial action (either in the UK or elsewhere) will not be resolved by expanding capacity.”

Demand management (the need for airport expansion)

We discuss whether demand management may be a viable alternative to expanding runway capacity. From a social welfare perspective, it would be optimal to internalise external costs through a market instrument such as tradable emission rights or a differentiated aviation charge at the level of the external effects caused by aviation. .. A second form of demand management discussed is the withdrawal of landing slots for short-haul journeys for which viable alternatives exist. .. third option is to allocate destinations among London’s five airports, so as to remove duplicate services and increase load factors. The conclusion is that each of these more interventionist options is less desirable than the introduction of market instruments, such as a differentiated environmental charge or tradable emission rights, that fully internalise the externalities of aviation.”

Desirability of harmonised environmental legislation

We come to the conclusion that the competition between European hubs is mainly for transfer passengers. National governments are aware of this competition .. it is conceivable that national governments may impose less strict environmental regulations in order not to damage the competitive position of their hub airport. If this proved to be the case, one might argue that harmonisation of environmental legislation was required to prevent a ‘race to the bottom’ .. However, we come to the conclusion that even if less strict noise or air pollution standards were indeed imposed nationally, this would not be a justification for further European harmonisation. .. An exception must be made for externalities that manifest themselves globally, such as the emission of greenhouse gases and the additional impacts of aviation activities on the climate.

These broad conclusions are important and are at the heart of the work. But for the average reader, it is the nuggets that illuminate these conclusions that are most memorable and telling. For example, that OEF accepts that non-business aviation, which represents over 75% of total air travel, does not contribute to the economy. But it then selects the highest of several DfT scenarios and makes assumptions about the proportion of business trips which are challenged by CE Delft (p20). Another is how OEF extols the virtue of the extra jobs created while also saying how more aviation will help migrant workers to come to Britain. CE Deflt points out that creating jobs is pretty pointless unless you have unemployment, ie local people to fill the jobs. And if you do have local people, flying in migrant workers is counter-productive!

For the full CE Delft report see HACAN web site.