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New 'hub' airport will likely cost more to build than it would make, according to research

Construction of a new 'hub' airport for London would cost more than projected revenues under "most" scenarios, according to new research carried out on behalf of the Transport Select Committee.24 Jan 2013

Research (51-page / 637KB PDF) by economic consultancy Oxera, carried out to inform the Transport Committee's work related to the Government's aviation policy, suggested that building a new airport to replace Heathrow would not be commercial viable without as much as £30 billion in public money.

However Jonathan Hart, an infrastructure law expert with Pinsent Masons, the law firm behind, said that the work "needs to be seen as part of a much bigger picture", and called for the findings not to distract from the "difficult decisions" to be taken by the Government on the future of aviation links to the capital.

Louise Ellman, chair of the Transport Committee, said that Oxera's work would help inform the MPs' approach to evidence-gathering as part of its Aviation Inquiry. Its next oral evidence session, which will feature witnesses both involved with and opposed to proposals for the development of a new hub airport, will take place on 28 January.

"This work was framed specifically to help the Committee assess the commercial viability of a new hub airport by asking whether any future owners could make adequate returns sufficient to obtain finance," she said. "The results suggest a new airport would require public investment and have considerable impact on Heathrow and other London airports. The research findings also shed significant light on the scale of investment required to deliver essential related surface transport links for any new airport."

"We hope this work delivers something new to a crucial debate. It doesn't provide answers but it does set out in a systematic way which areas of questioning the Davies Commission must address and answer fully," she said.

Oxera's report makes reference to some specific proposals for a hub airport, but does not evaluate these individually. Instead, it takes a 'proposal neutral' approach using broad conceptual numbers to come up with an estimate relating to the overall rationale for a new hub. It considers demand, airport and surface access construction costs and landing charges; and refers to a range of designs, number of runways and policy options.

According to its analysis, all the considered scenarios would result in a "negative value" on the rate of return required to interest a private investor in the project. It concludes that public funding of between £10bn and £30bn in today's money would be needed to make its estimates commercially viable.

As announced by the Government in September, economist Sir Howard Davies is leading an independent commission tasked with considering how the UK can retain its status as a global aviation hub. The Commission will report on the need for additional capacity and how quickly, and set out how that need should be met in the short, medium and long term. Davies is due to present his interim report by the end of this year, with a final report due by summer 2015.

"Ahead of the much-anticipated response of Davies, it is positive news that the Transport Committee has been looking at the economic foundations for establishing an airport 'hub'," infrastructure law expert Jonathan Hart said. "As always, though, the devil is in the detail."

"Oxera themselves recognise that they have not looked at specific proposals, nor do they factor in the wider societal costs. Today's research needs to be seen as part of a much bigger picture. It should not be allowed to become a distraction from the difficult political decisions that need to be taken with regards to Heathrow, and the bread-and-butter parliamentary time needed to get the Civil Aviation Act converted into effective legislation and with that an updated economic regulatory model for the airports," he said.

The Government cancelled plans for a proposed third runway at Heathrow when it took office in 2009 but has acknowledged the need for an alternative, which could include a new airport in the Thames Estuary or additional runways at Heathrow and Gatwick. Passenger demand for London's airports is forecast to increase from 140 million a year in 2012 to 400 million passengers a year by 2050, according to a report by the Greater London Authority.

In his Budget speech in March 2012, Chancellor of the Exchequer George Osborne said that the UK needed to "urgently confront" its lack of airport capacity in the south east. "We cannot risk cutting ourselves off from the rest of the world," he said.