Guest article: Heathrow gets generous with expansion zone homeowners – but by using its customers’ money

This article is written by senior London Conservative Daniel Moylan, who held a number of key transport and other posts under the mayoralty of Boris Johnson, including chief aviation adviser. In that role he made the case for a new airport in the Thames estuary. An opponent of Heathrow expansion since his time as deputy leader of Kensington and Chelsea Council, Daniel was an adviser to the owners of Gatwick Airport during the second half of last year.

The owners of British Airways have told the Department for Transport that Heathrow Airport’s compensation offer to homeowners who have to be relocated to allow a third runway to be built “has gone far beyond the usual amounts offered for public compensation. In doing so, it [Heathrow Airport] has no regard for its airline customers.”

Londoners may imagine that, if Heathrow Airport has made a more than usually generous offer to homeowners (which it has), it has done so with its own money. Nothing could be further from the truth in the world of regulated utilities, which embraces Heathrow Airport, because it is judged, quite rightly, to have “market power” – another term for monopolistic characteristics.

Political figures of left and right have a tendency to lump all privatisations together and either damn them or praise them as one. But there is a huge difference between privatising a state-owned company that has to compete on fair terms with others and privatising a monopoly (or near-monopoly). In a competitive environment, firms have to work with the prices that can be achieved in the market-place: efficiency and national prosperity ensue.

Monopolies on the other hand can set prices and seek to do so in order to maximise monopoly rents. They do not behave like businesses that have to compete. A catastrophic example of this vicious behaviour being played out was Gordon Brown’s award of a large part of London Underground’s Public Private Partnership to Metronet, which eventually went into administration at no cost to itself having extracted enormous sums for its shareholders for work inefficiently done.

To mitigate the aspiration of privatised monopolies to take advantage of their immunity to competition, the normal practice is to make the business subject to economic regulation. The regulator (in the case of Heathrow Airport it is the Civil Aviation Authority) then sets a return that the airport is allowed to earn on its regulated asset base. If the regulator thinks the company is not operating the assets efficiently, it can set a lower return at the next review, to prompt them to sharpen up their act. (Indeed this happened to a furious Heathrow Airport two years ago: it is heavily unionised and a far cry from being a by-word for efficient operation.)

The regulated asset base is the value the regulator attributes to the historical assets that the privatised entity took over, together with the approved cost of any expansion of those assets. It follows that Heathrow will always want to add to its regulated asset base, because the bigger it is, the more it can earn. But it will never want to grow at too fast a rate: if it created spare capacity, it would imperil its monopoly character, however much that might benefit passengers by allowing airlines to add new services at marginal prices. The owners’ aim is that Heathrow will always need to grow, yet will always be full: that is the magic elixir, the sweet spot that maximises the monopoly rents extracted by its shareholders. There is no suggestion that this is the customers’ sweet spot.

That is why Heathrow is untroubled by forecasts that the third runway, by the time it is built, will be so full that a fourth runway will be needed. Quite the contrary – if it wasn’t going to be full when built, they would delay the construction. Being full is a key feature of the business model.

So who is it that pays these fat charges to Heathrow Airport (said to be the highest in the world) allowed to them by their regulator? It is the airlines who pay: they have to pay a range of fees for landing, taking off and other services. Notionally these charges are passed on to passengers, but in practice at Heathrow they come straight out of airline profits, since there is no earthly reason to believe that airlines would reduce fares if relieved of the charges, given the (perpetual) lack of capacity at the airport that means airlines have no incentive to seek to grow traffic there by cutting fares.

International Airlines Group (British Airways, Aer Lingus and Iberia, with offshoots like Vueling) have about half the slots at Heathrow and so are on the hook for about half the cost of the hugely expensive third runway (£18 billion and rising, not counting a considerable subsidy from the taxpayer). And the cost of compensating homeowners whose houses must be demolished to make way for this folly will be an allowable addition to the regulated asset base. In effect, airlines will be paying rent to Heathrow in perpetuity for houses that will no longer exist.

So it is easy to see why airlines take exception to Heathrow Airport’s generous offer to give super-compensation to homeowners: the airlines will be paying for it. The idea that the 90% foreign owners of Heathrow Airport should use their own money to compensate the victims of their expansion has no doubt not even entered their head.

When announcing his decision to support a third runway, the Secretary of State for Transport sought to ignore the inherent contradiction between the airport and its airline customers by asking them to work together to minimise costs. It’s not working out that way.

Copyright © Daniel Moylan 2017

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