HEATHROW

[BasilBush]

So we meet again, Mr Bagso

As always you raise some very pertinent points. My only angle on this is to try to bring some facts to the debate. I certainly don’t want to be seen as a cheerleader for LHR R3 – my basic view is that airport capacity should be provided ONLY where there is a proven demand AND where users are prepared to pay for it. I don’t pay much heed to wider economic arguments, which I tend to regard as voodoo cooked up by dubious consultants. This applies not only in the London area but also in my own hometown of Manchester.

I certainly agree with many others that the estimated costs of LHR R3 are excessive, but I am afraid this is partly a consequence of (a) risk allowances being added by Davies to the basic costs, thereby ensuring that the ‘mark up’ is spent, and (b) the crazy ‘cost-plus’ nature of airport economic regulation in the UK.

Even so, I do believe that users of Heathrow would be prepared to pay the modestly higher airport charges that would result from the mega-scheme that is currently proposed, simply because of the attractiveness of the market and the hub model. I do not believe the same can be said of Gatwick, where its main users (easyJet) are highly unlikely to stomach the required increase in airport charges. As an aside, Shed has raised the spectre of taxpayer guarantees for private sector borrowing. I really think that is extremely unlikely (and I for one would be strongly against it) but if it were to happen then the risk of the guarantee being called would be vastly higher for GAL R2 than for HAL R3 - GAL R2 is simply not a bankable project in the face of airline resistance, pure and simple.

I also strongly believe that where a private scheme such as LHR R3 requires investment in (eg) surface access projects, then the cost of these should fall to the private investor not the taxpayer. As I’ve said before, the precedent is that HAL has had to stomach such costs in recent years and I see no reason why this principle wouldn’t be the same for LHR R3. But I think you are right to remain vigilant on this point.

In relation to your other points:

APD on connecting pax
You are right that connecting pax are currently exempt from APD. I’m not defending this, in fact I can see arguments as to why APD (assuming it exists at all) should apply to all pax, especially as it has in the past been justified as a quasi-environmental tax. There is no prima facie reason why it shouldn’t be levied on all pax, even if it affects Heathrow’s competitive position against other hubs, if it is regarded as compensating for the high environmental costs of developing Heathrow. I’ve also crossed swords with Fairdealfrank about my suggestion of concentrating APD on Heathrow and removing it from most other airports, by reclassifying it as a congestion charges/environmental tax. There is an economic justification for this, as a way of dealing with the market failure that results from the current imbalance of demand and supply at Heathrow. The only beneficiaries of this market failure are airlines, through the stratospheric slot values that are evident at Heathrow. I’m surprised that the clever chaps at Treasury haven’t latched onto this already.

HAL Corporation Tax
Your argument is that HAL’s reliance on debt financing will erode its taxable profits and hence reduce the UK's tax proceeds. That is true, but for every £ of tax deduction on interest paid by the borrower there is a £ of tax due on interest received by the lender. Yes, if the lender is overseas then there may be a net loss to the UK taxpayer, but there are probably swings and roundabouts here (for example, British lenders lending to foreign companies and paying UK tax on interest received). I’m not aware of any systematic imbalance, so your argument doesn’t really hold water.

Decline in HAL profitability
I’m not sure who attributed the decline in after-tax profits in 2014 to the lack of capacity, but that is pure spin. The underlying profits (ie at EBITDA level) actually increased by 10.3%. The decline at after-tax level is due to a combination of higher depreciation and various technical factors to do with the need to restate the value of various financial instruments as a result of interest rate changes etc.

I certainly don’t want to imply that all is rosy in the R3 garden, but I do think some of the scaremongering is a little unwarranted.