In choosing Heathrow, the government picked the wrong airport to expand

A third runway for Heathrow has finally been approved by ministers. Presuming law suits and politics do not bring down the project, who stands to benefit economically from the pouring of tarmac in west London?

On the one hand the Transport Secretary Chris Grayling, echoing the business lobbies, claims the whole UK economy will reap the rewards. Indeed, these lobbies warn we will all pay a heavy economic price if airport capacity is not soon increased.

On the other hand the anti-expansion campaigners claim only the interests of the airline industry will be served by a new runway, indeed that most of us will end up worse off due to the additional pollution and noise blight.

But the economics of airport capacity are much more nuanced than either of these two wings of the debate allow.

Where the anti-expansion campaigners have a strong case is in arguing that there is no substantive economic benefit for Britain in hosting a giant airport where business travellers change planes for onward travel.

Ministers have erred by buying into the idea that Britain needs an international “hub” airport.

David Cameron even instructed the Airports Commission, led by Sir Howard Davies (which recommended extending Heathrow over its rival Gatwick) to make maintaining “the UK’s position as Europe’s most important aviation hub” its primary consideration.

Yet there is no compelling evidence that hosting business travellers changing planes at Heathrow brings any substantial benefits for the wider country (although Heathrow itself will obviously profit from an increase in the number of captive customers for its shops and restaurants).

The true economic benefit of additional airport capacity in London and the South East lies in the expansion of point-to-point travelling; the creation of new routes for people to travel to the UK capital and for people in London to travel to other places in the world. Therefore the economic case for Heathrow expansion over Gatwick expansion, based on the hub argument, is flawed.

What about the airlines? Do they, as well as the airport operator, benefit from Heathrow’s expansion? The answer to this depends on which airline one is referring to.

A lack of supply of landing slots in the South East relative to demand gives the airlines that own those landing slots greater scope to increase fares. If demand were to continue to rise and slots were to remain limited, fares would increase and the profits of the likes of British Airways, which now owns a majority of the slots at Heathrow, would swell.

This underlines why expanding airport capacity is in the economic interests of travellers. And it is this economic benefit that must be weighed against the annoyance and complaints of those who live under the Heathrow flight path. Those who stand to lose are geographically concentrated and make more noise than those who stand to benefit. Ministers are certainly right to focus on the broader economic interest.

Yet who are those travellers who benefit? The Airports Commission put a greater value on business travellers than people flying off for holidays in the sun. Yet it’s far from clear that this is the appropriate calculation.

Finally, who pays for the construction? Expanding Heathrow will be expensive both in absolute and relative terms. The total cost estimates put it at around £23bn, to a large degree because to accommodate a new runway on the existing site a large section of the M25 will have to be diverted into a tunnel. The cost of expanding Gatwick was estimated at a considerably lower, although far from negligible, £8bn.

The £18bn construction costs of the new Heathrow runway itself and a new terminal are supposed to be covered by Heathrow itself. Yet as a monopoly, charges at Heathrow are regulated. The Government, through the Civil Aviation Authority, is expected to allow Heathrow to increase charges on airlines in order to pay for the project.

These charges will ultimately be passed on by the airlines in the form of higher fares. So to the extent that Heathrow is more expensive than the Gatwick option the excess cost will ultimately be picked up by travellers, partially offsetting the benefit of cheaper fares flowing from more capacity.

So where does that leave us? The economic case for an increase in airport capacity in the South East is strong – and if demand does continue to increase as projected then many of the benefits will indeed flow to travellers. But the case does not rest on Britain hosting a global plane-changing hub and nor does it rest solely on facilitating more business travel.

The residents of west London will lead the charge to overturn the Heathrow decision. But the case against expanding the airport is not made by the inconvenience of local residents, but by the fact that the economic case for choosing to allow Gatwick to expand instead was – and remains – stronger.