How to fund Heathrow's expansion

The airport should be allowed to sell the slots it creates

Photo by Belinda Fewings on Unsplash

The government has all but announced that Heathrow and Gatwick will each be allowed to build an additional runway. This is sensible.¹ Heathrow, our only hub airport and our principal business airport, has been constrained for a generation. No wonder our living standards are stagnating.

The Gatwick proposal is straightforward - they already have two runways. If they move them 12m further apart both can be used simultaneously. Laying concrete on an already prepared site will be the easiest and cheapest airport expansion in history.

The Heathrow proposal is more complex. The new runway will - rightly - be over the M25. As I showed in my earlier report, that makes it further away from London, massively reducing the noise effect. Runways over motorways are surprisingly common: Paris Charles de Gaulle’s northern runways cross the A1 motorway, the southern runway at Atlanta crosses Interstate 285, while LAX crosses over America’s legendary Route 1. It is much more expensive to build a runway on a bridge than on flat ground. Heathrow’s plans will cost £14bn. That is small compared with the cost of a new high speed train line - but it is not trivial.

Taxpayers should not pay for the runway. Heathrow is a commercial company and should finance its own expansion. Heathrow is, however, a heavily regulated company. The price airlines pay to land and take off at Heathrow is set by the Civil Aviation Authority, aka the government. How to pay for a new runway is therefore a public policy question.

Airports offer “slot pairs” - the right for an airline to land and take off at particular times. Most airports have plenty of slots, so the airport gives away the slot pair, and the airline pays the landing charges. Heathrow has been full for 20 years. Anyone wanting to land at Heathrow has to buy a slot pair from another airline.

Slots regularly change hands, and there is no requirement to report the price paid. Some prices have become public, however. Oman Air paid about £78m (in today’s money) back in 2016 for a prime early morning landing slot. SAS sold slots for about half that rate the same year. Let me imagine, for simplicity, that the average slot would sell for £39m, half what Oman Air paid. Expanding Heathrow will create 356 new slot pairs, implying - conveniently for me - revenue of £14bn.

Of course it is not quite that simple. Heathrow can’t collect the money until the runway is built - or at least it would have to offer a discount to get the money now. But they will make money from the new runway in other ways. They will receive landing charge revenue, and some elements of better than expected rents from airlines offering lounges, rents from shops selling duty free, coffee and so on, revenue from car parking and drop off fees and so on. They don’t need to be able to raise the full cost from selling slots. But they could and should be allowed to raise the bulk of the cost that way.

EU law requires slots to be allocated fairly and transparently. Maybe our exit agreement means we are still bound by this rule. But what could be fairer and more transparent than allocating slots to the highest bidder? We are not reserving them for BA or UK airlines, indeed, for competition reasons it would be sensible to ensure that BA’s overall share of Heathrow slots does not increase from current levels.

The faster the government declares that Heathrow can treat the asset that it will pay to create like any other asset, the better. That way Heathrow will be in a better position to finance this expansion, and build a bigger airport that will allow the UK to grow.

1. Climate change matters a lot, but constraining our business airport is not the right way to do it. We should instead decarbonise electricity, heating, and road transport more quickly, as well as investing in getting direct air capture and sustainable aviation fuels to scale - which will reduce costs, just as the cost of solar has fallen.