New Economic Report Delivers a Potentially Knockout Blow to Stansted Expansion Plans

A major new report published today (Friday 24 October) on “The Economics of Stansted Airport” by leading regulatory economist Professor David Starkie casts serious doubts on the feasibility of adding extra runways at Stansted airport.

Major expansion of Stansted is one of the options currently being considered by the government for increasing airport capacity in the South East. The government is expected to announce its policy in a new Aviation White Paper in December.

“If the government were to sanction a second Stansted runway in the White Paper,” argues Professor Starkie, “this is unlikely to be deliverable. In the absence of a commercial case, it is probable that there would be regulatory difficulties leading to possible legal challenges. It hardly seems likely that BAA shareholders and financiers would want to invest in a project which even BAA admits is not commercially viable.”

Professor Starkie traces the financial performance of Stansted since the last major expansion in the early 1990s and concludes that this has been ‘astonishingly bad’. Stansted has only been able to survive as a commercial entity as a result of cross-subsidisation, which puts up the cost to users of other BAA airports in the South East.

When the last major expansion of Stansted took place in the early 1990s (a result of decisions in the last Aviation White Paper) the government and BAA insisted that Stansted would be financially viable and that there would be no need for cross subsidisation. But it proved otherwise and the regulator – the Civil Aviation Authority (CAA) – had no other option but to accept cross-subsidisation on the grounds that the investment had already been made at Stansted and however mistaken, this could not be undone.

Although Stansted has grown considerably in size in recent years, this is because it has been able to attract the low-cost airlines by offering very low airport charges. Stansted is still unable to make a profit sufficient to cover its financing costs. It is widely known that continued cross-subsidisation is a serious concern to Heathrow based carriers BA, bmi and Virgin who resent the idea of subsidising competitors – particularly in the low-cost sector – based at Stansted.

The CAA has made clear that any future investment will need to be justified on a stand-alone basis, also reflected in the government’s consultation for the White Paper which stresses the need for financial viability. This is because of concerns that to allow cross-subsidisation could result in a distortion of competition and an abuse of BAA’s dominant market position. In addition, independent airports such as Luton would be faced with unfair competition from Stansted.

BAA has admitted in advance that an additional runway at Stansted would not be commercially viable without cross-subsidy from its other London airports (Heathrow and Gatwick).

The report is being issued by Stop Stansted Expansion to the top 250 shareholders and institutional investors in BAA as well as to MPs, civil servants and to those within the aviation industry with an interest in the development of the Air Transport White Paper.

Commenting on the significance of Professor Starkie’s findings, Carol Barbone, campaign director, Stop Stansted Expansion, said: “This report marks a watershed in our campaign, which until now has largely focused on the devastating environmental consequences of major expansion at Stansted. The government has stated that any new or existing airport developments must be commercially viable. By BAA’s own admission a second runway at Stansted is a non-starter when judged on this fundamental test.”

Airlines operating out of other BAA airports as well as independent UK airport operators are likely to welcome Professor Starkie’s findings and to be watching very carefully to see how the government responds to this.