Testing The Regulatory Model: The Expansion of Stansted Airport

On 13 December a hearing will commence at the High Court in London challenging the decision of the Government in its 2003 White Paper, The Future of Air Transport, to support the development of a second runway at Stansted. A timely Fiscal Studies paper by David Starkie, an aviation adviser, examines the commercial case and the public interest arguments for further expansion at Stansted and finds that on both grounds the proposal is severely deficient.

The paper reviews the history of Stansted Airport and notes that its consistently poor financial performance over several decades has distorted competition and caused material harm to competing airports, such as Luton. Stansted declared operating losses for about 25 years and is still not expected to produce financial returns equivalent to its cost of capital until 2008. In spite of this, BAA plc, Stansted`s owner, has been able to balance its books by leveraging market power at Heathrow. Following changes last year, the airport Regulator will now assess the permissible rate of return at Stansted on a stand-alone basis only. Viewed from this perspective, further expansion at Stansted will not be commercially viable without a substantial hike in charges. These will have to more than double in real terms but Stansted has always struggled to increase its charges and, even today, these fail to reach the level permitted by the Regulator.

David Starkie says "I think one needs to question the motives of BAA management in their desire to develop a second runway at Stansted. I do not believe that shareholders will be well served by the adoption of public interest arguments that will have the effect of increasing the regulatory risk faced by the company. I also find it difficult to appreciate why the Government should want to encourage marginal aviation activity at Stansted in an era of increasing environmental concerns."

Ends

Notes to editors

1. David Starkie is on the CAA's panel of advisers for the review of NATS price control and is adviser to the Irish Airport Regulator. He is also a former aviation adviser to House of Commons Select Committees.
2. All opinions expressed in this press release and the article are the author's own; they do not represent the views of the CAA or any other body with which he is associated.
3. For enquiries, contact David Starkie by email at @email. Contact the IFS press office on 020 7291 4800 for copies of the article.
4. The paper is published in Fiscal Studies, Vol. 25, No. 4, December 2004.