Runway Cost Benefit - Revised

UPROAR carried out an illustrative cost benefit analysis of the proposed runway at Dublin Airport and of a new airport on an undetermined green-field site, hypothetically with good communications and away from residential areas. Somewhere in the region of Newbridge, only 35 km from the M50, is one of many possibilities. Consideration might also be given to a proposal by John Hourican of Bord na Móna to provide a site six times the area of Dublin Airport for a new airport less than 30 km from Dublin near the M4.1 We found the new runway proposal to be a waste of €3 billion while the alternative was a viable economic proposition.

The original analysis was submitted to Fingal County Council as part of UPROAR's comments on additional information in August 2005. That analysis was based substantially on the Commission for Aviation Regulation's (CAR) draft determination, CP2/2005 of 31 May 2005, which was based on a draft Capital Expenditure (CAPEX) programme provided earlier by the DAA and in which a new runway figured. UPROAR made substantial use of those runway figures in its initial cost benefit estimates. Many changes have occurred since then affecting our information base, but their impact on our conclusions are likely to be minimal.2

Costs to local communities

As UPROAR has pointed out, there are large costs associated with the Dublin Airport option. These include the cost of congestion to millions of road users and airport users due to the extra traffic generated by the new runway, which it is claimed will generate ten million additional passengers by 2025. There are also the social costs imposed on the 10,000 people of Portmarnock and 100,000 or more in Malahide and Swords, by increased noise, air pollution and flooding.

An estimate of the cost of these factors to the people of Portmarnock alone can be made by considering the possible effects on property prices in Portmarnock of the new runway project. Some property experts say that property prices under a flight-path lose 10% to 15% of their value. With 2340 households in Portmarnock (Census 2002) and probably about 2500 in 2005, residential property alone in Portmarnock is worth about €1.3 billion. A 10% to 15% loss of property value for the residents of Portmarnock implies a cost of €130 million to €200 million. That is a proxy economic evaluation of the welfare loss to the residents of Portmarnock caused by this new runway development as a result of the adverse effects of noise, pollution, congestion, educational disadvantage, etc., on the community. If the effects on other affected communities such as Swords and Malahide were also considered the costs would be much greater. Construction of a new airport on a green-field site far from built-up areas would not have these costs to be set against the economic benefits of the project.

Land costs

In addition, the huge opportunity costs of the land destined for this new runway cannot be ignored (see: Valuing Land at Dublin Airport). It is very valuable land, worth about €1 million an acre as development land (maybe twice that if zoned residential 3). Further, large areas of land will be sterilised or allowed only restricted development because they will be within the inner or outer safety zones under the new runway's flight path. The sub-optimal use of this land is another large economic cost of this project. Some 3500 acres are affected in the outer safety zone where residential and other development will be restricted. According to experts this land will lose (or already has lost) on average from €500,000 to €750,000 of value per acre because of these restrictions. In other words, if the runway was not built and this land was released for development it would add, at the conservative €500,000 per acre, €1.75 billion to its value. The loss of that development to the Fingal area and indeed to the treasury of FCC is colossal.4

Costs and benefits.

The main benefit of the project is the increase in business as represented by the extra passengers (10 million by 2025 - adjusted to 2029 because timing of runway has changed) but only a share of that benefit can be credited to the new runway. There are then the construction costs of the project.

We have made rough estimates of all these costs and benefits and conclude that locating a new runway at Dublin Airport would be a huge economic loss. The ratio of benefits to costs is 3%. I.e. the benefits are only 3% of the costs. Total benefits are €113 million.5 Total costs are €3.3 billion. The net benefit is therefore -€3.1 billion, an economic loss of over €3 billion. The Internal Rate of Return (IRR) is infinitely negative because there is never a year of positive cash flow in any of the 30-year lifetime assumed. It is a total waste of €3 billion worth of public and private assets.

It is patently evident "on-the-back-of-an-envelope" that this runway is a financial and economic disaster. The principal component of the return to the new runway is the share of the airport charge that can be attributed to the new runway. The new runway will represent about 12% of the (non-land) asset base (RAB) of Dublin Airport. With the maximum airport charge allowed by the CAR assumed to be about €7 when the runway is built, some €0.85 is the return per passenger credited to the new runway. It is assumed that there will be 10 million extra passengers by 2025 because of this runway. That means revenues attributable to the new runway will be €8.5 million, in 2025 and much less before that date. Even if only the 840 acres of land to be absorbed by this runway had to be paid for, how could an asset costing €840 million be repaid (considered as a loan) at a rate of €8.5 million a year? That is only 1% of the asset value. The regulator demands a 7.4% return, so that the annual return by 2025 would only be a fraction of the return required. If, as argued later, the airport charge reflected the true value of the land asset consumed, a much higher return would be achieved, but still much less than would be required to justify this investment. In the case of a new airport, the full "loan" is repaid and at the rate required by the regulator. It can therefore be judged to be a viable investment - and before any of the real spin-off benefits are considered, few of which would arise with the Dublin Airport option.

One alternative: a second Greater Dublin Area airport.

The alternative considered is a green-field site for a new airport assumed to be convenient to good road and rail links. A construction cost of some €2 billion is assumed. (The new Kuala Lumpur Airport was built for $2.5 billion). That seems high, as Pier D, the second terminal and the new runway at Dublin Airport will cost, according to the DAA, under €500m. There is every reason to believe that these DAA estimates are far too low. For the alternative site, there are few costs for noise, traffic congestion, pollution or flooding; land is valued at agricultural prices, and only a few residents (probably on farms) are assumed to be disturbed as the site is located away from residential areas. The airport charge is set so as to break even at the Regulator's discount rate of 7.4%. The benefit/cost ratio is then 1.0, as required to break even. Benefits are equal to costs and the IRR, as expected, is 7.4%. Such a rate is considered to be a very reasonable rate of return on public projects.

The estimated airport charge to break even is €6.4. That is comparable to the rate of €6.14 decided in late 2005 by the Aviation Regulator for Dublin Airport. However, UPROAR believes that this rate is much too low because it ignores huge costs such as the opportunity cost of the land needed by the new runway (€840 million) and of other land subject to restricted development by the runway flight-path. If the rate for Dublin Airport was truly set economically, the charge could easily be a multiple of that at a new airport. If it costs €2 billion just to build an airport (before counting the land) how can Dublin Airport in its entirety (on 2500 acres) be valued by the regulator at only a little over €600m? If charges were set correctly, the new airport would be very competitive. (See Part 6: Valuing Dublin Airport Land.)

Consider what a boon a new airport would be for the economy of an area 30 km to 50 km southwest of Dublin. A new town could be created where the spin-off benefits would be able to materialise. No allowance was made for these benefits in the illustrative study. Some such benefits may also accrue to the runway at Dublin Airport but, in our opinion, they would be limited due to road congestion, high land and other property prices, and low unemployment in Fingal. Detailed calculations are available on request in a Microsoft Excel file.

More weaknesses

It should also be pointed out that these meagre returns depend on the DAA's projected number of extra passengers that would be accommodated by the new runway (10 million by 2025). This assumption is itself highly questionable. It seems that for engineering reasons the proposed new runway will not be able to handle all those extra passengers. Airport engineering consultants have advised UPROAR that the new runway would quickly run into diminishing returns. In their opinion, the restricted manoeuvring area available airside between the two parallel runways only 1.7 km apart, will severely limit the operating capacity of the new runway. It might be limited to no more than two-thirds the capacity of the existing 10L/28R runway and therefore only two-thirds the throughput of the same new runway built on an unconstrained site. If this is so, it means that the investment in the new runway will be even more wasteful than estimated here.

A further cost not included here is the cost of providing additional road infrastructure to make this runway work. The proposed "Airport Box" outlined in the FCC's Draft Dublin Airport Masterplan has been estimated to cost €200 million.6,7 UPROAR does not accept that even these works will relieve the road congestion arising from the new runway but if such works are necessary in the opinion of the FCC and the DAA to make this runway work, such costs also need to considered part of the cost of this runway. No costs or benefits of this construction have been included here.

Summary

In summary, if the runway is built at Dublin Airport we are throwing away at least €3 billion, probably much more. That is a total write-off. If a new airport is built in a suitable area, even though it will cost about €2 billion to build, we get our money back with 7.4% interest and potentially deliver huge extra benefits in a way fully consistent with our National Spatial Strategy. Also, users of both airports would get the benefits of real competition, whether the airports are publicly or privately owned. It should be noted that under the 1998 Air Navigation Act, Dublin Airport, with ministerial permission, can establish and operate a new airport.8

UPROAR's estimates are rough but are probably robust and are indicative of the huge economic disadvantage of the proposed development at Collinstown. We do not propose these figures be taken as definitive but rather to show that there is an overwhelming a priori case for a proper independent cost-benefit analysis to be done as required by the Department of Finance Guidelines for the appraisal of public investment projects. As these Guidelines have been ignored to date, UPROAR is calling for a full study to be carried out by specialists independent of the DAA and FCC. Planning permission should be withheld until such a study identifies the best economic option for additional runway capacity.

1. See: http://www.finfacts.com/irelandbusinessnews/publish/article_10002693.shtml
See also: "Another Airport in a Bog?" by Willie Dillon in the Irish Independent, Saturday 30 July 2005.

2. The Commission for Aviation Regulation (CAR) received a revised CAPEX programme from the DAA too late to be incorporated into the draft determination of May 2005 that was widely used by UPROAR. Subsequently, a finalised CAPEX programme was delivered to the CAR only a week before the Commission had to publish its final determination in CP3/2005 that it released on 29 September 2005. This final CAPEX plan did not envisage the new runway being constructed within the current determination period (2006-2009). Therefore, an element to pay for the new runway was not included in the final charge determination, although it had appeared in the draft charge determination.

As CAR did not have time to evaluate the new CAPEX against efficiency criteria nor did it have time to consider its affect on revenue streams and costs during the period of interest, they have reserved the right to revisit their final determination. As the new runway no longer falls into the time-frame of the current determination, it will also be revisited later by CAR.

Therefore, as far as this analysis is concerned, many of the runway figures originally used by CAR in its draft determination are still all we have to go on, even though the impact of the runway on charges is no longer included. As the CAR did not republish detailed calculations in its final determination, we are not sure how some of their calculations have been affected by the removal of the runway from their determination and consequently how some of our assumption might be affected. There is therefore quite some uncertainly in these figures but as the final result does not critically depend on a high level of accuracy on these elements, it is not of major concern.

3. A site for mixed development was reported for sale by Dublin County Council for €2 million an acre at Clare Hall near Dublin Airport in April 2006. Northside People, 26 April - 2 May 2006.

4. The Dublin Airport Authority will pay €10.2 million in rates to Fingal County Council in 2006. The increase in rates to be paid as a result of the new runway is not yet known, as the Rateable Valuation of the airport will have to be adjusted by the Commissioner of Valuation. It obviously will be only a fraction of this €10 million. We do not have an estimate, but it is not hard to believe that the rates forgone on the thousands of acres to be consumed or sterilised by this runway, if otherwise developed, would yield many times more revenue to FCC. (Source: Email to UPROAR from FCC 3 May 2006).

5. Benefits are made up of the positive cash flow items, net commercial revenue and charges. The commercial revenue is earnings from retail outlets at the airport. The charges are the amounts the Commission for Aviation Regulation (CAR) allows the airport to charge airlines. It is set by CAR as a maximum that can be charged per passenger. We assumed that for every €1 of charge, 12 cents can be credited to the new runway because the runway's construction cost when built will be about 12% of the total asset base as calculated by the CAR. For some questions raised about the validity of the CAR's valuation of assets at Dublin Airport. See Part 6: Valuing Dublin Airport Land.

6. Draft Dublin Airport Masterplan, Fingal County Council, March 2006.

7. Michael Lorigan, Fingal's director of transportation, said it would be seeking Government funding for this new road network, which was designed to be "independent" of the M1 and M50. It would cost at least €200 million and probably much more, depending on the price of land, but would bring "very significant benefits". Quoted in "Turbulent times ahead for Dublin airport's expansion.", by Frank McDonald in "Agenda", Irish Times, 17 April 2006.

8. The Air Navigation and Transport (Amendment) Act, 1998 states: "16 (3) The company may, with the consent of the Minister given after consultation with the Minister for Finance and subject to such conditions as the Minister may determine, establish a new airport or become the owner in whole or in part or manager of an existing airport."