Home Page

28 August 2005

The Value of Land at Dublin Airport.

Introduction.

Uproar(1)see Endnotes,believes that the issue of the correct economic valuation of land at and near Dublin Airport needs to be addressed in the context of the proposal by the Dublin Airport Authority (DAA) to build a new parallel runway there. In calling for a cost-benefit analysis of the new runway proposal Uproar has argued that the publicly owned land to be used for the runway (840 acres) and additional Inner Safety Zone land where no development can take place, should be valued at market opportunity cost, which would be from €1 million to €2 million per acre. Land within the Outer Safety Zone under the new flight path is also affected because development has been restricted since January 2005. Over 3000 acres in the Outer Safety Zone under the new flightpath have already lost at least €0.5 million per acre(2) .

There is the further issue of the valuation of the entire 2,500 acre site at Dublin Airport and of all the land in existing and proposed safety zones, which is of particular relevance to the determination of airport charges by the Commission for Aviation Regulation (CAR). If, contrary to current practice, airport and affected land was valued at full opportunity cost, the result would have a major effect on airport charges and consequently on national airport policy. (See below).

The "existing assets" fallacy

Uproar has previously pointed out the "existing assets" fallacy expounded by the defenders of Dublin Airport's new runway proposal. On 13 April 2005 at the Joint Oireachtas Committee on Transport, Mr. Gary McGann, DAA chairman said:

"Why would any company agree to the assessment of an alternative that would cost hundreds of millions of euro when it had in place an asset base capable of dealing with the task? That would not make sense and would require the Dublin Airport Authority to replicate everything(3)."

Here is John Burke, former Aer Rianta Chief Executive, speaking in December 2002:

"Fortunately, the airport has a vast land bank - more than 1,000 hectares - all of which was purchased about 40 years ago under the visionary former Irish Taoiseach
(Prime Minister) Sean Lemass."(4)

Both these eminent people would have us believe that the value of an asset is the price that was paid for it many years ago, rather than its alternative use-value today. Would anyone sell their house for the price paid for it 40 years ago? One has to wonder why otherwise sensible people propound such economic and commercial nonsense when they find themselves in charge of hugely valuable publicly owned assets.

International experience.

Other countries have debated the issue of valuing airport land for the purposes of regulation.

In 2002 The New Zealand Commerce Commission, as part of its enquiry into whether New Zealand's main airports should be controlled, decided that airport land should be valued at opportunity cost :

"In determining the appropriate asset base for each of the airports, the Commission decided that relevant land should be valued at opportunity cost." (5)

Their main report, paragraph 33, states (6):

"Valuing airfield land at opportunity cost provides appropriate signals either to continue operating the land in its existing use (as an airfield), or put the land to alternative use and relocate the airport. It also provides the appropriate incentives for new investment. Opportunity cost should be determined based on the highest alternative use value of airfield land, with that being the higher of the value with or without the sealed surfaces (the latter being after the costs of removing the sealed surfaces)."

In 2000, Sydney Airport Corporation Limited (SACL) arguing for including the full opportunity cost of land in the determination of airport charges, said in its proposal(7) :

"2.1 Inclusion of land

Under the Federal Airports Corporation, land was not included in the regulated asset base. In the draft notification SACL provides four separate reasons why it believes a return on the value of land should now be included in aeronautical charges, as follows:

· Valuing land according to its alternative use provides the economic signal for efficient decisions regarding the continuing use of the land as an airport, compared with the cost of an airport based further out of the city, with cheaper land, but increased costs in travel time etc;

· The Commonwealth, as a rational investor, would only continue to use Sydney Airport for aviation purposes if it could not achieve a higher return from an alternative use….

· Any possible future airport in the Sydney basin would be unable to compete with Sydney Airport as the cost of the latter's locational advantage is not reflected in current aeronautical charges;

· ……."
The Australian Competition and Consumer Commission's (ACCC) decision was somewhat mixed. It agreed in principle with the SACL proposal but decided to use an indexed historical cost method instead, based on the advice of consultants(8).

These New Zealand and Australian cases show that the same arguments made by Uproar in favour of valuing airport land at opportunity cost have been taken seriously by policy makers in other jurisdictions. Their arguments for and against opportunity cost valuation demonstrate the importance of land valuation for the assessment of the economic efficiency of airport operation and for the determination of regulatory airport charges. The implications for airport operations are immense but the debate has never taken place in Ireland. Uproar raised this issue with the CAR(9) , as we believe land has not been properly valued in the CAR's Draft Determination of Charges (CP2/2005)(10) . The response received did not address the questions raised.

Uproar's main concern is with the new runway, rather than with Dublin Airport as a whole; although the inclusion of all the land affected by Dublin Airport in the determination of charges would obviously have major implications for the new runway proposal. Whatever about a debate on whether or how much of such land should be valued at opportunity cost, (in which we are happy to engage) our position regarding the 840 acres ear-marked for the new runway and the 3000 plus acres in the new safety zone, is categorical. Our demand for a market opportunity cost valuation of this land does not raise existentialist questions about the continuation of Dublin Airport or hypothesise its relocation. Much of the proposed new runway site is a greenfield site. Some of it is occupied by the existing northern runway 29/11 and all of it is described by the DAA as agricultural land.

If the DAA is proposing to demolish that old runway it is, in their opinion, expendable; and the site is therefore subject to a full independent determination of its real alternative use-value. By choosing to build a new runway on it, the DAA is saying its current use is sub-optimal and is implicitly claiming that the proposed use of it under a new runway is economically optimal. In our view, that is a hypothesis that must be tested. If the land can realise €1-€2 million per acre, the DAA has to demonstrate that their proposal for its use can yield a return that would remunerate that investment. And that is before consideration of other costs, such as the new safety-zone land downvalued by restricted development, to which we have to add construction costs, road congestion costs, etc. In effect, a cost-benefit analysis of the runway proposal is required urgently (see below).

Effect on airport charges of full opportunity cost of land.

We estimated what the charge per passenger would have to be if all the land at Dublin Airport, as well as the land in the safety zones of all runways, existing and proposed, was fully valued at opportunity cost (see table below).

Even before any new runway is built, the charge, before other assets are considered, would have to be about €22 per passenger just to remunerate the land occupied and affected by the airport and the loss due to operating costs exceeding net commercial revenue.

Other airport assets (excluding land) will soon be worth about €1 billion according to CP2/2005. They bring the charge to €26 per passenger. As the number of passengers grows, the charge per passenger will decline. If, with the new runway, Dublin Airport gets to the projected 38 million passengers by 2025/9, the charge would be about €14.5 per passenger, assuming the same asset base. If the new runway was not built and 1000 acres were sold, the charge would be a more reasonable €17 instead of €26.

Some figures:

Our calculation is not difficult (being a simplified version of the method used by the CAR). The land cost is put at nearly €6 billion. Charge that at 7% and we get €420 million income needed per annum. There are nearly 20 million passengers per annum so we have to charge them about €21 a time, just for the cost of land. As there are another €1 billion of assets to be covered, we need another €70 million a year or another €3.5 per passenger to cover that. And as the airport loses over €1 for every passenger (operating expenses exceed net commercial revenue) we need to charge €21+€3.5+€1 = €25.5 per passenger, say €26: four times the charge at a new state-of-the-art airport. These land values are conservative and the value of the hundreds of acres totally sterilized in the Inner Safety Zones (outside DA-owned land) has not even been included.

Elsewhere we have estimated that if a new airport were built on a green-field site away from residential areas and with good communications, the charge (averaged over a 30 year life-time of a new airport) would be €6 to €7 per passenger(13) . If a charge of circa €25 for Dublin Airport was to be proposed now, the new runway would not be built at Dublin Airport and there would be huge commercial pressure to reduce that charge to a more reasonable level by asset (land) disposal and to begin building a second Dublin airport at a new site (perhaps on Bórd na Móna stripped bog as proposed by John Hourican(14) ). That would be an economically desirable outcome. It seems obvious that even if the new runway is built at Dublin Airport, a second Dublin airport will eventually be needed. It makes much more sense to start that more sustainable development sooner rather than later. That is the signal which the market would be giving now if the Dublin Airport site was valued at its opportunity cost. There would be a similar outcome if only the land implicated in the proposed new runway was so valued in a cost-benefit study.

The current charge at Dublin Airport is about €5 so, in effect, users of Dublin Airport are currently being subsidised to the tune of €20 per passenger if, contrary to current practice, the full opportunity cost of airport land should be included in the per passenger charge.

Uproar has called for an independent cost-benefit analysis to be done of the new runway proposal, as required by Department of Finance guidelines. Uproar has tentatively estimated that the new Dublin Airport runway option will lead to an economic loss of nearly €3 billion compared to a return of 7.4% for an alternative site(15) . We understand the CAR does not feel obliged to remunerate "externalities"in airport charges. The opportunity cost of the 840 acres to be used for the new runway is not an externality and cannot be ignored by the DAA or the CAR. The loss of development value for land in the Inner and Outer Safety Zone may be external to the balance sheet of Dublin Airport, but most certainly is not an external cost to the economy of Fingal, with which both Fingal County Council and central government should be very concerned. The CAR should include it, as it claims that economic efficiency is a guiding principle of the regulation of airport charges. Uproar believes that airport charges should reflect the full social costs of airports. If they did, we would eventually achieve an economically optimal and sustainable national airport infrastructure.

The future for Dublin Airport.

Should Dublin Airport be relocated? That is an interesting subject for study and debate. Whatever the outcome of such a debate, it is obvious that a slimmed-down, more efficient operation is required at Dublin Airport. At the very least, the hugely loss-making old northern runway 11/29 (that the DAA is planning to demolish) should go as it occupies land which, without question, is worth at least €1 million an acre. If a new runway as proposed in place of it would be a huge economic loss, how much of a loss is it at its present very low usage?

Land not needed at Dublin Airport should be sold for mixed development, probably at least 1000 acres, so realising €1 billion to €2 billion. New runway business will never remunerate that sum and the other costs of a new runway. That sum could be invested in improving the existing main runway, improved taxiways, a new terminal, improved commercial facilities, etc. DAA's crippling debt of €500 million could also be repaid(16) . With a smaller asset base to be remunerated, a more efficient airport could operate at a charge level acceptable to users. It could become, in effect, a more efficient Dublin City Airport as has happened in other cities. Charges would still be higher than the charge at the new airport, but the convenience of landing and taking-off 10 km from the centre of a capital city has to be paid for.

If Dublin Airport had to compete fairly with a new airport outside Dublin it would be forced to become efficient, if it is to survive. It seems rather obvious that whatever the future for Dublin Airport, a new second airport in the Dublin region is needed to provide an economically viable option, competition with which would determine if there is a viable and sustainable future for Dublin City Airport. As Uproar has repeatedly said, we need a proper study to determine best national aviation policy.

Matthew Harley, on behalf of Uproar.

Endnotes.
(1) Uproar - United Portmarnock Residents Opposing Another Runway is a sub-committee of the Portmarnock Community Association.

(2) See Uproar's "Uproar's observations on Further Information" at: www.norunway.com. This is our comments on the response by the DAA to the Further Information request by Fingal County Council regarding planning application F04A/1755 - Parallel Runway

(3) See: http://debates.oireachtas.ie/DDebate.aspx?F=TRJ20050413.xml&Node=H2&Page=4

(4) http://www.aci-europe.org/upload/aci%20nov_dec%202002%20burke.pdf

(5) http://www.comcom.govt.nz/RegulatoryControl/Airports/Overview.aspx

(6) http://www.med.govt.nz/buslt/bus_pol/airports/final/execsumm/airports-execsumm-05.html#P79_15455

(7) The SACL proposal regarding land is available in a consultant's report. http://www.necg.com.au/pappub/papers_necg_land_valuation_may00.pdf

(8) http://www.accc.gov.au/content/index.phtml/itemId/87729, http://www.accc.gov.au/content/index.phtml/itemId/87641

(9) See: "Land use and airport charges" at www.norunway.com.

(10) See http://www.aviationreg.ie

(11) "A price of €3.3 million was secured in January for a 1.33-hectare site on the Old Airport Road opposite Airways Industrial Estate." [€1 million per acre]. See: http://www.ireland.com/newspaper/commercialproperty/2005/0601/1451944554CPBUTLER.html

(12) Uproar consulted three North County Dublin property experts who wish to remain anonymous. They all agreed that an average loss of €500,000 per acre for the land in the Outer Safety Zone is a conservative estimate and expect that, if queried, no reputable valuer would challenge that figure. One example in the Portmarnock area was cited where land restricted because of the existing main runway was sold recently for €1.2 million per acre while a site across the road, but not restricted, sold for €2.4 million an acre around the same time. That represents a loss of value of €1.2 million per acre due to safety zone restrictions, considerably more than €0.5 million. These experts also believe that the valuation of runway land is conservative at €1 million per acre, as that land could easily be zoned residential and be worth €2 million an acre.

(13) See: Cost Benefit Analysis in Uproar's "Observations on Further Information Response" at www.norunway.com

(14) 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

(15) See: Cost Benefit Analysis in Uproar's "Observations on Further Information Response" at www.norunway.com

(16) http://www.ireland.com/newspaper/front/2004/0712/665116119HM1AIRPORT.html