There is no business itch too trivial for the British Chancellor George Osborne not to want to scratch it, no matter what the other consequences. So perhaps it shouldn’t come as a surprise that the sustained lobbying by not one but two separate Heathrow expansion campaigns has got Osborne, or so it’s claimed, lobbying his Cabinet colleagues on a change of mind on Heathrow’s third runway. I’ve written here before – in a long two-part post, here and here – about the long-term trends influencing aviation in the rich world. My assessment then was that most of them pointed to a decline in demand for long-haul flight (and in Europe and the United States, probably short-haul as well). So it’s probably worth spending some time on the ‘studies’ which support the latest political mood music emanating from Number 11.
The two campaigns are ‘Hub Heathrow‘ and one backed by Heathrow’s owners, BAA. The latter rustled up a number of business interests to support a recent letter to the Telegraph on the failings of government policy with regard to Heathrow. Both have commissioned economics forecasts to produce numbers, and both – naturally – conclude that the British economy will be adversely affected if Heathrow doesn’t get a third runway.
Trying to get at the assumptions
Since all forecasts are based on assumptions, I thought I should take a look at the assumptions sitting behind the two reports, starting with the Oxford Economics forecast commissioned by BAA, to see how they differed from mine. But if their report is sitting out there on the internet, it is extremely well-hidden. It’s not even worth a press release at BAA’s online Media Centre, nor any mention of it over at Oxford Economics. And no links to it from the various news outlets that covered this story, even from those that are normally diligent about such things.
So in the absence of any credible evidence, what have we got? The news stories are clearly written from the same media release, so let’s go with the Financial Times’ version.
BAA, Heathrow’s owner, released research findings … estimating that the UK would forgo annual gross domestic product of £8.5bn by 2021, and 141,000 jobs, if the airport was confined to two runways. … Oxford Economics, a consultancy commissioned by BAA, calculates the UK’s GDP would be £4.5bn less per year by 2021 as the country would not be as attractive to inward investors because of Heathrow’s capacity constraints. National income would be £3.6bn less because of reduced tourism and £410m less due to diminished trade with emerging markets. The overall £8.5bn figure – equivalent to 0.5 per cent of national income – would support 141,400 jobs, the study estimated.
The invention of ‘constrained demand’
Even without being able to read the report, we know how this sort of forecast is created. It assumes that future demand for aviation will increase in line with previous trends, and historically increases in GDP have tended to increase aviation demand. It then compares this ‘potential’ demand with the ‘constrained’ demand created by the lack of a Third Runway. A positive economic value is then attached to each of the extra passengers, and hey presto! (OK, I’m simplifying, but that’s the operating principle). Certainly the Frontier Economics model, which has been published, uses the ‘constrained demand approach to come up with its figure.
It’s a bit harder to work out how they got to the jobs figure, but it’s probably something like this: take the increase in GDP thrown up by the model, divide it by a figure for GVA (gross value added per job), probably weighted by different sectors. The GVA figure for 2021 is £60,000 per head, which is low, implying that many of these notional jobs would be low-value service and support jobs.
The letter to the Telegraph has a few more claims, notably that “UK businesses trade 20 times as much with emerging market countries that have a direct daily flight to the UK as they do with those countries that do not”, and that “Paris and Frankfurt already boast 1,000 more annual flights to the three largest cities in China than Heathrow does.” To be honest, it’s not worth spending too much time on them. Aviation routes follow trade, not the other way around, and the Frontier Economics report reveals that while the figure “three largest cities in China” is true, it elides past the fact that Healthrow also has 3,539 flights to Hong Kong per year, half as many again as Frankfurt, Charles de Gaulle, and Amsterdam combined. And LHR has more flights to the four Chinese destinations than any of their European competitors. Clearly, if it mattered to have more capacity from Heathrow to Beijing, Shanghai, and Gzangzhou, it would be possible to arrange it. These are commercial decisions, not capacity decisions.
Locking growth into the model
But there are wider and more important points here than naming some weaselly lobbying. Although it seems that George Osborne’s office later told the Financial Times that he wasn’t a fan of the Third Runway after all, the Coalition is in favour of airport expansion elsewhere. So understanding the way these ‘economic benefit’ models are constructed is worth a little time.
What these economic models do in practice is to lock in predictions of continued growth through the assumptions built into the models. They are, in effect, the algorithmic equivalent of the ‘predict and provide‘ model which blighted transport planning and policy for forty years or more. In a study for the WWF (opens pdf), Keith Buchan took the model for UK aviation demand used by the British Department of Transport, and ran it with a different set of assumptions about the future:
A doubling of the oil price assumed in 2030, from $53 a barrel to $106. The government’s forecasts assume that oil costs $60 a barrel today; that this will fall to $53 by 2012 and then remain at that level indefinitely…
Slower GDP growth as a knock-on result of higher oil prices. Government assumptions are for growth of 2-2.5%. We tested a reduction in this rate of 0.25%…. [which is way above the GDP growth we have this year, or probably any time soon.]
Policies that encourage a switch of short-haul passengers to rail.
Policies that encourage use of videoconferencing to reduce business flights. Recent research by WWF-UK showed that FTSE 350 companies expect on average a fall of 3% in business flying. …
Just the assumption about oil prices cuts passenger demand by 2030 by 15%. With the other three policies as well, passenger demand falls by 30%.
There is widespread belief and assertion that air transport brings benefits to many areas of the wider economy. This is accepted by economic studies as a self evident truth. The study team was unable to observe any strong agreement of the causality or scope of such benefits. Intrinsically, these benefits are difficult to quantify and the study was unable to identify agreement on the scale or value of benefits.
And it explicitly challenged the narrow range of assumptions which sit behind the models which it reviewed:
There are no scenarios which explicitly consider reduced oil supplies, though several assume rising oil prices over time. … The study team considers that it may be helpful to explore a wider range of scenarios with greater variations on GDP, oil price and oil availability. Such scenarios may challenge the need to justify infrastructure expansion, and may lead to economic studies with different future information needs.
As Adam Gordon says in his book Future Savvy, when you see a forecast, you should immediately be sceptical, especially when it’s produced in the service of a particular interest group. When you see a forecast promoting the economic benefits of a third runway at Heathrow, it’s more about politics than policy.
The picture at the top of the post is from the architecture blog Arch Daily, and is used with thanks.