Wednesday, 19 June 2013

Optimal airports

A million dollars a meter to extend Wellington's runway.
The airport announced in May that it would be seeking resource consent to extend the airport by 300m at a cost of $300 million to attract long-haul flights to the Wellington region.
The costs of the runway extension are reasonably well known. But what about the benefits?

All passengers wanting to get to Wellington will enjoy a slight increase in safety. If they value this, they'll be willing to pay more for flights to Wellington. The airport should then be able to extract slightly higher landing fees.

Passengers from overseas wanting to get to Wellington will enjoy a slight decrease in expected travel time as fewer of them will need to connect in Auckland (or Christchurch) to get to Wellington. Again, if they value this, they'll be willing to pay more for flights to Wellington. The airport should then be able to extract higher landing fees from those international flights.

If the change results in increased passenger arrivals in Wellington, then Wellington may benefit from increased tourist traffic. As always, we would need to be careful in estimating such benefits. First, spending by itself isn't a benefit; increased profits accruing to Wellington businesses are. Measures of "economic impact" that take total expenditures as a benefit are rather misguided. Wellington Council might be justified in putting a bit of money into the airport extension, funded by increased levies on businesses most likely to benefit from increased tourist and conventioneer flows: restaurants near tourist spots, hotels and the like.

There's little case for central government getting involved except where the extension results in a net increase in travel to New Zealand as a whole rather than just travel to Wellington. At least some of the benefit to Wellington will be a cost to Auckland and Christchurch in terms of travelers who would otherwise have enjoyed a layover in one of those cities before continuing on. And so any case for central funding would have to be based on net increases in tourist flows to New Zealand as a whole weighted by the likelihood that those travelers use Wellington as a base for more extensive travel. Central government might watch that any business case for Wellington Council funding not be based on trade diversion from Auckland and Christchurch.

Bottom line: if this were really a good idea, Wellington Airport should be able to fund the bulk of it via a bond issue that would be paid by increased landing fees consequent to the extension. If the main benefit is from increased arrivals from large jets, then set differential landing fees such that those enjoying the benefits are the ones bearing the costs.

Wellington Council could maybe throw in a bit, but should be pretty careful because it's awfully easy for interested parties to put together a business case based on wishful thinking or based on assuming private internalisable benefits are social. Wellington Airport suggests benefits including:

  • Reduced travel time and cost for those in Wellington
    • Makes travelers willing to bear greater landing fees, so can be fully internalised by the airport.
  • Better exposure to international student market
    • Possible, and harder for the airport to internalise. Note that much of this would be diversion from other NZ schools rather than a net increase in international student numbers. Wellington might not care about this, but it weakens the case for central government funding. 
  • Regional tourism benefits
    • Possible, and also harder to internalise. You can imagine mechanisms like local tourism operators paying for inclusion in a brochure handed out to incoming tourists, but that's pretty imperfect. 
  • Better international freight options
    • Should be fully internalised via landing fees.
  • Increased local property values
    • Um, no. This is one of the big rules in cost-benefit: you CANNOT count BOTH the increased benefits from an amenity AND the resulting increase in local asset values. That's double-counting.
  • Easier for Wellington-based firms to work internationally.
    • This would be partially internalised via landing fees paid by those firms, parking fees at the airport, and taxicab slotting fees, but only partially. 
  • Reducing fares to Oz by allowing consolidation onto larger planes
    • This should be fully internalisable via landing fees.
  • Benefits to central NZ from increased tourism
    • Again, be careful to assess things based on net likely increases in total tourism. 

It's rather harder for me to see a case for central government assistance, especially where many of the benefits to the Wellington region will be diversion from other parts of the country rather than net increases. Maybe there's a case based on expected national tourism risk from a spectacular Wellington crash, the risk of which could perhaps be lessened by an airport extension - or at least the linked article says so. But were I to be making a list of big lowish (but rising probability) costly risky things that could hit Wellington and for which the government seems inadequately prepared, well...


  1. I have an interest, as Wellington is our nearest airport and at the moment to get overseas I fly from Wellington to either ChCh or Auckland first. So would be willing to pay a bit extra provided added costs were less than a flight to ChCh or Auckland. But reason I am sceptical is that the case I read claimed that flights directly overseas would pay (through landing charges etc) for the added capital costs. But I am not sure - since most locals going overseas fly through wellington now, therefore the airport is already getting fees. Only if many more people fly, who never flew before, will there be more income - otherwise its just one type of income replacing another. I am not so worried that the city council is stumping up with some money at the moment - as they are shareholders in the airport so its OK that they are 'investing' or investigating. I notice that local business is already salivating, but that might be misplaced also as a proper international airport might lead to more locals leaving on holiday than new people coming in!

  2. Eric - "it's awfully easy for interested parties to put together a business case based on wishful thinking or based on assuming private internalisable benefits are social."

    Those words should be framed and placed on the wall in every place where cost-benefit analyses are conducted. So true.

  3. One issue with an otherwise excellent analysis: airport fees are a politically charged issue, both the landing fees and the taxi fees. There is a tussle between the airlines and the airport over fees. Every time Wellington raises its fees, the oligopolist airlines complain that the local monopolist is being unfair. That may constrain the ability to fund the extension through airport fees, even if the gain in consumer welfare would justify it.

  4. Sure, but AirNZ and the like can bargain with the airport ex ante, right? So the airport could say "Hey, airlines, here's the deal. You guys say you want a big runway. It's gonna cost a lot. In fact, we're only going to do it if you'll agree to pay an extra $100/passenger landing fee for the big planes that need the runway extension. If you don't like the fee, that's fine, we'll stick with the short runway."

  5. Better, it should be placed on the wall in every place where cost-benefit analyses are read and taken too credulously.

  6. The key would be that the bigger planes would pay higher fees than existing planes.

    The problem with Council investing is that it is very likely to lose money on the deal. Very back of the envelope, but suppose you get an extra $100 per passenger landing fee at the airport for big planes and you get an extra Dreamliner every day because of the runway extension. That's about $30k per day if it's one of the bigger Dreamliners. Ok. $300 million works out to being about $22m per year in interest on a 25 year bond, or $60k per day, every day. So you'd need 2 Dreamliners per day, every day, and each of them paying $100 per passenger more in fees than the airport would otherwise be collecting. Otherwise they're losing money.