A surprising feature of the new Labour government is its enthusiasm for new airport capacity, notwithstanding its commitment to a pathway to net zero greenhouse gas emissions by 2050. The primacy of economic growth, so strongly espoused by the Prime Minister and his Chancellor, have been summoned to logically justify this approach – both as a practical measure, and a signal to prospective investors in the UK economy that ‘we are open for business’ – even despite the adverse climate change consequences. The economic case itself, however, is very questionable.
This initiative began with a speech on 29 January by Rachel Reeves, Chancellor of the Exchequer, in which she backed a third runway at London’s Heathrow Airport as part of the re-booted plan to get the UK’s sluggish economy growing. She also supported expansions at Luton and Gatwick airports, a stance formally endorsed by Heidi Alexander, Secretary of State for Transport,who appears to not have been the principal decision-maker in these matters.
The airport expansion plans for which ultimate ministerial consent are required are these:
- Heathrow: the government has invited proposals for a third runway to be brought forward by the summer. The number of flights, presently capped at 480,000 a year, could increase to 720,000. Currently the airport serves more than 80 million travellers a year with its four passenger terminals and two runways, but eventually should be able to accommodate up to 140 million passengers a year, once the third runway is in operation.
- Gatwick: the Secretary of State has issued a ‘minded to approve’ letter for the Northern Runway Development Consent Order (DCO), subject to the outcome of further consideration of operational controls on the scheme. This proposal involves repositioning an existing runway by 12 metres to allow dual runway operations. This runway is long enough for typical short-haul passenger jets and will increase the airport’s annual number of flights to 380,000 from the present 260,000, with passenger numbers going up from 45 million to 75 million a year.
- Luton: the Secretary of State has granted a DCO that covers a new terminal (but no new runway), which could increase passenger capacity from 18 million to 32 million per year.
- Stansted: the government has welcomed Stansted’s £1.1 billion investment to extend its terminal. It already has permission to grow to 43 million passengers a year, from the current 29 million.
- London City: the government has approved plans to expand to 9 million passengers per year by 2031, from 6.5 million currently, but with no increase in the number of flights.
The Department for Transport plans to review the Airports National Policy Statement (the current version dates from 2018), including its compatibility with climate change obligations. Ensuring compatibility with climate change obligations will not be a trivial task, as is evident from the most recent report of the independent Climate Change Committee (CCC), proposing the Seventh Carbon Budget covering the five years 2038-2042.
Carbon Budgets
The UK’s Climate Change Act 2008 sets the framework for action to address climate change mitigation and adaptation. The Act requires the government to propose regular, legally binding milestones on the way to achieving Net Zero greenhouse gas emissions by 2050, known as carbon budgets. The CCC is required to advise the government on the level of these. Parliament must then agree each carbon budget for it to be set into law. To date the government has always followed CCC advice on the major decisions, including the level of the six legislated UK carbon budgets.
However, the government’s most recent Carbon Budget Delivery Plan, for the Sixth Budget, has been subject to successful legal challenge on the grounds that inadequate consideration had been given to the risks involved in delivery, assuming mistakenly that the policies would be delivered in full. The outcome is that the government has to lay before Parliament a fuller report dealing with the risks involved.
The CCC’s approach to carbon budgeting is to propose a ‘balanced pathway’, based on detailed expert analysis of options and extensive modelling. The treatment of aviation in the Seventh Carbon Budget has the following main features:
- Aviation demand can only grow if aviation sector technology roll-out progresses and begins to abate and offset aviation emissions, with demand management playing an important role in the 2020s and 2030s while availability of Sustainable Aviation Fuel (SAF) and permanent engineered carbon removals are both still limited.
- As a result, budgeted per-capita passenger-kilometres remain relatively flat between 2025 and the early 2030s. As SAF and engineered removals become more widely used from the mid-2030s, demand then grows from this point. This growth is conditional on these technologies developing as projected. Thus, compared to 2025 levels, aviation passenger demand is projected to increase by 2% by 2035 (to 319 million passengers), 10% by 2040 (to 345 million passenger), and 28% by 2050 (to 402 million passengers).
- Aviation will be the UK’s highest-emitting sector by the Seventh Carbon Budget period. The largest share of emissions reduction by this time comes from managing forecast aviation demand growth. This is followed by SAF uptake, efficiency improvements, and the roll-out of hybrid-electric aircraft and battery-electric aircraft.
- The cost of decarbonising aviation and addressing non-CO2 contributions to climate change is expected to be reflected in the cost to fly. This will help manage growth in aviation demand in line with Net Zero.
It does not need detailed analysis to see that the government’s vision of substantial expansion of airport capacity is very much at odds with the CCC’s proposals for demand management to achieve climate change objectives. This discrepancy could be difficult to deal with in the government’s plan to achieve the Seventh Carbon Budget in a way that would be proof against legal challenge.
One key risk concerns the availability and cost of Sustainable Aviation Fuel, a topic on which both the Department for Transport (DfT) and the CCC have similar aspirations. SAF is produced from biological feedstocks, at present mainly used cooking oil and animal waste fat, and is sufficiently similar to standard jet fuel to be used in existing aircraft. Other biological sources are being explored. At present, costs of SAF are higher than for kerosene and supplies are limited.
To incentivise the development of SAF, the DfT is creating an SAF Mandate, which will set a legal obligation on fuel suppliers in the UK to supply an increasing proportion of SAF over time. In 2025, the obligation is set at 2% of the total fossil jet fuel supplied, and will increase annually to reach 10% in 2030 and 22% in 2040. In addition, the Department is currently consulting on how best to support the UK SAF industry by a ‘revenue certainty mechanism’ that will help producers get the investment they need to ramp up the production. The DfT’s position that this mechanism should be funded by industry, consistent with the polluter pays principle, and that the preferred approach is to introduce a levy on suppliers of jet fuel. The outcome of the consultation will be enacted in legislation.
The DfT’s aspiration for a 22% share of jet fuel derived from sustainable sources by 2040 falls short of what would be required for complete decarbonisation by 2050, and in any event must depend on whether SAF providers are able to locate biological sources of supply and reduce costs to allow this fuel to be commercially viable, mandate or no mandate. This is an important source of uncertainty which the government will need to address in formulating its Seventh Carbon Budget in a way that will be proof against legal challenge.
Demand management
The uncertainty as regards SAF supply prompts the need to consider demand management of air travel more seriously than the UK government has so far, to have any real prospect of aligning with the Climate Change targets. I set out the argument succinctly in a letter that was published in The Economist of 22 February:
‘It is understandable that Heathrow and other UK airports in private ownership would wish to increase passenger numbers, revenues and profits. But this is not in the national interest in an era of decarbonisation.
‘The crucial fact that most air travel is for leisure. Even at Heathrow, only around a quarter of passengers are travelling on business. There is therefore ample opportunity for business travel to increase, displacing leisure travellers to other London airports with spare capacity, and beyond.
‘This will happen through market forces since business travellers will pay a premium for the advantages of Heathrow. Eventually, all spare capacity at UK airports would be taken, and then the lowest value flights would be priced off, such as the weekend jaunts by stag and hen parties to convivial continental cities.’
To illustrate how market forces work, consider a trip to India. Suppose I am flying on business for a short stay, my organisation paying the cost. Living in London as I do, I would fly from Heathrow direct to the airport nearest my destination, where I would arrange to be collected by car. On the other hand, if I am going on a longer holiday trip, paying out of my own pocket to travel economy class, I would shop around for the lowest cost route. I would quite likely fly via one of the Middle East hubs, taking longer but costing less, with the possibility of arriving at an airport nearer my final destination. With Emirates, for instance, I might still depart from Heathrow, but also could leave from Gatwick or Stansted, as well as from Birmingham or even Manchester. I would expect the cost of these alternative options to reflect the lesser demand from business travellers using these airports.
If demand for air travel continued to grow, eventually spare capacity at UK airports other than Heathrow would be used up. Then market forces would result in increases in prices charged by airports (and increases in their profits), which would deter the marginal traveller, such as such as discretionary low-budget short-duration leisure tripsabroad, taking advantage of the present availability of low-cost flights outside the main season for tourist travel. Some increase in the cost of leisure air travel could be expected to increase the attractions of domestic destinations, probably with rather little loss of enjoyment and a greater benefit to the UK economy.
To put some numbers to the argument: survey data collected by the Civil Aviation Authority for 2023 shows that at the UK’s eight main airports, 57% of terminal passengers were UK residents on leisure trips, and 30% were overseas residents traveling for leisure purposes. Only 14% of journeys were for business purposes. Even at Heathrow, only 19% of passengers terminating at that airport were travelling on business.
In absolute terms, business travellers terminating at Heathrow totalled 14.9 million in 2023. This compares with 20.3 million in 2019 and 20.7 million in 2015. So there is no growth trend of business travellers at this hub airport. Indeed, there is indication of a substantial change of practice resulting from the coronavirus pandemic, where the combination of working from home, experience of remote business meetings, and environmental concerns, have greatly reduced the amount of business travel, particularly short trips to EU countries.
Economic case
The Chancellor, in her 29 January speech, asserted that third runway at Heathrow would unlock further growth, could create over 100,000 jobs, and, according to a recent study from Frontier Economics, could increase potential GDP by 0.43% by 2050. However, this study, commissioned by the owners of the airport, is based on a black box proprietary model of the whole economy, of the kind that gained little credence previously, including past analysis by the Airports Commission of the case for a third Heathrow runway.
The economic case for a third runway must be based on the need to accommodate growth of business travel, in order to increase opportunities for British companies in export markets, foster inward investment to the UK, facilitate the growth of London and the South East as a place for doing business, and promote London as a world city for finance, media, education, tech and other specialisms. But with the present lack of growth of business air travel and the headroom of capacity for any future growth by displacing leisure trips, the national interest in additional airport capacity is far from being established.
Hospitality, entertainment, high-end retail and other businesses benefiting from inbound tourism would doubtless welcome increased airport capacity. However, UK visitors going abroad spend more than twice as much as overseas visitors to the UK – £62290 million against £28358 million in 2019 (ONS data). So increasing airport capacity is very likely to drain spending from the UK economy, which could detract from economic growth.
Given the unconvincing economic case and the conflict with policies to achieve Net Zero, why the enthusiasm amongst at least some government ministers for airport expansion? The explanation could reflect how desperate the Labour government is to boost economic growth, both to increase living standards and to raise tax revenues to fund increases in public expenditure, with a new requirement for higher defence spend. But the levers available to ministers are limited in scope and slow to act. So the positive stance toward increasing airport capacity serves to send a signal of intent, with no cost to the Treasury since airports are in the private sector.
Whether individual airport expansions go ahead will ultimately depend on commercial decisions by the owners, regardless of supportive government statements. The key question is whether the investment can be adequately remunerated by increased turnover in a market in which airports are in competition for airlines and their passengers. The business model takes account of landing and take-off fees charged to the airlines, and associated income from catering and retail concessions in the terminals, car parking and other trading in and around the airport. With one exception, airports can set their own charges for use. But charges at Heathrow are regulated by the Civil Aviation Authority on account of this airport’s dominant position. Currently charges are capped at about £25 per passenger, high by international standards.
The cost of a third runway at Heathrow was originally put at £14 billion in 2016, but this did not include the consequential adjustment and enhancement to surface transport,including putting a section of the M25 Motorway in tunnel. And for such a major construction project, there must be substantial risk that initial cost estimates are pitched too low, to get the proposal committed and underway, after which further cost are likely to be identified – as has been the HS2 experience. Accordingly, the owners will doubtless want reassurance that this expenditure can be recovered in higher passenger charges. But the airlines would be likely to oppose this since it would make their investment in Heathrow routes less competitive. BA would also oppose because expansion would be likely to lessen its dominance and pricing power at Heathrow. Under present arrangements, the CAA would need to adjudicate.
Also lying in wait on the critical path will be the updated Airports National Policy Statement, the government’s decision on implementing the Seventh Carbon Budget, and a planning inquiry into the detailed proposal for Heathrow expansion. For all the government’s talk about speeding up the planning process, with new legislation recently introduced to achieve this, the outcome of this particular scheme seems exceptionally uncertain.
From the point of view of both economic and climate policy, the case for a third runway at Heathrow looks highly unconvincing. And the commercial viability seems decidedly problematic. It is therefore good that some proper scrutiny is now going to be given by the House of Commons Environmental Audit Committee, which has launched a new inquiry to examine whether expansion of airport capacity can be achieved in line with climate and environment goals.
This blog post is the basis for an article in Local Transport Today, 1 May 2025.