London’s Heathrow Airport is what people in the airline business politely call “capacity constrained.” It is surrounded by houses and highways, making expansion challenging, and the two runways have reached their limits for flights. As Heathrow executives fret that Dubai will overtake the title for international passenger traffic—a milestone that could come next year—they are eager to build a third runway to accommodate new flights to growing markets in India, Africa, and South America.
A British government commission named Heathrow and Gatwick as the two airports best served by expansion. A report released by Heathrow last week as part of its lobbying effort sought to put a price on the current congestion: Passengers pay an extra £95 ($160) on average fares because of the two-runway bottleneck, according to the study, and a third runway would reduce the average round-trip flight by £300 by 2030. (That eye-popping figure even accounts for the cost of the new runway, pegged at £20 per passenger.) Heathrow officials did not respond to e-mails seeking comment.
A footnote buried on page 11 of Heathrow’s runway study, which was put together by Frontier Economics, an economic consulting firm, notes that calculations for how much fares would fall once a third runway were operational are “complicated by airline price setting,” which is typically focused on “maximizing profitability.” Indeed.
But if airfares rise as a result of restricted capacity, does it necessarily follow that prices decline when congestion eases? Would an expansion lure new service from budget airlines such as Ryanair (RYAAY) or EasyJet (EZJ:LN) with cheaper rates?
The U.S. is full of large airports whose capacity isn’t restricted. Chicago’s O’Hare and Atlanta Hartsfield airports are two of the world’s busiest, with thousands of flights each day, and both have steadily added runways. O’Hare opened a fourth runway last year and plans a fifth in 2015, with three additional ones coming before its ongoing modernization effort ends. Atlanta’s fifth runway opened in 2006. So have travelers at these hubs seen a corresponding decrease in average fares? Since the third-quarter of 2006, the average inflation-adjusted round-trip fare has climbed $30, to $432, in Atlanta, according to the Bureau of Transportation Statistics. In Chicago, meanwhile, the average trip has increased by $44, to just over $386 (a figure that includes fares at both of the city’s major airports).
Runways might not even be the most constricting feature of the Heathrow experience for travelers. Britain has been criticized for having some of the highest aviation taxes on the planet; they have risen some 2,600 percent since 1994, according to the International Air Transport Association. Any reductions in how much travelers pay to fly would almost certainly need to come from the airlines’ portion of the total price, not the tax burden travelers pay the government. Yet the Heathrow runway report says very little about airlines, the prime arbiter of travelers’ costs at any airport. The authors note that an airport and its airlines are not an integrated business enterprise and treating them as such “is a very strong assumption and very different from reality.” Still, the assumption works for predicting that a third runway would lower airfares at Heathrow, the report claims, because airlines can be considered “effectively competitive, with easy entry and exit of markets at an unconstrained airport.”
Unfortunately, in the real world, the large global airlines at Heathrow and elsewhere have divvied many of their international routes into alliances to which governments on both sides of the Atlantic grant immunity from antitrust regulation—a license, in effect, to collude on fares and schedules. Heathrow’s dominant airline, British Airways (IAG:LN), has joined with Oneworld Alliance partner American Airlines (AAL) to coordinate flights across the Atlantic. (The carriers boast hourly flights between London and New York. United (UAL), which operates most of its European flights from its Newark and Washington-Dulles hubs, is part of the Star Alliance with Lufthansa (LHA:GR), Air Canada (AC/A:CN), and Singapore. Delta Air Lines (DAL) and Air France-KLM (AF:FP) anchor a third large airline alliance, and Delta has likewise formed a joint venture with Virgin Atlantic for their Heathrow-New York flights.
Major international airports are engines of economic growth, which includes airline profitability. When airports expand, airfare discounts are certainly not among the project’s goals for an airline. Heathrow’s traffic says it’s short a runway—but selling the project as a fare-lowering exercise takes a flight of imagination.