Optimal airports

By Eric Crampton 20/06/2013

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…

0 Responses to “Optimal airports”

  • Convince me that a country of 4 million should have had Invercargill, Queenstown, Christchurch, Wellington, Palmerston North, Hamilton and Auckland as International Airports. It was a joke. Japan with 125 million has 5. We with 4 million had 8. There is no way we can efficiently police that border. We can’t even keep antelope(?) legs (FFS!) out of waste palm oil trees that farmers insist on buying to boost their cow milk production. AND this from a foot and mouth infested country. Nuts.

    Is it not beyond our wit to have efficient connections to Chch and Auckland and be done with it. Chch has done the right thing and has both Int and Dom terminals under the one roof. Auckland could do the same. Then spend the 300 million “saved” towards the decent transport system to the airport.

    Then economists would not need to do the sums designed to get the “users” to pay. We all do anyway. I doubt there is an airport in NZ that has been developed without our taxes.

  • Airports seem less a biosecurity problem than the ports (I’m guessing), but agree that it’s exceptionally unlikely that a clean cost-benefit analysis would recommend extending the Wellington runway for $300m.

  • Rotorua International Airport too, I think.

    I doubt Hamilton will maintain an international service for much longer. Even the national services look dodgy as people choose to drive up the much improved SH1 to Auckland where there is better choice, flights are cheaper, there is no extra departure tax, and, believe it or not, parking is cheaper too. I certainly wouldn’t think forking out more income tax for Wellington Airport a worthwhile spend for me. I agree, leave it at Auckland and Christchurch in terms of international airports.