Air Traveller's Subsidy | Final EIS Conclusion | External Infrastructure | Terminal Value Rabbit | Errata in EIS Cost-Benefit | Consumer Surplus | User Pays Levy | Funding SSA from KSA ? | No kSA Runways but ... | Is SSA Viable ? | Where Airport Users Live | Taxpayers Slugged ? | EIS Table J1.10 - Summary of Indicative Costs v Benefits

When tourism and business chiefs clamour for a Second Airport (whether it be at Badgery's Creek, KSA, Bankstown or anywhere else), they're talking about spending someone else's money - YOURS!!!

The summary of the Environmental Impact Studies shows the Second Airport costs will be huge. Air travellers will be in for a rude shock if they have to pay for this. Will the shock be so big a new airport won't be needed ? Wouldn't that be a victory for the environment !

The Draft EIS contained no detail of the airport economics that can answer these questions. The independent auditor was very critical of this - stating that the Draft EIS's analysis of the airport economics is not adequate for a project of this scale. There was no cost benefit analysis, and no account of how the funds for the project will be raised and recovered.

Belatedly, the Final Supplement for the Second Sydney Airport EIS addressed the issue of providing a Cost Benefit Analysis.

When you carefully analyse the economics as revealed in the Final EIS, it's clear that taxpayers are being asked to subsidise wealthy airport users for more than $80 per return air ticket.

It also becomes equally clear that a second airport will be built at KSA - at least in as much as KSA's capacity is expected to double in the next 20 years - even if a so-called Second Airport proceeds elsewhere.

The cost benefit analysis is summarised in the table below, which is based primarily on Table J1.10 of the Final EIS with additional information from other tables, and corrections and extensions discussed here.The analysis here also attempts to fill the gap in describing how the airport funds might be raised and recovered.

This page fills the gaps in the Final EIS analysis, and exposes errors and flaws in the second airport economics (see Sydney Airport KSA - What KSA Costs the Public for a treatment of KSA economics).

The Final EIS Conclusion

The Final EIS analysis concludes that the Second Airport has a Net Present Value (NPV) of $4.2 billion 1996 Australian dollars, a Benefit Cost Ratio (BCR) of 2.17 and an Internal Rate of Return (IRR) of 12.5%. This makes the airport seem viable (although an IRR of 12.5% might be too low to entice private sector investors), and the high BCR will help it rank well against other uses of public money (like schools and hospitals).

If you take a critical look at the data, however, the story is not so simple.

External Infrastructure

From the earliest days of the EIS process, the DOT appeared reluctant to identify the true project costs. The NSW government, which must pick up the tab for most of the off-site infrastructure needed by the airport, was naturally concerned. It was critical of this after the Draft EIS was released, and again after release of the Final EIS.

According to analysis conducted by NSW State Rail and Roads and Traffic Authority, the Final EIS understates the cost of external infrastructure by more than $3 billion dollars. That doesn't leave much change out of the Final EIS's claimed NPV of $4.2 billion. And even that "change" evaporates when you look at where it's come from:

Terminal Value Rabbit

The analysis spans a 25 year operational period, at the end of which the economist have assigned a net terminal value of $37.8 billion dollars to the Second Sydney Airport (SSA). This is an important figure - when discounted to 1996 dollars, it accounts for $4.1 billion of the claimed $4.2 billion net present value of the project (97 % of the value). Yet there is no explanation for how this figure was arrived at - and no sensitivity analysis for it.

The terminal value is like the end-of-lease value of a motor vehicle, except with less corruption due to taxation lurks. It should represent the sale price you'd expect to get for a 20 year-old 20 million passenger per year airport (if you had it built and available for sale today). KSA fits this description remarkably well. But would it fetch $4.1 billion ? Would the much less desirable Badgery's Creek come even close to this ?

The 1999 Balance Sheet for the Sydney Airports Corporation Limited (SACL), as submitted to the ACCC, reports that the total value of assets at KSA is $2.9 billion dollars. Melbourne airport, with about 60% of Sydney's passengers, fetched only $1.3 billion in its sale process. Either

• the Badgery's Creek terminal value is grossly overstated, or
• the Melbourne sale and SACL valuation of assets is grossly understated.

Either way, something is rotten in the state of Denmark !

In view of the uncertainties with deciding the terminal value, it's reasonable to question what answers come up if the terminal value is reduced or eliminated.

While questioning this, there are some other sloppy errors in the analysis that need attention before you can assess the credibility of the airport economics

Errata in Cost-Benefit Analysis

Table J1.10 of the EIS contains a number of mistakes.

1. It claims to be worked out for a 7% discount rate. But a close look at the discount rate column (reproduced in Column G below), you'll find the rate is approximately 6.5 %. It varies slightly, year by year, and there are some years where a clearly mistaken value has been typed into the table. (These have been highlighted by grayed backgrounds, and italicised text in the Table below. Values derived from them has also been italicised.).

2. It is claimed that all amounts are in 1996 dollars, but it is clear from the discount factors that data is being discounted back to 1998 only.

3. The Effective Demand data is based on the Draft EIS forecast demand. The Final EIS revises the Draft EIS forecasts downwards (to better match actual 1997/98 data). But the economic analysis does not use these lower figures. The effect of this will be to overstate the benefits.

Columns J, K and L have been added to the table below to correct the first two errors.

Are you getting an impression that the EIS economic analysis was cobbled together hastily without much quality control ? Strangely, all the errors favour the pro-airport case ! Such a bias might make you wary that the economists were in fact biased.

The Effective Demand error has not been corrected in the analysis here - there are bigger problems with the Economic Analysis's approach than just the lousy demand data.

Consumer Surplus

The vast majority of the airport benefits shown in column D (from Table J1-10) are derived from a technical economic argument about Consumer Surplus.

The Consumer Surplus argument appeals to Demand and Supply curves, and demand elasticity for air travel. Techo stuff that would bring joy to the heart of a mathematical economist.

The argument asserts that without a SSA, increases in demand would result in higher prices. Demand elasticity is the technical term for how much the demand falls as price increases (given no expansion in capacity). A SSA would shift the demand curve, allowing a lower price to be achieved. Airport consumers benefit by not having to pay the higher demand-constrained price if the SSA is built

The difficulty with this argument is working out what the demand elasticity is for travellers. As reported in the analysis, it varies quite widely in different studies. The analysis handled this by adopting an elasticity of 0.8, and reporting sensitivity of the results to two other values: -0.4 and -1.2. Does this elasticity of 0.8 make sense ? Let's try a spot check. As revealed on page J1-40, it shows that for an Effective Demand of 9.68 million passengers per year, the consumer surplus is $106.31 per passenger movement.

There's a few ways to interpret this:

First, note that at KSA, one-third of the passenger movements are passengers in transit. To convert passenger movement figures into return air fare figures, you need to divide by 2/3 then double - or equivalently multiply by 3.

1. If the SSA is built, the consumer is better off by $318 for a return air-fare. Given the average air-fare is $979 (with unconstrained capacity), that's a BIG saving. You might reasonably ask, why should we spend billions of taxpayer's money to make such a present to wealthy business and holiday travellers.

2. Another way to look at it is that the consumer should be able (indifferent) to paying up to $318 extra per return ticket to get the airport built. The consumer can pay $318 more !

3. Yet another way: if an extra $318 tax or charge was imposed on each return air fare, demand would fall by approximately 9.68 million passenger movements per annum. If flying were more expensive, there'd be no need for a second airport.

You could argue that such a fare increase could do a lot more damage to demand (i.e elasticity is much greater than 0.8). The airline industry could be relied on to squeal about that the very millisecond a government started suggesting such a levy. Or, equally, the elasticity might not be this high - something the airlines would be loathe to admit.

Is there a way to analyse things which avoids this argument, or at least puts it in terms laymen can better appreciate ?

User Pays Levy

One way to avoid the issue is to ask a different question. The key is to think user-pays, as the second interpretation of the demand elasticity suggests. Ask the question: how much would each traveller have to pay to cover the costs of building, operating and maintaining the airport (without consuming the present value of the land). Let's call this the Passenger Movement Levy(PM Levy).

The discounted annual airport income is then found by taking the Effective Demand (annual passenger movements), multiplying by the PM Levy ($), then discounting to 1996 dollars (the base year for the economic analysis). We aim to strike a PM Levy that results in a Net Present Value of Zero.

SSA Can't Self-Fund

Column M of the table shows the PM Levy for a 7% discount rate, with the Revised Effective Demand being used (i.e. based on revised forecast in Final EIS). The levy is $71 (or approximately $210 per return ticket) -

Column Q shows that for a 10% discount rate, the levy must be raised to $99 - it's quite sensitive to the assumed discount rate.

These levies are on top of the $16.27 per movement operating revenue accounted for in the EIS analysis (which may show up mainly through airline landing charges); the levies are over 4 and 6 times the present charges.

It should be clear that the demand for the SSA would dry up overnight if this levy were imposed. And especially if it did not apply at KSA. The demand elasticity figure of 0.8 suggests demand would fall by 6.5 (and 9.1 million) million passengers per year. But that would mean the levy would have to be increased, further, leading to even less demand etc.,. etc.,. In short, demand would collapse to zero, and prices at KSA would rise to match consumers willingness to pay for the scarce airport resources.

The reasonable conclusion from this is that the SSA can not fund its own operation. That's probably why KSA hasn't been sold - you've got to treat the two airports as a package, at least when selling them.

Funding SSA from KSA

If you were interested in being accurate about it, you should also treat SSA and KSA as a package in the economic analysis. That the EIS does not is a MAJOR ERROR in the EIS.

The first step to treating KSA and SSA as a package is to test whether SSA might be viable with a levy imposed on both KSA and SSA passengers.

To do this, you need to know the total costs of building KSA up from the current level of 22 million passenger movements per year to 41 million passsenger movements per year in 2032 (i.e. double). This growth at KSA is more than the growth at SSA (from 0 to 18 million). But since the EIS does not reveal this data directly, we have to make an estimate.

Remarkably, the EIS believes KSA's expansion can be achieved by continuing the present annual trend of 0.8 % growth rate in aircraft utilization (average passengers per aircraft movement). No change to the current runway configuration and 80 movements per hour cap ! Equally remarkable, this utilization improvement appears possible only at KSA, and is nowhere else brought to account in the planning of SSA.

No KSA Runways but...

Even if the growth at KSA can occur with no more aircraft movements, it's very questionable that no growth in terminal facilities would be needed - or indeed whether any of KSA's present external infrastruture could cope with double the number of passengers. It's obvious that something would have to be built for this.

It could be almost as expensive as building SSA, although it ought to be less due to the saving on runway costs. Let's make an under-estimate, and say it will cost at least a third of the SSA costs - and use data for construction of one of the SSA stages for KSA - aiming for completion in 2010 (see Column E2 in table). For the operating costs, use the data for year 2032 at SSA to get an operating cost per passenger movement, and assume it can be multiplied by KSA's annual passenger movement figure to give it's operating cost - see column E1 of the table below.

To be really accurate about this, the analysis ought to include a cost of acquiring KSA at its present scale of operations (e.g via proper valuation of the present scale of construction at KSA). At best, we could guess that KSA is worth more than the $4.1 billion stated terminal value of the SSA - but let's be pro-airport, and neglect this too (essentially, free-loading on what taxpayer's paid in having built KSA - a great way to earn a living if you can steer it your way).

Next, include a proper assessemnt of the external infrastructure, using the NSW government's submissions to the DOT (see Column E3).

Lastly, let's make sure that any demand figures used in the calculation include reductions for the levy effect, and the unwillingness of travellers to move from KSA to Badgery's Creek. Columns U to Y in the table show how demand is adjusted to account for the deterring effect of the levy, as well as the deterring effect of Badgery Creek's remoteness (the EIS uses a model that is approximately equal to assuming 19% of passenger movements is lost because of this). A demand elasticity of 0.8 has been used to calculate the deterring effect of the levy - and this implies only 2.5 (or 2.6) million passenger movements would be lost.

With all these corrections, columns J1 to M1 show the result for a 7% discount rate (and N1 to Q1 for a 10% discount rate). These show a return air ticket levy of $81 (or $84). A levy like this is 67% (or 73%) higher than current charges, and will probably undermine the regional airline demand very severely.

Is SSA Viable - What do you think ?

Do you think a Second Airport would be viable if such a levy was imposed ? If so, why on earth are taxpayers being expected to pay for the SSA ? And if so, would you still consider it viable after taking into account the environmental damage caused by the airport ? Or after considering the benefits of alternative investments of taxpayer funds ?

If the SSA is economically viable, why are we now hearing about proposals to extend KSA's life and transfer regionals to Bankstown - where environmental damage will be thousands of times greater ? Is that only about trying to get the second airport closer to the eastern suburbs ?

Have some savvy country people taken fright at the risks of user-pays being applied at KSA and SSA, and taken up free-loading on Bankstown as their solution ? The Western Research Institute's report produced at the behest of the Tourism Task Force is very careful to avoid user-pays analysis - even of their modest proposal to spend just $500 million on their proposed Bankstown upgrade. It doesn't take long to figure out that they too are asking for massive taxpayer subsidies of this move to Bankstown.

Where Airport Users Live

As the EIS Economic Analysis points out, airport users come from the wealthy end of town: "the location of SSA is geographically distant from those parts of Sydney where most demand for air transport is generated (mainly from residents of th eastern and northern suburbs)" (see Page J1-8 of Final EIS).

Taxpayers Slugged ?

At this time, the SSA proposal does not include a user-pays levy that accounts for all construction and operational costs of the airport. Taxpayers are being effectively asked to subsidise each airport user for $81 or more.

How much will this cost each taxpayer ? Tax is paid mainly by full-time employees. Column AA of the table shows the expected growth in full-time employees (assuming the same 1.21 % growth rate as occurred over 1985-1995). Column AB shows how much funding would have to be provided each year by taxpayers, assuming a fixed levy amount per employee (simplistic, but you should get the idea of how the average taxpayer would be hit). Each full-time worker would be up for an average of $130 per year (every year!) in order to subsidise airport users.

Is there no end to the greed and free handouts expected by the aviation industry and its users ?

Aren't there more deserving recipients of taxpayer's largesse than wealthy airport users ? Think about this next time you visit a hospital and see critically ill patients queueing on trolleys in emergency ward corridors.

Tell the tourism and aviation folks to NAFF-OFFand spend their own money on the airport, if it's such a great idea.