The cost of expanding runway capacity at Gatwick could put its business model based around low cost airline traffic at risk, according to research by the Independent Transport Commission (ITC). 

The scale of investment required to expand Gatwick would require the airport’s debt levels to rise ten-fold and see user charges double, the ITC said, adding that while maintaining the business under these conditions is achievable, it would bring significant risk and market uncertainty compared to investment at Heathrow.

“The Commission analysis shows charges at an expanded Gatwick would be close to those at Heathrow and significantly higher than those at Stansted and Luton, both of which compete with Gatwick for short-haul low-cost passenger.” ITC

“The estimates of the Commission are that user charges at Gatwick may have to double to cover the cost of expansion and at Heathrow increase by 50% from current levels,” says the report. “In the case of Gatwick this would mean taking substantial multipliers of its current debt levels, requiring an additional £14bn of debt compared to £1.5bn today.”

The ITC said that while there is evidence that borrowing on this scale can be achieved, independent commentators have highlighted that the level of financing required is significantly more than the airport has today. 

“This brings market uncertainty,” the report concluded. “The Commission analysis shows charges at an expanded Gatwick would be close to those at Heathrow and significantly higher than those at Stansted and Luton, both of which compete with Gatwick for short-haul low-cost passenger.”

Low cost airlines represent a high proportion of customers at Gatwick. Therefore, explained the report, higher airport charges would affect these more than the network airlines at Heathrow, since charges represent a larger proportion of overall costs. 

It also pointed out that as low cost airline passenger are also more price-sensitive, these airlines would have more alternative options such as Stansted should the final charges be judged too high. 

It added that if these risks were to materialise on a significant scale the commercial viability of the investment at Gatwick could become high risk. 

The ITC’s latest report "Delivering improved airport capacity: The cost and impact of the Airports Commission’s shortlisted options" is produced by experts Peter Hind and RDC Aviation and is intended to add to the debate as the Davies Airports Commission deliberates the three options for expanding airport capacity at Heathrow and Gatwick.

"A sensible balance needs to be struck between the legitimate concerns of those near any airport and the wider strategic needs of London and the UK." Dr Stephen Hickey, chairman of the aviation working group, ITC

Based on the Airports Commission’s estimates, the ITC said that all the short-listed schemes would all require substantial new capital investment and lead to significantly higher charges – although it accepts that the individual scheme promoters have disputed these figure.  

While the future will continue to see a mix between hub-and-spoke, and lower cost point-to-point,  strengthened hub is most likely to encourage new direct routes between the UK and global emerging market destinations. 

However, the report also concluded that if Heathrow were to be expanded, the case for Gatwick’s prices remaining subject to regulation would be weak. 

At Heathrow, the ITC concluded that the challenge is coping with the scale of the investment required and thus managing the risk of collecting the high charges that will be necessarily passed to airlines compared with other European hubs.

"The report highlights the major issues that the Airports Commission needs to address to reach robust conclusions. Costs, airport charges, commercial viability and consequential return on investment, will ultimately determine which options are more or less viable and deliverable," said Dr Stephen Hickey, chairman of the aviation working group, Independent Transport Commission. 

He added: "A sensible balance needs to be struck between the legitimate concerns of those near any airport and the wider strategic needs of London and the UK. I hope this report will be welcomed by the Airports Commission and will add further academic evidence to Sir Howard Davies and his team's deliberations.”