Wednesday, July 20, 2011


Posted by- Neelam Mathews
July 20, 2011

Hong Kong Needs a New Runway writes
Andrew Herdman, Director General,Association of Asia Pacific Airlines in response to a column, "Runway Inflation in Hong Kong," Business Asia, July 14) that questions the need for Hong Kong to invest in expanding its aviation infrastructure.  

Perhaps India will soon need a similar reasoning given its fast growing air traffic.

"You do not need a crystal ball to believe that demand for air travel over the next 20 years will almost certainly maintain the pattern of several decades of past growth, in line with rising incomes, with global air passenger numbers doubling roughly every 15 years. Aviation is a capital-intensive industry, both in terms of investments in modern jet aircraft as well as the supporting infrastructure including airports and air navigation services. The long lead times involved require proper planning and coordination among the various stakeholders, including governments.

Past experience around the world throws up many examples where a failure to plan ahead and build the necessary infrastructure leads to congestion, delays and a degraded service to the travelling public, and losses to the wider economy which depends on efficient air travel and air cargo services. Modern airports, like modern jets, don't come cheap, but pay for themselves many times over in the economic and social benefits accruing to the wider economy. Unlike some other modes of transport, aviation pays in full for its own infrastructure through user charges, fully reflected in the fares paid by the travelling public.

It is also nonsense to suggest that airports cannot plan their future capacity expansion because of uncertainties about future demand, the prices they will be able to charge for their services, or ignorance of their cost of capital. Airports are no different in this respect than any other business. What does cause them some difficulty is that additional runway or indeed terminal capacity must be built in discrete lumps, rather than being added incrementally, and involves lengthy planning approvals processes.

As for the ridiculous suggestion that airports should auction take-off and landing slots to the highest bidders, just remember the old joke, that an economist is someone who, when he finds something that works in practice, tries to make it work in theory. Auctioning is one way of rationing scarce supply using the price mechanism, but does absolutely nothing to address the supply side of the equation. Indeed, where there is a natural monopoly, as is the case with major infrastructure service providers such as airports, but certainly not airlines, auctioning would simply extract rents from the public users of the service and, worse, establish a strong incentive not to address any underlying shortage of supply. Given the perverse incentives to artificially limit capacity, the cure would be worse than the disease.

Aviation has undoubtedly played a key role in establishing Hong Kong as a major tourism hub, and a leading international center for business and professional services, trading and transport logistics. The timely development and construction of a third runway at HKIA is essential if Hong Kong is going to maintain its competitive edge and take further advantage of new growth opportunities, to the overall benefit of the entire community."

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