Flying blind

So the long-feared announcement has finally been made, and the British government has approved the construction of a third runway at London’s Heathrow airport. Environmentalists worldwide, and the millions living under the flightpath, have their heads in their hands as the integrity of climate policy is cut to pieces.

But all is not as it seems. There are many stages yet before the houses are demolished, the concrete poured and the new flights thunder over. Spare a thought for the executives of BAA, and their Spanish masters Ferrovial, who have to decide whether or not the £13bn or so the new runway will cost will eventually translate into solid long term profits and big bonuses, or whether the old adage might just be true- that if something can’t go on forever, it won’t.

Consider this: in May 2008 the economy had yet to feel the real chill winds of recession, and airline traffic was booming. But the frenetic global activity from Heathrow to Hyderabad was sucking up every drop of oil that could be produced, driving its price to $147 a barrel. At this level the airlines could not make an operating profit, however many people they carried. As BA’s Chief Financial Officer stated: “Long run fuel prices at those sorts of levels would result in pretty fundamental changes in our industry”. This could mean capacity cuts, ticket price increases, rationalisation – all due to excessive growth.

In other words, this global boom in air travel was not just environmentally unsustainable, it was – and is – economically unsustainable. We don’t have enough oil to fuel it, so it chokes on its own success. Ironically, the recent downturn may have saved large portions of the industry, because falling demand slashed the oil price as well as air traffic. So although many airlines were forced to cut capacity, they now make a better profit on the reduced operations, and passenger numbers at BAA’s airports fell last year.

The implications for Heathrow expansion are clear. Only a resumption of global airline growth can give BAA a return on the huge cost of the new runway. But those same conditions are most likely to drive oil demand – and its price – right back to the peaks we saw last year and beyond, forcing up ticket prices and so constraining air traffic growth. There is no prospect of new cheap oil supplies – as the boss of Shell UK has warned: “The era of easy oil is over”. BAA may just have been handed a poisoned chalice by the Brown government, but it doesn’t have to drink from it.