The business case for a longer runway ‘Open skies’ air links policy is of little value without an extension

1. Strategic air links is an issue flagged repeatedly as a key priority for Guernsey’s future economic and social wellbeing. Three critical decisions are recognised by astute observers as being linked: quasi ‘open skies’ policy; an extended runway; and Aurigny’s proposed £60m. ATR fleet replacement. The website Guernsey Matters recently published an interesting summary of the linkages. Yet to date, no comprehensive business case addressing these three linked issues has been published.

2. During a July 2018 Sunday phone-in, Charles Parkinson (president of the Committee for Economic Development), indicated that PwC would be reporting in August on matters relating to an extension of the runway, presumably by way of a business case.

3. This was reassuring, because only a financially competent and independent organisation such as PwC would have the stature to prepare and report such a business case without falling prey to political pressures (one way or the other) before publication.

4. The business case and rationale for a runway extension at Wellington (New Zealand) is illustrative of the issues and considerations involved for Guernsey: the cost of infrastructure investment; the enabling opportunities for types (and cost) of air travel/connections; direct airport revenue; the more substantial impact on businesses directly involved; and wider ‘multiplier’ effects on the wider economy. Futures are never certain, so an appropriate degree of probability weightings are also relevant.

5. Who is actually producing such a business case in Guernsey, if not PwC?

6. There is scope for numerous faults or mis-statements in such a business case, if not produced by a competent, independent organisation.

7. Runway extension cost. A 1,750m runway is deemed adequate by professional pilots for the aircraft types (with passengers, luggage and fuel reserves) to be operated by BA and low-cost carriers in future. That would require a revision to the airport perimeter with adequate safety run-off (Resa – ‘runway end safety area’), as already marked in the Island Development Plan. Cost ranges of £30m. to £40m. have been suggested. If such cost estimates are broadly accurate, the long-term financing costs at the Guernsey bond borrowing rate of approximately 3.45% would amount to between £1m. and £1.4m. per annum, which is less than half the current annual bus subsidy and thus equally affordable. And if the £330m. bond borrowing was not originally intended for major infrastructure projects with economic justification, just what was its purpose?

8. A 2,000m runway has been suggested by some. Perhaps this is an avoidable over-statement which could wrongly skew the cost-benefit analysis in favour of ‘doing nothing’? Clearly, an assessment of actual required operational length must be accurate.

9. Just building a longer runway does not guarantee more people will choose to come to Guernsey.

There are few guarantees in life. But one is that a failure to build a longer runway will continue to guarantee that BA and low-cost carriers cannot come to Guernsey and that air fares will remain comparatively high (and continue to depress volumes in the business and visitor economy). It is also clear that private investment in upgrading the local hotel stock and facilities will remain constrained in the absence of prospects for more visitors prompted by lower air fares. Conversely, a longer runway could also facilitate better landing aids in low-visibility conditions for all aeroplanes.

10. Two key industries in Guernsey (financial services and tourism) have been in continuing decline, employment-wise, for the past five-plus years. Low unemployment figures mask such declines, because people just leave the island rather than staying and being unemployed. These employment declines are very important to Guernsey, because Guernsey relies abnormally heavily (73%) on employment taxes for government tax revenue, and the top 10% of taxpayers (many in financial services-related businesses) pay 40% of the total tax take. Thus, a failure to reverse a decline in these two industries will have dire future consequences for funding Guernsey’s future education, health and social policies.

11. There is mounting evidence of financial businesses relocating or being deterred from coming to Guernsey due to relatively difficult or costly air links. Likewise visitors. Comparisons with Jersey are relevant. The difference in population is not the key reason, as some would lazily claim. Likewise, it is not a simple low price and low frequency trade-off, as some also claim. This was made very clear by Jersey’s head of Ports and Airport in Business Brief in August 2018. He emphasised that over 60% of air travellers to Jersey are visitors and that, without such volumes stimulated by low cost carriers, Jersey residents would have higher ticket costs and lower flight frequency and less choice of destinations. ‘If it were just residents, six flights a day to Gatwick and four to Southampton would suffice,’ he explained. Various Guernsey businesses now meet their London/UK-based clients in Jersey, due to easier air links. The logical end result of such a prolonged shift is that Guernsey effectively becomes a ‘dormitory parish’ of Jersey in the medium/long term, with no sustainable economy or independent political system of its own. For old retiring types like me, that may not be a major problem, but it offers a bleaker future to our children and the next generation wishing to stay living here.

12. There are various ways to arrive at the benefits to the economy of investment in infrastructure and air links. Most involve an assessment of impact on GDP (sometimes by sector), with an allowance for the ‘economic multiplier’ impact as the initial investment generates income which further stimulates other sectors of the economy in phases. The Wellington runway extension report provides one example. PwC economists could (should) provide a comparable independent analysis for Guernsey.

13. This issue is far too important to Guernsey’s longer term economic wellbeing to risk allowing a short-term focused political stitch-up to drive the process in an opaque manner.

14. Guernsey’s GDP in 2016 (latest available) was £2.86bn. The financial and related business services sector of the economy has historically been approximately 40% of the economy. The visitor and related services economy has shrunk to less than 10% of the economy.

15. Investment in ‘net new enabling infrastructure’ has been paltry in Guernsey in the eight years to 2018. No investment, no return.

16. Investment in a runway extension is a long-term enabling investment and related benefits should be assessed over an equally long term, say 20 years. Admittedly, long-term estimates will of course be subject to significant forecasting errors. But, the converse is more damning

– a short-term mindset which excludes anything but short-term forecasts simply guarantees the ‘do nothing’ conclusion. It guarantees a bleak future of no investment and no return.

17. Some sense of scale is warranted over 20 years and the following points may start to provide it. However, a proper full business case linking all factors needs to be produced.

18. A 1% rise or fall in GDP, enabled or disabled by underlying infrastructure, equates to roughly £30m. per annum. What might the impact be, with the ‘multiplier effect’ with or without complementary investments (in financial services innovation or hotels/visitor attractions)?

19. An open skies air links policy is of marginal value without a runway extension, because BA and the main low-cost carriers cannot fly to Guernsey efficiently. Subsidising a sub-scale airline by £3m.-£5m. p.a. to fly routes which others could fly at far lower cost is questionable.

Spending £60m. on an Aurigny fleet upgrade to ATR600s when they will primarily be used on secondary (non-lifeline) routes subject to ‘open skies’ competition is likewise questionable. However, Aurigny certainly can have a key future role for Guernsey.

20. As Chris Sherwell wrote in Guernsey Matters in July 2018, and as others have acknowledged, the above major policy and spending options warrant a comprehensive, linked business case. Is PwC producing it? Is business being consulted? How open to scrutiny will the business case be?

The States of Guernsey has done well collectively in recent years to achieve a balanced budget for annual revenue/spending, unlike most jurisdictions.

In doing so, has it been a little slow to invest and manage its capital assets for growth and economic development? If a proper business case supports it, might a longer airport runway provide a useful start to securing the island’s economic future?

JOHN HOLLIS,

1, Queens Road,

St Peter Port, GY1 1PT.

Editor’s note: Mr Hollis is a voting non-States member of the States’ Trading Supervisory Board