Technical Report 4 Sapere Research Group – Cost Benefit Analysis Report prepared for Wellington International Airport Limited Cost Benefit Analysis of the Proposed Runway Extension at Wellington International Airport Kieran Murray, John Wallace, Preston Davies 19 April 2016 About Sapere Research Group Limited Sapere Research Group is one of the largest expert services firms in Australasia and a leader in provision of independent economic, forensic accounting and public policy services. Sapere provides independent expert testimony, strategic advisory services, data analytics and other advice to Australasia’s private sector corporate clients, major law firms, government agencies, and regulatory bodies. Wellington Auckland Level 9, 1 Willeston St Level 8, 203 Queen St PO Box 587 PO Box 2475 Wellington 6140 Auckland 1140 Ph: +64 4 915 7590 Ph: +64 9 909 5810 Fax: +64 4 915 7596 Fax: +64 9 909 5828 Sydney Canberra Melbourne Level 14, 68 Pitt St Unit 3, 97 Northbourne Ave Level 2, 65 Southbank GPO Box 220 Turner ACT 2612 Boulevard NSW 2001 GPO Box 252 GPO Box 3179 Ph: +61 2 9234 0200 Canberra City, ACT 2601 Melbourne, VIC 3001 Fax: +61 2 9234 0201 Ph: +61 2 6267 2700 Ph: +61 3 9626 4333 Fax: +61 2 6267 2710 Fax: +61 3 9626 4231 For information on this report please contact: Name: Kieran Murray Telephone: +64 4 915 7592 Mobile: +64 21 245 1061 Email: [email protected] Page i Contents Executive summary ...................................................................................................... ix 1. Introduction ...................................................................................................... 1 1.1 Purpose and structure of this report ..................................................................... 1 1.2 Method ....................................................................................................................... 1 1.3 Key assumptions and inputs .................................................................................. 2 1.4 Revisions to the draft analysis ................................................................................ 3 1.4.1 Passenger and aircraft movement forecasts .......................................... 4 1.4.2 Value to New Zealand from additional tourist expenditure .............. 4 1.4.3 Value of travel time savings for existing users ...................................... 9 1.4.4 Negative effects of overseas expenditure by residents ...................... 10 1.4.5 Percentage of travellers flying direct .................................................... 11 2. Objectives of the project ................................................................................. 12 2.1 The main problem ................................................................................................. 12 2.2 Economic efficiency of air services to Wellington increased if constraint removed ................................................................................................ 12 2.3 Increasing production efficiency ......................................................................... 13 2.3.1 Short-haul loads ....................................................................................... 13 2.3.2 Long-haul loads ....................................................................................... 14 2.3.3 Reducing the cost of supplying airline services at Wellington Airport ....................................................................................................... 15 2.4 Increasing consumption efficiency ...................................................................... 17 2.4.1 Reducing the “generalised cost” of airline services to users ............ 17 2.4.2 Increasing efficient use of airline services at Wellington Airport ....................................................................................................... 18 2.5 Increasing dynamic efficiency .............................................................................. 18 2.6 External economic costs and benefits of an extended runway ...................... 18 2.7 Competition gains .................................................................................................. 19 2.7.1 Cost and time savings passed on to consumers ................................. 19 2.7.2 Potential for additional price reductions from increased competition .............................................................................................. 21 2.8 Improving distributional equity ........................................................................... 22 2.9 Achieving the desired outcomes of government .............................................. 23 2.9.1 Airport supports activity throughout central region .......................... 23 2.9.2 Wellington City Council’s long term strategic vision and plans ........................................................................................................... 24 2.9.3 NZ Government’s International Air Transport Policy ..................... 27 2.9.4 Supporting the Tourism 2025 targets .................................................. 29 2.9.5 Achieving national aims for international education ......................... 29 2.9.6 Meeting National Infrastructure Plan goals ........................................ 30 3. Forecast passenger traffic ............................................................................... 31 3.1 Forecasts prepared for this analysis .................................................................... 31 3.2 Market stimulation ................................................................................................. 32 Page iii 3.3 Base case option (“business as usual”) ............................................................... 33 3.4 Passenger forecasts if the runway is extended ................................................... 37 4. Alternative options considered ........................................................................ 44 4.1 Options previously considered ............................................................................ 44 4.2 Short list ................................................................................................................... 45 4.2.1 Option 2: Defer the runway extension ................................................ 45 4.2.2 Option 3: Promote Wellington Airport as a tourist and airfreight hub ............................................................................................ 46 5. Evaluation of the options ................................................................................ 48 5.1 Economic costs ...................................................................................................... 48 5.1.1 Incremental economic costs for airports ............................................. 49 5.1.2 Incremental economic costs for airlines in supplying the additional quantities of airline services under each option relative to the “base case” ...................................................................... 53 5.1.3 Incremental economic costs for users of airline services ................. 59 5.1.4 Economic costs for other sections of the community ...................... 62 5.2 Economic benefits ................................................................................................. 68 5.2.1 Incremental economic benefits for airports ........................................ 69 5.2.2 Incremental economic benefits for airlines ......................................... 72 5.2.3 Incremental economic benefits for users of airline services ............ 75 5.2.4 Incremental economic benefits for other sections of the community ................................................................................................ 86 5.3 Net economic benefits .......................................................................................... 90 5.4 Possible regional effects ........................................................................................ 93 5.5 Comparison with other CBA studies .................................................................. 94 6. Preferred option .............................................................................................. 96 6.1 Selection of the preferred option ........................................................................ 96 6.2 Sensitivity analysis .................................................................................................. 96 7. Implementation of the preferred option ........................................................ 100 7.1 Funding the preferred option ............................................................................. 100 7.2 Alternative approaches to funding .................................................................... 100 7.2.1 Assume Government revenue funding .............................................. 100 7.2.2 Assume an increase in user charges .................................................... 101 7.2.3 Assume a combination of government revenue and increased user charges ............................................................................................ 102 7.3 Incentives to airlines ............................................................................................ 103 Appendices Appendix 1 : Background and context........................................................................................... 104 Appendix 2 : Information sources .................................................................................................