So what on earth can we do about Heathrow?

The lines of fuming passengers at Heathrow Terminal 5 yesterday will have been as dispiriting to the airport's owner, BAA, as they were for the travellers themselves. Yet even when the baggage delays are fixed, T5 will not solve Heathrow's problems. For while Heathrow is the world's busiest international airport, the hub that connects the City of London with the rest of the world, it is also hated by travellers. On almost every measure of service quality, London's main airport is the pits. It suffers the worst flight delays, loses the most bags and generally subjects passengers to the greatest hassle with its endless security queues, rude staff and shoddy facilities. It has become a national embarrassment and its owner an object of loathing.

Above all, neither T5 nor the plans to rebuild most of the other terminals are the answer to Heathrow's biggest problem: a chronic lack of runway space. While other hub airports in western Europe have the luxury of four runways or more, Heathrow has only two, which operate within a whisker of full capacity. Heathrow can neither grow to meet demand nor deal with minor problems without them turning into very big ones.

The solution favoured by the Government and the aviation industry is a third runway. Only by allowing Heathrow to expand, they say, can Britain have the globally competitive hub airport that the economy requires. A final decision has been promised before the summer. It looks like being the wrong one.

The worst reason for not expanding Heathrow is concern about climate change. The inconvenient truth is that if Heathrow were to disappear most of the airline traffic would just go elsewhere. But there are two overwhelming reasons for not going ahead with a bigger Heathrow, both of which stem from the airport's location, hemmed in by housing and major roads.

The first is that it is doubtful whether any major world airport dumps its negative externalities on more people than does Heathrow. Thanks to prevailing westerly winds and the east/west axis of its two runways, about two million people in west London endure noise blight, local air pollution and the small but ever-present risk of a catastrophic accident.

By relaxing operating restrictions on Heathrow's existing runways and adding the third runway, BAA calculates that it can raise the number of flight movements from today's limit of 480,000 a year to 720,000. With the help of forecasts provided by BAA, the Government seems to have convinced itself that a 50 per cent increase in flights is environmentally acceptable. That is a conclusion disputed by 15 councils, all three serious mayoral candidates and the Government's own watchdog, the Environment Agency.

The second reason the envisaged expansion of Heathrow is misguided is that it can never be what its promoters say Britain needs: a globally competitive hub airport. Passenger traffic forecasts suggest that within a very few years of a third runway opening in 2020, Heathrow will be full again. BAA has talked ominously about a fourth runway in due course but not even the most ardent Heathrow expanders can say where it would go, let alone the infrastructure-to provide efficient ground access. In capacity terms, Heathrow will continue to be hopelessly out-gunned by the likes of Paris Charles de Gaulle, Amsterdam Schiphol and Frankfurt.

Is there a better alternative? Almost certainly. Nearly every other developed country faced with a Heathrow-type problem has known that when you are in a hole, stop digging. Time after time, in country after country, hub airports have been rebuilt further from city centres where they can grow while doing the least environmental damage.

Briefly, in the Seventies, it was British government policy to build a big airport in the Thames Estuary, east of London. A few years ago, a similar but updated proposal was rejected by the Government - strongly influenced by BAA and British Airways, whose agenda it didn't suit - as being too costly. There was no serious examination of the potential benefits of the proposal.

A more modest, market-led solution to Heathrow's overcrowding would be to allow the price for using the airport to reflect the value and scarcity of its capacity, while at the same time promoting competition with London's other airports. The Civil Aviation Authority has just granted BAA the right to raise landing charges by inflation plus 7.5 per cent each year for the next five years to help fund new terminals. Predictably, the same airlines that complain about the run-down facilities at the airport are furious.

They would be even crosser if Heathrow were allowed to charge market clearing prices. However, if such a change were to happen over time and was accompanied by a break-up of BAA's monopoly, something another regulator, the Competition Commission, is actively considering, the need to expand Heathrow would be much less pressing.

The new owner of Gatwick, which is much better placed to grow than Heathrow, would be strongly incentivised to build a second runway after 2019 (when an old planning agreement expires) and to develop the airport as an alternative hub by offering airlines keener prices and better service. Gatwick already has good surface transport links to London and can expand with far less environmental damage than Heathrow.

Higher charges at Heathrow would push transit and holiday passengers to other airports. Transit passengers make up around 35 per cent of the total at Heathrow today - because it suits the business models of the airlines ( especially BA) who want to feed passengers on to lucrative long-haul routes.

It also suits BAA, encouraged by the current regulatory framework to stuff as many passengers into the airport as possible rather than care about service quality. The aviation industry says the loss of some of these passengers would mean a contraction of Heathrow's route network. But in reality, transfer passengers bring very little wider economic benefit. And Heathrow would still offer a wide number of routes.

Crucially, for the business users who generate most economic value, Heathrow would become a more pleasant, less congested airport with fewer delays. Achieving that goal - including fixing this week's problems at T5, along with the other problems of poor service - should be the priority before we even think of major new expansion. The eventual need for a brand-new airport, perhaps in the second half of the century, would not have gone away. But at least the Government would have escaped from the hole it seems so intent on digging for itself.

Matthew Symonds is industry editor of The Economist. A special briefing on Heathrow appears in the current issue of the magazine.