Australia's government will proceed with building the proposed Western Sydney airport after Sydney Airport Corporation chose to walk away from the project.

The airport operator received a notice of intention (NOI) from the government in December, and says that following recent market engagement and feedback from investors, it found that the terms put forward in that notice "do not meet its investment criteria."

"Despite the opportunities that [Western Sydney airport] will present, the risks associated with the development and operation of WSA are considerable and endure for many decades without commensurate returns for our investors," says chief executive Kerrie Mather.

The NOI spelled out that the airport will be operational by 2026, initially with one 3,700m runway and a terminal capable of handling 10 million passengers per year. If it had accepted the NOI's terms, Sydney airport would have been forced to finance the development on its own.

Sydney airport was granted a right of first refusal to build and operate any new airport in the Sydney region as part of its privatisation in 2002.

In a statement, prime minister Malcolm Turnbull confirmed that Canberra will build the airport, with details to be announced in the Budget on 9 May.

"The Government has worked carefully to meet our obligations and we have been planning for either contingency – acceptance or rejection by Sydney Airport Group," he says. "We are well positioned to move forward on terms that are consistent with the terms of the Notice of Intention."

It is expected that a new statutory corporation will be established to oversee the development of Western Sydney.

The new airport is seen as essential to relieve looming congestion at Sydney's Kingsford Smith International airport. A previous government study has forecast that all slots at the existing airport will be fully utilised by 2027.

Source: Cirium Dashboard