FT’s Jonathan Ford on massive doubts over Heathrow’s ability to fund its runway – without huge subsidy from taxpayers
Jonathan Ford, the City Editor of the Financial Times (who knows a thing or two about finance) on the Heathrow runway scheme. It would cost at least £14 billion (probably more with inevitable over-spends), and as Heathrow is already the most expensive airport in Europe, its ability to claw back money is limited – anyway, it cannot get airlines and passengers to pay until the runway is built and operating. Despite sales of some of its airports, totalling more than £4bn, its debt was still £13.4 billion in 2017. And “Heathrow’s 2017 accounts record a dividend of £847m for shareholders last year on after-tax profits of just £516m, implying that dividends were partially funded by taking on yet more corporate debt.” Shareholders are not going to be happy to receive almost no dividend for several years. “Heathrow might try to ease the burden by discreetly pressing for public subsidy, figuring that once the state is committed to the 3rd runway it will not want to see the project come off the rails. The government should stand firm. Its decision to pick the most expensive of three runway options on the table was always predicated on the idea that all could be financed without state support.”
Hole at the heart of Heathrow’s third runway
After a decade-long debate, money remains an unsettled question
By Jonathan Ford (Financial Times)
JUNE 10, 2018
Can Heathrow afford its third runway? It might seem an odd question, just as parliament is set to vote on the London airport’s much disputed expansion. It often feels as if every angle, from aircraft noise to the nesting habits of the local population of crested newts, has been thoroughly picked over in the decade-long debate.
Money, however, remains an unsettled question. Building the runway is hardly cheap: it will chew through at least £14bn at today’s values, according to plans the government is endorsing.
And that is mainly for the infrastructure that goes within the airport fence. There could also be a few billions more of “surface access costs”.
In theory, coming up with the cash should not be a problem. Like some one-armed bandit set always to come up with a jackpot-striking three lemons, the regulatory system exists to give investors a set return that should allow them to recover all qualifying capital costs, however massive.
But in practice, Heathrow does not live entirely within its own regulatory bubble. Passenger charges are already about 40 per cent higher than those at rival European airports, making London an expensive hub for the global airlines this monster project is meant to be serving.
There is no certainty neighbouring Gatwick will not go ahead with its (much cheaper) second runway, adding further to capacity around the UK’s capital. Then there is the possibility that Heathrow could overshoot on costs as it delivers the six-year project, given ambitious engineering challenges such as the bridging of a runway over Britain’s busiest motorway, the M25.
Given all this, Heathrow seems short of balance-sheet firepower. Since its takeover by a Spanish-led consortium in 2006, the group has seen its shareholders’ funds dwindle from £5.5bn before the deal to just £703m, thanks partly to a well-honed knack for value extraction. Despite sales of some of its airports, totalling more than £4bn, its debt has stuck at stubbornly stratospheric levels. In 2017 it totalled £13.4bn.
Scraping together the necessary funds is not impossible. The shareholders could, for instance, have a whip round and put in the £5bn-odd to fund the development corporately. But that hardly fits with their recent pattern of behaviour. Heathrow’s 2017 accounts record a dividend of £847m for shareholders last year on after-tax profits of just £516m, implying that dividends were partially funded by taking on yet more corporate debt.
That will need to change radically if the £14bn project is to be properly underpinned. Indeed, it will require shareholders to go on a crash dividend diet. Assuming a one-thirds/two-thirds split of equity and debt, the six-year project could incur financing charges alone of £2bn-3bn.
There will not be extra revenue to meet this until the project is completed — scheduled for 2025. And the scope for transferring project risk on to customers is not unlimited. The only way to bring forward income is to increase the charges the airport levies on passengers, as it has done in the past to finance Terminals 2 and 5. But that would further elevate already high fees, putting strain on competitiveness. And in any case the government and the Civil Aviation Authority, the regulator, have promised that charges will stick broadly where they are.
Heathrow claims it can increase the number of flights using the existing infrastructure, and the airport plans to ask the government to lift the 480,000 cap on annual aircraft movements. But that is likely to be contentious, given sensitivity to night blight and noise pollution. And even if successful, the number of flights would only rise by about 5 per cent.
There is, of course, the chance that Heathrow might try to ease the burden by discreetly pressing for public subsidy, figuring that once the state is committed to the third runway it will not want to see the project come off the rails.
The government should stand firm. Its decision to pick the most expensive of three runway options on the table was always predicated on the idea that all could be financed without state support.
Sticking to this line is not only politic, it is vital if ministers are to contain creeping cost inflation on what is already a gold-plated project. Heathrow must be made to shoulder the risks and costs of the scheme it has promoted. Meanwhile, a prudent state might usefully keep open a fallback option, such as the second runway at Gatwick, should the airport’s owners be unable to make those numbers add up.
Heathrow owners urged to stop huge payouts to investors – and strengthen its own finances instead
The Sunday Times says in 2017 Heathrow’s debt totalled £13.7 billion, and it is under pressure to cut its huge dividends for its shareholders, if it was allowed to build a £14bn? (£17bn?) 3rd runway. Ministers and airlines are demanding that Heathrow keeps landing charges down, which would mean the regulator, the CAA, capping dividends. Instead the airport would have to use spare funds for the runway project, and to strengthen its finances. Heathrow paid over £3bn in dividends since its buyout in 2006. Combined with a huge building projects, including two terminals, this has increased its debt to £13.7bn. Last year Heathrow paid more than £560m in interest, plus £525m in dividends, and it approved another £114m payout to shareholders last month. The Sunday Times says that could leave its balance sheet vulnerable if the runway project hits difficulties or the aviation industry suffers a downturn. The runway would almost double the size of Heathrow’s £15.8bn asset base. The shareholders gain from take-off and landing charges, which add about £20 to each passenger’s ticket. A cap by the CAA on Heathrow’s gearing (a measure of debt as a proportion of the value of assets) would ban dividends if borrowings went above a certain level. Heathrow’s gearing is now 87% (far higher than similar businesses) and it wants to increase this ratio up to 93%.
Sunday Times commentary on Heathrow: the cash machine with an airport attached
The Sunday Times reports that under a complex (perverse) incentive system, Heathrow is encouraged to spend as much as it can on developing the site. Heathrow’s investors earn returns based on the size of its “regulatory asset base” (RAB), under a formula set by the CAA. So the more the airport spends, the more its owners can earn. It gives an example of £74,000 to cut down 3 trees, which is at least 20 times the normal price. These costs of developing the airport are recouped through passenger charges, and also set off against UK tax. The Sunday Times questions the efficiency, governance and transparency of the management of Heathrow. It says the airport is demanding an insurance policy against the risk that the project goes wrong, and wants the CAA to ensure it will be compensated by airlines and passengers if there are unanticipated difficulties (eg. construction delays, or lower than anticipated passenger numbers or revenue).Scrutiny of Heathrow’s spending has inadequate, there is no audit of the RAB, to show how the figure of £15.8bn for the expansion project is calculated, and Heathrow has not provided a detailed cost breakdown for the runway plans. There are past examples of excessive costs eg. the T2 car park at £61,000 per place, or a smoking shelter at T2 that which was priced at £450,000, but finally cost £1m.
Heathrow consultation on its plans delayed as CAA hopes to reassure airlines on lower 3rd runway costs
The Times says Heathrow’s plans for a 3rd runway have been delayed until at least December, or early 2018, as the airport tries to cut £6 billion from the cost. A report by the CAA said that Heathrow’s proposals would be published for consultation “no earlier” than December. This had been expected by August. The CAA report was distributed to airlines, and said that Heathrow was working on revised proposals designed to cut £6 billion from the previous £17.6 billion budget. Heathrow’s attempts to cut the cost is to reassure airlines like British Airways and Virgin Atlantic over “gold-plated” facilities planned for Heathrow expansion – that airlines fear they would have to pay for. Airlines fear higher landing charges, leading to higher fares, knocking their profits and even driving some airlines out of Heathrow. Heathrow has already publicised cuts to its plans, like delaying Terminal 6 and an underground passenger transit system to limit the expense. The problem of how to get the runway over the M25 has not been resolved, but it would be cheaper to do a bridge over the motorway rather than a proper tunnel, as the Airports Commission had expected. The airlines want Heathrow to “make available more mature information/data on costs and benchmarking before [the consultation].”