Heathrow trying to persuade doubters that it will not need public money to funds its plans and will not struggle to fund £14bn 3rd runway
Heathrow airport is denying it will struggle to fund its possible new £14bn runway, as there are concerns that taxpayers will have to help pay for one of Britain’s biggest infrastructure projects in decades. Paul Deighton, Heathrow’s chairman, has written to the CAA to “set the record straight” after noting “a continuing debate regarding the financials” of expansion. “We have an investment grade credit rating, and existing shareholders will invest equity to maintain this through the higher risk expansion period,” he said. “This is a very strong position from which to finance the expansion of Heathrow. There will be no cost to the taxpayer.” However, it is likely to need higher landing charges and that taxpayers have to foot much of the bill. Heathrow is already £13.4bn in debt — not far shy of the £15bn value of its regulatory asset base. Equity was just £703m. Much of the £14bn price of the runway would be borrowed money, and financing costs of that could be £2bn-£3bn over a 6-year construction period — might stretch the balance sheet to breaking point. These sums don’t include likely of cost overruns and legal claims.
Heathrow rejects claims it will struggle to fund £14bn runway
Critics say landing charges will rise and taxpayers will foot expansion bill Heathrow’s landing charge is already the highest in Europe
By Gill Plimmer and Jonathan Ford in London (Financial Times)
Heathrow airport has hit back at accusations that it will struggle to fund its controversial new £14bn runway, after allegations that taxpayers will be called on to help pay for one of Britain’s biggest infrastructure projects in decades. Paul Deighton, Heathrow’s chairman, has written to the Civil Aviation Authority to “set the record straight” after noting “a continuing debate regarding the financials” of expansion.
“We have an investment grade credit rating, and existing shareholders will invest equity to maintain this through the higher risk expansion period,” he said. “This is a very strong position from which to finance the expansion of Heathrow. There will be no cost to the taxpayer.”
MPs voted for Heathrow’s latest expansion plan last month but there are concerns that it will require a significant rise in airline landing charges and that taxpayers will be forced to foot a large chunk of the bill. Heathrow is already £13.4bn in debt — not far shy of the £15bn value of its regulatory asset base, according to Heathrow Airport Holdings’ 2017 accounts.
Equity stood at just £703m, while investors — which include sovereign wealth funds and the Spanish company Ferrovial — have been pulling out more in dividends than Heathrow has been earning. Last year they received a payout of £847m even though post-tax profits were just £516m. Under the plans approved by parliament last month, much of the £14bn price of the third runway would be financed with borrowed money.
There are concerns that financing costs — which could run to £2bn-£3bn over the six-year construction period — might stretch the balance sheet to breaking point.
Heathrow expansion Who will pay for Heathrow airport’s £14bn third runway These sums do not take into account the possibility of cost overruns and legal claims. Heathrow’s owners may also come under pressure to contribute more towards transport access to the expanded airport. Although Heathrow believes it should pay only £1bn for the road and rail connections, Transport for London believes the cost will be nearer £10bn.
Lord Deighton, commercial secretary to the Treasury from 2013 until he became executive chairman at Heathrow in 2015, urged the CAA to “deliver a stable regulatory framework that provides a fair rate of return to investors”. The CAA said: “We welcome Heathrow airport’s renewed commitments to work with stakeholders to deliver a third runway affordably.”
The regulator said it expected the airport to keep charges “as close to current levels as possible”.
At £22 per passenger, Heathrow’s landing charge is already the highest in Europe. Willie Walsh, chief executive of IAG, owner of British Airways, Heathrow’s biggest airline, has said he believes it is “only a matter of time before we start hearing excuses for massive cost escalation”.
Lord Deighton, who was responsible for the government’s national infrastructure plan in 2014, said that shareholders were “clear that Heathrow must remain affordable”.
Jonathan Ford (FT) on the serious financing doubts: “Who will pay for Heathrow airport’s £14bn 3rd runway?”
With the vote on a possible 3rd Heathrow runway expected on 25th June, Jonathan Ford and Gill Plimmer write, in the Financial Times, of the very serious doubts over how the runway could be funded. They say: “Most agree that this leveraged structure is wholly inappropriate to support a project as large as the 3rd runway. It offers no leeway for construction risk on what will be a highly complex engineering challenge. There is also the question of how Heathrow might meet the financing costs, which could run to £2bn-£3bn over the six-year construction period, assuming an interest rate of between 4 -7%.” And …”investors have been pulling out more in dividends than Heathrow has been earning. Last year they received a payout of £847m even though post tax profits were just £516m, implying that the corporate debt was used, in part, to fund these returns.” … And “A key question is how much debt the markets will lend against the £2bn of operating cash flow Heathrow expects to have by the time construction begins in 2019.” … The Airports Commission said it could saddle Heathrow with up to £27 billion of debt. Ford also questions the opaque structure of Heathrow, with at least 10 corporate layers between Heathrow Airport Limited ….and shareholders.”
Remember this? Another broken promise by an earlier Heathrow chairman?
That 1999 Sir John Egan “Dear Neighbour” letter
The “Dear Neighbour” letter dated April 1999, from Sir John Egan (then Chairman of BAA, the owner of Heathrow) setting out a range of claims about how Terminal 5 would not make the situation worse for residents. This included the promise there would be no new runway.
See the letter, saved on the HACAN website:
Beryl Wilkins, a retired teacher, questioned why past promises were allowed to be broken, including an inspector who had said in a consultation meeting that Terminal 4 would be the last.
Nigel Milton, director of policy and political relations for Heathrow, said: “The people who made those promises weren’t in a position to make these promises.”
John Holland-Kaye also made a similar comment at an Airports Commission public meeting on 3.12.2014 :
Heathrow Airport boss apologises for ruling out Third Runway in 1990s, saying: ‘We got it wrong’
3 DEC 2014
Heathrow’s CEO has apologised for broken promises that he said have ‘hung over the airport’s relationship with local communities’.
John Holland-Kaye made the apology at the Airports Commission’s consultation conference today (Wednesday, December 3), where options for expanding either Heathrow or Gatwick are being discussed.
He said he was sorry for the airport’s past commitment, made almost 20 years ago, to permanently rule out building a third runway.
He said: “I am shocked by that commitment. It should never have been made. And it could never be kept. That is not an excuse. It is an apology. I am sorry Heathrow made that commitment. It has hung over the relationship with local communities, and has led to a deficit of trust that can only be repaired by demonstrating we are a different company from the past.”
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