Heathrow plans to increase 3rd runway costs – to £2.9 bn – before approval, hoping it will be too costly to scrap its plans
Heathrow plans to triple the amount it spends on its third runway proposal, to £2.9bn – well before getting final approval. This either means air passengers using Heathrow would be charged more (something the industry and the government do not want), or else the taxpayer will be charged. Even if the runway never goes ahead. The CAA has a consultation about the costs and how Heathrow has been speeding up the process, spending ever more money. (The legal challenges are now going to appeal in October, but Heathrow is pressing ahead with its DCO consultations). Especially on carbon emissions, air pollution and noise grounds, it is entirely possible the runway will be blocked and the DCO will not be granted. The CAA says it has asked Heathrow “to consider different options for this spending and the implications of this spending for the overall programme timetable and the interests of consumers.” [Not to mention the taxpayer, who may end up paying …] Heathrow is increasing the amount of its “Category B” costs and “early Category C” costs. They want to increase the amount spent already to be so large, that it effectively cannot be cancelled. Detailed costs still have to be outlined, but Heathrow is expected to submit its initial business plan to the CAA for review towards the end of this year.
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Lilian Greenwood’s letter asked:
Recommendation 11: DfT committed to “monitor the financeability and affordability of the Heathrow third runway scheme as the design develops and as the economic regulatory framework for expansion matures”. When did the DfT make its most recent assessment and what did it conclude?
Recommendation 24: DfT said that it anticipated “launching the Aviation Strategy in the first half of 2019”. Why has this been delayed and when do you plan to publish this?
This is the (pathetic, evasive )reply from Grayling and the DfT civil servants:
“Aviation connectivity is vital to productivity and ensuring our long-term capacity is critical if the UK is to attract inward investment and grow our trade with new and fast growing overseas markets. Reflecting this, the Government published the consultation on its Aviation 2050 strategy in December 2018. This considered proposals to develop a partnership for sustainable growth, improve passenger experience, and establish new connections across the world.
“The consultation period was extended to June 2019 to consider the outcome of the Airline Insolvency Review and the report by the Committee on Climate Change on our long-term emission targets, both of which were published in May. The Government is now considering the responses to the consultation and plans to publish a final strategy later this year. ”
The CAA consultation
Economic regulation of capacity expansion at Heathrow: consultation on early costs and regulatory timetable, July 2019
11th July to 22nd August 2019
CAA says: “This consultation document focuses on the costs of expansion incurred by Heathrow Airport Limited (“HAL”) in advance of receiving a development consent order (“DCO”) under the Planning Act 2008 for the expansion of Heathrow airport. It deals with the new information that has emerged on these costs and notes that there could be significant implications for the wider programme timetable, depending on the levels of this spending and how we propose to treat the expenditure in the regulatory framework.
“It also deals with issues relating to the regulatory timetable and updates the guidance we provided previously to HAL on the scope and content of its price control business plans.”
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Category A costs are:
Costs which are incurred by HAL during the Airports Commission process, or before Heathrow was named as the preferred location for new runway capacity on 25 October 2016. [CAP 1513, paragraph 3.20] On an exceptional basis, some Category A costs may be recategorised as Category B costs if HAL can provide a strong and clear case that the information submitted as part of the DCO planning process is not materially different from the information submitted to the Airports Commission or the Government prior to 25 October 2016. [CAP 1513, paragraph 3.21]
Category B costs (the only ones the CAA says Heathrow should be able to recover) are:
Costs which are: • in general1 , incurred by HAL after the Government policy announcement on its preferred location for new capacity (25 October 2016); and • associated solely with seeking planning permission for the delivery of new runway capacity at Heathrow. [CAP 1513, paragraph 3.10]
Category C costs are:
Costs incurred by HAL in connection with implementation and construction of new capacity, up to entry-intooperation. The majority of these costs will typically be incurred after planning permission is granted. [CAP 1651, appendix A]
Early Category C costs are:
Those costs that HAL will incur prior to the grant of a DCO permitting capacity expansion. These costs will be incurred in addition to the Category B planning costs. They include the costs of relocating certain large commercial and other facilities, community costs (compensation costs for other commercial activities, agricultural activities and residential property) and other enabling costs for construction. [Chapter 2, paragraph 2.1]].
An important requirement for costs to be considered as early Category C expenditure is that the purpose of this expenditure must be to promote the efficient and timely delivery of the overall programme for capacity expansion at Heathrow airport.
Heathrow plans to increase third runway costs before approval
Regulator fears consumers will have to pay £2.9bn for project that might be scrapped
By Janina Conboye in London (Financial Times)
JULY 12, 2019
Heathrow airport is planning to triple the amount it spends on its controversial third runway to £2.9bn ahead of final approval, sparking fears that passengers will pay extra even if the project is eventually cancelled.
The industry regulator said it wanted to seek the public’s views on the airport’s proposal to accelerate spending because of the risk that the costs would be passed on to consumers through passenger service charges.
The Civil Aviation Authority said in a consultation document that management at the UK’s busiest airport was speeding up certain spending on the £14bn project to meet the 2026 completion target date for the runway.
However, it is still uncertain whether the expansion will go ahead, following opposition from politicians, local residents and environmentalists. Heathrow is expected to submit its application for a development consent order, the permit required by all nationally significant infrastructure projects, next year. The airport hopes the transport secretary will approve it in 2021.
“In light of these increases, we have asked [Heathrow] to consider different options for this spending and the implications of this spending for the overall programme timetable and the interests of consumers,” the CAA said.
“The more Heathrow’s operator spends before it gets planning approval, the greater the risk that consumers will end up paying for extra costs in the event that expansion does not go ahead.”
Heathrow wants to increase so-called Category B costs associated with seeking planning permission, such as the public consultation and master plan development, from £265m to more than £500m. And early Category C expenses, relating to acquiring and relocating buildings and compensating local communities, are set to rise from £650m to £2.4bn.
The CAA said the overall cost of delivering the runway was still broadly in line with Heathrow’s proposed budget of £14bn. It added that if planning consent was given to Heathrow’s expansion and the runway was delivered on time, the increase in pre-consent spending would “benefit consumers by promoting choice and greater competition between airlines”.
Detailed costs still have to be outlined, but the airport is expected to submit its initial business plan to the CAA for review towards the end of this year.
The regulator said that while Heathrow’s current cost estimates were reasonable, “we have asked Heathrow Airport Limited to look at all options to see how this risk can be reduced and to engage with airlines on the best approach”.
In its master plan revealed in June, Heathrow said it would stagger expansion to manage costs and appease residents concerns about noise and pollution. Dividing the project into four phases is part of Heathrow’s efforts to keep the passenger service charge close to 2016 levels, said one person briefed on the airport’s plans. Heathrow’s fee of £22 per person is already one of the most expensive in the world.
Construction of the new runway is in the first phase of the project, which is scheduled for completion in 2026. The fourth phase, which includes car parks, road systems and hangars, is set to be finished in 2050.
In response Heathrow said it had a record of delivering multibillion-pound airport infrastructure on-budget and was confident its plans and experience would deliver a new runway at Heathrow for £14bn. “It is great that the CAA are also increasingly confident in our cost projection,” it said. “We value their input and will continue to work alongside them to ensure this critical project for Britain is delivered.”
Heathrow’s revised spending plan attracted immediate criticism, particularly from IAG, the owner of British Airways, Heathrow’s dominant airline. “The CAA must be strong and ensure that Heathrow doesn’t get away with this,” IAG said. “The airport seems hell bent on ramping up costs despite the government only approving the third runway if customer charges don’t rise from today’s levels.”
Heathrow’s passenger charges are paid by the airlines, which decide how much to pass on to passengers in ticket prices. The CAA consultation document suggested that if charges were increased to cover the expansion costs then the airlines might have to absorb some of the costs.
Heathrow Hub, which proposed an alternative expansion plan that was rejected by the Department for Transport, said: “At last the CAA is starting to focus properly on the huge costs of Heathrow airport’s own plan.”
It added that Heathrow’s plans were outrageously expensive and disruptive. “As the CAA concedes, this will potentially have an important impact on consumers via higher air passenger fees,” it said.
John Stewart, chair of the Hacan campaign group opposed to Heathrow’s expansion, said: “The unexpected costs continue to rise. If the CAA continues to limit the amount Heathrow can raise from the airlines through landing charges, the possibility of the government needing to help out the airport must be looming into view.”
The CAA’s consultation closes on August 22.
This article has been amended to clarify IAG’s criticism of Heathrow’s revised spending plan
https://www.ft.com/content/15c12364-a426-11e9-974c-ad1c6ab5efd1
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