Aviation regulator, the CAA, losing patience with Heathrow expansion – approve only £1.6bn before DCO granted

The CAA has rejected Heathrow’s desire to spend nearly £3bn on its new runway despite the plans not having received final approval, in a sign that it is losing confidence in Heathrow’s ability to fund the project on budget.  The CAA has a new consultation on this. The CAA approved just under half Heathrow’s request; £1.6bn (at 2018 prices) before the DCO is granted, saying that “passengers cannot be expected to bear the risk” of Heathrow “spending too much in the early phase of development, should planning permission not be granted”. This is yet another hurdle for Heathrow.  Heathrow now says that instead of opening its new runway in 2026, that has now been put back to 2028/ 2029. That delay makes a large difference to the supposed economic benefit to the UK, which was at best marginal even with a 2026 opening date.  Both Heathrow and the Government claim that the project will be privately financed yet there are concerns about Heathrow’s ability to afford expansion as costs continue to rise and the markets begin to question the viability of the investment. Standard and Poor said there is significant concern about the design, funding and construction costs of a 3rd runway which would make it unviable.

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AVIATION REGULATOR LOSING CONFIDENCE IN HEATHROW EXPANSION

19 December 2019

From the No 3rd Runway Coalition

The Civil Aviation Authority has rejected Heathrow Airport’s desire to spend nearly £3bn on its new runway despite the plans not having received final approval, in a sign that it is losing confidence in Heathrow’s ability to fund the project on budget (1).

The aviation regulator cited the risk that the costs would be passed on to passengers were the runway not to go ahead. The CAA approved just under half Heathrow’s request; £1.6bn (1), saying that “passengers cannot be expected to bear the risk of Heathrow Airport Limited spending too much in the early phase of development, should planning permission not be granted”, in a clear sign of the many hurdles Heathrow has to clear before receiving final permission to expand (2).

2028/29, the new target date Heathrow has now set for it to open the new runway, is also reducing what potential small economic benefits it would bring to the UK by 2030 – a key criteria the government previously assessed when choosing Heathrow’s expansion scheme, compared to Gatwick’s or the extended runway proposed by Heathrow Hub Ltd (3).

Both Heathrow and the Government claim that the project will be privately financed yet there are concerns about Heathrow’s ability to afford expansion as costs continue to rise and the markets begin to question the viability of the investment.

In its latest analysis of Heathrow’s business case, Standard and Poor revealed that there is significant concern about the design, funding and construction costs of a third runway (4). The report raises specific concerns about the availability of relevant information which could result in a downgrading of Heathrow’s investment grade credit rating which would make the 3rd runway unviable.

Analysis of the consolidated accounts of Heathrow Airport Limited and its holding group FGP Topco shows the airport to be losing money. Despite claiming some £22bn in reserves, once you consider dividends, interest payments on debt, and financial instruments the airport is not making a profit (5).

The political issue with approval of this level of spending in advance of planning consent is the ‘poison pill’ agreement between Heathrow and the Government which could result in taxpayers picking up the bill for Heathrow’s costs should the Government cancel the 3rd runway (6).

Paul McGuinness, Chair of the No 3rd Runway Coalition, said: 

“Even the regulator is losing confidence in Heathrow’s ability to finance this runway. Heathrow previously declared their 3rd runway would cost £14bn. But now, just 18 months later, they tell us that they’ll have to spend one and a half billion of this before they even apply for planning permission!

“As financial experts have advised us, Heathrow seems to be flying by the seat of their pants on this expansion – unable to determine how much they’ll need to invest, let alone the source of that investment capital.

 “Government should immediately halt this project, before taxpayers inevitably find themselves underwriting the irresponsible and vain aspirations of this foreign owned private company.”

 ENDS.

[Heathrow had proposed increasing early so-called Category C spending, relating to acquiring and relocating buildings and compensating local communities, from £650m to £2.4bn, based on 2014 prices. The CAA said that in 2018 prices proposed early Category C expenditure was subsequently increased to £2.8bn.]

NOTES

1).  https://www.ft.com/content/13c97730-226d-11ea-92da-f0c92e957a96

2). Court of Appeal Verdict on Heathrow expansion expected from 13 January 2020

3) Airports National Policy Statement, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/714106/airports-nps-new-runway-capacity-and-infrastructure-at-airports-in-the-south-east-of-england-web-version.pdf

4) S&P Global Ratings: Heathrow Funding Limited, 9 August 2019 https://www.heathrow.com/content/dam/heathrow/web/common/documents/company/investor/credit-ratings/sp/2019-Heathrow-Funding-Ltd.pdf

5) Heathrow Consolidated Accounts, John Busby, 27 September 2019, Figure 4. http://www.after-oil.co.uk/HeathrowConsolidatedAccounts.htm

6) Heathrow Airport Limited Statement of Principles, 2016, Page 4. para. 2.1.6. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/562175/heathrow-airport-limited-statement-of-principles.pdf

No 3rd Runway Coalition representatives available for further comment,

contact Rob Barnstone on 07806 947050

or rob@no3rdrunwaycoalition.co.uk


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See also

Heathrow’s third runway plans face further delay

UK aviation regulator concerned about level of spending ahead of final approval

By Tanya Powley and Peggy Hollinger in London  (Financial Times)

19.12.2019

Heathrow’s timetable for its third runway faces further delay after the UK aviation regulator said it was minded to approve only just over half the amount London’s busiest airport wants to spend on its project ahead of final approval.

The UK’s Civil Aviation Authority on Thursday rejected Heathrow airport’s proposal to more than quadruple certain early construction-related spending to £2.8bn because of the risk the costs would be passed on to passengers if the project is eventually cancelled.

In a consultation document released on Thursday, the regulator instead said its preference was for spending to increase to £1.6bn. It added that the move would mean a delay of about a year to the 2026 scheduled opening of Heathrow’s third runway, based on Heathrow’s estimates.

However, Heathrow said the CAA’s proposal would delay the completion of the runway by up to three years.

The CAA’s move comes after management at the airport proposed in the summer to speed up certain spending on the £14bn project to meet its 2026 completion target date for the runway.

Paul Smith, group director of consumers and markets at the CAA, said: “We believe that more runway capacity at Heathrow will benefit air passengers and cargo owners . . . However, we have also been clear that timeliness is not the only factor that is important to consumers.

“Passengers cannot be expected to bear the risk of Heathrow Airport Limited spending too much in the early phases of development, should planning permission not be granted.”

Heathrow had proposed increasing early so-called Category C spending, relating to acquiring and relocating buildings and compensating local communities, from £650m to £2.4bn, based on 2014 prices. The CAA said that in 2018 prices proposed early Category C expenditure was subsequently increased to £2.8bn.

The CAA has approved Heathrow’s plan to raise early Category B expenditure, associated with seeking planning permission, such as the public consultation and master plan development, from £265m to more than £500m.

Heathrow said Thursday’s announcement was an “important milestone” in expanding the airport.

“We will now review the detail to ensure it will unlock the initial £1.5bn to £2bn of private investment over the next two years at no cost to the taxpayer,” a spokesperson said. “Whilst this is a step forward, the CAA has delayed the project timetable by at least 12 months.

“We now expect to complete the third runway between early 2028 and late 2029.”

However, there is still uncertainty over whether the expansion will go ahead, following opposition from politicians, local residents and environmentalists. A judgment on five judicial reviews by campaigners against the expansion is expected early next year.

Heathrow is likely to submit its application for a development consent order (DCO), the permit required by all nationally significant infrastructure projects, next year. The airport hopes the transport secretary will approve it in 2021.

While the CAA has rejected the highest early spending plan, approval to spend more money ahead of getting a DCO is still likely to attract criticism, such as from IAG, British Airways’ parent company and Heathrow’s biggest customer.

Willie Walsh, IAG chief executive, has long criticised plans to spend significantly on early construction costs before planning permission is granted or the scheme’s final costs are known. On Wednesday, he called on the government to commission an independent assessment of Heathrow’s expansion costs.

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 the airport’s efforts to keep the passenger service charge close to 2016 levels. 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 was scheduled for completion in 2026. The fourth phase, which includes car parks, road systems and hangars, is set to be finished in 2050.

However, an independent report commissioned by the CAA suggested that Heathrow’s target date of 2026 for the runway opening was “optimistic” even under the airport’s preferred approach to early spending. It noted that a more likely opening date would be between early 2027 and late 2028 under Heathrow’s previous proposal.

The CAA’s consultation will be open for responses until February 28, with a final decision expected in the spring.   Its title is:  “Economic regulation of Heathrow Airport Limited: policy update and consultation on the early costs of capacity expansion”

https://consultations.caa.co.uk/cmg/early-costs-of-capacity-expansion/

FT article at

https://www.ft.com/content/13c97730-226d-11ea-92da-f0c92e957a96

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The CAA consultation:

“Economic regulation of Heathrow Airport Limited: policy update and consultation on the early costs of capacity expansion”

Closes 28 Feb 2020

Opened 19 Dec 2019

Overview

This consultation document provides further information on costs Heathrow Airport Limited (HAL) expects to incur in advance of obtaining a Development Consent Order under the Planning Act 2008 for the expansion of Heathrow airport.

It outlines the approach to spending on these early costs that we consider is in the best interest of consumers and the regulatory arrangements that should apply to this spending.

It follows on from our July 2019 consultation on early costs and our previous policy documents on these matters.

Views invited

We welcome views on all the issues raised in this document including the issues set out in the executive summary and highlighted in chapters 1 to 3.

Please e-mail responses to economicregulation@caa.co.uk by 28 February 2020. 

We expect to publish the responses we receive on our website as soon as practicable after the period for representations expires. Any material that is regarded as confidential should be clearly marked as such and included in a separate annex. Please note that we have powers and duties with respect to information under section 59 of the Civil Aviation Act 2012 and the Freedom of Information Act 2000.

If you would like to discuss any aspect of this document, please contact
Robert.Toal@caa.co.uk.

https://consultations.caa.co.uk/cmg/early-costs-of-capacity-expansion/

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The consultation document is at https://publicapps.caa.co.uk/docs/33/CAP1871%20Early%20expansion%20costs%20condoc%20v1.6.pdf

 

This says;

 

At the time of publishing our April 2018 consultation, HAL’s initial estimate was that it would spend approximately £650 million (2014 prices) on early Category C costs. HAL then provided further information in autumn 2018 as part of its business plan information for the iH7 price control period (2020-2021) which suggested total spending might reach £1.6 billion. See www.caa.co.uk/CAP1819, chapter 2.

 

and

 

Following the analysis in chapter 1, this draft condition refers to a runway opening date of 2029 and construction spending of not more than £1.6 billion before the grant of a DCO. The condition does not attempt to define the activities that the licensee should concentrate on and the scenario on which it is based is not a detailed project plan. The underlying activities are not sufficiently certain to form part of the licence condition and are more appropriately dealt with through appropriate governance processes.73

 

and

 

Taking this approach allows the condition to set out a fairly simple obligation that in the circumstances where the licensee is carrying out expansion, it should do so in a manner consistent with a runway opening date not later than 2029 and not incurring more than £1.6 billion of construction costs prior to the determination of its DCO application.

 

[The aim of the CAA is not to increase the costs of flying for passengers, so they can continue to fly, in huge numbers, cheaply ….  AW comment ]


See earlier:

 

Heathrow ordered by CAA to rein in 3rd runway costs – to ensure it is built economically and efficiently

The CAA has inserted a significant new clause into Heathrow’s licence, starting in January 2020, amid concerns that costs on the vast 3rd runway project will spiral out of control. Heathrow will be penalised if it fails to build its £14bn expansion scheme efficiently — the first time such a condition has been imposed on the airport. Airlines, especially British Airways, are nervous that Heathrow will try to get them to pay up-front for construction costs, which would put up the price of air tickets, deterring passengers. The CAA polices the fees the airport charges passengers. It said the new licence clause was needed to “set clear expectations for Heathrow to conduct its business economically and efficiently”. Heathrow says this is disproportionate and could put off investors. IAG boss Willie Walsh has repeatedly complained that Heathrow’s runway scheme is a “gold-plated”, and that there is little incentive for Heathrow to keep costs down. Under a complex incentive system, the more Heathrow spends, the more its owners can earn. Heathrow has already spent £3.3 billion on its plans, which have not even yet passed through legal challenges, let alone the DCO process.

Click here to view full story…

 

Who will pay for Heathrow’s 3rd runway? There is no simple answer. Can Heathrow afford it?

Both the airport and Government claim that the project will be privately financed yet there are concerns about Heathrow’s ability to afford expansion as costs continue to rise and the markets begin to question the viability of the investment. Heathrow is already spending over £3 billion on enabling work, before even starting to build. The total cost could be £31 billion, not the alleged £14 billion.  In its latest analysis of Heathrow’s business case, Standard and Poor revealed that there is significant concern about construction costs of a 3rd runway. This raises specific concerns – which could result in a downgrading of Heathrow’s investment grade credit rating which would make the 3rd runway unviable. The airport and its holding company, FGP Topco, are losing money.  A huge sum is needed for the planned development, especially if more passengers are to travel to/from the airport on public transport.  The Conservative Election Manifesto said “no new public money” will be available to support the third runway and that the onus is on Heathrow to demonstrate that the business case is viable. The CAA has decided that Heathrow will be penalised if costs spiral out of control, amid concerns that the project will not be built on budget.

Click here to view full story…

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