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.
Who will pay for Heathrow’s 3rd runway?
12 December 2019
From the No 3rd Runway Coalition
The question of who will pay for Heathrow’s third runway does not have a simple answer. 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.
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 (1). 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 (2).
Significant investment is also required in road and rail improvements to support expansion, particularly as the airport has to increase the percentage of passengers arriving at Heathrow by public transport. Indeed, the Airports National Policy Statement has placed a requirement on Heathrow to demonstrate how they can deliver this in their planning application (3) .
However, the lack of progress on both Western and Southern rail access improvements into Heathrow is a huge cause for concern. The Government recently published its strategic objectives for the Southern Rail Scheme which reveals that they do not expect the scheme to be operational before 2030, four years after the planned opening date of the third runway. Even this date is optimistic as the Government has still not confirmed what type of rail scheme it actually wants delivered (4/5).
Further, the Conservative General Election Manifesto appears to row back on previous Government commitments to contributing to the financial costs of such public transport improvements. It states that “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 (6).
The CAA board met in November to discuss whether to approve Heathrow’s plans to spend £3.3bn on planning and enabling costs. It is the first time such a clause has been used. This ‘investment’ would be achieved through borrowing which under the RAB model enables the airport to make profits by passing the cost of repayments onto airlines and passengers (7). Effectively, the airport is seeking permission to increase their revenues by raising the landing charges to help cover the costs of the third runway. The board inserted a new clause into its licence to build a third runway – penalising Heathrow if costs spiral out of control, amid concerns that the project will be built on budget (8).
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 (9).
Paul McGuinness, Chair of the No 3rd Runway Coalition, said:
“Heathrow previously declared their 3rd runway would cost £14bn. But now, just 18 months later, they tell us that they’ll have to spend almost a quarter of this before they even apply for planning permission, and that total costs have already more than doubled to £31bn!
“As financial experts have long 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.”
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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.
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Rival scheme, Heathrow Hub, estimate true costs of Heathrow runway could be £61 billion, by 2050 (not £14 bn)
The rival scheme, to try to build a 3rd Heathrow runway – Heathrow Hub – have put together figures indicating the final cost of Heathrow’s 3rd Runway Plan could be £61 billion by 2050. That is in contrast to the £14 billion claimed by Heathrow itself and even the £32 billion assed by IAG. Heathrow Hub say the cost of the initial phase, included in Heathrow’s current consultation, could be as much as £37.7 billion, when it is supposedly completed in 2026. The figure of £14 billion is based on 2014 prices, 5 year out of date, and assumes a pared down scheme with no new terminal capacity. Heathrow’s current consultation shows a completely different scheme, which would cost far more. There is no clarity on how Heathrow would bridge the M25 (12 lanes wide at that point) and what it would cost. Over 5 years, there are now higher costs from inflation and higher land acquisition and relocation costs. Heathrow Hub say Boris Johnson and Grant Shapps should announce a review of the project. They want the CAA to make Heathrow provide proper figures on costs. The CAA disclosed pre-planning application spending by the Airport has tripled to £2.9bn. The Hub’s scheme would, of course, also cost more than they estimate now …
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