Robert Peston on the CAA and airport charges: Heathrow warns of investment threat
Robert Peston explains the rows about Heathrow’s charges. The CAA has calculated how much Heathrow should charge airlines, based on how much profit it should be allowed to make over the next 5 years. Heathrow wants high charges, and predictably, the airlines want low charges. Heathrow has invested £11bn in improving its airport terminals and facilities over the past decade and is telling the CAA that not allowing an increase in its fees would make its future plans to invest £3bn “economically irrational”. Heathrow says its shareholders won’t put up the money for future necessary investment if the charges are too low – their owners would have no interest in financing new runways on the proposed level of allowable return. Robert Peston says the dispute is not likely to be settled quickly and there may be an appeal to the competition authorities. At the heart of the dispute between Heathrow and the CAA is the extent to which Heathrow is subject to risk and competition. In recent years, Heathrow’s owners, led by Ferrovial, have made no money at all, largely because of regulatory intervention.
Heathrow warns of investment threat
As the chancellor prepares to announce tomorrow a modest shift of public expenditure away from current spending towards capital projects, a business unusual for the scale of its infrastructure investments is threatening to pull the plug.
Heathrow, which has invested £11bn in improving its airport terminals and facilities over the past decade, is today telling its regulator (the CAA) that plans to cut its allowable return would make future plans to invest £3bn “economically irrational”.
The background is that the Civil Aviation Authority (CAA) has calculated that Heathrow’s “weighted average cost of capital” or WACC has fallen from mid 2009 by 2.4 percentage points to 5.35% before tax.
This sets the return or profit that Heathrow will be permitted to make from what it charges airlines and customers for five years from April 2014.
The view of Heathrow’s management, in its response submitted to the CAA today, is that its shareholders won’t put up the money for future necessary investment on that level of allowable return.
However, as you would probably expect, the airlines take a different view – and got their revenge in early, at the weekend.
They say that price rises for them implied by the proposed new allowable return – an annual increase of inflation minus 1.3% – would “harm passengers”.
They believe that charges could be capped at inflation (RPI) minus 9.8% without undermining Heathrow’s investment plans.
It is a classic and predictable row involving a regulated business.
But it has important economic consequences, partly because, as the IMF has pointed out, most infrastructure spending has a high impact on current and future economic growth, and – perhaps more importantly – Heathrow’s role as a “hub” airport has disproportionate importance for the UK’s prosperity (especially the prosperity of the south).
The dispute almost certainly means none of this will be settled quickly: an eventual appeal to the competition authorities looks more than likely.
Also it is an added complication for the Davies review into where and whether new runways should be built in the south, since Heathrow’s executives believe their owners would have no interest in financing new runways on the proposed level of allowable return.
At the heart of the dispute between Heathrow and the CAA is the extent to which Heathrow is subject to risk and competition.
It is patently a very stable business compared to many. It does face competition, domestically and abroad, but pretty muted competition.
“There will come a moment when the owners of Heathrow tire of waiting for jam tomorrow”
However shocks to its business do occur, whether from ash clouds above Iceland, or fears of pandemics being spread by travel.
So the question is whether the CAA is correct to set the allowable return several percentage points below what airports in Rome, Frankfurt and Paris can generate.
Also, the CAA is in effect saying, with its cost of capital calculation, that Heathrow is as safe and stable as the National Grid and Network Rail – which Heathrow disputes.
There is a wider implication for the UK’s inward investment prospects from this dispute too.
In recent years, Heathrow’s owners – led by Ferrovial of Spain – have made no money at all, largely because of regulatory intervention.
That regulatory intervention has probably benefited the British economy, because prices for customers have been held down, while the airport has continued to invest significant sums in improving and expanding capacity.
But there will come a moment when the owners of Heathrow tire of waiting for jam tomorrow.
Those owners include the sovereign wealth funds of China, Singapore and Qatar (CIC, GIC and Quatar holdings), which collectively own 40% of Heathrow.
As it happens, the British government hopes this immensely deep-pocketed trio of investors will be persuaded to back the modernisation of Britain’s economy and infrastructure in other important ways.
Though, to coin a City phrase, if they feel done in by the airports regulator, they are unlikely to have a nice warm feeling about investing their wonga anywhere else where regulators or the government can determine their profits.
British Airways and other airlines attacks 40% Heathrow price rises to airlines
Date added: June 23, 2013
Willie Walsh, chief executive of International Airlines Group, the owners of British Airways, has attacked Heathrow for applying to the CAA to be allowed to charge airlines 40% more to use the airport over the next 5 years. The CAA is expected soon to announce the new regulated costs of using the UK’s airports for the next 5 years. Heathrow has said it needs the large increases to pay for more capital investment and improving the facilities for passengers. Willie Walsh is complaining about this and making out that BA cares about lower fares for its passengers: “In the interests of air travellers, we believe it is high time these charges started to come down.” British Airways has its hub at Heathrow and has the largest number of flights and passengers there. Mr Walsh said the airport had failed to get to grips with costs and that as the only hub airport in the UK it was acting as a monopoly provider. Virgin and IATA have also complained about the increase in charges. How will Heathrow manage to build another runway, or even two, when its airlines don’t want to pay for it? Click here to view full story…
Heathrow Airport produces its 5 year business plan with large rise in landing charges to pay for £3 billion investment
February 12, 2013
Heathrow Airport has produced its business plan for Q6 (which is the 6th period of 5 years, from April 2014 -2019). It plans to spend some £3 billion on infrastructure, like work on Terminal 2. As Heathrow and the CAA over-estimated the number of passengers using Heathrow over the past 3 years, their income has been lower. Therefore Heathrow plans to raise its landing charges per passenger, by as much as 30 -40% by 2019 – much more than inflation. It said its prices “inevitably” had to rise in order to ensure a “fair return” to its investors. The CAA will publish its final decision on whether it has approved Heathrow’s proposals in January 2014. Launching the investment plans, Colin Matthews said the airport envisaged passenger numbers increasing from just under 70m now to around 72.6m by 2018-19. Heathrow’s 5-year plan is separate from any decision on whether a 3rd runway is built. Maximum airport charges allowed by the CAA are calculated using a complex formula taking into account the total value of Heathrow’s assets, return on capital invested and forecast number of passengers. Click here to view full story…