Sunday Times commentary on Heathrow: the cash machine with an airport attached

The Sunday Times reports that under a complex (perverse) incentive system, Heathrow is encouraged to spend as much as it can on developing the site. Heathrow’s investors earn returns based on the size of its “regulatory asset base” (RAB), under a formula set by the CAA.  So the more the airport spends, the more its owners can earn. It gives an example of £74,000 to cut down 3 trees, which is at least 20 times the normal price. These costs of developing the airport are recouped through passenger charges, and also set off against UK tax. The Sunday Times questions the efficiency, governance and transparency of the management of Heathrow.  It says the airport is demanding an insurance policy against the risk that the project goes wrong, and wants the CAA to ensure it will be compensated by airlines and passengers if there are unanticipated difficulties (eg. construction delays, or lower than anticipated passenger numbers or revenue). Scrutiny of Heathrow’s spending has been inadequate, there is no audit of the RAB, to show how the figure of £15.8bn for the expansion project is calculated, and Heathrow has not provided a detailed cost breakdown for the runway plans. 


Heathrow: the cash machine with an airport attached

Should airlines and passengers face sky-high charges for using the west London hub?

By John Collingridge (Sunday Times)
March 18 2018, Share

The bosses of some of the world’s biggest airlines received a strange request last year from Heathrow airport — it wanted to spend £74,000 to chop down three trees. A little research suggested that the quoted price was up to 20 times what a tree surgeon would normally charge for the simple task, if the trees were located elsewhere. Yet this type of scenario has become commonplace at Europe’s biggest airport, carriers claim.


The more Heathrow spends, the more its owners can earn. That investment is recouped through passenger charges, with about £20 added to the ticket price for each traveller who arrives or departs. Those charges are among the most expensive of any airport in the world.



In 2010, the airport started work on a 3,320-space multi-storey car park at Terminal 2. The agreed cost, to be clawed back via passenger charges, was £202.7m. At that price, each space cost more than £61,000 — more than four times the typical amount. Gatwick airport built a 1,177-space car park in 2011 for £17m, about £14,400 per space. Bristol airport is spending £9.5m on a facility with more than 1,000 spaces.


And there is much more …

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Heathrow owners urged to stop huge payouts to investors

By John Collingridge (Sunday Times)
March 18 2018,

Heathrow’s debt totalled £13.7bn last year

Heathrow is under pressure to cut blockbuster dividends for its shareholders while it builds a £14bn third runway.

Ministers and airlines are demanding that Europe’s busiest airport holds down charges — which could see the industry watchdog, the Civil Aviation Authority (CAA), cap payouts. Heathrow could be forced to divert spare funds into the new runway, and to strengthen its finances. Heathrow paid more than £3bn in dividends since its debt-fuelled buyout in 2006. Combined with a huge building projects, including two terminals, this pushed debt to £13.7bn last year.

The gigantic borrowings force Heathrow to divert a large portion of its cashflow to creditors. Last year it paid more than £560m in interest, alongside £525m in dividends, and it approved another £114m payout to shareholders last month. That could leave its balance sheet vulnerable if the runway project hits difficulties or the aviation industry suffers a downturn. The runway would almost double the size of Heathrow’s £15.8bn asset base.

The airport’s shareholders make a return from take-off and landing charges, which add about £20 to each passenger’s ticket. Transport secretary Chris Grayling has insisted that Heathrow keep charges close to current levels. Airlines, including British Airways, have argued that fees should not rise.

Heathrow is owned by the Spanish construction giant Ferrovial alongside Qatari, Chinese and Singaporean sovereign wealth funds. The Universities Superannuation Scheme, which invests the pensions of British academics, owns 10%.

The CAA has hired consultancy KPMG to analyse “measures that could improve the financial resilience of Heathrow Airport Ltd, including a gearing cap, a minimum liquidity requirement or minimum credit worthiness”.

A cap on Heathrow’s gearing — a measure of its debt as a proportion of the value of its assets — would ban dividends if borrowings climb above a certain level.

Heathrow’s gearing stands at 87% — far higher than similar businesses — and it wants to stretch its balance sheet further, taking the ratio up to 93%. In 2012, the CAA imposed a gearing ceiling on the air-traffic company Nats.

Heathrow told the CAA that debt limits would be “disproportionate to the possible benefit they might provide” and said it “operates the business’s financing in a manner that delivers financial resilience greater than its financing arrangements require”.