Heathrow investors may soon realise “the days of plenty are over”, with returns cut

Heathrow’s planned 3rd runway plans took a very substantial knock on 27th March, when the 3 Appeal Court judges ruled that the Airports National Policy Statement was invalid.  It had not properly taken carbon emissions, and the Paris Agreement, into account. The Government now has to decide what to do about the NPS. The scheme is looking less attractive for its investors. The Sunday Times has written that “Heathrow’s owners, which have siphoned off a stream of dividends over the past decade, are about to learn that the good times are coming to an end.” …”Heathrow was bought for £10.3bn as part of the airports monopoly BAA in 2006 by a consortium led by the Spanish infrastructure giant Ferrovial. After an initial period when lenders restricted dividends, payouts have flowed, while debt has soared. From 2012, the airport has paid out more than £4bn of dividends, including £500m announced last week.”  Currently Heathrow investors earn more, the more Heathrow spends and builds.  “But that may be about to change…” The CAA may soon get much tighter on returns to investors, as they are being with NATS. 


Forget the third runway, Heathrow’s payouts are on the line

The huge returns to the airport’s owners are under threat

By John Collingridge (The Sunday Times)
March 1st 2020

As the clock ticked down to Heathrow’s date with destiny at the Court of Appeal last week, the airport’s boss made one last attempt to burnish its green credentials.

The west London hub had become carbon-neutral, John Holland-Kaye declared, and would go even further by planting trees in Scotland and restoring peat bogs in Lancashire. It was a “significant milestone and a testament to the determination of our airport to help spearhead a new era of sustainable aviation”, said the urbane chief executive.

However, the calculation excluded the hundreds of thousands of flights and millions of cars that use the airport. Only the physical infrastructure — terminal buildings and baggage handling gear — was counted.

It was a futile PR gesture. Last week, climate change campaigners delivered a hammer blow to the airport’s £14bn plan [maybe as much as £30 billion]  for a third runway when three High Court judges ruled that expansion was illegal as it did not take into account the Paris climate agreement. That agreement, from 2016, under which the government pledged to restrict climate emissions, was not factored in when ministers approved the third runway, they ruled.

Add to that opposition from Boris Johnson, and the airport’s expansion plans have been left in tatters.

Other problems are also mounting. Heathrow’s owners, which have siphoned off a stream of dividends over the past decade, are about to learn that the good times are coming to an end.

The Civil Aviation Authority (CAA), which polices the charges that Heathrow levies on every ticket, is about to clamp down on the airport’s returns. Competition could also be on the way, too, via an attempt by hotels tycoon Surinder Arora to build a rival terminal at the airport.

Heathrow was bought for £10.3bn as part of the airports monopoly BAA in 2006 by a consortium led by the Spanish infrastructure giant Ferrovial. After an initial period when lenders restricted dividends, payouts have flowed, while debt has soared.

From 2012, the airport has paid out more than £4bn of dividends, including £500m announced last week, to investors including sovereign wealth funds from Singapore, Qatar and China — as well as USS, which invests on behalf of British academics.

Under a complex regulatory system, investors are rewarded based on the size of Heathrow’s asset base, (RAB) which now stands at £16.6bn. That means the more they build, the more they earn — underlining the attractiveness of the third runway to investors. Those returns are recouped from passengers via airport charges — about £22.64 on every flight.

Yet those dividends are starting to look like an anachronism. Regulators are clamping down on former state-owned companies, from water suppliers to power grids. After years of turning a blind eye to hefty dividends, the pendulum has swung back to cutting bills for consumers. Labour’s re-nationalisation pledge pushed the Tories to adopt policies once anathema to the party of the free market: price caps on household power bills and water companies told to slash bills.

Ofwat, the watchdog, has sent shockwaves through the water industry with its five-year price ruling. An unprecedented four companies are appealing to the competition watchdog over the rate of return Ofwat has allowed them, arguing that it would make their businesses unaffordable.

The contagion is spreading. Nats, which manages the UK’s airspace and is jointly owned by Heathrow, airlines and the government, is at loggerheads with the CAA over its latest business plan. The aviation watchdog has slashed Nats’ cost of capital — hence the return investors can make — between 2020 and 2024, arguing that the rewards were “inappropriate and unduly generous” and that Nats enjoyed a comfortable position as a low-risk monopoly.  [See more on NATS below] 

Nats has appealed to the Competition & Markets Authority, but the trend is set: returns are falling fast.

Heathrow is watching the Nats case closely. Its approach has been to ignore public sentiment by demanding an even higher cost of capital, arguing that the risks involved in building a runway over the M25 mean it needs better returns.

Ultra-low interest rates and the infrastructure gold rush have slashed borrowing costs for companies that own pipes, roads, cables and runways. Heathrow has taken advantage of that, pushing net debt to an eye-watering level of £14.4bn. Gearing is now running at 86.5% — well above the 60% the CAA sets as a notional level. Because borrowing is cheaper than pumping in new equity, investors have been able to make outsized returns.

In future, owners of airports such as Heathrow will not be allowed to use a consequence of central banks’ multibillion-dollar money printing to cream off huge returns.

Whether the third runway goes ahead after last week’s appeal court intervention, Heathrow’s owners are about to learn that the days of plenty are over.


More on NATS

This is the NATS document

CMA Statement of Case – 28 November 2019 [the Competition and Markets Authority]



The Government website page about this is at

and says:

NATS En-route Limited (NERL) Price Determination
The CAA has referred an appeal from NATS to the CMA for a determination on the price controls.

“Reference from the CAA
In August 2019, the CAA published its Final Decision on the price control called ‘RP3’, which will apply for the period 1 January 2020 to 31 December 2024. NATS has rejected this Decision, and the CAA has asked the CMA for a determination on the price controls.

“The CMA must conclude the determination within 6 months of the reference, unless the CAA agrees to an extension of up to a further 6 months.”


See earlier:

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’s shareholders get £500m as profits rise (including income of £126m from car parking)

IAG, the owner of British Airways, is angry that Heathrow has paid out  £500 million in dividends to its foreign investors while charging its airline customers more. IAG says the dividend payments – now totalling £3.5 billion since 2012 – make Heathrow more costly for airline passengers (so slightly deterring them from flying perhaps). Heathrow said “It is right that our shareholders receive returns in record years and it will ensure we expand whilst keeping airport charges close to 2016 levels.” Heathrow’s top shareholders include the Qatar Investment Authority, Singapore’s GIC and the China Investment Corporation. Its largest single investor is Spain’s Ferrovial. The only UK shareholder is the Universities Superannuation Scheme (USS) with a 10% stake.  Heathrow’s figures out last week show revenue growth of 3% to £2.97 billion in 2018 with 80.1 million passengers (up 2.7% from 78 million).  Car parking income was £126 million (up 5% from £120 million in 2017). Retail revenue per passenger was £8.94 (up 5.8% from £8.45 in 2017). Total retail income was £716 million (up 8.6% from £659 million in 2017). Heathrow paid £70 million (2017: £53 million) in corporation tax. Out of £2,970 million total revenue. 



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.

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