Blog: Broke Heathrow should not receive any taxpayer cash
The issue of whether Heathrow could ever pay for a 3rd runway is one that has become even more pressing, now the airport has been hit very hard by Covid-19. Its finances have been shaky for a long time. In an analysis, by Chair of the No 3rd Runway Coalition, Paul McGuinness, sets out the facts. Heathrow has claimed that it “can survive with no passengers for the next 12 months, so our’s is a very good position to be in”. But in fact Heathrow admitted to its staff (email of 6 April) that the publicised “£3.2 billion war chest” is merely the liquidity that can be mustered when “we have drawn down all the cash and credit facilities at our disposal”. So, yet more borrowing to be repaid in the future — presumably by passengers. Looking into Heathrow finances, it is clear that it has sold assets and borrowed against those that remain, in order to finance enormous dividend payments to shareholders (92% of which do not pay UK tax), while avoiding corporate taxes. It has an eye watering level of debt. By the end of 2019, its borrowing against its assets was £15.449 billion, so it had reached a leverage ratio of 97% — higher than any comparable UK infrastructure or utility operation. Read the whole blog for details.
Broke Heathrow should not receive any taxpayer cash
Heathrow has given notice that it may wish to seek taxpayer assistance. But is it entitled to such support?
With a chain of subsidiaries as long as a runway, and thirteen sets of accounts, getting one’s head around Heathrow’s finances can be — as if by design — quite a challenge. But, once undertaken, it reveals a company that has sold assets and borrowed against those that remain, in order to finance enormous dividend payments to shareholders (92% of which do not pay UK tax), while avoiding corporate taxes.
Moreover, it reveals an eye watering level of debt, which looms in stark relief to some of the recent, rather boastful statements made by its CEO (John Holland-Kaye) and attributed to the company’s “Chairman” (Lord Deighton).
In both the recent Accounts of Heathrow Airport Holdings Limited and the accompanying Press Release, the company’s Chairman, Lord Deighton, is said to claim that the airport had received “over £12 billion of private investment” from its shareholders over the last decade. This is more than misleading. It is fallacious.
When BAA plc’s stable of airports was forcibly broken up in 2009, under monopoly rules, the investment of FGP Topco (Heathrow’s holding company) was a mere £13.1 million. BAA plc was acquired for £10.7 billion, paid by adding this to its borrowings of £3 billion pre-acquistion, so that it started its life as FGP Topco in 2007 with borrowings of £13 billion, adding over another £1 billion to its current “fair value” debt which, with coming interest payments, rises to £16 billion. And since then, money has been generated first from the sale of assets, and then from a thorough recapitalisation of remaining assets, to keep the operation in place and pay large dividends to the shareholders.
Along with Heathrow, the initial investment also bought 4 other airports (Standsted, Glasgow, Aberdeen and Southampton). The sale of these produced £8 billion, which was used to pay significant dividends to shareholders; since when loans have been secured against the remaining fixed assets.
By the end of 2019, Heathrow had increased its borrowing against these assets to £15.449 billion; meaning that with an assets value of £15.8 billion, it is now so highly geared with debt, that it has reached a leverage ratio of 97% — higher than any comparable UK infrastructure or utility operation.
Of this borrowing, £1.389 billion was actually added in 2019; from which £500 million was paid in dividends. Additionally, and despite a £14 million loss in the final quarter of 2019, the holding company paid its shareholders an interim dividend of £100 million this year, on 20 February 2020. So, even after the money which could have been put away for a rainy day (such as now) had already been disbursed in dividends to Heathrow’s mainly foreign investors, every asset has been mortgaged up to the hilt, to release yet more cash — with significant portions being directed towards shareholders’ bank accounts.
Heathrow has had 538 Charges (a borrower’s right to seize assets, in the event of non-payment of a loan) listed against it at Companies House.
“£12 Billion of investment” has not come from shareholders, as claimed in the statement attributed to the company’s “Chairman”, Lord Deighton. Money has come from the divestment of company assets, through secured borrowing (recapitalisation) — and significant portions of this have gone to shareholders.
The recent boasts from the company’s CEO, John Holland-Kaye, started in April, just as surprise was being expressed at the fragility of aviation sector players, under Covid-19 pressures. And he has continued to speak of the business’s “current financial strength”.
Yet in an internal email of 6 April, the CEO explained to staff that whilst the airport’s pre-crisis revenue was £250 million per month, and its operating and maintenance costs were only £190 million, its monthly debt repayment bill was (and remains) a staggering £75 million per month — meaning that Heathrow’s indebtedness has the airport’s core business running at a £15 million monthly loss, even in good times.
To compound this state of affairs, Heathrow already runs a large current account overdraft which, because it is unsecured debt (that could be called in at any point), renders Heathrow technically bankrupt. Tellingly, within the company accounts, Heathrow now admits that it is run as a “going concern” (accountancy jargon to indicate that a business may wish to defer some of its prepaid expenses to a future accounting period).
On BBC’s Newsnight (28th May 2020), Holland-Kaye repeated the earlier public brag, telling the programme “we’re very well funded so we can survive with no passengers for the next 12 months, so our’s is a very good position to be in”. But such a public suggestion of “financial strength” must be delusory. For he has had to admit to staff (email of 6 April) that the publicised “£3.2 billion war chest” is merely the liquidity that can be mustered when “we have drawn down all the cash and credit facilities at our disposal”. So, yet more borrowing to be repaid in the future — presumably by passengers (if the current account creditors have not already called in the overdrafts, tipping Heathrow into Administration).
In fact, Heathrow’s financial frailty was recognised several months ago, leading to Heathrow having to file a “Section 642 Notice” in November 2019 — so as to reassure the markets and financial regulatory authorities that it believed it could fulfil its massive debt obligations. Yet, on 2 June 2020 the ratings agency, Standards & Poor’s, put the debt of Heathrow Airport’s principal funding vehicle (Heathrow Funding Ltd) on “credit watch with negative implications” — a second credit downgrade in just two months. And on 16th June 2020, it was announced that Heathrow is seeking waivers on covenants from holders of £1.1 billion of bonds.
The boast that Heathrow can somehow find a way to stand on its own two feet for “12 months” is pertinent however. For it is equally (as may have been the intention) an indication that, without any revenue to pay interest on its bonds, and with the threat of bankruptcy, Heathrow will be looking to the taxpayer for assistance at the end of this period — despite its notorious record for avoiding corporate tax on previous large profits, through its carefully designed, multi-layered, debt-ridden, labyrinthine corporate structure.
In 2019 alone, Heathrow may have felt able to pay £500 million to shareholders, out of the £1.89 million of additional borrowing; but by setting off the financing of their massive debt against tax (notwithstanding the avoidance of £110m withholding tax on the interest paid on bonds), Heathrow managed to keep their corporate tax contribution to just £28 million. Extraordinarily, by historical standards, this is a large payment of corporate tax by Heathrow. Research by The Times (published 10th January 2016) found that “HEATHROW has handed its owners £2.1bn in dividends over the past four years — but paid only £24m corporation tax in almost a decade”.
It is usually expected that companies pay dividends on profits. But because of the enormous interest payments it has to make to its creditors, Heathrow minimises it taxable profit. So their shareholders simply receive their dividends from this borrowing, which is secured by mortgaging its assets to lenders. And, then, the enormous cost of interest payments to creditors is used to generate tax credits to minimise its corporate taxes.
The Treasury and the Bank of England are demanding certain conditions of those companies who receive corporate “bailouts” from taxpayer funds, under the Covid Corporate Financing Facility: there must be neither staff bonuses, nor dividend payments to shareholders, whilst the company is in receipt of taxpayer support. But, with Heathrow having all but given notice that it is anticipating a need to seek government assistance, should it not be asked to adhere to those conditions, now?
For just as it siphoned off £100 million of dividends on 20 February (as it simultaneously slashed the wages of those who operate the airport and protect our borders), would it not be entirely characteristic of Heathrow to make yet another large dividend payment just before it calls the Treasury for a lifeline? And most reasonable individuals on the “Clapham Omnibus” would surely think that this indebted company, that has enriched its shareholders through recapitalisation, and hardly paid any corporation tax, should not be permitted to get away with any such thing.
On an entirely different note, does it not seem absurd that this company was claiming that it could fund a 3rd Runway? They always knew that they could never get back the billions that they have paid out to shareholders, on the back of debt. The plan was simply to mortgage every newly built asset to the eaves; using passenger charges to finance the debt and pay dividends to shareholders who, themselves, would not contribute a penny. Hence Heathrow’s spat with the CAA over raising passenger charges: because rather than taking the upfront capital risk, as responsible corporations do, they planned all along to transfer the risk onto their customers, and away from themselves and shareholders — as corporate pygmies might.
Heathrow’s financial history appears to show that every sinew has been stretched to guarantee returns to shareholders and avoid the payment of corporate taxes. Assets have been secured against prodigal levels of debt, only to the advantage of overseas shareholders. And, with there being no chance of these enormous dividend payments being returned, this type of tax avoiding recapitalisation may well look, to some, like asset stripping.
It is possible that Heathrow’s current campaign of boasting is spawned — just like the sort of bragging one finds in a school playground — from a growing sense of weakness.
But such weakness is self-inflicted. And it would be quite wrong for a company that has pauperised itself through such irresponsible financial engineering to be bailed out by those who have acted responsibly and properly paid their tax.
By Paul McGuinness, (Chair, No 3rd Runway Coalition)
Heathrow defends paying over £100m in dividends amid aviation industry struggle
13 April 2020
Heathrow airport has defended handing investors more than £100m in dividends despite the aviation industry being brought to its knees by the coronavirus pandemic. Europe’s busiest airport said shareholder payouts were agreed in February “before the significant impacts of Covid-19 on our industry were clear or anticipated”. The dividends will come as a boon to Heathrow’s major investors. But the decision to press ahead with rewarding shareholders could threaten to undermine a concerted effort by Britain’s airports to secure bespoke financial support from the taxpayer. The Airports Owners Association ratcheted up the pressure on ministers over the weekend by calling for lending caps to be lifted for aviation businesses as well as the Government’s furlough scheme to be extended beyond May. Heathrow has agreed a 10% pay cut with its biggest union Unite. Non-unionised staff have been warned they face the sack if they refuse to accept voluntary wage reductions of up to 15%. Around a quarter of Heathrow’s senior management has been made redundant and staff have been told they could be transferred on to the Government’s furlough scheme where the taxpayer foots the bill for 80pc of wages.
Ferrovial threatens to pull out of Heathrow if CAA does not let it make large enough returns
Heathrow’s biggest shareholder, Ferrovial, has warned that it could sell its 25% stake if returns are squeezed by the aviation watchdog. This casts doubt about the 3rd runway. Ferrovial says it would not put money into the runway, (costing between £14 and £32 billion) unless the Civil Aviation Authority (CAA) grants it “attractive returns”. The CAA ruled in December that Heathrow could not spend more on early construction in order to ensure the runway was built by the end of 2026 as planned. That means that the 3rd runway will now not be completed until 2028 – 2029, at the earliest, and not 2026 as Heathrow and its investors had hoped. The CAA currently has a consultation, that ends on 5th March, on Economic regulation of Heathrow, on the “regulatory framework and financial issues”. The CAA effectively decides how much money Heathrow can make through a complex tariff. This is usually updated every 5 years, although this has been extended by 2 years. A controversial regulatory scheme incentivises the airport’s owners to build, spend more, as then they earn more in returns – the passenger flight charges, now about £20 per passenger. If Ferrovial decides to pull out, it would invest in schemes elsewhere.
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.
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.
How Heathrow has been getting away with paying so little tax to the UK government
UK tax rules have allowed airports like Heathrow to pay far less tax than they should. It is estimated that Heathrow’s foreign owners have been able to get a tax break of perhaps £120 million per year from the UK government. And the airport’s shareholders (which include the governments of China, Qatar and Singapore – with only 10% by the USS being British – .have paid themselves about £3 billion in dividends in 5 years. Rules on how firms can cut tax bills due to large debt interest payments began in 2017, but the Treasury has given an exemption for infrastructure projects like Heathrow. The think-tank, Taxwatch, said: “In the case of Heathrow, the benefits of the exemption appear to flow overwhelmingly to the owners of the company.” …“The company was bought using a huge amount of debt. Instead of paying back the debt themselves, the new owners managed to push this liability on to Heathrow, making the company liable for large interest payments… The large debt repayments wiped out the company’s pre-tax profit.” Revenues at Heathrow have risen to £2.9billion but its owners have paid little corporation tax, due to massive debts. Between 2007 and 2014 the group reported a total pre-tax loss of more than £2 billion, and paid just £15 million in corporation tax. In the past 3 years it declared pre-tax profits of more than £1 billion, leading to corporation tax payments of £122 million (ie. £70 million in 2018 and £53 million in 2017).
Heathrow issues €650m bond, to borrow more money, weeks before Brexit deadline
Heathrow Airport has placed a €650m (£558.9m) bond with only weeks to go before the UK is due to leave the European Union. The 15-year bond was backed by current and new investors, which were mostly European, and reached an order book in excess of €2.8bn (ie. there was demand of that amount). Heathrow said the high demand for the bond “shows investor confidence in Heathrow’s expansion plans and resilience ahead of Brexit.” The bond means Heathrow hopes to extend the duration of its debt portfolio – ie. taking more time to pay it all back – for its 3rd runway expansion plans. It said the funds will be used on day-to-day corporate spending. The airport’s director of treasury and corporate finance, said: “The transaction delivers on our strategy of further diversification, longer duration and stronger liquidity.” Heathrow hopes, at the earliest, that the runway might open in 2026 – but it has a large number of hurdles to overcome before them, including the long DCO (Development Consent Order) process, that is the equivalent of a planning application, but for a vast project – with the decision taken out of the hands of the local authority, and made by government instead (a process devised to avoid the sort of long delays they had on Terminal Five).