BA hits out over £500m bill (Category B costs) for Heathrow failed 3rd runway plans that it wants to pass on to airlines
A row has erupted between Heathrow and British Airways, its largest airline, over the plans to get airlines to pay the £500m bill relating to the airport’s third runway expenses so far. A regulatory consultation by the CAA recommends allowing Heathrow to charge carriers for expansion costs incurred until February this year. These are called “Category B” (£500m) and early “Category C” costs, associated with getting planning consent. CAA regulations allow Heathrow to increase charges in line with costs incurred. Willie Walsh, the outgoing boss of IAG, that owns BA, has repeatedly clashed with Heathrow over the framework, which he has said encourages the airport to “spend recklessly.” IAG has never wanted to pay for Heathrow’s costs in developing the runway (partly as the extra capacity at Heathrow would increase competition with BA by other airlines). CAA director Richard Stephenson said it was reviewing responses to the consultation (held in summer 2019) and had yet to make a decision. Heathrow has pressed ahead, spending a great deal on its runway plans, even before legal obstacles had been cleared. The restriction of early spending by the CAA meant a delay in the runway timetable of 2-3 years.
BA hits out over £500m bill for failed airport plans
Heathrow airport is considering passing on the bill for its failed third runway on to carriers
A row has erupted between Heathrow airport and British Airways over the plans to hand airlines a £500m bill relating to the airport’s controversial third runway.
A regulatory consultation recommends allowing Heathrow to charge carriers for expansion costs incurred until February this year.
Judges blocked Heathrow’s controversial £14bn expansion seven months ago over climate change concerns – but not before the airport spent hundreds of millions of pounds in preparation.
Regulations allow Heathrow, which is owned by a consortium led by Spain’s Ferrovial and the Qatar state, to increase charges in line with costs incurred.
Willie Walsh, the outgoing boss of IAG, the FTSE 100 group that owns BA, has repeatedly clashed with Heathrow over the framework, which he has said encourages the airport to “spend recklessly”.
A spokesman for IAG said: “In any other business, a wealthy, privately owned company like Heathrow Ltd would have to meet its own sunk costs.
“But Heathrow is a monopoly that will simply pass the bill to the airlines, further damaging UK aviation as it struggles to survive the Covid crisis. The regulator must step in.”
A spokesman for Heathrow said: “The CAA established an approach to expansion-related costs some time ago – with that approach approved and agreed by airlines, including IAG. We believe this approach should remain.”
CAA director Richard Stephenson said it was reviewing responses to the consultation and had yet to make a decision.
The row came as ministers faced questions over claims that taxpayers would not pay for Heathrow’s expansion. Analysis by The Sunday Telegraph of Department for Transport filings reveals £2.4m has been spent on investment bankers, lawyers and consultants over the last year in relation to Heathrow’s third runway.
A spokesman for the DfT said “The Government has always been clear that any expansion at Heathrow must be privately funded. However we regularly draw on expertise from inside and outside Government, to ensure ministers can benefit from comprehensive advice on high-profile schemes. Any outside advice is procured subject to a rigorous business case to ensure value for money for the taxpayer.”
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.
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.
How Heathrow is happy to pay way over the odds, to increase its RAB, allowing more revenue
The City Editor of the Financial Times, Jonathan Ford, has written about how the reasons for Heathrow’s anticipated costs for its possible 3rd runway. The cost of £17 billion, or now £15 billion are exceptional. But Jonathan explains how Heathrow’s investors seem happy to spend so much. It is because of the curious incentives that operate in the topsy-turvy world of utility financing. As with most ventures that have monopolistic aspects, Heathrow is not subject to ordinary restraints on capital expenditure. The principal check is the willingness of the airport’s regulator, the Civil Aviation Authority, to sign off on the mechanism by which these costs can be recovered from captive airline customers through passenger charges. Heathrow often pays far above the going rate for building, new technology etc, because this adds to the airport’s regulated asset base (RAB) on which it gets an allowed return, and thus permits it predictably to expand its own revenues. Since taking over BAA in 2006, Ferrovial has been extremely active, tripling Heathrow’s RAB to £15bn. It is a system that has allowed the airport’s owners to finance these expansions with vanishingly little equity capital. Heathrow is encouraged to fund everything with debt by a regulatory system that allows it to keep the gains from financial engineering. Heathrow’s owners hope to shrug off the risks of completion, but transfer them on to customers.
CAA consultations on the economic regulation of Heathrow
There was a CAA consultation in December 2019 on the economic regulation of Heathrow airport
This followed the CAA consultation in summer 2019
Category A costs are:
Costs which are incurred by HAL during the Airports Commission process, or before Heathrow was named as the preferred location for new runway capacity on 25 October 2016. [CAP 1513, paragraph 3.20] On an exceptional basis, some Category A costs may be recategorised as Category B costs if HAL can provide a strong and clear case that the information submitted as part of the DCO planning process is not materially different from the information submitted to the Airports Commission or the Government prior to 25 October 2016. [CAP 1513, paragraph 3.21]
Category B costs (the only ones the CAA says Heathrow should be able to recover) are:
Costs which are: • in general1 , incurred by HAL after the Government policy announcement on its preferred location for new capacity (25 October 2016); and • associated solely with seeking planning permission for the delivery of new runway capacity at Heathrow. [CAP 1513, paragraph 3.10]
Category C costs are:
Costs incurred by HAL in connection with implementation and construction of new capacity, up to entry-intooperation. The majority of these costs will typically be incurred after planning permission is granted. [CAP 1651, appendix A]
Early Category C costs are:
Those costs that HAL will incur prior to the grant of a DCO permitting capacity expansion. These costs will be incurred in addition to the Category B planning costs. They include the costs of relocating certain large commercial and other facilities, community costs (compensation costs for other commercial activities, agricultural activities and residential property) and other enabling costs for construction. [Chapter 2, paragraph 2.1]].
An important requirement for costs to be considered as early Category C expenditure is that the purpose of this expenditure must be to promote the efficient and timely delivery of the overall programme for capacity expansion at Heathrow airport.
Heathrow plans to increase 3rd runway costs – to £2.9 bn – before approval, hoping it will be too costly to scrap its plans
Heathrow plans to triple the amount it spends on its third runway proposal, to £2.9bn – well before getting final approval. This either means air passengers using Heathrow would be charged more (something the industry and the government do not want), or else the taxpayer will be charged. Even if the runway never goes ahead. The CAA has a consultation about the costs and how Heathrow has been speeding up the process, spending ever more money. (The legal challenges are now going to appeal in October, but Heathrow is pressing ahead with its DCO consultations). Especially on carbon emissions, air pollution and noise grounds, it is entirely possible the runway will be blocked and the DCO will not be granted. The CAA says it has asked Heathrow “to consider different options for this spending and the implications of this spending for the overall programme timetable and the interests of consumers.” [Not to mention the taxpayer, who may end up paying …] Heathrow is increasing the amount of its “Category B” costs and “early Category C” costs. They want to increase the amount spent already to be so large, that it effectively cannot be cancelled. Detailed costs still have to be outlined, but Heathrow is expected to submit its initial business plan to the CAA for review towards the end of this year.
Willie Walsh reiterates that he will fight Heathrow runway, due to cost; content with 3 hub system for IAG instead
Willie Walsh has reiterated his determination not to pay the exorbitant costs of a new Heathrow runway (and that’s without the costs that the taxpayer would have to pick up for surface access improvements – which could be £20 billion). He said the current proposal to build a 3rd Heathrow runway is “indefensible” from a cost point of view and he will fight it. BA holds over 50% of Heathrow’s slots. Walsh said he was worried about the current Heathrow proposal because there was now “desperation by the airport to get a third runway and they are willing to do anything to get it.” He commented: “So the airport is incentivised to spend money while I am incentivised to save money.” Because the coalition government blocked a 3rd runway in 2010, in January 2011 BA and Iberia were merged to form IAG. Then IAG bought UK airline BMI, to get hold of its Heathrow slots, gaining an extra 42 pairs. That ensured IAG had enough Heathrow slots to secure its ability to compete from its hub base. Since then Walsh has made his plans to use a 3 hub strategy – with Madrid and Dublin as its two others, not depending so much on Heathrow. IAG also owns Iberia, Vueling and Aer Lingus. Dublin will be adding a new runway – probably by 2020.