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CAA tells Heathrow’s owners to invest more in the company, or risk state takeover
Date added: 25 October, 2020
The CAA has warned the foreign funds behind Heathrow that the airport is threatened with nationalisation if they do not inject new money to help it cope with the pandemic. They said that without emergency funding from shareholders including several sovereign wealth funds, Heathrow faces a similar fate to Railtrack, the former FTSE 100 company that collapsed in 2001 with debts of £3.5billion; then taxpayers took back control of the rail network. The CAA has rejected Heathrow’s demand for permission to increase its airline and passenger charges, and the airport has paid out £4 billion in dividends since 2012. It has paid £2.1bn in dividends over just the past 4 years. Heathrow has threatened court action if the CAA does not allow it to set higher charges, which it claims it is entitled to. Heathrow has massive debts, owing over £17 billion to banks and bondholders, but it claims it has enough cash to see it through till 2023. However, it has been handling at best 30% as many passengers in recent months, compared to the same time in 2019. Shareholders “need to be fully aware of the projected liabilities of the companies in which they invest and the performance risks they face”. The CAA is now consulting the industry on its proposed rejection of Heathrow’s call for higher charges.
Update: 26th October 2020:
The CAA deny the claims yesterday. Richard Stephenson, director at the CAA, said that the watchdog “has not ‘threatened’ to nationalise Heathrow airport, nor do we have the legal powers to do so”. He said that the Railtrack case study was not there to draw comparisons and that “nationalisation has never been considered”. Times link.
Heathrow’s owners told to invest or risk state takeover
The airline industry watchdog issued the threat after rejecting Heathrow’s demand for higher airline and passenger charges this month
By Oliver Gill (Telegraph)
The foreign funds behind Heathrow have been warned the airport is threatened with nationalisation if they do not inject new money to help it cope with the pandemic.
The airline industry watchdog said that without emergency funding from shareholders including the sovereign wealth funds of Singapore and Qatar, Heathrow faces a similar fate to Railtrack, the former FTSE 100 company that collapsed in 2001 under debts of £3.5bn. Taxpayers stepped in and took back control of the rail network.
The Civil Aviation Authority (CAA) issued a thinly veiled threat to Heathrow owners also including the Spanish infrastructure company Ferrovial and a Chinese sovereign wealth fund, as well as the UK’s Universities Superannuation Scheme, after rejecting the airport’s demand for higher airline and passenger charges.
Heathrow has made the demand despite paying out £4bn in dividends via just one of the entities in its corporate structure since 2012.
The regulator said: “Heathrow’s request set out a solution that would involve consumers bearing a significant proportion of the costs associated with the pandemic and providing additional protection for shareholders. We have considered Railtrack as a relevant example of when a regulated company has faced severe financial issues.”
This weekend Heathrow hit back, accusing the CAA of sending a “terrible” message to foreign investors and threatening court action if regulators do not allow higher charges, which it claims it is entitled to.
Javier Echave, the airport’s finance chief, said: “You are breaking the principle of the UK being a safe haven for investors’ money.”
The row is escalating as concern over Heathrow’s ability to withstand more months of depressed air travel rises, given its heavy debts. It owes more than £17bn to banks and bondholders, but says it has funds to see it through until 2023 even though only 19m travellers passed through between January and September, a decline of almost 70pc.
The CAA’s comparison with Railtrack pointedly referenced a comment from Stephen Byers, transport secretary during the company’s collapse. He said shareholders “need to be fully aware of the projected liabilities of the companies in which they invest and the performance risks they face”.
A Heathrow spokesman said the airport was “completely different” to Railtrack and the CAA caveated its comparison by saying there were “a number of important differences in circumstances” between the two.
The CAA is now consulting the industry on its proposed rejection of Heathrow’s call for higher charges.
Richard Stephenson, communications director of the regulator, said: “We do not yet believe that Heathrow has demonstrated its request is a proportionate measure. That’s why we are seeking additional evidence.”
Mr Echave said that without the ability to charge more “when demand returns, Heathrow could become the dysfunctional gateway of Britain”.
“It’s outrageous what Heathrow is doing,” said one senior airline industry figure.
British Airways’ owner IAG said it was “staggered” by the demand.
“Heathrow is a wealthy, privately owned company, which should seek funds from its shareholders,” it warned.
Heathrow’s appeal for money provides the clearest signal yet of the financial pain wrought by the pandemic on Europe’s biggest airport.
Bosses say that they are within their rights to ask for the injection. A regulatory framework allows it to pass on “exceptional costs” to airlines, and ultimately customers, they say.
Nevertheless, the CAA rejection surprised and impressed the airline industry, which itself has suffered so badly it has collectively cut tens of thousands of jobs.
“In the past, the CAA has rolled over,” says one senior source. “For once they have shown their teeth.”
The stakes are enormous. Heathrow ranks among one of the most indebted companies in Britain. It owes an array of banks and bondholders more than £17bn.
This week, the airport will update investors on third quarter trading. Its owners, 90pc of which are from overseas, may struggle to see the upsides amid the devastation.
The airport has already announced that passenger numbers were down 82pc in September.
Heathrow’s debt mountain
Experts from consultancy Five Aero estimate 43m travellers need to come through Heathrow’s doors each year just to cover its interest bill of around £500m. So far it has welcomed just 19m.
The CAA’s proposal to reject an increase in charges, which remains subject to consultation, has prompted speculation within the industry that Heathrow could soon face a cash crunch.
Javier Echave, the airport’s finance chief, rejects this. At the end of September, cash reserves stood at £2.4bn, enough to see it through until 2023 in a worst-case scenario, he says.
Yet Echave and John Holland-Kaye, the airport’s chief executive, still have a £1.7bn hole to fill if they cannot force the CAA into a reversal.
Failure to do so could leave Heathrow at risk of breaching its banking covenants, which when tested in December will require it to keep debt below 95pc of the regulated value of its assets.
Other potential sources of funding bring their own challenges, however.
Tapping the airport’s owners – which include Spain’s Ferrovial, Qatari and Chinese sovereign wealth funds and pension schemes – would be complicated. “Because they have a disparate group of shareholders, it is going to be quite difficult,” says one industry source.
A direct government bailout appears to be off the table, after being ruled out by the CAA. The regulator compares Heathrow’s plight with that of Railtrack, the privately owned predecessor of tracks and stations owner Network Rail that collapsed in 2001.
The CAA cites Railtrack as “a relevant example of when a regulated company has faced severe financial issues”. Railtrack tried to tap taxpayers for money; but the Blairite government refused, placing the former FTSE 100 company into administration.
Echave will not entertain the notion of asking Heathrow’s wealthy shareholders for more money. He is focused on changing the regulator’s mind and is prepared to go to the High Court if necessary.
“If the CAA fail to adjust for this, they will be simply failing their duties to enforce something that is already in the settlement,” he says.
“This could [mean] a significant reduction in capital investment, which, while it will not impact safety, will ultimately hit passengers. When demand returns, Heathrow could become the dysfunctional gateway of Britain
“Also, the message for foreign investors is terrible,” he adds. “If you are not prepared to enforce a settlement, you are breaking the principle of the UK being a safe haven for investors’ money.
“If the CAA does not change its decision this could require us to launch a legal challenge. Because the consequences [on Heathrow] would be severe.”
Running out of runway
The hole in Heathrow’s balance sheet is not the only thing Holland-Kaye and Echave have to worry about. The Unite union is threatening industrial action amid claims the airport plans to “fire and rehire” staff, putting them on inferior contracts. The airport has warned up to 1,200 jobs may need to be cut if it cannot agree changes with unions.
Meanwhile, the future of the £14bn third runway hangs in the balance. Supreme Court judges are not expected to rule until next year on whether to overturn a Court of Appeal decision to block the expansion on environmental grounds.
With pre-Covid demand for air travel not expected to return until the middle of this decade, the building of the third runway is about as far away as it has ever been. A team of roughly 200 people working on the project have been stood down and reallocated.
In the meantime, Echave’s priority is changing the CAA’s mind. Like the airline bosses earlier this month, he does not mince his words as the crisis deepens and tensions escalate. “The consequences for not allowing for an adjustment are dangerous,” he insists.
Lufthansa has warned of more job cuts to come after already revealing plans to axe 22,000 jobs, around 16pc of its workforce.
American Airlines is due to axe 19,000 jobs as stimulus money runs out and Congress negotiations hit a stalemate. United Airlines has warned of 13,000 redundancies if a deal for a second relief package cannot be reached.
British Airways announced in April it is to axe as many as 12,000 jobs after plunging to its worst ever quarterly loss. The cuts amount to more than a quarter of the airline’s 45,000-strong workforce. Up to 270 pilots face compulsory redundancy under measures agreed by the British Airline Pilots Association and it is locked in talks with unions on the future of its cabin and ground crew.
Cathay Pacific is cutting 6,000 jobs globally and closing its budget Cathay Dragon brand after posting a HK$9.9bn (£1bn) loss in the first half of the year.
Virgin Atlantic has confirmed up to 1,000 more jobs are to go, following cuts of 3,000 announced earlier in the year.
easyJet announced up 4,500 jobs were at risk in May, including 1,900 jobs in the UK. More than 700 pilots have since avoided compusory redundancy by accepting new contracts with fewer flying hours.
Ryanair warned at the beginning of May that it would have to slash 3,000 posts across Europe (15pc of its workforce) as a result of the coronavirus pandemic. It has since struck a deal with the Unite union to safeguard around 1,800 UK cabin crew jobs.
Qatar Airways said in May it will axe more than 9,000 jobs, or a fifth of its workforce.
Etihad Airways has laid off a large number of employees due to the coronavirus pandemic, according to reports.
Emirates said as many as 600 pilots and nearly 7,000 cabin crew could lose their jobs due to the air travel slump.
