Heathrow’s Supreme Court case: can it avoid paying for the failed 3rd Runway?
The Supreme Court will, on 7th and 8th October, hear the appeal by Heathrow airport, against the ruling by the Appeal Court, that the Airports NPS is illegal. Rival scheme to build a Heathrow runway (keen to expand the airport), “Heathrow Hub” explains why Heathrow is going ahead with this further expense of the Supreme Court hearing, when it is struggling with huge financial problems and the reduction in demand for flights, due to Covid. The way Heathrow’s finances work is that, the more it spends – therefore increasing the size of its Regulated Asset Base (RAB) – the higher the return it can earn, and the more it can charge airlines. So it has a vested interest in keeping its spending high, to the fury of the airlines. Heathrow Hub say: “It is not commonly understood that if Heathrow abandoned its Supreme Court case then the CAA would be unlikely to approve its attempt to recover the £550m it has spent on the failed 3rd Runway, including a provision for its legal costs.” If Heathrow did not struggle to the end, to try to get the runway approved, it would have to finance those huge costs itself. Hence the reason for going ahead with the legal process, even though Heathrow admits no new runway is needed for at least 10+ years.
Heathrow’s Supreme Court case this week: who will pay for the failed 3rd Runway?
Press release from Heathrow Hub, Extended Runway scheme
6th October 2020 –
Heathrow’s Supreme Court case could result in airlines and passengers being landed with a £550m bill for the failed 3rd Runway and shows how the economic regulation of the airport is seriously flawed.
On 7th October, Heathrow Airport will be in the Supreme Court appealing February’s judgement by the Court of Appeal, which found the 3rd Runway was incompatible with the UK’s climate change commitments.
However, Heathrow Hub, the independent proposal for incremental expansion via an Extended Northern Runway, believes Heathrow’s real motive is to show it is making every effort to pursue expansion, and therefore leave the Civil Aviation Authority (CAA) with no option but to force passengers and airlines to pick up the £550m bill for the failed 3rd Runway scheme.
The CAA has indicated it is minded to approve the sum, which could yet increase further and would be collected via passenger charges levied on airlines and their passengers.
While Heathrow continues to advocate the scheme, the CAA’s policy allows its costs to be added to the airport’s so-called Regulated Asset Base. This enables Heathrow to run up capital expenditure, including legal costs, earn a return on it, and then pass the bill on via higher passenger charges.
If the regulator refused to approve the sum and Heathrow’s shareholders were forced to pay, then there is a provision in the original Statement of Principles and most recently the 2018 Relationship Framework, signed by the airport and the Department for Transport. This could potentially give Heathrow a case against the Government, should it withdraw its support for the scheme, thereby putting taxpayers on the hook.
Heathrow has some £17bn of debt, partly due to substantial dividends paid by the company to its shareholders in recent years. The Covid pandemic has exacerbated its financial position given the substantial fall in air traffic due to government-imposed travel restrictions.
A spokesman for Heathrow Hub, said: “The big question is who will pay for the failed 3rd Runway?
“It is not commonly understood that if Heathrow abandoned its Supreme Court case then the CAA would be unlikely to approve its attempt to recover the £550m it has spent on the failed 3rd Runway, including a provision for its legal costs. It is iniquitous that passengers and airlines, who had no say in the 3rd Runway, should then have to pick up the bill for a scheme which was always doomed to fail, particularly at a time when the airlines themselves are struggling for survival.
“The CAA has conducted several consultations on economic regulation of Heathrow Airport. The underlying problem is that Heathrow is a monopoly and the regulatory system incentivises it to run up excess costs. The 3rd Runway fiasco shows the regulatory framework needs urgent reform.”
Boscobel & Partners
0203 642 1310
Notes to editors
Heathrow Hub is an independent proposal for additional capacity at Heathrow, by extending the existing northern runway westwards away from London, negating the need to build a 3rd Runway. Planes would land at one end and take off at the other. The scheme is cheaper, greener, simpler, quicker, quieter and safe. It also destroys fewer houses and was deemed viable by the Airports Commission. For more information and images, please visit: www.heathrowhub.com
Heathrow Hub’s proposal to extend the Northern Runway has been independently costed at £4.3 billion for its first phase.
HAL has spent £0.5bn on expansion work to date (p.72, para. 18 & footnote 22 Appendix C) and estimates a further £46m of “wind down costs” (p. 78, para. 40) excluding Supreme Court appeal costs – https://publicapps.caa.co.uk/docs/33/CAP1940%20Heathrow%20Economic%20regulation%20policy%20update%20and%20consultation%20June%202020.pdf
Details of the Supreme Court case can be found here: https://www.supremecourt.uk/cases/uksc-2020-0042.html
See comment on this in the Times by Alistair Osborne:
Filling up two runways is enough of a challenge just now for Heathrow. In August, passengers were down 81.5 per cent. So, you’d think it would have something better to do than run up legal costs arguing for a third one: the scheme costed at anywhere between £14 billion and £32.5 billion, depending on how the airport defines the project.
Think again. Tomorrow Heathrow begins its Supreme Court appeal over February’s verdict to block the runway. Judges found that the government’s Airports National Policy Statement was unlawful because it failed to account for the UK’s climate change commitments under the 2018 Paris accord. The government’s not appealing but Heathrow is plugging on. Why?
Well, ostensibly, because the runway wouldn’t be operational until the next decade, long — you hope — after coronavirus. But is there another reason? Well, Heathrow has so far run up £504 million costs failing to build the thing, plus £46 million from standing down myriad consultants and planners since February. And it wants the money back: added to its regulated asset base and effectively charged to airline passengers via higher landing charges.
It’s something the Civil Aviation Authority is proposing to allow, much to the fury of the airlines. As British Airways-owner IAG put it, why should its customers “cover the costs” of Heathrow’s “failed bid to build the runway. In any other business, a wealthy, privately owned company like Heathrow would have to meet its own sunk costs”. To boot, they’d be even more sunk if the project was officially dead.
So, what better way to keep it alive than a drawn-out appeal? Heathrow says that’s not what it’s up to. But, amid a row over who pays for the runway costs so far, that’s not what the airlines think.
CAA review finds Heathrow ‘wasted’ money and was “inefficient” as costs of 2 tunnel refurb projects costs spiral
The CAA’s economic performance review concludes that Heathrow has “wasted” money on two ongoing tunnel refurbishment schemes and acted inefficiently. The cost overrun of both schemes combined is estimated at £212.4M, although the CAA suggests that those costs could be inflated further by the time work is completed. Costs on the cargo tunnel job between Terminal 4 and the Central Terminal Area have soared by £152M, from its approved £44.9M budget to the current final cost of £197M, the report reveals. The cost of upgrading the main vehicular tunnel to Terminals 1, 2 & 3 has risen by £60.3M from an approved budget of £86M to £146.3M. On the cargo tunnel, the CAA states that “there is clear evidence that the actions of HAL may have directly contributed to wasted spending or lost benefits”. The delays have lead to a loss of benefits to consumers. Heathrow could have been more efficient in managing its work contractors. The CAA will now assess whether to remove costs associated with the tunnel refurbishments from HAL’s Regulated Asset Base (RAB) – which effectively means HAL would have to pay for cost overruns, rather than charging airlines.
BA hits out over £500m bill 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.
Heathrow has lost £1 billion since start of March, is cutting staff pay, and could cut 1,200 jobs
Heathrow says that it has lost £1 billion since the start of March, due to the Covid pandemic. There could be 1,200 Heathrow jobs lost. The airport served a formal notice to staff yesterday, triggering a 45-day consultation period over compulsory job losses. The airport and unions have failed to agree to a deal over the future of its frontline workforce after months of talks. Heathrow is proposing salary cuts of between 15-20% for some affected staff, with a phased reduction in salaries over 2 years. A voluntary redundancy scheme has been offered. The airport claims there might be few compulsorily redundancies, but only if the unions agree a deal. About 4,700 frontline staff are affected, including engineers, security and airside operations. Heathrow has already lost 450 out of 1,000 head-office managerial staff. The airport had indicated previously that as many as a quarter of staff could be made redundant, so up to 1,200 jobs may go. Heathrow said its proposals “guarantee a job” for anyone who wants to remain with the business. The Unite union is not happy with the airport’s offers. Gatwick is losing about 600 jobs, a quarter of its workforce.