CAA rules that Heathrow can only raise £300m out of £2.6bn through higher charges, plus another £500 m
Heathrow’s bid to increase airport charges to recover £2.6 billion lost during the coronavirus pandemic has been rejected by the aviation regulator, the CAA – which said its expenditure had been “disproportionate and not in the interests of consumers”. The CAA is allowing Heathrow to initially raise only an additional £300 million through higher charges, out of the £2.6 billion it asked for. “The CAA has agreed to a limited, early adjustment to HAL’s RAB of £300m and will consider this issue further as part of the next price control (H7)” which starts on 1st January 2022. The CAA has agreed to allow Heathrow to raise charges to recover the £500 million “it incurred efficiently” on its plans for a 3rd runway, between 2017 and 1st March 2020. Heathrow said it faces loses of around £3 billion due to the Covid pandemic. IAG, which owns British Airways, the largest airline at Heathrow, said it is “extremely disappointed” with the CAA decision, which means more expensive tickets for its consumers from 2022. Heathrow wants concessions by the CAA, though its shareholders have earned nearly £4 billion in dividends in recent years.
UK Civil Aviation Authority publishes update on economic regulation of Heathrow Airport Limited
27.4.2021 (The CAA)
The UK Civil Aviation Authority (CAA) has today published a package of measures relating to our economic regulation of Heathrow Airport Limited (HAL).
The documents cover:
- Confirmation of our policy to allow Heathrow to recover the costs it incurred efficiently as part of its expansion programme;
- The CAA’s latest update on the efficiency of HAL’s capital expenditure during the current price control period (Q6)
- The CAA’s decision relating to HAL’s request for an increase to its regulatory asset base (RAB) of £2.6bn to account for the losses incurred because of the pandemic. The CAA has agreed to a limited, early adjustment to HAL’s RAB of £300m and will consider this issue further as part of the next price control (H7); and
- The CAA’s view on some of the key issues it will be considering as part of H7, which will come into effect from January 2022.
Commenting on the CAA’s decision to allow a limited, early adjustment to HAL’s RAB, Paul Smith, Director at the CAA, said:
“Following Heathrow’s request for a RAB adjustment we have taken the decision that an early intervention on the scale of its request is disproportionate and not in the interests of consumers. The other issues raised by Heathrow as part of its request will be dealt with during the next price control review.
We do, however, recognise that these are exceptional circumstances for the airport and there are potential risks to consumers if we take no action in the short term. The decision we have announced today will incentivise and allow Heathrow to maintain investment, service quality and be proactive in supporting any potential surge in consumer demand later this year.”
Further details on Heathrow Economic Regulation
The CAA has today set out a package of measures relating to our economic regulation of Heathrow Airport Limited (HAL).
In this, our overriding priority will always be furthering the interests of consumers of the airport. We also recognise that the pandemic has had a devastating impact on the aviation sector, including HAL and its airline customers. And there remains a high degree of uncertainty as to how quickly international travel will recover.
Due to the effect of the pandemic, HAL requested an adjustment to its Regulatory Asset Base (RAB) of £800m now, and a total of £2.6bn at the end of 2021. This would be recovered through airport charges from 2022.
Following a review of evidence from all stakeholders and consistent with our previous statements, we have decided that an early adjustment of the size of HAL’s request would be disproportionate and not in the interest of consumers. It would also be better to deal with many of the issues raised by HAL during the next H7 price control review
We do, however, recognise that these are exceptional circumstances and there are potential risks to consumers in the short-term
We are therefore allowing a much smaller RAB adjustment of £300m to incentivise HAL to plan effectively, reopen its terminals in a timely way for a summer recovery, and generally invest to benefit its consumers.
In coming to this decision, we have focused on quality of service and investment and also considered the financial position of the notionally efficient company (which is consistent with the approach we use in setting price controls), with a lower assumed level of gearing than the actual company. We are clear that any risks to HAL’s actual financing are a matter for its shareholders, not for consumers to resolve.
We will also consider whether any further RAB adjustment should be made as part of the next price control. But only if it brings long-term benefits to consumers.
- Economic regulation of Heathrow Airport Limited: response to its request for a covid-19 related RAB adjustment (CAP2140)
H7 way forward
We anticipate the next price control (H7) will run for five years from January 2022.
A key development will be a new traffic or revenue risk sharing mechanism. This would help manage the ongoing uncertainty about future passenger volumes by sharing the risk more equitably between the airport and airlines.
In addition, we propose developing a sharper set of tools to incentivise more efficient capital spending by HAL.
And we have set out our initial views on HAL’s revised business plan (submitted December 2020) for the next control period. This included proposals to significantly increase airport charges for consumers. We have said that to allow us and other stakeholders to gain an accurate appraisal of its plan, HAL needs to provide further information in a number of areas, particularly its capital plan.
Early costs and Q6 spending
In our latest update on the efficiency of HAL’s Q6 capital expenditure we have confirmed our decision to allow HAL to recover the costs (c£500m) it spent on its expansion programme, between 2017 and 1 March 2020. Heathrow can start recovering these costs from the beginning of H7 by adding them to its RAB, which will be subject to an efficiency review.
Not doing so would undermine the confidence of investors in the regulatory framework for HAL, and their willingness to invest in providing better services for consumers.
We have also reviewed the efficiency of HAL’s wider capital programme and while we have not found evidence of inefficiency in relation to the bulk of its programme, we have identified problems with a small number of projects. This includes some of the expenditure for Heathrow’s cargo tunnel project, which means it will not be able to recover a proportion of the costs for this project.
- Economic regulation of Heathrow Airport Limited: working paper on Q6 capital expenditure and early expansion costs (CAP1996)
Regulator rejects Heathrow’s bid to raise £2.6bn through higher charges
The Civil Aviation Authority described the request as ‘disproportionate and not in the interests of consumers’.
By Neil Lancefield (The Standard)
Heathrow’s bid to increase airport charges to recover £2.6 billion lost during the coronavirus pandemic has been rejected by the aviation regulator.
Civil Aviation Authority (CAA) director Paul Smith described the plan as “disproportionate and not in the interests of consumers”.
It has allowed the west London airport to initially raise only an additional £300 million through higher charges.
Heathrow’s passenger numbers have fallen to the lowest level since the 1960s, with just 461,000 people travelling through the airport in February. That represents a 92% decline compared with February 2020.
In relation to the additional money Heathrow wants to recover, the CAA said it will “consider this issue further” as part of the airport’s next regulatory period, named H7, which begins on January 1 next year.
Mr Smith insisted the CAA recognises that “these are exceptional circumstances for the airport and there are potential risks to consumers if we take no action in the short term”.
He went on: “The decision we have announced today will incentivise and allow Heathrow to maintain investment, service quality and be proactive in supporting any potential surge in consumer demand later this year.”
Heathrow said it faces loses of around £3 billion due to the virus crisis.
An airport spokeswoman claimed the CAA has “failed to deliver” in its duties “to consumers and to Heathrow’s financeability”.
She said the CAA’s ruling “falls far short” of what is required through “regulatory principles” which enable investors to recover their capital.
She added: “This undermines investor confidence in UK regulated businesses, and puts at risk the Government’s infrastructure agenda.
“The CAA will need to address all the issues related to adjustment fully in the upcoming H7 regulatory settlement to attract the investment needed to maintain service, keep prices lower than they would otherwise be and protect resilience through the recovery.”
The CAA did confirm it will allow the airport to raise charges to recover the £500 million “it incurred efficiently” on its third runway project between 2017 and March 1 2020.
IAG, parent company of British Airways the airline that operates the most flights at the airport, said in a statement that it is “extremely disappointed” with the decision, which will “unfairly penalise consumers”.
It went on: “Heathrow is the most expensive hub airport in the world.
The airport has deliberately rewarded its investors at the expense of consumers and now the regulator is asking passengers to bail it out
“For over seven years, passengers paid Heathrow higher airport charges to cover the risk in the case of lower traffic.
“Meanwhile Heathrow’s shareholders have earned nearly £4 billion in dividends.
“The airport has deliberately rewarded its investors at the expense of consumers and now the regulator is asking passengers to bail it out. The CAA’s role is to protect consumers’ interest, not Heathrow’s shareholders’ profits. Post-Brexit this makes the UK even less competitive and will drive traffic to other airports. We’re assessing our options.”
Heathrow may be able to persuade the CAA to let it get back some money, in higher charges, due to huge Covid losses
The Civil Aviation Authority has been considering whether to allow Heathrow to increase its airport charges, in order to recoup the £2.8 billion that it says it had lost due to Covid (a few months ago). The CAA had rejected Heathrow’s revised request to hike charges by £2.8bn, labelling it “disproportionate”. But it now concedes that there has been “a further material deterioration in the outlook for the aviation industry” – due to further Covid travel restrictions – since it launched a consultation on the rises in October 2020. CAA director Paul Smith said: “In these exceptional circumstances we are persuaded that there are real issues we need to address to protect Heathrow’s consumers. However, in our view Heathrow’s proposals are not in the best interests of consumers.” Heathrow has been threatening legal action against the CAA. The airport already has over £15bn of debts. The CAA has added two new options, for the H7 period, which starts on 1 January 2022, and will consult on them until 5th March. They are: Package 1 No intervention before H7, but consider interventions at H7 and Package 2 Targeted intervention now and consider further intervention at H7. The largest airline at Heathrow, IAG, has always opposed the CAA allowing higher charges.
CAA may very soon announce its decision on whether Heathrow can charge £1.7 bn more
The Telegraph believes the CAA may announce this week that it will reject Heathrow’s demand to be allowed to raise £1.7bn in increased future passenger and airline levies. The airport wants to be get back some of its losses caused by the pandemic. But the CAA is expected to confirm the rejection that it consulted on in October – the consultation ended on 5th November. The CAA said in October that Heathrow had not “demonstrated its request is a proportionate measure” and was seeking further evidence. Heathrow finance chief Javier Echave threatened legal action unless the CAA backed down and accused the regulator of sending a “terrible” message to foreign investors (who have made immense profits out of Heathrow in recent years). Industry insiders cautioned that the CAA is “playing its cards very close to its chest” over its decision and “could offer concessions to break the deadlock.” Heathrow claims it will have to raise consumer prices, after the immense losses caused by having very few passengers over the past year.
Heathrow with £17bn debts wants to raise £1.7bn from higher airport charges
Heathrow’s attempt to increase airport charges by £1.7bn sparked anger recently, and were rejected by its regulator, the CAA. British Airways’ owner IAG said it was “staggered” by the demand, as Heathrow has very rich wealth fund owners, who could help the airport with funding. Heathrow is claiming they are within their rights to ask for the price rise. They say their regulatory framework allows it to pass on “exceptional costs” to airlines, and ultimately customers. Many in the airline industry, which does not want higher costs for its passengers, were surprised and impressed by the CAA decision, against Heathrow. One said: “In the past, the CAA has rolled over. For once they have shown their teeth.” Heathrow is immensely in debt, owing banks and bondholder £17 billion. In September, its passenger number was under 20% of its 2019 level. The cost of its 3rd runway plans (now postponed indefinitely?) could be over £30 billion. It is estimated that Heathrow needs 43 million annual passengers, just to cover its interest bill of around £500m. Heathrow at risk of breaching its banking covenants, which when tested in December, will require it to keep debt below 95% of the regulated value of its assets.
CAA tells Heathrow’s owners to invest more in the company, or risk state takeover
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.