Heathrow at risk of defaulting on its £15bn debt as UK-US flights not returning soon
Heathrow has now made a loss of at least £3 billion, due to the pandemic. It is now at risk of defaulting on its huge £15bn debt, after talks stalled over the return of flights between Britain and America. Heathrow had been depending on lucrative trans-Atlantic flights resuming by the start of July. At the end of June, Heathrow warned its bondholders that if its profits are £66m or more lower than expected by December 2021, then it will breach the strict rules governing its complex portfolio of loans. It does not look likely that flights to the US will return to anything approaching 2019 levels for a long time. Up to 2019, North America was Heathrow’s single biggest market making up almost 19m of its 81m passengers in 2019. Heathrow is believed to have the support of its lenders despite the prospect of a potential breach of its banking covenants, the rules that govern loans. Shareholders, which include Spain’s Ferrovial and the state of Qatar, injected £600m into the business when it faced the prospect of a similar breach last year.
Slow return of transatlantic travel fuels Heathrow fears
Its earlier profit forecasts assumed that flights across the Atlantic would restart in July
By Oliver Gill, CHIEF BUSINESS CORRESPONDENT (The Telegraph)
3 July 2021
Heathrow Airport is at risk of defaulting on its £15bn debt mountain after talks stalled over the return of flights between Britain and America.
The travel hub has warned lenders that if profits are only £66m worse than expected by December 2021, then it will breach strict rules governing its complex portfolio of loans.
Its profit forecasts were set out in an update to bondholders at the end of last month and assumed that flights across the Atlantic would restart in July – but officials are increasingly adamant there will be no return to normality this summer.
Washington insiders have been spooked by rising rates of the Delta coronavirus variant. The chances that flights will restart imminently are “zilch”, one person said, with talks now expected to drag on until September instead.
Before the pandemic, North America was Heathrow’s single biggest market with almost 19m of its 81m passengers coming from the region in 2019.
EU countries are capitalising on Boris Johnson’s decision to stick to tighter rules. French President Emmanuel Macron has embarked on a charm offensive to woo Wall Street investment bankers, who are weary of the UK”s tough border controls.
John Holland-Kaye, Heathrow’s boss, said: “Britain’s economic recovery is falling behind its European rivals because we have been slow to restart international aviation. The UK has always been better connected to the US than its European rivals, but now they have more flights and more passengers from the US than we do.”
Heathrow is believed to have the support of its lenders despite the prospect of a potential breach of its banking covenants, the rules that govern loans. Shareholders, which include Spain’s Ferrovial and the state of Qatar, injected £600m into the business when it faced the prospect of a similar breach last year.
Separately, the owner of Stansted and Manchester airports will go to the High Court this week to in a legal bid alongside Ryanair and the owner of British Airways owner to force the Government to disclose data behind its controversial traffic light system for controlling the borders.
Charlie Cornish, boss of Manchester Airports Group, said: “Despite the UK’s vaccination headstart, we are now clearly seeing European countries pull ahead of us in their recovery.
“We desperately need the UK Government to be more agile and open when it comes to international travel.”
Heathrow’s losses due to the pandemic – £3 billion
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.
Heathrow owners divided about plan to raise £2.8bn by higher charges (due to Covid losses)
Heathrow is facing the spectre of a divided boardroom over its plan to raise billions of pounds from airlines and customers by increasing airport prices. State-backed Qatar Airways, whose owner is Heathrow’s 2nd-biggest shareholder, said Heathrow’s plans to recoup £2.8bn is “unreasonable, not in the consumer interest and should be rejected”. Qatar Airways’ boss, Akbar Al Baker, is a representative for the state of Qatar on Heathrow’s board of directors. Despite huge cuts in traffic, Heathrow claims it has enough cash reserves to cope with this year, even if there are low passenger numbers. There was recently a consultation about how much the CAA will let Heathrow charge airlines, in order to recoup cash lost due to the pandemic. Heathrow has threatened legal action if the CAA does not allow this.
Heathrow makes £2bn loss in 2020 due to the pandemic – warning on continuing to be a “going concern”
Heathrow lost £2 billion in 2020 because of the fall in passenger numbers due to the Covid pandemic. The numbers are lower than for perhaps 50 years, and the airport is issuing a warning about its future. Its pre-tax loss was £2.01bn for its full-year compared to a £546m profit in 2019. Revenues fell 62% £1.18bn, with passenger were at 22.1 million, 73% less than in 2019. This led the airport to issue a warning, that the “existence of a material uncertainty… could cast significant doubt upon the group and the company’s ability to continue as a going concern”. Nobody knows how much air travel will happen this year. Heathrow desperately wants relief on all its business rates, an extended furlough scheme for its staff, and a revival of VAT-free airport shopping for tourists to the UK. John Holland-Kaye makes his usual statements about how vital Heathrow is to Britain … Since the start of the pandemic, the airport has cut operating costs by nearly £400m, reduced capital expenditure by £700m and raised £2.5bn in funding. And it says it ended 2020 with £3.9bn of liquidity, which it says is enough to last until April 2033 even if there is no recovery in passenger numbers. Which begs the question of why it needs more government support now.
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.
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.