Heathrow’s financial problems deepen, especially if it has 15% less passengers in 2022 than forecast

Heathrow has been allowed, by its regulator the CAA, to increase its passenger charge from £19.36 to £30.19 this year until the summer. After that the CAA will probably rule on charges for the next 5 years.  Heathrow wanted a larger increase, to £43 per passenger, and based some of its profit forecasts on that – and is peeved with the CAA for limiting its charges. Heathrow has net debts of £15.4 billion .  It says that if its number of passengers in 2022 is more than 15% below its forecast of 45.5 million, it will have financial problems – though “no covenant breaches are forecast in 2022” but that is possible. Its forecast aeronautical revenue for 2022 has been revised down to £2.19 billion, and its underlying earnings down to £1.04 billion.  If Heathrow has to breach its covenant terms with its lenders, it becomes a less attractive (aka lucrative) investment, and its credit rating  eg. by Standard & Poor’s and Fitch.  The airlines using Heathrow are, predictably, deeply opposed to yet higher Heathrow charges.

Passenger charge row casts cloud over Heathrow profit forecast

By  Alistair Osborne  (The Times)
January 29 2022

Heathrow’s lobbying for a huge increase in charges has angered the airlines that use the airport and pay for the privilege

Heathrow has cut its profit forecasts and warned of a possible breach of its banking covenants after claiming that the aviation regulator should have allowed it to raise its passenger charges by more than 56%.

In an update to investors, Britain’s premier airport accused the Civil Aviation Authority of making “material and basic errors”, despite allowing an inflation-busting rise in charges from £19.36 to £30.19 per passenger. The increase, from the start of this year, covers the period until this summer, when the regulator is expected to rule on charges for the next five years.

After lobbying for a rise to as much as £43 per passenger, the airport had budgeted last year for an increase of “approximately £7 per passenger” more than the regulator eventually allowed.

Based on a forecast of 45.5 million passengers, it said that it faced a “reduction” of £307 million in forecast aeronautical revenues for 2022 and a similar drop in underlying earnings. The figures have been revised down to £2.19 billion and £1.04 billion, respectively.

The airport, which has £15.4 billion of net debt, said that “no covenant breaches are forecast in 2022”, though it warned that they were possible “if cashflows from passengers are more than 15% below forecast”.

Its owners include Ferrovial, the Spanish construction group, and state-backed funds in China, Qatar and Singapore.

The airport’s lobbying for a huge increase in charges has angered its airline customers. Luis Gallego, chief executive of International Consolidated Airlines Group, the British Airways owner, said the airport was “now 90% more expensive than its European competitors. Hiking prices will be detrimental for the UK’s economic recovery.”

Willie Walsh, the former IAG boss who heads the International Air Transport Association, has accused the regulator of permitting Heathrow to “continue their disgusting gouging of airlines and passengers”.

Heathrow says the pandemic has cost it £3.4 billion after traffic plummeted, with traveller numbers down to 19.4 million last year compared with 2019’s pre-Covid record of 80.9 million.

The CAA is said to believe that most of the issues Heathrow claims to be errors are differences of opinion over efficiency targets and levels of return.



What does a covenant breach mean?

Essentially, a breach of covenant means that one or more parties have not acted in accordance with the covenant that is currently in place. This could be in relation to any number of things, such as access rights, building rights or even preventing a business being run from the property.

If Heathrow had to breach its covenants with its lenders, that has knock-on effects on their credit ratings  eg. by Standard & Poor’s and Fitch.

It is an indication that Heathrow has serious financial difficulties, and looks less good – or safe –  as an investment.

See earlier:


Heathrow will not return to “normal” (ie. 2019 levels) of passengers for several years (if ever)

Due to restrictions to try to avoid Omicron spreading, or more being introduced into the UK (it initially probably arrived due to air travel, from Africa) many people who had booked flights over Christmas cancelled.  Heathrow said about 600,000 passengers due to use the airport had cancelled. This continued a bad year for the airport.  It had only about 19.4 million passengers in 2021 compared to around 80 million in 2019 – ie. 24% of the 2019 number.   It had a bit over 22 million in 2020 (so 2021 was 12.3% below 2020). CEO John Holland-Kaye did not expect a return to the level of passengers in 2019 for many years, perhaps by 2026. Even that is very uncertain.

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Heathrow losses now £2.9bn and consolidated net debt £15.2 bn

Heathrow has announced that its cumulative losses from the Covid-19 pandemic have hit £2.9 billion. In its results for the first half of 2021,  Heathrow’s revenue dropped from £712 million in the first six months of 2020 to £348 million in the first half of 2021, which is 51.1% less than in the first half of 2020, and 76.2% less than the first half of 2019. Its pre-tax loss widened 18% to a little over £1 billion.  It had 3.85m passengers, which is 75.1% less than the same period in 2020, and 90.1% less than the first half of 2019.  Heathrow (it has a complex structure of numerous companies and levels) had  consolidated net debt of £15.2 billion — not much less than the airport’s £16.9 billion regulated asset base (RAB), or the CAA’s proxy for its value.  Heathrow had been allowed, by the CAA, to increase its RAB by £300 million, to £16.9 billion.  Its chief executive John Holland-Kaye is using the half-year figures to warn about a covenant waiver on its various loans.  The group of Heathrow companies has £4.8 billion of liquidity, (ie. ability to borrow) with average cost of debt just 1.64%. 




CAA allows Heathrow to increase passenger charge from £22 to £31.19 from January – to be reviewed again

The UK Civil Aviation Authority (CAA) has allowed Heathrow to charge its airline customers more in the period from 1 January 2022, as an interim measure, for six months. Heathrow’s current price control expires on 31 December 2021 and the final decision and licence modifications for a new 5-year control period (H7) will not be made and take effect until the summer of 2022. At present the airport can charge up to £22 per passenger, and it wanted to increase that to £43 in January 2022.   The CAA now says Heathrow can charge £30.19 per passenger.  The CAA says: “Once we have set the final price control for the H7 period, any difference between it and the holding price cap will be trued up or down.” The rise to £31.19 is an increase of 37%, compared to the current inflation rate of 5.1%.  Shareholders have received more than £4bn in dividends since 2012.  Airlines are deeply opposed.   



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.