Travel chaos won’t bother Heathrow, “the ATM with runways attached”

Heathrow has been highly profitable for its owners, which include Ferrovial, the Qatari sovereign wealth fund, and USS, the British academics’ pension scheme.  Since 2012, the owners have taken £4 billion in dividends (but nothing in 2021 and only £100m in 2020)— and Heathrow is still valued at more than £17 billion. But it has £16 billion of debt to boost the returns. These amazing economics are due to the antiquated way Heathrow is regulated.  Because it’s a monopoly, for long haul flights, the CAA sets its returns, using the “regulated asset base” (RAB), and decides what it can charge airlines on the back of that. But this encourages the owners to throw as many costs as they can on to the RAB. Inflating Heathrow’s value means they get paid more. So wherever it can, Heathrow gold-plates spending – with everything costing as much as possible.  Much of Heathrow’s income comes from passenger charges, which were £19 pre-Covid; the CAA allowed a temporary increase to £30; and they now have to fall back to £26 by 2026. Heathrow has been described as “a cash machine with a couple of runways attached.”  At least it now seems the 3rd runway is unlikely to be built.


Travel chaos won’t bother Heathrow, the ATM with runways attached

By Oliver Shah, Comment in the  Sunday Times
July 17 2022

What other business could land billions of pounds in dividends while having endless dogfights with its customers? Heathrow is unique. Britain’s only hub airport accounts for three quarters of the UK’s long-haul flights. That allows it to be insouciant about decisions such as its imposition of a 100,000 cap on daily passenger numbers last week.

Having cut thousands of jobs in the pandemic, the airport is now suffering staff shortages so severe it has asked airlines to stop selling summer tickets.

Emirates blasted Heathrow for fomenting “airmageddon” and said it would continue to fly its full schedule (though a rapprochement appeared to have been reached by Friday). The Department for Transport and the aviation regulator have written to John Holland-Kaye ordering the airport boss to produce a “credible and resilient” plan for the next six months.

But the events of the past few days shouldn’t come as a surprise.

Heathrow has no qualms about angering airlines, and by extension passengers. If you want to understand why, look at the model that has churned out a long trail of lucre for its owners — led by the Spanish infrastructure giant Ferrovial and the Qatari sovereign wealth fund, and including USS, the British academics’ pension scheme.

Heathrow and six other airports formed one of Margaret Thatcher’s first big privatisations when she floated the British Airports Authority (BAA) in 1987. Ferrovial’s consortium took BAA private with a £10.3 billion bid in 2006. Three years after that, a competition inquiry ruled that it should be broken up.

The owners sold everything other than Heathrow, pocketing multibillion pound paydays from the disposals of Gatwick, Stansted and other airports. Since 2012, they have taken £4 billion in dividends — and in Heathrow they still have an asset valued at more than £17 billion. It’s juiced up with almost £16 billion of debt to boost the returns.

These amazing economics have come about courtesy of the antiquated way Heathrow is regulated. Because it’s a monopoly — no other airport in the UK can connect short-haul with long-haul flights, and another will never be built — the Civil Aviation Authority (CAA) sets its returns. It does so using something called the regulated asset base, or RAB. It looks at the value of Heathrow’s assets — £17.8 billion — and decides what it can charge airlines on the back of that.


The problem is this encourages the owners to throw as many costs as they can on to the RAB. Inflating Heathrow’s value means they get paid more.

So Ferrovial and friends spend like holidaymakers in Wetherspoons at 9am. Stories abound about a smoking shelter whose cost ballooned from £450,000 to £1 million, and parking spaces built for £61,000 — more than four times the typical amount. Wherever it can, Heathrow gold-plates spending. That’s why the Paddington express train, funded by the airport, costs a ridiculous £37 return for a 15-minute journey.

The airport reaps most rewards via passenger charges, levied and passed on by the airlines. Before the pandemic, these were £19 per person. In December, the CAA allowed Heathrow to jack them up to £30 as an interim measure. The airport demanded almost £42 for the next five-year settlement in a greedy attempt to claw back Covid losses. For once, the regulator showed backbone and ordered a cut to £26 by 2026.

The RAB model hasn’t just turned Heathrow into a cash machine with a couple of runways attached. It has also made it fat and lazy. Whereas hubs such as Dubai have sprung back to life quickly, Heathrow underestimated the pace at which demand for air travel would recover. It was slow to begin recruiting again and has struggled to attract staff such as ground handlers.

Yet other than the odd flare-up like the one last week, the Heathrow issue is off the government’s radar. It would be difficult to solve, and the high charges generate useful tax revenue. Attempts by third parties, such as the hotels tycoon Surinder Arora, to compete have met with a cool reception from the CAA. Arora offered to build the now-doomed third runway at a 40 per cent discount.

That’s a shame, because the lack of competition isn’t an impossible puzzle. In the US, terminals can be owned by different companies at the same airport.

The status quo means Heathrow gradually becomes more bloated, more inefficient and less competitive versus rival hubs such as Amsterdam Schiphol. It costs nine times more to land a Boeing 777 at Heathrow than at Dubai.

The ire directed at Holland-Kaye over the daily passenger cap is all very well, but he is merely a gofer for the overseas investors that have taken advantage of a weak regulator for more than a decade. Heathrow is a classic example of bad privatisation. The market has failed to deliver innovation — just another form of stasis, in which extraordinary rewards flow to a small group of shareholders at the expense of customers.

This has become normal. Even with a recession on the cards, I wonder how many employers will look at the aviation sector’s re-hiring travails and think twice before making the kind of job cuts they would have carried out in the past.

Double-digit unemployment was a feature of downturns in the 1980s and 1990s. It is presently at 3.8 per cent, close to a record low. The dynamics causing labour shortages — the vanishing of older workers after Covid and an outflow of EU nationals — are unlikely to change. So we may have the strange combination of negative growth and a still-hot jobs market. At least that would limit the depth of the UK’s dive.