Likelihood of Heathrow’s 3rd runway even lower, after CAA charges decision
The CAA has refused Heathrow’s demand for a big increase in the fees it charges airlines. It had wanted up to £43 per passenger. But its regulator, the CAA, allowed it £27.49 on average. The present charge is higher, which means that fees will have to come down over the next few years. Heathrow can appeal to the Competition and Markets Authority (CMA). It looks increasingly unlikely that Heathrow will be able to build a 3rd runway. There was little mention of it in the CAA’s recent analysis. The 242 page ruling on charges just says: “We [the CAA] have said we will deal with these matters separately and in a way consistent with our statutory duties if Heathrow were to reintroduce proposals for capacity expansion.” Heathrow will say only that the plan is under review. There is some evidence in the CAA’s prices ruling that the runway will be a long way off, if ever. The CAA said the charges they are allowing would give Heathrow sufficient financial headroom to pay investors £1.5 billion over the next few years, a rate of return in line with other utility investments. But Heathrow has a level of gearing – the ratio of borrowing to equity base — of over 82%, making even that rate of return unlikely. And the negative impact of the CO2 from an expanded Heathrow make the project ever more improbable.
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Heathrow will need to mind the sliding doors in its runway plan
By Dominic O’Connell
March 11 2023, (The Times)
Big companies are used to having their wishes thwarted by regulators and governments. It is one thing, though, to be told, “No”, and another to be told, “No, and what is more your arguments are dumb and you haven’t been paying attention for the past couple of years.”
That is what happened to Heathrow this week when the Civil Aviation Authority (CAA) refused its demand for a big increase in the fees it charges airlines. The airport operator had wanted up to £43 per passenger. The aviation regulator, which to many experts’ surprise has found the stump of a backbone in this set of negotiations, gave it £27.49 on average. The present charge is higher, which means that fees will have to come down over the next few years.
Heathrow can appeal to the Competition and Markets Authority but it should think seriously about the grounds. Its law firm, Towerhouse, and its financial adviser, KPMG, put a barrage of final arguments to the CAA but were given short shrift. They had made an “unjustified leap of logic”, used “selective” precedents and “failed to review and follow our process in its entirety”.
Whether Heathrow appeals or not there has already been one casualty during these talks. The dominant issue at Heathrow a few years ago, in fact the lightning rod issue in a wider debate about economic growth versus climate change, was whether the airport would be allowed to grow by building a third runway. Now the subject has disappeared.
There was scant mention of it in the CAA’s analysis, surprising given that Heathrow has held detailed discussions with the regulator about how to fund a new runway and plans were well advanced. Legal challenges and the coronavirus have intervened and the scheme now looks dormant, to say the least. The ruling on charges, which runs to 242 pages (not counting appendices) deals with a new runway in a couple of lines. “We [the CAA] have said we will deal with these matters separately and in a way consistent with our statutory duties if Heathrow were to reintroduce proposals for capacity expansion.” Heathrow will say only that the plan is under review.
The pandemic was one of those sliding doors moments that have peppered the saga of new runways for the southeast for five decades. This year, for example, should have marked the tenth anniversary of the opening of a new runway at Stansted. That was the timetable envisaged under a previous review to end all reviews, one ushered through in 2003 by Alastair (now Lord) Darling, the transport secretary. It was indeed a blockbuster: the extra strip at Stansted would have been followed by another at Heathrow a couple of years later and possibly one more at Gatwick after 2019. Go back another 30 years and you come across another once-and-for-all solution: the Roskill Commission, which ended with the government backing construction of a four-runway hub at Maplin Sands in the Thames Estuary. That path was closed by another sliding door, the 1973 oil crisis, which put all thoughts of grands projets out of the government’s mind.
Darling’s grand plan was also overtaken by an unexpected development. One of its cornerstones was BAA’s ownership of the three big London airports. It would bite the bullet and spend £3 billion on a runway at Stansted because it knew that the big earner, another runway at Heathrow, was just around the corner. The scheme fell apart when the Spanish group Ferrovial made a successful bid for BAA and shortly afterwards the company was broken up on competition grounds. The three largest London airports now have different owners. This fragmentation, and rising political opposition, meant the end of Darling’s blueprint.
Heathrow’s new owners — Ferrovial and a gaggle of sovereign wealth funds and pension schemes — did not give up and must have thought they had cracked it in 2018 when parliament voted in favour of a new scheme. The Court of Appeal ruled the decision unlawful but Heathrow won at the Supreme Court in December 2020. It was a pyrrhic victory. The pandemic was in full swing and Heathrow’s existing two runways were half empty.
The question now is when, or whether, Heathrow will revive the plan. There is some evidence in the CAA’s prices ruling that the day will be a long way off.
The regulator said that the charges it set would give the company sufficient financial headroom to pay investors £1.5 billion over the next few years, a rate of return in line with other utility investments.
The Heathrow they were talking about, however, was a fictional creature. The CAA said that that return would be for a “notional” company that had gearing — the ratio of borrowing to equity base — of 60 per cent. The real Heathrow has a lot more debt. Its gearing was 82.3 per cent at the end of last year. In other words, the real company will have less headroom to pay dividends than the company conjured up by the regulator. Whose problem is this? The CAA was clear: “It is for Heathrow’s management and shareholders to manage the consequences for financing of higher levels of gearing.”
The result is that the stream of cash that Heathrow’s owners will have hoped would flow their way from the post-pandemic recovery in aviation is likely to be postponed. Do they really want to postpone it further by putting extra money into a new runway development? In the past they might have been confident of recouping the investment in the short term by increasing prices on current users, but that would require another fraught negotiation. It is more likely that they will bide their time.
The longer they wait, the closer they come to another sliding door. Unlike previous upsets — oil crises, takeover bids and pandemics — this time the door is in plain view and shutting slowly but inexorably. The environmental argument against a new runway becomes stronger as the UK comes closer to confronting its net-zero emissions goals. It might be stretching it to say that a new runway at Heathrow now looks impossible, but
the odds have lengthened mightily.
https://www.thetimes.co.uk/article/b0b71218-bf78-11ed-8959-aac6a1130ac2
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See earlier:
CAA rules that Heathrow average maximum price per passenger will fall from £31.57 in 2023 to £25.43 in 2024
The UK Civil Aviation Authority has published its Final Decision for the annual caps that will apply to the charges that Heathrow levies on airlines for using the airport, until the end of 2026. The CAA confirmed that charges for 2023 will remain fixed at the level set out in its interim decision issued earlier this year. The average maximum price per passenger will then fall by about 20% from £31.57* per passenger in 2023 to £25.43** per passenger in 2024 and will remain broadly flat at that level until the end of 2026. This means the average charge over the five years will be £27.49 compared to £28.39 for Final Proposals, a reduction of £0.90 (all in nominal prices). This lower level of charges from 2024 recognises that passenger volumes are expected to return to pre-pandemic levels, and should allow Heathrow to continue “investing in the airport for the benefit of consumers and supporting the airport’s ability to finance its operations.” The CAA hopes passengers will benefit from slightly cheaper fares, and better systems when they travel. The current passenger forecasts are higher than in earlier assessments.
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