Could Heathrow ever afford to build a 3rd runway?

The possibility of more airport expansion, and growth in the number of flights and passengers, is a serious problem of increasing carbon emissions.  Heathrow is to have a new chief executive, Thomas Woldbye, from Copenhagen airport in October – replacing John Holland-Kaye. He has to decide whether to try to get a 3rd runway.  As well as the increased CO2, Heathrow has the problem of paying for its expansion. Could it ever afford it? Since it got final approval for expansion in February 2020 (Appeal Court), costing about £14 billion, the costs of construction and financing will have hugely increased. Heathrow has vast debts, which it has increased to raise the regulatory value of their assets.  Heathrow now has £16bn of borrowings and posted a loss this year largely due to the rising cost of its inflation-linked loans. The team working on the expansion was disbanded a few years ago, and there are no current estimates of the cost. The forecast for the demand for flying, oblivious of the climate destabilisation now underway, is for over 50% more passengers by 2050.  The airport’s shareholders and board are yet to decide whether to push forward with a 3rd runway, and over what timeframe. 


Will Heathrow’s third runway finally go ahead?

A new chief executive and a boom in travel could resurrect the stalled project. But rising costs and environmental concerns stand in the way

By Philip Georgiadis and Gill Plimmer in London (FT)

The view from Heathrow airport’s 87 metre-high control tower stretches more than 20 miles, overlooking the constant flow of aircraft taking off and landing.

For nearly two years during the pandemic, those skies were unusually quiet. But the travel industry has since roared back to life, propelling the UK’s biggest airport towards its largest passenger numbers since 2019 and near its maximum capacity of 480,000 flights a year.

While the boom in trade is welcome, it has also reignited one of the thorniest public policy debates in the UK: how best to expand the capacity of London’s five major international airports — or to what extent it should be increased at all at a time of rising anxiety over the industry’s environmental impact.

At the centre of that equation is Heathrow, which has dropped from the second busiest airport at the turn of the century behind Atlanta’s Hartsfield-Jackson to eighth place, trailing Istanbul and Dubai.

It is a sobering demotion for Britain, the country that co-developed the supersonic Concorde jet, turned terminals into attractive shopping destinations and led a drive towards cheap package holidays and budget flights.

Now its airports have suffered a series of recent embarrassments, from the failure of the air traffic control system in August to Gatwick this week cancelling flights because of staffing shortages at air traffic control.

What happens next for Heathrow will fall to its incoming chief executive, Thomas Woldbye, from Copenhagen airport, who must decide how best to proceed with government-approved plans for a third runway.

The decades-long discussion appeared to come to an end when the UK parliament voted in favour of the major expansion in 2018 and for other airports serving the capital such as Gatwick and Stansted to upgrade existing airfields.

But just as Heathrow was poised to apply for planning permission, the outbreak of Covid-19 plunged commercial aviation into a battle for survival.

Now there are new calculations to be made, not least how to square expanding flight capacity with lowering emissions, and how to pay for the new runway and surrounding infrastructure at a time when inflation has pushed up financing and construction costs.

For Sir Howard Davies, chair of the commission that guided the Conservative government’s airport policymaking before the pandemic, the final decision from Heathrow’s shareholders on whether to expand the airport represents a wider judgment on the future prospects of the UK and its capital city.

“Until recently, no one has lost money by betting on London. It has been the big growth city in Europe, and it was right up until Brexit. Is it now?” he asks. “I think [the Heathrow expansion] has become more of a symbolic decision.”

But many in the wider business community believe it is crucial for the third runway to go ahead if Britain is to compete with the rest of the world.

“Expansion at Heathrow airport is vitally important for the UK economy and remains a priority for businesses,” says Alex Veitch, head of policy and insight at the British Chambers of Commerce.

Opened in: 1946 as London airport, on the boundaries of Hillingdon, west London. It is operated by Heathrow Airport Holdings Limited, formerly BAA plc, which is owned by a consortium of investors led by the listed but family-controlled Spanish construction company Ferrovial

Expansion plans: In 2018, Heathrow won government backing for a third full-length runway allowing it to increase capacity by 260,000 flights a year. Under the plans, Terminals 1 and 3 would eventually be demolished and Terminals 2 and 5 would be expanded in a three-decade-long project

The first passenger flight took off from Heathrow in 1946, then called London airport, destined for Buenos Aires.

The event heralded a period of rocketing growth in civil aviation with Britain at the forefront. But as travel became more affordable and demand grew, so did the need for more capacity.

Plans to allow Heathrow to expand its relatively small footprint compared with other big airports began in earnest 20 years ago, but were almost immediately beset by political opposition, not least from voters living underneath the airport’s flight paths.

By 2019, the airport laid out its plan for one of the most expensive private sector infrastructure projects in the UK with an estimated cost of £14bn. As well as a 3.5km runway and taxiways on land to the north-west of the airport’s current boundary, the work would involve diverting the nearby M25 motorway into a tunnel to make room for the expansion. In the process, 750 homes, a primary school and an energy plant would be demolished.

The upgrade, however, would help the airport meet demands for flying, projected to rise in the UK by 52 per cent by 2050, according to government forecasts in July.

John Holland-Kaye, Heathrow’s chief executive who will leave in October, has been a key driver of the third runway. He insists that the airport “definitely” needs to expand, arguing that the pandemic is but a blip in the longer-term trend of ever-growing demand for travel.

“When it comes to Heathrow, it is a need for hub capacity. What we do is so different to what Gatwick, Stansted, Luton and the other airports do. It is the ability to connect all UK regions to [the world],” he says.

Business leaders are almost unanimous in calling for a bigger “hub” airport, which connects short and long-haul flights, enabling passengers to transfer to flights to other airports worldwide. Their support comes despite the drop-off in corporate travel and the rise of videoconferencing. Heathrow is also one of the UK’s most important ports, handling £203bn of cargo last year, more than all the country’s other airports combined.

Martin McTague, national chair of the Federation of Small Businesses, says increased airport capacity would be “a driver for economic growth, providing new jobs, linking UK businesses to new markets, bolstering international tourism, and developing both national and regional connectivity”.

Proponents of expansion point to a 2022 UK government paper that estimates the aviation sector contributed at least £22bn to gross domestic product each year and employed 230,000 people prior to the pandemic.

Heathrow is viewed as a laggard compared with other countries, which have expanded their airport capacity more rapidly and more cheaply than in the UK, says Sam Dumitriu, head of policy at Britain Remade, a campaign group that pushes for infrastructure improvements. The organisation was set up by a former adviser to Boris Johnson on energy and the environment.

Turkey, for example, opened the first phase of its new Istanbul international airport four years ago at a cost of about $11bn. It is now the busiest in Europe with five runways capable of serving 90mn passengers a year.

Dublin airport also opened a new North Runway last year, 15 years after planning permission was granted, which cost around €320mn, although this does not include land.

“In almost every type of infrastructure, from airports and railways to nuclear power and road tunnels, the UK pays over the odds compared to other developed nations,” says Dumitriu, who blames outdated planning policies and ministerial indecision for legal challenges and delays.

Gatwick.  Opened in: 1958 in Horley, Surrey. Its majority owner is VINCI Airports, with the remainder owned by a consortium of investors, managed by Global Infrastructure Partners

Expansion plans: London’s second-biggest airport, which has one runway and two terminals, applied for planning permission in July to increase capacity by 60 per cent. The £2.2bn project includes bringing a standby runway into use to enable the airport to handle up to 75mn passengers a year by the late 2030s

Britain is not the only country to have struggled with airport expansion. Paris’s Charles de Gaulle airport has to rethink plans for a fourth terminal after new environmental regulations and the effects of Covid-19 made it unfeasible, Dumitriu acknowledges. Similarly, Amsterdam’s Schiphol airport, a beneficiary of the delays in expanding Heathrow, is being forced to cut flights by the Dutch government on environmental grounds.

In Berlin, the new Brandenburg airport was intended to cost €2bn in 2009. It opened in 2020, 10 years late and more than three times over budget at €7bn.

Alexander Jan, former chief economist at engineering giant Arup, says Britain “could be so much more successful” and that other countries are “stealing a march on us”.

“They might be taking the carbon but they are also getting the jobs, prosperity and growth,” he adds.

To build or not to build
Heathrow’s future may well hinge on the arrival of its new boss Woldbye, whose CV includes managing an expansion in environmentally conscious Denmark.

The airport’s shareholders and board are yet to decide whether to push forward with a third runway, and over what timeframe, although multiple people familiar with the matters say there is still broad support for expansion.

But even if the board is prepared to proceed, there are new headwinds to face including the airport’s debt-laden balance sheet and inflation, which has pushed up financing and construction costs. Heathrow executives do not know how much the expansion plan would now cost, the people say.

Heathrow is owned by a consortium of investors, led by the listed but family-controlled Spanish construction company Ferrovial, and includes sovereign wealth funds from Singapore, Qatar and China.

Ever since privatisation in 1987, the owners have been allowed to collect a return based on the regulatory value of their assets — encouraging them to continuously expand. This stable framework has allowed Heathrow to fund itself almost entirely with debt.

Now the company has £16bn of borrowings and despite the bounce back in passenger numbers, it posted a loss this year largely due to the rising cost of its inflation-linked loans.

Although Heathrow insists it can finance expansion through a combination of equity and debt, there are concerns that its leveraged structure would be unable to support a project as large as the third runway.

That has prompted alarm among the airline industry that the project would be bankrolled by increasing the charges Heathrow levies on carriers and passengers.

Shai Weiss, the chief executive of Virgin Atlantic, said in a speech last November that it would be difficult for airlines to support expansion at Heathrow until the regulatory framework was reformed so that the airport was “focused on delivering a quality experience for passengers . . . rather than excessive dividends for shareholders”.

Willie Walsh, director-general of the airline lobby group Iata and a former British Airways boss, agrees, saying it “would be crazy” to trust Heathrow to manage the sizeable construction costs.

While he does not dispute the benefits of expansion, he argues that any discussions need to be preceded by “satisfied travellers, customer-centric behaviour by management and lower costs in the current set-up”.

The expansion project also brings additional costs in the form of the surrounding infrastructure. Although Heathrow had said it would contribute £1bn, Transport for London has estimated it will require an additional £10bn to deliver public transport infrastructure to accommodate the 50 per cent increase in demand, as well as the rerouting of the M25, a figure Heathrow does not accept.

Chris Tarry, aviation consultant at Ctaira consultancy, says that Heathrow would “absolutely” seek to recoup the investment spent on a new runway through landing fees charged to airlines, which are set by aviation regulator, but ultimately passed through to passengers.

London’s other big airports, meanwhile, have been quietly pushing on with their own expansion plans. Gatwick, denied a major new second runway on nearby land by the government’s support for growth at Heathrow, this year launched a consultation on a smaller scheme to bring its standby runway into regular use.

A far more modest undertaking than at Heathrow, the estimated £2.2bn project would deliver a step-change in capacity at the London’s second busiest airport, from bout 45mn passengers per year to 75mn.

Stansted, Luton and City airports have all laid out plans to grow passenger numbers without building new runways. Some industry analysts believe these ambitions tap into a shift towards airlines using smaller aircraft on point-to-point medium-haul routes, such as across the Atlantic or to the Middle East.

Ken O’Toole, deputy chief executive of Manchester Airports Group, which owns Stansted, said: “By encouraging airports to develop schemes that make best use of existing capacity, government is delivering the best deal for consumers, the economy and the environment.”

Some experts, however, believe Heathrow has lost the momentum it had before the pandemic. Particularly “momentum of policy . . . and the ability to produce a business case which attracts investment,” says Alistair Watson, head of planning at law firm Taylor Wessing.

“Right now, aviation planning and Heathrow have none of that.”

‘It will never happen’
For campaigners opposed to Heathrow expansion, the delays have given their cause renewed optimism.

Robert Barnstone, co-ordinator of pressure group the No 3rd Runway Coalition, is more confident than ever that the third runway will never happen. The argument “is weaker than it has been for the past decade, if not ever”, he says.

“Not just for the obvious environmental damage that adding 260,000 more flights would generate, but in terms of the financeability and the economic case for the project,” Barnstone adds.

In the years since parliament agreed to the expansion, the UK has beefed up its climate change commitments and in 2019 passed a legally binding commitment to achieve net zero by 2050.

The UK government and the aviation industry have nevertheless both argued that growth in flying is compatible with climate targets, and are betting on breakthrough technologies such as new fuels or propulsion methods emerging at commercial scale.

Tim Alderslade, chief executive of industry body Airlines UK, says UK aviation has “broken the link between growing passenger numbers and carbon emissions”. But he adds that government support is needed to increase supply and bring down the price of “sustainable aviation fuels”, which are available in small quantities.

But most environmentalists, and some scientists, dispute this. Cutting flying, they argue, is the only realistic way for the sector to decarbonise successfully.

Tim Johnson, director of the Aviation Environment Federation, an NGO, says industry and government plans to decarbonise are banking on “the best possible outcomes” from scaling up new technologies. “I don’t think that is the reality. Things are moving quite slowly,” he adds.

A significant setback came from the government’s own independent panel of advisers. In June, the Climate Change Committee recommended that no airport expansions should proceed until a UK-wide framework was in place to assess and control the sector’s emissions.

London mayor Sadiq Khan, who has made reducing the capital’s air pollution a top priority, is also opposed to expansion. “A third runway at Heathrow will have a damaging impact on air quality, noise and London’s ability to achieve net zero carbon,” his office says.

There are also questions on the need for a hub airport as the industry adjusts to fewer of the high-paying business travellers who previously drove demand on many of the most lucrative routes.

Three of Europe’s largest airline groups, British Airways owner IAG, Lufthansa and Air France-KLM, all reported a drop in the rate of recovery in corporate travel in their most recent earnings, while bookings at US airlines have flatlined over the past year.

Johnson says the “market has been sending really mixed signals” on the future of flying. “Everybody seems to be hazarding a guess on long-term demand,” he adds.

Davies, the former Airports Commission chair, says that the setbacks are not “going to change the calculation”. “If you wanted a significant increase in London airport capacity then Heathrow is [still] highly likely to be the best place to do it,” he adds.

A larger question may be whether expansion is politically palatable for the government or the opposition Labour party, which is leading the polls ahead of an expected election next year. The government still supports Heathrow’s expansion provided it can be delivered within the country’s environmental obligations. Labour has said Heathrow’s plans fail four “tests” it has set the project, including on the environment and delivering benefits across the UK

The “biggest issue remains political support” for Heathrow expansion, says one senior industry executive. “It probably needs two parliaments of unwavering support from the government to get it done,” the persons says. “It feels a stretch to me.”

Johnson has reached the same conclusion: “The political space seems to be shrinking and at some point will be closed.”


See also:


MPs warn against Heathrow Airport expansion: ‘Put the planet first’

Fleur Anderson, the Labour MP for Putney, led a parliamentary debate on 24th May, in which she said plans to expand Heathrow would subject Londoners to unacceptable levels of noise and air pollution.  That would be “a serious health issue” for her constituents. She called for the Government to block the project. Fleur said to the incoming Heathrow CEO:  “There is no version of an expanded Heathrow which is compatible with climate targets. There is no version of an expanded Heathrow that does not reduce the quality of the lives of 650,000 people in my constituency and beyond, who live under the flight path. And there is no version of an expanded Heathrow that does not make the air our children breathe even more polluted.  I implore you, put the quality of life and the planet first, and the profits of your shareholders second.”  A coalition of MPs came together for the debate, to protest against any expansion of Heathrow. They included former Shadow Chancellor John McDonnell, MP for Hayes and Harlington; Munira Wilson; Fleur Anderson; Ruth Cadbury; Andy Slaughter; Rupa Huq and John Randall.

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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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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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How are Heathrow’s plans for a 3rd runway coming along? (They are not)

There are still “a number of serious hurdles to overcome” before Heathrow could consider a 3rd runway. Heathrow director of communities and sustainability Becky Coffin confirmed that the project remains paused and under internal review. There are the inevitable impacts on the UK’s net zero, noise, air quality and road congestion, which remain serious and although surface transport decarbonisation is advancing, so-called ‘jet zero’ is some way behind (or probably impossible). The Airports National Policy Statement (ANPS) approving the policy of Heathrow expansion (eventually cleared by the Supreme Court) is nearly 5 years old and calls to revisit it are growing. Meanwhile, other airports are getting on with their expansion plans which mean that any carbon allocation for airports is getting used up at Heathrow’s expense, so it will get left behind. ie. Bristol, Southampton, Stansted, Luton, Gatwick, Manston. Despite the ANP win, the £14bn expansion plans have remained frozen due to Covid, and Heathrow’s lack of available funds. In March 2021 the airport put its £900M T5 rail link on “controlled pause”, citing lack of funds. But in May 2022, Heathrow resumed purchasing houses in proximity to the proposed site.

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