heathrow airport revised business plan

Economic regulation of Heathrow Airport Limited: Policy update and consultation

Closed 18 Aug 2020

Opened 23 Jun 2020

[email protected]

This consultation deals with the following main issues:

• the responses we received to the April 2020 Update and our approach to protecting the interests of consumers;
• requirements for HAL’s revised business plan (“RBP”), which it is due to publish in the autumn of 2020;
• improving the efficiency incentives and capital expenditure governance arrangements for the H7 price control period; and
• further thoughts on our approach to assessing HAL’s financeability and setting the cost of capital for the H7 price control period.

Heathrow Airport Limited has paused its work on capacity expansion at Heathrow airport. We also address the regulatory treatment of expenditure incurred to date on expansion.

Consultation document

• Economic Regulation of Heathrow Airport Limited: Policy Update and Consultation (CAP1940), June 2020

Consultation studies published alongside this consultation

• Arcadis review of the initial tests for Heathrow West proposal 
• PwC Report: Independent Planning Cost Review for 2018  
• Flint Report on WACC/Cost of Capital April 2020   

Views invited

We welcome views on all the issues raised in this document and, in particular, the issues set out in the executive summary and those highlighted in chapters 1 to 4.

Please e-mail responses to [email protected]

We expect to publish the responses we receive on our website as soon as practicable after the period for representations expires. Any material that is regarded as confidential should be clearly marked as such and included in a separate annex. Please note that we have powers and duties with respect to information under section 59 of the Civil Aviation Act 2012 and the Freedom of Information Act 2000.

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Heathrow’s 2020 business plan to focus on lowering airfares

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Posted: 6 January 2020 | International Airport Review | No comments yet

Heathrow is to submit investment plans for 2020 which it has said will mean lower airfares and shows how expansion is deliverable.

Heathrow Airport has announced that it will submit an Initial Business Plan to the CAA showing how it will deliver expansion and connect all of Britain to global growth.

The airport has said the plan, which been crafted following engagement with consumers, business groups, local communities and airlines, will deliver:

• An expanded Heathrow that lowers airfares and delivers more choice of destinations for passengers
• Boosts Britain’s connectivity with the world
• Invests in meeting sustainability targets for communities 
• Keeps airport charges within a few pounds of 2016 levels.

“This plan ticks all the boxes,” said Heathrow CEO John Holland-Kaye. “New capacity at Heathrow will help drive down airfares, attract up to 40 new long haul as well as more domestic routes and connect all of Britain to global growth. It delivers a sustainable airport at the cost we said without a penny of taxpayer money.

“Expanding Heathrow will make Britain the best connected country in the world, at the heart of the global economy.”

The plan also provides a rigorously reviewed financial assessment, the airport said, confirming that it can expand within the total cost originally submitted in 2014 to the Airports Commission and financed by private money.

Heathrow has also said the lower fares will be delivered over the course of the next decade as it expands and unlocks competition amongst airlines for the benefit of passengers. A lack of available capacity at Heathrow over the past decade has stifled airline growth, it said, and this plan opens up the airport for other carriers to achieve their ambitions.  

Two ‘bookend’ options have been outlined in the plan which centres on investment over the next 15 years on either prioritising further enhancement to passenger service, or prioritising more rapid growth to deliver more connectivity and greater airline competition sooner, Heathrow has said. Both options will reportedly lead to lower overall airfares and ensure a third runway is delivered by 2030 with affordable airport charges.

Over the next six months, Heathrow has said it will engage with stakeholders to seek feedback on the plan and which of these two options best meets their priorities. That feedback will be incorporated into a Final Business Plan published in 2020 which will give a clear indication of the path Heathrow will take. The CAA will ultimately determine the investment approach that Heathrow pursues.

Related topics

Aeronautical revenue , Airport construction and design , Airport development , Capacity , Economy , Passenger experience and seamless travel , Passenger volumes , Sustainable development

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Videh Kumar Jaipuriar has been nominated for his exemplary leadership in managing and navigating Delhi International Airport (DEL) during the COVID-19 pandemic. He led multiple initiatives to ensure business continuity at DEL, which included passenger safety and convenience, stakeholder management, cash conservation, adoption of new technologies, and care for environment and employee safety.

He proactively engaged with the government stakeholders and supported them in safeguarding aviation through strong confidence building measures for travellers, such as developing several indigenous technology solutions like air circulation with six changes per hour and a combination of UV and plasma disinfection systems to provide safest journey experience to their passengers. Under his leadership, DEL has been forefront of implementing safety measures which was later adopted across the country.

Despite lockdown, Jaipuriar ensured that DEL was operational for rescue missions, medical evacuations, and transporting medical essentials to various parts of the country. He further led the Vande Bharat Mission flights of Government of India (a rescue mission to get Indians back to India), as well as rescue flights by other international governments. His outstanding leadership across all areas across the stakeholders in the aviation ecosystem and going beyond the call of duty in managing and navigating this crisis for a national capital airport having national importance makes him the apt choice for the Person of the Year Award.

Adnan Saggaf continues to demonstrate strong leadership skills throughout the COVID-19 pandemic and brought out of the box ideas in attracting traffic and to support his team during this difficult time. With new innovative ideas in balancing cash flow, the facilities were kept maintained and the personal were kept employed. 

Saggaf has protected the financial stability of his staff income, ensured valuable cost cutting management, shown excellent performance of crisis management, and exceptional negotiation skills shown with authority regarding agreement restructuring and receivable payments.

To handle the loss of Umrah traffic to the airport, Saggaf chose to attract new airlines, mainly LCCs, to use the terminal with attractive offers and more reliable services. He built a new strategy by diversifying the airport offers. He prepared the facilities by deploying new technology and working on enhancing passenger experience. Saggaf also initiated a capacity building programme for the airside team by drafting SOPS, training and coaching, as well as initiating dedicated workshops to discuss ideas and to deploy new initiatives.

Leaders show strength in difficult times, and this is exactly what Saggaf showed and why he deserves to be awarded as the Person of the year 2021.

Peter has been with the Sangster International Airport for over 25 years. 

He has experience in customer service, operations and now oversees the security function and is also the Chief Operations Officer. 

Peter has been instrumental in co-ordinating the preparation and implementation of a COVID-19 response plan for not just MBJ, but to guide the operation of all agencies operating on airport. The aim of this plan was to ensure a safe environment for staff and the travelling public; therefore, this plan was instrumental to establish consumer/travellers/public confidence and provided information and guidelines on the new protocols implemented at the airport.  

Peter is well known for his expertise in investigation and aviation security. His co-operation with law enforcement stakeholders has been unrelenting in assuring the security of the airport and stakeholders alike. 

While Peter is known as a firm individual that displays the outmost professionalism and integrity, he operates on the basis of equity and fairness in all matters relating to staff, clients, passengers and the general public.   

Robson Freitas has developed and led the BH Airport plan for the resumption of airport operations post-COVID-19, as well as being responsible for leading the group of Directors and Managers at the airport, defining the three main pillars of recovery: Health and Safety of People, Institutional and Integrated Communication and Institutional Partners. These central pillars include ensuring hygiene and health and social distances measures for passengers, users, and the airport community, in addition to participating in strategic committees involving the public sectors to comply with regulatory rules. Freitas developed the COVID guardians programme, who were responsible in monitoring and following up on the measures already implemented for COVID-19 and advising users, employees and other people on compliance with distancing, hygiene and health measures recommended by health authorities. He also developed a COVID booklet with information and guidance for the airport community regarding good hygiene and health practices and led the beginning of the publication of a monthly newsletter with passenger curve information, allowing the planning of reopening and rehiring by commercial stores. Freitas also supported the reduction of OPEX by planning the temporary closure of areas, toilets and equipment in common use and internalising some activities.

During the COVID-19 pandemic, Raghunath worked closely with all the aero concessionaires and cargo operators to minimise disruption and provide financial relief to them. The airline marketing team helped launch a historic first route to the U.S. West Coast and the cargo team at BIAL also achieved record numbers over this period, with the airport becoming India’s leading airport for the export of perishables. Despite the impact of COVID-19, Raghunath has led a digital transformation and expansion at BIAL airport, with new initiatives and the deployment of the fully biometric-based self-boarding solution for seamless passenger flow and travel experiences and a process automation and analytics platform. These initiatives amongst many others, meant that the airport won ACI World’s ‘Voice of the Customer’ initiative, which recognised BIAL airports efforts to prioritise their customers during COVID-19. Raghunath has remained a staunch and resilient leader during such an uncertain time and is very much appreciated by his team.

As Head of Operations, Alicia Prince has played a critical role in leading and navigating Cairns Airport through the COVID-19 pandemic. During the pandemic, Prince implemented a functional plan to ensure business continuity and staff welfare, segregating front-line operational staff into work teams to avoid interaction between groups, as well as strict sanitisation processes. She ensured that the $55 million domestic Terminal upgrade continued safely despite the unprecedented COVID-19 crisis.

She also deployed the COVIDSafe Operation Plan for Cairns Airport, which was endorsed and later commended by Queensland Chief Health Officer. As part of this plan Alicia developed an airport layout to provide physical separation of low risk and high-risk arrivals and initiated increased hygiene and sanitisation protocols. The health and safety of the airport community was paramount to maintaining operations, and in response to this Alicia initiated a COVIDSafe training program for the entire airport community and worked closely with her team to deliver.

As a result of the great work Prince has done to ensure COVID-19 best practices, Cairns Airport was one of the first Australian Airports to be awarded an ACI Global Health Accreditation.

Alicia also led the terminal optimisation project, which assessed and implemented terminal downscales due to the crisis. Significant savings (both financial and environmental) were achieved by reducing the operational footprint of the airport.

Whilst maintaining operations throughout the pandemic was a priority, Alicia ensured her team were kept well informed and engaged. Cairns Airport has a team of 33 volunteers which form part of Alicia’s wider team. To ensure they remained connected and cared for, Alicia and her team created care packages including home-made cakes and personally delivered to each of the volunteers’ houses in a COVIDSafe manner. Alicia demonstrated great leadership throughout the pandemic and continues to do so today. Her clear and transparent communication and collaboration with other Australian Airports and key agencies to ensure best practice and alignment contributed greatly to business continuity. Furthermore, all the above was managed whilst working remotely and juggling home schooling with her two young boys.

Balram Bheodari leads Hartsfield-Jackson Atlanta International Airport as North America’s most efficient airport, due to his vast knowledge of and astute attention to efficiency in aviation, which has allowed the airport to thrive in the most difficult of markets. Bheodari combines operational expertise, integrity, and selflessness to provide a quality of leadership throughout Atlanta Airport. He oversees all facets of airport governance, including operations and a multi-billion-dollar capital improvement programme, ATLNext, designed to pave the way for Atlanta’s growth over the next 20 years. During COVID-19, Bheodari developed a comprehensive resumption of operations playbook that served to support ATL’s recovery efforts. With guidance from the Federal Aviation Administration and Centers for Disease Control and Prevention (CDC) amid evolving health and safety guidelines, Bheodari steadfastly encouraged collaboration among stakeholders, team-building among aviation employees, and adaptability in uncertain times. Throughout the pandemic, he participated in daily calls with Airports Council International and other large-hub airports to share best practices as well as information from Washington, D.C. federal offices and the CDC.

He aimed to restore customer confidence and ensure the airport was a healthy facility using COVID-19 safe protocols. Since, the airport achieved Airport of the Year by the Airport Minority Advisory Council (AMAC).

During the height of the pandemic, Bheodari was the most ardent supporter of our mission-critical employees. Having worked his way up through the ranks, he fully appreciates the oftentimes thankless jobs these employees perform that keep the Airport safe and running optimally at all times. Morale never flagged because Bheodari made sure those employees felt valued through hazard pay, special meals, social media posts, intranet spotlight features, and other incentives.

His actions and his directives all reflect his commitment to the three key focus areas of our organisation’s strategic plan: people, purpose and performance.

Jonas Abrahamsson has shown the strength to steer the company towards its long-term sustainable goals, despite the challenges of COVID-19. Abrahamsson has ensured that Swedavia achieved its net zero target for all ten of the airports in 2020 and has continued to support strategic development and innovation to further the cause of sustainable air travel. During 2020, when passenger numbers where down over 90 per cent and a lot of investments were paused, he decided that investments in the company’s net zero target should proceed, allowing Swedavia to become the first net zero airport group by the end of 2020.

Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO. During the COVID-19 pandemic, Dinsdale, as CFO of the airport at the time, fought relentlessly to make sure that the company survived the crisis and worked with great commitment to secure the funding of the airport. For example, a voluntary salary cut for the executives and the founding of the Budapest Airport Foundation, which supports blue collar workers who lost their job during the COVID-19 pandemic.

After being nominated to CEO position in March 2021, Dinsdale continues to work closely with the executive team to create a clear COVID-19 recovery strategy for Budapest Airport. This will also mean that we come out stronger of the pandemic and have a clear focus. Dinsdale is an inspiring true leader who helped us all to cope with the very difficult times of the pandemic and I am convinced that he truly deserves this award.

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Q6 Revised Business Plan - June 2013 - Heathrow Airport

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1. Introduction and context<br />

Despite this material shortfall, <strong>Heathrow</strong>’s shareholders<br />

chose to maintain their support for the Q5 capital<br />

investment programme supported by the airlines.<br />

Passengers and airlines have tangibly benefited from this<br />

investment. Aeronautical charges have been lower than<br />

they would have been if passenger forecasts had been<br />

more representative, and investment levels have been<br />

maintained despite these lower volumes. The<br />

maintenance of investment in Q4 and Q5 has ensured<br />

<strong>Heathrow</strong> is in a strong position as we head into <strong>Q6</strong>, in<br />

terms of passenger experience and competitiveness.<br />

However, the experience of Q4 and Q5 underlines the<br />

importance of two requisites for <strong>Heathrow</strong> to be a<br />

sustainable business:<br />

• Firstly, the <strong>Q6</strong> settlement must now re-base passenger<br />

forecasts to align with actual demand – with an<br />

inevitable impact on airport charges. To be clear, we<br />

are not expecting to ‘recoup’ lost revenue from Q5.<br />

Rather we are simply looking to reset required<br />

aeronautical revenues to allow <strong>Heathrow</strong> to earn its<br />

cost of capital in <strong>Q6</strong> given the passenger numbers we<br />

now expect;<br />

• Secondly, while the incentive regulation scheme under<br />

which <strong>Heathrow</strong> operates today means that<br />

shareholders are solely responsible for bearing this risk<br />

in Q5, it also requires that <strong>Heathrow</strong> can expect to<br />

earn an appropriate rate of return on its investment<br />

(equal to its WACC) in <strong>Q6</strong>. This will inevitably require<br />

an upward adjustment of prices in <strong>Q6</strong>.<br />

The experience of passenger forecasts over Q4 and Q5<br />

emphasises the nature of the risk <strong>Heathrow</strong> faces.<br />

This is a risk materially greater than any other regulated<br />

company which are largely protected from volume risk<br />

through the structure of their revenue and price caps.<br />

In fact, only NATS has a similar price cap structure to<br />

<strong>Heathrow</strong> and is protected by a risk-sharing mechanism.<br />

This leads to materially higher Beta risk for <strong>Heathrow</strong><br />

compared to other regulated companies, a key<br />

component of the WACC.<br />

Also compared to other utilities, <strong>Heathrow</strong>’s risk is<br />

more asymmetric – a consequence largely of its<br />

capacity constraint – which in itself adds an additional<br />

risk premium.<br />

In addition, with a lower than average rate of free cash<br />

flow (compared to utilities) <strong>Heathrow</strong> is more exposed to<br />

the risk that future changes to the regulatory regime will<br />

prevent full repayment of past investments.<br />

There is significant disagreement between <strong>Heathrow</strong><br />

and the CAA on the correct level of <strong>Heathrow</strong>’s WACC.<br />

<strong>Heathrow</strong>’s position and evidence is laid out fully in its<br />

response to the CAA’s Initial Proposals. Even without<br />

accounting for <strong>Heathrow</strong>’s compelling evidence, the<br />

CAA’s own WACC assessment should be corrected to<br />

account for errors in calculations. These corrections in<br />

<strong>Heathrow</strong>’s view would position the CAA’s WACC at<br />

5.8% – at this level <strong>Heathrow</strong> cannot contemplate a<br />

£3bn capital investment plan.<br />

In accordance with the CAA’s requirements for business<br />

plans, the RBP has been modelled on the Q5 WACC of<br />

6.2%. No other modelling, using other values of WACC,<br />

has been included within the plan.<br />

© <strong>Heathrow</strong> <strong>Airport</strong> Limited <strong>2013</strong><br />

<strong>Heathrow</strong> <strong>Q6</strong> <strong>Revised</strong> <strong>Business</strong> <strong>Plan</strong> - Public version | Chapter 1 Page 11

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1. Introduction and context 1.6 Community context <strong>Heathrow</strong> <strong>Airport</strong> is one of the largest employment sites in Europe with over 76,600 people working within the <strong>Airport</strong> boundary creating gross value added (GVA) of almost £3.3 billion per annum 2 . A further 7,700 people are employed in the local area (Hillingdon, Hounslow, Spelthorne, Ealing and Slough) in activities which are directly related to the <strong>Airport</strong> but who work outside the <strong>Airport</strong> boundary; a GVA of £0.3 billion is supported by these jobs. There are further indirect and induced jobs supported in the local area, London and elsewhere in the UK through the purchases of goods and services and through the expenditures of employees. A total of 114,000 jobs and GVA of £5.3 billion is supported in the local area by the operation of <strong>Heathrow</strong> <strong>Airport</strong>. These jobs represent approximately 22% of total employment in the local area. Across the UK as a whole, <strong>Heathrow</strong> supports almost 206,000 jobs and GVA of almost £9.7 billion which is equivalent to 0.8% of UK GVA. This is a considerable contribution to the UK economy from a single employment site. 1.7 Investor context Delivering for the passenger requires that <strong>Heathrow</strong> is a financially viable business and is able to finance historical and new capital expenditure on an ongoing basis. We will enter <strong>Q6</strong> following an extremely challenging commercial environment in Q4 and Q5 where the target return on RAB has not managed to be delivered. We estimate that <strong>Heathrow</strong> has achieved a return on RAB of 4.8% in Q5, 1.4% below the target 6.2%. Traffic underperformance (33.2m below forecast, almost 10%) has been the main driver of underperformance. We estimate that the shortfall in passengers has translated into £650m (07/08p) loss of revenue. Figure 1.3: Investment returns have fallen short of the targeted return 9% 8% 7% Specifically <strong>Heathrow</strong> <strong>Airport</strong> supports the growth of the local economy through a number of initiatives which tackle the barriers to economic prosperity. Education, skills, employment and business growth have the greatest impact on economic growth and <strong>Heathrow</strong>’s programmes are designed to impact each of these areas. Our education programmes support Science, Technology, Engineering and Maths (STEM) related learning which addresses the skills shortage in the UK. The <strong>Heathrow</strong> Jobs & Careers Fair demonstrates the vast array of careers available to school and college leavers. The <strong>Heathrow</strong> Academy supports local unemployed people getting back into the workplace in the areas of retail, aviation and construction. Finally, the <strong>Heathrow</strong> Meet the Buyers encourages local businesses to do business with us, our supply chain or each other. 6% 5% 4% 3% 2% 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Return on RAB before exceptionals Profiled target return 2 Source: Optimal economics study on <strong>Heathrow</strong> related employment. Page 10 <strong>Heathrow</strong> <strong>Q6</strong> <strong>Revised</strong> <strong>Business</strong> <strong>Plan</strong> - Public version | Chapter 1 © <strong>Heathrow</strong> <strong>Airport</strong> Limited <strong>2013</strong>

1. Introduction and context Despite this material shortfall, <strong>Heathrow</strong>’s shareholders chose to maintain their support for the Q5 capital investment programme supported by the airlines. Passengers and airlines have tangibly benefited from this investment. Aeronautical charges have been lower than they would have been if passenger forecasts had been more representative, and investment levels have been maintained despite these lower volumes. The maintenance of investment in Q4 and Q5 has ensured <strong>Heathrow</strong> is in a strong position as we head into <strong>Q6</strong>, in terms of passenger experience and competitiveness. However, the experience of Q4 and Q5 underlines the importance of two requisites for <strong>Heathrow</strong> to be a sustainable business: • Firstly, the <strong>Q6</strong> settlement must now re-base passenger forecasts to align with actual demand – with an inevitable impact on airport charges. To be clear, we are not expecting to ‘recoup’ lost revenue from Q5. Rather we are simply looking to reset required aeronautical revenues to allow <strong>Heathrow</strong> to earn its cost of capital in <strong>Q6</strong> given the passenger numbers we now expect; • Secondly, while the incentive regulation scheme under which <strong>Heathrow</strong> operates today means that shareholders are solely responsible for bearing this risk in Q5, it also requires that <strong>Heathrow</strong> can expect to earn an appropriate rate of return on its investment (equal to its WACC) in <strong>Q6</strong>. This will inevitably require an upward adjustment of prices in <strong>Q6</strong>. The experience of passenger forecasts over Q4 and Q5 emphasises the nature of the risk <strong>Heathrow</strong> faces. This is a risk materially greater than any other regulated company which are largely protected from volume risk through the structure of their revenue and price caps. In fact, only NATS has a similar price cap structure to <strong>Heathrow</strong> and is protected by a risk-sharing mechanism. This leads to materially higher Beta risk for <strong>Heathrow</strong> compared to other regulated companies, a key component of the WACC. Also compared to other utilities, <strong>Heathrow</strong>’s risk is more asymmetric – a consequence largely of its capacity constraint – which in itself adds an additional risk premium. In addition, with a lower than average rate of free cash flow (compared to utilities) <strong>Heathrow</strong> is more exposed to the risk that future changes to the regulatory regime will prevent full repayment of past investments. There is significant disagreement between <strong>Heathrow</strong> and the CAA on the correct level of <strong>Heathrow</strong>’s WACC. <strong>Heathrow</strong>’s position and evidence is laid out fully in its response to the CAA’s Initial Proposals. Even without accounting for <strong>Heathrow</strong>’s compelling evidence, the CAA’s own WACC assessment should be corrected to account for errors in calculations. These corrections in <strong>Heathrow</strong>’s view would position the CAA’s WACC at 5.8% – at this level <strong>Heathrow</strong> cannot contemplate a £3bn capital investment plan. In accordance with the CAA’s requirements for business plans, the RBP has been modelled on the Q5 WACC of 6.2%. No other modelling, using other values of WACC, has been included within the plan. © <strong>Heathrow</strong> <strong>Airport</strong> Limited <strong>2013</strong> <strong>Heathrow</strong> <strong>Q6</strong> <strong>Revised</strong> <strong>Business</strong> <strong>Plan</strong> - Public version | Chapter 1 Page 11

• Page 1 and 2: Q6 Revised business plan Public ver
• Page 3 and 4: Executive summary Passenger experie
• Page 5 and 6: Introduction and context Passengers
• Page 7 and 8: Box 1.1 Summary of Heathrow’s res
• Page 9: 1. Introduction and context 1.5 Hub
• Page 13 and 14: Our transformation to date Since 20
• Page 15 and 16: 2. Our transformation to date 2.2 I
• Page 17 and 18: Page intentionally blank © Heathro
• Page 19 and 20: Our vision and priorities for Q6 Ou
• Page 21 and 22: 3. Our vision and priorities for Q6
• Page 23 and 24: Page intentionally blank © Heathro
• Page 25 and 26: Our proposition for Q6 In this chap
• Page 27 and 28: 4. Our proposition for Q6 4.1.3 Com
• Page 29 and 30: 4. Our proposition for Q6 4.2.2 Pro
• Page 31 and 32: 4. Our proposition for Q6 4.3 Compe
• Page 33 and 34: 4. Our proposition for Q6 4.4.2 Hub
• Page 35 and 36: Page intentionally blank © Heathro
• Page 37 and 38: Aeronautical charges This chapter o
• Page 39 and 40: 5. Aeronautical charges Table 5.1:
• Page 41 and 42: 5. Aeronautical charges 5.1.2 Opera
• Page 43 and 44: 5. Aeronautical charges Willingness
• Page 45 and 46: Dependencies and risks This chapter
• Page 47 and 48: 6. Dependencies and risks 6.4 Risks
• Page 49 and 50: Conclusion This Revised Business Pl
• Page 51 and 52: esurfacing y resurfacing Terminal 1

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Rating Action Commentary

Fitch Affirms Heathrow Funding and Heathrow Finance Notes, Outlook Negative

Tue 30 Mar, 2021 - 2:55 PM ET

Fitch Ratings - London - 30 Mar 2021: Fitch Ratings has affirmed Heathrow Funding Limited's class A bonds at 'A-' and class B bonds at 'BBB'. Fitch has also affirmed Heathrow Finance plc's outstanding high yield (HY) notes at 'BB+'. The Outlooks are Negative.

RATING RATIONALE

The affirmation reflects our expectation that Heathrow's supportive regulation and significant market power as a primary hub airport, will allow it to significantly increase 2022 aero tariffs, by around 40% to 50% in nominal terms under Fitch's cases to offset reduced traffic during recovery from the coronavirus pandemic. Heathrow also has financial flexibility in the form of largely deferrable shareholder distributions and its ability to reduce its cost base to some extent.

Overall, we expect that this will enable Heathrow to deleverage below our rating sensitivities of 8x for the class A and 9x for the class B notes by 2022, and 10x for the HY notes by 2023. This will be driven by a gradual recovery from 2021 following the severe coronavirus-related volume shock in 2020.

The Negative Outlooks reflect the ongoing uncertainty relating to the timing and duration of the traffic shock triggered by the coronavirus pandemic, together with the embedded execution risk in delivering tariff increases in the next regulatory period, H7, starting in January 2022. For the HY notes, it also reflects the uncertainty related to the timing of resumption of dividend payments to Heathrow Finance plc from Heathrow SP, although significant cash reserves at Heathrow Finance plc mitigate any short-term liquidity risk.

Heathrow's liquidity position is strong, partly due to significant debt issuance in 2019 ahead of anticipated capex related to the third runway project, which we now expect to be significantly delayed, in addition to further debt issuances during 2020.

KEY RATING DRIVERS

Large Hub with Resilient Traffic: Volume Risk - Stronger

Heathrow is a large hub/gateway airport serving a strong origin and destination market. Heathrow has historically demonstrated traffic resilience, with a maximum peak-to-trough fall of just 4.4% through the 2008 economic crisis, reflecting the attractiveness of London as a world business centre; the role of Heathrow as a primary hub offering strong yield for its resident airlines; the location and connectivity of Heathrow with the well-off western and central districts of the city; and unsatisfied demand as underlined by the capacity constraint, which also helps absorb shocks.

The coronavirus pandemic led to an unprecedented impact on travellers' mobility with a contraction of 72.7% of Heathrow's passenger numbers in 2020. We currently expect traffic to reach around 90% of 2019 levels by 2025 under the updated Fitch rating case (FRC), but if the severity and duration of the pandemic are longer than expected, we will revise the rating case accordingly.

Regulated and Inflation-Linked: Price Risk - Midrange

Heathrow is subject to economic regulation, with a price cap calculated under a single till methodology based on RPI+X, and is currently set at RPI-1.5% for the Q6 regulatory period, which started in April 2014 and has been extended through i (interim) H7 to 2021. The price cap, set by the UK Civil Aviation Authority (CAA), is established to offset Heathrow's significant market power and is highly sensitive to several assumptions made by the regulator, such as cost of capital, traffic forecast and operational efficiency. The regulatory process is transparent but creates material uncertainty each time it is reset.

Capacity Constrained: Infrastructure Development/Renewal - Midrange

As a result of the coronavirus pandemic, Heathrow's next regulatory period (from 2022 to end-2026) excludes the approval, planning, funding and execution of the third runway project, reducing regulatory uncertainty. The coronavirus-driven 2020 traffic contraction alleviates capacity constraints in the short term, but in Fitch's view this issue remains in the longer term.

Heathrow has a record of successfully accessing capital markets to secure funding and delivering capex projects. We also note the regulator's mandate to ensure capex can be financed in addition to affordability to end-users as supportive.

Refinance Risk Substantially Mitigated: Debt Structure - Midrange (Class A); Midrange (Class B); Weaker (HY)

The class A debt benefits from its seniority, security, and protective debt structure (ring-fencing of all cash flows and a set of covenants limiting leverage). The debt portfolio is exposed to some floating rate risk, with at least 75% being fixed, in addition to some refinance risk, which is mitigated by the issuer's strong capital market access, due to an established multi-currency debt platform and the use of diverse maturities. The class B notes benefit from many of the strong structural features of the class A notes. The HY notes have a weaker debt structure due to their deep structural subordination.

FINANCIAL PROFILE

For the class A and class B debt, we forecast net debt to EBITDA returning to below the respective negative rating action triggers of 8x and 9x by 2022, and remaining below them under the FRC, indicating a temporary impairment of Heathrow's credit profile. After turning negative in 2021, post maintenance interest cover ratios (PMICRs) remain consistently above the respective negative rating action trigger levels of 1.6x and 1.3x for the class A and class B notes throughout the remainder of the forecast period.

For the HY debt, we forecast net debt to EBITDA returning to below the negative rating action trigger of 10x by 2023 under the FRC, and remaining below it for the remainder of the forecast period. After turning negative in 2021, PMICRs also remain fairly consistently above the negative rating action trigger level of 1.15x. However, the dividend cover is materially affected by the reduced cash up-streaming from Heathrow SP to Heathrow Finance plc, resulting in no dividends in 2021, and low cover in 2022. This is mitigated by strong liquidity at Holdco level, with around GBP377 million of cash available as at end February 2021. Fitch estimates this will cover over three years of debt service.

We are closely monitoring developments in the sector as airports' operating environment has substantially worsened and we will revise the FRC should the severity and duration of the pandemic be worse than expected or the issuer fails to enforce tariff increase as expected.

Heathrow is one of the most robust assets in the sector. Historically, it has higher leverage than its European peers (Aeroports de Paris (ADP); A-/Negative), albeit with a better debt structure for senior debt. However, ADP's Issuer Default Rating (IDR) is now aligned with that of Heathrow Funding Limited's class A debt. This reflects that the coronavirus pandemic and acquisition-related debt has led to a sustained impairment of ADP's leverage metrics under the FRC. Compared with Gatwick (BBB+/Negative), Heathrow's bonds benefit from a stronger revenue risk profile.

Fitch compared the structural subordination of Heathrow Finance plc's HY notes with that of Gatwick Airport Finance plc (BB-(EXP)/Negative), Atlantia SpA (BB/Rating Watch Evolving; RWE)/ Autostrade per l'Italia SpA (ASPI; BB+/RWE) and Getlink S.E. (BB+/Stable). The rating of Gatwick Airport Finance's notes reflects their structural subordination to the Gatwick ring-fenced group, in addition to the current lock-up that prevents cash up-streaming to Gatwick Airport Finance plc, and is expected to continue until mid-2024. This is materially longer than for Heathrow, which we assume will resume cash up-streaming in 2022.

Atlantia is rated one notch below ASPI, its opco, as compared with Heathrow Funding Limited it has fewer structural protections. Similar to Heathrow, for Getlink, lock-ups at the opco, together with limited ability to push down debt to the opco due to restrictions on additional indebtedness, lead to a two-notch difference for the 'BB+' rated debt, versus the 'BBB'-rated debt issued by Channel Link Enterprises Finance plc (CLEF).

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

All classes: Revenue recovery combined with deleveraging ahead of Fitch's current expectations could lead to a revision of the Outlook to Stable.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Class A notes: Failure to improve net debt to EBITDA to below 8x by 2023, or average PMICR below 1.6x.

Class B notes: Failure to improve net debt to EBITDA to below 9x by 2023, or average PMICR below 1.3x.

HY notes: Failure to improve net debt to EBITDA to below 10x by 2023, or average PMICR below 1.15x.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [ https://www.fitchratings.com/site/re/10111579 ].

TRANSACTION SUMMARY

Heathrow is a major global hub airport with significant origin and destination traffic and resilience due to its status as the preferred London airport.

Revenues are regulated and subject to an inflation-linked price cap on a single till basis. We view the structured, secured and covenanted senior debt as offsetting some of the higher expected five-year average leverage under the Fitch rating case for the class A and B bonds compared with peers. The HY bonds are structurally subordinated.

CREDIT UPDATE

Traffic fell by 72.7% in 2020 vs 2019 from 80.9 million to 22.1 million. Revenue in 2020 was GBP1.175 billion, vs 2019 revenue of GBP3.070 billion, primarily reflecting material reductions in both aeronautical and retail revenues (around 60%). Other revenue performed slightly better, falling by around 40% year on year. Prior to coronavirus, management had been projecting 2020 revenues of GBP3.061 billion.

As part of the April 2020 review, Fitch projected Heathrow revenue of GBP1.504 billion, meaning actual revenues have under-performed Fitch's previous expectations. Aeronautical income fell, predominantly due to reduced passenger numbers as a result of the pandemic. Fewer aircraft movements also drove revenue down following the European Commission's temporary suspension of the slot usage rule. Retail income declined as a result of reduced passenger numbers. The decrease in other revenue demonstrated relative resilience in other regulated charges collections and property and others.

As at December 2020, Heathrow reduced its net operating costs by over GBP300 million compared with the December 2019 forecast. To deliver this, Heathrow implemented a comprehensive business protection plan, which included company-wide organisational redesign, temporary pay cuts, bonus cancellations, recruitment freeze, use of the government furlough scheme, consolidation of operations into two terminals and one runway and renegotiations of suppliers' contracts. Many of these initiatives are expected to generate some further cost savings in 2021, either as permanent or volume-driven reductions to the largely fixed cost base. Terminal 4 is also expected to remain non-operational until end-2021.

2020 EBITDA fell by 86% to GBP270 million vs 2019 EBITDA of GBP1.921 billion. Prior to the pandemic, management had projected EBITDA of GBP3.061 billion in 2020. As part of the April 2020 review, Fitch projected EBITDA of GBP535 million under the FRC. In terms of capex, Heathrow significantly reduced spending during 2020 to preserve cash, with investment focused on the safety and resilience of the airport.

The CAA published a consultation on Heathrow's proposed regulated asset base adjustment on 5 February 2021, with a view to making a decision during March. The CAA has ruled out a no-intervention option, although the timing, extent and form is not yet clear. Heathrow also submitted its revised business plan in December 2020. The plan will inform the CAA's initial proposals in relation to the H7 regulatory period due to be published in summer 2021.

In terms of covenants and waivers, Heathrow secured a waiver from Heathrow Finance plc's creditors in July 2020. As a result, Heathrow Finance plc's interest coverage ratio covenant is waived for 2020. In addition, Heathrow Finance plc's regulatory asset ratio covenant was revised from 92.5% to 95.0% in 2020 and 93.5% in 2021. Despite the deteriorated traffic outlook, as at December 2020, Heathrow did not forecast any covenant breach in 2021 as a result of mitigations in place.

Heathrow has maintained strong levels of liquidity throughout the pandemic with 2021 maturities already fully pre-funded. Heathrow has also retained strong market access thus far during the pandemic, which we expect to support continued strong liquidity. Heathrow plans to raise further debt during 2021 to ensure the liquidity horizon extends to 24 months by the end of 2021.

Risks related to Brexit are now significantly reduced. The UK left the EU on 31 December 2020 with no meaningful interruption to flights between the UK and the EU.

FINANCIAL ANALYSIS

Under the Fitch base case, we assume traffic to remain 60% below 2019 levels following the 72.7% contraction in 2020, with recovery to 2019 levels by 2024. We forecast EBITDA to grow to around GBP2.5 billion by 2025, from GBP1.9 billion in 2019 driven by the traffic recovery. Under the FRC, we assume traffic to remain 60% below 2019 levels in 2021, with recovery to around 90% of 2019 levels by 2025, meaning recovery to 2019 levels extends beyond the 2025 forecast horizon. We forecast EBITDA to grow to around GBP2.3 billion by 2025, from GBP1.9 billion in 2019, driven by the traffic recovery.

All potential investment related to the third runway expansion has been deferred to beyond the H7 regulatory period, meaning capex assumed under Fitch cases more focused on maintenance. We assume dividend payments will resume and generally increase from 2023. Fitch net debt to EBITDA will recover to levels in line with our downgrade sensitivities by 2022 for the class A and B notes, and by 2023 for the HY debt.

Fitch also ran additional sensitivities, testing a downside case with a longer traffic recovery, the effect of lower inflation. The sensitivities demonstrate that the issuer's credit profile would be impaired under the downside case, but is not significantly affected by moderately lower inflation.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

• Heathrow Finance plc/Debt/3 LT
• Heathrow Finance plc/Debt/5 LT
• Heathrow Finance plc/Debt/1 LT
• Heathrow Finance plc/Debt/2 LT

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

APPLICABLE CRITERIA

• Infrastructure and Project Finance Rating Criteria -- Effective March 24, 2020 to Aug. 23, 2021 (pub. 24 Mar 2020) (including rating assumption sensitivity)
• Airports Rating Criteria — Effective Oct. 22, 2020–May 16, 2022 (pub. 22 Oct 2020) (including rating assumption sensitivity)

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Third-party Model ( 1 )

ADDITIONAL DISCLOSURES

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

ENDORSEMENT STATUS

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• Press releases

New report reveals Heathrow and aviation sector's £12bn boost to annual economy

• Press Releases
• New report reveals Heathrow is “Britain’s most valuable port” – boosting regional economies by £400m 

More than £153bn of non-EU exports and imports are shipped through Heathrow in 2021  

Heathrow sits at the centre of the UK aviation sector’s £12 billion annual boost to the British economy 

A new report details Heathrow’s value to Britain and its support for the UK’s regions: delivering a £400 million boost to economies across the UK.  The study, which contains new research by consultancy Frontier Economics, reveals Heathrow is Britain’s “most valuable port”. 

It charts how in 2021, as Britain emerged from the pandemic, more than £153 billion of non-EU exports and imports travelled through Heathrow while in 2019 visitors travelling through the airport went on to spend £400 million in towns and cities across the UK. 

The report: ‘ Heathrow: Sustainable Growth, Global Connectivity ’, notes the part Britain’s hub airport plays in the UK aviation sector’s £12 billion annual boost to the British economy.  And it details the importance of the global hub airport model to the UK’s economic growth and to Britain’s exporters who rely on aviation trade routes.  

The hub model helps to drive trade growth and regional economies by pooling demand for global connections and providing more choice of destinations for passengers and businesses.  

British consumers and businesses can reach 95% of the global economy with a direct flight from Heathrow with over 200 ‘unique’ one-stop connections between the UK regions and rest of the world. 

The report focuses on how Heathrow’s unrivalled connectivity to the world’s growth markets support the economies of Scotland, Wales, Northern Ireland and all the English regions with case studies from across the UK of business.   The data reveals that Heathrow’s domestic route network connects the nations and regions of the UK to global growth and strengthens the fabric of the Union. In 2019, passengers travelling through Heathrow spent more in Scotland than in any other part of the UK, some £276 million.    

In the North East, business passengers who travelled through Heathrow generated more than £150 million in trade and investment in 2019. In Northern Ireland more than £120 million in trade and investment was generated by Heathrow’s business passengers and in the South West it was £10 million.  

Heathrow CEO John Holland-Kaye welcomed the findings of Frontier Economics.  However, he said growth could not come at any cost and reconfirmed Heathrow’s goal by 2030 of cutting carbon emissions in the air by up to 15% and at least 45% on the ground compared to 2019.  

He said: “Aviation is a force for good in the world, lifting millions out of poverty through trade and tourism. But these social and economic benefits cannot come at any cost. Climate change is an existential threat to aviation and the planet and our industry must play its part by taking fossil fuel carbon out of flying.   

“That is why at Heathrow, we are taking the lead to decarbonise aviation. We have worked with others across the industry to develop a plan to do so and are taking in our own airport.” 

The publication of the new report follows the launch in early 2022 of the Heathrow 2.0: Connecting People and Planet strategy.  The strategy sets out how the UK’s only hub airport is driving forward net zero aviation and ensuring the local area remains a great place to live and work, including ambitious new actions and plans on net zero, air quality, noise pollution and waste. 

Notes to Editor 

The report, Sustainable Growth, Global Connectivity, can be viewed in full at: www.heathrow.com/sggc  

To learn more about the report and view all the case study videos from across the UK click here .

To learn more about Heathrow’s refreshed Sustainability Strategy, Heathrow 2.0: Connecting People and the Planet, launched in February 2022, please visit:  www.heathrow.com/sustainability  

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Heathrow response to the Secretary of State’s statement on airport testing

Heathrow brings business to Colombia

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Extinction Rebellion co-founder avoids jail term for drone action near Heathrow

Roger Hallam and two other activists given suspended sentences at Isleworth crown court in London

Extinction Rebellion and Just Stop Oil’s co-founder Roger Hallam has avoided imprisonment after attempting to bring disruption to Heathrow airport by getting involved in an action to fly toy drones in the vicinity.

Climate activists said the aim of the plan was to raise awareness about the impact of the airport’s proposed third runway on the climate.

Hallam, along with Dr Larch Maxey, had previously been found guilty of conspiracy to cause public nuisance in relation to the Heathrow drones action. A third man, Mike Lynch-White, pleaded guilty.

At a sentencing hearing at Isleworth crown court in west London on Friday, Hallam and Maxey were both given two-year sentences suspended for 18 months. Lynch-White was given a 17-month sentence suspended for 18 months. All are required to carry out hundreds of hours of community service.

Climate activists who attended court welcomed the fact that the men received non-custodial sentences.

The drones were in the air between 14 and 18 September 2019 and in the words of Judge Edmunds, when passing sentence on Friday, “the action fizzled out, with no more than 20 drones within a five-day period” flown.

The drone flights were within the 5km exclusion zone around the airport.

While the judge said he was satisfied that all three men were committed to the principle of non-violence, he found them to be “naive” about the risks of the action.

In November 2023 the court heard that Hallam and others planned to fly drones near Heathrow in order to “paralyse” the airport and “embarrass” the government into abandoning plans for a third runway there.

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The action was staged by the organisation Heathrow Pause, which called for plans for the airport’s third runway to be halted due to its projected impact on climate breakdown, noise and air pollution, and to open up a debate.

In a statement issued before the sentencing hearing, Hallam said: “Humankind is heading for indescribable suffering if we continue to put carbon emissions into the atmosphere. Thousands of people need to create mass economic disruption and go to prison in order to force governments to protect their people and enact legislation that will rapidly reduce carbon emissions.”

• Extinction Rebellion
• Just Stop Oil
• Climate crisis
• Heathrow third runway

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Failure to insulate UK homes costing thousands of lives a year, says report

Labour says it would aim for zero-waste economy by 2050

UK government can never accept idea nature has rights, delegate tells UN

To revive Britain from recession the next government must get growth right

Young climate activists aim to sway six Labour candidate selections

‘A make-or-break moment’: what does Labour’s U-turn mean for the UK’s green transition?

UK’s emissions fell slightly in 2022 but transport and homes still biggest emitters

Labour scrapping £28bn green pledge could leave UK colder, sicker and poorer

UK should invest in green economy instead of tax giveaways, study shows

Most viewed.

UK Border Force Officers Suspend Heathrow Airport Strike Action Plan

FILE PHOTO: Members of the public wait in the arrivals hall at Terminal 5 of Heathrow Airport in London, Britain, December 5, 2023. REUTERS/Alishia Abodunde/File Photo

LONDON (Reuters) - UK Border Force officers at Heathrow Airport, Britain's busiest hub, have suspended the strike action they were due to take for four days from April 11 in a dispute over working conditions, a trade union said on Friday.

The officers, who carry out immigration controls and passport checks, hope to enter further negotiations with the interior ministry over a new roster and changes to shift patterns, the Public and Commercial Services Union said.

"The suspension of the strike gives the Home Office the opportunity to resolve the dispute," the union said. "If there is no progress in the talks, strike action will take place."

(Reporting by William Schomberg)

Copyright 2024 Thomson Reuters .

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