Heathrow holds course on £1.7bn hike in airport charges

Heathrow’s attempt to increase airport charges by £1.7bn sparked anger two weeks ago.

Industry leaders did not mince their words in response to the request, which was rejected by the Civil Aviation Authority.

“It’s outrageous what Heathrow is doing,” said one senior airline industry figure.

British Airways’ owner IAG said it was “staggered” by the demand.

“Heathrow is a wealthy, privately owned company, which should seek funds from its shareholders,” it warned.

Heathrow’s appeal for money provides the clearest signal yet of the financial pain wrought by the pandemic on Europe’s biggest airport.

Bosses say that they are within their rights to ask for the injection. A regulatory framework allows it to pass on “exceptional costs” to airlines, and ultimately customers, they say.

Nevertheless, the CAA rejection surprised and impressed the airline industry, which itself has suffered so badly it has collectively cut tens of thousands of jobs.

“In the past, the CAA has rolled over,” says one senior source. “For once they have shown their teeth.”

The stakes are enormous. Heathrow ranks among one of the most indebted companies in Britain. It owes an array of banks and bondholders more than £17bn.

This week, the airport will update investors on third quarter trading. Its owners, 90pc of which are from overseas, may struggle to see the upsides amid the devastation.

The airport has already announced that passenger numbers were down 82pc in September.

Heathrow’s debt mountain

Experts from consultancy Five Aero estimate 43m travellers need to come through Heathrow’s doors each year just to cover its interest bill of around £500m. So far it has welcomed just 19m.

The CAA’s proposal to reject an increase in charges, which remains subject to consultation, has prompted speculation within the industry that Heathrow could soon face a cash crunch.

Javier Echave, the airport’s finance chief, rejects this. At the end of September, cash reserves stood at £2.4bn, enough to see it through until 2023 in a worst-case scenario, he says.

Yet Echave and John Holland-Kaye, the airport’s chief executive, still have a £1.7bn hole to fill if they cannot force the CAA into a reversal.

Failure to do so could leave Heathrow at risk of breaching its banking covenants, which when tested in December will require it to keep debt below 95pc of the regulated value of its assets.

Other potential sources of funding bring their own challenges, however.

Tapping the airport’s owners – which include Spain’s Ferrovial, Qatari and Chinese sovereign wealth funds and pension schemes – would be complicated. “Because they have a disparate group of shareholders, it is going to be quite difficult,” says one industry source.

A direct government bailout appears to be off the table, after being ruled out by the CAA. The regulator compares Heathrow’s plight with that of Railtrack, the privately owned predecessor of tracks and stations owner Network Rail that collapsed in 2001.

The CAA cites Railtrack as “a relevant example of when a regulated company has faced severe financial issues”. Railtrack tried to tap taxpayers for money; but the Blairite government refused, placing the former FTSE 100 company into administration.

Echave will not entertain the notion of asking Heathrow’s wealthy shareholders for more money. He is focused on changing the regulator’s mind and is prepared to go to the High Court if necessary.

“If the CAA fail to adjust for this, they will be simply failing their duties to enforce something that is already in the settlement,” he says.

“This could [mean] a significant reduction in capital investment, which, while it will not impact safety, will ultimately hit passengers. When demand returns, Heathrow could become the dysfunctional gateway of Britain

“Also, the message for foreign investors is terrible,” he adds. “If you are not prepared to enforce a settlement, you are breaking the principle of the UK being a safe haven for investors’ money.

“If the CAA does not change its decision this could require us to launch a legal challenge. Because the consequences [on Heathrow] would be severe.”

Running out of runway

The hole in Heathrow’s balance sheet is not the only thing Holland-Kaye and Echave have to worry about. The Unite union is threatening industrial action amid claims the airport plans to “fire and rehire” staff, putting them on inferior contracts. The airport has warned up to 1,200 jobs may need to be cut if it cannot agree changes with unions.

Meanwhile, the future of the £14bn third runway hangs in the balance. Supreme Court judges are not expected to rule until next year on whether to overturn a Court of Appeal decision to block the expansion on environmental grounds.

With pre-Covid demand for air travel not expected to return until the middle of this decade, the building of the third runway is about as far away as it has ever been. A team of roughly 200 people working on the project have been stood down and reallocated.

In the meantime, Echave’s priority is changing the CAA’s mind. Like the airline bosses earlier this month, he does not mince his words as the crisis deepens and tensions escalate. “The consequences for not allowing for an adjustment are dangerous,” he insists.