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Heathrow wants to put up ticket costs to recover covid losses – and the Government agrees

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The Civil Aviation Authority is, astonishingly, allowing Heathrow to proceed with its claim to have its coronavirus losses repaid to it by the airlines via a levy on flight tickets.

Heathrow has asked the regulator for £2.8 billion to compensate it for the losses it has incurred due to coronavirus. The money would be paid to the airport by the airlines using it via an increase in ticket prices. British Airways passengers would be on the hook for roughly half, so circa £1.4 billion.

Whilst you would have expected the claim to be thrown out, the CAA is allowing it to proceed.

Heathrow Terminal 5

On Friday, the CAA – which is technically an independent regulatar and not a Government body – published this document (PDF) which says, basically, that it doesn’t know what to do.

The CAA said that the full £2.8 billion claim seems ‘disproportionate’. (The original claim was for £1.7 billion but Heathrow has now raised this by an extra £1.1 billion.)

This isn’t surprising when you remember that Heathrow’s entire turnover for 2019 was just £3.0 billion. The airport isn’t asking to be paid 11 months of profits – it wants to be paid 11 months of turnover.

The CAA has, however, extended its consultation period to (de facto) give the airlines more time to suggest how much they think they would like to hand over.

IAG, parent of British Airways, unsurprisingly believes that the sum should be zero. It points out that Heathrow has paid £4 billion in dividends to its shareholders in recent years, and as these include the Qatari and Chinese Governments they are not exactly strapped for cash.

Quoted in The Times, IAG said:

“It’s not fair nor reasonable to ask consumers to bail out Heathrow. It’s a wealthy, privately owned company which should seek funds from its shareholders, as many other businesses in our industry have done to weather this pandemic.”

Heathrow believes that a failure to make airline passengers bail it out will:

“undermine the perception of investing in the UK and the Government’s Global Britain agenda.”

Paul Smith, Director of the CAA, said:at the UK Civil Aviation Authority, said:

“In these exceptional circumstances we are persuaded that there are real issues we need to address to protect Heathrow’s consumers. However, in our view Heathrow’s proposals are not in the best interests of consumers. Although we propose to reject its disproportionate request, we are issuing a final consultation on whether a more limited and targeted intervention is warranted now or whether it is in consumers’ best interests to consider these issues as part of developing a new longer-term regulatory settlement, which will begin at the start of next year.”

IAG’s £1.4 billion share of the £2.8 billion, if Heathrow was successful in recovering the full sum it is claiming, would not be handed over in cash up front. It would be funded by an extra levy added to all British Airways flight tickets from Heathrow via an increase in the Regulatory Asset Base.

All other airlines using Heathrow would be in the same position, but clearly BA would be hit the hardest by a substantial margin.

The extended consultation period ends on 5th March.

Comments (82)

  • Scottie says:

    Fat Cats to get guaranteed UK cream it seems ! Whether based overseas or in the UK. And the poor old UK tax payers must foot the bill for any losses or risk. What a warped and biased system it is !

    • JDB says:

      There is no suggestion that taxpayers will foot any bill in relation to this. If permitted by the regulator, airlines will see increased charges that will be passed on to passengers.

  • Paul pogba says:

    Will flights at Gatwick also be adding charges or will they be getting comparatively cheaper? Airlines could rebel a little and ramp up flights at alternative airports before Heathrow.

    • insider says:

      It doesn’t really matter – LGW is slightly less regulated than LHR, so in theory they can ramp up charges, but within a cap. But LHR are effectively asking the CAA to underwrite their business, whether the airlines turn up or not [retrospectively in this case, but it sets a precedent].

      • kitten says:

        No, LHR are effectively asking the government to underwritw their losses but the profits belong to Heathrow and their shareholders.

        CAA should send Heathrow away with nothing. If they don’t it’s really clear that this needs to go to the Monopolies Commission ( now the CMA?) and the protection of passengers entrusted to a different agency that actually has the competence to identify the ripoff Heathrow and their shareholders want to perpetratw here and actually protect consumers against these monopolies.

        The CAA is not up to the task and it should be taken away from them.

  • JDB says:

    This isn’t a new story; it has been in the public domain for months – all published on the Civil Aviation Authority website. Most utilities are regulated, in part, based on their RAB which is the the subject of intense debate between the companies and their regulator at each review. If the facts change fundamentally, the RAB will change.

    • Rob says:

      It’s not new, and we’ve written about it before. Now we’re writing about it again, because there are new developments.

  • Cheshire Pete says:

    They cried poverty as the reason to impose new car parking drop charges, and withdrawn their subsidy for the Free red Buses around the perimeter. Now they want it all back anyhow, so they’ve lost nothing and still withdraw what we’re Free concessions!?

    Sharks, springs to mind.

  • Stephen says:

    This is a proposal to increase the regulatory asset base not to give heathrow the equivalent amount of money.
    Just like the regulated utilities, a blended cost of capital x RAB is used to calculate allowed regulatory return so heathrow is seeking that % multiplied by £2.8 billion, not £2.8 billion! The narrative in the consultation makes it seem like CAA are against the RAB adjustment and instead want to sweep it all into discussions for the H7 review this year. They also note that they think heathrow has benefited from an overly profitable H6 regulatory period so that probably ought to be taken into account and thus an equity injection equivalent to excess distributions might be appropriate as a starting point

    • Rob says:

      The x% is paid every year, however. If the return on RAB is, say, 5% then Heathrow will be able to charge an extra £140m per year for ever. The DCF of that at current rates is actually higher than £2.8 billion, and indeed Heathrow could – if it wished – go out and borrow £2.8 billion at 1% secured against the £140m of additional annnual income.

    • insider says:

      The single till system means that HAL will recover that £2.8bn, just over a longer period of time (as Rob says above). The RAB is depreciated each year, and the depreciation is effectively money into HAL’s pocket, once it flows through the calculations. Plus the fact they will earn the WACC on that £2.8bn, in reality, they will recover a substantial chunk more than £2.8bn over time

  • Dance-Ace-Base says:

    Just because “that’s how it works” (to encourage private investment) doesn’t mean people aren’t justified to be angered about ALL of the risk being passed onto the consumer and all of the profits going to foreign investors (with no benefit to the taxpayer). That may be the system but the system is warped too far in favour of private investors at the expense of the consumer. Cost to the consumer may be “regulated” but only ever changes in one direction.

  • David S says:

    We will maybe help you out but you can’t pay any dividends to your shareholders for x number of years. Sounds a bit fairer and stops the £2.8BN simply ending up in shareholders pockets.

    • Rob says:

      Why should the shareholders care whether the money is paid in dividends now or just mounts up in the company to be paid out in a massive lump sum in 5 years?

      I’m happy to take no money from HfP for 5 years (and then take it all in 1 chunk in 2026) if the Government agrees to give me 1 year of normal revenue as covid compensation.

    • kitten says:

      David S then Heathrow will just artificially depress profits and hoard them until the restrictions pass and then shareholders take them. Plenty of ways to do this in the accounts.

  • A frequent flyer says:

    Any investment is a risk and the investors in this case should take a big loss.
    BA should not have to pay the investors nor should BRITISH taxpayers.

    • kitten says:

      nor British consumers (passengers) nor companies whose employees use the monopoly airport known as Heathrow.

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