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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)

  • Andrew says:

    What am I missing? Aren’t all businesses ultimately going to expect their customers to cover their covid losses? BA will put up prices as soon as demand returns (there were signs of this already last summer when things were looking better), they just don’t need to ask for permission to do so. Going straight to putting up prices is surely no different to taking a government loan and then putting up prices to help pay it back?

    • AJA says:

      I agree with you. Along with increases in income taxes, possible reductions in tax relief on pensions or reducing the 25% tax free lump sum, reductions in child tax credit, increases in NICs etc. All to recover the cost of Covid reliefs the government has been paying. We will all be paying for years, to think otherwise is just naive.

      • Rob says:

        I think you are going against 150 years of economic theory here, which states that a business can only charge what the customer is willing to pay. If a business cannot make a profit at that level (due to extra covid costs or whatever) then it will exit the market. Last time I checked it wasn’t compulsory to buy stuff.

        • insider says:

          but of course, Heathrow doesn’t operate under normal economic theory. It operates under ‘how much can I scare the CAA’ theory. Ultimately, the current management of the CAA doesn’t want the embarrassment of accidently being the ones who bankrupt Heathrow

          • kitten says:

            The government and the CAA need to man up and bankrupt Heathrow if necessary.

            Plenty of shareholder funds there. If shareholders dont want to support BAA / Heathrow or aren’t prepared to restructure like every other business without monopoly power or already collecting rents on government-given monopolies is needing to be willing to do, then there is no reason the governnent should award them additional privileges other businesses don’t get and especially not allow their monopoly power to abuse consumers.

            Privatised means privatised. Losses and profits.

          • JDB says:

            @kitten – I’m not sure if you know what ‘shareholder funds’ means in a business context. I don’t think you will find a lot of shareholder funds in the business as you suggest. Heathrow, even after massive cost cutting is burning through £150m/month and, as with most utility businesses, HAL is highly geared (c.£16bn of debt). I’m not sure how it would serve anyone’s interests for it to be bankrupted (your preferred option). The risk to the new business that would be perceived as much higher = higher cost of capital, so the regulated charges would be higher.

            The company is currently bearing all the losses but is seeking to recover them within the regulatory framework which they are entitled to do.

            Please look at the facts.

          • Rob says:

            It would actually be in EVERYONE’S interest if Heathrow went bust. The debt would be wiped out and the asset sold for a low price to someone else (probably the same people who own it now). The regulatory asset base could be reset and charges could come down. Bit unfortunate to the holders of the £16bn of debt but at least 75% would be recovered I reckon.

            My wife is doing this full-time at the moment, albeit for tankers and not airports.

            In what non-bankers would see as crazy, she is repossessing assets at a loss and then lending even more money to other people so they can immediately buy the assets off her.

        • AJA says:

          Rob, how is BA or any business putting up prices going against economic theory? Prices change all the time, it is accepted that there are off-peak vs peak prices. Airfares are generally higher the further out you book. J fares are higher than I fares, if an airline just offers J fares are you saying no one will book? A hotel room costs more on certain days of the week than it does on others, travelling over school holidays will always be more expensive than term time. What about inflation, fuel surcharges, or this latest £8.90 surcharge on your other article? The only time prices really drop is when there is competition. If every airline increases their prices, and I am not talking about colluding in this, then the consumer will pay more. I am not saying there won’t be any sales to encourage us to book but generally outside of those sales I think prices will be more expensive.

          • memesweeper says:

            .. but there is a limit to how high prices can go, and airlines usually charge as much as they can get away with already. So, if the airport fees go up, the ‘slice’ of the cake for the airline in the airfare is reduced.

          • kitten says:

            JDB so when did BAA announce a rights issue diluting their shareholders equity? They’ve not even considered such shareholder-contributing solutions.

            They’re just whining to the government that has given their shareholders monopoly profits, for more.

            Send them away, and take back their assets if necessary.

  • will says:

    Two main points to make here:
    1. Are we going to see an extra charge that then remains after the amount claimed is repaid?
    2. We now appear to be living in a world where there is assumed to be little or no risk to private enterprise, the expectation is that when things go wrong “someone else” will foot the bill, which ultimately taxpayer is that entity of last resort. Given this, shouldn’t taxpayer be taking some dividends in the good years? (And yes I understand that taxpayer already gets a share of profits and other revenue/income but that’s there to fund roads/health/security so the airport has customers and surrounding infrastructure, it’s not been enough since 2007 to even cover that, let alone cover failing businesses)

    • insider says:

      1. Heathrow effectively charge airlines in 2 ways. A ‘passenger service charge (PSC)’ which you see as a fee when you buy your ticket, and landing charges, which vary depending on the size and noise categories of the aircraft. Heathrow can choose how much weighting falls on each of these. In reality, they will probably keep the PSC similar to today, and ramp up the landing charges that the airlines pay (hence the airlines will get the flak of increasing prices). This will eventually flow through in increased airline fares.

      2. Ultimately Heathrow are not asking for taxpayer money, they are asking their users to pay more (so effectively asking the airlines / travellers to fund their losses). So Joe Public who never uses Heathrow will not pay anything to Heathrow (apart from very indirectly through the fact Heathrow have used furlough and some of the government backed debt programmes)

      • will says:

        Given the airlines are on life support from the government in the form of government backed loans that may need to be written off I would argue that any charges Heathrow passes on to the airlines have a government backed element to them.

        Likewise they issued the dividends to the shareholders in the good times, traditional business practice has been to budget for the possibility of an external shock during the good times.

        The main issue causing this is that in having Heathrow privately run it’s assumed its a competitive marketplace, it isn’t its effectively something similar to a monopoly as the government restrict new airfield capacity and also favour LHR for future growth so the private company operating it is able to generate extraordinary profits.

        See which of these apply to LHR:
        “Monopoly characteristics include profit maximizer, price maker, high barriers to entry, single seller, and price discrimination.”

        • insider says:

          it’s well known that Heathrow is a monopolistic powers. The CAA determined that they (and LGW) have substantial market power.

          Unfortunately, we only have the CAA to rely on to ensure they are regulated appropriately.

          • Anna says:

            The CAA won’t even tell BA to stop breaking the law on passenger rights!

  • RussellH says:

    What currently passes for a government in this country did at least have the sense to temporarily stop banks from paying didvidends[1].
    Surely they could do exactly the same for HAL? Or are they scared of HAL’s shareholders in a way that they are not scared of holders of bank shares?
    [1] Just to be clear, I do hold bank shares my self, both directly and indirectly. I cannot say that I have been happy to lose the dividends, but I fully accept the reasons why it was done.

  • Gordon Leishman says:

    Thames Water tried the same dishonest procedure – trying to surcharge the Customers for future projects.
    OFWAT advised them on no uncertain terms, where to flush their raddled thinking.

  • Matarredonda says:

    LHR has been a disgrace for many years holding the Government and country to ransom paying out vast dividends.
    It should never have been privatised as is a national asset.
    Personally I try to avoid using as at every turn you are ripped off.
    Will the CAA have the guts to say no to this demand? Ultimately I doubt it and they will allow by reducing by a few million saying they have looked after passenger interests.

  • G1712 says:

    The tax savings for a couple using a 2-4-1 and avoiding LHR are now about £300, would it also be possible to avoid the charge discussed in the other article today by starting in these locations?

    • G1712 says:

      *charges discussed in this article.

    • ChrisC says:

      No. As long as you fly via LHR you will get charged the fee.

      Which ‘tax savings’ are you referring to though?

      • AJA says:

        I suspect they are talking about starting in INV or JER where there is no APD.

        • ChrisC says:

          Just wanted clarification. When people say ‘taxes’ they don’t always mean proper government taxes.

          APD saving would be £360 for 2 in non economy if starting in an APD exempt airport.

          But fly via LHR and you are psying the new charge (not a tax)

  • L Allen says:

    I have a lot of sympathy for all the people who work for Heathrow Airport (not that there’s quite so many remaining with all the redundancies) but that doesn’t extend to the board whose remit seems to be: squeeze the staff, squeeze the airlines and passengers, keep the dividends flowing to the shareholders. This is absolutely the time where the shareholders have to step up and demand that profit is reinvested to keep the place running. Surely the whole point of being a shareholder is to SUPPORT the business you’ve invested in, not just drain it of cash like some Philip Green tax dodging vehicle. Oh… Yeah… move along, nothing to see here 🙂

    • JDB says:

      Although you suggest otherwise, shareholders and bond holders have been supporting the business. HAL lost £1.5bn in the first three quarters of last year and will no doubt show further huge losses when it publishes full year results later this month. Your comment makes no sense.

      • Rob says:

        That’s based on kitchen-sinking various non-cash items, eg “fair value loss on investment properties”. It made a PROFIT (at EBITDA level) of £259m in the first nine months of 2020.

        Even on a pure cash level (ie cash in minus cash out) it generated £215m of surplus in those nine months.

        • kitten says:

          Plus £1.5bn is b*gger all in the context of Heathrow business. It could be many, many times that before they should fo what they’re supposed to and resort to the range of (re)/finanancing options available to them before whining to expand the base on which they will earn rent using their monopoly power.

          Send them away

  • Informed says:

    Heathrow were given billions as an insurance fund against issues like Covid, but thought the best use for the money was to give it to their foreign shareholders. Just let the company go bust.

    • memesweeper says:

      +1

      if it goes to the wall it immediately comes back to life with new owners. There can be no reward without risk, and the existing shareholders have seen lots of upside in the past.

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