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CAA rejects Heathrow’s request to put up ticket costs to recover covid losses

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The Civil Aviation Authority has, after a public backlash, rejected a claim by Heathrow Airport for £2.6 billion to compensate it for the losses it has incurred during coronavirus.

The money would be paid to the airport by the airlines using it via an increase in ticket prices. British Airways passengers were on the hook for roughly half, so circa £1.3 billion.

Heathrow has not walked away empty handed, however. The CAA is allowing it to reclaim £300 million via future additional airline charges.

We last covered this story in early February. At that point, the CAA – which is technically an independent regulatar and not a Government body – published this document (PDF) which said, basically, that it didn’t know what to do.

The CAA said that the full £2.6 billion claim seemed ‘disproportionate’.

‘Disproportionate’ was putting it mildly, when you remember that Heathrow’s entire turnover for 2019 was just £3.0 billion. The airport wasn’t asking to be paid 11 months of profits – it wanted to be paid 11 months of turnover.

IAG, parent of British Airways, was leading the charge for the sum due to be set at 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 back in February, 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 believed 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.”

Why was the request cut to £300 million from £2.6 billion?

This is the key part of the argument used by the CAA:

“[we] considered the financial position of the notionally efficient company (which is consistent with the approach we use in setting price controls), with a lower assumed level of gearing than the actual company. We are clear that any risks to HAL’s actual financing are a matter for its shareholders, not for consumers to resolve.”

What this means in plain English is:

  • The CAA believes that Heathrow is in financial difficulties because it borrowed too much money in order to pay dividends to its shareholders
  • The award of £300 million is based on what the CAA believes Heathrow would have needed had it not loaded itself up with excessive debt

It’s not over yet, however

Had the claim succeeded, IAG’s £1.3 billion share of the £2.6 billion would have been 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 have been hit the hardest by a substantial margin.

British Airways has a reprieve for now. Unfortunately, the story is not yet over.

As well as allowing Heathrow to reclaim £300 million via an increase in the Regulatory Asset Base, the CAA has agreed that it will return to this topic as part of the next series of price control discussions. These will impact airline charges at Heathrow from January 2022.

The CAA said in a statement last week:

“Following Heathrow’s request for a RAB adjustment we have taken the decision that an early intervention on the scale of its request is disproportionate and not in the interests of consumers. The other issues raised by Heathrow as part of its request will be dealt with during the next price control review.

We do, however, recognise that these are exceptional circumstances for the airport and there are potential risks to consumers if we take no action in the short term. The decision we have announced today will incentivise and allow Heathrow to maintain investment, service quality and be proactive in supporting any potential surge in consumer demand later this year.”

It is still possible that the CAA will let Heathrow recover more of its covid losses, although it will insist that any increase in charges “brings long-term benefits to consumers.

The plan, still to be finalised, is meant to ensure that the 2022-2026 price control settlement leads to a fair balance of risk and reward between the airport and its airlines, given the uncertainty over passenger volumes.

You can read more on the CAA website here.

Comments (25)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Dubious says:

    For anyone interested, there is some comment from John Holland-Kaye in this recent interview that outlines Heathrow’s position on this matter:

  • Paul says:

    Heathrow has always been the unacceptable face of rip off Britain. Shabby service, expensive and the bogs stink.

    It has long exploited, many would suggest abused, their position to the detriment of consumers.

    I used T5 last August when it was noting but a Petri dish for the growth of the virus later in the Autumn. I was there again two weeks ago and it’s still cheaper to buy booze in Tesco and despite being almost deserted, the bogs still stank!

  • Nathan says:

    Dear CAA,
    Please can we have some money for this old rope.

    Time was when running a business was about risk and reward.

  • mr_jetlag says:

    Still £300m too high. Chancers.

  • J says:

    I like Heathrow, I want it to thrive. But if a company gets in trouble because it borrowed to pay dividends, there is no justification to ever offer external help.

  • Memesweeper says:

    I’m not clear why it’s unacceptable just to let it go bust, or what the downside to consumers would be if it did.

    • Rob says:

      It’s not unacceptable at all. It would be bought back immediately, probably by the same shareholders. The only losers would be the bondholders.

      • JDB says:

        Ultimately the passengers/airlines would lose as well. The ‘phoenix’ company’s cost of capital would inevitably be higher than at present so that charges would automatically be higher.

        • will says:

          Given that it’s currently almost interest free for anyone with good credit to borrow money and very hard to get interest from deposits, all it would require is a cash rich buyer (or buyer with good line of credit already) who sees the potential for a return on the investment bigger than either buying a bond or cash in bank.

        • kitten says:

          *Not if capped by decent regulation.

    • TeesTraveller says:

      Indeed. There will be plenty of buyers for the assets.

  • TeesTraveller says:

    Wonder when the £8.90 Exceptional Regulatory Charge will disappear? Would have been good for the CAA to pin them down on this. I know it’s not really part of the CAA remit but my fear is this will be the same sort of temporary event that we saw when fuel surcharges came in – these never went away, despite a rebrand.

    • JDB says:

      The £8.90 was agreed by the CAA and charged in the manner preferred by the airlines and was something always built into the regulatory framework.

  • ChrisW says:

    What did they do with the billions in profit they made over the years? Presumably, kept some in a war chest for a rainy day like a global pandemic?

    • JDB says:

      How do you think the company was able to absorb over £2bn of losses in 2021?

      • Rob says:

        Heathrow, at the EBITDA level, made a PROFIT of £270m in 2020.

        You need something far more messy than coronavirus for Heathrow to actually lose money.

        Whilst it reported a huge headline loss, this is due to the ‘ITDA’ elements of ‘Earnings Before Interest Tax and Depreciation’, eg interest (due to Heathrow overloading the company with debt), tax, depreciation (a non-cash item) and amortisation (again, a non-cash item).

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