Heathrow: Cleared for take off
I am suffering from a ‘flu-like’ virus which – according to my doctor – is afflicting “young adults” all across North London.
“Young adult” must be a technical, medical term. It was a bit of surprise to be categorised as such, but far be it from me to disagree with expert opinion.
But through the viral fog, I’ve been trying to discern the shape of the price settlement for our leading airports.
And from what I can see, the Civil Aviation Authority has blinked. In fact the airlines will probably complain that the CAA has shut its eyes and is refusing to open them.
The airlines will squeal because Heathrow and Gatwick are being allowed to increase what they charge them from 1 April by far more than could have been expected.
BAA will express disappointment with elements of the settlement, notably that there has been no increase in the cost-of-capital assumptions that underpin the pricing proposals.
But BAA is largely trying to spare the blushes of the regulator. The fact is that today’s settlement is very good news for the airports operator and its owner, the consortium led by Ferrovial of Spain.
So the first and big point to make is that there will not be a financial crisis at BAA.
With money markets still in turmoil, it may not be an ideal moment for the Ferrovial consortium to refinance the £9bn of debt it took on when buying the airports in 2006 (see last week’s blog on this).
However if there was doubt it would be able to find new loans, the CAA has laid that doubt to rest.
Or to put it another way, it has provided some comfort to future purchasers of regulated British businesses that if they don’t do their sums quite right, well the consequences should not be too severe.
The governor of the Bank of England would describe that, I think, as an increase in moral hazard.
But the Treasury, which thinks Britain has benefited from the sale of important companies to overseas interests, will be relieved that future buyers from abroad of great British businesses won’t be scared off.
Now, let’s look at those chunky increments in what Heathrow and Gatwick can charge.
Actually before I get on to that I am going to be horribly pedantic and point out that the CAA in today’s statement seems to have confused percentage points and percentages – which would be amusing, except that it’s an economic regulator and is presumably supposed to know the difference (actually its possible, I suppose, that the CAA doesn’t know how to round to the nearest whole number, which would be even more upsetting).
Anyway, Heathrow is being permitted to charge 7% (“per cent” NOT “percentage points”) more than what the CAA proposed just last November (the increase in percentage points is 8).
And Gatwick can charge 12% more than the November recommendation.
As a result of the wonderful power of compounding, that represents a massive increase in the airports’ cash flow over the five years of this settlement: the increment will compound at 7.5% plus RPI inflation every subsequent year.
That means, according to my calculations, that by 2013 BAA will receive £1.26 more per Heathrow passenger than it had expected to receive just three months ago – or about £95m in gross incremental revenue.
Not all of that will be profit.
It’s to state the obvious to say that there have been massive increases in security-related costs for airports over the past few years. But I’m not clear quite how security demands have changed since the last price-control proposals were published on November 20.
Understandably the airlines, which incur these charges, will moan.
However their argument that landing at Heathrow is becoming uneconomic isn’t strengthened by their propensity to pay huge amounts to each other to acquire landing slots at what some regard as a circle of hell too horrible even for Dante’s imagination.
The point is that Heathrow has an enormous share of the market. Many of us have to use it: there’s no real choice for some destinations at certain times.
Which means that the airlines will be able to feed the increased charges through to us. Passengers will pay.