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Heathrow: Cleared for take off

Robert Peston | 10:15 UK time, Tuesday, 11 March 2008

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.

Heathrow airportAnd 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.

Comments   Post your comment

While costs may have risen, is it not about time the Government realise that increasing fees is not the way to go?

Whats needed is expansion, particularly at Heathrow.

In order to remain competitive, there is no other option, save an all new airport for London - although finding a place for it will be tricky enough without the irreponsible eco-warriors causing a nuisance.

  • 2.
  • At 12:00 PM on 11 Mar 2008,
  • James Marsh wrote:


It's time we built another airport - in The Thames Estuary, out at sea. Why not 6 runways.

  • 3.
  • At 12:36 PM on 11 Mar 2008,
  • R Chamberlain wrote:


Was anyone in any doubt that above inflation rises would not be allowed by our ever efficient watchdog ? Considering the invitations for the grand T5 opening are still to be posted then one can presume the CAA boffins didnt wish to waste the new suits and dresses bought for the occasion.

Some of the old addages are still true ! Owe the bank a million and you have problems, owe it a billion and they have a problem !

Another consumer let down

R Chamberlain

  • 4.
  • At 12:59 PM on 11 Mar 2008,
  • angry from Manchester wrote:

Moderator - I'm still in the industry, hence need for anonymity.

Comment - In the late 80s I worked on a proposal for a new "greenfield site" mega-airport in southern England. The business case was predicated on charges to the airlines of £10 per passenger at 1988 prices.

Thats £19.80 in today's money. The CAA's proposed CEILINGS are £12.80 at Heathrow and £6.79 at Gatwick. While the airlines (and passengers) may whinge, they are still getting airports on the cheap.

Taking into account "new" issues such as environmental concerns and enhanced security, the cost of NEW capacity (once we've sqeezed as many planes and passengers as possible through the heritage assets privatised in the 80s) could be even higher now than that 80s estimate.

  • 5.
  • At 01:11 PM on 11 Mar 2008,
  • Anthony Hellenger wrote:

Sir, it continues to surprise me that all dialogue on London's runway capacity focuses entirely on either Heathrow, or a brand new multi-billion pound airport in the Thames estuary. There are, lying dormant around the South East, a number of underutilised and indeed abandoned runways which could provide notable relief to Heathrow in particular. Equidistant between the capital and the UK's industrial hub of Birmingham, an hour to the west end of London, lie both Upper Heyford and Oxford airports, the latter with a runway the same size as London City and Heyford a mere mile from the M40. With both long haul and freight utilising the longer Heyford runway and regional operations using Oxford, a significant relief valve could be opened for the demand on Heathrow, arguably in the right part of the country, north-west of the capital. Surface infrastructure, be that rail or road, could be radically enhanced at a fraction of the cost of the alternatives for the benefit of the region as a whole.

  • 6.
  • At 01:22 PM on 11 Mar 2008,
  • J H wrote:

Hmmmm. Agreement higher than the originally published expected amounts? Sounds like a result for BAA...

Robert, maybe you should investigate further on this one, in particular the relationship between people in the regulation department in BAA and the CAA economic regulation team.

You can email for me details if you wish.

  • 7.
  • At 01:49 PM on 11 Mar 2008,
  • TS wrote:

What a disgrace:

1 Company buys vital piece of monopolistic British infrastructure almost entirely with debt.

2 Company predictably (to most people apart from the regulator it would seem) can't afford to pay interest on debt.

3 Regulator allows company to charge customers (who are forced to use the monopolistic infrastructure) more to pay the interest on their debt.

4 Customer effectively buys vital piece of infrastructure for foreign company (by paying over the odds).

This keeps on happening, companies should not be allowed to buy what boils down to a monopoly with debt. In the end the customer will always end up paying for the purchase (the purchase of water utilities and football clubs with debt is a similar situation). There is also the added bonus that we are sending out the message:

"Buy Britain, don't worry if you overpay and overload with debt, we will allow you to rip off the consumer to bail yourselves out."

  • 8.
  • At 02:03 PM on 11 Mar 2008,
  • marion foster wrote:

Re- Heathrow expanion-yesterdays news. The minister saying that the 'planes will be quieter, of course they will be - they took readings when Concord was still flying! Also enviromentally friendly, the design of such craft is not even on the drawing board yet! No mention that a great percentage of flights are not full or carry a great deal of freight! Make railway travel improved and cheaper. Stop 'short haul' flights. Build an airport with good road/train infrastructure just for freight. There will be no need for expansion as there is spare capacity now. We do not need it for work, sadly most of the jobs will be for shopworkers/cleaners with everything becomming mechanised. As for becomming a 'hub' for people changing flights its only to become a money spinner, the profits now going to Italy now Duty free has been sold by Santander! They only bought it to prop up the failing building business in Spain, wonder how much of a threat they have made by saying they will go into liquidation if it does not get the go-ahead. Marion

  • 9.
  • At 02:12 PM on 11 Mar 2008,
  • Simon Tompsett wrote:

Robert Peston says " If our airports are less than best in class, that’s detrimental to our economic growth prospects." This is utter nonsense. Economic growth will happen regardless of what happens at our airports. Mr Peston seems to accept the propaganda from BAA without questioning it.

The greatest economic benefit we could achieve would be to allow the communication that flying gives without causing the pollution. This can be done with multimedia videoconferencing. This is going to give cash-strapped businesses far more benefit than increasing airport capacity.

Mr Peston seems to have failed to understand the cost of climate change and the damage that the aviation industry does to the real economy (as opposed to short-term company profits).

We need to stop the hidden subsidy that the aviation industry gets from tax exemption.

Its time for Robert Peston to understand that when all the true costs are considered the economy needs airport expansion like a hole in the head!

  • 10.
  • At 02:19 PM on 11 Mar 2008,
  • TS wrote:

What a disgrace:

1 Company buys vital piece of monopolistic British infrastructure almost entirely with debt.

2 Company predictably (to most people apart from the regulator it would seem) can't afford to pay interest on debt.

3 Regulator allows company to charge customers (who are forced to use the monopolistic infrastructure) more to pay the interest on their debt.

4 Customer effectively buys vital piece of infrastructure for foreign company (by paying over the odds).

This keeps on happening, companies should not be allowed to buy what boils down to a monopoly with debt. In the end the customer will always end up paying for the purchase (the purchase of water utilities and football clubs with debt is a similar situation). There is also the added bonus that we are sending out the message:

"Buy Britain, don't worry if you overpay and overload with debt, we will allow you to rip off the consumer to bail yourselves out."

  • 11.
  • At 04:14 PM on 11 Mar 2008,
  • andy y wrote:

I agree with Anthony Hellenger(comment#5). I am not anti airport, quite the opposite, indeed I used to work in Aviation and live very near a regional airport, but I do believe that Heathrow needs to be improved whilst LOWERING the number of flights into it. The infrastructure in the area (inc M25, M4, M40 & the local Hotels etc) just can't cope with expansion. There's no direct rail access without transferring to a tube and the whole place is a sorry excuse for a welcome for travellers. Flight operations should be spread around many other available locations, with each offering high quality services. Not everyone needs to go to Central London (and the links to London from Heathrow are actually quite poor) but for those that do, as well as the Airfields AH mentions and the other existing London Airports, Airfields in the SE that could be used to relieve Heathrow include Farnborough, RAF Brize Norton (move the RAF transport fleet elsewhere), RAF Alconbury etc etc. Not all will need to be developed, of course, but if Airports were developed at Oxford, Alconbury, Upper Heyford or Brize Norton there might be a knock on positive economic impact in the Midlands as such airports could serve both the Midlands and London. A novel concept for a notably SE-Centric Government. Before Heathrow gets a third runway it should also be noted that there are also numerous regional airports with spare capacity. In the long run a new International Airport MAY need to be built somewhere but that should not happen until the VAST amount of existing capacity is used up. Heathrow may be full up but Britains existing airports and other runways are not.

  • 12.
  • At 05:16 PM on 11 Mar 2008,
  • andy y wrote:

I agree with Anthony Hellenger(comment#5). I am not anti airport, quite the opposite, indeed I used to work in Aviation and now live very near a regional airport, but I do believe that Heathrow needs to be improved whilst LOWERING the number of flights into it. The infrastructure in the area (inc M25, M4, M40 & the local Hotels etc) just can't cope with expansion. There's no direct rail access without transferring to a tube and the whole place is a sorry excuse for a welcome for travellers. Flight operations should be spread around many other available locations, with each offering high quality services. Not everyone needs to go to Central London (and the links to London from Heathrow are actually quite poor) but for those that do, as well as the Airfields AH mentions and the other existing London Airports, Airfields in the SE that could be used to relieve Heathrow include Farnborough, RAF Brize Norton (move the RAF transport fleet elsewhere), RAF Alconbury etc etc. Not all will need to be developed, of course, but if Airports were developed at Oxford, Alconbury, Upper Heyford or Brize Norton there might be a knock on positive economic impact in the Midlands as such airports could serve both the Midlands and London. A novel concept for a notably SE-Centric Government. Before Heathrow gets a third runway it should also be noted that there are also numerous regional airports with spare capacity. In the long run a new International Airport MAY need to be built somewhere but that should not happen until the VAST amount of existing capacity is used up. Heathrow may be full up but Britains existing airports and other runways are not.

  • 13.
  • At 05:40 PM on 11 Mar 2008,
  • TS wrote:

What a disgrace:

1 Company buys vital piece of monopolistic British infrastructure almost entirely with debt.

2 Company predictably (to most people apart from the regulator it would seem) can't afford to pay interest on debt.

3 Regulator allows company to charge customers (who are forced to use the monopolistic infrastructure) more to pay the interest on their debt.

4 Customer effectively buys vital piece of infrastructure for foreign company (by paying over the odds).

This keeps on happening, companies should not be allowed to buy what boils down to a monopoly with debt. In the end the customer will always end up paying for the purchase (the purchase of water utilities and football clubs with debt is a similar situation). There is also the added bonus that we are sending out the message:

"Buy Britain, don't worry if you overpay and overload with debt, we will allow you to rip off the consumer to bail yourselves out."

  • 14.
  • At 10:17 AM on 12 Mar 2008,
  • xxx wrote:

Well, for comment 10,13. This is an issue more complicated than what you have said. Cost of debt (interests) can be cheaper than cost of equity. while CAA allow for additional interest charge, presumably they allow for much less cost of equity than they would have for a heavily equity funded buy-out. Certainly, I am not sure neither whether funded entirely by debt is of customers' best interest, because CAA might have to allow for larger cashflows due to financeability concerns.

  • 15.
  • At 11:46 AM on 12 Mar 2008,
  • Rude Boy wrote:

Err, excuse me. Apart from the obvious, where are the passengers coming from and going to?
Will folk still be releasing equity from their houses in order to afford their well earned holiday in the sun?
I don't think so.
Will they need to cut back their travel plans once $100 plus fuel prices take effect?
I think so.
Will their credit cards stay in their pocket whilst they are waiting for the flight?
Yep.
At least once the shops are trimmed back there will be more room for seating.
Time to get real.
Is airtravel an essential?

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