Heathrow boss’s plan simply won’t fly

Nohing gives John Holland-Kaye a bigger thrill than his £14 billion third runway project. But, whatever his obsession with that, the Heathrow boss can’t overlook another thing: he’s also got an airport to run. And that guzzles money, too.
How much is clear from a Civil Aviation Authority spreadsheet, squirrelled away this week on its website. It projects Heathrow capex for the first half of this century, though the key period is between now and 2035. That’s when the third runway project is scheduled to be complete, with Heathrow having built not only the landing strip (due to open in 2026) but related terminals for 130 million passengers a year — up from 2017’s 78 million.

Tot up the damage and it comes to £33 billion: a run rate of £1.8 billion a year. Or, to put it another way, £1 billion a year more than the airport’s present capital expenditure — for 18 years. So, ask yourself this: is it really conceivable that Heathrow can deliver the third runway and make the required investments in its existing facilities, while keeping passenger charges “close to current levels”: the promise of transport secretary Chris Grayling?

Look at last year’s figures. Total revenue was £2.9 billion. Knock off the £1.1 billion operating costs. Then the capex and hefty interest costs of a business 86 per cent geared with £13.7 billion net debts. The free cashflow left? About £480 million. Or enough for only half the required extra annual capital expenditure. Too little, too, to invest and keep up dividends for shareholders, led by Spain’s Ferrovial. They’re not an altruistic bunch, either, presently en route to take out £3.5 billion in seven years.

So how will Heathrow pay for it? The airport argues it’ll be able to keep charges broadly flat because it will have higher passenger volumes once the runway opens in 2026. But it’s got to get there first, with the CAA expecting £17 billion of capex by then. And that assumes no cost overruns for a project predicated on diverting all 12 lanes of the M25.

The numbers don’t stack up. Yes, maybe Heathrow could borrow a bit more, even if it’s already highly geared. And perhaps shareholders could forgo all dividends for as long as it takes — though why would they do that? Who invests £33 billion without demanding a return? No, the obvious way out is for Mr Holland-Kaye to persuade the CAA to permit regulatory pre-funding — allowing higher passenger charges years before the runway’s built. But that would involve Mr Grayling breaking his big promise.

And the airlines would be livid. Willie Walsh, boss of British Airways owner IAG — Heathrow’s top customer — is hardly alone in finding the runway costs “exorbitant and unacceptably vague”. He also objects to Heathrow’s incentive to “gold-plate” capex, with spending allowed by the regulator added to the airport’s “regulated asset base” to boost future returns. He expects the CAA to keep a lid on charges. But if it does that, can Heathrow fund the runway? It’s about time Mr Holland-Kaye explained how