My Account Menu

CAPA Login

Register to trial CAPA Membership!

UK Civil Aviation Authority has 'fundamently underestimated' the cost of raising capital: Heathrow

4-Oct-2013 9:36 AM

UK's Heathrow Airport responded (03-Oct-2013) to the UK Civil Aviation Authority publishing its final proposals for the economic regulation of Heathrow, saying airport charges should be subject to a real terms price freeze (RPI +0%) from 2014-2019. Heathrow noted that the CAA’s figure is derived from its forecasting of future passenger numbers, retail revenues, operational efficiencies, and the cost of financing capital investment. Since the publication of its Initial Proposals in Apr-2013, Heathrow has argued that the CAA has fundamentally underestimated the cost of raising capital to invest in new facilities. Heathrow CEO Colin Matthews said: “This proposal is the toughest Heathrow has ever faced. The CAA’s proposed cost of capital of 5.6% is below the level at which Heathrow’s shareholders have said they are willing to invest. The CAA’s settlement could have serious and far-reaching consequences for passengers and airlines at Heathrow. We want to continue to improve Heathrow for passengers. Instead, the CAA’s proposals risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre for international investment. We will now carefully consider our investment plans before responding fully to the CAA.” Heathrow noted that it has invested GBP11 billion over the last ten years in new facilities such as terminal 5, with the new GBP2.5 billion Terminal 2 to open in 2014. Heathrow noted that that its rate of return on capital investment as set by the CAA has declined from 7.75% in Q4 (2003-2008) to 6.2% in Q5 (2008-2014). The airport lamented, "The CAA’s current proposal of 5.6% return in Q6 provides no incentive for shareholders to fund improved facilities. Since 2008 Heathrow has made a pre-tax loss every year and shareholders have not received the return on their investment allowed for by the regulator. This is unsustainable. Heathrow’s own proposals, submitted to the CAA in July, would have delivered a £3bn investment to further improve the airport and passenger experience. This would see airport charges increase by around one pound a year per ticket, with research showing that passengers are prepared to pay more for better service they value. To ensure prices remain competitive, Heathrow’s proposals committed to taking £427m out of operating costs and delivering further cost-efficiencies to airlines through the modernisation of the airport. The CAA has a duty to set a price cap level which both protects the interests of passengers and ensures the required investment can be financed". It also noted: "Heathrow has to compete for investment on the global stage, and its international shareholders from Canada, China, Qatar, Singapore, Spain and the United States are all looking for a fair return corresponding to their investment risk. If the UK does not offer a competitive rate of return, international investors will be discouraged from investing in regulated British companies". It also noted: "The Airports Commission is currently considering options for new runways. Whether its final recommendations support a new runway at Heathrow or a new hub airport elsewhere, the level of financing required will be unprecedented. International investors will not fund billions of upfront investment in UK infrastructure if the lesson from history is that their return will be cut as soon as they have built it". [more - original PR]