Heathrow Airport’s regulation looks a poor deal for passengers

It is hard to keep track of the many and various ways London’s Heathrow Airport has attempted to shove the costs of the pandemic on to its customers.

There was a £5 (€5.90) charge for cars dropping off passengers. There was the £8.90 (€10.55) “pandemic tax” to cover fees for baggage handling, electricity and other services.

Then there was the attempt to bump up the airport’s regulated assets base, or RAB – a mechanism that normally incorporates investment in the returns the airport can earn over an extended period of time – by a whopping £2.6 billion (€3.08 billion) to claw back losses.

The regulator of the Civil Aviation Authority rightly called that “disproportionate” in April, allowing £300 million (€355 million) to be added to the RAB, a position it stuck to on Tuesday when announcing its proposals for the next five-year period of regulation.

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Airlines, which wanted the £300 million scrapped, won’t be happy – and neither will Heathrow. But that is the normal situation in an industry defined by its various dysfunctions.

“The system’s broken,” said Andrew Charlton of Aviation Advocacy. Instead of using Covid-19 as an opportunity for a reset, he argues, governments and regulators held the sector together with a variety of “odd sticking plasters”.

Operation costs

The next battle is over the costs of operating the airport given lower passenger numbers, and who will bear the risks in this recovery. And again, it looks like the preferred answer is customers.

Heathrow’s consortium of wealthy owners, which include Spain’s Ferrovial and the Qatar Investment Authority, have taken £4 billion (€4.7 billion) in dividends out of the airport since 2012 – including £100 million (€118 million) in April 2020. However, they didn’t put their hand in their pockets last year, despite the airport’s stretched finances.

Now they seem remarkably determined to stress test the idea that travellers will continue to head through the doors in what is already one of the world’s most expensive airports.

The airport had suggested that fees, which are ultimately paid by travellers, be increased by 90 per cent over the next five years. In the event, the regulator has proposed charges rise by 15 to 60 per cent, which provoked a furious response from airlines and will now go to consultation.

There is plenty of nonsense to go around here. Airlines complain about “gouging” in a regulatory system that they helped design and implement, and as Heathrow points out resulted in charges falling 20 per cent in the seven years before the pandemic.

The proposal seems to hand Heathrow a deal largely in its favour. The airport reckons it could take until 2026 for passenger numbers to recover to their 2019 level, in the best-case scenario – that’s markedly more gloomy than the rest of the industry. But it underpins its argument that high fixed costs and fewer people necessitate higher charges (which might coincidentally help it recoup pandemic losses).

Price-sensitive crowd

Yes, the long-haul and business travel that used to fill Heathrow might stay grounded for longer than short-hop leisure flying. But the latter is picking up nicely. And some of the carriers that have come into the airport during Covid-19 aren’t full service premium carriers, but low-cost names such as Blue Air and Sky Express.

That means, one way or another, the airport’s customers both in terms of airlines and bums on seats are likely to become a more price-sensitive crowd. Heathrow needs to show it can “look for lower cost ways of doing things” and “review its business model in the light of structurally changed demand”, said John Strickland, an aviation consultant.

Instead, the downside of a more sluggish recovery than forecast, or the risk that business travel never resumes as before, could be passed on to airlines and consumers through a new proposed risk-sharing mechanism based on traffic numbers. A more buoyant than expected outlook would see costs ultimately returned to airlines (though whether passengers see any of that is another matter).

But Heathrow could get the much higher airport charges it wants, while passing on the risks of a slower resulting recovery to airlines and holidaymakers – and it’s not clear that transfer of risk has been adequately factored into its regulated returns. That shouldn’t fly.

– Copyright The Financial Times Limited 2021