Heathrow Third Runway
On 1 July 2015 the Airport Commission issued its Final Report and was immediately disbanded.
The Airport Commission ... unanimously concluded that the proposal for a new Northwest Runway at Heathrow Airport, in combination with a significant package of measures to address its environmental and community impacts..., presents the strongest case.
The Commission failed to make the case for the need for any more runways in the UK as it took no cognisance of the Department of Transport's (DfT) aviation statistics, or if it did, it failed to recognise their significance. DfT publishes traffic statistics annually at the end of July. See links (1) and (2).
These two plots show the overall runway use in the UK and at Heathrow. The annual figures for passenger numbers, freight weights and air transport movements are divided by those for 2007, when runway use peaked in the UK and at Heathrow, to create comparative indices.
Figure 1 UK Runway usage
The UK's overall runway usage, i,e., the number of take offs and landings per annum (ATMs), peaked in 2007 and was in 2016 still fewer by 6.6%. The 2007 peak of ATMs was not a limit as there is still spare runway capacity at Stansted. UK passengers carried in 2016 increased by 12% over those in 2007 before the recession, but the associated runway usage, though increasing, is still less than in 2007. The number of passengers carried per flight has increased from 107 in 2007 to 128 in 2016 due to the deployment of bigger aircraft and will increase further with the trend to larger aircraft.
Figure 2 Heathrow trends shown as indices
The trends at Heathrow show that since 2007 to 2017, passenger numbers increased by 14.7% and freight tonnage by 21.7%, but the number of take offs and landings has remained virtually the same throughout a decade at 446,000 passenger flights and 28,000 pure freight flights. Average passenger numbers per flight arriving and departing have increased from 150 to 175. To accomplish an increase in passenger numbers by 50% to 113 million a year, which the additional runway is envisaged to provide, airlines need only provide a fleet of aircrafts with average passenger numbers of 255. For certainty an average numbers of passengers carried per flight could readily be raised to 290 which would meet the aspirations of Heathrow in its prospectus of carrying 130 million passengers per year. The annual number of passengers handled is more likely to be limited by surface access capacity than by other factors.
Airlines fleets could be composed of small and large aircraft provided that a growing average number of passenger numbers is attained to 255 by the time the expansion is required and to 290 to meet a prospectus 130 million passengers per year. Similar increased freight carrying capacity can be secured with larger aircraft.
The Airbus A380-800 is certified for up to 853 passengers, achievable with a one-class configuration, while it has a "three-class" 544-passenger configuration. The Boeing 777-300 has a seating capacity of up to 550, with a "three class" configuration of up to 396. Boeing's 747-400 has a seating capacity up to 524 with a "three class" configuration of 416.
Emirates had record passenger numbers in April 2017 with its A380s, which then only ran at 75% full, showing further increases to come. So it seems that the trend to deploy ever bigger aircraft will continue for the foreseeable future. The airlines have already invested in new, bigger aircraft, which will enable better use of runways and are not willing to pay additional airport charges to finance the building of another.
Meanwhile in 2017, Heathrow's chief executive John Holland-Kaye hailed 2016 as a “milestone year” as Heathrow Airport reported a rise in earnings and revenues. He said, "Passenger numbers rose 1 per cent to 75.7m in 2016" without realising that if numbers are rising with the deployment of bigger aircraft, but without the benefit of another runway, he is destroying his case for the third.
A record-breaking 78 million passengers went through Heathrow in 2017, marking a more than 3 per cent increase on the previous year’s figure, thanks to larger and fuller aircraft flying in and out of the international transport hub. The airport said that Heathrow had also become one of the fastest growing major European hubs for cargo. A total of 1.7 million metric tonnes of cargo passed through the airport during the 12-month period.
However, the current terminal capacity is just 85 million passengers per year, so to accommodate 50% increase in numbers a 13% increase in capacity is required, while to attain the aspirational number of 130 million, a 53% increase is required. However, the road and rail connections are unlikely to be expanded to cater for such an expansion.
Heathrow has expanded its passenger and freight traffic with no increase in air transport movements and without another runway. With the overall UK reduction in air traffic movements, there is ample runway capacity in the UK for the foreseeable future and there is no need for any more to be built.
Air traffic control
The ageing design of UK airspace means that there is a limit in the number of flights what can be managed without delays.
The Department for Transport estimates that, if airspace management remains unchanged, there will be 3,100 days' worth of flight delays by 2030 - that is 50 times the amount seen in 2015 - along with 8,000 flight cancellations a year. Adding 50% to the number of air traffic movements (ATMs) at Heathrow by building another runway will clearly worsen the control problem. As Heathrow's traffic with bigger aircraft is increasing without it, the concerns of the traffic controllers can be eased if its building is abandoned.
For example, Emirates announced the augmentation of a 8,588 mile service from Dubai to Panama City taking 17 and a half hours from 1 February 2016. In 2018 Quantas started to fly 9,009 miles from Heathrow to Perth in Australia in 17 hours 20 minutes. Longer haul flights will avoid landing charges at an intermediate hub and also the excessive fuel use of landing and taking off. It also saves on staff logistics.
If long-haul flights are a continuing trend, it means that Heathrow's expansion to increase its role as a hub is questionable.
Heathrow's offshore financing
FGP Topco Limited is the ultimate owner of Heathrow, heading up 12 main subsidiary companies, as listed in Figure 3.
FGP Topco Limited, is a 90% foreign-owned holding company
(From FGP Topco Limited's Annual Report 2016)
|Caisse de dépôt et placement du Québec||12.62%|
|Government of Singapore Investment Corporation||11.20%|
|Alinda Capital Partners||11.18%|
|China Investment Corporation||10%|
|Universities Superannuation Scheme||10%|
FGP Topco's shareholdings
FGP Topco's paid up shares amount to only ca. £13 million, while the capital for airport works is raised by issuing bonds totalling ca. £14 billion, around 20% of which are issued by Heathrow Finance plc and 80% by Jersey-based Heathrow Funding Limited.
Annual returns for 2016 published in Companies House show that FGP Topco has paid up shares of £505m in ADI Finance 1, which has paid up shares of £3812m in ADI Finance 2, which has paid up shares of £2666m in Heathrow Airport Holdings, which has paid up shares of £466m in Heathrow Holdco, which has paid up shares of £6309 in LHR Airports, which has paid up shares of £2177m in Heathrow (DSH), which has paid up shares of £3109m in Heathrow Finance plc, which has paid up £11 million of shares of in Heathrow (SP), which has paid up shares of £11m in Heathrow (AH), which has paid up shares of £10m in Heathrow Airport, which has paid up shares of £4 in Heathrow Express Operating Company Limited.
FGP Topco's dividends
FGP Topco's annual reports, from its conception in 2006 up to the end of 2016, were analysed to get the total of the dividends it received, the amount of interest paid on the bond financing and the tax credits earned when the interest paid exceeded the operating profit. The dividends totalled £2.495 billion and the tax credits amounted to £860 million. (In 2017 an additional dividend of 525 million was paid).
In 6 of FGP Topco's ten years the interest payments on borrowings, together with losses on financial instruments, have led to costs exceeding the operating profit and leading to a loss.
Assuming that 80% of the finance was raised offshore and thereby withholding taxes of 20% avoided, a rough calculation was made to assess the withholding tax avoided, i.e. £5938 million x 0.8 x 0.2 = ca. £950 million.
In the successive annual reports there are complex taxation calculations, but essentially the financial mode of operation has led over the ten years to the payment of £860m in tax credits by the taxpayers and a possible loss to HM Treasury of bondholders' withholding tax of around £950m.
In 2016 Heathrow Airport paid a "dividend" of £594m to Heathrow (AH) from "Retained Earnings", which added £2m to it and paid a "dividend" of £596m to Heathrow (SP) which stated that it passed £596m to Heathrow Finance plc, but which is unaccounted for in Heathrow Finance plc's annual report of 2016. Heathrow Finance plc paid a "dividend" of £616m to Heathrow (DSH) which paid £616m to LHR Airports. LHR Airports subtracted £88m from the £616m from Heathrow (DSH) and paid a £528m "dividend" to Heathrow Holdco, which paid Heathrow Airport Holdings the £528m. Heathrow Airport Holdings added 12m to its payment of then amounting to £540m to ADI Finance 2, £195m of which was used for loan repayment and £30m in interest payments, leaving £325m for ADI Finance 1.
However, according to its Financial Statements, the actual 2016 dividend of £325 million paid to FGP Topco's shareholders originated from the issuance of bonds (Summary cash flow, page 16) or was drawn from its profit and loss reserve (Note 7, page 93). It was not apparently paid out at the end of the "dividend trail".
Profit and Loss reserves
In FGP Topco and each of the subsidiaries there are Profit and Loss reserves.
These are listed in the table below.
It appears that "dividends" followed the "dividend" trail into the profit and loss reserves distributed through the chain of companies in the shown in Figure 3. It is not certain whether these large sums have been consolidated into FGP Topco's Profit and Loss reserve of £2,303m, or if they can be summed. If the latter, the total is the colossal sum of £22.12 billion.
Heathrow Funding Limited
Of the four finance companies in the Heathrow group, Heathrow Funding Limited is registered offshore in Jersey. It originated as BAA Funding Limited when BAA was privatised and was split off when airports other than Heathrow were sold off. The company has no employees.
Its expenditure in interest payments on the bonds it issues and in the costs of financial instruments is offset periodically by payments from FGP Topco's active subsidiaries. Heathrow Finance plc in the UK also issues bonds and administers financial instruments.
ADI Finance 1 and ADI Finance 2 are involved in FGP Topco's Senior and Junior debt, while Heathrow Finance plc and Heathrow Funding Limited split the issuing of bonds roughly 20%/80%.
Prospectuses are issued periodically in which the ratings of the bonds are stated and in which the non-payment of interest withholding tax is confirmed, or compensation paid if payment is required.
Heathrow's subsidiary Heathrow Finance plc in 2016 reported issued bond financing of around £14 billion, of which £11.5 billion was issued offshore in Jersey by Heathrow Funding Limited, around 80% of the funding.
In its 2013 prospectus Heathrow Funding Limited states:-
The Issuer believes that all payments made under a Borrower Loan Agreement can be made without deduction or withholding for or on account of any UK or Jersey tax.
If the bonds were issued in the UK, the interest paid to UK bondholders would be subject to "withholding tax" of 20%, which would mean they would require a higher interest rate than would appertain if issued offshore.
However, in its 2017 prospectus Heathrow Finance plc in an assuagement for its bondholders states:-
All payments by or on behalf of the Issuer under or with respect to the Notes will be made free and clear of and without withholding or deduction for or on account of any present or future Tax imposed or levied on such payments by or within the United Kingdom or by or within any department, political subdivision or governmental authority of or in the United Kingdom having power to tax (each, a “Relevant Taxing Jurisdiction”), unless the Issuer is required to withhold or deduct Taxes by law. In that event, the Issuer will pay additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by each Noteholder and Couponholder after such withholding or deduction (including any withholding or deduction in respect of any Additional Amounts) will not be less than the amount the Noteholder or Couponholder, as the case may be, would have received if such Taxes had not been withheld or deducted.
In his Autumn Statement in 2016, the Chancellor of the Exchequer, avowed to stop what he sees as tax avoidance by the failure to pay UK tax on offshore interests. If he attains his aim, it means that Heathrow will have to issue its bonds in the UK making them less attractive to prospective bondholders with a consequent raising of interest rates or subject to compensation if withholding taxes are levied prior to payment. Also bonds mature and those currently issued offshore will have to be replaced by UK issued equivalents at a higher interest rate to compensate for the paying of the withholding tax.
If HM Treasury insisted that the whole £11.5 billion issued bonds offshore be replaced by UK equivalents it would be a catastrophe for Heathrow. In any case the current financial arrangements are unlikely to be able to fund the runway and the expansion of Heathrow's facilities without increasing airport charges, which it pledges will not rise and which airline operators will decline to pay.
Funding Heathrow's expansion
It appears that Heathrow is effectively paying 8%/annum interest on its borrowings. So that the cost of its financing of the £17 billion expansion will require a similar sum in interest on construction progress payments over the construction period of the expansion. Due to the interference to its business of the infrastructure activities, such as the tunneling of the M25, its Heathrow's revenue will be reduced, such that it may not be able to service its current debts, let alone the additional borrowings for the new runway. The airlines have refused to pay additional airport charges to support the expansion expenditure as there has already been investment in bigger aircraft to increase its traffic, so that it is reluctant to invest in a runway it doesn't need.
The taxpayer is expected to fund the disputed costs of £5 to £18.6 billion surface access infrastructure needed, possibly with a contribution from the airport. But it is far from clear which government agency (or agencies) will co-ordinate with the airport the destruction of whole communities and the relocation of houses, a school, hotels and many businesses, including the Waterside complex and the Energy-from-Waste plant. Is this a fair charge on the taxpayer and burden on the government's resources to support a company with ca. 90% foreign ownership?
Also, if the current, partly offshore, funding of the expansion leads to corporation and withholding tax avoidance or to the procurement of tax credits, the taxpayer will fail to get a return on the investment in the connecting and supporting infrastructure.
There is no need for another runway at Heathrow as by an increase in the average passenger numbers per flight from 150 in 2007 to 175 in 2016 and then to 255 will add the 50% to its capacity anticipated with the runway. By the end of 2017 the average number of passengers per flight had risen to 175. Also an increase to 290 average passengers per flight will attain its ultimate target of 130 million passengers a year. With no real need for a third runway at Heathrow or anywhere in the UK it is difficult to support such a great expenditure and interference to local social and business activity. The desired traffic increase can be achieved with the progressive deployment of bigger aircraft, the investment in which is already in hand..
In the UK as a whole the overall runway usage had declined in 2016 by 6.6% from that of 2007 when it peaked. Even at this level in 2007 there was adequate, standby runway capacity at Stansted. There is no need for additional runways in the UK for the foreseeable future as overall deployment of bigger aircraft will increase capacity in passenger and freight carrying and the current runway capacity is underused.
However, there is a strong case to improve the passenger and luggage handling at Heathrow to be able to accommodate ever bigger aircraft arrivals and departures, but no case for the construction of a third runway.
FGP Topco would need its finances restructuring to fund around £30 billion of additional borrowing to add to its current borrowings of £14 billion. If the Chancellor of the Exchequer's initiative to stop offshore tax avoidance succeeds, prospective bondholders will have to pay withholding taxes and will demand raised interest rates in compensation. This could have an adverse effect on the rating of the bonds.
There is concern that, if the summation of the profit and loss reserves in the subsidiaries amounts to £22.12 billion, then the £14 billion borrowings were not in their entirety necessary. The interest on the borrowings plus the costs of the supporting financial instruments then mostly exceed the operating profits. This could be viewed as a device for the business to operate artificially at a loss thus avoiding the payment of corporation tax and gaining tax credits..
John Busby 27 March 2018