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. (1) and (2). These two plots show the overall runway use in the UK and for Heathrow.

Figure 1 UK Runway usage

The UK's overall runway usage, i,e., the number of take offs and landings per annum, peaked in 2007 and has since reduced by 11.3% in 2015. UK passengers carried in 2015 increased by 5% over those in 2007 before the recession, but the associated runway usage has declined. The number of passengers carried per flight has increased, 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, passenger numbers have increased by 10% and freight tonnage by 14%, but the number of take offs and landings has remained virtually the same. Average passenger numbers per flight arriving and departing have increased from 145 to 160. To accomplish an increase in passenger numbers of the 50% the additional runway is envisaged to provide, airlines need only provide a suite of aircrafts with average passenger numbers of 240. For certainty an average numbers of passengers carried per flight could readily be raised to 300. Airlines fleets could mandatorily be composed of small and large aircraft provided that a growing average number of passenger numbers is attained to 300 by the time the expansion is required. Similar freight carrying capacity can be secured with larger aircraft. 

Airbus has announced the next development of its A380 will take 30% more passengers than a Boeing 747, so it seems that the trend to deploy ever bigger aircraft will continue for the foreseeable future. Emirates had record passenger numbers in April 2017 with its A380s, which only run 75% full, showing further increases to come. Heathrow's CEO claimed this supported the building of a new runway without realising it destroyed his case.

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.

Hubs overflying

Emirates has announced the augmentation of a 8,588 mile service from Dubai to Panama City taking 17 and a half hours from 1 February 2016. This 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

With its ultimate ownership by FGP Topco Limited, the holding company Heathrow Airports Holdings Limited (HAHL) is 90% foreign owned. (From Wikipedia)

Owner Shares
Ferrovial 25%
Qatar Holding 20%
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%

See HAHL's Annual Report for 2014
http://www.heathrow.com/file_source/Company/Static/PDF/Investorcentre/Heathrow-Airport-Holdings-Limited-31-December-2014.pdf
 
At the end of the year the company had borrowings of over £12 billion with financing costs of £980 million eating up its operating profit of ca. £1 billion, leaving a profit of just £105 million before tax for a turnover of £2.7 billion and paid corporation tax of just £34 million. However, most of the interest payments were passed to Heathrow Funding Limited (HFL), an off-shore company registered in Jersey. HFL was split off from BAA Funding Limited by which the financing bonds for the BAA privatisation were issued and it now issues bonds for Heathrow's subsequent capital projects. This provided HFL with a profit in 2014 of £82 million, taxed only at £8,600 as a "securitisation" company, instead of UK corporation tax of £18 million at 21.5%.

HAHL's annual reports for 2014 and 2015 show corporation taxes paid of £34 million and £35 million, but the 2016 report shows it then received a tax credit of £71 million, giving it an overall tax credit of £2 million over the three years. With a combined 3-year turnover of £8.267 billion, HAHL effectively paid no corporation tax in 2014/2015/2016.

HFL's virtually untaxed profits in 2014 and 2015 were £82 million and £13 million, but currently only its 2016 first half year report is published showing an untaxed profit of £75 million which, if the second half continues as the first half, the profit will amount to £150 million by the year end. If so, does this constitute a tax avoidance of £(82+13+150)*0.215 million - £2 million + £(34+35) million = £120 million? The beneficiaries of this largess are not evident, but may be named in one of the reports of the many interlocking subsidiaries. 
 
It appears that HAHL is effectively paying 8%/annum interest on its borrowings. so that the cost of its financing of the £17 (now £20?) billion expansion will require a similar sum in interest on construction progress payments over the construction period. Due to the interference to its business of the infrastructure activities, such as the tunnel over 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. IAG has refused to pay additional airport charges to support the expansion expenditure as it has already invested 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 £6 billion infrastructure needed, but which government agency (or agencies) will organise the destruction of whole communities and the relocation of houses, a school and many businesses, including the Waterside complex. the Energy-from-Waste plant, is far from clear. Is this a fair charge on the taxpayer and burden on the government's resources to support a company with ca. 90% foreign ownership?

Conclusion

There is no need for another runway at Heathrow, or in the UK as the overall runway usage has declined by 11.3% since 2007 when it peaked. Even at this level in 2007 there was adequate, standby runway capacity at Stansted. 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.

HAHL will need its finances restructuring to fund around £40 billion of additional borrowing to add to its current borrowings of £12 billion. To garner a better return on the taxpayers' infrastructure investment, Heathrow Funding Limited should be merged with HAHL or re-registered in London. Its "securitisation" status should be reviewed so that if repatriated it will pay corporation tax. 

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.

John Busby 20 June 2017

(1) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/450380/avi0101.xls

(2) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/450479/avi0102.xls