UK MPs have voted to expand Europe’s busiest airport, but at what price? Ian Taylor reports
UK MPs voted to back the British government’s National Policy Statement on Heathrow on Monday in a step towards building a third runway at Europe’s busiest airport.
But there is a long way to go to construction as pressure grows on Heathrow’s owners to slash costs or cede control of part of the project.
Heathrow says its plan for a new northwest runway will cost £14 billion to increase capacity to 110 million passengers a year, but few in the industry believe its assurances.
Hotel and property tycoon Surinder Arora, who has developed hotels all around Heathrow, argues the airport’s expansion plans are more likely to cost £31 billion and claims his Arora Group can develop Heathrow to handle 130 million passengers a year for £14.4 billion.
Arora said: “It’s about time we had some competition for Heathrow. Its terminal works are always above budget.
Heathrow’s interest is very simple – the more they spend, the more they make. We’ve been involved in tonnes of construction projects. We’ve never gone back and said we need an extra pound.
“We spoke to airlines and came up with [a scheme for] the same northwest runway that is slightly different to Heathrow’s.”
Carlton Brown, Arora Group chief financial officer, explained: “Heathrow Airport Holdings [HAL] plans terminal expansion in three locations and assumes a lot of building in the central area. That will push up costs. Our scheme only expands one location.”
The Arora plan would concentrate new airport capacity on the western side of Heathrow near Terminal 5.
Arora insisted: “We don’t want to take over the airport. We’ll work with HAL, but we won’t work for HAL. We want to operate the terminal.” He believes he can operate a terminal more efficiently than Heathrow and argues: “Why not allow more than one operator of terminals?”
Brown added: “It’s a misconception that Heathrow runs its terminals. Much is run by airlines or outsourced. Heathrow does not run the retail, it does not run the car parks. HAL does not need to run building maintenance. That is what we do. We maintain and operate all sorts of properties.”
He said: “We’re meeting with HAL and the airlines, but HAL wants to control [the process] and progress is slow. Heathrow won’t go into this voluntarily. It’s not in their financial interests.”
Costs of construction
Heathrow says the plan for a third runway to the airport’s northwest will cost £14 billion. This excludes the costs of any legal challenges or overruns.
It will require bridging 12 lanes of the M25 motorway which circles London and is the country’s busiest.
An additional £10 billion will be needed to upgrade rail and road links. Heathrow is in dispute with London transport authority TfL over who will pay for this.
Heathrow has yet to provide a breakdown of the costs, but under pressure from airlines led by British Airways owner IAG it cut is estimate of the costs by £2.5 billion from the original £16.5 billion.
Heathrow plans to borrow the money. The financing costs alone could run to £2bn-£3bn on top of the £14 billion runway cost.
The airport already has substantial debts. Heathrow Airport Holdings (HAL) reported £13.4 billion in debt in 2017, when its asset base (value) is put at £15 billion.
The Airports Commission, which recommended building the third runway, estimated the expansion would increase Heathrow’s debt to £27 billion.
The CAA will decide how much Heathrow can charge airlines and passengers to fund expansion. The government has pledged only “to keep airport charges as close as possible to current levels”.
Heathrow charges are already 40% higher than at competing European airports. The CAA allows the owners/shareholders a guaranteed return on investment, which incentivises spending.
IAG chief Willie Walsh said he has “zero confidence” in Heathrow to build the runway on time and on budget.
Heathrow has been owned by a consortium led by Spanish construction firm Ferrovial since 2006. The sovereign wealth funds of Singapore, Qatar and China are major investors.
The shareholders received £847 million in dividends last year, when profits were £516 million.
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