Don’t let Heathrow puncture the travel ‘bubble’ prematurely

Bubbles burst. But it’s not usually in the interests of their beneficiaries to do the popping.

The travel industry is back in business. A surge in demand has brought UK airport security queues to a standstill. Yet Heathrow, Britain’s busiest airport, wants to act as party pooper.

It argued on Tuesday that the rebound was “temporary”, that rising fuel costs, the war in Ukraine and weaker global growth could all weigh on travel plans and — to top it off — that “we are still in a pandemic”. Yes, it upgraded passenger forecasts for the year, but said they would reach only 65 per cent of pre-pandemic levels.

Heathrow is not wrong that all these factors could hold back demand. But its pessimism stands out in the industry. Delta Air Lines has had record ticket sales in recent weeks despite rising ticket prices. IAG said in February it would fly 85 per cent of pre-pandemic capacity this year and Virgin Atlantic expects to reach 100 per cent of 2019 Heathrow passenger flying levels during the summer peak.

So why so glum? One possibility is that Heathrow is right. Publicly listed airlines have their own incentives to talk the sector up, while flight cancellations that now extend to June underline the risks that remain. As the airport’s chief financial officer Javier Echave puts it, forecasting is “bloody difficult”. It’s been hard to be too negative over the past two years. For most of the period, passenger figures have come in below Heathrow’s estimates.

Flight bookings from Heathrow for the three months from September are 67 per cent of pre-pandemic levels, according to aviation data company ForwardKeys. But customers are booking much closer to departure dates, so as ForwardKeys analyst Olivier Ponti puts it, “the outlook is not necessarily as pessimistic as those numbers might suggest”.

The cynical view is that Heathrow’s doom-mongering is posturing in an ongoing tussle with its regulator, the Civil Aviation Authority, over how much the airport can charge airlines — and ultimately passengers.

The CAA is due, finally, to set Heathrow’s price cap for the next five years later this year. Heathrow wants a bigger uplift to charges than the CAA allowed when it set an interim limit in December. Passenger forecasts are part of the formula for calculating the maximum Heathrow can levy per traveller. Fewer passengers helps justify higher charges.

Heathrow insists that any suggestion it is underplaying forecasts to secure a higher cap is nonsense. It points to proposals for a risk-sharing mechanism under which the airport would pay back money to airlines if passenger numbers prove to be higher than expected. It argues that would negate any benefit from higher fees based on lower passenger figures.

A risk-sharing mechanism is broadly accepted as a good idea and other airports use it. There’s a debate about exactly how the mechanics might work. But if it was based on a lower number of passengers and a higher level of charges as the default, that might mean consumers paying a higher price now before they (or airlines) receive a retrospective adjustment. As the CAA noted last year, the way the risk-sharing mechanism is structured will also affect Heathrow’s incentives to compete for more customers. And higher charges hardly seem likely to increase the airport’s appeal and stimulate demand.

At the same time Heathrow is arguing that the demand bump is a blip, it is reopening Terminal 4 and helping hire 12,000 new staff. It warns that unless it is able to increase charges further there will be “longer queues and more frequent delays”. Since the timing of the new charging regime keeps slipping, it is hard to square that justification with a downbeat medium-term outlook.

If uncertainty is the problem, delay seems the right answer. MPs came to the same conclusion in a report published on Monday, urging a one-year postponement to the introduction of the CAA’s new charging regime to allow for further clarity to emerge. If there is a bubble, allow it to deflate then set charges. Don’t allow Heathrow to puncture it prematurely to secure higher payments for itself.

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