Heathrow landing-charge increases a sign of a broken system

The travel sector is in chaos again. France has closed its borders to the Brits. And questions about everyone’s holiday prospects are probably best directed to prioritiser-in-chief Chris Whitty.

Perfect timing, then, to consider the fraught subject of what Heathrow should be able to charge its airlines (and therefore passengers) in 2022.

This bust-up is only a taster of what’s ahead: regulator the Civil Aviation Authority announced a price cap today of £30.19 per passenger as an interim measure from January until the summer, an increase of 56 per cent or 37 per cent, depending on who you ask, in an industry that can’t even agree what everyone is currently paying.

By mid-next year, it is hoped, the regulator will have figured out the number for the next five-year regulatory period, at which point the difference between that and the interim cap is refunded to the airport or the airlines.

You don’t need to do detailed sums to find the fundamental answer, which is that the regulatory system around landing charges at Heathrow appears entirely broken.

The regulator’s position will be familiar to anyone who has tried to parent small children. For this interim measure, it offered the airlines and Heathrow a chance to come up with their own compromise. When they failed, it picked a midpoint, whereupon everybody started screaming.

Both sides are, of course, trying to influence the longer-term decision next year. Heathrow objects that the CAA is assuming that operating costs for next year will be lower than 2020’s already depressed level and that this will endanger its ability to invest. The airlines justifiably howl that the system is failing airlines and travellers: Heathrow’s charges, which were already expensive, will on the new rates be about two to three times higher than rival airports in places such as Paris, Madrid and Amsterdam.

The gulf between the two sides is partly down to uncertainty over the recovery. Some of the more optimistic airline forecasts probably now need tempering. But Heathrow’s outlook has been unusually dour: its June forecasts for passenger numbers in 2022, on which its regulatory submissions were based, were so gloomy that it revised them up slightly last week to 45m passengers, or 45 per cent below 2019 levels. Only at LHR did Omicron make things more cheery.

Its downbeat assessment also seems to reflect a determination to wait for the return of the high-margin, price-insensitive traffic on long-haul and business routes that used to fill its terminals, rather than fighting for activity in the meantime. That is a strategy based on passing the costs of the downturn on to its remaining customers rather than adapting, something the regulator shouldn’t allow.

Nor should the CAA let the financial priorities of Heathrow dictate regulatory outcomes, a state of affairs that over recent years seems to have become embedded. It has been well chewed over that Heathrow’s private owners, such as Ferrovial and the Qatar Investment Authority, took out more than £4bn in dividends in rosier times, only to fail to put their hands in their pockets to support the airport through the pandemic, unlike the airline investors tapped for equity.

But the airport’s problem isn’t liquidity: it has funds. It is weighed down by £19bn of debt, which includes some cash-flow covenants that were waived during the pandemic. Those remain in question for next year, depending on what it is allowed to charge and how many passengers come through its doors. Ultimately Heathrow’s debt, and whether that looks sustainable in the post-Covid world, is a matter for its management and owners, not the flying public.

Heathrow hasn’t had it all its own way: the CAA blocked its more egregious attempts to recoup its pandemic costs from customers.

But charges will rise by more than 50 per cent next year at Heathrow, an airport that is highly regulated to protect consumers from its dominance. Meanwhile 25 miles down the road at more lightly regulated Gatwick, fees will rise in line with inflation. That is plain odd. And a sign that an overhaul is needed.

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