Heathrow's Third Runway Wins Backing of Parliament—But Not British Airways

(Bloomberg) -- London Heathrow airport’s 16 billion-pound ($21 billion) expansion plan may have cleared its last major political hurdle, but the project has yet to convince British Airways, the hub’s biggest customer.

After U.K. lawmakers backed the construction of a third runway by 415 votes to 119 late Monday, BA owner IAG SA responded by saying that the financing arrangements proposed by Heathrow are likely to increase user charges and effectively require present-day passengers to fund future flights.

“Parliament has approved Heathrow’s expansion without any idea of how much it will cost,” IAG Chief Executive Officer Willie Walsh said in a statement. “We have zero confidence in Heathrow management’s ability to deliver this project while keeping airport charges flat.”

Heathrow, which counts Qatari and Chinese funds among its investors, said the vote backing the government’s national policy statement on airports, which enshrines the runway plan, was “momentous,” and will unlock billions of pounds in growth and create tens of thousands of jobs in the critical years after Britain leaves the European Union.

CEO John Holland-Kaye said in an interview that the crowded airport has spent 18 months reducing the expense of the project, but won’t be pinned down to fixing the final cost before submitting its master plan at the end of next year. He said Walsh is “negotiating in public,” adding: “That’s his job.”

After decades of delays tied to concerns about extra aircraft noise, increased pollution, the demolition of homes and the impact on roads, construction should finally begin in 2021, he said. The new landing strip is expected to open in 2026, lifting annual capacity to 135 million travelers from 2017’s 78 million.

While Heathrow has pledged to keep charges close to today’s level, Walsh predicted “massive cost escalation” for the project in coming years, calling on the Civil Aviation Authority to stop Heathrow “rewarding its shareholders to the detriment of the U.K.”

IAG has previously appealed to the Department for Transport to cap Heathrow’s charges, while lobbying the CAA to create competition within the airport by allowing terminals to be run by third parties. It argues that most U.S. facilities are owned or leased by airlines, as are some sites in Europe.

‘No Competence’

While IAG, which controls 54 percent of Heathrow’s operating slots, would be a prime beneficiary of additional capacity, the limit on flights has inflated the worth of its existing operation, bolstering fares on trans-Atlantic routes that are already among the world’s most profitable.

Vince Cable, leader of the Liberal Democrats, the only major party to formally oppose the third-runway plan, echoed IAG’s concerns about fees, describing Heathrow as “an exceedingly dodgy company” that pays more than it earns in dividends and exploits monopoly holdings in areas such as car parks while doubling its debt and running down shareholder funds.

“It has no interest in development and no competence in managing the kind of risky project now envisaged,” Cable said in the House of Commons debate.

Holland-Kaye rejected that claim, saying Heathrow has been transformed into an “airport to be proud of” over the past decade with the opening of Terminal 5, where BA is based, and the reconstruction of most other facilities.

Sloping Runway

Heathrow says it has already shaved 2.5 billion pounds from the cost of expansion by switching to a sloping runway over London’s M25 orbital motorway to minimize tunneling work, and staggering the construction of terminal infrastructure as more flights are added.

The airport was acquired for 10 billion pounds in 2006 by a group led by Ferrovial SA. The Spanish builder has since cut its stake to 25 percent, allowing the entry of investors including the Qatar Investment Authority, which has a 20 percent holding, U.S. private-equity firm Alinda Capital Partners, with 11 percent, and China Investment Corp., which owns 10 percent.

Transport Secretary Chris Grayling told parliament that all five of London’s main airports will be full by the mid 2030s if the government fails to act. Heathrow has been close to capacity since the start of the decade, squeezing in more passengers only because its airlines are moving to bigger jets.

Enlarging Heathrow is also “absolutely crucial to the U.K. as a whole,” Grayling said, with some businesses already switching to rival hubs Frankfurt, Amsterdam, Paris, which have made additional capacity provision.

The parliamentary vote removes the final political hurdle to Heathrow’s growth, three years after a state-appointed commission concluded that the plan offered greater strategic and economic benefits than a second runway at London Gatwick or an entirely new airport in the River Thames estuary, as championed by Boris Johnson, now foreign secretary, who missed the vote.

Including the runway plan in a national policy statement will help minimize further procedural logjams, with planning authorities confined to considering elements of the proposal rather than whether it should be built at all.

To be sure, Heathrow’s vision faces further challenges, with London Mayor Sadiq Khan, who favored expanding Gatwick, saying last week he’d join with local councils to seek a judicial review if parliament approved the new runway.

While that could delay the project, it’s unlikely to block it, since the review mechanism weighs the lawfulness of how a government decision was reached rather than whether it’s right or wrong.

“I’m not concerned,” Holland-Kaye said. “You get this with any major infrastructure project and it won’t hold back the planning process.”

--With assistance from Kitty Donaldson.

To contact the reporters on this story: Christopher Jasper in London at cjasper@bloomberg.net;Kaye Wiggins in London at kwiggins4@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Thomas Penny, Andrew Noël

©2018 Bloomberg L.P.