Passengers willing to pay for further improvements at Heathrow

A survey of Heathrow’s passengers shows they are willing to pay for investment to further improve the airport – and that they are prepared to pay more than Heathrow is proposing. Heathrow’s Alternative Business Plan, which it has submitted to the Civil Aviation Authority (CAA), makes efficiency savings totalling £427m, putting the increase in charges at less than a pound a year per ticket. At this level investors would invest £3bn to further improve the airport.

The survey forms part of the airport’s work on its business plan for Q6 – the regulatory period which covers 2014-2019 – and asked airport passengers their willingness to pay extra charges in return for further improvements to the airport1. Heathrow is proposing an investment of £3bn during Q6, one of the largest private sector investments in UK infrastructure.

The survey found that the average passenger at Heathrow is willing to see charges rise by £23 over the five year period2 in order to secure the improvements on offer. Heathrow is proposing a total increase in charges of £5.01, meaning airport charges make up just 5% of the average ticket price.

Heathrow’s investment plans include the completion of Terminal 2: The Queen’s Terminal and the early works on extending the building; the development of a new integrated baggage system; and the construction of new taxiways and stands which will allow Heathrow to accommodate more of the most modern aircraft.

The investment proposed for Q6 is in addition to the £11bn that has been invested in the airport since 2003. That investment includes the construction of Terminal 5, the new Terminal 2 due to open in 2014, new baggage tunnels and the refurbishment of Terminals 3 & 4.

We want to invest to continue the improvements passengers have seen in recent years. We know the proportion of passengers rating their journey as ‘very good’ or ‘excellent’ has increased from 48% in 2007 to 74% today. The airport has moved from the bottom to the top quartile of EU airports for passenger satisfaction and Terminal 5 has been voted the world’s best airport terminal for the last two years. We want to maintain this momentum and give the UK a hub airport it can be truly proud of. Under the CAA’s current proposals that won’t be possible.

Every five years the CAA scrutinises the airport’s capital expenditure plans, operating costs and commercial revenues to set the maximum amount the airport is permitted to charge airlines over the coming period. Its initial proposals in April set the increase in charges at a level which would not allow Heathrow to compete on the global stage to attract investment. Under those proposals there would be no choice but to cut planned investment from £3bn to £2bn.

However, Heathrow has re-examined its original case and reduced its proposed annual increase in passenger charges from RPI+5.9% to RPI+4.6%. This has been made possible by increasing operational savings from £248m to £427m and by proposing a lower rate of return for shareholders. It now means the proposed increases are just £1 a year per ticket.

Colin Matthews, Chief Executive of Heathrow said:

“Investors can choose to put their money anywhere in the global marketplace. The CAA’s current proposals will make it impossible to persuade them to put anything other than the bare minimum of capital into Heathrow. We know airlines want the improvements that we’re proposing and we have done everything possible to keep the cost of those improvements to an absolute minimum. The CAA has a duty to act in passengers’ interests – today we’re making clear that passengers want these improvements and are prepared to pay for them.”

The plans seek to strike the right balance between continuing to invest for passengers and keeping charges at a level that is affordable for airlines. The level of charges at Heathrow is also tightly linked to the historic level of capital investment in new facilities.

Heathrow’s business plan needs to deliver a fair return to shareholders to encourage future investment in the UK. Our Q6 plan includes a capital investment programme of £3 billion, a tariff increase of RPI +4.6% and an average maximum allowable charge per passenger of £23.68 over the five year period. The detailed figures in Heathrow’s Alternative Business Plan are set out below:

The CAA will publish final proposals in October 2013 for consultation before coming to a decision in January 2014.

We believe Heathrow’s plans represent good value for passengers, airlines and the UK as a whole. Our investment will deliver a better journey for passengers, more efficient and reliable infrastructure for airlines, and additional jobs, trade and economic activity for the UK.

Reference

1. 1178 people completed the survey online after being recruited at Heathrow’s departure gates in January 2013. The research adopted a similar approach to that used by the CAA.
2. The median extra amount people were prepared to pay was £23, the mean was £44.

The price per passenger (in 2011/12 prices) for 2012/13 (the final year of Q5) was £19.33. For 2013/14 (Q5+1) it is £20.71. The annual tariff increase for Q5 was RPI +7.5%.

The Q5 period was extended for a year to allow time for the new Civil Aviation Bill to be passed by parliament, so that the Q6 settlement could take place under this bill.

Heathrow’s plans for Q6 include ten priority areas:

• New Terminal 2. Heathrow will open the new Terminal 2: The Queen’s Terminal in 2014 which will result in most passengers travelling through new facilities. The subsequent move of airlines into the new terminal allows the closure of Terminal 1 in 2016. The end of Q6 will see the start of work on extending Terminal 2.
• Smoother journeys. Heathrow will build more self-service check-in kiosks and introduce new self-service bag drops which will give passengers greater choice and reduce airline operating costs. We will also enhance real time information and introduce free wi-fi.
• Consistent, courteous service. Heathrow will provide additional customer service training for staff, and introduce mobile staff with tablet computers to provide greater assistance to passengers.
• Improved efficiency. We will deliver £427 million of savings to minimise airline charges by improving operational efficiency; retiring old facilities such as Terminal 1; and investing in new facilities, such as self-service bag drops, which reduce airlines’ costs.
• Better surface access. Heathrow will extend its innovative personal rapid transport ‘pods’ to link Terminals 2 & 3 with their business car parks. The airport will fund part of the Crossrail project which will link Heathrow to the City of London, Canary Wharf and the East End quickly and efficiently.
• Valued airport products and services. We will continue to evolve our range of commercial products and services to meet the demand from our diverse mix of passengers, including develop premium retail and additional lounges, all of which contribute to significantly offsetting airport charges.
• Higher punctuality. We will introduce new airport management technology and additional runway rapid exit taxiways to help improve punctuality and reliability at Heathrow. We have an aspirational target of 90% on time performance, up from 80% today and around 63% in 2007.
• Quicker connections. We will reduce the waiting time for transfer security so that 99% of the time passengers wait less than ten minutes – the shortest security queuing standard of any major hub airport in Europe. A new integrated baggage system will improve baggage reliability which has already improved from 40 missed bags per thousand passengers in 2007 to 15 per thousand today.
• Quieter aircraft. Heathrow will invest in upgraded stands and taxiways that will help to make it the busiest hub for A380s in Europe. These modern aircraft are popular with passengers, as well as quieter and more fuel-efficient than the aircraft they replace. Following the introduction in 2011 of new incentives and penalties to encourage airlines to operate the quietest aircraft, we will continue to trial new operational procedures that can reduce noise for local communities and roll out improved noise insulation schemes for local properties.
• Reduced pollution. Heathrow will increase the provision of pre-conditioned air which allows aircraft to switch off their engines while on the ground. We will also introduce more airside electric vehicles, cutting local pollution and reducing operating costs for airlines.

Summary of Heathrow’s Business Plan

• Full Business Plan – published January 2013, our original plan proposing a £3bn capital investment plan
• Revised Business Plan – published June 2013, responded to the CAA’s Initial Proposals, proposed a reduced level of capital investment and further efficiencies
• Alternative Business Plan – published July 2013, proposing a revised £3bn capital investment plan, conditional on a fair and reasonable settlement