Making Heathrow profitable: Three challenges for the new boss
After years of loss-making, Heathrow could be on the cusp of a turnaround, just as its new Danish chief Thomas Woldbye steps in.
The west-London hub announced today its losses had narrowed significantly over the last nine months, as soaring demand for travel swept across the sector.
Over the summer, 29m passengers passed through the airport, which now expects a booming annual figure of 79.3m, up from a previous forecast of between 70m to 78m.
But Europe’s busiest hub still remained £19m in the red, while rival Gatwick reported bumper profits in late summer.
What’s on Woldbye’s to-do list that will bring Heathrow’s revival full circle?
Loss-making and debt
First on the list is sorting out the airport’s finances. For years it has failed to turn a profit, with Covid-19, rising interest rates and inflation compounding the issue.
Heathrow’s debt currently sits at £15.8bn and is piling up, while operating costs have also jumped up to £1.03bn.
The airport argues its debt is at historically low levels and believes it’s debt financing model, over equity financing, is effective in boosting investment and lowering costs for passengers.
“So the level of debt we have at Heathrow is the lowest we have got in a decade. So actually, we are very well funded, we have a robust policy, we have a strong position,” Heathrow’s Chief Financial Officer Javier Echave, told CityAM
“We have grown during the summer at twice the speed of any other hub in Europe, so we have delivered twice as many passengers and obviously that requires the asset, and also investment, to really deliver the level of service and resilience that we have.”
However, analysts have described its bills as “very substantial.” And with this summer’s record demand firmly in the rear view mirror and the cost of servicing those bills rising over £500m in just four years, it’s an issue that can’t be ignored.
Echave reckons Heathrow will return to profit by the end of next year.
Retail income
Heathrow has been a key voice in calling for the government to overturn the decision to axe VAT-free shopping for international visitors in 2021, alongside other airports, retailers and City groups.
Its latest financial report revealed a near quarter rise in retail revenue being driven by strong passenger traffic. For years Heathrow has benefited from cash-rich tourists splashing out in its shopping malls.
However, retail revenue per passenger actually decreased 7.4 per cent, which the airport blamed in part on the scrapping of the rebate for overseas travellers.
Politicians are currently mulling over whether to overturn the so-called ‘tourist tax’ amid growing industry pressure.
A favourable decision could be pivotal to whether Woldbye enjoys a sweeter looking balance sheet – crucial for a turbulence-free tenure.
Expansion
The holy grail.
Heathrow’s long-delayed, much maligned proposal for a third runway proved too big of a chestnut for former boss Holland-Kaye to crack.
The project was halted because of Covid-19-era lockdowns, but it has a parliamentary seal of approval and is currently under review.
Soaring inflation has set the clock ticking, with the alarming failures of HS2 laying bare the risks of continued delay.
Transport minister Jesse Norman told the Commons today that although the project still has parliament’s support “in principal,” it would have to come forward with plans for its funding, including private financing.
Echave told CityAM “the fundamental challenge is that to deliver expansion, you need certain economic conditions. And when you really look at the economic conditions of Heathrow today versus three years ago, they’re worse.”
Ultimately, that means a “slightly longer” delivery time. Although Echave insists he is “confident that expansion remains probable” and that the “business case” stacks up.
But given the state of Britain’s infrastructure, no one would bank on Heathrow’s third runway being delivered in the near-term.
A clearer vision for the future of that project would put Woldbye head and shoulders above his predecessor. But what that looks like now is anyone’s guess.