Q6 Full Business Plan - Heathrow Airport

Q6 

Full business plan 

Public version 

January 2013

Contents 

1. Introduction and context 4 

2. Our transformation to date 10 

3. Our vision and priorities for Q6 16 

4. Our proposition for Q6 22 

5. Aeronautical charges 38 

6. Dependencies and risks 46 

7. Conclusion 52 

Disclaimer 

This document is provided for the sole purpose of facilitating Q6 

discussions with the CAA. 

Although care has been taken to ensure the accuracy, completeness and 

reliability of the information provided, in no event shall Heathrow Airport 

be liable for any direct, indirect, special or incidental damage, or third 

party claims resulting from, arising out of, or in connection with the use 

of this information. The information may be subject to change in the 

circumstances set out herein. 

This document is premised on the assumption that the Q6 regulatory 

framework will effectively be a continuation of the prevailing model. 

Although possible changes to this model are occasionally given 

reference, the information provided does not cater for shifts in the CAA’s 

regulatory policy, nor does it consider any potential implications of the 

new Civil Aviation Act or implications to Heathrow’s business of a 

licencing regime. 

This document is without prejudice to any view Heathrow Airport may 

take during Q6 discussions. The assumption of the regulatory model 

used in this document does not necessarily imply any support for this 

model by Heathrow Airport. 

Page 2 Heathrow Q6 Full Business Plan - Public version

Executive summary 

Passenger experience at Heathrow has been transformed over Q5 and 

must continue to improve during Q6 to meet rising passenger 

expectations and evolving airlines’ needs. 

Investment in the new Terminal 2 and other enhancements will drive tangible improvements for 

Heathrow’s passengers in Q6 and beyond. A range of other less visible investments will deliver 

valuable improvements in reliability and consistency of service. Our plan also includes providing 

new direct links to central London via Crossrail, extensive asset replacement, closing Terminal 1, 

and constructing new stands and taxiways for large aircraft. 

Passenger experience and punctuality have consistently improved through Q5 and Heathrow’s 

performance during London2012 demonstrates that we enter Q6 better placed, with passenger 

satisfaction near the top of the league table of European hub airports. Constrained by capacity, we 

strive to adapt to the fast changing needs of our customer airlines: unpredictable airline mergers, 

alliance moves and changes to delivery dates of next generation quiet, fuel efficient aircraft add to 

the challenges of delivering a daily schedule which uses practically all available capacity. 

Heathrow will maintain the highest standards of safety and security and will further improve 

efficiency. Airlines operating at Heathrow benefit from high yields. Nevertheless, Heathrow 

competes with other European hubs on price as well as service offering and we will drive cost 

reduction, productivity and investments which reduce airline costs. We have made progress in Q5 

and this plan sets out aggressive efficiency proposals to go further. 

The economic environment and weaker than predicted demand have negatively impacted the 

whole sector in recent years. During Q5, Heathrow has lost revenue of more than £600m from 

over-optimistic passenger forecasts and shock events, the impact of which cannot be offset 

because of capacity constraints. 

Accordingly Heathrow’s shareholders have made an unsustainably low return on their investment. 

This must be corrected in Q6. An acceptable return, not least in the form of the regulated cost of 

capital, is essential to justify on-going investment. Investment in Heathrow is critical for airlines and 

passengers. Moreover, as one of the largest private infrastructure investors in Western Europe, our 

investment is important for the economic future of the UK, vital for trade, good for jobs and the 

local community. 

Charges will rise as a result of all of these factors. The level of these rises will be mitigated by our 

efficiency plans and through generating commercial revenue. The passenger experience in Q6 will 

warrant those charges and airlines will benefit from some of the best facilities and highest yields 

that any hub airport has to offer. 

Our success as a hub airport depends on successful airlines and satisfied passengers. We are 

committed to collaborating effectively with airlines, groundhandlers, Border Force, NATS, the CAA 

and many others to achieve our common goals. 

Colin Matthews, CEO 

© Heathrow Airport Limited 2013 

Heathrow Q6 Full Business Plan - Public version Page 3

1 

Page 4 Heathrow Q6 Full Business Plan - Public version | Chapter 1 

© Heathrow Airport Limited 2013

Introduction and context 

Passengers’ interests are at the heart of Heathrow’s planning and 

operations. We have invested over £11 billion since 2003, consistently 

focusing on service delivery. But we’re not finished and this document sets 

out our plans to continue to improve the passenger experience during Q6. 

1.1 Purpose 

At the request of the Civil Aviation Authority (CAA), this 

document sets out Heathrow’s Full Business Plan (FBP) for 

the next quinquennium (Q6) – the period April 2014 to 

March 2019. It serves as a basis for the CAA to determine 

the airport’s regulated aeronautical charges in Q6. 

The business plan defines the outcomes the passenger 

would experience as a result of our investment plans 

together with the level of aeronautical charges necessary 

to support this plan. 

The FBP contains our current thinking and has been 

approved by both the Heathrow Executive Committee 

and the Heathrow Board. Throughout this year, we will 

continue to update and elaborate our plans as they 

mature. Where necessary, we will alter these plans in 

response to stakeholder feedback, any market or wider 

economic developments, or other relevant factors, in 

time to inform the CAA’s final proposals. 

1.2 Regulatory context 

This business plan has been prepared in accordance with 

the CAA’s stated requirements and Heathrow’s obligation 

to provide a business plan to help inform the CAA’s Q6 

regulatory review. The FBP is based on an assumed 

continuation of the existing regulatory construct – 

incentive regulation using a Regulated Asset Base (RAB) 

based single-till. 

The nature of RAB based regulation demands that a 

bottom up, thorough review of each of the different 

building blocks is undertaken by the CAA. Therefore, 

the business plan is based on a detailed bottom-up 

assessment of each ‘building block’ and other key 

components, and presents a consolidated view of the 

integrated financial forecasts for our business. 

The inter-dependent nature of the ‘building blocks’, 

and the requirement to carefully integrate each variable, 

means that ‘top down’ adjustment of any individual 

variable in isolation is not feasible. The effect of any 

proposed adjustment to individual variables can only 

be analysed in the context of the potential impact on 

other variables and the integrated financials. Therefore, 

a ‘top down’ approach, based on some notional view 

of stakeholder expectations, would be inconsistent with 

the ‘building block’ approach and the prevailing 

regulatory model. 


Heathrow Q6 Full Business Plan - Public version | Chapter 1 Page 5

1. Introduction and context 

1.3 Passenger and airline 

context 

Our business plan takes passenger interests as its 

principal objective. This objective is enshrined in the 

regulatory regime and is also consistent with Heathrow’s 

commercial interest, as we need to remain competitive 

with other European hubs both in terms of service 

offering and our price. This depends on the airport being 

valued by passengers and airlines that choose to fly to 

and from Heathrow. We understand through our 

research what drives a positive experience throughout 

the passenger journey at Heathrow and have captured a 

set of passenger principles to guide our thinking. These 

principles include the consistent delivery of basics such as 

security and cleanliness, enabling reliable and predictable 

journeys, showing that we care for the passenger, and 

providing value for money. 

Since June 2011, we have been consulting with our 

airlines to maximise the opportunity presented by the 

Q6 regulatory review to improve passenger experience. 

The Heathrow Airport community has followed a process 

of Constructive Engagement (CE) intended to inform the 

CAA’s thinking on the Q6 settlement. This process 

followed the direction set out within the CAA’s Mandate 

for CE, and concluded on 3 December 2012. 

The FBP does not form part of CE. Nevertheless, we 

have drawn extensively from the CE debate with our 

airline community in developing the plan as there is a 

substantial degree of agreement on many issues, such 

as the priorities for Q6 and many of the investments 

proposed. This plan is consistent with the output from 

CE. It is expected that the FBP will form the basis for 

ongoing discussions with our airline customers, in 

some areas. 

1.4 Demand context 

The over-optimism in Quinquennium 4 (Q4) and 

Quinquennium 5 (Q5) passenger demand forecasts has 

been acknowledged by all parties – in Q5 we are already 

a cumulative 33 million passengers behind the level 

expected in the 2008 settlement and so will enter Q6 

with passenger numbers 10% below the levels 

anticipated at this stage in Q5, as shown in Figure 1.1. 

As we enter Q6 it is important that passenger forecasts 

are reset to reflect current forecasts which show only 

modest growth, through larger aircraft and higher load 

factors, against a background of macro-economic 

uncertainty. In a constrained environment such as 

Heathrow, where annual air traffic movements are at 

99% of capacity, there is virtually no potential to grow 

through aircraft movements. Similarly, there are limits to 

load factors (passengers per aircraft), and so growth 

depends on the number of seats per aircraft – a function 

of fleet mixes and aircraft seat configurations, both of 

which have displayed positive and negative historical 

trends in recent years. 

In addition, the unique characteristics of demand and 

operations at Heathrow have a significant bearing on 

the FBP. For example, the proportion of long-haul 

passengers in Heathrow’s overall mix is materially higher 

than at other competing European hub airports, as 

shown in Figure 1.2. This high proportion of long-haul 

traffic share, together with the operational complexity 

(due to operating much of the day at 99% of capacity) 

within a constrained environment, all drive up costs. 

Studies, to support the structure of aeronautical 

charges at Heathrow, have estimated that long-haul 

passengers are 40% more expensive to serve than 

short haul passengers. 

A very similar picture would emerge from an analysis 

of economy versus premium class passengers. Set against 

this, long-haul passengers and even more so premium 

class passengers, provide higher yields to airlines. Slot 

values show that Heathrow is a highly valued airport by 

its customers. 1 

1 

If airlines were not able to operate profitably from Heathrow, slot values would be zero. However, Deloitte has estimated the market value of a pair of Heathrow’s landing slots to be 

around £25-30 million – higher than those of either Frankfurt or Charles de Gaulle. See http://www.deloitte.com/view/en_gb/uk/969833d0303fb110VgnVCM100000ba42f00a 

RCRD.htm 

Page 6 Heathrow Q6 Full Business Plan - Public version | Chapter 1 © Heathrow Airport Limited 2013


Figure 1.1: Passenger numbers have fallen short of forecasts 

80 

78 

76 

74 

Passengers 

72 

70 

68 

66 

64 

62 

2002/03 

2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 

Q4 settlement forecast Q5 settlement forecast Actual 

Figure 1.2: Percentage of long haul passengers at major 

European hub airports 

60 

50 

% long haul passengers 

40 

30 

20 

10 

0 

Madrid Amsterdam Frankfurt Charles 

De Gaulle 

Heathrow 




1.5 Hub context 

Heathrow is the UK’s international hub airport, offering 

the only connection from London, or indeed the entire 

UK, to many destinations around the world. 

Flying is of great value to the UK – for the economy and 

for consumers – as it: 

• Fosters investment and trade – there is strong 

evidence that UK trade flourishes to countries where 

direct air connectivity is best. Air connectivity, 

therefore, is important to the UK’s economic future, 

and particularly to the generation of UK employment 

through overseas trade; 

• Forges connections – linking multicultural Britain to 

an increasingly globalised world, socially and 

economically. 

What’s more, direct access to one of the world’s largest 

international hub airports at Heathrow (compared to 

indirect routing through other European hubs) provides 

clear benefits for UK consumers including: 

• Wider choice of direct routes; 

• Diversity of carriers and service offers; 

• Lower cost flights on direct routes in many cases; 

• Greater frequency of flights to the most popular 

destinations. 

Heathrow’s network of short-haul and long-haul traffic 

enables us to act as a transfer point for passengers. This 

sustains a wide range of destinations – particularly 

long-haul destinations – served from Heathrow. As the 

UK’s direct connection to the world, we provide over two 

thirds of the UK’s long-haul connectivity and we are the 

main UK airport that offers direct services to China, Brazil 

and much of Asia. Furthermore, we are at the end of 

eight of the world’s intercontinental top-ten ‘thick’ 

routes and serve over 180 destinations. 

In addition to the economic benefits of having a hub 

airport, our capital investment benefits the whole of the 

UK. For example, construction of Terminal 2 (T2) has 

involved a diverse supply chain with components being 

sourced from every region of England and Wales. 

1.6 Community context 

Heathrow Airport is one of the largest employment sites 

in Europe with over 76,600 people working within the 

Airport boundary creating gross value added (GVA) of 

almost £3.3 billion per annum 2 . A further 7,700 people 

are employed in the local area (Hillingdon, Hounslow, 

Spelthorne, Ealing and Slough) in activities which are 

directly related to the Airport but who work outside the 

Airport boundary; a GVA of £0.3 billion is supported by 

these jobs. There are further indirect and induced jobs 

supported in the local area, London and elsewhere in the 

UK through the purchases of goods and services and 

through the expenditures of employees. A total of 

114,000 jobs and GVA of £5.3 billion is supported in the 

local area by the operation of Heathrow Airport. These 

jobs represent approximately 22% of total employment 

in the local area. Across the UK as a whole, Heathrow 

supports almost 206,000 jobs and GVA of almost £9.7 

billion which is equivalent to 0.8% of UK GVA. This is a 

considerable contribution to the UK economy from a 

single employment site. 

Specifically Heathrow Airport supports the growth of the 

local economy through a number of initiatives which 

tackle the barriers to economic prosperity. Education, 

skills, employment and business growth have the 

greatest impact on economic growth and Heathrow’s 

programmes are designed to impact each of these areas. 

Our education programmes support Science, Technology, 

Engineering and Maths (STEM) related learning which 

addresses the skills shortage in the UK. The Heathrow 

Jobs & Careers Fair demonstrates the vast array of 

careers available to school and college leavers. The 

Heathrow Academy supports local unemployed people 

getting back into the workplace in the areas of retail, 

aviation and construction. Finally, the Heathrow Meet 

the Buyers encourages local businesses to do business 

with us, our supply chain or each other. 

2 

Source: Optimal Economics study on Heathrow related employment. 



1.7 Investor context 

Delivering for the passenger requires that Heathrow is a 

financially viable business and is able to continue to 

finance new capital expenditure. We will enter Q6 

following an extremely challenging commercial 

environment in Q4 and Q5. Shareholder returns in Q5 

were poor and unsustainable. In practice, deterioration 

started even earlier in Q4. Returns have been less than 

4% in four of the previous nine years, despite the 

allowed return being 7.5% and 6.2% in Q4 and Q5 

respectively – see Figure 1.3. As at 2011/12 (the latest 

year for which Heathrow’s regulatory accounts are 

available), the aeronautical revenue shortfall between the 

return on Regulated Asset Base (RAB) and the regulatory 

determined weighted average cost of capital (WACC) 

was £208 million. Cumulatively to date the shortfall is 

over £600m since the start of Q5. 

Figure 1.3: Investment returns have fallen short 

of the cost of capital 

8% 

7% 

6% 

5% 

4% 

3% 

2% 

03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 

Return on RAB before exceptionals 

WACC 

The root cause of the failure to achieve our allowed 

return has been overly optimistic passenger forecasts in 

both the Q4 and Q5 regulatory settlements, as shown in 

Figure 1.1 previously. This significant shortfall is now 

equivalent to a yield per passenger of just under £3, or 

an additional 18% on aeronautical charges. 

Despite this material shortfall, Heathrow’s shareholders 

chose to maintain their support for the Q5 capital 

investment programme supported by the airlines. 

Passengers and airlines have tangibly benefited from this 

investment. Aeronautical charges have been lower than 

they would have been if passenger forecasts had been 

more representative, and investment levels have been 

maintained despite these lower volumes. The 

maintenance of investment in Q4 and Q5 has ensured 

Heathrow is in a strong position as we head into Q6, in 

terms of passenger experience and competitiveness. 

However, the experience of Q4 and Q5 underlines the 

importance of two requisites for Heathrow to be a 

sustainable business: 

• Firstly, the Q6 settlement must now re-base passenger 

forecasts to align with actual demand – with an 

inevitable impact on airport charges. To be clear, we 

are not expecting to ‘recoup’ lost revenue from Q5. 

Rather we are simply looking to reset required 

aeronautical revenues to allow Heathrow to earn its 

cost of capital in Q6 given the passenger numbers we 

now expect; 

• Secondly, while the incentive regulation scheme under 

which Heathrow operates today means that 

shareholders are solely responsible for bearing this risk 

in Q5, it also requires that Heathrow can expect to 

earn an appropriate rate of return on its investment 

(equal to its WACC) in Q6. This will inevitably require 

an upward adjustment of prices in Q6. 

The experience of passenger forecasts over Q4 and Q5 

emphasises the nature of the risk Heathrow faces. This is 

a risk materially greater than any regulated utility which 

are largely protected from volume risk through the 

structure of their revenue and price caps. In fact, only 

NATS and Royal Mail have similar price cap structures to 

Heathrow, and both these companies are protected by a 

risk-sharing mechanism. This leads to materially higher 

Beta risk for Heathrow compared to other regulated 

companies, resulting in a higher WACC. 

Also, compared to utilities, Heathrow’s risk is more 

asymmetric – a consequence largely of its capacity 

constraint – which in itself adds an additional risk 

premium. 

In addition, with a lower than average rate of free cash 

flow (compared to utilities) Heathrow is more exposed to 

the risk that future changes to the regulatory regime will 

prevent full repayment of past investments. 



2 



Our transformation to date 

Since 2006 Heathrow’s performance has consistently improved, through 

significant investment and a strong focus on service. Satisfaction is now on a par 

with the top quartile of European airports. 

2.1 An improving experience for our passengers 

Heathrow has been transformed in Q5 and so we will 

enter Q6 with a much improved passenger experience. 

Figure 2.1 shows the trend in overall satisfaction of 

passengers with the airport, relative to European 

benchmarks (the average and top-quartile of European 

airports). 3 Heathrow has narrowed the satisfaction gap 

to the top quartile of European airports to only 

0.01points in the most recent quarter. 

Passenger satisfaction at Heathrow improved to the 

highest ever passenger ratings of 3.96 in Q3 2012. 4 

This strong performance has raised the Moving Annual 

Average (MAA) to 3.92, also a record high. Passenger 

satisfaction during London2012 was particularly strong 

when we achieved record high results in both ASQ and 

QSM 5 further demonstrating the benefits of forward 

planning and collaboration with the airline community. 

Figure 2.1 Overall satisfaction with Heathrow – ASQ trend Q2 2006-Q3 2012 

4.20 

4.00 

3.80 

AQS Score 

3.60 

3.40 

3.20 

3.00 

Q2 

06 

Q3 

06 

Q4 

06 

Q1 

07 

Q2 

07 

Q3 

07 

Q4 

07 

Q1 

08 

Q2 

08 

Q3 

08 

Q4 

08 

Q1 

09 

Q2 

09 

Q3 

09 

Q4 

09 

Q1 

10 

Q2 

10 

Q3 

10 

Q4 

10 

Q1 

11 

Q2 

11 

Q3 

11 

Q4 

11 

Q1 

12 

Q2 

12 

Q3 

12 

Heathrow EU average Top EU quartile 

3 

We use the upper quartile as a benchmark here to avoid breach of confidentiality of individual airport data. 

4 

ACI’s Airport Service Quality (ASQ) survey to Q3 2012 – the most comprehensive measure to compare our performance. EU average and EU top quartile relate to our 

EU comparator group of airports. 

5 

QSM - Quality of Service Monitor, our own passenger survey. 



2. Our transformation to date 

Today, 75% of passengers rate Heathrow as either 

excellent or very good, compared to only 54% at the 

start of Q5. Only 4% rate it as poor/very poor compared 

to 11% at the start of Q5. Overall satisfaction has 

improved by 14 percentage points and excellent/very 

good ratings by 50% since the start of Q5 (see 

Figure 2.2). 

Heathrow has also achieved continuous improvements in 

passenger experience by continuing to provide a strong 

retail and commercial proposition. This – underpinned by 

a sustained advertising campaign, more in-terminal sales 

support and a targeted product – has enabled a 

significant contribution to the single till and positively 

impacted the passenger experience. 

Figure 2.2: Improvements in passenger satisfaction 

4.0 

3.9 

3.8 

3.7 

3.6 

3.5 

3.4 

3.3 

3.2 

ASQ Score overall satisfaction with Heathrow (Score out of 5) 

% Passengers rating Heathrow ‘Excellent’ or ‘Very good’ 

80% 

3.92 72% 

70% 

60% 

50% 

48% 

40% 

3.43 

30% 

20% 

10% 

3.1 

2007 

2012 

0% 

2007 

2012 

We have achieved this overall performance by focusing 

on those areas that passengers tell us are the most 

important to them, and where they think we are lagging 

behind the best airports in Europe. For example, we have 

improved in the ratings of all aspects of security and 

cleanliness at the airport. 

Wayfinding ratings at Terminal 1 (T1) continue to 

improve, following investments during 2010/11, 

while Terminal 3 (T3) has recorded its best ever score 

(4.00 in Q3 2012) following investment in the departure 

lounge and improvements to security. At Terminal 4 (T4), 

investments in Q5 have led to sustained improved 

passenger ratings, while passenger satisfaction at 

Terminal 5 (T5) is now consistently high (MAA to Q3 

2012 4.06). T5 was recently voted the World’s Best 

Airport Terminal in the Skytrax Awards 2012, and 

Heathrow has recently been upgraded to a 4 Star 

Airport by Skytrax. 

Looking forward, Terminal 2 (T2) is scheduled to open in 

the second half of 2014 – shortly after the start of Q6. 

After a period of airline migration, the new terminal will 

serve around 20 million passengers a year. Alongside T5, 

the opening of T2 will mean that 60% of all Heathrow 

passengers will benefit from new facilities throughout 

Q6, with all other terminals also benefiting from further 

improvements. 

Following the opening of T2, we anticipate passenger 

satisfaction at Heathrow will increase again, with ratings 

comparable to, or better than, the leading European hub 

airport and within the top quartile of our European 

comparator group. 



2.2 Improving operations for our airlines 

During Q5 we have continued to support the hub and 

strengthen our resilience through improvements in three 

areas: stand supply, transfers and airfield performance. 

We have delivered new stands for T5, T3 and for the 

new T2 (the first phase of which is already operational), 

making it easier for us to accommodate the evolving 

aircraft fleet mix at Heathrow. We have also improved 

the experience for transfer passengers by investing in a 

transfer baggage system between T5 and T3, which 

reduces the transfer time of baggage between these 

terminals. Overall baggage performance has now 

improved by 62% as shown in Figure 2.3. 

These initiatives will deliver benefits for airlines by 

reducing departure delays by up to 20%, tactical flow 

restrictions by up to 30%, fuel savings of 10,000 tons 

or more per annum and handling costs by 10%. Not 

only that, the discipline that comes with A-CDM helps 

to improve departure schedule delivery. This leads to 

better predictability and punctuality, which in turn 

supports Heathrow’s transfer capability and the overall 

passenger experience. 

To strengthen the incentive to use quieter aircraft at 

Heathrow, in order to reduce aircraft noise on the local 

community and reduce pollution, we have also 

restructured airport charges. 

Figure 2.3: Departure punctuality and baggage mis-connect rates 

85 

80 

Departures punctuality 

80% 

45 

40 

Missed bags per 1000 passengers 

40 

75 35 

70 

65 

63% 

30 

25 

60 

55 

20 

15 

15 

50 

10 

45 

5 

40 

2007 

2012 

0 

2007 

2012 

In collaboration with our airlines and NATS, we have also 

improved departure punctuality, as shown in Figure 2.3 

and have focused on airfield operations and resilience, 

including strengthening planning and response to the 

impact of snow at the airport, and implementing airport 

collaborative decision making (A-CDM). 

Heathrow has continued to develop constructive and 

productive relationships with the airline community, 

covering operational to strategic issues. The success in 

achieving this is measured via regular surveys that also 

highlight areas of high performance and areas where 

there is scope for improvement. The 51 airlines that 

responded to the latest survey rated the day to day 

relationship with Heathrow at 7.5 out of 10. We will 

continue to focus on our airline customers to ensure that 

we maintain positive working relationships that will help 

deliver operational improvement at Heathrow. 




2.3 Transforming our infrastructure 

Heathrow’s transformation has partly been enabled by 

enlarging and refreshing the infrastructure, particularly 

over the last two quinquennia with the construction of 

T5 in Q4 and the ongoing construction of T2 in Q5. This 

has resulted in the number of wide bodied aircraft stands 

increasing by 19% and the total terminal floor space at 

Heathrow has more than doubled, as shown in Figure 2.4. 

Within a constrained airport such as Heathrow, it is 

critical we optimise the use of our capacity – both on the 

airfield where we are constrained to 480,000 air 

transport movements per year, or within terminals where 

we need to match peak hour demand and capacity 

within each aspect of our operation. 

In 2012 Heathrow Airport undertook a review of 

terminal occupancy across the entire campus, in 

consultation with the airline community, determining 

airline occupancy of each terminal once the new T2 

opens in 2014. The occupancy review followed the sale 

of bmi to IAG, the owner of British Airways. 

known Q6 cost constraints. The feasibility and options 

are under review by Heathrow, in consultation with 

Virgin Atlantic. Heathrow does, though, recognise and 

support in principle Virgin Atlantic’s desire to have their 

domestic and international services co-located as soon 

as possible, within the dual constraints of maintaining 

an affordable investment plan and the associated 

implementation risk that an airline move places on the 

Heathrow operation. 

The terminal occupancy evaluation process evaluated 

potential terminal occupancy options against criteria 

related to the operational impact on the airport as a 

whole. We focused on the key factors that impact on 

efficient operation and cost; these included the need to 

minimise capital expenditure, and the requirement to 

constrain operational expenditure. The occupancy 

decision is better for the passengers as it maximises the 

level of intra-terminal transfers, enables airline cost 

reduction and enables the closure of T1 to reduce 

Heathrow’s operational expenditure. 

Figure 2.4: Infrastructure change 2008 to 2016 

130 

125 

120 

Wide body stands 

126 

900,000 

800,000 

700,000 

600,000 

Heathrow Terminal area (square meters) 

837,000 

115 

500,000 

110 

105 

100 

106 

400,000 

300,000 

200,000 

100,000 

329,000 

95 

2008 

2016 

0 

2008 

2016 

The new T2 will be home to STAR Alliance and Aer 

Lingus. The Terminal Occupancy Review assumed that 

BA’s divested slots (further to their acquisition) would end 

up in T2 irrespective of the ultimate ownership. The 

business plan reflects this assumption. Heathrow does, 

however, recognise that following the acquisition of the 

divested slots by Virgin Atlantic, options should be 

evaluated that might seek to avoid a move to T2 and 

instead move the relevant flights directly from T1 to T3, 

if operationally practical and affordable within the 

We will continue to ensure that we optimise the use of 

our capacity throughout Q6, responding to on-going 

changes in the industry where possible, such as airline 

mergers and alliance changes. 




3 



Our vision and priorities for Q6 

Our vision is to be ‘the UK’s direct connection to the world and 

Europe’s hub of choice by making every journey better’, and is supported by 

our priorities for Q6 around passenger experience, hub capacity and resilience, 

and a competitive cost of operation. 

3.1 Our framework for Q6 

We first established our vision to be ‘the UK’s direct 

connection to the world and Europe’s hub of choice by 

making every journey better’ with our airline customers 

in 2010 and it continues to have strong support. It is a 

positive aspiration for Heathrow – one that will bring 

benefit to passengers, airlines and the UK economy as a 

whole by securing connectivity to key destinations 

around the world. 

We have developed three priorities for Q6 around 

passenger experience, hub capacity and resilience, and a 

competitive cost of operation. These have been agreed 

with the airline community through CE. These priorities 

shape and guide our thinking, particularly when 

considering solutions for Q6. 

Together with the airline community, we have also 

defined a set of passenger principles, which capture 

what drives a positive experience throughout the 

passenger journey at Heathrow, and a set of service 

propositions. These were developed collaboratively with 

the airlines, based on a gap analysis of the current 

passenger experience. Both a Community and a 

Heathrow-specific version of the service propositions 

were developed and subsequently agreed in April 2012. 

In this way passenger interests are embedded at the very 

heart of future developments at Heathrow. Figure 3.1 

sets out the relationships between the vision, priorities 

and service proposition for Q6 and how they are guided 

by the passenger principles. 

Figure 3.1: Framework for Q6 

Vision Priorities Service propositions 

The UK’s direct 

connection to the 

world and Europe’s 

hub of choice by 

making every 

journey better 

Deliver a noticeably better, 

‘hub of choice’ passenger 

experience 

Deliver improved resilience and 

sufficient hub capacity 

Ensure a competitive total 

cost of operation 

High quality terminals 

Courteous service and efficient security 

Smoother journeys 

An end to end passenger experience 

Enable punctuality and resilience 

Improve capacity utilisation 

Improve connections and baggage 

Focus on sustainability 

Increase non-aeronautical income 

Retire old facilities 

Increase operational efficiencies 

Support reduction of airline costs 

Guided by passenger principles, enabled by collaboration 

and leading towards the Masterplan 



3. Our vision and priorities for Q6 

3.2 Our priorities and aspirations for Q6 

Our aspiration for Q6 is to deliver against our priorities 

and meet our aspirational targets for the end of Q6 are 

shown in Figure 3.2. 

Figure 3.2: Our priorities and targets for Q6 

Deliver a noticeably better, 

‘hub of choice’ passenger experience 

An ASQ rating of >4.00 and leading amongst 

European hub airports with 80% of passengers 

rating Heathrow as excellent or very good 

Deliver improved resilience 

and sufficient hub capacity 

At least 80% of departing and arriving flights are 

punctual to within 15 minutes of scheduled time; 

with an aspiration to approach 90% punctuality 



Our targets recognise that with the improvements made 

over recent years in the passenger experience and the 

impending opening of T2, we need to continue to sustain 

passenger experience while focusing on resilience. 

Improving resilience at Heathrow will improve passenger 

experience still further. We recognise the value that 

passengers and airlines place on punctuality, however 

meeting this target will require the continued collaboration 

between the airline community, NATS and ourselves. 

Our aspiration for competitive total cost of operation is 

to be at the frontier of efficiency for major European hub 

airports, which we will achieve through setting a 

challenging target of achieving a 6.8% cumulative 

reduction in underlying operating cost over the 

quinquennium, while also delivering ongoing benefits to 

our airlines through the facilities and services we provide. 

We aspire to improve further and faster, but we must 

moderate this to avoid further price increases. It is not 

possible to satisfy the desires of all our airlines within a 

single quinquennium, particularly one as challenging as 

Q6, and so we have had to make some tough choices. 

However, we believe that the aspirational targets we have 

set will ensure all passengers’ satisfaction will improve. 

To be at the frontier of efficiency for major 

European hub airports, by reducing our 

underlying operating cost over Q6 by 6.8% 



3.3 Our proposition for Q6 

Through our focus on the Q6 priorities and our service 

propositions, we will deliver a better experience for the 

passenger with noticeable improvements across their 

entire journey. As our focus is on improving the end to 

end passenger journey, this encompasses the work of 

third parties who together with Heathrow Airport 

collaborate to provide the service to the passenger. 

Figure 3.3 summarises the proposition for our passengers 

and airlines showing each of the propositions and how 

they contribute to improving the end to end passenger 

journey. Chapter 4 then outlines in more detail how each 

of the propositions will be achieved. 

Figure 3.3: Our propositions for Q6 

Priorities 

Some of the most significant improvements for the 

passenger in Q6 are planned around punctuality and 

on queuing standards in transfer passenger security, 

together with the impact of the new Terminal 2. 

These are described further in the section 3.4 below. 

Service propositions 



Deliver a noticeably 

better, ‘hub of choice’ 

passenger experience 


An end-to-end passenger experience 



Deliver improved resilience 

and sufficient hub capacity 



Increase non-aeronautical income 









3.4 Significant improvements for Q6 

3.4.1 Improved punctuality 

Despite Heathrow operating at 99% capacity for much 

of the day, passengers still expect their flights to depart 

and arrive on time. To achieve this, the airport and airline 

community need to design predictability into the 

schedule, manage variations in the schedule and then 

recover quickly if disruption occurs. 

By the end of Q6, punctuality will improve to over 80% 

– and we aspire to move towards 90% –, of flights 

arriving or departing within 15 minutes of their 

scheduled time, through collaboration with NATS, the 

CAA and the airline community. Helping the airport to 

run smoothly on as many days as possible sounds simple 

but in reality requires significant investment of time and 

resource across the whole airport community including 

NATS and the CAA. 

The outcome for the passenger will be more reliable 

journey times, taking the stress out of the airport 

experience, as aircraft queuing time to take off will be 

reduced, taxiing times shortened and extensive stacking 

as aircraft wait to land will no longer be the norm as 

it is today. The outcome for Heathrow’s airlines will be 

increased efficiencies, better aircraft utilisation and a 

more sustainable business. 

3.4.2 Harmonised direct and transfer security 

queue standard 

We believe Heathrow already operates the shortest 

passenger security queue standard of any major hub in 

Europe, and that passengers on the whole are very 

satisfied with the service provided, as shown in Figure 3.4. 

We will extend our existing service level for direct 

passengers to transfer passengers, so that 99% of the 

time passengers will wait less than ten minutes – 

whether a direct passenger or a transfer passenger. We 

also propose a harmonised five minute queue standard 

for both direct and transfer passengers. 

Figure 3.4: Passenger satisfaction with current security 

queue standards 

100% 

80% 

60% 

40% 

Satisfaction with security 

3% 5% 

62% 

66% 

This can be achieved through a range of local and 

international initiatives using technology and process 

innovation – such as the introduction of airport 

collaborative decision-making, and by introducing 

some of the concepts from the Future Airspace 

Strategy (FAS) and Single European Sky ATM 

Research programme (SESAR). 

20% 

0% 

35% 

28% 

Outbound passengers 

Transfer passengers 

Excellent Average/Good Poor/Very Poor 

Punctuality is underpinned by resilience which will 

continue to be enhanced by a range of processes, 

people and infrastructure changes, including additional 

runway rapid exit taxiways to enable landing aircraft to 

more quickly leave the runway, preparedness and 

planning for events such as snow, and the use of 

operational freedoms, tested in conjunction with 

the DfT (Department for Transport) and CAA in Q5. 

To further improve our existing baseline level of service 

for all passengers, we propose moving to an equivalent 

per passenger measure once the measurement 

technology becomes available. This proposition will be 

easier for passengers to understand, and provides a more 

reliable and consistent service for passengers and their 

airlines without increasing operational costs. 



3.4.3 Terminal 2 

T2 will offer a significant improvement for passengers 

travelling through Heathrow. When T2 opens and 

associated airline migration is complete, a further 

20 million passengers a year will benefit from new 

facilities at Heathrow. 

With the opening of T2, we anticipate there will be a 

further increase in passenger satisfaction at Heathrow, 

with ratings comparable to, or better than, the leading 

European hub airports and within the top quartile of our 

European comparator group. 



4 



Our proposition for Q6 

In this chapter, we set out the outcomes we will deliver for passengers 

by the end of Q6, through delivery of our priorities and our propositions. 

The outcomes will be delivered 

progressively throughout Q6 in line 

with the investment plans. This 

business plan is fully integrated, so 

achieving these outcomes depends 

on delivering the total business plan. 




An end-to-end experience 





Increase non-aeronautical charges 






4. Our proposition for Q6 





4.1. Improved 

passenger 

experience 

4.1.1 High quality terminals 

After the opening of T2 in 2014, 

Heathrow’s passengers will be 

travelling through one of the most 

modern set of terminals at a hub 

airport anywhere in the world. 

More than 60% of passengers will 

experience leading-edge ‘new’ 

terminals. The other 40% will 

experience the recently upgraded T4, 

or T3, which will have selective 

investment in Q6 so it continues to 

provide a great passenger experience 

for the remainder of its operational 

life. These improvements, which will 

be done in conjunction with core 

asset replacement, include a modest 

enhancement in T3 in order to 

improve ambience, particularly in 

arrivals and the piers. In T4 we will 

make modest enhancements in the 

arrivals and forecourt areas, building 

on the work done in Q5 which 

focused on the check in and the 

departure lounge. 

Planning for the future, we will also 

commence design and delivery of a 

further phase of T2, for completion 

late in Q7, in order to be able to 

continue to provide high quality 

terminals into the future as 

passenger numbers grow. 

We will target a substantial 

proportion of investments in Q6 at 

replacing or maintaining core assets 

that underpin the passenger 

experience and operation of the 

airport. This will allow us to sustain 

the improvements we made during 

Q5 and provide a strong platform for 

further improvements, ensuring 

effective risk avoidance and legal 

safety compliance. Examples of core 

assets to be sustained include 

replacing lifts, escalators and 

terminal air conditioning, 

refurbishing toilets and floor finishes, 

and replacements for core back 

office systems and infrastructure. 

Many of these asset replacements 

will further enhance passengers’ 

perception and experience and 

enable an efficient operation at 

Heathrow. 







4.1.2 Courteous service and efficient security 

Passengers appreciate the help they 

get from informed, courteous staff. 

Often that help is given by the 

airport’s employees on behalf of all 

its customers. We will continue to 

train all staff – including PRM 

(passengers with reduced mobility) 

operators, cleaners and retail staff – 

to provide a consistent level of 

passenger service. More passenger 

service interactions will be with 

‘mobile’ staff that will use tablet 

computers to provide real-time 

information for passengers when 

they need it. We will make these 

improvements from within existing 

operating cost budgets. 

Throughout Q6 we will sustain 

security improvements delivered 

during Q5 – which have focused on 

reducing waiting times and ensuring 

staff courtesy – while continuing to 

guarantee high levels of safety and 

compliance. 

As described in Section 3.4, we will 

extend our existing baseline level of 

service for direct passengers to 

transfer passengers, so that 99% of 

the time passengers wait less than 

ten minutes - whether a direct 

passenger or a transfer passenger. 

We believe this is the shortest 

passenger security queue standard 

of any major hub in Europe. Within 

the overall baseline service above 

we propose a harmonised upper 

threshold for direct and transfer 

passengers at a level which deploys 

broadly the equivalent overall level 

of capital and operating cost as in 

Q5. To further improve consistent 

baseline service for all passengers, 

we propose moving to an equivalent 

per passenger measure once the 

measurement technology becomes 

available. 

We will continue to explore 

opportunities to improve security, 

considering all possible options. For 

example, one significant opportunity 

would be a policy change by the 

DfT to allow passengers to keep 

tablet computers in their bags at 

security which would improve the 

passenger experience and reduce 

operational costs. 








4.1.3 Smoother journeys 

As airlines are relocated post the 

opening of T2 and prior to the 

closure of T1, terminal capacity will 

more closely match demand, 

enabling a smoother and more 

predictable journey. 

The modern layout in T2 will enable 

simpler flows that passengers already 

experience in T5. Passengers will 

have the choice of using either 

self-service kiosks or self bag-drop 

facilities (subject to successful trials), 

or using full-service check-in desks 

and customer service desks, if they 

wish. Entering security will be faster, 

thanks to automated ticket 

presentation in place across 

Heathrow. 

Passengers will find it easier to find 

their way and to access the very 

latest information, when they need 

it. Some signage will go digital, so 

it can be changed dynamically. 

Wayfinding will be personalised and 

mobile – so passengers can get 

real-time information on their mobile 

device that guides them through the 

airport, using indoor location-based 

services as they become available. 

This, coupled with enhanced 

information on facilities and services, 

will allow them to plan their time in 

the airport. The ambience of 

departure lounges will be more 

relaxed, with a broad range of 

services to appeal to all passenger 

types – from retail and catering, to 

services such as lounges targeted at 

transfer passengers. There will also be 

targeted initiatives to provide extra 

services to specific passenger groups 

– such as PRMs and connecting 

passengers. Complimentary Wi-Fi 

will further enhance the passenger 

experience and enable additional 

services. 

Heathrow will continue to support 

the Border Force (BF) to deliver a 

high quality service. We recommend 

that we should be obliged to publish 

immigration waiting times to give 

passengers greater transparency on 

the service they should expect. 

On arriving in the UK, we aspire that 

passengers’ immigration experience 

will be noticeably different from 

today, with more EEA (European 

Economic Area) passengers using 

automated immigration gates. With 

investment from the BF in 

automated gates and the continued 

roll-out of e-passports across the EU 

(full enrolment by the end of 2016), 

many more of Heathrow’s EU 

passengers could be able to use 

automated gates. All of our progress 

in improving immigration is 

dependent on the support of the BF, 

and so we are working with them to 

achieve this outcome. 

In addition to ensuring smooth 

departures for the passenger, we will 

also improve baggage capacity and 

resilience to enable further 

improvements in the baggage 

product. Passengers can be confident 

in the knowledge that if something 

does not go to plan, they will be 

looked after, and that the airport 

and airlines will work together to 

minimise their stress and enable 

them to progress their journey. 

We will also adopt new technology 

to improve the process and the 

quality of the passenger experience 

as proven technologies become 

available. This will be enabled by the 

more flexible approach to capital 

investment now proposed, and 

through the use of a small 

innovation fund. 



An end-to-end passenger experience 




4.1.4 An end-to-end passenger experience 

Easy access to the airport is a vital 

component of the end-to-end 

passenger experience, so we will 

focus on improving the choice and 

quality of access to Heathrow still 

further. 

Crossrail will replace Heathrow 

Connect to provide direct rail 

services to Central London, the City 

and Canary Wharf. As a result, over 

2.5 million more people will live 

within a 60-minute isochrone of the 

airport, strengthening Heathrow’s 

catchment area. 

Heathrow’s strategic surface access 

infrastructure will have undergone 

significant refurbishment. Targeted 

asset replacement – including road 

and rail tunnels, rail stations, track 

and Heathrow Express rolling stock – 

will provide a more reliable and 

resilient transport network. 

The co-location of Long Stay car 

parks will make them easier to find, 

especially from the west of the 

airport. An additional Personal Rapid 

Transport (PRT) – equivalent to the 

current T5 service – will run from 

Central Terminal Area (CTA) business 

parking to T2 and T3. 

Passengers will start to see a new, 

more efficient CTA as they arrive at 

Heathrow, with a simplified road 

system, the new T2 Multi-Storey 

Car Park 2 and de-cluttering through 

the removal of obsolete buildings. 





Deliver improved 

resilience and sufficient 

hub capacity 

4.2. Improved 

hub capacity and 

resilience 

4.2.1 Enable punctuality and resilience 

The predictability and reliability of 

Heathrow’s schedule shapes 

passengers’ overall experience of the 

airport and its facilities. The more 

predictable the departure schedule, 

the better the passenger experience. 

By the end of Q6, punctuality will 

improve to over 80% – and we 

aspire to move towards 90% – of 

flights arriving or departing within 

15 minutes of their scheduled time, 

through collaboration with NATS, 

the CAA and the airline community. 

This will be achieved through a 

range of initiatives as described in 

Section 3.4. 

We will also develop an Airport 

Operational Control Centre which 

will improve the flow through the 

airport by bringing together the 

information and core people into a 

single location to enable proactive, 

co-ordinated management of 

facilities and manpower required to 

meet the schedule. 

Airspace improvements will 

significantly reduce stacking for 

arriving aircraft and queuing for 

departing aircraft. Revised flying 

times will reduce fuel burn by 10% 

and remove the inefficiencies of 

building surplus time into schedules 

to compensate for excess airborne 

and runway holding times. In 2010 

for example, NATS estimated the 

cost of stacking at Heathrow to be 

£120,000 per day and over 200,000 

tons of unnecessary CO 2 

per annum. 

Throughout Q6 we will sustain our 

underpinning focus on safety and 

start working on initiatives generated 

by both the SESAR programme and 

the European Action Plan for the 

Prevention of Runway Incursions and 

Excursions. Examples include runway 

status lights, the ongoing 

development of Airport CDM, 

surface management systems and 

the first initial steps towards a 

ground-based augmentation system 

as a landing aid to Category IIIb. The 

aerodrome component of European 

Aviation Safety Agency (EASA) 

rulemaking will have been 

completed by 2014, and then 

implemented during Q6. 






hub capacity 

4.2.2 Improve capacity utilisation 

We expect to see passengers 

continuing to benefit from many 

airlines operating their most modern 

aircraft on Heathrow routes and by 

the end of Q6 Heathrow is likely to 

be the busiest A380 hub airport in 

Europe. Heathrow will support these 

developments by investing in new 

and upgraded stands and taxiways 

that can handle these longer, wider 

aircraft. These investments are 

fundamental to providing capacity 

to underpin growth in passenger 

numbers, but are dependent on 

airlines realising their new fleet plans. 

Stands will be re-engineered and 

taxiways re-designed to ensure that 

the flow of aircraft around the 

airfield is optimised. We will provide 

these stands across T2 and T3 to 

serve airline needs, especially for 

new code F aircraft. The step change 

in fuel efficiency and, consequently, 

unit costs offered by these nextgeneration 

aircraft will greatly 

benefit our airlines, and will also 

reduce aircraft noise. 

We will also see big improvements 

on the ground, reducing taxiing 

times, and enabling airlines to save 

fuel and reduce their carbon 

footprint. As T2 is completed we will 

see a more efficient airfield layout 

and the northern taxiway will be 

enabled for code F aircraft. We will 

also address the operational 

challenges facing the airfield – such 

as more frequent operation close to 

the air transport movement (ATM) 

cap, a general increase in aircraft 

size, and continuing growth of air 

traffic elsewhere in the London area. 







hub capacity 

4.2.3 Improve connections and baggage 

Over 80% of passengers connecting 

through Heathrow will enjoy a better 

journey. The expansion and upgrade 

of T5’s connections security area will 

remove a major area of passenger 

dissatisfaction, transforming the 

experience for the 12 million 

passengers every year who connect 

through it, although an optimised 

design solution has yet to be 

determined. Passengers connecting 

through T2 will experience new 

state-of-the-art facilities. 

Connection times for passengers will 

have fallen, with over 60% of 

connecting passengers now both 

arriving and connecting within the 

same terminal. Baggage misconnection 

rates will also improve 

alongside punctuality. 

Heathrow’s baggage performance – 

which is currently leading other 

European hub airports – will get 

even better, with the completion of 

T3’s integrated baggage facility. 

Passengers’ hold baggage will be 

screened by the next-generation 

‘Standard 3’ baggage screening 

machines, as required by European 

Directive and the DfT. And, with the 

T5 to T3 baggage tunnel in full use, 

the baggage connections between 

terminals will be more efficient and 

timely, giving connecting passengers 

a more reliable service. 






hub capacity 

4.2.4 Focus on sustainability 

We are committed to managing our 

airport sustainably – enhancing our 

economic benefits, while cutting our 

environmental impacts and providing 

a safe and secure environment and 

good conditions of employment. 

Running our airport safely and 

securely is our priority for our 

passengers and staff. Safety 

performance showed significant 

improvements over Q5 with 

passenger injuries per million 

passengers down from 1.41 in 2007 

to 0.93 by 2012. Other indicators of 

performance such as staff injuries 

and aircraft related incidents also 

saw reductions over the period. 

However, there is no room for 

complacency and we aim to secure 

further improvements during Q6 in 

order to meet the ever increasing 

moral, legal and financial drivers for 

excellence in safety performance. 

To deliver on our commitment to 

improvement we will seek to: 

• create a culture that is intolerant 

of accidents and incidents 

• establish safety as a core business 

value and embed the concept that 

“good safety is good business” 

• make safety important and 

personal such that it influences 

people’s choices and behaviours 

In practical terms we will continue to 

promote health and safety as a 

unifying theme across all 

stakeholders and seek to exert more 

influence over the many third party 

organisations operating at Heathrow. 

We will also ensure that we are 

responsive to change, for example, 

during asset replacement works that 

create short term risks during the 

execution phase but lead to new 

infrastructure that is safer and more 

economical to operate and maintain. 

By the end of Q6, passengers, 

airlines and local communities will 

notice a marked improvement in the 

airport’s sustainability performance. 

• The development of the airport’s 

energy network will continue, with 

the part-biomass fired T2 energy 

centre linked through to the CTA 

and T5, ensuring efficient use of 

low-carbon heat across the whole 

campus. Terminals will be ‘energy 

smart’, matching the need for 

heat, cooling and power to the 

demands of the passenger and 

operation – saving energy, utility 

costs and cutting CO 2 

. Further 

renewable energy solutions will be 

progressed with photovoltaic 

capability on the roof of T2. 

Continued overleaf > 







hub capacity 

4.2.4 Focus on sustainability (continued) 

• Waste will be segregated at source 

where possible and recycling will 

increase, cutting the need to 

dispose of waste via energy from 

waste incinerators, and to landfill. 

• The number of electrically 

operated operational vehicles will 

increase as Heathrow’s electric 

charging infrastructure develops – 

cutting local pollution levels, and 

reducing operating costs for fleet 

operators. 

• With the opening of T2 and 

through a retrofit programme, an 

increasing number of airlines will 

be able to benefit from preconditioned 

air units that cut the 

fuel cost for airlines while reducing 

local air pollution. This will 

demonstrate that the airport is 

fulfilling its role in meeting local air 

pollution limits. 

• Heathrow’s surface water pollution 

control infrastructure will have 

been improved, providing greater 

resilience for future weather 

events and supporting the airport’s 

ongoing commitment to 

compliance with regulatory 

standards. De-icer recovery activity 

on the airfield will continue to 

increase and, if technology trials 

prove to be successful, we will see 

increasing levels of de-icer being 

extracted and recycled from 

surface water, reducing the 

pollution load requiring treatment. 

• The airport will increasingly use 

water from non-potable sources to 

reduce demand on the public 

water supply. Wherever water 

from the public supply is 

consumed, the water-using 

systems will be designed and 

specified to minimise water 

consumption through the use of 

water-efficient fittings. 

Although aircraft movement figures 

were similar between the start and 

end of Q5, we have seen good 

progress in reducing the size of our 

noise contours. 

Between 2006 and 2011, the area 

within the 55dBA Lden has fallen by 

around 9% (this is the standard 

European measure for noise from all 

forms of transport, which measures 

average noise above 55 decibels over 

the course of the day). A significant 

part of this reduction is as a result of 

the replacement of older aircraft 

with newer, quieter variants and the 

introduction of new aircraft types 

such as the A380 and B787. In part 

this is incentivised by Heathrow’s 

aeronautical charge structure that 

provides for lower prices for quieter 

planes. Heathrow will continue to 

encourage the use of quieter aircraft 

as well as pursuing opportunities to 

trial operational procedures to 

reduce noise impacts. 

Among other steps, during Q6 we 

will see the roll out of improved 

noise insulation schemes to the 

local community and enhancements 

in our noise and track monitoring 

systems to enable the provision of 

information in a more accessible 

format. We will be setting out our 

approach on noise in a separate 

document during the course of 2013. 



Increase non-aeronautical revenues 

Ensure a competitive 

total cost of operation 

4.3. Competitive 

total cost of 

operating at the 

airport 

4.3.1 Increase non-aeronautical revenues 

Commercial revenues will grow 

further in Q6 through a range of 

initiatives and investments. At the 

same time, we will continue to 

achieve the combined goals of 

growing commercial revenue in 

the single till and enhancing 

passenger experience. 

The new T2, and improvements 

to retail in T5, will offer passengers 

an enhanced departure lounge 

experience and an exciting selection 

of brands. We will develop new 

products and services, particularly 

in the premium range, to enhance 

income and offer passengers 

greater choice, including enhanced 

lounge facilities for passengers. 

Improvements to car park capacity 

and connectivity will also enhance 

passenger journeys, grow commercial 

income and improve the sustainability 

of the car park operation. 

The Heathrow Journey Team will 

continue to provide a multilingual 

service that improves passenger 

experience and encourages retail 

expenditure. Also, e-business and 

digital media investments will 

leverage emerging technologies to 

provide more flexible and personal 

channels for passenger 

communication and marketing. 




Retire old facilities & Increase airport operational efficiencies 



4.3.2 Retire old facilities 

As T2 opens, T1’s passenger 

throughput will decrease, having a 

major impact on Heathrow’s total 

operational costs. We have now 

concluded, through the occupancy 

review, that we will be able to close 

T1 to passengers (excluding the 

baggage system which is required to 

support T2) at the end of 2016. This 

will follow a period when airlines will 

move into the new T2 and other 

terminals. It will also enable further 

reductions in operational costs – 

though the closures will require 

some investment in facilities to 

enable these moves. There are some 

risks involved in the closure of T1, 

such as the impact on pier service, 

which we will continue to assess and 

attempt to mitigate. 

4.3.3 Increase airport 

operational efficiencies 

An efficient operating cost base is 

critical for delivering value to 

passengers and airlines. Heathrow is 

therefore continually focused on 

ways to reduce operating costs. 

Reductions so far in Q5 are evidence 

of this, during which by 2011/12 we 

have effectively achieved the 1.5% 

compound annual growth rate 

(CAGR) reduction in real operating 

costs envisaged in the Q5 

determination. 

Fundamentally, the drive for such 

solutions within Q5 has allowed the 

airport to enter Q6 with an improved 

operational cost base. 

We will accelerate efficiency initiatives 

in Q6, with a range of additional 

solutions such as energy demand 

management and other initiatives. 






4.3.4 Support the reduction in airline costs 

Heathrow Airport strives to be an 

efficient place for airlines to operate, 

by providing the appropriate 

infrastructure and service 

proposition. Fuel costs, staff costs, 

ground and baggage handling costs 

together represent well over two 

thirds of a typical network airline’s 

cost base. So, the better Heathrow 

can deliver support through 

appropriate infrastructure and service 

in these areas, the better it is for our 

airline customers. 

Investing in new, larger stands 

enables Heathrow to handle more 

next-generation aircraft. These new, 

long-haul aircraft typically reduce 

airline fuel costs by around 20%. 

Investing in leading-edge baggage 

systems has enabled the Heathrow 

community to more than halve the 

baggage mis-connect rate in recent 

years. At £100 of airline cost per 

mis-connected bag, the 

improvement across Heathrow now 

represents a saving of around £50 

million per year. 

We recognise that, at times, there 

are new solutions and investments 

which will increase our operating 

costs, but will reduce airlines’ 

operational costs or significantly 

benefit our resilience and passenger 

experience. 

For example, many airlines have 

been realising significant cost 

efficiencies by reducing their 

numbers of ground staff thanks to 

Heathrow’s investment in common 

user self-service kiosks. Future 

investment in self-service bag drop 

facilities will enable further 

reductions, for example our current 

plans for roll out of self-bag drop in 

T2 and T5 could reduce airline costs 

by the order of £1.5 to 3.5 million 

per annum. Delivery of further preconditioned 

air and fixed electrical 

ground power units also enables 

airline cost reduction, through 

reduction in the use of aircraft 

auxiliary power units. 

While these projects increase 

Heathrow’s capital and operational 

expenditure, this investment will be 

offset by a reduction in airline costs. 

We nevertheless need to work 

further with airlines to quantify this 

for individual business cases. 




4.4. Summary 

As described in this chapter, our proposition for Q6 will continue to improve passenger experience at Heathrow. 

Our propositions support the end to end passenger journey for departing, arriving and transferring passengers, 

as shown in Figure 4.1. 

Figure 4.1: Improvements across the passenger’s journey in Q6 

Simpler parking 

New pod system 

Option for 

self bag drop 

Consistently 

courteous service 

Automated ticket 

presentation 

New retail brands 

and lounge products 

Improved punctuality 

Enhanced resilience 

Free Wi-Fi 

Information 

on the go 

A new 

Terminal 2 

Retire 

Terminal 1 

Focus on 

sustainability 

Extensive asset 

replacement 

Crossrail service 

in operation 

Improved reliability 

of baggage delivery 

Quicker connections 

Capacity for new quieter 

and fuel efficient aircraft 




5 



Aeronautical charges 

This chapter outlines the aeronautical charges necessary to give effect to the 

outcomes and improvements to passenger experience described in Chapter 4. 

5.1. Q6 aeronautical charges 

Under the regulatory model, Heathrow Airport’s 

aeronautical charges for Q6 are driven by the division of 

the required aeronautical revenue by the volume of 

passengers using Heathrow: 

• Volume of passengers using Heathrow – this plan uses 

the latest forecast of 355.2 million passengers over Q6. 

The Q5 settlement forecast 76.2 million passengers in 

2011/2 while the outturn was 70.1 million. This 

shortfall will continue throughout the remainder of Q5 

and Q5+1, resulting in the need to reset the price to 

reflect the lower base level of passenger numbers as 

we enter Q6. Even by the end of Q6, we expect 72.6 

million passengers per year through Heathrow – still 

substantially less than the forecast for the end of Q5; 

• Required aeronautical revenue is in turn made up of a 

number of critical components: 

- Extent of historic capital investment – £11 billion will 

have been invested over the period 2003 to 2014 (Q4 

and Q5); 

- Operational cost implications of larger and improved 

facilities such as T5 and the new T2 – T5 costs £125 

million per year 6 to support; 

- Ability to subsidise aeronautical income with income 

from commercial activities, which is significantly 

affected by economic factors; 

- Extent of services delivered as Other Regulated 

Charges (previously called Non-Regulated Charges) 

and recovered at cost – around 20% of the 

cost base. 

The price is a function of the single till regulatory model 

as shown in Figure 5.1 and can be seen to be £24.56 

averaged over Q6. Broadly, non-aeronautical revenue 

streams offset operational expenditures, and so in one 

sense aeronautical charges equate to the cost of past 

investments in the airport. It is also apparent that the 

overwhelming proportion of capital costs (depreciation 

and the return on RAB) relates to pre-Q6 expenditure, 

and represents a fixed cost to the business. 

Figure 5.1: Breakdown of the price 

40 

35 

30 

Opex 

Commercial 

£ / passenger 

25 

20 

15 

10 

Depreciation 

Q6 Capex - Depreciation 

Pre Q6 Capex - Depreciation 

Q6 Capex - Return 

ORC 

£24.56 

5 

Return on RAB 

Pre Q6 Capex - Return 

0 

6 

2011/12 prices. 



5. Aeronautical charges 

Table 5.1 shows the indicative price profile for delivering 

the outcomes we describe above. Using the same 

methodology as for the Q5 calculation, the value of ‘X’ 

in Q6 is 5.9%. 

The investments Heathrow makes have lives well beyond 

Q6, and so it is important to look also at the implications 

of the Q6 plans for future quinquennia. We have not 

attempted any detailed modelling over this longer term 

time horizon, but Table 5.1 gives illustrative projections, 

assuming capital expenditure of just over £4.5 billion in 

Q7. Although tentative, these projections do illustrate 

that real aeronautical charges will fall between Q6 and 

Q7, from an average £24.56/passenger in Q6 to £23.03/ 

passenger in Q7. The change in the value of ‘X’ is even 

more pronounced from X=5.9% in Q6 to X=-5.8% in 

Q7, due to the ‘over-shooting’ property of the ‘X’ 

calculation where below/above returns at the beginning 

of a quinquennia need to be profiled by above/below 

returns at the end of the period. 

Alternatively, the price could be adjusted by using an 

initial adjustment (known as a P 0 

adjustment) to address 

the shortfall in passenger numbers in Q5, leaving the 

value of ‘X’ to account for Q6 factors only. Table 5.1 also 

shows this alternative price path where an initial 

adjustment of 10% is made to prices at the start of Q6 

(roughly the amount needed to adjust for the lower than 

anticipated passenger numbers at the start of Q6), 

followed by a lower level of ‘X’ of 2.6% in subsequent 

years. The value of ‘X’ is lower under this profile because 

it no longer needs to absorb the impact of the resetting 

of the passenger forecast. The price profile for both 

these options is shown in Figure 5.2. 

Heathrow is also considering the potential to realign 

regulatory and financial years. This would significantly 

enhance transparency between regulatory and statutory 

accounts. The implications of this are to reduce the Q6 

value of ‘X’ from 5.9% to 5.4% due to the cash flow 

benefit of bringing forward price revisions from April to 

January. 

In the following sections we describe the major factors 

that influence the aeronautical charge level and profile. 



Table 5.1: Q6 prices for 5-year Q6 and Q7 

£ million, 

2011/12 prices 

2014/15 2015/16 2016/17 2017/18 2018/19 Total Q6 2019/20 2020/21 2021/22 2022/23 2023/24 Total Q7 

'X' 0% 5.9% -5.8% 

Yield per passenger 7 21.97 23.25 24.50 25.81 27.30 24.56 8 25.76 24.32 22.95 21.67 20.45 23.03 

Passengers 69.5 70.3 71.0 71.8 72.6 355.2 73.4 73.9 74.4 74.9 75.5 372.1 

'X' 10% 2.6% -3.6% 

Yield per passenger 23.33 23.94 24.47 25.00 25.65 24.48 24.75 23.89 23.06 22.26 21.49 23.09 

Passengers 69.5 70.3 71.0 71.8 72.6 355.2 73.4 73.9 74.4 74.9 75.5 372.1 

Figure 5.2: Price profile over Q6 & Q7 

29 

27 

Yield per passenger (£) 

25 

23 

21 

19 

17 

2013/14 

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 

Yield per passenger Q6 and Q7 Yield per passenger Q5 + 1 Yield per passenger Q6 and Q7 P 0 

Adjustment 

7 

Yield per passenger is profiled by RPI-X price cap formula 

8 

Arithmetic average of profiled yields 




5.1.1. Capital investment 

Capital investment at Heathrow, financed by shareholder 

equity and issuing of debt, is repaid through the building 

block model by depreciation charges to repay the 

original capital investment, and a return on the RAB (or 

the cost of capital) to compensate for the financing costs 

taking account of the risk of investment. 

Heathrow has invested heavily over recent years to 

enhance passenger experience and deliver efficiencies for 

the airlines. Individual investments over Q5 have 

included: 

• Enhancing the passenger experience by replacing T2 

with a new terminal; 

• Improving baggage performance and airline 

efficiencies by delivering a new baggage system for T3; 

• Improving pier service by delivering T5C. 

For Q6 this investment will become embedded in the 

RAB, and will be reflected in the building block 

calculations through the return on RAB and depreciation 

charges. 

Heathrow will continue to invest over Q6 – our plan is 

based on £3 billion of investment 9 which will impact the 

return on RAB, depreciation and operational costs in Q6 

and beyond. The broad composition of the capital plan is 

shown in Table 5.2. 

Table 5.2 Capital investment split by priority 

Priority 

Capital 

investment 

We believe that a £3 billion capital investment plan is 

appropriate for addressing our priorities during a period 

of low passenger growth while also recognising airline 

concern on “affordability” – both during Q6 and to 

reflect the impact of new facilities on the charge in Q7 

and beyond. We believe that a capital investment plan of 

less than £3 billion would lead to insufficient capacity to 

support anticipated growth and this would inevitably 

compromise passenger experience. At £3 billion we are 

able to take a step towards the Masterplan, enabling the 

long term improvement of the hub. 

The efficient level of capital costs will be affected by an 

airport’s operating environment. Among European 

airports, there is a strong correlation between capital 

expenditure levels and metrics indicating levels of 

operational congestion. 

Heathrow continues to ensure efficient delivery of capital 

projects and has put in place a comprehensive 

methodology to enable this. Compared to other airports, 

Heathrow faces various innate disadvantages that will 

have an impact on the cost of projects. In particular, its 

restricted land footprint 10 increases the cost of 

construction of new facilities at Heathrow due to 

extensive site preparation, the need to maintain 

operational continuity during construction, and the 

extent of vertical build design. This is why capital costs at 

Heathrow will generally be higher than at other, less 

constrained airports. Over time, this feeds through to the 

value of Heathrow’s RAB. 

Passenger experience 

(including T2, baggage systems and 

surface access) 

Hub capacity and resilience 

(including Airport resilience) 

£1,640m 

£450m 

Asset replacement £910m 

9 

Our investment plan has been calculated to be £3 billion in 2012/13 construction prices, equivalent to £3.4 billion in nominal prices. For the purposes of the business plan this is deflated 

back to 2011/12 prices using RPI, giving a £3 billion plan. 

10 

Heathrow has limited footprint. LHR: 1,147 ha, FRA: 2,200 ha, AMS: 2,788 ha, CDG: 3,200 ha. Clearly Heathrow’s footprint would increase in the event of the build of a third runway. 



5.1.2. Operational costs 

Q5 to 2011/2 

Q5 has been an important part of Heathrow’s journey to 

an efficient operating cost base. Overall operating costs 

have fallen by £41 million per annum between 2008/9 

and 2011/12 (2011/12 prices). In terms of operating cost 

performance compared to the CAA Q5 decision, by 

2011/12 Heathrow has effectively achieved the 1.5% per 

annum underlying cost reduction included in the CAA 

decision. 

Remainder of Q5+1 

For the remainder of Q5 and the extension year we have 

sought initiatives that have prepared us for an efficient 

cost base at the beginning of Q6. This will enable us to 

accelerate our journey to exceed the overall underlying 

cost reduction set out in the Q5 settlement by the end of 

Q5+1, and place Heathrow firmly on the efficiency 

frontier for similarly large European hub airports. 

Q6 

Planning forward to Q6 we will face a number of 

structural changes to the cost base, mainly related to 

new infrastructure: 

• T2 will become operational in 2014 although we plan 

to close T1 to passengers by the end of 2016; 

• New IT infrastructure to enhance passenger 

experience, including self-bag drop and free Wi-Fi; 

• Other business cases which change the scope of 

services provided to passengers and airlines, or benefit 

the single till through commercial revenues. 

In addition some uncontrollable costs will rise in real 

terms. Principally this will be rates and utility costs which 

will not only rise as a result of the new infrastructure but 

also rising real unit costs – the consequences of rates’ 

revaluations in the UK, and anticipated strain on energy 

prices from the government’s environmental objectives. 

However, in Q6 we will continue to drive productivity 

solutions, both through capital investment and process 

efficiency initiatives, as well as seek other cost savings. 

Overall, after excluding the structural factors, our plan 

implies an underlying operational cost reduction of 1.4% 

CAGR over Q6, equivalent to a cumulative cost saving of 

£248 million over Q6. This represents a significant 

reduction in our cost base as it equates to nearly 2.8% 

CAGR in terms of the controllable cost base. 11 

It must be appreciated that there is risk around achieving 

this target due to firstly unforeseen implementation 

difficulties, and secondly unforeseen events outside of 

the control of Heathrow. This, however, is a risk that 

investors in Heathrow bear. 

Q6, therefore, will see two kinds of efficiency benefit: 

• The benefit of a fully efficient and optimised cost base 

as we enter Q6; 

• The benefit of on-going pressure to remain at the 

efficiency frontier. 

The impact of this on total operational costs is shown in 

Figure 5.3. After account is taken of the impact of T2 

opening, T1 closure to passengers and rates revaluation, 

it is possible to see the impact of these operational 

efficiencies. 

Figure 5.3: Evolution of Heathrow’s operating costs 

1,115 

1,070 

£m 11/12p 

1,025 

980 

935 

2008/09 

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 

Opex Opex excluding T2 and T1 close Opex excluding T2, T1 close and rates evaluation 

NOTE: Graph line colours amended 05/02/2013 to correctly match key 

11 

Excluding such items as rents, rates and utility costs. 




5.1.3. Revenues 

Heathrow has two important revenue streams that 

offset costs: 

Other regulated charges (ORCs) 

ORCs allow for separate recovery of a significant 

proportion (around 20%) of the operational cost base 

and an annuity towards some capital costs. The value of 

ORCs will increase substantially for Q6 primarily due to 

the inclusion of Q5 capital expenditure (previously 

recovered via airport charges) in the ORC annuities and 

the impact of Q6 capital projects. This results in a 20% 

increase in ORC revenue. 

Commercial revenues 

Our plan is to deliver real commercial revenue growth of 

1.2% CAGR through Q6 to substantially mitigate 

operational costs. Commercial revenue will continue to 

grow through a range of initiatives and investments as 

described in Section 4.3.1, while continuing to achieve 

the combined goals of growing commercial revenue in 

the single till and enhancing passenger experience. 

5.2. Downstream market 

impact 

The impact of the business plan, particularly the 

proposed level of Heathrow’s aeronautical charges, on 

downstream markets for air travel into and out of 

Heathrow will of course have some bearing on the 

market dynamic. 

As noted in section 5.1 above, it is well understood that 

the Q6 price is a function of the agreed assumptions and 

the building blocks. The regulated price should therefore 

be based on the efficient cost of services and the 

infrastructure invested in, at risk, by Heathrow’s 

shareholders, and not determined according to the 

sustainability of certain downstream business models, or 

some hypothetical downstream market construct. 

Forecast passenger growth in Q6 is one of the factors 

that limits the amount of capital expenditure proposed 

to be undertaken in Q6 - with some consequent impact 

on prices particularly in Q7. But the fact remains that 

past investment undertaken at Heathrow must be taken 

into account in the Q6 building block model. 

Competitiveness is determined by an airport’s overall 

attractiveness to passengers and airlines, and as 

described in this business plan, Heathrow’s propositions 

for Q6 will further improve Heathrow’s infrastructure, our 

operations and resilience, and the overall passenger 

experience. Heathrow will continue to provide a 

competitive service to airlines and passengers. 

‘Affordability’ is another concept, which is not so well 

established, that can only be effectively considered 

relative to an individual airline’s business model. 

Different airline passenger profiles, different airline cost 

structures and inter-temporal considerations illustrate the 

challenge Heathrow faces in seeking to balance a 

number of competing interests and priorities – all 

pointing to very different affordability boundaries for 

each individual airline. 



Notwithstanding, from a comparative and absolute 

perspective, we believe Heathrow remains ‘affordable’. 

Our analysis shows that airlines are able to earn 

comparable returns on operations at Heathrow relative 

to those achievable at other European hub (comparator) 

airports. 

Moreover, any analysis of historic and future price levels 

must be properly contextualised, and not considered on 

a stand-alone basis, or in abstract terms. Airport charges 

must be considered in the context of ticket prices and 

airfares, unit or aggregate airline revenues and airline 

profitability derived from operations at Heathrow. For 

example, the revenues generated by airlines – on a per 

seat basis – on both short- and long-haul routes from 

Heathrow are higher than at Frankfurt, Charles de Gaulle 

and Amsterdam. This is down to passenger mix and fare 

levels at Heathrow, and load factors. From an EBITDA 

perspective, airlines at Heathrow tend to generate higher 

margins at Heathrow relative to non-Heathrow 

operations, with ~£23 additional EBITDA per 1000 ASKs 

(airline seat kilometres) at Heathrow. 

Similarly, we understand that the average attainable 

yields for airlines operating at Heathrow are greater than 

those attainable at comparator airports. The higher 

proportion of premium and long-haul traffic at Heathrow 

is consistent with the observation that airline yields at 

Heathrow are at least 15% higher than those achievable 

of other European hub airports. This is shown in Figure 

5.5, which sets outs average yields for 2007 to 2011 for 

a number of European hub airports. 

In other words, Heathrow is currently competitive relative 

to other major European hub airports, and we intend to 

stay that way throughout Q6. Airlines are able to operate 

profitably to fill all of Heathrow’s available capacity, as 

shown by the market value of Heathrow’s landing slots – 

calculated by Deloitte to be the most valuable of any 

European airport. 12 

Figure 5.5: Average airline yields 2007-2011 

0.18 

Yield ($) 

0.16 

0.14 

0.12 

Average yields 

15% greater 

than at Charles 

De Gaulle 

0.10 

0.08 

2007 2008 2009 2010 2011 

Source: Ernst and Young analysis/IATA Intelligence service 

Amsterdam Frankfurt Heathrow Charles De Gaulle 

12 

If airlines were not able to operate profitably from Heathrow, slot values would be zero. However, Deloitte have estimated the market value of a pair of Heathrow’s landing slots to be 

around £25-30 million – higher than those of either Frankfurt or Charles de Gaulles. See http://www.deloitte.com/view/en_gb/uk/969833d0303fb110VgnVCM100000ba42f00 

aRCRD.htm 



6 



Dependencies and risks 

This chapter sets out and assesses the dependencies and risks to this business plan. 

6.1. Regulatory model 

We recognise that the CAA may be required to 

determine an appropriate form of regulation at 

Heathrow based on a detailed assessment of market 

power – and that any proposed regulation be designed 

to help ensure the CAA meets its statutory duties (a key 

part of which is of course the passenger interest). If the 

CAA determines that Heathrow has Significant Market 

Power (SMP) and that it needs continued price 

regulation, a regulatory framework will be required. 

Consistent with the CAA’s policy to date, the CE 

process and industry discussion, this business plan 

broadly assumes a continuation of the existing 

regulatory construct – a RAB-based single till following 

a simple ‘building block’ approach. Table 6.1 

summarises the key features and assumptions that we 

have adopted within this approach. 

Table 6.1: Key assumptions in the building block model applied in the Full Business Plan 

Assumption 

Building block model 

Price control and duration 

Regulated Asset Base (RAB) 

Single till 

Explicit volume 

risk-sharing 

Service quality 

Weighted average cost of 

capital (WACC) 

Passenger forecasts 

Other regulated charges 

(ORCs) 

Security costs 

Noise 

Costs of Heathrow 

expansion 

Detail 

As per current practise, we assume a building block model where the regulated aeronautical price is calculated ex ante to 

fully recover the expected costs (less expected commercial non-aeronautical revenues) over the expected passenger numbers. 

Heathrow, therefore, bears the risk that ex post actual recovery will fall short of this amount, and in consequence receives a 

risk adjusted cost of capital. Indeed, Heathrow failed to recover actual costs in Q5, primarily due to the shortfall in passenger 

numbers 

As per current practice and CAA policy to date, we assume a ‘RPI+/-X’ form of control over a five-year period. We also 

consider alternative cases of aligning calendar and financial years (to aid comparison with statutory accounts and align with 

Heathrow’s planning processes) achieved by subtracting three months off the first year of the price control period 

As per current practice, CAA policy to date and CE, we assume a RAB-based construct from which we calculate regulatory 

depreciation and the return on RAB 

As per current practice and CAA policy to date, we assume a net revenue requirement consisting of efficiently incurred 

operational costs, regulatory depreciation, a return on the RAB, less commercial income 

We do not assume any form of volume risk-sharing. Our business plan is based on an appropriate allocation of risk 

consistent with the assumed passenger volumes and the estimated cost of capital 

The Service Quality Rebate (SQR) scheme will continue, albeit with modifications 

As per current practice across all regulated sectors, we calculate the required return on RAB (or the cost of capital) by a 

WACC, using the Capital Asset Pricing Model (CAPM) to determine the cost of equity component. A lower WACC would 

need to be accompanied by other changes to the regulatory settlement to reduce the level of risk to the business 

Passenger forecasts are based on the expected number of passengers using Heathrow, allowing for a statistically expected 

level of ‘shock’ events 

As per current practice, ORCs are set on a cost pass-through basis for other services provided by Heathrow 

We assume the same ‘S’ factor regime as in Q5, to protect Heathrow against unanticipated changes in security requirements 

Our business plan allows £25m over Q6 to cover the cost of noise mitigation programmes (excluding any resulting from 

Heathrow expansion – see below). This expenditure should not be subject to the normal incentives for minimisation, and 

there are also risks that Heathrow will be exposed to payments higher than this. For this reason we assume there will be a 

cap a collar mechanism to protect Heathrow from large unexpected overspend and similarly to ensure that airlines get the 

benefit of any material underspend 

Departing from existing practice, any incurred costs in Q6 from Heathrow expansion through either runway expansion or 

mixed mode operation will be covered under a Notified Items approach 



6. Dependencies and risks 

6.1. Regulatory model (continued) 

A fundamental shift in regulatory policy towards a 

new construct – particularly at a time of legislative 

and economic turbulence – would increase uncertainty 

and risk, distort incentives to investment, and possibly 

create an unnecessary burden on both the regulator 

and market participants, while adding no immediate 

additional value. Moreover, a shift in regulatory 

policy – which has an adverse effect on the RAB and 

by definition, Heathrow’s financing structure and 

business – is likely to also have an adverse effect 

across the value chain. 

As stated above, Heathrow has developed its business 

plan based on an assumption of a RAB-based single till 

regulatory construct. Given the interdependent nature 

of the variables within the ‘building block’ model and 

the inter-temporal nature of regulation and incentive 

structure at Heathrow, any amendments to the 

regulatory construct will have an impact on the 

business plan. 

6.2. Licence 

Heathrow remains keen to ensure that the development 

of proposals on the structure of the licence and its 

content proceed simultaneously to the development of 

the wider Q6 review. It will be critical for Heathrow and 

all stakeholders to have an early and clear understanding 

of how regulatory policy is intended to operate through 

the proposed licensing framework. 

The new licensing framework will bring significant 

changes to the regulatory regime and may also have a 

bearing on the type of regulation. This business plan is 

based on an assumption that the new legislative and 

licensing framework will not materially affect either how 

Heathrow is regulated, or the assumed regulatory 

construct. For example, the business plan does not allow 

for any additional cost which may arise as a result of new 

licence conditions or related regulatory requirements. 

However, there are clearly potential risks to Heathrow. 

Uncertainty and risk associated with the legislative and 

licensing process could directly impact market and 

investor confidence in what is a highly capital intensive 

business. 

6.3. Government policy 

The business plan is based on the existing two-runway 

Heathrow, in accordance with current government policy. 

There is however the possibility of a change to 

government policy, for example permission for a future 

expansion at Heathrow. Any change in government 

policy will have an impact on this plan, and in particular 

we assume will trigger expenditure under a ‘Notified 

Items’ approach. 

See Box 6.1 on sustainable hub capacity growth. 


Box 6.1 

Sustainable hub capacity growth 

The Heathrow hub is of great value to 

the UK – for the economy, for society 

and for consumers. It fosters trade and 

investment, and links Britain to an 

increasingly globalised world. 

What matters most to travellers is being able to get to 

where they want, when they want. As the UK’s 

international hub airport, Heathrow has been central 

to maintaining the UK’s connectivity to global markets 

for more than fifty years. The characteristics that have 

enabled this are: 

• A strong set of network airline customers that use 

the airport as a transfer hub; 

• The scale to operate a large route network and 

frequent flights; 

• Terminal facilities and systems that have been 

designed to quickly transfer passengers, their 

baggage and cargo between aircraft; 

• A great geographical location for attracting local 

direct passengers – close to London and at the 

heart of demand for business travel; 

• Effective integration into road and rail connections. 

Much of Britain’s motorway network has been 

planned so that it connects to Heathrow; 

• An excellent geographical location for connecting 

transfer passengers between large international 

markets such as Europe and 

North America. 

In order to protect this connectivity, the Davies 

Commission has recently been appointed with a 

remit to consider options for maintaining the UK’s 

status as an international hub for aviation. The 

Commission has been tasked with examining the 

scale and timing of any requirement for additional 

capacity to maintain the UK’s position as Europe’s 

most important aviation hub. In doing so, the 

Commission will provide an interim report to the 

Government no later than the end of 2013, and 

a final report by the summer of 2015. 

All of the hub capacity options to be considered by 

the Commission could be grouped into three 

categories: 

1 Dual hubs in which Heathrow and another airport 

such as Stansted or a new Thames Estuary airport 

both develop and operate as standalone hubs in 

their own right; 

2 A split hub or ‘virtual hub’ in which Heathrow and 

another airport such as Stansted or Gatwick are 

joined together by a high speed rail connection for 

transfer passengers to operate a single hub that is 

physically separated over two sites; 

3 A single hub in which Heathrow adds new runway 

capacity or Heathrow is closed and a replacement 

hub airport provides new UK hub capacity. 

The choice for the UK is not between two hubs or 

one, but between one hub or none. Only a single 

airport can operate as a hub in the UK. That leaves 

three options for the UK Government: it can do 

nothing and let the UK fall behind its European 

competitors at the cost of lost growth and jobs; it can 

add additional capacity at Heathrow; or it can close 

Heathrow and replace it with a new hub airport. The 

pros and cons of each option should be carefully 

considered and each proposal should be rigorously 

assessed against the UK’s future air transport needs. 

Heathrow will continue to make the case for 

increased hub capacity to defend the hub and 

improve connectivity. In the meantime, we will 

continue to focus on delivering sustained, meaningful 

improvements to the passenger experience in the 

broadest sense: getting to, travelling through and 

flying from the airport. 




6.4. Risks to the cost base 

6.4.1. Cost Forecasts 

There are a number of significant risks to the cost 

projections shown in this plan. These risks are covered in 

Chapter B6, but the most material are: 

• Unprecedented volatility in energy prices – only part of 

which is passed on through ORCs; 

• Material changes in security requirements and 

regulations may make the security cost forecasts 

invalid and inadequate – only part of which could be 

recovered by the ‘S’ factor; 

• The operational costs of new facilities such as T2 are 

difficult to forecast precisely, in the absence of any 

historic actual costs; 

• The timing of T1 closure in order reduce operational 

costs, is dependent on a series of projects, many of 

which are dependent on third party projects; 

• Shocks such as meteorological events, industrial action, 

or one-off events that change passenger volume 

profiles (such as the Olympics) have an impact on the 

cost base when they occur; 

• Pension liabilities are subject to demographic and 

investment return uncertainty, and the outcome of 

triennial negotiations with trustees. 

6.4.2. The economic environment 

The business plan has been developed at a time of 

considerable on-going economic uncertainty. For 

example, if the risks to a deeper European recession 

materialise, this would of course have wider economic 

impacts and will almost certainly affect demand at 

Heathrow and elsewhere. Similarly, risks of a slowdown 

in the US following removal of fiscal stimuli, or slower 

growth in China impact on Heathrow. Both the 

passenger numbers and the commercial revenue at 

Heathrow are highly sensitive to the macro-economic 

assumptions made. 

6.4.3. Airline developments 

Airlines may delay or cancel fleet upgrades, fail or merge, 

and new airlines may acquire landing slots at Heathrow. 

Each of these will have impacts on the passenger 

forecast and the facilities and services required at 

Heathrow, and the corresponding operating cost. 

We have assumed within this business plan that the 

recent decision on terminal occupancy – instigated due 

to the acquisition of bmi by IAG – is final. 



6.4.4. Failure of collaboration 

Service delivery to airport passengers is down to a set of 

processes that are integrated across several operating 

parties. These include the airlines, the airport itself, 

ground handlers, border agencies, and all their service 

partners. Opening a new terminal such as T2 requires the 

design, implementation and proving of processes across 

all those impacted by the terminal’s operation. In the 

case of T2, alliance co-location and a revised terminal 

occupancy mean a new and different set of parties will 

be working together. 

Integrating these processes across the different operating 

parties depends on them collaborating and working 

effectively. CE has demonstrated strong collaboration 

and provides a platform for stronger integrated working. 

Heathrow Airport recognises the importance of 

stakeholder engagement and therefore the process of 

developing a revised governance framework with the 

airlines, to enable and support collaboration. 

The business plan has been developed on the basis of 

continuing and improving collaboration with the airline 

community. Without this some of our aspirations would 

not be achieved and could have a financial impact on the 

business plan. It should also be recognised that the 

consequences of ineffective collaboration may have 

wider knock-on consequences. 

6.4.5. Policy Change 

There is potential for policy changes which might affect 

this business plan, for example around passenger or 

baggage security standards. Some policy changes, for 

example allowing passengers to keep tablet computers 

in their bags at security, have the potential to improve 

both the cost of providing passenger security and 

improve the passenger experience, whilst other policy 

changes could increase costs. 



7 



Conclusion 

This Full Business Plan sets out our plans to continue 

to improve the passenger experience during Q6, delivering 

real benefits for passengers, airlines and Heathrow Airport. 

At the request of the CAA, this document sets out a 

single set of consolidated and integrated financial 

projections for our business and the implied level of 

aeronautical charges necessary to support this plan. We 

believe that this business plan provides a robust basis for 

the CAA to develop its Initial Proposals for Q6 in April. 

Since 2003, we have invested over £11 billion and 

consistently focused on service delivery. We plan to invest 

a further £3 billion during Q6. Our investments have 

transformed the airport so that the majority of our 

airport infrastructure has been developed or redeveloped, 

as shown in Figure 7.1 overleaf. 

Our investments have and will continue to generate 

additional employment in the UK, both directly through 

the supply chain, and through the additional trade and 

economic activity that better air connectivity brings to 

the UK economy. 

We have defined a clear proposition for Q6 which 

focuses our efforts on passenger experience, hub 

capacity and resilience and a competitive total cost of 

operation, and we have developed an aggressive 

efficiency plan to achieve a 6.8% cumulative reduction in 

underlying operating cost over the quinquennium. 

The shortfall in passenger numbers in Q5, which is 

currently 10% below the level anticipated in the Q5 

settlement, results in the need to reset the price as we 

enter Q6. This will not allow recovery of Q5 revenues but 

simply ensures the correct passenger forecast for Q6. 

Together with the need to pay off the debts arising from 

historic capital investment, this results in the need for 

aeronautical charges to rise in Q6. This continuous 

improvement, investment and the efficiencies proposed 

will ensure that charges are kept to a minimum whilst 

delivering the passenger experience and service 

proposition so much desired by Heathrow’s airlines. 



Figure 7.1: Infrastructure transformation Q4 to Q6 

Terminal 5 

T5 A & B 

T5 – T3 airside road tunnel 

Energy centre 

T5C 

T5 – T3 transfer baggage tunnel 

Personal rapid transit 

Self bag drop 

Retail enhancements 

Additional security capacity 

Airfield 

Southern runway resurfacing 

Northern runway resurfacing 

A380 taxiways 

Surface access 

Car park enhancements 

Personal rapid transit 

Terminal 3 

Car park & forecourt 

Pier 6 and A380 stands 

Integrated baggage 

Check-in, lounge & 

reclaim refurbishment 

A380 stands 

Ambience improvement 

Central Terminal Area 

Road realignment 

Crossrail 

Station access 

Campus 

Asset replacement 

Energy centre 

Airport operations control centre 

Aviation fuel storage 

Key: Q4 Q5 Q6 


Terminal 1 

Departure lounge extension 

Check-in refurbishment 

Baggage system enhancements 

Closure 

Terminal 2 

T2A 

T2B Phases 1 & 2 

T2 Car park 

T2 stands 

T2 Taxiway 

Self bag drop 

Commence T2 Phase 2 

Terminal 4 

Check-in extension 

Lounge, security & 

connections refurbishment 

A380 stands 

Baggage systems enhancements 

A380 stands 

Crossrail 



heathrow.com 


NND 0113

Q6 Full Business Plan - Heathrow Airport

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