Q6 Full Business Plan - Heathrow Airport

5. Aeronautical charges
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.
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