Heathrow Airport is facing a “higher level of regulatory risk” as it prepares for negotiations on its recently approved third runway, according to a report from Standard & Poor’s.
The ratings agency said the UK’s largest airport could be “subject to a similar level of pressure” to its peers in the water industry, which have come under scrutiny from regulator Ofwat and been forced to lower returns to record low levels. Heathrow operates under a similar Regulated Asset Base model to the UK’s water companies.
“The obvious tension between regulators trying to lower charges to users to stimulate demand and increase customer satisfaction on the one hand, and airports investing in significant capex programmes while potentially facing slower traffic growth on the other, could increase pressure on the ratings,” S&P added.
Heathrow’s third runway expansion was finally approved by UK legislators in June, removing one of the most significant barriers to the approximate £14 billion ($18.5 billion; €15.9 billion) project.
“The regulator [Civil Aviation Authority] is yet to decide on the economic regulation for Heathrow’s third runway,” Tania Tsoneva, director of infrastructure finance ratings at S&P, told Infrastructure Investor. “If the cost of capital is lowered because the cost of debt and equity on the market are lower, we do expect that there could be an offsetting premium for capacity expansion. The regulatory period will not start until 2021 and in order for the regulator to decide on the input for the next period, they need to know the [full] costs for the runway. It’s going to take some time and I don’t think they’re going to decide in 2018 on what the cost of capital is going to be.”
Traffic growth at UK airports grinded to an almost complete halt in the first half of this year, according to the Civil Aviation Authority, although this was even more pronounced for airports outside of London.
S&P said it forecasts similar levels for the rest of the year. This could deteriorate further after Brexit, it added, although this is dependent on what deal is secured between Britain and the European Union.