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The third runway dividend

Nearly two months after the UK government approved the development of a new runway at Heathrow, we assess what the move means for the airport’s shareholders.

As a project first seriously explored by a UK government in the early 1990s and been debated repeatedly since, it would be fair to say Heathrow Airport’s third runway has come under some scrutiny. Yet Prime Minister Theresa May’s government is now hoping the debate can be put to rest and the bulldozers can arrive after she approved the development in October.

According to Heathrow, at a cost of up to £17.6 billion ($21.6 billion; €20.1 billion), the third runway will be the largest privately funded infrastructure project in Europe. However, the problems it has faced – and still faces – are perhaps best encapsulated by a description of the third runway as “seriously flawed”. That came from its eventual backer Theresa May in 2009.

Yet with May’s new mantra being that Britain is “open for business”, it appears her government has called time on the treatment of the third runway as a political football, a welcome move for investors after former governments spent years avoiding a decision. The go-ahead is expected to be ratified by a vote in parliament either next year or in 2018.


Despite industry calls to get “spades in the ground as soon as possible”, this may still take some time. A third runway would not be operational by 2025 at the earliest, assuming there are no further delays, a rarity in UK infrastructure development. Such a timeline would require construction to begin within the next five years.

Meanwhile, environmental group Greenpeace has joined four local councils surrounding Heathrow to prepare a legal challenge and Mayor of London Sadiq Khan has added his backing to the bid, although law firm Clyde & Co’s planning partner Ian Ginbey has sounded caution over such plans.

“It is probably premature to bring any legal challenge given that there will now follow a lengthy period of consultation following publication of a draft national policy statement,” he says. “However, a challenge cannot be ruled out once a substantive decision has been made following the conclusion of this consultation process. If brought, one would expect a challenge to be expedited.”

In theory, Ginbey adds, the aforementioned parliamentary vote could also derail the government’s approval. Labour leader Jeremy Corbyn and shadow chancellor John McDonnell are both opposed to the plan, although many of Labour’s MPs back the Heathrow expansion.

Other planning issues include where to build the new runway, with one government minister suggesting it even be constructed over the M25 motorway. The M25 is just one of the surrounding roads that Heathrow has agreed to pay the full cost of improvements for, while the government has told Heathrow it must also contribute towards the cost of improved rail links to the airport.


Heathrow’s agreement to fund such costs only makes the project more expensive, yet the exact sum remains in doubt. The Airports Commission, which was established by the UK government in 2012, concluded it would cost about £18.6 billion. Heathrow, meanwhile, estimated in 2014 a £15.6 billion cost, while a government statement recently described costs as between £15.3 billion and £17.6 billion for the construction of the runway and additional terminal facilities. In a July open letter urging the government to approve the expansion, Heathrow’s shareholders said: “We stand ready to invest £16bn of private money.”

What is clear is that regardless of the final price, Heathrow will need to raise substantially more debt to add to the group’s current £12 billion debt levels. In the past, it has often raised debt through subsidiary Heathrow Funding, a special purpose vehicle which issues bonds and subsequently lends the proceeds to Heathrow. The vehicle has issued debt in a variety of currencies such as euro, US and Canadian dollars, Norwegian krona and Swiss francs, and it is expected to continue to do this to meet construction costs.

“We expect construction of the third runway will require a significant amount of new debt, but the exact amount will depend on the final construction cost and the equity contribution from the shareholders,” Beata Sperling-Tyler, credit analyst at Standard and Poor’s, says. She adds that Heathrow will need to refinance a portion of the debt it currently holds, with £1.2 billion in debt maturities to be met in the first quarter of 2017.

“It’s a regulated asset-based model, so the more capital expenditure the potential for greater revenue returns. Heathrow will be able to borrow on this basis,” Liz Jenkins, partner at Clyde & Co, predicts.

When contacted, Heathrow declined to comment, as did lead shareholder Ferrovial (25 percent), the Spanish infrastructure firm. Heathrow’s other shareholders comprise Qatar Holding (20 percent), Caisse de dépôt et placement du Québec (12.62 percent), the Singapore Investment Corporation (11.20 percent), Alinda Capital Partners (11.18 percent), China Investment Corporation (10 percent) and Universities Superannuation Scheme (10 percent).


Once the third runway is built, there remains significant potential for Heathrow to take advantage of the expansion and improve its revenues, which grew 1.2 percent to £2.1 billion in the first nine months of 2016. Sperling-Tyler explains that increased retail and parking revenues, a growing percentage of long-haul flights and Heathrow’s commitment to provide flights to six more UK airports from the current eight will drive up revenues. However, there is a limit as to just how much a third runway can affect Heathrow’s revenue base.

“Heathrow is subject to a restriction of 480,000 air traffic movements [aircraft landing or taking odd] per annum,” she says. “If this cap is lifted then there will be potential for even further revenue increase. Because of the current capacity restrictions, Heathrow’s revenues are growing very slowly.”

While Heathrow has reportedly asked the government if this could be lifted for the construction phase, it has not stated any ambition for a permanent increase. In fact, the government’s approval of the third runway came with a proposal of a six-and-a-half-hour ban on scheduled night flights, an increase on the current ban imposed by Heathrow of five hours, further limiting the site’s potential for exponential growth.

The restrictions associated with the expansion also limit the value of Heathrow if or when it is eventually sold by the current owners. Sperling-Tyler observes that privately owned airports have typically sold at between nine and 22x their EBITDA, with an average of 15x. BAA’s sale of Gatwick in 2009 to Global Infrastructure Partners for £1.5 billion was 9.3x its EBITDA, while Edinburgh and Stansted were sold 16.7x and 15.9x EBITDA in 2012 and 2013, respectively. Heathrow’s EBITDA in the first nine months of 2016 rose 4.4 percent to £1.3 billion.

“Multiples have been slightly higher in controlling stakes and lower in minority stakes,” she adds. “Heathrow would probably be at the lower end of the range because of capacity constraints , although this could change with the [third] runway.”


The UK government’s decision to expand Heathrow not only ended a debate going back over 20 years, but also dealt a blow to Gatwick, which in recent years had been vying with Heathrow for the government and the Airports Commission’s attentions to expand its own runway. Gatwick believed it could build another at half the cost of Heathrow’s and even indicated it may bid to press ahead with an expansion regardless.

“Gatwick have said they will expand to another runway anyway once the agreement with West Sussex Surrey County Council expires in 2019,” Jenkins says. “This timetable may actually occur before Heathrow expands. There may, however, be issues around emissions restrictions, which could be breached if both Heathrow and Gatwick expanded around the same time.”

The UK’s Climate Change Act to cut emissions by 80 percent by 2050 will already be tested by Heathrow’s expansion, part of the basis of the challenge by Greenpeace. While a Gatwick expansion would deliver a happy ending to both parties, it is unlikely to be a move sanctioned by a new Prime Minister following the recommendation of the Airports Commission, a report authored at an estimated cost of up to £20 million.