Heathrow pushed into big losses in Q2

Heathrow Airport announced its second quarter results this morning, adding to the tale of travel industry misery clocked up during the “lost quarter”.

The headline figure was a pre-tax loss for the first half of the year of £1,059m. The airport operator doesn’t actually disclose the Q2 figures, preferring to focus on the H1 numbers. But with a bit of effort you can back out all the Q2 figures using the Q1 reports, giving you what I think are a much more interesting set of numbers. The rest of this post will focus on these Q2 figures.

The pre-tax loss for the quarter was £781m, including £40m of “exceptional items”, mostly write-downs of capital projects that won’t now get finished and a £68m write-down on the value of investment properties.

With airlines mostly grounded, it was no surprise that revenue collapsed, falling by 85% compared to Q2 last year. Let us take a look at the detail of this because there are a few interesting little stories if you look hard enough.

Capacity and passenger volumes

Seat capacity operated from the airport fell by 91.3% compared to last year, dropping to only 2.3m seats. That is actually quite a bit less than you’d expect if you were relying on published schedule data from OAG, which would give you a figure almost a third higher. I think that shows the scale of the last minute cancellations that were going on. Normally that would be only 1-2%, but these are not normal times.

The other interesting statistic is the load factor reported by the airport for the flights that did operate. Last year it was 80.9%. This year it was only 35.5%, despite all those last minute cancellations. The combination of capacity and load factor declines led to a 96.2% fall in passengers overall.

Let’s look at the revenue outcome, starting with the “aeronautical” charges, paid by airlines and partly passed on to passengers as part of the much loved “taxes, fees and charges” item.

Aeronautical charges

There are three categories of aeronautical charges. The big two are levied on either a “per movement” basis (basically per take-off or landing) or on a per passenger basis. The final category is parking charges (aircraft, not cars - I’ll get to that one later).

The first interesting thing is that per passenger charges went down by quite a bit less than passenger numbers did (92.7% vs 96.2% versus last year). That meant that unit charges jumped from £14.45 a passenger to £27.50, a 90% increase. My best guess is that Heathrow released a circa £10m provision they’d been holding for volume related rebates that they now know won’t be payable. If that is the reason, it shows how small the “volume incentives” they give to their airline customers are in normal times. I’m sure this will be a much bigger number at other airports.

You get a similar jump in the per movement charges, if you calculate them using only the passenger movement figures they disclose. Revenue for this category went down by 82.5% whilst passenger air transport movements (ATMs) fell by 91.9%. We have another £13m or so of unexpectedly high revenue to account for. I think that most of the explanation is provided by cargo only flights. Normally these are insignificant at Heathrow, but airlines were running a lot of cargo only flights during this period. Based on what I understand of Heathrow’s charges, you would need 43 cargo departures a day to account for this extra revenue. That ties up reasonably well with media reports of 38 cargo flights a day on the 31st March.

Parking charges is less of an interesting story that it might have been. With pictures of Heathrow full of parked aircraft, you might have expected this to see a big increase, but actually it fell by 50%. I don’t know whether Heathrow waived some charges or airlines just did a good job of parking their aircraft somewhere else. Probably a combination. In any case, this was Heathrow’s best performing revenue category.

Retail and other revenue

With so few passengers and most retail outlets closed in any case, retail revenue plummeted by 92%. Car parking income fell 94%. Catering revenue disappeared completely.

Here again we see the revenue per passenger jump up compared to last year, more than doubling overall. It must have been the case that actual revenues per passenger were down since most outlets were closed. Again I think the explanation is the release of provisions for revenue incentive payments to retailers that had been set aside in better times.

Other revenue was down by 65%, with categories such as property revenue “only” down 38% and Heathrow Express dropping by an eye-popping 96.8%.

Operating costs

With total revenue down £663m compared to last year, how much did Heathrow manage to claw back by attacking the costs? Not a lot really, managing to offset only 15%, or £100m. Costs fell by 20.8% in total, with cost categories like rates and “other” proving to be essentially fixed.

By actions such as closing half the terminals and one of the two runways, Heathrow managed to bring down utilities spend by 48%, maintenance costs by 26% and operational costs by 18%. They even managed to reduce depreciation costs by 15.5% - I guess they stopped depreciating some terminals and runways whilst they were not being used. Also useful for keeping the regulated asset base high, which helps maximise what they are allowed to charge to airlines in future.

Employment costs fell 36%, with about half of that down to furlough payments from the government. The rest came through pay cuts, with pay cuts ranging from 10% for unionised staff to 100% for the CEO. Ryanair’s Michael O’Leary recently announced that faced with a similar revenue reduction, he got his staff costs down by 77% in the quarter. He will not have been at all impressed with that performance.

Liquidity and outlook

Heathrow were at pains to point out that with £2.7 billion in cash as well as undrawn facilities they had sufficient liquidity to last until “well into 2022” using their internal traffic forecast. That forecast seems to be based on an expectation of 29.2m passengers for the whole of 2020, or 15.4m in the second half. That will require the ramp up in airline capacity that started in July to continue, long haul routes to get going again and load factors to rise too. The latest news on the pandemic around the world and reintroduction of quarantine to Spain is making that look more doubtful than it seemed a few weeks ago.

They also said that they could withstand a “zero revenue" scenario until at least June 2021. With quite a bit of their Q2 revenue looking like it is provision releases rather than real revenue and doubts about the recovery, I can understand why the auditors insisted on looking at such a scenario. Liquidity isn’t their only problem - the notes to the accounts divulged that they would have breached some of their loan covenants this year if they hadn’t got agreement from their creditors to amend the triggers. I think the creditors should probably get ready for further such requests.

That probably explains how vocal Heathrow CEO John Holland-Kaye has suddenly become about the need to bring in a passenger testing regime to replace the current travel restrictions and quarantines that are being used to contain the virus. Whilst he claims that UK ministers are “keen on the idea”, the immediate response from Government advisers appeared lukewarm, pointing out that it can take a number of days from infection before tests return a positive result, meaning quarantine is still likely to be a requirement for flights from higher risk places.

Who pays?

Another statement from John Holland-Kaye that came with the results suggests to me that he knows he is going to need to go to his shareholders for more equity, and maybe sooner rather than later.

“Heathrow has requested that the CAA makes a policy statement setting out that it will amend Heathrow’s Regulated Asset Base to allow Heathrow to recover excess losses over an extended period of time."

For those who don’t follow the arcane world of airport regulation, what this means is that Heathrow wants its regulator to confirm that any losses it has incurred or will incur from the crisis will be eventually be clawed back from airlines and their customers. In the current regulatory system, passenger volume risk is one of the few risks that Heathrow’s shareholders are expected to bear in return for the equity return that they are allowed to earn. Heaven forbid that Heathrow should have to ask its shareholders to send back some of the billions in dividends they have received over the last few years, with £100m being paid out as recently as February.

Airline bosses are struggling to survive the worst crisis in the industry’s history. Even for those that make it through, they will face many years rebuilding their battered balance sheets.

I can only imagine how that statement from Heathrow will be making their blood boil at the moment.