44BI Heathrow 51

Business Update

In assessing our performance for the nine months ended 30 September 2024, we have outlined key performance metrics that illustrate our progress. The glossary section of this report provides detailed definitions for each indicator.

Passenger traffic

(1)        For the nine months ended 30 September

(2)        Calculated using rounded passenger figures

(1)        For the nine months ended 30 September

(2)        Calculated using rounded passenger figures

(3)        Cargo tonnage includes mail volumes

In the nine months to 30 September 2024, we saw higher passenger volumes compared to 2023, driven by an increase in passenger ATMs and small load factor increases. Almost all markets exceeded 2023's numbers, with double-digit growth for the UK and Asia Pacific regions. Africa saw fewer passengers travelling to Algeria, Kenya and South Africa. Summer 2024 was our busiest ever, with record-breaking months in June, July, August and September. Between June and September, over 30 million passengers flew through Heathrow. Madrid, Los Angeles, Amsterdam, Frankfurt, and Delhi are the latest joiners to the "millionaire club" - routes with over a million passengers travelling from Heathrow- joining Doha, Dublin, Dubai and New York.

Service and operational performance

(1)        For the nine months ended 30 September

During the first nine months of 2024, we achieved an overall ASQ rating of 3.99 out of 5.00, in line with the same period last year, while accommodating higher passenger numbers. Overall, 75% of passengers rated their Overall Satisfaction with Heathrow as either 'Excellent' or 'Very Good'. This shows a small year-on-year improvement (9M 2023: 74%). The proportion of 'Poor' ratings remained low at only 1%.

Improvements for the first nine months of 2024 compared to the same period last year remained evident for many attributes, particularly 'Wi-Fi Service Quality', 'Availability of Water Filling Stations', 'Check-in Waiting Time' and 'Ease of Making Connections with other Flights'.

Operationally, we saw a strong performance during our busiest summer ever recorded. Security performance has been very good, with 91.9% of  direct passengers passing through security within 5 minutes. Better operational performance across the airfield has seen improved aircraft turnarounds, resulting in departure punctuality outperforming arrivals. However, overall punctuality continues to be impacted by airspace closures and weather. Baggage performance remains stable.

Capital expenditure

During the first nine months of 2024, £795 million (2023: £461 million) of capital expenditure was incurred. This included £127 million for the acquisition of a building, as well as £60 million in capital creditors movements (2023: £43 million). The total investment expected for 2024, will be over £1 billion, further details will be provided in our December Investor Report.

We continue to deliver our H7 Capital Plan, comprising over 450 projects across six programmes. Our next-generation Security Programme is progressing well. Terminal designs have been completed, and new lanes are operational in all terminals and across Heathrow; the roll out continues at pace. Training for 4,000 Security and Engineering colleagues is underway. In the T2 Baggage Programme, the new system design is ongoing with an alliance of five multidisciplinary partners. The Commercial Revenue Programme has seen an investment of £48 million across commercial propositions in retail, digital and surface access, with new media screens installed in terminals and further developments in our retail estate, including a new Harrods store in T3. In the Carbon and Sustainability Programme, the roll-out of electric vehicle (EV) chargers continues with stations for airlines and colleagues now live airside in T2 and T3, along with plans for the new carbon-efficient pre-conditioned air units for aircraft stands. In the Asset Management and Compliance Programme, we are making good progress on the current portfolio, with the resurfacing of the Southern runway now completed and safety systems in the cargo tunnel now installed. Finally, the mobilisation of the Efficient Airport Programme has begun, with 75% of programme now live delivering projects to drive punctuality, service and operational efficiency across the airport, including 80 new screens installed in T5 to show live updates on airfield activities, making ground operations (ramp) management more efficient.

Key regulatory developments

In August, the CAA published a revised timetable for H8 and initial guidance on the constructive engagement (CE) process. The timetable keeps with the original start date for the H8 period as 2027, but the CAA has now proposed to condense the process around one single Heathrow business plan, and multiple rounds of CE, both pre and post our business plan submission.

-   October 2024: CAA draft method statement on H8, including business plan guidance

-   June 2025: Single H8 Business Plan submission from Heathrow

-   December 2025: CAA's Initial Proposals

-   July 2026: CAA's Final Proposals

-   November 2026: CAA's Final Decision

-   January 2027: H8 Price Control Period Begins

Heathrow has aligned its approach with the CAA's new timetable, and discussions with airlines to implement CE are underway. The CAA will publish a final position on the overall timetable and CE process in October.

Long-term growth and capacity developments

We are conducting an internal review of the work we have carried out previously and the different circumstances we find the aviation industry in. This will enable us to progress with appropriate recommendations to create capacity at Heathrow Airport. The Government's ANPS continues to provide policy support for our plans for a third runway and the related infrastructure required to support an expanded airport.

People and planet

The new Government has sent a strong signal of intent on Sustainable Aviation Fuel (SAF), with the SAF mandate secondary legislation passed in September and the Revenue Certainty Mechanism included in the King's Speech. With industry partners, we continue to press the Government on the need for rapid progress on the latter to attract investment to the UK.

In October, we launched our electric ground service equipment (e-GSE) strategy with Team Heathrow companies. We are focusing on utilising the available power at each stand as well as a look ahead at our longer-term approach for future technologies. We also shared our first proposal for a future airside Ultra Low Emission Zone (ULEZ) strategy built around our current zero emission vehicle infrastructure plans. A recommended policy is due by Q1 2025.

In Q3, we outperformed our Hydrotreated Vegetable Oil (HVO) target - this is driven by biofuel consumption across British Airways fleet and additional growth across the rest of Team Heathrow.

During the third quarter, the Heathrow Employment and Skills Academy launched a new Level 3 aviation course in partnership with Harrow, Richmond & Uxbridge Colleges (HRUC), aimed at inspiring the next generation of aviation talent. Additionally, a new collaboration with Ethos Farm kicked off a series of work experience insight days, offering young people with disabilities the chance to gain hands-on customer service experience in the terminals.

Finally, in the community space, Heathrow Community Rangers, with 71 volunteers, completed projects at partner schools, including a sensory garden at Pippins Primary and playground improvements at Heathrow Primary and Harmondsworth Primary. The Heathrow Community Take-Off Fund provided support for numerous projects, including workbenches for William Byrd Primary and a community event for Harmondsworth Village. Additionally, 57 colleagues contributed over 130 volunteer hours through the Heathrow World of Work initiative.

Key management changes

We are pleased to announce that in October, Sally Ding was appointed to the permanent position of Chief Financial Officer (CFO). Sally has been our Acting CFO since April. She joined Heathrow in 2006 and has played a key role in establishing and strengthening our financing platform. In the last six years, Sally has built robust global financial partnerships, delivered pioneering fundings, led us through Covid and executed complex business plans.

Paula Stannett, Chief People Officer, left Heathrow at the end of August. A process to appoint a new Chief People Officer is underway.

Ultimate shareholder update

On 28 November 2023, Ferrovial announced that an agreement had been reached for the sale of its entire stake (c.25%) in FGP Topco Limited, the parent company of Heathrow Airport Holdings Limited, for £2,368 million. The agreement had been reached with two different buyers, Ardian and The Public Investment Fund (PIF), who would acquire Ferrovial's shareholding in c.15% and c.10% stakes, respectively, through separate vehicles. On 16 January 2024, Ferrovial announced that, pursuant to the FGP Topco Shareholders Agreement, certain other FGP Topco shareholders had exercised their tag-along rights, which resulted in 60% of the total issued share capital of FGP Topco being available for sale.

On 14 June 2024, Ferrovial announced that Ardian and PIF had made a revised offer to acquire shares representing 37.62% of the share capital of FGP Topco for £3,259 million. The offer has been accepted by Ferrovial and certain Tagging Shareholders, and, as a result, an agreement has been entered into pursuant to which Ferrovial and certain Tagging Shareholders will sell a pro rata portion of their shares in FGP Topco such that Ferrovial will remain as a shareholder with shares representing 5.25% of the issued share capital of FGP Topco. Following the sale, Ferrovial and the Tagging Shareholders selling at the same time as Ferrovial will, together, hold shares representing 10% of the issued share capital of FGP Topco. Ardian and PIF will hold shares representing c.22.6% and c.15.0%, respectively, through separate vehicles.

On 26 July 2024, Ferrovial announced that following the expiry of the period to exercise the tag-along and pre-emption rights, no FGP Topco shareholder had exercised either its tag-along or pre-emption rights. The Transaction remains subject to applicable regulatory approvals and, consequently, there remains no certainty that the Transaction will complete.

While we acknowledge the existence of a change of control clause in the bonds issued by Heathrow Finance plc. and the continuing nature of the negotiations, we are not at this time privy to any information that would lead us to believe that the change of control clause would be triggered.

Financial Review

Basis of presentation of financial results

Heathrow (SP) Limited 'Heathrow SP' is the holding company of a group of companies (the 'Group'), which includes Heathrow Airport Limited ('HAL'), which owns and operates Heathrow Airport, and Heathrow Express Operating Company Limited ('Hex Opco') which operates the Heathrow Express rail service. Heathrow SP's consolidated Financial Statements are prepared in accordance with UK adopted international accounting standards. The financial information presented within these financial statements has been prepared on a going concern basis. More detail can be found in the going concern statement on page 14.

Alternative performance measures  

Management uses Alternative Performance Measures ('APMs') to monitor performance of the segments as it believes this more appropriately reflects the underlying financial performance of the Group's operations. These remain consistent with those included and defined in the Annual Report and Financial Statements for the year ended 31 December 2023.

Summary performance

(1)        Adjusted operating costs exclude depreciation, amortisation and fair value gains and losses on investment properties.

(2)        Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value gains and losses on investment properties.

(3)        Adjusted operating profit excludes fair value gains and losses on investment properties.

(4)        Adjusted profit/(loss) before and after tax excludes fair value gains and losses on investment properties and financial instruments and the associated tax impact of these.

(5)        Certain re-measurements consist of: fair value gains and losses on investment property revaluations, gains and losses arising on the re-measurement of financial instruments, together with the associated fair value gains and losses on any underlying hedged items that are part of a cash flow, fair value and economic hedging relationship and the associated tax impact on these.

Revenue

Aeronautical revenue has decreased, driven by lower H7 charges set by the CAA, partially offset by higher passenger numbers. Retail income, which includes retail concessions and car parking, has increased, driven by higher departing passengers. Other revenue has increased due to higher other regulated charges (ORCs), mainly from prior year under recovery, offset by lower surface access revenue (maturity of Elizabeth Line). More details can be found on page 16.

Adjusted operating costs

Employment costs, which include overtime, recruitment and training, have increased due to additional colleagues needed to accommodate the higher demand. The rise in operational and maintenance is mainly due to higher levels of passengers requiring support (PRS) resourcing, cleaning and maintenance. Finally, tight cost controls and stable energy prices have resulted in slightly lower utilities and other costs.

Net finance costs

In the nine months ended 30 September 2024, net finance costs before certain re-measurements decreased to
£683 million (nine months ended 30 September 2023: £1,165 million). This has been driven by a significant decrease in the RPI annual growth rate from 11.3% to 3.5%, resulting in a lower inflation accretion expense.

Fair value gain on financial instruments

A non-cash fair value gain on financial instruments of £208 million (nine months ended 30 September 2023:
£439 million) was largely driven by a reduction in index-linked swap liabilities and other derivatives compared to the prior year. The liability is measured with reference to market expectations of inflation and interest rates. The inflation forward curve is broadly flat with an average 1bps decrease through the 1-to-20-year period, and the interest rates curve increased by an average of 20bps in the year.

Taxation

The total tax charge for the nine months ended 30 September 2024 was £200 million (nine months ended 30 September 2023: £158 million) on a profit before tax of £696 million (nine months ended 30 September 2023: £618 million).

The tax charge before certain re-measurements was £114 million (nine months ended 30 September 2023:
£1 million tax credit). Based on a profit before tax and certain re-measurements of £350 million (nine months ended 30 September 2023: £19 million loss), this results in an effective tax rate of 32.6% (nine months ended 30 September 2023: 5.3%). This represents the best estimate of the annual effective tax rate expected for the full year, applied to the pre-tax profit before certain re-measurements for the nine months. The tax charge is higher than the statutory rate of 25% (nine months ended 30 September 2023: rate of tax credit was lower than the statutory rate of 23.5%) primarily due to the impact of non-deductible depreciation, increasing the tax charge for the year (nine months ended 30 September 2023: non-deductible expenses reducing the tax credit for the year offset by the deferred tax movements at the 25% tax rate).

In addition, for the nine months ended 30 September 2024, a deferred tax charge of £86 million (nine months ended 30 September 2023: £159 million) was recognised on certain re-measurements arising from fair value gains on financial instruments and investment properties of £346 million (nine months ended 30 September 2023: £637 million). In the period, the Group paid £40 million of Corporation tax (nine months ended 30 September 2023: £1 million).

Restricted payments

In the nine months ended 30 September 2024, total restricted payments (gross and net) made by Heathrow SP amounted to £137 million (2023: £200 million). This funded scheduled interest payments on debt at Heathrow Finance. No payments to ultimate shareholders were made during the period.

Recent financing activity

In the first nine months of 2024, we successfully issued a £350 million, 8-year, Class B sustainability-linked bond (SLB). It was our debut GBP SLB and the first SLB in the Sterling market to include all scopes of emissions. We also issued a £400 million, 7-year Holdco bond at Heathrow Finance, the largest transaction that Heathrow Finance has ever completed. We also priced £100 million in new Class A debt and £100 million in new Class B through the private placement market in May, which includes our first use of proceeds green issuance, with maturities in 2039 and 2054, and proceeds were received in August. These transactions complement our robust liquidity position and add additional diversification.

Redemptions in the first nine months of 2024 comprised the repayment of a Class B bond of £600 million in February, a Heathrow Finance bond of £300 million in March, a Class A bond of CHF400 million in May and a Heathrow Finance loan of £75 million in August.

In the first nine months of 2024, we made early paydowns of accretion on our inflation swaps totalling £206 million and executed an additional £32m which will be settled after the period end.

Debt and liquidity at Heathrow (SP) Limited

(1)        2023 figures are as at 31 December 2023.

(2)        Lease liabilities relating to leases that existed at the point of transition to IFRS 16 (1 January 2019) are excluded from Consolidated nominal net debt. All new leases entered into post-transition are included.

The average cost of Heathrow SP's nominal gross debt at 30 September 2024 was 3.49% (31 December 2023: 3.68%). This includes interest rate, cross-currency and index-linked hedge costs and excludes index-linked accretion. Including index-linked accretion, Heathrow SP's average cost of debt at 30 September 2024 was 6.09% (31 December 2023: 9.11%).

The average life of Heathrow SP's gross debt as at 30 September 2024 was 10.2 years (31 December 2023: 10.2 years).

The Group has sufficient liquidity to meet its forecast needs for the next 24 months. In making this assessment, the Directors have considered both the Heathrow SP Group of companies, as well as the wider Heathrow Finance plc group of companies (the "Heathrow Finance Group"). This includes operating cashflows under the base case business plan and capital investment, debt service costs, debt maturities and repayments. This liquidity position considers £2,264 million in cash resources across the Heathrow Finance Group, as well as undrawn revolving credit facilities of £1,386 million.

Debt at Heathrow Finance plc

(1)        2023 figures are as at 31 December 2023.

Financial ratios

At 30 September 2024, Heathrow SP and Heathrow Finance continue to operate within required financial ratios. Gearing ratios and interest coverage ratios are defined within the Glossary.

(1)        2023 figures are as at 31 December 2023.

Pension scheme

We operate a defined benefit pension scheme (the 'BAA Pension Scheme'), which closed to new members in June 2008. At 30 September 2024, the defined benefit pension scheme, as measured under IAS 19, was funded at 98.9% (31 December 2023: 95.6%). This translated into a deficit of £29 million (31 December 2023: £128 million). The
£99 million reduction in the deficit in the nine months is largely due to actuarial gains of £100 million (attributable to a loss on assets offset by a decrease in liabilities due to a 0.50% increase in the discount rate and experience losses reflecting actual inflation in 2024); service costs of £7 million; a finance charge of £5 million; and contributions paid in the year. In the nine months ended 30 September 2024, we contributed £11 million (30 September 2023: £11 million) into the defined benefit pension scheme. No deficit repair contributions have been paid in the nine months (30 September 2023: nil). The Directors believe that the scheme has no significant plan-specific or concentration risks.

Outlook

Following a record-breaking summer, we have revised our 2024 traffic forecast to 83.8 million passengers. We will provide an updated financial forecast for 2024 and 2025 in our next Investor Report, which will be published in December.

Starting in 2025, our financial results will be published semi-annually. A new Trading Statement will replace the Q1 and Q3 financial results.