Heathrow agrees new deal with airlines with increased incentives worth ‘hundreds of millions of pounds’ to major operators

London's Heathrow airport has signed a significant new deal on airport charges that it says is "worth hundreds of millions of pounds" for airlines operating at the UK hub. Following detailed negotiations over the past several months, Heathrow and major airlines operating at the airport have agreed terms which should "deliver significant passenger benefits in releasing funds to drive investment and growth," it explains.

Under the terms of the agreement, Heathrow will establish a new growth incentive that will encourage airlines to increase passenger numbers at the airport ahead of expansion. Airlines at Heathrow currently operate with average load factors below the IATA global average. But If they now reach global averages for filling aircraft there is an opportunity to reduce passenger charges by 10-20% against what they might otherwise be, in addition to helping Heathrow meet the Government's affordability target for expansion.

"With more passengers on each existing flight, Heathrow would be able to spread the development costs of its planned expansion across a larger passenger base - helping to keep airport charges close to 2016 levels in real terms throughout the expansion project," it says.

The CAA has supported the negotiation of the commercial arrangement and is expected to launch a public consultation on the solution in the coming weeks. If the CAA gives final approval to the commercial arrangement, the current regulatory settlement would be extended until Dec-2021 - removing the need to negotiate an interim iH7 regulatory settlement.

This can only be a benefit to all parties - from the regulator to airlines and the airport - as it will allow them to focus their resources on agreeing the regulatory settlement that will be in place during the main expansion works from 2022 (subject to the airport being successful in its development consent order application).

CHART - British Airways is the largest operator at London Heathrow with a 45% share of weekly seats and will have most to gain from the new charge systemSource: CAPA - Centre for Aviation and OAG (data: w/c 25-Feb-2019)

The airport has had a strong start to 2019 with 5.9 million passengers travelling through the UK hub in Jan-2019, a 2.1% year-on-year rise for the month and its 27th consecutive record month. The performance was boosted by passengers returning home after the winter holidays.

Africa and East Asia continue to be amongst the best performing regions, up 9.7% and 5.6% respectively. The African nations to make the biggest gains were Morocco (+40%), Ethiopia (27%), Nigeria (13%) and South Africa (12%). In East Asia, China saw growth of 27%, due to the continued interest in new services to the country.

This follows a record 2018 where the airport passed the 80 million passenger milestone for the first time. For the full calendar year, Heathrow handled 80.1 million passengers (+2.7% vs 2017), supported by a small 1% reduction in airport charges to GBP21.78. Revenues for the year rose 3% to nearly GBP3 billion on the back of strong retail spend and increased demand to fly.