STRATEGIC UPDATE

Heathrow New Strategy

After nearly a decade, we have refreshed our strategy to align our efforts and ensure collective progress towards a common objective. Starting with our purpose, which continues to be Making Every Journey Better, it now means something to everyone, whatever their role in our business. Central to our renewed focus is our new vision: "To be an extraordinary airport, fit for the future". This aspirational goal sets the stage for where we envision Heathrow in the future. To translate this vision into reality, we have identified six Beacons, formerly known as our Strategic Priorities, which serve as the driving forces behind our vision. These Beacons have been carefully selected to address the most pressing needs in the short to medium term, providing a clear roadmap for achieving our objectives. At the heart of our strategy lie our Foundations, the core principles that are indispensable to our business. These foundational elements serve as the base upon which our entire plan is built, underscoring their non-negotiable importance in every aspect of our business. Finally, our six Values remain unchanged. Heathrow values were developed by our colleagues, for our colleagues, as a common set of qualities describing the culture we want to experience at Heathrow. Through these values, we will strive for excellence, champion and respect the diversity and talent of our people, care for one another and deliver our vision. In the coming months, we will share more details about our Beacons and Foundations.

Business Update

In assessing our performance for the three months ending 31 March 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 three months ended 31 March

(2)        Calculated using rounded passenger figures

(1)        For the three months ended 31 March

(2)        Calculated using rounded passenger figures

(3)        Cargo tonnage including mail

The increase in passenger traffic is driven by a significant increase in passenger ATMs compared to last year and some small load factor increases. Almost all markets exceed 2023's numbers, with double-digit growth for the UK, Asia Pacific and Latin America. Africa is aligned with 2023 figures, with fewer passengers travelling to Egypt and Algeria. At the end of March, our summer season kicked off, and passengers will have even more options with six new airline routes to Abu Dhabi, Kos, Izmir, Bangalore, Barcelona and Paris-Orly. This is the first time Heathrow has served the route to Paris-Orly since 2017. The normalisation of belly hold capacity has led to increased cargo tonnage.

Service and Operational performance

(2)        For the three months ended 31 March

In the first three months of 2024, overall passenger satisfaction achieved the highest score since Q1 2022 while welcoming 11% more departing passengers this year compared to last year. Many attributes demonstrated an improvement compared to Q1 2023, including 'Wi-Fi Service Quality', 'Availability of Water Filling Stations', 'Ease of Making Connections with other Flights', Waiting Time at 'Security' and 'Check-in'. In contrast, attributes including 'Restaurant/Bars/Cafes', 'Shops', and 'Signage to Access to the Terminal' saw a decrease.  

Operational resilience started strong in 2024. Security performance has been very good, with the vast majority of direct passengers passing through security within 5 minutes. Improved operational performance across the airfield has seen improved aircraft turnarounds, resulting in departure punctuality outperforming arrivals. Although, overall punctuality continues to be impacted by airspace closures and weather. Baggage performance remains stable.

Capital expenditure

During the first quarter of 2024, £320 million (2023: £169 million) of capital expenditure was recognised. This included £127 million for the acquisition of a building, as well as £7 million in capital creditors movements (2023: £68 million). We are continuing to invest in the H7 Capital Plan, comprising over 450 projects across six programmes. Our next-generation Security Programme is progressing well, as we continue to make good progress across all terminals, and we move towards completing a total of 146 lanes. In the T2 Baggage Programme, the new baggage system is being designed by our newly appointed strategic baggage partner, and IT replacement works have begun. The Commercial Revenue Programme has seen an investment of £12 million across commercial propositions in retail, digital and surface access. In the Carbon and Sustainability Programme, the roll-out of electric vehicle (EV) chargers continues 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 of 160 live projects, with seven additional projects completed in Q1. Finally, the mobilisation of the Efficient Airport Programme has begun with multiple opportunities identified to improve passenger satisfaction whilst driving efficiencies across the airport-wide operation.

Key regulatory developments

On 28 March 2024, Heathrow submitted its formal response to the CAA's consultation on 'Setting future price controls - review of approach'. It follows on from the DfT independent review of the CAA published in 2023, that recommended the regulator should review the process, governance and 'mechanics' for conducting economic regulation. Whilst the overall CAA review is considerably broad, Heathrow has outlined where improvements in approach, guidance and decision-making are needed. The CAA has committed to issue their response during Spring 2024. This should trigger further actions for H8, including more detailed timetable plans from the CAA's initial high-level indicative plan.

In addition, on 20 March 2024, the CAA published a further consultation on 'H7 Final Issues'. The consultation deals with both the matters that were remitted to the CAA by the CMA through its October 2023 Final Determinations of the appeals of the H7 Final Decision on price control (FD), as well as the matters the CAA was not able to resolve prior to making the March 2023 FD. Amongst other issues, the consultation is proposing adjustments to a number of elements in the FD, including the approach to calculating the "AK" adjustment to revenues for 2020-2021 and the "index-linked premium" used to calculate the cost of debt for the H7 WACC, for instance. According to the CAA, taken together, proposed changes would result in a revenue reduction of c. £184 million (2020 CPI) and lead to 6% lower nominal tariffs for 2025 and 2026. We are now reviewing in detail the approach and calculations set out by the CAA and will respond to the consultation ahead of the 1 May deadline.

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.

Heathrow 2.0 - Connecting People and Planet

During the first quarter of the year, Heathrow maintained momentum across carbon and sustainability. As an inaugural adopter of the Taskforce on Nature-related Financial Disclosures (TNFD), we will be better positioned to transparently measure our impact on nature. Our World of Work program, which includes the STEM Generation activity and Essential Skills Masterclasses, has been instrumental in benefiting local students and colleges. Additionally, we successfully launched the first Lift-off event of 2024, with a strong focus on Zero Waste and Construction & Energy.

We gained further understanding of Sustainable Aviation Fuel (SAF) uplifted in 2023, supporting us to track annual progress in this critical area. Last year, we extended the deadline of our SAF incentive to the end of September 2024 due to a delay in global supply. In a strategic move, we joined a major hydrogen technology hub led by Cranfield University, which will contribute to our preparation for a hydrogen-powered future. The release of the 2023 Sustainable Travel Zone (STZ) Annual Report highlights Heathrow's initiatives to promote sustainable travel among passengers and colleagues, emphasising their positive impacts.

Key Management Changes

Chris Annetts, Chief Strategy Officer, will leave the company at the end of April. With effect from 1 May 2024, Nigel Milton's title will change from Chief of Staff and Carbon to Chief Communications and Sustainability Officer and Ross Baker's title will change from Chief Commercial Officer to Chief Customer Office. Emma Gilthorpe, our Chief Operating Officer (COO), has also decided to depart from Heathrow, and her last day will be 26 April 2024. Drawing on the strength of internal talent, we are delighted to announce that Javier Echave, currently our Chief Financial Officer (CFO) will take over from Emma and become our new COO from 26 April 2024. Sally Ding, currently our Director of Treasury & Corporate Finance, will be acting CFO whilst a permanent recruitment process completes. 

Ultimate Shareholder Update

On 28 November 2023, Ferrovial announced that an agreement has 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 has 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 have exercised their tag-along rights, which resulted in 60% of the total issued share capital of FGP Topco being available for sale. The parties are currently investigating options to satisfy the exercised rights. 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 12.

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)        Revenue does not contain any adjustments for non-GAAP items.

(2)        Adjusted operating costs exclude depreciation, amortisation and fair value adjustments on investment properties.

(3)        Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value adjustments on investment properties.

(4)        Adjusted operating profit excludes fair value adjustments on investment properties.

(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.

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

Revenue

The decrease in aeronautical revenue is 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 and overall stronger car parking performance. Other revenue has increased due to higher Other regulated charges (ORCs) from higher passenger numbers offset by lower surface access revenue.

Adjusted operating costs

(1)        Unadjusted operating costs were £521 million (2023: £505 million). This included depreciation & amortisation of £163 million (2023: £183 million) and a fair value gain on investment properties of £7 million (2023: £6 million).

Employment costs, which includes overtime, recruitment and training, have increased due to additional colleagues being 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 and service quality rebates paid. Finally, tight cost controls and stable energy prices have resulted in stable Utilities and Other costs.

Net Finance Costs

Net finance costs before certain re-measurements decreased to £197 million (2023: £442 million). The RPI annual growth rate has decreased year on year from 13.5% to 4.5%, resulting in a lower inflation accretion expense.

Taxation

The total tax charge for the three-month period ended 31 March 2024 was £65 million (2023: £10 million tax credit) on a profit before tax of £189 million (2023: £60 million loss).

The tax charge before certain re-measurements was £38 million (2023: £30 million tax credit). Based on a profit before tax and certain re-measurements of £83 million (2023: £139 million loss), this results in an effective tax rate of 45.8% (2023: 21.6%). 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 three-month period. The tax charge is significantly higher than the statutory rate of 25% (2023: lower than the statutory rate of 23.5%) primarily due to the non-qualifying depreciation forecast for 2024 compared to the relatively low profits forecast, increasing the tax charge for the year (2023: non-deductible expenses reducing the tax credit for the year offset by current year deferred tax movements at the 25% tax rate).

In addition, for the three months ended 31 March 2024, a tax charge of £27 million (2023: £20 million) was recognised on certain re-measurements arising from fair value movements on financial instruments and investment properties of £106 million (2023: £79 million).

Restricted payments

In the three months ended 31 March 2024, total restricted payments (gross and net) made by Heathrow SP amounted to £66 million (2023: £95 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 three 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 notional that Heathrow Finance has ever completed. Redemptions in the first quarter of 2024, comprised the repayment of a Class B bond of £600 million in February and a Heathrow Finance bond of £300 million in March.

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 31 March 2024 was 3.74% (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 31 March 2024 was 7.80% (31 December 2023 9.11%).

The average life of Heathrow SP's gross debt as at 31 March 2024 was 10.3 years (31 December 2023: 10.2 years).

The Group has sufficient liquidity to meet its forecast needs for at least the next 18 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 takes into account £2,360 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 31 March 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 31 March 2024, the defined benefit pension scheme, as measured under IAS 19, was funded at 97.7% (31 December 2023: 95.6%). This translated into a deficit of £64 million (31 December 2023: £128 million). The £64 million reduction in the deficit in the three months is largely due to actuarial gains of £64 million attributable to a reduction in liabilities driven by a 0.3% increase in the discount rate partially offset by a loss on assets; service costs of £3 million; a finance charge of £1 million; and, contributions paid in the year. In the three months ended 31 March 2024, we contributed £4 million (2023: £3 million) into the defined benefit pension scheme. No deficit repair contributions have been paid in the three months (2023: nil). The Directors believe that the scheme has no significant plan-specific or concentration risks.

Outlook

The strong demand in Q1 and the continuing trend will likely see us outperforming the current passenger forecast. We, therefore, have revised our 2024 traffic outlook to 82.4 million passengers. Consequently, adjusted EBITDA for 2024 is expected to be £1,938 million. We will provide revised forecast and associated financial forecast in the June investor report.