Could Heathrow be at Risk of Collapse?

by Piers Moore Ede
Image copyright Heathrow Airport.

Many of the world’s biggest airports have seen air traffic nosedive during COVID-19. Such has been the impact that some, including Heathrow, have warned that if passenger numbers do not take off quickly, they may not be able to carry on.

John Holland-Kaye, the chief executive officer at Heathrow, has said that the airport has enough money to cope until 2023. However, with passenger numbers not expected to fully recover until 2024, is the UK’s largest airport at risk of collapse?

graph 1

Lowest Passenger Numbers Since the 70s

In Heathrow’s financial results for the year ending 31 December 2020, Holland-Kaye described it as “one of the most challenging years in the company’s history”.

The pandemic has caused passenger numbers to plummet, leading to free-falling revenues and annual losses of around £2bn. The decline in passenger numbers also saw Heathrow lose its title as Europe’s biggest airport, with Paris’s Charles de Gaulle taking its place.

Passenger numbers for the year fell from 80.9 million in 2019 to just 22.1 million in 2020, with more than half of those travelling in January and February. That was the smallest annual total since 1975. That led to falling revenues, down from more than £3bn in 2019 to £1.175bn in 2020, and an end of year loss of more than £2bn, compared with a profit of £546m for the year before.

graph 2

Passengers Remain Grounded for Much of the Year

The traffic volume figures reported by Heathrow show that, with the exception of January and February 2020, every month saw at least an 80% fall in passenger numbers when compared to the year before. The only month to see greater passenger numbers was January 2020, with a 3% increase on the same month in 2019.

The first lockdown began on 16 March, leading to a 52% fall in traffic for the month. With the restrictions fully in place, Heathrow passenger numbers fell by over 95% in April, May and June. Since then, passenger numbers have hovered at between 81% and 89% of the monthly totals for 2019. And with lockdowns continuing to be enforced around much of the globe, there’s little sign of a let-up anytime soon.

It’s not Just Passenger Numbers That Have Fallen

As well as a 72% reduction in passengers when compared to 2019, the airport has also moved significantly less cargo.

Typically, 94% of the cargo handled by Heathrow Airport is carried in the bellies of passenger planes. However, with a 57.8% fall in the number of air transport movements and restrictions on international trade, the volume of air cargo handled by Heathrow has dropped by 28.2%.

However, it’s not all bad news on the cargo front. The airport has played a vital role in the transportation of PPE into the UK in response to the pandemic. During 2020, 19,000 passenger flights were turned into makeshift cargo freighters to help bring vital equipment into the UK.

graph 3

Passenger Traffic Won’t Recover Until 2024

Although there are some signs that international travel could return to the UK this year as the coronavirus vaccines continue to be rolled out, the prognosis for the next few years is not anywhere near as positive as Heathrow and other airports would like. The International Air Transport Association (IATA) has released an updated global passenger forecast that predicts traffic will not return to the pre-COVID-19 levels until 2024.

Short-haul travel is expected to recover more quickly than long-haul, which will provide a boost to passenger numbers. However, factors such as the slow virus containment in the US and developing economies around the world, along with a decline in corporate travel and weaker consumer confidence, means a slow and gradual recovery is likely.

graph 4

Debt is on the Rise

While passenger numbers at Heathrow have fallen, the level of debt has been on the rise. London’s primary airport is currently sitting on £15bn worth of debt, which has been accumulated over the last decade. During those years, shareholders have been paid several billion pounds in dividends. That fact certainly won’t be lost on the government or the general public if the airport goes in search of a bailout.

The airport has already approached the Civil Aviation Authority (CAA), its economic regulator, to ask for an increase in airline prices to compensate. That has understandably outraged its customers, who do not wish to pick up the airport’s pandemic bill.

There’s no Shortage of Cash Flow

In terms of the airport’s short-term future, there’s no risk of an imminent collapse. Heathrow has around £4bn in cash, which is enough to keep it in the business until at least 2023. It’s thought that by this time, passenger numbers, while not back to pre-COVID levels, should be sufficient for the airport to sustain itself. However, there’s also a huge amount of uncertainty over the behaviour of the virus and the effectiveness of the vaccine against different strains. That could undermine the recovery and represent a significant risk to the airport’s long-term viability.

Given the uncertainty, the IATA has called on the continued support of governments to keep airports financially viable. Currently, Heathrow has received government support in the shape of the furlough scheme, but unlike smaller airports and retail, hospitality and leisure businesses, it has not benefited from business rates relief. That’s why Holland-Kaye has called for the chancellor, Rishi Sunak, to extend business rates relief to large airports for the next two years.

People Have Not Lost Their Desire to Travel

Perhaps what is most in Heathrow’s favour is the huge pent-up demand to travel after a year of government-imposed restrictions and successive lockdowns. Airlines and travel companies reported a surge in holiday bookings after Boris Johnson announced his roadmap for easing the coronavirus lockdowns.

EasyJet said that flight booking from the UK soared by 337% and package holidays were up by 630% when compared with the previous week. Tui, the world’s largest travel company, also reported an increase in bookings of up to 500%.

Even if the public has to wait a few months longer than they would like, it is this overwhelming desire for a summer holiday that will keep Heathrow Airport and its airlines in flight.

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