ANNUAL REPORT AND FINANCIAL STATEMENTS 2020
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS
OUR PURPOSE TO MAKE EVERY JOURNEY BETTER
OUR VISION TO GIVE PASSENGERS THE BEST AIRPORT SERVICE IN THE WORLD
2
STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
At a glance Group structure Independent auditor’s report 6 80 118 Chairman’s letter HAHL Board of Directors Consolidated income statement 8 82 128 Our response to COVID-19 Executive Committee Consolidated statement of 10 86 comprehensive income 129 Key financial and operational indicators Corporate governance 12 88 Consolidated statement of financial position History of Heathrow Chairman’s introduction 130 14 88 Consolidated statement of Our business Governance structure changes in equity 16 90 131 Operating review Roles and responsibilities Consolidated statement of cash flows 20 92 132 Our strategy Composition of the HAHL Accounting policies 24 Board and its committees 133 93 Our commitment to sustainable growth Significant accounting judgements 31 2020 HAHL Board activities and estimates 94 Financial review 148 46 Effectiveness Notes to the Group financial statements 95 Our approach to capital allocation 152 54 Audit Committee Company statement of financial position 98 Our approach to taxation 206 56 Remuneration Committee Company statement of changes 102 Our approach to risk management in equity 58 Sustainability and 207 Operational Risk Committee Our principal risks Accounting policies 108 60 208 Nominations Committee Task force on climate related Notes to the Company 109 financial disclosures financial statements 64 Finance Committee 212 110 Section 172 (1) statement Alternative performance measures 72 Directors’ report (‘APMs’) – unaudited 112 215 Directors’ responsibilities statement 115
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 3 SECTION 01 STRATEGIC REPORT
At a glance 6 Chairman’s letter 8 Our response to COVID-19 12 Key financial and operational indicators 14 History of Heathrow 14 Our business 16 Operating review 20 Our strategy 24 Our commitment to sustainable growth 31 Financial review 46 Our approach to capital allocation 54 Our approach to taxation 56 Our approach to risk management 58 Our principal risks 60 Task force on climate related financial disclosures 64 Section 172 (1) statement 72
4 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 5 AT A GLANCE
Keeping passengers and colleagues safe We have only been able to remain open throughout the pandemic by maintaining high safety levels. We helped to develop international standards for safe travel through airports and invested in cutting-edge COVID-secure technologies and testing facilities for up to 25,000 passengers a day to help restore international travel safely.
Annual loss of £2bn underlines the devastating impact of COVID-19 on aviation Passenger numbers collapsed to 22.1m, more than half of whom travelled in January and February. Overall revenue fell 62% to £1.2 billion and Adjusted EBITDA fell to £270 million. Government policies over recent months have effectively closed borders. We have had no government support, other than furlough, and have not been given relief from business rates, unlike other airports, retail and hospitality businesses. The March Budget is the key opportunity for the Chancellor to support the sector by providing 100% business rates relief, extending the furlough scheme and reversing the tourist tax. We support the Prime Minister’s plan to restart travel and the economy We will work with the Global Travel Taskforce, so that Britain can become the first country in the world to safely restart international travel and trade at scale, saving thousands of jobs and reinvigorating the UK economy. The Prime Minister has a unique opportunity to agree a common international standard for safe travel with other world leaders when he hosts the G7 in June.
28% decline in cargo volumes shows the cost to the economy of shutting down aviation Passenger planes from Heathrow are the UK’s global trading network, carrying British exports and inbound supply chain. Economic recovery will be held back until long haul passenger flights are restarted, especially to key markets such as the US.
6 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
Decisive action to weather the storm Airports have very high fixed costs. We acted quickly to cut gross operating costs by nearly £400m, reduced capital expenditure by £700m and raised £2.5bn in funding including a £600m capital injection. We ended the year with £3.9bn of liquidity, enough to see us through until 2023.
Building Back Better We remain focused on decarbonising aviation. We became carbon neutral in 2020, and have been working to make decarbonizing aviation a flagship goal for COP26 ahead of a global agreement for net-zero emissions by 2050 at the ICAO general Assembly in September 2022.
CAA must act now to unlock lower charges and more investment for consumers If the CAA acts to approve a RAB adjustment, to recover regulatory depreciation and provide a fair balance of risk and reward, they can unlock lower airport charges and higher investment in passenger service and resilience. Heathrow expansion is mission critical to delivering “Global Britain” With the Supreme Court reinstating the Airports National Policy Statement, we will consult with investors, Government, airline customers and regulators on our next steps.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 7 CHAIRMAN’S LETTER
Dear All, The magnitude of the COVID-19 crisis we are going through has far surpassed anything that any of us could have imagined 12 months ago. The impact on the global aviation sector has been seismic. UK aviation itself was grounded not once, but three times during 2020.
8 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
At Heathrow, passenger traffic plummeted 73% to 22.1 million, the lowest volume we have seen since 1975 – and it would have been much lower if January and February hadn’t been relatively normal months. Our 2020 Adjusted EBITDA is hardly 15% of what is was in 2019. Our French competitor has overtaken us as busiest airport in Europe. A fierce battle for survival continues to take place today as new strains of the virus emerge and tighter travel restrictions come into force.
We entered this crisis with a robust As we close the most challenging The role the UK’s aviation industry financial standing and a strong liquidity year in our history, our business needs to play in driving the UK’s position. That was not luck, but a fundamentals remain strong. We made economic recovery and supporting testament to our cautious financial the most of our hub status and cargo the Government’s Global Britain and management and the ongoing facilities to protect our revenue and levelling-up ambitions cannot be commitment of our shareholders. increased our London market share. understated. But to play our part, the Our response to COVID-19 has been Our regulatory framework means sector must survive this crisis – and swift from the outset. We quickly that our building blocks will be reset that means meaningful Government implemented decisive actions to protect in 2022 to reflect our current market support must finally be forthcoming. our passengers, colleagues and reduced and trading conditions; this limits While the Government cannot know our costs; we positioned ourselves as our revenue exposure to the next 12 how the virus will evolve, it can well as we could to win the recovery months. Our financing platform has take a lead to establish a common and have kept a resolute focus on proved its resilience, allowing us to international standard that enables building back better in response to secure a waiver from our creditors, a safe travel and trade to resume in this pandemic. capital injection into the Regulated the months ahead – we continue Group and to strengthen our liquidity Throughout 2020, keeping people to urge Ministers to grip this issue, to £3.9 billion. Sustainable growth safe remained our first non-negotiable particularly in the year the UK hosts has remained core to our strategy and priority. We invested early to transform the G7 summit. actions towards our colleagues and Heathrow into a COVID-secure airport, suppliers while we continued to push In addition, the UK’s reputation as a deploying cutting-edge sanitising for growth in Sustainable Aviation low-risk, well-regulated market is also technologies, trialling new rapid Fuels in the year that the UK hosts the under threat. Urgent action by the testing methods and mandating face COP26 global climate change summit. CAA to reaffirm the principles of the coverings throughout the airport. Finally we also welcomed the Supreme regulatory settlement, and reassure All the while, we kept the UK’s only Court decision, unanimously ruling the investors that their investments hub open to repatriate Britons from Airports National Policy Statement as are protected, is required if further around the world and ensure vital lawful and legal Government policy. In investment into UK infrastructure is to supply lines could bring much needed the long term, we will need additional be secured. Without this action, not PPE and medical equipment into the capacity to provide the international only will investing in the UK become country. None of that would have been connectivity that will be required to less attractive, but airport charges will possible without the commitment and deliver the government’s Global Britain increase and the passenger experience dedication of our colleagues, to whom I ambitions. will deteriorate. want to address a heartfelt thank you. While we have done everything we At the same time, we made significant could to be best positioned for what LORD PAUL DEIGHTON progress in reducing costs, cutting comes next, an uncertain path lies Chairman £303 million of net operating costs ahead. Ministers must finally take and cancelling or deferring £700 action to support the UK’s world- million of capital expenditure. class aviation industry with a clear and comprehensive financial support package. The Treasury has provided billions of pounds of support to other sectors that did not need it while aviation has been left to fend for itself.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 9 OUR RESPONSE TO COVID-19
10 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
The COVID-19 outbreak represents a seismic challenge for the aviation industry, including Heathrow. We recognised the need to reorganise and adapt our operations to remain open throughout the crisis, while ensuring that passenger and colleague safety remained our highest priority. More information on our response to COVID-19 can be found on the following pages:
CHAIRMAN’S LETTER 8 OUR BUSINESS 16 OPERATING REVIEW 20 OUR STRATEGY 24 OUR COMMITMENT TO SUSTAINABLE GROWTH 31 OUR APPROACH TO CAPITAL ALLOCATION 54 OUR APPROACH TO RISK MANAGEMENT 58 OUR PRINCIPAL RISKS 60 SECTION 172(1) STATEMENT 72 CORPORATE GOVERNANCE 88
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 11 KEY FINANCIAL INDICATORS
REVENUE £1,175m Revenue is an indicator of our top-line growth. It consists of aeronautical income, 2020 1,175 which is generated from fees charged to airlines for use of the airport’s facilities, 2019 3,070 and retail and other income from a variety of other sources. Revenue was heavily 2018 2,970 impacted by the COVID-19 related lockdowns and by Government travel restrictions in 2020; declined 61.7% in the year. 2017 2,884 2010 1,845
ADJUSTED EBITDA1 £270m Adjusted EBITDA is an indicator of how we are delivering top-line revenue growth 2020 270 while remaining efficient and controlling operating costs. Adjusted EBITDA is profit 2019 1,921 before interest, taxation, depreciation and amortisation, excluding fair value gains 2018 1,837 and losses on investment properties and exceptional items. The decline in revenue offset by cost savings, realised through management initiatives, resulted in a 85.9% 2017 1,760 reduction in Adjusted EBITDA. 2010 881
(LOSS)/PROFIT BEFORE TAX £(2,012)m (Loss)/profit before tax is a measure of total return generated before taxation. 2020 (2,012) The loss before tax was £2,012 million in the year. 2019 546 The loss before tax includes non-cash fair value of our investment properties 2018 422 and financial instruments of £412 million and £202 million respectively and 2017 579 exceptional costs of £184 million. 2010 n/a2
REGULATORY ASSET BASE1 £16,492m The Regulatory Asset Base (‘RAB’) is a regulatory construct, based on predetermined 2020 16,492 principles not based on IFRS. It represents the cumulative net capital invested in 2019 16,598 Heathrow for which we earn a regulated return. By investing efficiently in our 2018 16,200 airport, and constructively engaging with airlines, we add to our RAB over the long-term which, in turn, contributes to delivering shareholder value. 2017 15,786 2010 11,449 The RAB decreased 0.6% in the year due to the capital investment being lower than the assumed ordinary depreciation as a result of a decrease in passenger numbers.
CONSOLIDATED NOMINAL NET DEBT1 £13,130m Consolidated nominal net debt is a measure of indebtedness used by our financers. 2020 13,130 Net debt increased by 5.8% in the year. 2019 12,412 2018 12,407 2017 12,372 2010 n/a2
12 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
KEY OPERATIONAL INDICATORS
PASSENGERS 22.1m The sum of all arriving, connecting and departing passengers. 2020 22.1 In 2019, we welcomed a record 80.9 million passengers. 2019 80.9 The impact of COVID-19 in 2020 led to a 72.7% decrease in passenger numbers. 2018 80.1 2017 78.0 2010 65.7
PASSENGER SATISFACTION 4.243 An independent passenger satisfaction survey that compares our performance 2020 4.243 against circa 350 airports worldwide. Passengers rate their experience on a scale 2019 4.17 from 1.00 to 5.00, where one is ‘poor’ and five is ‘excellent’. Our vision is to give 2018 4.15 passengers the best airport service in the world. In 2019, we achieved a record high level of passenger satisfaction, however the ASQ survey was temporarily suspended 2017 4.16 in March to limit the spread of COVID-19, before resuming in August. Q4 2020 2010 3.80 result was also our best Q4 score (4.24).
DEPARTURE PUNCTUALITY 85.7% The number of flights that depart from their stand within 15 minutes 2020 85.7% of the scheduled time. 2019 78.5% Due to the reduction in passenger demand and flights resulting from the 2018 77.6% COVID-19 pandemic departure punctuality improved to 85.7% in the current year. 2017 80.2% 2010 71.0%
BAGGAGE CONNECTION 99.2% To improve service for every 1,000 passengers (direct and connecting) we measure 2020 99.2% the percentage who successfully travelled with their bags on the same flight. We put 2019 99.0% a great passenger experience at the heart of what we do; our operational ambition 2018 98.8% is ‘every passenger, every bag, every time’. 2017 99.0% 99.2% of bags successfully connected in the current year. 2010 98.2%
LOST TIME INJURIES 0.14 We measure the number of lost time injuries for every 100,000 hours worked in the 2020 0.14 last 12 months. In their working life a person works an average of 100,000 hours. 2019 0.34 We want everyone at Heathrow to go home safe and well to their loved ones at the 2018 0.33 end of each day. Lost time from injuries reduced to 0.14 in 2020. 2017 0.48 2010 n/a2
1 Alternative Performance Measures (‘APMs’): the performance of the Group is assessed using a number of APMs. Management believe that APMs provide investors with an understanding of the underlying performance of the Group, while recognising that information on these additional items is available within the financial statements should the reader wish to refer to them. APMs are discussed in detail and defined on page 215 of the financial statements. 2 Figures are not available for 2010 as Heathrow (SP) was trading as BAA (SP) Limited and the available information includes the trading results of other airports no longer owned. Results have only been provided where it was possible to separate the trading performance of Heathrow Airport. 3 The passenger satisfaction score for Q4 2020. This was also our best Q4 score.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 13 HISTORY OF HEATHROW For over 70 years we have been an integral part of the UK and its history. From a private airfield to one of the world’s busiest international airports, a lot has changed in that time.
In 1930, British aero engineer and Work demolishing Heath Row and To reach aircraft parked on the aircraft builder Richard Fairey paid the clearing land for the runways started apron, passengers walked over Vicar of Harmondsworth £15,000 for a in 1944. However, by the time the war wooden duckboards to protect their 150-acre plot to build a private airport had ended the RAF no longer needed footwear from the muddy airfield. to assemble and test aircraft. another aerodrome and it was officially There was no heating in the marquees, handed over to the Air Ministry as which meant that during winter it During World War II the Government London’s new civil airport on 1 January could be bitterly cold. By the close requisitioned land in and around the 1946. The first aircraft to take off from of our first operational year, 63,000 ancient agricultural village of Heath Heathrow was a converted Lancaster passengers had travelled through Row, including Fairey’s Great West bomber called Starlight that flew to London’s new airport. Aerodrome, to build RAF Heston, a Buenos Aires. base for long-range troop-carrying By 1951 passengers had risen to aircraft bound for the Far East. An RAF- The early passenger terminals were 796,000 and British architect Frederick type control tower was constructed and ex military marquees which formed a Gibberd was appointed to design a ‘Star of David’ pattern of runways tented village along the Bath Road. permanent buildings for the airport. laid, the longest of which was 3,000 yards long and 100 yards wide.
1986 1987 His Royal Highness Prince The British Airports 1955 Charles and Princess Diana Authority is privatised Her Majesty The Queen opens the inaugurate Terminal 4. as BAA plc. Central Terminal Area and Control Tower.
1946 1964 London civil airport The Beatles are mobbed officially opens. at London Airport. 1940 1980 1990 1960 1950 1970
1966 1976 The British Airports Authority is created. Concorde makes its London Airport is renamed ‘Heathrow’. first passenger flight. 1998 The Heathrow 1944 Express rail service is launched. Construction of London 1969 Airport’s runways begins. Terminal 1 opens.
14 15 2020 Heathrow remains open during the pandemic to COVID-19 help people get home secureand to vital supply lines the for UK. 2018 MPs overwhelmingly vote in favour of Heathrow expansion. 2019 Heathrow welcomes a record 80.9m passengers. FINANCIALSTATEMENTS sterilisation and disinfecting products, and disinfecting products, sterilisation and medicines, swabs medical oxygen, a crucial was also test kits. Heathrow of of thousands lifeline to the hundreds home. returning UK residents position as the unique Heathrow’s airport provides only hub UK’s that that means demand resilience to return the airport is well placed demand once passenger to growth are and travel restrictions increases to continuing look forward eased. We to connect our story and continuing all of the UK to global growth. 2016 Heathrow itscelebrates 70th anniversary. 2015 1 Terminal closed. HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 2014 2: TheThe new Terminal opens Terminal Queen’s businessfor on 4 June.
2010 Demolition work started on Terminal 2 to make way for its £1 billion which replacement opens on 4 June 2014. 2020 GOVERNANCE REPORT GOVERNANCE
By the time we celebrated our 60th we celebrated our By the time in 2006 we had served anniversary on over 1.4 billion passengers around 14 million flights. 2008 and opened in March 5 Terminal of an exciting marked the beginning brand- The new chapter for Heathrow. Terminal 2: The Queen’s new Terminal on 4 June 2014. opened for business over 80 airlines were In 2019, there offering Airport operating at Heathrow short-haul 110 long-haul and 98 Airport handling with Heathrow routes, 80.9 million passengers. a record Since the start of 2020, the COVID-19 pandemic has had a significant impact During this on the aviation industry. period, we used our available capacity to prioritise cargo flights with specific urgently medical cargo items that were needed in the COVID-19 pandemic including hospital equipment, PPE,
2010 2008 is 5 Terminal officially opened by Her Majesty The Queen March; in the firstcommercial A380 arrives flight at Heathrow UK. 2009 4 undergoesTerminal a major refurbishment improveto facilities. STRATEGIC REPORTSTRATEGIC
The focal point of Gibberd’s plan was of Gibberd’s The focal point There tower. control a 122ft-high terminal called was also a passenger renamed Building (later the Europa and an office block called 2) Terminal Building. the Queen’s 1 opened, by which In 1969, Terminal a year time five million passengers as the airport passing through were Boeing 707s, the jet age arrived with travellers taking VC10s and Tridents all parts to and from Heathrow from of the world. The 1970s marked the decade when the world became even smaller thanks and wide-body jets such to Concorde as the Boeing 747. As the decade drew to a close, 27 million passengers were Demand annually. using Heathrow the need for for air travel also created 4, which another terminal, Terminal opened for business in 1986. 2000 A new air-traffic A new air-traffic tower is control operational – the tallest in the UK. 2007 The Terminal 5 The Terminal planning public inquiry ends – the longest UK in history. 1999 OUR BUSINESS
WHAT WE DO We are a service business which seeks We maintain a strong focus on This is underpinned in 2020 by a cargo to give passengers the best airport operational performance, improving operation which has allowed airlines to service in the world. Heathrow is the the passenger experience and investing switch their operations to cargo-only UK’s only hub airport. Hub airports in new and upgraded facilities. We were and/or ‘preighters’ (passengers planes combine direct passengers, transfer named ‘Best Airport in Western Europe’ temporarily converted to freighters). passengers and freight to enable long- by Skytrax for the fifth time in 2019, Over 23,000 cargo-only flights travelled haul aircraft to fly to destinations all and in 2020 we were named through Heathrow over the course of over the world. These destinations could Best Airport for Shopping for the the year, a near seven-fold increase not be served with regular, year round eleventh year running. compared to 2019. flights by point-to-point airports which We benefit from countercyclicality. In Sustainability is core to our strategy. rely on local demand alone. In 2019, times of reduced passenger traffic across We launched Heathrow 2.0 in 2017, a we were the seventh busiest airport the industry, airlines have tended to long-term sustainability strategy which globally and the busiest airport in consolidate traffic towards hubs such sets out a series of ambitious targets to Europe in terms of total passengers. as Heathrow Airport. Our position as deliver sustainable growth and to drive In 2020 we have dropped significantly the UK’s only hub airport ensures that positive change throughout the aviation from this position, due to the impact Heathrow remains a resilient airport, industry, as well as at the airport itself. of the COVID-19 pandemic. maintaining the UK’s critical trade We remain committed to taking action In 2020, we served 22.1 million and passenger connectivity during to protect and support people, economy passengers (2019: 80.9 million), with the COVID-19. This underlying characteristic and environment. In 2021 we will revise sharp decrease in passenger numbers of Heathrow means that the airport is and update our strategy to ensure it was due to the impact of COVID-19. well placed to return to growth once helps us meet the expectations of our passenger demand increases and travel We serve a range of market segments, stakeholders and retain our licence to restrictions are eased. including business and leisure travellers, operate, while reducing environmental direct and transfer passengers, and long Long haul passenger flights from and social risks to our business. We will and short-haul routes operated by a Heathrow provide the trading routes share the detail of a revised and diverse range of major airlines. As well which carry the UK’s exports and supply updated Heathrow 2.0 sustainability as earning aeronautical income from chain. Heathrow is the largest UK port strategy later in 2021. airlines, we also generate income from a by value with 1.2 million tonnes of cargo Further details of our commitment to variety of other sources. valued at over £147 billion passing sustainable growth can be found on through it in 2020 (2019: 1.6 million They include concession fees from pages 31 to 45. tonnes, valued at £141 billion). This has retail operators, income from car parks, included PPE, testing kits, respirators advertising revenue, rents from property and other essential medical equipment, space and income from the provision imported to meet the nation’s needs of airport facilities and transportation during the global pandemic. services notably the Heathrow Express rail service.
16 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
INVESTMENT AND Other infrastructure This is calculated as the sum of all our INFRASTRUCTURE We own railway infrastructure forecast costs (including operating including stations, tunnels, rolling expenditure, the required return using We have invested over £12 billion of stock and track from Heathrow as the cost of capital determined by the private money, at no cost to taxpayers, far as Airport Junction on the Great CAA on the forecast RAB and regulatory transforming Heathrow’s infrastructure Western Mainline. depreciation) less projected non- since privatisation in 2006. In 2019, aeronautical revenue. we invested £856 million to ensure We also own public car-park spaces that Heathrow remained passengers’ that are available to passengers and the The resulting revenue requirement is preferred airport. In 2020, in response general public. The terminals and their divided by forecast passenger numbers to COVID-19, we enacted a reduced approaches provide advertising space, to produce the per passenger maximum capital plan and have invested £521 which yields further income. allowable yield. million, the majority of this being in a Our regulatory framework is consistent variety of programmes to ensure the with the economic regulation of other safety and resilience of the airport. REGULATORY UK regulated industries (such as water ENVIRONMENT and the energy sector). This form of Terminals economic regulation is sometimes We are subject to economic regulation referred to as ‘incentive regulation’, Each of our four operational by the Civil Aviation Authority (‘CAA’), in that we have an incentive to invest terminals is either relatively new which is the independent aviation in better facilities for consumers and or recently refurbished. regulator in the UK, responsible for outperform the economic settlement economic regulation, airspace policy, Due to the reduction in passenger by attracting more passengers, safety and consumer protection. As demand resulting from the COVID-19 reducing operating costs or delivering the economic regulator for UK airports, pandemic, in April 2020, operations higher commercial revenues. In the the CAA assesses the market power from Terminals 3 and 4 were opposite case, we must absorb negative of airports and if an airport passes temporarily consolidated into Terminal financial impact, with no automatic the market power test(s) set out in 2 and Terminal 5. adjustment for shortfalls in our the Civil Aviation Act 2012 (the ‘Civil passenger numbers or additional costs We have a total of approximately Aviation Act’), the airport is regulated unless in exceptional circumstances and 58,600 square metres of retail space by means of a licence. Heathrow has agreed with the CAA. served, prior to COVID-19, by over been determined, by the CAA, to hold 450 retail outlets. Many of our retail significant market power and operates The regulatory environment provides outlets closed in late March 2020, under a licence granted by the CAA in cash flow predictability which supports leaving only essential retailers open. February 2014. The licence includes a external investment. Other key factors price cap on Heathrow’s airport charges. and protections include: Runways Economic regulation is designed to • The CAA has the statutory duty to set Prior to the COVID-19 pandemic allow the UKs regulated airports to a return that secures financeability of we operated two parallel runways, generate revenues which are sufficient our operations. generally operating in ‘segregated to finance their operating and capital • Building blocks rebaseline at the start mode’, with arriving aircraft allocated expenditure requirements and provide of every regulatory period which to one runway, and departing aircraft a regulated rate of return on their restricts long-term risk exposure. RAB. Each regulatory period is set for to the other. Given the effects of • Certainty and defined timing for defined periods of time, known as ‘price COVID-19 on passenger numbers, in recoverability of efficiently incurred control periods’, the duration of which April 2020 we moved to single runway capital investments through the RAB. operations, with the consolidation is determined by the CAA. Return on of passenger operations into two investment set by the CAA is meant to • Pricing and asset value linked to terminals, while maintaining enough provide a fair, symmetric, remuneration inflation (‘RPI’). flexibility to ramp up as passenger of risk, with limited upside to keep • Some protection against exceptional demand returns. charges low as well as limited downside. circumstances, for example changes in security regulation proposed by the The economic regulation framework The airport is permitted to schedule government, changes in traffic mix, sees the CAA setting the maximum level up to 480,000 air-traffic movements intra-period movements in property of airport charges for Heathrow using a (‘ATMs’) per year. In 2019 we operated rates costs and capital investment risk per-passenger price-cap mechanism (RPI at 99.1% of this cap and had been in early phases of maturity. operating close to the limit for many +/- X) which incorporates an allowed years prior to COVID-19. In 2020 we return on RAB. • The Q6 settlement also expressly operated at only 41.9% of this cap, set out the ability for Heathrow and The building blocks of this ‘Single Till’ other parties to request that the price given the effects of COVID-19 on calculation are illustrated overleaf. The passenger numbers. control be reopened in the event CAA first determines the regulated of exceptional circumstances under ‘revenue requirement’. Section 22 of the Civil Aviation Act.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 17 OUR BUSINESS (CONTINUED)
ASSETS
REGULATORY ASSET BASE F (EXISTING AND NEW CAPITAL INVESTMENT) PASSENGER FORECAST
CALCULATED E / F WITH WACC
COSTS INCOME CHARGES
B C D E G RETURN ON OPERATING REGULATORY COMMERCIAL REQUIRED AERONAUTICAL INVESTMENT COSTS DEPRECIATION REVENUES REVENUE CHARGES CAPITAL
A
Building blocks for maximum allowable yield calculation
2020 REGULATORY DEVELOPMENTS COVID-19 related RAB adjustment H7 and Regulatory timetable In July 2020 we applied to the CAA for an The H7 period is due to start on The CAA is continuing to consult on adjustment to the Regulatory Asset Base 1 January 2022. In December we its proposals for the regulatory (‘RAB’) for an appropriate amount of the submitted our Revised Business Plan framework which will be in place for unexpected losses which occurred due to (‘RBP’) to the CAA. This set out our the H7 period. We are expecting further the impact of COVID-19. The adjustment plans for the H7 period following consultations from the CAA in early is designed to secure the recovery of consultation with airlines and the 2021 focusing on policy development historic investment efficiently incurred as publication of further policy views in areas such as capital efficiency well as losses in return as per economic from the CAA through 2020. Our and the recovery of early expansion parameters used to set our allowed plan seeks to maximise passenger costs. We are expecting the CAA’s cost of capital. This proposal seeks the growth and minimise airport charges Initial Proposals, which will provide its enforcement of the protection included in to support airlines in the recovery. preliminary view on the our settlement against unlimited downside The plan assumes our proposed RAB price cap and conditions for the H7 triggered by exceptional circumstances. In adjustment is fully implemented, which period in Summer 2021. October, the CAA published a consultation is a critical factor for our plan to be requesting further evidence that this action debt financeable and equity investable was required. In response to the CAA’s and also unlocks our capacity to use consultation we set out the need for the financial levers to keep prices as low as urgent adjustment as prescribed in our possible. Our RBP will form the basis of license and how our proposed mechanism the CAA’s decision making for the H7 would ensure that Heathrow could period. Our RBP proposes a minimum continue to operate in the interests of five-year regulatory period from 2022- users while smoothing the impact of this 2026 as the basis of our H7 framework. change on passengers over future years. We have proposed evolutions to the regulatory framework following the In February, the CAA published a further impact of COVID-19 to ensure that consultation, recognising the existence of the framework is robust to future exceptional circumstances as defined in our uncertainty and appropriately balances license and accepting that doing nothing risk and reward in the H7 period and was not an option as well as laying out its beyond. These evolutions include a two preferred solutions. We have proposed proposed price control adjustment a reasonable adjustment that allows the mechanism which automatically adjusts CAA to act now in order to lower future if revenues deviate from forecast by charges and maintain investment in the over 8% by making an adjustment to airport – protecting jobs and avoiding rapid the RAB. Additionally, we are proposing degradation of service. The CAA must changes to ensure we can mitigate any ultimately take a decision – but failure unforeseeable future costs caused by to act in the right way and in a timely the pandemic and changes in relevant manner will see confidence in effective Health and Safety legislation. regulation evaporate. This would not just affect Heathrow, but will undermine the perception of investing in the UK and the Government’s Global Britain agenda.
18 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
GENERATING REVENUE We generate three types of income: Movement charges RETAIL AND OTHER INCOME aeronautical income, which is Until 2019, landing charges were levied The ‘Single Till’ means that higher generated from fees charged to airlines for substantially all aircraft (with certain for use of the airport’s facilities, retail retail and other income reduces per- diplomatic and other flights being passenger charges. Retail and other income and other income from a exempted). These are calculated in variety of other sources. income is generated from a variety of accordance with the certified maximum sources. These include: take-off weight, and adjusted, where AERONAUTICAL INCOME applicable, in accordance with each • Concession fees from Aeronautical income reflects the aircraft’s noise-rating, emissions and retail operators. fees charged by Heathrow to the the time of day. Incentives are provided • Direct income from car parks, airport’s airline customers. The tariff for quiet and clean aircraft. Airlines pay advertising revenue and structure can vary in consultation a penalty for movements in the core premium products. with stakeholders, but include night period (23.30 to 06.00). Airlines • The rental of airport property space, three key elements: that operate unscheduled flights within such as aircraft hangars, warehouses, the night-time period are charged an cargo-storage facilities, maintenance Passenger charges amount five times greater than the facilities, offices and airline lounges. daytime charge. Passenger charges are based on the • The provision of facilities such as number of passengers per aircraft From 2020, movement charges are baggage handling and passenger and levied in respect of all departing now levied instead of landing check-in. passengers. There is no charge for charges. The charge per movement crew members. Charges vary by route • Fare revenue from the Heathrow is around half of what the landing Express rail service. area (European, domestic and rest-of- charges were previously, however world) and type (transfer and non- is applied to each aircraft on both transfer passengers). These are passed take-off and landing. The noise rating on directly by airlines to passengers. component of these charges also includes a multiplier effect for any movements that are unscheduled between 23.30 and 06.00.
Parking charges Parking charges are levied for each 15-minute slot after 30 and 90 minutes (narrow and wide-bodied aircraft respectively).
YEAR ENDED 31 DECEMBER 2020
AERONAUTICAL RETAIL OTHER £647m £234m £294m
TOTAL REVENUE £1,175m
RETAIL CONCESSIONS CATERING OTHER RETAIL CAR PARKING OTHER SERVICES £97m £19m £43m £40m £35m
TOTAL RETAIL REVENUE £234m
OTHER HEATHROW PROPERTY REGULATED CHARGES EXPRESS AND OTHER £118m £26m £150m TOTAL OTHER REVENUE £294m
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 19 OPERATING REVIEW
2020 has been one of our most challenging years – but despite £2bn of losses and shrinking to passenger levels we haven’t seen since the 70s, I am hugely proud of the way that our colleagues have kept our passengers safe and the UK’s hub airport open for vital supplies throughout. We can be hopeful for 2021, with Britain on the cusp of becoming the first country in the world to safely resume international travel and trade at scale. Getting aviation moving again will save thousands of jobs and reinvigorate the economy, and Heathrow will be working with the Global Travel Taskforce to develop a robust plan underpinned by science and backed by industry. The Prime Minister will then have the unique opportunity to secure global agreement on a common international standard for travel when he hosts the G7 in June. In the meantime, we need next week’s Budget to support aviation’s recovery by extending furlough and providing 100% business rates relief.
JOHN HOLLAND-KAYE Chief Executive Officer
20 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
REVIEW OF THE YEAR 2020 has been the toughest year While this allowed travel to restart, The market remains extremely by far in Heathrow’s 75-year history. it became clear in mid-August that uncertain, but we have £3.9 billion of The year started strongly, with record the recovery had stalled so we cash, which would be sufficient to take passenger numbers in January, building started making plans for further cost us well into 2023 under our current on a record 80.9m passengers served reduction and began implementing traffic forecast or through 15 months in 2019. We were gearing up for in October. These included cutting all even without any revenue. This is as further growth as we prepared the our costs to the lowest level we safely strong a position as we could have planning application for Heathrow could, including further management hoped for. We have had no action Expansion, in line with the Airports reductions, closing our main office and from Government, other than the National Policy Statement (‘ANPS’), suspending our free travel zone. We national furlough scheme, and no which was given overwhelming and also changed our pricing to link it more support as yet from the CAA to cross-party parliamentary approval in to aircraft movement and cargo, and enforce protections assumed in 2018. In January our airport operation slightly less dependent on passenger our license, though they have became carbon neutral, and in early numbers. By acting early, we have been recently recognised that they need February, we helped to launch the UK’s able to get the maximum cash benefits to take action in these exceptional Sustainable Aviation roadmap, the first for 2021. circumstances. time that an entire national aviation The change programme has resulted Now, after 12 months with very few industry had committed to net zero in very difficult choices: a reduction passengers, we are only just starting to emissions by 2050 and laid out a plan of around a third of our management see daylight at the end of a very long to get there. team and around a quarter of our tunnel. While so much has changed, In mid-February, the Court of Appeal frontline choosing to leave under we still retain some of the strengths suspended the ANPS, (a ruling which voluntary severance. As a significant from February 2020. Heathrow, the was reversed in December by the local employer, we are very conscious UK’s only hub airport and biggest port, Supreme Court), and the first cases of that job losses in frontline roles have a has a critical role to play in rebuilding COVID-19 started to appear in Europe. devastating impact on the community the national economy and connecting Through March, passenger numbers around Heathrow. We have therefore all of Britain to global growth. collapsed completely as COVID-19 chosen to cut our payroll cost by Despite the pandemic, we have became a global pandemic, countries reducing legacy terms and conditions achieved record levels of customer closed their borders and the UK to above market levels and the London service and resilience, which reflects the went into the first lockdown. In April Living Wage, which has allowed strength of our service culture. We have passengers had fallen to only 3 percent us to avoid frontline compulsory done this by working closely with our of 2019 levels. redundancies. We are very grateful Team Heathrow partners to a common that 100% of our frontline colleagues Our first concern was the safety of plan to help us all come through this have accepted these new terms. colleagues and passengers. We worked crisis with a more efficient and agile quickly with other airports and airlines After a second lockdown in November, operation which is designed around the around the world to set consistent the market started to recover, only for needs of our passengers. high standards of COVID safety in the further restrictions to be put in place We have continued to work on a end to end passenger journey, and to in mid-December as new variants of plan for net zero carbon aviation and implement them at Heathrow. COVID-19 emerged around the world. to build a ‘coalition of the willing’ We are currently in a third lockdown We acted quickly and decisively in across the world; during 2020, airlines and under tight border controls to March to conserve cash, stopping in the US, Middle East, Hong Kong protect against new variants, but the capital expenditure and implementing and Russia have signed up, and the rapid roll out of vaccinations gives the a £300m net operating cost reduction entire European aviation sector has prospect of bringing the COVID-19 programme and suspended all work announced a plan for net zero aviation. crisis to an end and the return to a on expansion while retaining key more normal life. Most important of all, we have talent. This change process was been able to retain a talented team made more difficult through being The result of acting quickly on revenues at Heathrow who have demonstrated managed remotely by people and capex and beating our £300 great versatility, resilience and working from home. million net cost reduction target has teamwork in coming through 2020 been that we have ended the year At the same time, we worked hard and have grown in capability. They with only a slightly lower EBITDA than to protect revenues and bring in new are the best reason for confidence in forecast in June despite lower traffic airlines, including dedicated cargo our future. – which is a great credit to the hard freighters. We supported the UK work of our team in delivering the Government in developing a risk-based plan. We have been well supported by approach to reopening borders safely, shareholders and creditors and have which resulted in the introduction of successfully raised £1.7 billion of debt travel corridors in June. and injected £600 million of capital into the regulated business.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 21 OPERATING REVIEW (CONTINUED)
BREXIT OUTLOOK In December, the UK and EU agreed These changes will impact our pricing The outlook for our Adjusted EBITDA a Comprehensive Trade Agreement proposition materially and are therefore performance in 2021 remains (the ‘Deal’) that came into force on 1 a significant and credible threat to our consistent with the revised guidance January 2021. The Agreement outlines income. Removing tax free shopping published in our December Investor new rules for living, working and would lead to a significant reduction Report on 18 December 2020. We trading between the two parties. in retail income of circa £200 million forecast 37.1 million passengers annually. Removing tax free shopping travelling through Heathrow in 2021 or Aviation was identified at early would lead to a c.15% increase in a 54% reduction compared to 2019. stages as a priority for both sides. passenger charges from 2022, due Our forecast assumes no further The Agreement includes an aviation to increased difficulty to remain price recovery during the first quarter and chapter, providing the rights for flights competitive versus foreign airports and around two thirds of the annual volume to continue between the EU and UK destinations, as well as the knock- forecast materialising during the without disruption. All other air services on impact of passengers using the second half of year. between the UK and rest of the world VAT refund scheme at the airport. countries have been rolled over or Given the more gradual recovery Heathrow, World Duty Free, and Global renegotiated, meaning that flights can envisaged, further steps to reduce our Blue, have launched a Judicial Review continue to all markets with certainty. costs were taken in October. Terminal 4 on the Government’s decision for which The aviation chapter also outlines will remain non-operational throughout a hearing took place in late February. ambitions for cooperation on future air 2021 while the ramp up of Terminal traffic management, aviation security 3 will remain contingent on and consumer protection, while rules KEY MANAGEMENT CHANGES traffic recovery. In the absence of on airline ownership and control will be meaningful Government support, Rachel Lomax stepped down from the reviewed after 12 months. we reduced our people costs further HAHL Board on 23 February 2020, including additional reductions in our From a border perspective, the UK’s having served just over nine years on management roles and removal of all Border Operating Model (‘BOM’) the Board. Following a reorganisation legacy allowances. outlines a phased approach for cargo of the business that took place on 17 to limit immediate changes at the UK March 2020, Stuart Birrell resigned as Taking into account the mitigations border, with full checks beginning from Heathrow’s Chief Information Officer put in place throughout 2020, we 1 July 2021. The UK Government also and as a director of Heathrow Airport do not forecast any covenant breach confirmed that EU citizens can continue Limited and LHR Airports Limited, during 2021 under our current to use electronic gates at immigration Emma Gilthorpe’s role changed from traffic scenario. Given the degree of upon arrival into the UK. We are Expansion Director to Chief Operating uncertainty around traffic recovery, working closely with Government Officer, Andrew MacMillan’s role we have also considered a severe but and industry to support Global Britain changed from Chief Strategy Officer to plausible downside scenario whereby post-Brexit and ensure any longer-term Chief Carbon & Strategy Officer and traffic reduced to 27 million passengers disruption is minimised and Chris Garton’s role changed from Chief in 2021. In this scenario, we concluded adequately managed. Operating Officer to Executive Director, that sufficient mitigations would Solutions. Olivier Fortin was appointed remain within management control to From a retail perspective and ahead of as the HAHL Board’s Climate Change avoid any covenant breach. However, the end of the transition period, the Director on 27 January 2021. the impact of COVID-19 continues Government announced changes to to create considerable uncertainty airside tax-free sales of all non-excise for the aviation industry and the fact goods and the withdrawal of the VAT that, under other severe but plausible Refund scheme from January 2021. The downside scenarios, the Group may existing tax-free status is a key purchase need to take additional action indicates driver among passengers, particularly the existence of a material uncertainty. in high-spend categories such as luxury and technology. The VAT Refund scheme incentivises international residents to visit the UK and spend in the UK retail sector which benefits the wider economy and ‘UK PLC’. It is also a material source of revenue subsidising JOHN HOLLAND-KAYE passenger charges. Chief Executive Officer 23 February 2021
22 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 23 OUR STRATEGY
COVID-19 continues to represent a seismic challenge for the aviation industry, including Heathrow. Despite this, our vision remains to give passengers the best airport service in the world. This vision has both helped to guide our COVID-19 response and make key changes to our business to secure future success.
RESPONDING TO AN INDUSTRY IN CRISIS Heathrow’s market saw dramatic, PROTECT THE BUSINESS sudden shifts through multiple national lock-downs and worldwide Safety and security remain our first and We also significantly reduced our capital quarantines. Uncertainty continues non-negotiable priorities. COVID-19 by £700 million, to preserve cash with as to when stability and growth continues to have a significant impact investment focused on the safety and will return. on our business and recovery is resilience of the airport. For instance, expected to be much more gradual we invested in resurfacing the southern In response, our strategy has focused than previously thought. We have runway, which is typically challenging to on what we can control and what therefore implemented several steps to do in busier operational periods. will maximise opportunities with reduce our costs, preserve liquidity and Reorganising the business – We recovery. We have reprioritised around protect our financial covenants. controlling costs and ensuring financial made immediate changes to implement stability. We have continued to listen Extending our cost reduction temporary pay cuts, bonus cancellations, to our passengers. They still want programme – Like most infrastructure recruitment freezes and to maximise the direct flights to destinations they want, businesses our cost base is largely use of the Government furlough scheme. from a choice of airlines, at a price ‘fixed’, while this has been a very We have made significant changes to they are willing to pay. COVID-19 efficient model when we have had our organisational design. We have also has heightened their expectations stable demand, it is not suited to major undertaken work to ensure all salaries especially around ease of new changes in demand. In 2020 we have are aligned to market rate to ensure processes, cleanliness and reassurance. significantly reduced our cost base and savings become sustainable through the It has accelerated the need for digital started to make it more variable. By recovery. Our focus has been to protect relationships and created new needs the end of 2020 we reduced our gross jobs through this crisis and to offer every such as testing services. We have taken operating costs by circa £400 million frontline colleague a job at a market rate a lead in developing responses to this in compared to our December 2019 salary above the London Living Wage. Investor Report forecast. Through 2020 our management team the global aviation industry. reduced by around a third, while around Alongside organisational changes as We reoriented the immediate business a quarter of our frontline colleagues detailed below, we also consolidated plan as the impacts of COVID-19 chose to leave under voluntary severance our operations into two terminals and the suspension of the Airports as a result of implementing new market and one runway. We will continue National Policy Statement hit in spring aligned terms and conditions. 2020. We have focused on Protecting to balance our infrastructure and the Business, Winning the Recovery terminal occupancy with demand. Focusing on efficiency – We are and Building Back Better as phases. We’ve also renegotiated most of our undertaking a significant corporate These continue to pursue our strategic supplier contracts and are reviewing all transformation to drive efficiency in priorities but with a focus balanced contracts to find opportunities for cost key business processes and systems. across the stage of recovery we find reduction. The only major area where We seek to improve the efficiency of ourselves in. we have not been able to reduce cost the airport through standardisation of is in governmental costs such as processes, particularly at known pinch Business Rates. points including security.
Preserving liquidity and protecting
our financial covenants – We took
the proactive step to raise £1.7 billion
from global debt capital markets to
strengthen our liquidity in response to
the crisis. In addition, we also secured
a new £750 million facility at ADI
Finance 2. The facility’s net proceeds
were injected into the Heathrow
Finance Group to provide further
headroom to our group gearing
covenant level including £600 million
pushed into the Heathrow SP Group
that was used to optimise our
working capital position. ANDREW MACMILLAN Chief Strategy Officer
24 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
WIN THE RECOVERY • Targeting new entrants – working We look forward to contributing to the closely with airline partners to newly created Build Back Better Council Creating an environment where encourage hand backs of unused slots which brings together 30 business passengers feel safe and confident to fly because of the suspension of the slot leaders from a wide range of sectors of is fundamental to winning the recovery. usage rule to provide new entrants the British economy. The Council will We have worked with the Government with an opportunity to fly from work with the Government to unlock to implement the necessary standards Heathrow for the first time. investment, boost job creation and and procedures as the pandemic has support the delivery of Global Britain. evolved. We have put in significant • Supporting our cargo business – the best performer during the pandemic We played a leading role in developing measures to keep passengers and the sustainable aviation roadmap, colleagues safe, including UK robots, UV with a c.8x growth in cargo-only movements. We will develop a more launched in February 2020, and have handrail technology, Perspex screens and been working to get it established in hygiene technicians. Since April 2020, ambitious cargo strategy which could help to diversify our future revenue Government policy. We will continue we have encouraged the introduction of working on reducing our own a Common International Standard for and rebalance our strategic exposure to passenger demand. emissions further through using pre-departure testing which will allow renewable electricity, road user charging international travel and trade to get and more EV charge capacity. back to normal as soon as possible. Responding to passenger needs We support all measures that will bring – We are working to mitigate the impact Heathrow Expansion the COVID-19 crisis to an end, but that the Government policy on VAT will – In December, the Supreme Court blanket hotel quarantine is effectively have on our airport and retailers, which unanimously ruled the ANPS as lawful the closure of our borders which carries is in essence a tourist tax. In similar and legal Government Policy. Their huge ramifications for Britain and the scenes to the devastation on the high verdict concluded the Government had aviation sector. street, a number of our retailers have considered the Paris Climate Change also exited the airport. Where possible, Agreement as part of the policy and Testing regimes and vaccine we are seeking to replace these retailers reversed the decision taken by the Court development – We trialled pre- with new and fresh options for our of Appeal in February 2020. We have departure testing with four of our passengers. Our passengers have also already committed to net zero and this transatlantic carriers – American expressed a desire for digital options to ruling recognises the robust planning Airlines, British Airways, United Airlines support them throughout their airport process that will require us to prove and Virgin Atlantic. This helped the experience, meaning they can have expansion is compliant with the UK’s industry and Government to evaluate a wider selection of products with a climate change obligations, including which pre-departure testing approach touch-free experience. the Paris Climate Agreement, before is practical and safe enough to replace construction can begin. As passenger quarantine and other travel restrictions. BUILDING BACK BETTER numbers recover, our immediate focus We have also developed a testing will be to continue to ensure their safety pilot for airport colleagues, where While the immediate focus remains on and to maintain our service levels while around 2,000 Heathrow colleagues will beating the pandemic, we also stand we consult with investors, Government, regularly take part in rapid lateral flow ready to support the Government’s airline customers and regulators on our tests to help identify those who may efforts to build back better and deliver next steps. unknowingly be carrying the virus. a cleaner, greener and more resilient economy. Policy and regulatory matters Working to attract as much traffic – In December we submitted our Revised as possible – To offer as many flights Sustainable growth – Taking the Business Plan to the CAA, setting our to as many destinations as possible, carbon emissions out of flying remains proposed approach to the next price our work includes; both an ethical and a business control period (H7) due to start in 2022. • Incumbent airline build-back – imperative for Heathrow. After We recognise the uncertainties ahead supporting 80% of incumbent achieving the goal of our airport and that major demands of our plan airlines flying, although on operation becoming carbon neutral, we will be outside of our control including reduced schedules. are playing a leadership role to create the recovery of passenger demand, momentum to solve the problem across • Airline Consolidation of London the implementation of our proposed our scope 3 greenhouse emissions. RAB adjustment and the length of the operations – British Airways, Virgin The Committee on Climate Change Atlantic and numerous other regulatory period. We have requested (‘CCC’) has recommended no airport the CAA to enforce protections included airlines have chosen to fly from expansion unless the industry proves Heathrow rather than other London in our current license to recover that Sustainable Aviation Fuel (‘SAF’) regulatory depreciation with immediate airports, albeit this will unlikely be a works. We are working on advocating permanent move. effect and limit losses in the same way action by the UK Government. The UK upside is capped. Timely action by the will host COP26 this year which provides CAA will secure private investment to an important forum. We were involved maintain current levels of service and in developing the Terra Carta, a green lower charges to consumers from H7. recovery charter for business led by HRH, The Prince of Wales.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 25 OUR STRATEGY (CONTINUED)
HEATHROW’S STRATEGIC FRAMEWORK We continue to shape our strategy in the context of an overall strategic framework, defining who we are and how we seek to achieve our long-term aims.
WHO WE ARE WHAT WE WANT HOW WE ARE GOING Our strategic framework ensures Our Strategic Brief sets out our TO ACHIEVE IT that our purpose is at the heart of high-level aspirations for the future Our Masterplan is our long-term, what we do. It reminds us of our of Heathrow for all our strategic high-level development plan priorities and values which reflect stakeholder groups. agreed with our stakeholders. a simple business logic: engaged Our Management Business Plan people deliver excellent service and (‘MBP’) contains the actions and results, which underpin our license resources we need to deliver our to operate and grow. Excellent strategy. Our Revised Business Plan service at an affordable price is reflects consumers’ views and our differentiator that makes provides the plan and building blocks passengers more likely to choose for the next regulatory period. Heathrow again.
MASTERPLAN - VISION MANAGEMENT PURPOSE BUSINESS PLAN STRATEGIC BRIEF PRIORITIES (INTERNAL) REVISED VALUES BUSINESS PLAN (REGULATORY)
WHO WE ARE WHAT WE WANT HOW WE ARE GOING TO ACHIEVE IT
VISION To give passengers the best airport service in the world
PURPOSE Making every journey better
T R E
A C PRIORITIES I N V S S R U F H O E S T S B T R R E A W M E A AN IN O MOJO CUSTOM T THE PL ABLE GR
WHO WE ARE
T
T
R
C E
A E G T P K E I S I E V E N E C F I E G R I P A N V I S E H G R N V T E G NE E I EX S EVERYO RYONE W CELLENT VALUES
D I M O G W Y P A I N R R N I O E O D G H R H Y T T K T VIN ER H HT ING TOGE G EV E RIG
Our high-level aspirations for the future of Heathrow for all our WHAT WE WANT STRATEGIC BRIEF strategic stakeholder groups
MASTERPLAN The long-term plan for the layout of an expanded Heathrow HOW WE ARE GOING MANAGEMENT The consumer outcomes, action and resources we need to deliver TO ACHIEVE IT AND REVISED BUSINESS PLAN our strategy including over the next regulatory period
26 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
Our priorities explained Our values explained
MOJO KEEPING EVERYONE SAFE To be a great place to work, we will help K We look after everyone. We never compromise on E E E F P A our colleagues fulfil their potential and IN S G NE EVERYO safety or security and do the job properly first time, work together to lead change across every time. We’re committed to safety as the M O OJ Heathrow with energy and pride. foundation of an efficient operation and a secure airport. We know safety and security are essential TRANSFORM CUSTOMER SERVICE for a great passenger experience.
To deliver the world’s best passenger
T R E
A C I experience, we will work with the N V TREATING EVERYONE WITH RESPECT S R
F E T T O S R R Heathrow community to transform the E C M R A E E P T M S We celebrate diversity and respect others. We’re CU O I ST N E G R service we give to passengers and airlines, E H V IT ER W friendly, polite and considerate. We value improving punctuality and resilience. YONE everyone’s contribution. We support our people so BEAT THE PLAN they can care for others. To secure future investment, we will ‘beat the plan’ and deliver a competitive GIVING EXCELLENT SERVICE
B return to shareholders by growing E G N E A I We put a great passenger experience at the heart A V C T I PL I THE N V G R revenue, reducing costs and delivering E EX S CELLENT of what we do. We take time to understand what investments efficiently. our passengers and our airlines really want. We are the best we can be and deliver what we promise. SUSTAINABLE GROWTH To grow and operate our airport WORKING TOGETHER sustainably, now and in the future. S U H We’re one airport team. We develop excellent S T W T R A W O E I R H N RO KI ET ABLE G NG TOG working relationships and bring out the best in each other. We work constructively with each other and our airlines, partners and local communities. We look for win-win outcomes that benefit Heathrow and our partners.
IMPROVING EVERY DAY We aim higher. We all play our part in achieving I M Y P A R O D V Y ING EVER great financial results. We always look to keep things simple, reduce costs and improve efficiency. We regard every pound spent as if it were our own.
DOING THE RIGHT THING
D We’re honest, open and fair, and act with O G IN IN G H T T HE RIGHT integrity. We’re responsible in the way we do business. We challenge the status quo, tell it like it is and speak out if we have a concern. We have the tough conversations, make the right decisions, stand by our word and do what we say we will.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 27 OUR STRATEGY (CONTINUED)
OUR STAKEHOLDER GROUPS The strategic framework also sets our aspirations for The full Strategic Brief can be found on our website at: each of the five strategic stakeholder groups (passengers, https://www.heathrow.com/company/about-heathrow/ colleagues, airlines, investors, UK communities and company-information/heathrows-strategic-brief environment) and the key components of our Heathrow Ecosystem (statutory authorities, supply chain and commercial partners).
R O W E C O S Y T H S T E A E M H
PASSENGERS:
TO GIVE
COMMUNITIES AND
PASSENGERS THE ENVIRONMENT:
BEST AIRPORT A GREAT PLACE
SERVICE IN THE
TO LIVE
WORLD
S C
E
O I CONNECTING
T
M
I ALL OF THE UK M
R INVESTORS: O
DELIVER TO GLOBAL E
R
H COLLEAGUES:
C T GROWTH
COMMERCIAL A GREAT PLACE
I U
RETURNS THAT A
A TO WORK
L
SUPPORT Y
P R
INVESTMENT A
O
AIRLINES: R
T T
N U PROMOTE AIRLINE
T E
A SUCCESS THROUGH R
T
S S AFFORDABILITY
S U P P L Y C H A I N
28 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
PERFORMANCE AGAINST STRATEGIC PRIORITIES The following performance metrics were set for each of the four strategic priorities prior to the COVID-19 outbreak and provide a picture for the year.
PERFORMANCE INDICATORS
Lost-time Injuries1 Colleague engagement1
2020 2020
M OJO 20 20
20 20
1 Number of lost time injuries for every 100,000 hours worked (Lost time injuries), miniPulse colleague survey results (Colleague engagement). 2 Due to COVID-19, the miniPulse colleague survey was temporarily suspended for 2020.
PERFORMANCE INDICATORS
3 3
T Passenger satisfaction (‘ASQ’) Security queuing R E
A C
I N V S R 2020 F E 2020 O S R M ER CUSTOM 20 20
20 20
Departure punctuality3 Baggage connection3
2020 2020
20 20
20 20
Connections satisfaction (‘QSM’)2 3 Airport service quality (‘ASQ’); percentage of flights departing within 15 minutes of schedule (Departure punctuality); percentage of passengers passing through central security within 2020 five-minute period (Security queuing); percentage of connecting bags traveling with the passenger (Baggage connection); quality of service monitor (‘QSM’). 20 4 The ASQ survey was temporarily suspended in March in order to mitigate the spread of COVID-19 and resumed in August. Q4 2020 result was also our best Q4 score (4.24). 20 5 Due to COVID-19, connections satisfaction was temporarily suspended for 2020.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 29 OUR STRATEGY (CONTINUED)
PERFORMANCE AGAINST STRATEGIC PRIORITIES (CONTINUED)
PERFORMANCE INDICATORS1
Adjusted EBITDA £m
2020 B E A AN T THE PL 20
20
Passengers (millions) 2020 2019 Var. %2
UK 1.5 4.8 (69.8)
Europe 9.8 33.2 (70.3)
North America 3.9 18.8 (79.5)
Asia Pacific 2.9 11.4 (74.5)
Middle East 2.5 7.8 (68.2)
Africa 1.1 3.5 ( 67.3)
Latin America 0.4 1.4 (68.8)
Total passengers 22.1 80.9 (72.7)
Key traffic 2020 2019 Var. % performance indicators
Passenger ATM3 177,285 473,233 (62.5)
Load factors (%) 3 57.7 80.0 (27.9 )
Seats per ATM 216.2 213.7 1.2
Cargo tonnage (‘000) 1,141 1,587 (28.1)
We believe sustainability in all our aspects is fundamental to our long term business success. Our Heathrow 2.0 plan explained our plans across four pillars of sustainability. Despite the impact of COVID-19 we continued to progress against that plan in 2020. We intensified our focus on taking the carbon out of flight in particular, committing to net zero and achieving carbon neutrality during S U H S T T the year. We will review Heathrow 2.0 over 2021. We provide details of our Heathrow 2.0 activity A W IN O ABLE GR and performance in the next section.
1 Further analysis can be found in the Financial Review on page 46. 2 Calculated using unrounded passenger figures. 3 Passenger air-traffic movements (‘ATM’) includes commercial flights including scheduled, chartered and cargo and excluding positioning and private flights; load factor is a percentage of seats filled by passengers.
30 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
OUR COMMITMENT TO SUSTAINABLE GROWTH COVID-19 has a huge impact on our business and on communities around the world, including those local to Heathrow. The economic and employment needs During 2020 we made some early SUSTAINABLE in our local communities have increased adaptations to our plan: DEVELOPMENT GOALS and understanding of the strategic risk • We have increased our focus on of climate change has continued to The United Nations’ Sustainable climate change given its ever grow. While COVID-19 is a once in a Development Goals (‘SDGs’) were growing prominence as the greatest generation challenge, climate change launched in 2015. They are a universal challenge facing our generation. is a once in the planet’s history call to action to end poverty, protect Carbon has explicitly become part of challenge that must be urgently the planet and ensure that all people an executive director’s portfolio - the addressed. The pandemic has enjoy peace and prosperity. They feel Chief Carbon and Strategy Officer demonstrated that global problems more relevant than ever as we embark now leads a Carbon and Strategy require global solutions, reinforcing on 2021. To show how Heathrow team, thus placing climate change at the principles informing our strategy 2.0 supports the 17 goals, we have the centre of the company’s strategic and our unequivocal commitment summarised which goals apply to each planning. In 2020 we became to sustainability. of the four pillars within this report. carbon neutral for our buildings Heathrow 2.0 is our plan for and infrastructure and are working sustainable trade and growth. It towards zero carbon. SUSTAINABILITY CULTURE sets out how we will improve life • We focused our limited resources We have embedded sustainability for colleagues and communities, on supporting local communities, into our culture and through our contribute to a thriving economy, for example donating laptops to governance structures. Key aspects and help to tackle global challenges schools and food to food banks. include: including climate change. Our plan has We sponsored a Heathrow Local four pillars through which we aim to Recovery Plan under the leadership • HAHL Board1 of Directors: deliver the big outcomes that reflect of Lord David Blunkett to bring Our Board also has a dedicated the material colleague, community together local boroughs, employers sub-committee which discusses and environmental opportunities for and other stakeholders to help sustainability issues quarterly: the Heathrow: Great Place to Work, Great people get back into work. Sustainability and Operational Risk Place to Live, Thriving Sustainable • We have enhanced our diversity and Committee. In 2021, the Chair of Economy and a World Worth Travelling. inclusion strategy, underlining our the Audit Committee assumed a We remain committed to taking commitment to creating a welcoming responsibility for climate change to action across these pillars to protect and inclusive workplace. Our goal is further strengthen governance on and support people, economy and for Heathrow to reflect the diversity climate at Board level. environment and enable future of the local community at every • Executive team: Our Chief Executive generations to benefit from global level by 2025. This is a challenging and the Executive leadership team travel in a world without carbon. target, and we have significant provide strategic direction for the Heathrow 2.0 supports the ambitions work to do, particularly on ethnic delivery of Heathrow 2.0 through set out in our Revised Business Plan diversity, but it is the right thing their functions. and will help us meet the expectations to do for our business and for our • Our Carbon and Sustainability of our stakeholders, while reducing local communities. Leadership Group: Ensures that environmental and social risks to our Heathrow 2.0 is embedded and business. We will share the detail of implemented across the business and a revised and updated Heathrow 2.0 shapes departmental sustainability sustainability strategy later in 2021. plans. Its members are senior departmental leaders.
1 The HAHL Board is the Board of Directors of Heathrow Airport Holdings Limited as defined on page 80.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 31 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)
A GREAT PLACE TO WORK
2020 was a hugely challenging year for our colleagues and our focus was on safety as our top priority. Although we needed to pause many of our programmes of work, we still believe the places we work should provide people with opportunities. We want everyone who works at Heathrow to feel they can be happy, motivated, and developed in ways which encourage them to flourish.
EMPLOYMENT AND SKILLS Flagship goal: 10,000 apprenticeships by 2030 to help people develop skilled and sustainable careers.
SUSTAINABILITY PERFORMANCE INDICATOR
Total Team Heathrow number Number of apprenticeships arranged through of apprenticeships the Heathrow Academy1
T T
2020 T C 2020
20 20
1 Measured by number of apprenticeship starts.
Both the COVID-19 pandemic and DIVERSITY AND INCLUSION the delay to our expansion plans have impacted delivery of our Our business depends on the ability to At Heathrow we have taken the apprenticeships strategy as employers provide an industry leading passenger following actions to leverage and at the airport retrenched and reduced service. To do this effectively we must develop further the skills and their workforce. For 2020 we have recognise that a diverse range of capabilities of our colleagues not yet been able to collect data thought, skills and experiences are and organisation: for apprenticeship starts across required. Diversity and Inclusion is a fundamental part of our business Impact of the pandemic and our Team Heathrow due to disruption diversity and inclusion Goals caused by the pandemic. We remain strategy and to demonstrate our committed to apprenticeships as a commitment we have set ourselves The COVID-19 pandemic created way of supporting people to develop ambitious goals to ensure we are numerous challenges for our business, sustainable careers. In 2020 this was representative of our local community including making difficult workforce demonstrated through our ongoing at every level by 2025. decisions about jobs, salaries, furloughing and returning to work. delivery of the Shared Apprenticeship 2020 was a pivotal year for diversity We aimed to protect our diverse Scheme in Construction, with the 39 and inclusion at Heathrow, one that colleagues, ensuring our diversity learners already on the scheme able to saw the development of the Diversity representation saw little impact, as continue. Our flagship goal of 10,000 and Inclusion team. The team have illustrated in the table on the following apprenticeships by 2030 was linked to implemented our Diversity and page. We are proud to say that the our expansion plans and the additional Inclusion strategy and action plan, they challenges we were faced with did opportunities that would create. In the act as our organisational conscience not distract us from our commitment light of changes to those plans and the and focus on driving equality, providing to diversity and inclusion. impact of COVID-19, we are reviewing challenge, implementing change and and revising our strategy and the time creating a sense of belonging and We will continue to monitor our scale of our goals. inclusion for all colleagues. progress against our diversity and inclusion goals quarterly through our The COVID-19 pandemic and the newly created Diversity and Inclusion Black Lives Matter protests of 2020, People Committee, chaired by The sparked by the killing in Minneapolis Chief People Officer, attended by of George Floyd, highlighted that both The Chief Operations Officer, Chief institutional and societal racism and Financial Officer, Chief of Staff, inequality is still prevalent around us. Learning and Inclusion Director, This cannot continue. Diversity and Inclusion Manager and key representatives from across the organisation.
32 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
Black Lives Matter Movement The Black Lives Matter Movement can This was positively received by Our race and ethnicity network worked be traced back to 2013 but the killing colleagues which led to an increased closely with Show Racism the Red Card, of George Floyd took the movement to number of Listening Circles taking the UK’s largest anti-racism educational areas it had not reached before and will place across the organisation where charity to provide a number of result in lasting change. We responded colleagues of all ethnicities took part workshops to educate colleagues about directly to this movement and this in conversations talking about race to the causes and consequences of racism. was passionately led by our CEO. share experiences and further enhance The network took part in celebrating Heathrow held dedicated company- their learning. This positive action ‘Standing together against racism wide discussions giving colleagues was further demonstrated through on wear red day’ and were awarded a voice and platform to share their the activities that took place during Bronze for their engagement activity experiences, to explore the movement Black History Month; recognising and both internally and externally. and show support for anti-racism. celebrating difference. Colleagues of Most importantly, our CEO gave a all ethnicities joined virtual book club very important message; At Heathrow, sessions, engaged in inclusivi-tea’s everybody is welcome. which provided a safe space to discuss, ask, share and learn about race.
Goals Target Performance 2020 2019 Reflect the diversity of the local 49% Female representation Senior managers2 37.2% 35.0% community at every level for Female at each level All colleagues3 40.8% 43.0% colleagues Reflect the diversity of the local 39.9% Black, Asian, Senior managers 17.2% 17.0% community at every level for Black, Asian Minority Ethnic representation All colleagues 45.9% 43.0% and Minority Ethnic Colleagues at each level Create an inclusive culture where 100% Disclosure rates Gender 98.0% N/A4 colleagues feel confident in recording (including prefer not to say) for: Disability 19.1% N/A4 and sharing their diversity data Gender, Disability, Ethnicity and Sexual orientation Ethnicity 92.0% N/A4 Sexual orientation 19.1% N/A4
GENDER AND ETHNICITY PAY GAP
Gender Ethnicity We see the gender pay reporting We are committed to increasing the Career Elevate, managed by requirements as a step in the right representation of Black, Asian and MyKindaFuture is an online mentoring direction, helping us to retain, develop Minority Ethnic colleagues across all and learning experience aimed at and attract the best talent whilst, levels of our organisation. In 2020 we supporting diverse colleagues to creating an inclusive workplace where voluntarily calculated our Ethnicity Pay develop the mindset and skills needed everyone can achieve their potential. Gap data which will be used to inform to adapt and thrive in a new role, our Race Action plan and launch our career and working environment. In 2020, the median Gender Pay Gap first Ethnicity Pay Gap report in 2021. has increased to 4.5% (vs, 3.0% in 2019). The mean Gender Pay Gap has We know that reducing our pay gap improved by 1.0% to 8.8% (from 9.8% and changing the representation of in 2019). our workforce will take time and we continue to implement and develop The median Bonus gap has remained key levers to support us achieving our flat at 0.3%, with both the median goals. For example, in Q4 of 2020, male and female colleagues paid the we signed up to ‘Career Elevate’, a Airport Profit bonus. The mean Bonus government funded resource and part gap has improved by 1.0% to 27.0% of their national retraining scheme. (from 28.0% in 2019). We are proud of the progress we have made, but there is still more to do and the 2020 Gender Pay Gap Report sets our ongoing plans to improve our Gender Pay Gap.
2 Executive to band C. 3 All directly employed colleagues of the Heathrow Airport Holdings Limited Group as defined on page 80. 4 Data was not collected in 2019 – new performance indicator from 2020.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 33 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)
DISABILITY CONFIDENT DIVERSITY NETWORKS DIVERSITY AWARDS LEADER STATUS Diversity networks, by their very In 2020 we were delighted to see Heathrow were awarded Disability nature, are about change. They exist our work on Diversity and Inclusion Confident Leader Status in 2020 largely because there is a desire to see recognised by several award schemes: recognising our efforts to support a difference within organisations and the recruitment, retention and identify through the collective voice what • Winner of RIDI Award for Disability development of disabled colleagues. the perceived issues and barriers are. Confident. We have demonstrated that we have: Our diversity networks continue to • Winner of the Genius Within CIC help us promote an inclusive culture Award for Umbrella Project. • Challenged attitudes through their awareness raising • Winner of the British LGBT Award for towards disability. campaigns. They include: Altitude, Network Group of the year. • Increased the understanding our gender equality network; HAND, of disability. Heathrow Airport’s Network for Disability; en-haNCE, our culture and • Removed barriers to disabled ethnicity network; and PROUD, our colleagues and those with long-term LGBT+ network. Each network has an health conditions. executive sponsor who acts as a mentor • Ensured that disabled colleagues and champion, and a director sponsor can fulfil their potential and realise who supports the network to meet its their aspirations. objectives. In 2020 all our networks have adapted the way they operate • Provided adjustments during and found new ways to engage with recruitment and once employed colleagues virtually. as a colleague. • Implemented several changes to In 2021, we will support the our recruitment processes including development of our networks by guaranteed interview if you meet the enhancing their structure, driving minimum requirements for the role. strategic alignment of network activity with the business so they are supporting the delivery of the Diversity Heathrow are the first airport to be and Inclusion strategy, action plan and awarded Disability Confident Leader goals. We will encourage collaboration Status and subsequently received a between networks and promote Ministerial Visit by MP Therese Coffey. intersectionality. Our network steering We were also delighted to win the groups will be used as an opportunity RIDI Awards 2020 for our Disability to develop our diverse colleagues. Confident submission.
DISCLOSURE RATE We aim to create a welcoming, inclusive workplace where everyone feels able to bring their whole self to work and perform at their best, we need to continue to ensure we create a safe environment where colleagues feel confident in doing this. Our aim is to focus on this in 2021 and see an increase in disclosure rates and creating more diverse role models.
PAULA STANNETT Chief People Officer
34 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
A GREAT PLACE TO LIVE
Whilst COVID-19 has without doubt been the most challenging time in Heathrow’s history, we also know that our community has needed us more than ever before. We want to be a responsible neighbour that benefits our local community.
RESPITE FOR RESIDENTS Flagship goal: halve the number of fights on non-disrupted days which operate late after 23:30.
SUSTAINABILITY PERFORMANCE INDICATOR
Late Running Aircraft1
T
2020
20
1 Unscheduled departing aircraft operating after 23:30 on non-disrupted days, with the goal of seeking to at least halve the number by 2022 compared to 2016.
The figure for 2020 is significantly QUALITY AIR, LOCALLY COVID-19 COMMUNITY lower than 2019 because of the RESPONSE operational impacts of the pandemic In May 2019, we announced the which reduced annual movements by world’s first airport Ultra Low Emission We remain committed to being a 63%. As the airport recovers we remain Zone (‘ULEZ’). In December 2020, responsible neighbour throughout the committed to reducing the number due to the impact of COVID-19, these crisis. We have shared resources with of late runners through collaborative plans were adjusted with a proposal to those who needed them most. This initiatives such as the Quiet Night explore the introduction of a Forecourt included donating laptops to local Charter. The lower number of flights Access Charge for vehicles in late 2021. primary schools via funds donated by operating in and out of Heathrow led Our current estimates indicate that members of the Executive Committee to us taking the decision to consolidate such a charge will reduce congestion, and the recycling of old equipment, operations by closing one of our two improve air quality and cut carbon supporting Team Heathrow companies runways at different periods during emissions in travel to the airport. It to distribute surplus food to foodbanks, the year. During the summer we also is way to pragmatically support a making donations of facemasks to carried out extensive repair works to shift away from cars in a post-COVID NHS hospitals, and repurposing our the southern runway which meant it recovery. An airside ULEZ also remains Heathrow Community Rangers to was closed for a number of months. part of our future plans. provide logistics support to community Although flight numbers were organisations. In 2021 space within our much lower during the year (meaning head office will be utilised as an NHS less noise), we knew the changes to COVID-19 vaccination centre, under how we operated our runways, the Government’s mass vaccination would impact some local residents programme. through loss of respite, so provided monthly bulletins.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 35 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)
COMMUNITY INVESTMENT COMMUNITY ENGAGEMENT In 2020, Heathrow has continued to Heathrow’s engagement in 2020 had Heathrow Community Engagement provide support for its neighbouring to quickly respond to the implications Board (‘HCEB’) continued to operate villages. This has included the of COVID-19. This meant that our and held its first quarterly Independent Heathrow Community Ranger provision regular forums (Local Focus Forum and Forum in July. HCEB also published a - three full-time rangers and a part- Heathrow Community Noise Forum) report, with Oxford Economics, on the time supervisor - who maintain aspects were replaced with paper updates impacts of reduced activity at Heathrow of the local community, including in the spring and summer, and then on the local area. landscaping and litter-picking. This transitioned to virtual meetings in the initiative is designed to add value autumn. As part of business protection to the service provided by the Local and cost saving initiatives, the creation Authority. We have maintained our and distribution of the borough partnership with its five most local newspaper, ‘Heathrow News’ was primary schools, offering them support stopped. In the Summer of 2020, the wherever we were able to help them first quarterly e-bulletin was circulated to respond to the impact of COVID-19. to local community members on our We also transitioned our education mailing list. Throughout 2020, we have programmes, such as weekly reading continued to maintain the community partners with colleague volunteers, phoneline, which receives queries and to a virtual delivery towards the end complaints from local residents on an of the year. It is really important to us array of topics such as noise, Heathrow that the support we provide to schools Expansion, runway operations and is targeted according to need and we community support. In 2020, they work with Business in the Community took 1,682 calls from local residents or to help deliver this through our primary other stakeholders and received 1,042 school activities. Our partner schools’ queries by email. During the year, priorities changed in 2020 as they 39,083 noise complaints were received responded to the pandemic and we’re from 945 complainants. Of these pleased to continue to support them. complaints, 76% were from the same Other aspects of our Community 10 complainants. There was a 70% Investment programme in 2020 have drop in the number of people making been scaled back to reflect the impacts noise complaints compared to 2019, of COVID-19 on the business, including and a 50% drop in the total number of the Neighbouring Villages Fund. complaints received. We continued to support the Heathrow Community Trust, an independent grant-making charity which funds projects that improve quality of life for communities near the airport. Further detail can be found on page 45.
36 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
A THRIVING SUSTAINABLE ECONOMY
As the UK’s only hub airport, we have a critical role to play in the economy, both nationally and locally. We want to use our influence to drive change and collaborate with the 400 businesses that operate from or supply goods and services to Heathrow.
HEATHROW LOCAL RECOVERY PLAN In November, following four months The plan sets out a clear agenda for The plan will be implemented by of work and collaboration with local the recovery of our local economy and the Heathrow Local Recovery Forum stakeholders, we published the brings together the recommendations (‘HLRF’), chaired by Lord Blunkett that ‘Heathrow Local Recovery Plan’ to from Heathrow and its neighbouring was established in September 2020. help drive local economic growth local authorities, local enterprise The plan can be viewed at: post-pandemic. The local recovery plan partnerships and key partners, https://mediacentre.heathrow.com/ came at a critical time, as research committed to enabling airport pressrelease/details/81/Corporate- from Oxford Economics revealed that sector recovery and supporting local operational-24/12624 there could be 16,000 fewer jobs in communities affected. the communities around Heathrow in 2021 versus 2019 as a result of the devastating economic impacts of COVID-19.
LONDON LIVING WAGE Flagship goal: All our direct supply chain colleagues working at Heathrow will be transitioned to be paid the London Living Wage by the end of 2020 and we will encourage commercial partners and our supply chain to work towards the London Living Wage, while continuing to give affordable service to our customers.
SUSTAINABILITY PERFORMANCE INDICATOR London Living Wage Contracts1
T
2020 1 The number of amended and renegotiated contracts to be London 20 Living-Wage compliant, with the goal of all direct supply chain colleagues working at Heathrow to be transitioned by the end of 2020.
Despite the impact of the pandemic, we have maintained the LLW for all our directly employed colleagues. Due to the impact of COVID-19 on our business, in March 2020 we made the very difficult decision to pause delivery of our Living Wage Roadmap for suppliers. We remain committed to transitioning all direct supply chain colleagues working at Heathrow to be paid the London Living Wage and we are currently working through the details of our revised Living Wage Roadmap so that we can restart this programme again as soon as we are able to.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 37 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)
A WORLD WORTH TRAVELLING
CLIMATE CHANGE
Aviation is a force for good in the Heathrow cannot get to net zero To remove the carbon from flying there world, helping power economic growth alone. Carbon emissions at Heathrow are in turn two choices: “change the and bringing people and cultures are generated by airlines, other plane” or “change the fuel”. Changing together. Our challenge is to protect organisations that operate at Heathrow, the plane means developing a new the benefits of aviation in a world passengers and colleagues. That is why zero-emissions aircraft. Electric and without carbon and to do that we need our Target Net-Zero plan is built around hydrogen technologies are both options to get to net-zero aviation emissions the following goals: for shorter journeys. Airbus has recently by 2050. COVID-19 has shown us the announced plans for a commercial effects of a genuine global crisis. It is • Working with our industry partners, hydrogen aircraft with a capacity of clear we must act now to avoid that Government and passengers to up to 100 seats and a range of up to kind of crisis with our climate and the decarbonise flight. 2,000kms to be flying by 2035. That devastating impacts that entails. • Working with other organisations would be a significant step forward. However, flights of that distance still We continue to play a leadership role that operate at Heathrow, and only represent around 30% of global which matters not just because we with passengers to eliminate aviation carbon. This shift will also take must help the UK achieve its net-zero carbon on the ground from decades as the aircraft fleet is gradually target, but because we can use our surface access and vehicles. changed over – too slow to meet status as a major global hub airport and • Finishing the job of getting our climate change goals. our industry links to accelerate change own house in order as the airport in our sector and around the world. operator. Our airport infrastructure The 70% of aviation carbon that comes Ultimately delivering net zero underpins became carbon neutral in January from longer journeys will require a the future success of our business and 2020 through carbon offsetting, the different solution: changing the fuel. sector, enables the benefits of airport next goal is achieving zero-carbon That means feeding new, lower carbon expansion, and it reduces airport infrastructure. SAF into existing pipelines and aircraft. the significant risks associated with These fuels are proven, have the climate change. potential to cut carbon by at least 70% DECARBONISING FLIGHT and meet strict sustainability standards. It is positive that in the midst of the worst crisis in the aviation sector’s Over 95% of Heathrow’s carbon Whilst we deliver the steps necessary history, momentum on addressing footprint is from flights. Our role is to to take the carbon out of flying, there climate change has continued to build support the industry roadmap, using are opportunities to support initiatives and progress has been made. The focus our scale and influence to drive change outside of our sector and put the now is to place climate change at the and take a lead in campaigning for net- carbon back in the ground today. centre of the industry’s recovery and zero flight. Carbon removal will be a key part of accelerate progress towards achieving getting aviation to net zero and the The journey to net-zero aviation has net zero during this decade. sector can play a role in catalysing two parts. First, removing the carbon and scaling up the market for nature from flying. Second, putting any carbon based and engineered carbon we do emit back in the ground through HEATHROW ‘TARGET removal. Nature-based carbon removal natural climate solutions or through opportunities are already available and NET ZERO’ engineered carbon removal. take time to deliver carbon benefits so We published ‘Target Net-Zero’ in investment now is important. We are a early 2020, our plan for net-zero, founding member of the Coalition for which supports the UK industry net- Negative Emissions which is working to zero target and roadmap. Our ambition support an overall UK policy framework is for 2019 to be the year of peak for nature-based and engineered carbon emissions from Heathrow, carbon removals. We have taken a driven by the accelerated retirement leadership role within UK aviation to of older aircraft because of the assess the scale of opportunity and to pandemic, and with urgent action by understand how removal projects and the Government to scale up Sustainable benefits can be realised. We have so far Aviation Fuel (SAF). funded three Woodland Carbon Code projects in Scotland and Wales.
38 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
Building an industry coalition Leading the drive towards Taking direct action to to deliver net zero Sustainable Aviation Fuels cut emissions In 2020, we have continued to invest Core to the goal of net-zero flight are Beyond advocacy we are looking at in our advocacy role, building the case the policies needed to urgently scale up what we can do directly to support the for action through our involvement in SAF in particular. decarbonisation of flight. business groups, through the media, During 2020 we’ve been working and participating in key speaking Our landing charges already incentivise through industry groups to events. Key highlights of Heathrow led planes that are cleaner for local air understand how the scale up of SAF or supported events include: quality and quieter. We are now can be achieved and build momentum consulting on how we could use our to action. • Our CEO speaking to the Airports landing charges to incentivise SAF. Council International Europe Globally the key initiative has been the We are also considering where capital Conference and the ICAO Global Clean Skies for Tomorrow coalition, investment by Heathrow can cut Stock-taking Seminar on Carbon; a a group of leading airports, airlines, carbon from aircraft both in the air and global event on a long-term climate OEMs, fuel companies, aviation users on the ground and support our airline goal for aviation. and governments, working through the customers to deliver their carbon goals. World Economic Forum and the Energy • Participation in the World Economic We are making it easier for customers Forum CEO Action Group. Transition Commission’s “Mission Possible Partnership” on hard to abate to reduce the carbon impact of their • Clean Skies for Tomorrow publishing sectors. The group backs the ambition flights. In early 2020 we launched a its European Policy Proposal. of net-zero aviation and is working quick and easy platform for customers • We joined a round table of global on the opportunity for scale up, the to purchase quality carbon offsets to industry leaders as part of His Royal availability of feedstock, technology cover flights. As travel recovers post Highness’ ‘Sustainable Markets pathways and costs, and policy COVID-19 we plan to restart promotion Initiative’, and we lead its aviation proposals including both a supply-side of the platform. taskforce. mandate and demand-side incentives. • Continuing membership and By 2030, 10% of all aviation fuel used involvement in the Council for in Europe could be sustainable, based Sustainable Business to develop its on analysis by the Clean Skies for position on the decarbonisation of Tomorrow Coalition. aviation, and the Corporate Leaders Within the UK, Heathrow has Group on Climate Change. set out proposals for aviation • Calling for and participating in decarbonisation to Government both the UK Government Jet Zero directly and through our membership Council bringing all parts of the of Sustainable Aviation. A series of industry together in the drive for meetings with government ministers, zero-carbon flight. senior officials and advisers • Mainstream media interviews and have focused on the interventions the publication of opinion pieces. needed by the Government to • In the finance sector we are an support the scale up of SAF. active member of Accounting for In 2020, the Government launched Sustainability and support their the Jet Zero Council, a group of programme of work. Climate change 25 industry, Government and and sustainability is a feature of our environmental leaders tasked with participation in global roadshows and agreeing and delivering the plan for investor conferences. net-zero aviation. We will stay actively • Heathrow proudly joined a group of involved in that process supporting global companies in January 2020, the development of ambitious targets who are supporting and welcoming for SAF use and working with airlines the launch of the ‘Terra Carta’ – and others to make any target a part of HRH The Prince of Wales’ commercially viable reality. Sustainable Markets Initiative.
Advocacy will remain a priority for us as the global industry continues to develop its long-term response to addressing climate change, before gathering at the ICAO General Assembly in 2022 to agree a global net-zero emissions target.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 39 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)
A WORLD WORTH TRAVELLING (CONTINUED) ELIMINATE CARBON ON GETTING OUR OWN HOUSE BUILDING TARGET NET THE GROUND – SURFACE IN ORDER – ZERO-CARBON ZERO INTO HEATHROW’S ACCESS AND VEHICLES AIRPORT INFRASTRUCTURE REGULATED BUSINESS PLAN Three percent of Heathrow’s carbon Less than 1% of Heathrow emissions In December 2020, we submitted the footprint comes from surface access are directly controlled by the airport. latest draft of our business plan to to and from Heathrow by colleagues, These are the emissions from the the CAA for the next 5-year regulated passengers and freight vehicles, or from energy used to run our buildings and settlement period which begins in vehicles operating within the airport. infrastructure. Heathrow became 2022. As part of our priority for Our goal is to deliver the infrastructure, carbon neutral in January 2020. Our sustainable growth, we have made a services and incentives that enable plan is for zero-carbon infrastructure strong case for action for addressing passengers and colleagues to make by the mid-2030s. Total emissions climate change and included actions more sustainable travel choices. from our electricity and gas use have from Target Net Zero that we need to More sustainable travel choices also fallen by around 85% since 2015. This deliver in this period. As our business contribute to reducing congestion, is a result of continued investment recovers, we propose to invest in improving local air quality, improving in energy efficiency measures, the initiatives that deliver the biggest cuts health and wellbeing and supporting generation of renewable energy on-site in emissions from aircraft and on the our ambition of Heathrow as a great from biomass and solar which delivers ground, reducing our footprint as fast place to live. 10% of our energy needs and shifting as we can through the first half of this to a renewable electricity tariff. decade to the end of 2026. During the next decade, we expect to see a bigger shift by passengers, Moving forward we plan to continue Our Task Force for Climate-Related colleagues and airport companies with the same approach. Consuming Financial Disclosure provides more to electric vehicles in response to less energy will always be the first information on how our approach to government policy. We plan to step as it helps us save costs. We will climate change addresses our material support the growth in electric vehicles identify new opportunities to operate climate risks. by investing in our electric vehicle our assets more efficiently. We will charging network, so we keep pace also continue the job of decarbonising with demand, maintain a good service the airport’s gas heating network and and increase usage. We will also see transitioning to 100% renewable how we can accelerate a faster uptake energy sources. by colleagues and Team Heathrow partners, supported by the introduction of an airside ‘Ultra-Low Emissions Zone’ by 2025. The introduction of Crossrail services to Heathrow will increase the number of rail connections and offers passengers a new convenient service. We also plan to invest in other active travel and public transport improvements in our next regulated settlement period to provide passengers and colleagues with more sustainable options for getting to and from the airport be that walking, cycling, bus and coach, or rail.
40 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
TARGET NET ZERO
Finishing the job of getting our Working with our industry partners, Removing carbon from own house in order Government and passengers to the atmosphere decarbonise flight 1. We will keep investing until all our 8. We will help passengers to offset airport infrastructure and vehicles 5. We will work to build a global their flights and increase our are zero carbon. aviation industry ‘high ambition own investment in natural and coalition’ with the aim of agreeing technological solutions to remove Working with our Team Heathrow a global net-zero emissions target carbon from the air until aviation partners and with passengers to at the ICAO general assembly in reaches net-zero carbon. eliminate carbon on the ground 2022. 9. We will keep evolving this plan 2. We will support business partners 6. We will help accelerate the and testing ourselves to go further to ensure vehicles at Heathrow production and use of Sustainable wherever possible, working with meet ultra-low emissions standards Alternative Fuels (‘SAF’). airlines, airports, manufacturers, by 2025 as a step toward a full government and academics to 7. We will support the development zero-carbon fleet in the future. consider what further steps we can of technologies which can get take together. 3. We will make it easier for the aviation to fully zero-carbon flight. 76,000 people who work at 10. We believe there is scope for the Heathrow, our passengers and all Government to help the aviation those who travel in our local area industry move faster by supporting to reduce their emissions from the development of new zero- travel on the ground. carbon technologies, developing a clear net-zero standard, investing 4. We will become a world-leader in in new public rail schemes and low-carbon construction, setting incentivising the development a clear baseline and ambitious and take-up of more sustainable reduction targets to reduce aviation fuel – for example, embodied carbon from expansion through the Air Passenger Duty of the airport. We will offset and promoting offsetting. residual emissions. To find out more about our Target Net Zero plan visit http://www.heathrow. com/net-zero.
Definitions Carbon-Neutral Net-Zero Zero-carbon airport To offset residual carbon emissions, This means that the maximum infrastructure credits can be purchased from feasible emission-reductions of Generating no carbon from carbon removal projects (such as carbon have been made, and any the energy used to run Heathrow, afforestation) or from paying for residual emissions are including all our buildings and fixed activity in other sectors that reduces counterbalanced by an equal volume assets. We are working towards carbon emissions elsewhere, for of carbon removals achieved by becoming a zero-carbon airport by example paying for renewable purchasing offset credits. Work the mid-2030s. energy projects to replace the continues to build our detailed Target burning of fossil fuels. We became Net-Zero strategy out of our current carbon-neutral for airport 8 point plan including the fastest infrastructure in January 2020. timeline for making our airport infrastructure net-zero.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 41 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED)
A WORLD WORTH TRAVELLING (CONTINUED) OUR CARBON FOOTPRINT
We monitor our carbon footprint and which for 2020 are not yet available. Our methodology for carbon reporting report on our greenhouse gas emissions Our carbon footprint for 2020 will be follows the Greenhouse Gas Protocol annually. This helps us to identify published later in 2021. Our goal is to and Airport Carbon Accreditation opportunities to reduce our emissions automate carbon data gathering so (‘ACA’) guidelines. It includes emissions and assess our progress in delivering that in the future we can publish our from our infrastructure, travel to and our Target Net-Zero plan. carbon footprint at the same time as from the airport and aircraft in the the annual report and accounts. More landing and take-off (‘LTO’) cycle. This The data in this report is for 2019. detailed information on our footprint year we have expanded the scope of We produce a detailed carbon footprint is available in our 2019 Sustainability our footprint to include scope 3 ‘cruise’ each year in our annual sustainability Progress Report at www.heathrow. emissions. These are departing aircraft progress report which is published com/company/about-heathrow/ emissions above 3000ft between later than our annual report and heathrow-2-0-sustainability-strategy/ departure and arrival airports. accounts. Calculating our footprint reports-and-futher-reading relies, in part, on external data sets
Emission source Greenhouse gas emissions 2017 2018 2019
SCOPE 1 (tonnes CO2e) 29,216 28,330 26,515 Fuel consumption utilities – Market based 24,779 23,604 21,942 – Location based 24,779 25,711 24,335 (134,288.9 MWh) Operational vehicles 1,749 1,817 1,668 (157.7 MWh) LPG for fire training 9 34 35 (4.9 MWh) Refrigerants 2,678 2,875 2,871
SCOPE 2 (tonnes CO2e) 15,680 0 0 Grid electricity consumption – Market based 15,680 0 0 – Location based 97,408 79,921 71,163 (283,229 MWh)
SCOPE 1 and 2 carbon intensity (kg CO2e/passenger) 0.58 0.35 0.33
SCOPE 3 (tonnes CO2e) 20,998,580 21,045,899 20,778,193
Total (tonnes CO2e) 21,043,476 21,074,229 20,804,708
Supporting notes: Scope 1 emissions We continue to apply the • Improvements have been made to our methodology for accounting refrigerant same footprint boundaries emissions and so emissions for previous years have been recalculated and uplifted. to reflect our operational Scope 2 emissions control both at the airport • Market-based grid electricity consumption: market-based emissions for grid electricity and offsite – including our have been used to calculate total emissions. business parking “Pod” test • Guarantee of Origin (‘REGO’) contract: the REGO certificate covers HAL (‘Heathrow track and Business Support Airport Limited’), our “Pod” test track and Business Support Centre (in Glasgow), Centre (‘BSC’) – and to all of which fall under Scope 2 electricity. align with the Greenhouse Gas Protocol (‘GHGP’), • All scope 1 and 2 emissions are UK based. which provides accounting Scope 3 emissions and reporting standards, as • Third party fuel consumption – utilities: market-based emissions for grid electricity have well as sector guidance. been used to calculate total emissions; includes the Heathrow Express (HEX) depot. • This footprint does not currently include supply-chain emissions from freight and logistics activity. However, we are currently mapping out these emissions as part of our Carbon Trust supply-chain accreditation.
42 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
SCOPE 1 AND 2 EMISSIONS Heathrow’s operational vehicles 6.3% Scope 1 are all ‘direct’ CO2e emissions from activities at Heathrow under our LPG for fire training 0.1% direct control, such as Heathrow’s own vehicles, fuel required to heat our Refrigerants 10.8% terminals and non-carbon emissions including refrigerant gases.
Scope 2 are all ‘indirect’ CO2e emissions from the electricity purchased for the Utilities – fuel consumption 82.8% organisation. Scope 2 market-based emissions for 2019 were zero. This is because our electricity was sourced using a Renewable Energy Guarantee of Origin (‘REGO’) backed contract. The REGO certificate covers Heathrow Airport Limited, our parking-pod test track and Business Support Centre (in Glasgow), all of which fall under Scope 2 electricity.
SCOPE 3 EMISSIONS Our scope 3 emissions include all the other indirect activities in relation to the airport, occurring Landing and take off cycle (‘LTO’) 6.0% from sources we do not own or directly control. We know that Passenger surface access 3.0% getting our own house in order is Colleague surface access 0.6% only the first step and that we must Other1 0.2% support decarbonisation across the whole industry, including flights. Cruise emissions from departure flights90.2%
1 Other comprises of business travel, operational vehicles & equipment, waste, water, third party grid electricity consumption - market based and fuel consumptions - utilities.
ENERGY EFFICIENCY We have invested over several years to A heat link to supply renewable heat make our airport more energy efficient. from our biomass boiler to Terminal In 2020, energy use fell significantly 5 was completed and successfully as we worked quickly to consolidate commissioned in 2020. The link now operations to reflect lower passenger enables the biomass boiler to supply numbers due to COVID-19. By renewable heat to both Terminals 2 considering opportunities to minimise and 5, and to maximise the amount energy use during this period, we of renewable electricity we generate reduced electricity use by 23% and on site. natural gas by 16% compared to 2019. The impact of COVID-19 has meant energy use has increased in some areas - we have increased the ventilation of our buildings to implement government guidelines as one example.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 43 OUR COMMITMENT TO SUSTAINABLE GROWTH (CONTINUED) EXPANSION
In June 2018 Parliament approved the In October, we submitted an appeal to As passenger numbers recover, the Airports National Policy Statement the Supreme Court and in immediate focus will be to continue (‘ANPS’) which set out the policy December, the Supreme Court to ensure their safety and to maintain framework for expansion at Heathrow unanimously ruled the ANPS as lawful our service levels while we consult Airport and was to be the primary and legal Government policy. The with investors, government, airline basis for decision-making on any verdict confirmed the Government customers and regulators on our next development consent application for a had taken into account the Paris steps. These include the continued new north-west runway. Climate Change Agreement as part validation of the underlying business of the policy, and that this would case (traffic demand and pricing We were was making considerable be considered as part of the robust proposition); ensuring a fair and stable progress towards our Development planning processes in the UK. We have economic regulatory framework; and Consent Order application to deliver already committed to net zero and this the confirmation or a review of the a sustainable, affordable and ruling recognises the robust planning ANPS by the Secretary of State for financeable expanded Heathrow, process that will require us to prove Transport. including holding multiple expansion is compliant with the UK’s consultations to seek feedback on With the support of the Government, climate change obligations, including its proposals. However, in February the CAA and the airlines, Heathrow will the Paris Climate Change Agreement, 2020, the Court of Appeal concluded be able to deliver an Expansion project before construction can begin. The that the Government was required, that would benefit the airport’s local Government has made decarbonising but had failed, to take into account communities as well as the whole of aviation a central part of its green the Paris Climate Change Agreement the UK, delivering tens of thousands growth agenda, through wider use when preparing the ANPS. The Court of jobs and resulting in an unrivalled of Sustainable Aviation Fuel as well declared that the ANPS had no legal network of international connections as new technology. This is the right effect unless and until the Government that would help Global Britain succeed. outcome for the country, which will carried out a review of the policy. allow Global Britain to become a reality The Government declined to appeal and Heathrow remains committed to to the Supreme Court directly, but a long-term sustainable expansion and we were granted permission by considers it a probable outcome based the Supreme Court to appeal the on experience to date. Court of Appeal ruling.
44 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
OUR CHARITY PARTNERSHIPS
As the UK’s leading airport, we have a responsibility to not only reduce our negative impacts, but to deliver a positive future as well. In 2020, we have worked with our three corporate charity partners.
The work, which is overseen by our In 2020 we donated £0.6m (2019: In 2020, Heathrow made the difficult Charities and Communities Committee, £0.9 million) and we leveraged1 but necessary decision to scale saw Heathrow donate cash, collect funds totalling £0.1m from passenger back our charity partnerships for passenger donations, and share our donations and airline noise fines (2019: the following year. This means that time. This helps us to deliver on our £0.6m, which also included colleague in 2021, Heathrow’s national and company values, and our community fundraising and donations from other international partnerships with DofE and Heathrow 2.0 sustainability airport companies). This has been an and LendWithCare, will be on hold. commitments. Our charity partners are: incredibly challenging year for Heathrow, This provides the opportunity for the but we have continued to support our business to consolidate its efforts, to • Heathrow Community Trust charity partners. We made the decision make the greatest difference to the – our local partner. to pause colleague fundraising in the Heathrow Community Trust possible, • Duke of Edinburgh Awards Scheme year due to the impacts of COVID-19 and therefore our local community. We – our national partner. government restrictions and furlough will review our partnership plans for on colleagues, and due to the fall 2022 at the end of the year. • CARE International UK in passenger numbers, this year’s – our international partner. passenger coin collection totals are also significantly reduced.
HEATHROW THE DUKE OF CARE INTERNATIONAL COMMUNITY TRUST EDINBURGH’S AWARD CARE International is a charity that Heathrow Community Trust is an The Duke of Edinburgh’s Award works around the globe in 100 independently run grant-making (‘DofE’) programme transforms countries to save lives, defeat poverty charity. The Trust’s grant programme young people’s confidence, skills and and achieve social justice. Our funds projects that improve quality wellbeing. In 2020, we gave £200,000 partnership enables our passengers and of life for communities near the (2019: £200,000) to support DofE colleagues to support entrepreneurs airport. This year, our donation to transform more young people’s lives. living in poverty around the world, the Trust in the second half of the £160,000 supported DofE’s planned, through the ‘Lendwithcare’ initiative. year was reduced to reflect the budgeted work including operational ‘Lendwithcare’ is an online lending challenging environment that the costs, whilst £40,000 was ringfenced platform that allows you to personally business is operating within. We have to support young people in our give entrepreneurs much-needed access continued to prioritise supporting its neighbouring boroughs – Hillingdon, to credit and training. This money is local community. In 2020 we gave Hounslow and Slough, as part of the then used to help change the lives of £425,000 (2019: £725,000) and a Boosting Participation project. As a those living in poverty. CARE receives further £10,900 (2019: £107,000) result of the funding spent locally, donations from our passengers via was leveraged1 from airline noise 488 young people were able to start coin collection boxes in our terminals, fines. This, along with funds raised in their DofE award. In April, DofE which aim to encourage them to previous years, allowed the Trust to launched ‘DofE with a Difference’ donate left over currency. In 2020 distribute grants worth £438,000 in to allow young people to continue passenger donations made to CARE 2020, including through three rounds undertaking their award throughout totalled £89,000 (2019: £286,000). of emergency COVID-19 resilience lockdown. Two Heathrow Colleagues, A proportion of these funds were funding, as well as several rounds of ‘DofE Champions’ worked on a diverted to Lendwithcare’s Small their usual grant programmes at the shared project with DofE for Black Business Solidarity Fund in response beginning of the year. In 2020 projects History Month. to COVID-19. funded by the Heathrow Comunnity Trust directly benefitted 10,902 people, of which 4,797 were young people, and maintained or improved 236,827m2 of community green space, including planting 11,181 trees.
1 Leverage is a measure of additional resources contributed to charities from sources other than the company.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 45 FINANCIAL REVIEW
COVID-19 related lockdowns and associated Government travel restrictions in 2020 have significantly impacted our financial performance, nevertheless decisive management actions have delivered significant cost savings and protected liquidity. Revenue declined 62% and Adjusted EBITDA declined 86% to £270 million, after the delivery of c. £400m gross cost savings. We continue to actively manage our liquidity position having successfully raised £1.7 billion from global capital markets and protect creditors by injecting £600 million capital into the regulated group to weather the crisis.
JAVIER ECHAVE Chief Financial Officer
46 STRATEGIC REPORT GOVERNANCE REPORT FINANCIAL STATEMENTS
2020 2019 Year ended 31 December £m £m
Revenue 1,175 3,070 Adjusted operating costs1 (905) (1,149)
Adjusted EBITDA2 270 1,921 Depreciation and amortisation (812) (771)
Adjusted operating (loss)/profit3 (542) 1,150 Net finance costs before certain remeasurements and exceptional items (672) (775)
Adjusted (loss)/profit before tax (1,214) 375 Tax credit/(charge) on (loss)/profit before certain remeasurements and exceptional items 211 (104)
Adjusted (loss)/profit after tax4 (1,003) 271
Including certain remeasurements and exceptional items Fair value (loss)/gain on investment properties (412) 43 Fair value (loss)/gain on financial instruments (202) 128 Exceptional items (184) – Tax credit/(charge) on certain remeasurements and exceptional items 16 (29)
(Loss)/profit after tax (1,785) 413
1. Adjusted operating costs excludes depreciation, amortisation, fair value adjustments on investment properties and exceptional items which are explained further in Note 3. 2. Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation, fair value adjustments on investment properties and exceptional items. 3. Adjusted operating (loss)/profit excludes fair value adjustments on investment properties and exceptional items. 4. Adjusted (loss)/profit before and after tax excludes fair value adjustments on investment properties and financial instruments, exceptional items and the associated tax impact of these including the impact of the UK corporation tax change.
BASIS OF PRESENTATION OF FINANCIAL RESULTS SUMMARY PERFORMANCE Heathrow (SP) Limited (the ‘Company’ Management uses Alternative In the year ended 31 December 2020, or ‘Heathrow SP’) is the holding Performance Measures (‘APMs’) to the Group’s revenue declined by 61.7% company of a group of companies (the monitor performance of the segments to £1,175 million (2019: £3,070 million). ‘Group’), which includes Heathrow as it believes this more appropriately Adjusted EBITDA declined 85.9% to Airport Limited (‘HAL’) which owns and reflects the underlying financial £270 million (2019: £1,921 million). The operates Heathrow airport, and performance of the Group’s operations. Group recorded a £1,785 million loss Heathrow Express Operating Company The APMs have been updated to include after tax (2019: £413 million profit). Limited (‘Hex Opco’) which operates the exceptional costs which is new for the Heathrow Express rail service. Heathrow year and the rest remains consistent SP’s consolidated financial statements with those included and defined in the are prepared in accordance with Annual Report and Accounts for the international accounting standards in year ended 31 December 2019. A conformity with the requirements of the reconciliation of our APMs has been Companies Act 2006. included on page 215. The financial information presented The Group has separately presented within these financial statements has certain items on the income statement been prepared on a going concern basis. as exceptional as it believes it assists We have a strong liquidity position and investors to understand underlying do not forecast any covenant breach performance and aids comparability of during 2021 under our current traffic the Group’s result between periods. The scenario, while acknowledging that the exceptional items are material items of impact of COVID-19 continues to create expense that are considered to merit considerable uncertainty for the aviation separate presentation because of their industry. Under certain severe but size or incidence. They are not expected plausible scenarios, the Group may need to be incurred on a recurring basis. to take additional action within our control to mitigate against any debt default covenant breach. More detail can be found in the going concern statement on page 133.
HEATHROW (SP) LIMITED ANNUAL REPORT AND ACCOUNTS 2020 47 FINANCIAL REVIEW (CONTINUED)
REVENUE RETAIL REVENUE In the year ended 31 December 2020, revenue declined 2020 2019 Var 61.7% to £1,175 million (2019: £3,070 million). Year ended 31 December £m £m % Retail concessions 97 342 (71.6)
2020 2019 Var Catering 19 64 (70.3) Year ended 31 December £m £m % Other retail 43 113 (61.9) Aeronautical 647 1,831 (64.7) Car parking 40 125 (68.0) Retail 234 722 (67.6) Other services 35 78 (55.1)
Other 294 517 (43.1) Total retail revenue 234 722 (67.6) Total revenue 1,175 3,070 (61.7) Retail revenue declined by 67.6% driven by reduced passenger numbers and mix of retail service available. Aeronautical revenue declined by 64.7%. Aeronautical Retail revenue per passenger increased 18.6% to £10.58 revenue per passenger increased 29.2% to £29.26 (2019: £8.93). Retail income per passenger is largely (2019: £22.64). The decline in aeronautical revenue is distorted due to the reduced passenger numbers. predominantly due to reduced passenger numbers. The average revenue per passenger is largely distorted by the reduced traffic number and an increase in cargo movements which are charged on a per movement basis. OTHER REVENUE
2020 2019 Var 000 Year ended 31 December £m £m % 517 509 Other regulated charges 118 244 (51.6) 496 509 2 00 Heathrow Express 26 117 (77.8) 722 Property and other 150 156 (3.8) 716 2 000 612 659 Total other revenue 294 517 (43.1)