HEATHROW’S INITIAL BUSINESS PLAN DETAILED PLAN December 2019 The information contained within this document constitutes an initial company position and does not reflect a final view. It is provided to you to facilitate constructive engagement with Heathrow Airport Limited and is based on the best, most robust information available to Heathrow Airport Limited at the time of writing. Heathrow Airport Limited will not accept or assume any responsibility or liability for the accuracy or correctness of the information or of any figures provided, calculations or any assumptions that may be drawn from them. This information is intended for your sole purpose, is commercially sensitive and confidential and should not be shared outside your organisation or with any third party without the consent of Heathrow Airport Limited. Chapters Page No Title No Introduction 3 1 Setting the Scene 8 2 Consumer engagement driving our business plan 25 3 Our H7 plans & choices 68 4 Sustainable Growth 88 5 Resilience 104 6 Measures, Targets & Incentives 123 7 Passenger Forecasting 141 8 Capital Investment 165 9 Operating Expenditure 200 10 Commercial Revenues 241 11 Other Charges 273 12 WACC 283 13 Financing 330 14 Regulatory Framework 347 15 Governance & Assurance 372 List of Annexes & Appendices 392 Glossary 394 INTRODUCTION Overview • We have built an ambitious, balanced plan for the years from 2022-2036 of which the centrepiece is the opportunity for Heathrow to expand • The plan is structured around consumer and stakeholder outcomes and providing the supporting evidence for our regulatory building blocks • Our plan consists of a summary plan, describing overall outcomes, a detailed plan summarising our thinking in each area, and supporting documents and annexes • We welcome feedback, particularly on key questions we pose, on this Initial Business Plan which will be updated over the course of 2020 Heathrow’s plan for 2022 to 2036 Heathrow expansion will connect all of Britain to global growth, putting it at the heart of the global economy for generations to come. We will be the best-connected country in the world, with regular direct flights to all the major cities in the United States, China and India, the great economies of the 21st century. Regular flights to every corner of the UK and rail links to North, South, East and West will spread the benefits of growth to every nation and region of our country. This Initial Business Plan shows how we will deliver the global connections that Britain needs in a way that is sustainable, affordable, deliverable and financeable. We will meet all the requirement of the Airport National Policy Statement (ANPS), which received the overwhelming support of MPs. Since the ANPS vote, we have committed to doing all we can to reach net zero flying by 2050. For Heathrow’s own operations at the airport we will be carbon neutral from next year and in 2020 we will set out our plan to be net zero as soon as possible. IAG, our largest airline customer, has committed to net zero carbon for flight by 2050. We are working with them and others to make this the standard in global aviation, to take the carbon out of flying and remove any competitive distortions. This plan delivers on the affordability challenge. This is an incredible achievement, given the increases in charges that have been required to expand other major hubs. We want to deliver expansion as cost efficiently as possible and have worked closely with our airline customers to minimise capital spend. We are also providing a comprehensive package of measures to minimise the negative impacts of growth on local communities and maximise the benefits they receive. None of this is easy, but our enviable track record in delivering complex infrastructure projects on time and on budget, and our strong, predominantly UK supply chain mean that we can be trusted to deliver. Heathrow expansion will be one of the largest privately financed infrastructure projects in the world. The current regulatory framework, with a Regulated Asset Base and single till, have proven the most efficient way to finance large, long term projects. This plan ensures the 3 necessary cashflows to support global debt financing at an investment grade, while maintaining a sufficient return to attract equity investment to support the expansion programme through any shocks or the economic cycle. The big prize for consumers is through lower airfares. While we have been constrained by runway capacity, only around 50% of routes have faced competition between airlines, making airfares higher than they could be. The introduction of more competition and choice between airlines will reduce passenger fares by tens or even hundreds of pounds a ticket. This value could potentially support the shift to zero carbon flights. We do face some real choices over the speed, service, connectivity and resilience that we plan for over the next 15 years. We have reflected these in two options, both of which meet the challenge of being sustainable, affordable, deliverable and financeable. This Initial Business Plan is the start of a conversation with consumers, airlines and other stakeholders. Your feedback will be reflected in our Final Business Plan in 2020. Heathrow expansion will connect all of Britain to global growth, allowing future generations to enjoy the benefits of aviation that we enjoy today, in a world without carbon. John Holland-Kaye Chief Executive, Heathrow 4 Heathrow’s Initial Business Plan Welcome to the detailed version of Heathrow’s H7 Initial Business Plan (IBP). In this section we outline the purpose of the document, how to navigate it, and feedback we seek. Purpose The H7 regulatory period is a critical time for Heathrow. The CAA’s regulatory settlement will determine much of how we serve the 80 million passengers and third of UK cargo that already travels through the airport each year. We deliberately frame it throughout as a 15-year plan. This matches the reality for consumers, investors and others – that choices made now only make sense on that time horizon. Throughout, we describe “H7” in that 15-year framework. It will decide whether and how we invest in new capacity, including in a third runway. The runway can be open before 2030 as set by the ANPS. But the full programme of expansion will take until the mid-2030s. Heathrow has operated at capacity for over 15 years. The next 15 years when we increase capacity by 50% will be the biggest period of change since our airport was built 72 years ago. Expansion will transform consumer experience. Consumers will benefit from lower airfares and more choice of destinations and airlines. We will have two world class terminals, Terminal 5 in the west and Terminal 2 in the east, as well as Terminal 4. Passengers will enjoy easier access to the airport and easier connections between flights. Heathrow will be one of the best multimodal interchanges in the world, making it easy to get to by public transport from across the country. We will be a carbon neutral airport, with predominantly electric vehicles, powered by solar panels and wind. Heathrow will not only be transformed, physically. We will have more interesting, versatile and skilled jobs for local people, more routine processes will be automated, creating a safer working environment. A major investment programme will also affect our economics, financing and airport charge well into the 2030s. Importantly, Heathrow expansion necessitates significant new funding by debt markets and our shareholders. This increases both the risk of their investment and the timeframe to recover it compared with Q6, demanding some new thinking about regulation, complicating comparisons to Q6 and other regulated companies generally. There are choices and trade-offs. We are proposing an IBP which seizes the opportunities for Heathrow in 2022 to 2036 while balancing those choices. It starts by identifying what consumers gain from and are looking for from the airport. These outcomes are described in our summary plan. The detailed plan goes into more depth on these outcomes and how we might measure progress against them. It also then describes how the activities, investments and other choices we make in delivering them flow through into the regulatory building blocks. We summarise the evidence that demonstrates our forecasts are reasonable and robust. This detailed plan builds on the feedback from consumers, our public consultations, our detailed engagement on the masterplan with airlines at the M4 and M5 gateways1, our annual accounts and our other plans, proposals and reports. Each of these serves different purposes. By necessity therefore this detailed plan focuses on some aspects and abbreviates or assumes other elements dealt with elsewhere. These parallel processes continue to evolve in many cases. For consistency, we have fixed assumptions at a particular point in time. We make these explicit where relevant - for example the capital plans are all based on the M4 Exit plan even though we anticipate further refinement in 2020 at the M5 masterplan gateway. The IBP primarily presents our thinking through the lens of our outcomes, and the regulatory framework and building blocks. 1 M4 and M5 are Heathrow/Airline gateways in the masterplan development process that lead to the DCO submission 5 The plan has been created with reference to CAA and government guidance. It has been developed from listening to consumer feedback and we have tested the choices with consumers. We are very grateful to the feedback from the Consumer Challenge Board (CCB). It reflects the views of all our stakeholders; consumers, the local community, airlines, colleagues and investors. Sustainable growth is central to the plan as expansion cannot come at any cost to local communities and the environment. The IBP is not a final answer.