Strategic UPDATE

Heathrow New Strategy

Early this year, we launched a new strategy to align our efforts and ensure collective progress towards a common objective: "To be an extraordinary airport, fit for the future". To translate this vision into reality, we have identified six Beacons. These Beacons, listed below, have been selected to address the most pressing needs in the short to medium term, providing a clear roadmap for achieving our objectives. In future publications, we will report progress against our six Beacons.

Winning Team: Be a great place to work by providing an engaging colleague offering and culture that attracts and retains diverse talent. Create an inclusive performance culture with clear accountabilities and a continuous improvement mindset. Ensure our workforce delivers the capabilities required in the future.

Fast and Focused: Embed a culture of simplicity and efficiency to improve the overall effectiveness of the organisation, ensuring that everything we invest delivers value, as quickly as possible.

Value for Customers: Drive targeted improvements in experience, across all our customers, including passengers, airlines, retailers, and tenants. This will attract customers to Heathrow, delivering value not just to Heathrow but to all customers.

Digital Future: Use data and digital to make quicker and better-informed decisions across the business. Automating processes and exploiting technology to be more efficient which will improve performance and deliver better outcomes for customers and stakeholders.

People and Planet: Ensure continued licence to operate by delivering on our commitments. Work towards our carbon targets with the ultimate aim of reaching net zero, making Heathrow a great place to live and having a positive impact on local communities and the planet.

Creating Capacity: Unlock capacity in the short, medium and long-term, to enable us to meet growing passenger demand.

At the heart of our strategy lie our Foundations, the core principles that are indispensable to our business. These foundational elements serve as the base upon which our entire plan is built, underscoring their non-negotiable importance in every aspect of our business.

1.     Safety, Security and Compliance

2.     Service and Operation

3.     Governance and Financial Resilience

Business Update

In assessing our performance for the six months ending 30 June 2024, we have outlined key performance metrics that illustrate our progress. The glossary section of this report provides detailed definitions for each indicator.

Passenger Traffic

(1)         For the six months ended 30 June

(2)        Calculated using unrounded passenger figures

(1)         For the six months ended 30 June

(2)        Calculated using unrounded passenger figures

(3)        Cargo tonnage includes mail volumes

Our summer season kicked off and in June, we experienced record passenger numbers. The increase in passenger traffic is driven by a significant increase in passenger ATMs compared to last year and some small load factor increases. Almost all markets exceed 2023's numbers, with double-digit growth for Asia Pacific, mainly driven by China and Japan. Africa saw fewer passengers, largely due to a smaller number of movements. The normalisation of belly hold capacity has led to increased cargo tonnage.

Service and Operational performance

(1)         For the six months ended 30 June

(2)        2023 comparative restated to be comparable H1 number

In the first six months of 2024, we achieved an overall ASQ rating of 4.02 out of 5.00, representing a strong improvement versus the same period last year. Overall, 76% of passengers surveyed rated their Overall Satisfaction with Heathrow as either 'Excellent' or 'Very good' driven by Check-in aspects, with the proportion of 'Poor' ratings remaining low at just 1%.

Operational resilience started strong in 2024. Security performance has been very good, with the vast majority of direct passengers passing through security within 5 minutes. Improved operational performance across the airfield has increased the number of turnarounds completed in scheduled time, resulting in departure punctuality outperforming arrivals and being nearly 10% higher compared to 2023. Currently, our main operational challenges are adverse weather conditions and airspace congestion in Europe. Baggage performance has seen an improvement from last year.

Capital expenditure

During the first six months of 2024, £552 million (2023: £296 million) of capital expenditure was incurred. This included £127 million for the acquisition of a building, as well as £32 million in capital creditors movements (2023: £17 million).

We continue delivering our H7 Capital Plan, comprising over 450 projects across six programmes. Our next-generation Security Programme is progressing well: terminal designs have been completed, and new lanes are now operational in all terminals as we move towards completing 146 lanes. Training for 4,000 Security and Engineering colleagues in the new equipment and processes is underway. In the T2 Baggage Programme, the new system design has begun with an alliance of five multidisciplinary partners. The Commercial Revenue Programme has seen an investment of £30 million across commercial propositions in retail, digital and surface access with 52 active projects and 7 delivered. In the Carbon and Sustainability Programme, the rollout of electric vehicle (EV) chargers continues, with airside charging hubs now live in Terminal 2 and Terminal 3. Plans continue for new carbon-efficient pre-conditioned air units for aircraft stands, and the first pilots for heat de-carbonisation are now in early design. In the Asset Management and Compliance Programme, we are making good progress on the current portfolio of 160 live projects. Thirteen additional projects were completed in H1, and the resurfacing of the southern runway has now commenced. Finally, the mobilisation of the Efficient Airport Programme has begun with 20 active projects focusing on optimisation and efficiency. These projects aim to improve passenger satisfaction while driving efficiencies across the airport's operations.

Key regulatory developments

Heathrow has recently responded to two key Civil Aviation Authority (CAA) consultations. Firstly, the consultation on 'H7 Final Issues', which deals with both the matters that were remitted to the CAA by the CMA through its October 2023 Final Determination of the appeals of the H7 Final Decision on price control (FD), as well as the matters the CAA was not able to resolve prior to making the March 2023 FD. These included elements of the AK factor, Shock Factor, Pension Deficit Repair Costs, index-linked premiums on cost of debt, the treatment of business rates and pod parking revenues. The CAA issued their decision in July, which maintained the proposals set out in March 2024. In CAA's view, the positions brought forward by Heathrow and the airlines did not offer new evidence for them to move from their original proposals. Considering the AK factor, Heathrow's net benefit for 2025 and 2026 is expected to be circa £140 million, which is better than that of FD. The CAA also decided to leave some issues (such as premiums on index-linked debt and business rates) open for later review, and they will have to be revisited during the next price control process (H8).

Secondly, the consultation on 'Setting future price controls - review of approach', followed by the DfT independent review of the CAA published in 2023, where there was a recommendation that the regulator should review the process, governance and 'mechanics' for conducting economic regulation. Heathrow is committed to being a constructive and engaging partner to the CAA looking towards H8 and, therefore, is playing an active role in this process. Heathrow's response has outlined where improvements in approach, guidance and decision-making are needed, and it expects this can help inform improvements to the next price control (H8) and future cycles. The CAA has not confirmed a publication date, but Heathrow expects the CAA to issue their responses to this consultation during the Summer.

Alongside the above, Heathrow is also engaged in the Outcome Based Regulation (OBR) mid-term review process. The OBR framework was introduced in H7 to replace the previous service quality rebate and bonus framework for airport service quality. The new framework includes a "continuous improvement" approach that would allow it to be updated during the H7 period through a mid-term review - which would look to understand how the new OBR framework is bedding in and whether there are any specific issues arising from the application of new measures and targets. The CAA started the mid-term review in Q2 2024, which is expected to finish in Q3-Q4 this year. The review will help inform the approach to H8, but this does not affect Heathrow's ability and airlines to seek a modification of Heathrow's licence with immediate effect if there is an agreement to do so.

Long-term growth and Capacity developments

We are conducting an internal review of the work we have carried out previously and the different circumstances in which we find the aviation industry. This will enable us to progress with appropriate recommendations to create capacity at Heathrow Airport. The Government's Airports National Policy Statement (ANPS) continues to provide policy support for our plans for a third runway and the related infrastructure required to support an expanded airport.

Connecting People and Planet

Connecting People and Planet is our sustainability strategy in which we focus on the environmental, social and governance ('ESG') issues where the airport needs to make the biggest difference by 2030. During the first six months of the year, Heathrow maintained momentum across carbon and sustainability. As an inaugural adopter of the Taskforce on Nature-related Financial Disclosures (TNFD), we will be better positioned to transparently measure and improve our impact on nature. Our World of Work programme, which includes the STEM Generation activity and Essential Skills Masterclasses, has been instrumental in benefiting local students and colleges. Heathrow colleague volunteering has been central to the success of this programme. Additionally, we successfully launched the first Lift-off event of 2024, an additional way to attract and work with SMEs, with a strong focus on two areas at this time: Zero Waste and Construction & Energy, both aligned with our sustainability strategy. Progress against local air quality and emissions targets has been driven by notable improvement in public transport connectivity and usage, including further integration of the Elizabeth Line and the expansion of the Flightline bus network.

In April, the UK Government published its Sustainable Aviation Fuel - SAF mandate, starting at 2% in 2025 and rising to 10% by 2030, and launched a consultation on a revenue certainty mechanism to support a local SAF industry. This is welcome progress, and we continue to advocate for SAF, via the RISE campaign, as a new government steps into office. The development of hydrogen-fuelled flights continues, and earlier this year, we joined a major hydrogen technology hub led by Cranfield University, which will contribute to our preparation for a hydrogen-powered future. Following this, in April, we announced the appointment of the world's first Professor of Airport Decarbonisation. This new position within the Centre for Air Transport Management at Cranfield University is co-funded by Heathrow and signifies an important collaboration between us and academia.

As the airport on the ground makes the shift towards electric, in June we opened an ultra-rapid charging hub for operational vehicles. It is the first of eight hubs planned with an 80% charge achievable in under 30 minutes, allowing for less vehicle downtime. The release of the 2023 Sustainable Travel Zone (STZ) Annual Report highlights Heathrow's initiatives to promote sustainable travel among passengers and colleagues, emphasising their positive impacts. Finally, following the launch of our new Quieter Neighbourhood Support scheme in February, we have seen encouraging take-up in the initial pilot zone.

Key Management Changes

Paula Stannett, our Chief People Officer since 2013, will leave Heathrow at the end of August. A process to appoint a new Chief People Officer has commenced. Stuart Baldwin resigned as a Non-Executive Director for Heathrow Airport Holdings Limited, FGP Topco Limited, ADI Finance 1 Limited and ADI Finance 2 Limited with effect from 29 May 2024. He was replaced by Andrew Dench as a Non-Executive Director for Heathrow Airport Holdings Limited, FGP Topco Limited, ADI Finance 1 Limited and ADI Finance 2 Limited on the same date.

Ultimate Shareholder Update

On 28 November 2023, Ferrovial announced that an agreement had been reached for the sale of its entire stake (c.25%) in FGP Topco Limited, the parent company of Heathrow Airport Holdings Limited, for £2,368 million. The agreement had been reached with two different buyers, Ardian and The Public Investment Fund (PIF), who would acquire Ferrovial's shareholding in c.15% and c.10% stakes, respectively, through separate vehicles. On 16 January 2024, Ferrovial announced that, pursuant to the FGP Topco Shareholders Agreement, certain other FGP Topco shareholders had exercised their tag-along rights, which resulted in 60% of the total issued share capital of FGP Topco being available for sale.

On 14 June 2024, Ferrovial announced that Ardian and PIF had made a revised offer to acquire shares representing 37.62% of the share capital of FGP Topco for £3,259 million. The offer has been accepted by Ferrovial and certain Tagging Shareholders, and, as a result, an agreement has been entered into pursuant to which Ferrovial and certain Tagging Shareholders will sell a pro rata portion of their shares in FGP Topco such that Ferrovial will remain as a shareholder with shares representing 5.25% of the issued share capital of FGP Topco. Following the sale, Ferrovial and the Tagging Shareholders selling at the same time as Ferrovial will, together, hold shares representing 10% of the issued share capital of FGP Topco. Ardian and PIF will hold shares representing c.22.6% and c.15.0%, respectively, through separate vehicles.

While we acknowledge the existence of a change of control clause in the bonds issued by Heathrow Finance plc. and the continuing nature of the negotiations, we are not at this time privy to any information that would lead us to believe that the change of control clause would be triggered.

Financial Review

Basis of presentation of financial results

Heathrow (SP) Limited ('Heathrow SP') is the holding company of a group of companies (the 'Group'), which includes Heathrow Airport Limited ('HAL'), which owns and operates Heathrow Airport, and Heathrow Express Operating Company Limited ('Hex Opco') which operates the Heathrow Express rail service. Heathrow SP's consolidated financial statements are prepared in accordance with UK adopted international accounting standards. The financial information presented within these financial statements has been prepared on a going concern basis. More detail can be found in the going concern statement on page 15.

Alternative performance measures  

Management uses Alternative Performance Measures ('APMs') to monitor performance of the segments as it believes this more appropriately reflects the underlying financial performance of the Group's operations. These remain consistent with those included and defined in the Annual Report and Financial Statements for the year ended 31 December 2023.

Summary performance

(1)    Adjusted operating costs exclude depreciation, amortisation and fair value gains and losses on investment properties.

(2)    Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value gains and losses on investment properties.

(3)    Adjusted operating profit excludes fair value gains and losses on investment properties.

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

(5)    Certain re-measurements consist of non-cash fair value gains and losses on investment property revaluations, gains and losses arising on the re-measurement of financial instruments, together with the associated fair value gains and losses on any underlying hedged items that are part of a cash flow, fair value and economic hedging relationship and the associated tax impact on these.

Revenue

The decrease in aeronautical revenue is driven by lower H7 charges set by the CAA, partially offset by higher passenger numbers. Retail income, which includes retail concessions, car parking, and other surface access, has increased, driven by the higher number of departing passengers and resilient Car parking performance. Other revenue has increased due to higher Other regulated charges (ORCs) from higher passenger numbers offset by the maturity of Elizabeth Line impacting Heathrow Express revenues. More details can be found on page 18.

Adjusted operating costs

Employment costs, which include overtime, recruitment and training, have increased due to inflation and additional colleagues being needed to accommodate the higher demand, which is in line with our forecast. The rise in operational is mainly due to inflation and higher demand and Passenger-Requiring Support (PRS) resourcing, offset by lower Measures, Targets, and Incentives (MTIs) rebates. The increase in maintenance costs is largely attributed to inflation and terminal cleaning and maintenance efforts across terminal, airside, and baggage areas to ensure a safe and well-maintained environment for passengers and colleagues. Finally, tight cost controls and stable energy prices have resulted in stable Utilities and Other costs. More details can be found on page 19.

Net Finance Costs

In the six months ended 30 June 2024, net finance costs before certain re-measurements decreased to £442 million (six months ended 30 June 2023: £842 million). The RPI annual growth rate has decreased year on year from 11.3% to 3.0%, resulting in a lower inflation accretion expense.

Fair value gain on financial instruments

A non-cash fair value gain on financial instruments of £111 million (2023: £278 million) follows a small reduction in index-linked swap liabilities compared to the prior year because of early accretion payments during the period. The liability is measured with reference to market expectations of inflation and interest rates, and inflation forward curve increased by an average of 21bps, offset by interest rate forward curve increased by an average of 55bps, resulting in a fair value gain.

Taxation

The total tax charge for the six-month period ended 30 June 2024 was £95 million (six months ended 30 June 2023: £98 million) on a profit before tax of £323 million (six months ended 30 June 2023: £279 million).

The tax charge before certain re-measurements was £59 million (six months ended 30 June 2023: £7 million tax credit). Based on a profit before tax and certain re-measurements of £178 million (six months ended 30 June 2023: £139 million loss), this results in an effective tax rate of 33.1% (six months ended 30 June 2023: 5.04%). This represents the best estimate of the annual effective tax rate expected for the full year, applied to the pre-tax profit before certain re-measurements for the six-month period. The tax charge is significantly higher than the statutory rate of 25% (six months ended 30 June 2023: lower than the statutory rate of 23.5%) primarily due to the non-deductible depreciation compared to the relatively low profits forecast, increasing the tax charge for the year (six months ended 30 June 2023: non-deductible expenses reducing the tax credit for the year offset by the deferred tax movements at the 25% tax rate).

In addition, for the six months ended 30 June 2024, a deferred tax charge of £36 million (six months ended 30 June 2023: £105 million) was recognised on certain re-measurements arising from fair value movements on financial instruments and investment properties of £145 million (six months ended 30 June 2023: £418 million). In the period, the Group paid £25 million of Corporation tax (six months ended 30 June 2023: £1 million).

Cash position

At 30 June 2024, the Group had £1,437 million (31 December 2023: £1,941 million) of cash and cash equivalents and term deposits, of which cash and cash equivalents were £173 million (31 December 2023: £191 million). In the six months ended 30 June 2024, there was a decrease of £18 million in cash and cash equivalents (six months ended 30 June 2023: a decrease of £57 million). In addition, in the six months ended 30 June 2024, there was a decrease of £486 million in term deposits (six months ended 30 June 2023: a decrease of £613 million), mainly due to the repayment of a Class B bond of £600 million in February.

Cash generated from operations

In the six months ended 30 June 2024, cash generated from operations increased 3.9% to £922 million (six months ended 30 June 2023: £887 million). See note 14, page 33, for details on the reconciliation of Adjusted EBITDA to cash generated from operations.

Restricted payments

In the six months ended 30 June 2024, total restricted payments (gross and net) made by Heathrow SP amounted to £66 million (six months ended 30 June 2023: £95 million). This funded scheduled interest payments on debt at Heathrow Finance. No payments to ultimate shareholders were made during the period.

Recent Financing Activity

In the first six months of 2024, we successfully issued a
£350 million, 8-year, Class B sustainability-linked bond (SLB). It was our debut GBP SLB and the first SLB in the Sterling market to include all scopes of emissions. We also issued a
£400 million, 7-year Holdco bond at Heathrow Finance, the largest transaction that Heathrow Finance has ever completed. We have also priced £100 million in new Class A debt and £100 million in new Class B through the private placement market, which includes our first use of proceeds green issuance, with maturities in 2039 and 2054 and proceeds to be received in August. These transactions complement our robust liquidity position and add additional diversification.

Redemptions in the first six months of 2024 comprised the repayment of a Class B bond of £600 million in February, a Heathrow Finance bond of £300 million in March and a Class A bond of CHF400 million in May.

During the year, we made early paydowns of accretion on our inflation swaps totalling £206 million.

Debt and Liquidity at Heathrow (SP) Limited

(1)         2023 figures are as at 31 December 2023.

(2)        Lease liabilities relating to leases that existed at the point of transition to IFRS 16 (1 January 2019) are excluded from Consolidated nominal net debt. All new leases entered into post-transition are included.

The average cost of Heathrow SP's nominal gross debt at 30 June 2024 was 3.40% (31 December 2023: 3.68%). This includes interest rate, cross-currency and index-linked hedge costs and excludes index-linked accretion. Including index-linked accretion, Heathrow SP's average cost of debt at 30 June 2024 was 6.53% (31 December 2023: 9.11%). The average life of Heathrow SP's gross debt as at 30 June 2024 was 10.3 years (31 December 2023: 10.2 years).

The Group has sufficient liquidity to meet its forecast needs for the next 18 months. In making this assessment, the Directors have considered both the Heathrow SP Group of companies, as well as the wider Heathrow Finance plc group of companies (the "Heathrow Finance Group"). This includes operating cashflows under the base case business plan and capital investment, debt service costs, debt maturities and repayments. This liquidity position takes into account £1,949 million in cash resources across the Heathrow Finance Group, as well as undrawn revolving credit facilities of £1,386 million.

Debt at Heathrow Finance plc

(1)         2023 figures are as at 31 December 2023.

Financial ratios

At 30 June 2024, Heathrow SP and Heathrow Finance continue to operate within required financial ratios. Gearing ratios and interest coverage ratios are defined within the Glossary.

(1)         2023 figures are as at 31 December 2023.

Pension scheme

We operate a defined benefit pension scheme (the 'BAA Pension Scheme'), which closed to new members in June 2008. At 30 June 2024, the defined benefit pension scheme, as measured under IAS 19, was funded at 98.9% (31 December 2023: 95.6%). This translated into a deficit of £30 million (31 December 2023: £128 million). The £98 million reduction in the deficit in the six months is largely due to actuarial gains of £99 million attributable to a loss on assets offset by a decrease in liabilities due to a 0.60% increase in the discount rate and experience losses reflecting actual inflation in 2024; service costs of £5 million; a finance charge of £3 million; and, contributions paid in the year. In the six months ended 30 June 2024, we contributed £7 million (30 June 2023: £7 million) into the defined benefit pension scheme. No deficit repair contributions have been paid in the six months (30 June 2023: nil). The Directors believe that the scheme has no significant plan-specific or concentration risks.

Outlook

The outlook for our adjusted EBITDA performance in 2024 remains consistent with the guidance published in our June Investor Report on 28 June 2024.

Starting in 2025, our financial results will be published semi-annually. A new Trading Statement will replace the Q1 and Q3 financial results.