BAA today publishes its capital investment plan ('CIP') for Heathrow Airport which sets out the airport's current plans for investment over the ten-year period to 31 March 2020.

This annual document is part of Heathrow’s normal business cycle. It takes into account the views of Heathrow’s airlines on major investment decisions and progress against programme milestones.

Highlights

This year's CIP document updates Heathrow's detailed investment plans and projections through to the end of the current regulatory period on 31 March 2013 and outlines the currently planned investment over the balance of the ten-year period covered by the document. A more detailed engagement with airlines regarding Heathrow's investment plans for the period from April 2013 will commence shortly and continue as discussions relating to the next regulatory period evolve.

Investment in current regulatory period

Heathrow's capital investment programme is one of the largest construction programmes in the UK involving investment of around £1 billion a year over the five years to 31 March 2013 ('Q5') and supporting thousands of high value jobs.

Completion of the investment programme will deliver world-class infrastructure and transform the customer experience at Heathrow. This will allow Heathrow to build on substantial progress made in improving service standards and customer satisfaction which have seen Heathrow for the first time ranked top(1) for overall passenger satisfaction amongst the five major European hub airports.

Since publication of the previous CIP document in 2009, significant work has been undertaken by Heathrow and its airlines to complete the planning of the investment to be delivered over Q5.

This has involved extensive discussions about prioritising future spend, finalising scope and reappraising the costs of delivery in order to further improve passenger experience and operational effectiveness. A re-prioritised Q5 investment plan has been agreed with airlines.

Total expenditure in Q5 is expected to be within the original £5,137 million outturn cost figure implied by the CAA settlement, a key component in determining future tariffs at Heathrow. Lower than forecast inflation in the first two years of the current quinquennium has enabled scope to be added to the Q5 CIP (£4,736 million in 2007/08 prices compared to £4,542 million in the CAA settlement) whilst remaining within forecast outturn cost. Nevertheless, delivery of the revised scope within forecast cost requires robust focus on delivering projected cost efficiencies.

The current expected phasing of investment over Q5 including actual expenditure in the year to 31 March 2009 and forecasts for the remaining years (in outturn prices) is set out below based on the broad project groups used in the 2008 regulatory settlement.*

* Spend has been transferred between the broad project groups from that shown in the settlement to reflect changes in how individual projects are managed and in the scope of project groups.

** A significant proportion of PSDH expenditure was originally allocated to work related to the possible development of a third runway and additional terminal capacity. Given the recent announcements from the new UK government that it will not support the development of a third runway at Heathrow, BAA will be discussing with airlines the potential future use of these funds.

The overall investment programme for the current regulatory period is making satisfactory progress. The key project is construction of a new Terminal 2 and satellite buildings which will replace the old Terminal 2 that closed in late 2009. Demolition of buildings on the new Terminal 2 site will be completed in 2010 and construction of the new terminal is underway. The new Terminal 2 will be home to the Star Alliance airlines at Heathrow providing competitive equivalence to British Airways at Terminal 5.

Other major projects in the current regulatory period will include completion of Terminal 5C, the second satellite to Terminal 5 that is expected to become operational in early 2011. In addition, as part of the development of an integrated baggage system across Heathrow, the baggage tunnel and associated systems between Terminals 3 and 5 are expected to become operational in 2012.

By February 2010, ten of the 24 capital investment trigger projects during the current regulatory period had been completed. Based on forecast project completion dates for all trigger projects as at February 2010, it is expected that aeronautical income will be adjusted by £42 million (in 2007/08 prices) over the regulatory period (approximately 1% of the CAA's forecast of aeronautical income in this period) to reflect re-phasing of investment compared to that anticipated by the CAA at the time of the March 2008 settlement.

Investment in future regulatory periods

Heathrow intends to continue strengthening its competitive position by implementing its vision to be Europe's hub airport of choice by making every journey better. Critical to this is ongoing work with its airline community to formulate a comprehensive masterplan for investment to develop the airport beyond the current regulatory period. This includes taking account of the recent announcement by the new UK government that it will not support the development of a third runway at Heathrow.

Whilst not definitive or exhaustive at this stage, longer term capital investment requirements may include the development of a new passenger transfer product, based on track transit or automated people mover technology, that could ultimately link all terminal and satellite buildings. There may also be further expansion of the new Terminal 2 beyond the first phase currently under construction. This would be built on the current footprint of Terminal 1, necessitating the closure of this terminal. In relation to surface access, investment plans are expected to focus on Airtrack and Crossrail.

The full Heathrow 2010 capital investment plan document is available at www.baa.com/investor within the ‘Document centre’ section of the ‘Investor centre’.

(1) Airport Service Quality survey by Airport Council International for the first quarter of 2010.

For further information

BAA
Media enquiries Tel.020 8745 7224
Andrew Efiong, Head of Debt Investor Relations Tel. 020 8745 2742

Finsbruy
Mike Smith or Don Hunter Tel. 020 7251 3801