By Mark Potter and Jane Barrett
LONDON/MADRID, March 11 (Reuters) – London’s crowded Heathrow airport will be allowed to raise airline charges by a bigger-than-expected 23.5 percent, giving a boost to the airport’s indebted owner but sparking fury among its users.
Shares in Spanish construction group Ferrovial, which bought Heathrow owner BAA in a 10 billion pound ($20 billion) deal in 2006, leapt as much as 8.8 percent after BAA said on Tuesday the new charges should help it to complete a much-delayed refinancing of its debts by the end of June.
But Heathrow users such as British Airways reacted angrily to the price controls from regulator the Civil Aviation Authority (CAA), which were more generous to Ferrovial than its previous proposals in November.
“These overly generous charges far exceed what is required to upgrade facilities across Heathrow,” British Airways (BA) said in a statement.
“The CAA must hold BAA to account throughout the five year period to ensure the airport operator delivers improvements and does not divert funds to pay off Ferrovial’s debts.”
As well as struggling to refinance its debt amid the global credit market turmoil, Ferrovial has come under fire for service levels at Heathrow, where queues, delays and lost baggage have become commonplace.
The CAA said Heathrow would be allowed to charge 12.8 pounds ($25.7) per passenger in the year starting April 1, and increase this by no more than retail price inflation plus 7.5 percent in the subsequent four years.
The regulator had proposed a price cap of 11.97 pounds in November, but said it was increasing this to take account of the need for additional investment and security.
The CAA set a price cap of 6.79 pounds per passenger for London’s Gatwick airport, which is also run by BAA, up from its previous proposal of 6.07 pounds.
REFINANCING
“People were expecting tariffs to be the same or slightly above the previous proposal so it’s very positive for the stock,” said Gonzalo Moros, an analyst at Ahorro Corporacion.
“Now we have to see what happens with the refinancing but obviously, with these figures, they (Ferrovial) can negotiate with much more certainty now that they know about future cash flow etc.”
At 0830 GMT, Ferrovial shares were up 6.6 percent at 46.51 euros. BA shares were down 0.1 percent at 241.5 pence.
BAA said the rise in charges was still not enough.
“The (CAA) review does not recognise sufficiently … the scale of the task we are embarked on,” it said in a statement.
Nonetheless, BAA said the new charges would allow it to finalise its refinancing plans.
It plans to implement the refinancing by the end of the second quarter, and said it would include a migration of existing bondholders into an investment-grade, ring-fenced structure backed by its three London airports and the Heathrow Express rail service.
“Conscious of the existing difficulties in the capital markets, BAA is also working constructively on a bond and bank based financing which can be effected within the same investment grade securitisation structure in order to improve the chance of completing the refinancing in these challenging market conditions,” it said in a statement.
The cost of insuring BAA debt against default fell, but not by as much as some traders had anticipated. Its five-year credit default swaps were about 40 basis points tighter at 420 basis points, a trader said. That means it costs 420,000 euros ($645,000) a year to insure 10 million euros of BAA’s debt.
“The bonds are also a couple of points better, which you would expect given that the bonds will go into a ring-fenced entity,” the trader said. “But there must be some degree of scepticism about when this is going to happen because I would have expected CDS to be much tighter.”
