Heathrow6.45% S Regulatory News (88BX)

Disclaimer

These materials contain certain statements regarding the financial condition, results of operations, business and future prospects of Heathrow. All statements, other than statements of historical fact are, or may be deemed to be, "forward-looking statements". These forward-looking statements are statements of future expectations and include, among other things, projections, forecasts, estimates of income, yield and return, pricing, industry growth, other trend projections and future performance targets. These forward-looking statements are based upon management's current assumptions (not all of which are stated), expectations and beliefs and, by their nature are subject to a number of known and unknown risks and uncertainties which may cause the actual results, prospects, events and developments of Heathrow to differ materially from those assumed, expressed or implied by these forward-looking statements. Future events are difficult to predict and are beyond Heathrow's control, accordingly, these forward-looking statements are not guarantees of future performance. Therefore, there can be no assurance that estimated returns or projections will be realised, that forward-looking statements will materialise or that actual returns or results will not be materially lower than those presented.

All forward-looking statements are based on information available at the date of this document. Accordingly, except as required by any applicable law or regulation, Heathrow and its advisers expressly disclaim any obligation or undertaking to update or revise any forward-looking statements contained in these materials to reflect any changes in events, conditions or circumstances on which any such statement is based and any changes in Heathrow's assumptions, expectations and beliefs.

These materials contain certain information which has been prepared in reliance on publicly available information (the "Public Information"). Numerous assumptions may have been used in preparing the Public Information, which may or may not be reflected herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on the position or results shown by the Public Information. As such, no assurance can be given as to the Public Information's accuracy, appropriateness or completeness in any particular context, or as to whether the Public Information and/or the assumptions upon which it is based reflect present market conditions or future market performance. The Public Information should not be construed as either projections or predictions nor should any information herein be relied upon as legal, tax, financial, investment or accounting advice. Heathrow does not make any representation or warranty as to the accuracy or completeness of the Public Information.

All information in these materials is the property of Heathrow and may not be reproduced or recorded without the prior written permission of Heathrow. Nothing in these materials constitutes or shall be deemed to constitute an offer or solicitation to buy or sell or to otherwise deal in any securities, or any interest in any securities, and nothing herein should be construed as a recommendation or advice to invest in any securities.

This document has been sent to you in electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently neither Heathrow nor any person who controls it (nor any director, officer, employee nor agent of it or affiliate or adviser of such person) accepts any liability or responsibility whatsoever in respect of the difference between the document sent to you in electronic format and the hard copy version available to you upon request from Heathrow.

Any reference to "Heathrow" means Heathrow (SP) Limited (a company registered in England and Wales, with company number 6458621) and will include its parent company, subsidiaries and subsidiary undertakings from time to time, and their respective directors, representatives or employees and/or any persons connected with them.

These materials must be read in conjunction with the Heathrow (SP) Limited Annual Report and Accounts for the year ended 31 December 2021.

Strategic priorities

Our vision remains to give passengers the best airport service in the world and our plan is centred around four strategic priorities which are fundamental to us achieving our vision:

- Mojo: making Heathrow a great place to work;

- Transforming customer service: driving excellent service;

- Beating the plan: creating long-term sustainable value to all stakeholders and remaining highly competitive;

- Sustainable growth: pursuing our options to grow by building back better.

The following performance metrics provide a picture on each of the four priorities for the nine months ended 30 September 2022. All indicator definitions are available in the glossary section of this report.

MOJO

(1) For the nine months ended 30 September

We want Heathrow to be a great place to work and continue to provide fantastic opportunities for our talented colleagues to develop their careers. We have continued building strong leadership capability and in the first nine months of the year 185 colleagues (2021: 160) were promoted and 314 colleagues (2021: 206) were assigned to training and development programmes. We also want to ensure everyone goes home safely every day and maintain our focus on the safety and wellbeing for our passengers and colleagues. In the first nine months of 2022, our lost time injuries metric was 0.36 (2021: 0.27). The increase was predominantly due to the substantial increase in passenger numbers and the ramp-up across our operations. We continue to work internally on our incident reduction plans.

TRANSFORM CUSTOMER SERVICE

(1) For the nine months ended 30 September

(2) Courtesy & Helpfulness of Airport Staff replaced the Cleanliness KPI for 2022

In the first nine months of 2022, Heathrow welcomed 44.2 million passengers, an increase of 34 million compared to the first nine months of 2021. Over the quarter, the majority of passengers have had a good experience through the airport, reflecting our ramp-up plan and implementation of the capacity cap. The temporary capacity limit introduced in July improved passenger journeys, with fewer last-minute cancellations, better punctuality and shorter queue times.

We achieved an ASQ rating of 3.99 out of 5.00 (2021: 4.22), reflecting operational pressure. Our European competitor airports also recorded decreases in levels of passenger satisfaction. 69% of passengers surveyed rated their Heathrow experience 'Excellent' or 'Very good' (2021: 82.8%). The main reason for the decrease was that more passengers rated their Heathrow experience as 'Good' or 'Fair' compared to the 'Excellent' rating we were seeing in 2019. Satisfaction with the Courtesy and Helpfulness of Airport Colleagues also decreased at 4.39 (2021:4.41). Our European competitor airports also recorded decreases in levels of passenger satisfaction. Some challenges in our operational metrics, in particular on departure punctuality, still reflect delays at other airports and airspace congestion across Europe.

BEAT THE PLAN

Revenue over the first nine months of 2022 continued to show strong growth driven by aeronautical and retail revenue in line with passenger recovery and the increase in demand.

Passenger Traffic

(1) For the nine months ended 30 September

(2) Calculated using unrounded passenger figures

(1) For the nine months ended 30 September

(2) Calculated using unrounded passenger figures

Over the first nine months of the year, a total of 44.2 million passengers travelled through the airport (2021: 10.2 million). Passenger numbers in September were close to 5.8 million, which was 15% below 2019 levels, the highest since the start of the pandemic. We also recorded the busiest summer out of any European hub airport. Although demand continues to be driven by outbound leisure, inbound leisure and business travel are showing signs of recovery. During the third quarter, business travel reached 21.5% of overall traffic, compared to 28% in the same period pre-pandemic.

Air traffic movements ("ATMs") grew 183%, in line with the overall increase in demand as more markets are now open. In addition, we saw a 53% of increase in load factors, which still provides a significant growth opportunity. The average number of seats per passenger aircraft remained broadly in line with last year at 217.3 (2021: 210.1). Passenger growth was seen in all regions, with Europe, the Middle East, and North America, in particular, driving the increase compared to 2021. Two airlines have launched flights from Heathrow since the start of the year - Bamboo Airways with a weekly service to Hanoi and WestJet with a service to Calgary four days a week.

Our cargo tonnage remains flat compared to the same period in 2021. This was due to an increase in flights offset by airlines shifting focus towards passenger flights, where cargo is carried in the belly hold of planes.

Build Back Capacity - Despite much forward planning and actions taken to prepare for the summer, in early July, we started to see periods when service dropped to a level that is not acceptable. Scaling up quickly is challenging, and the entire airport ecosystem was stretched which is why we introduced a departing passenger cap to keep supply and demand in balance. 

The temporary capacity limit introduced in July successfully improved passenger journeys, with fewer last-minute cancellations, better punctuality, and shorter queue times. We are confident the cap can be removed without compromising service levels, and we are working in conjunction with our airline partners to develop a more targeted mechanism that protects existing airline schedules and will manage capacity during peak days around the winter holidays.

We plan to progressively increase capacity for Winter 2022 so that this does not significantly impact demand with a view to being back to full capacity by the end of 2023. To achieve this goal, we have established a 'Build Back Capacity' programme covering all aspects of the airport ecosystem. The programme aims to build back capacity, resilience and service levels and includes capacity and demand alignment to ensure the operation is not over-stretched during this critical period, a Recruitment Task Force to reduce Heathrow's vacancy gap at pace and airline ground handling medium-term resilience and efficiency enhancements.

SUSTAINABLE GROWTH

Heathrow 2.0 - Our refreshed sustainability strategy sets out the goals we will work towards this decade. It focuses on delivering outcomes that align with the most material environmental, community and colleague issues for the airport.

Heathrow's Sustainability Report for 2021 was published in August, providing a transparent update to stakeholders on progress made last year, work undertaken to relaunch Heathrow 2.0 earlier this year and data on key sustainability impacts aligned to the goals within Heathrow 2.0.

Heathrow's Surface Access Strategy was published in August. It sets out plans to increase passenger public transport mode share, reduce colleague single-occupancy-car mode share, reduce carbon emissions and improve air quality and increase public transport catchment, to support the delivery of the goals and targets set out in both key pillars of Heathrow 2.0.

Net zero aviation - Our net zero plan sets out how to get to net zero carbon emissions for our own operations and our contribution to decarbonising wider UK aviation. It includes stretching goals to cut carbon "in the air" by up to 15% and "on the ground" by at least 45% against 2019 levels by 2030. Its eight goals show where we will cut our emissions and how we plan to do that, including how we will work in partnership and influence others where we do not directly control emissions.

Investment is key to delivering our net zero plan. As part of our "H7" business plan, we put forward £207 million of capital expenditure in a carbon programme, covering everything from modernising airspace to electric vehicle charging. Our regulator, the CAA, backed notionally the full programme in its final proposals, although the overall plan is not financeable and our proposals risk being not deliverable.

A historic global aviation net zero deal was reached at the ICAO General Assembly on 7th October. This agreement on a net zero 2050 goal marks a pivotal moment in the sector. Committed advocacy work by our CEO and leadership team has played an important role, including our CEO's Chairship of the Sustainable Markets Initiative (SMI) Aviation Taskforce on behalf of HRH the King. Alongside WEF's Clean Skies for Tomorrow and other industry partners, SMI activity, such as engaging States at the Commonwealth Heads of Government Meeting in Kigali in June, helped to make it possible.

Following the publication of its Jet Zero Strategy in July, we continue to support the Government on its plans to introduce the mandates and consult on the price incentives needed to stimulate domestic investment in Sustainable Aviation Fuel (SAF). We look forward to the Jet Zero Strategy aim to have five new SAF facilities in development in the UK by 2025 and working with the government on SAF's wider commercialisation and scale-up, alongside investment in new technology, including zero-emission aircraft, delivery of critical airspace modernisation and supporting carbon removal technologies.

Heathrow continues to play its part in accelerating the use of SAF at the airport. Our SAF landing charges incentive - designed to deliver 0.5% SAF at Heathrow during 2022 - was over-subscribed - and we are consulting on incentives to more than double the SAF mix in 2023 and increase it steadily in the coming years, complementing the Government's new Jet Zero policy.

A great place to live and work - We are committed to Heathrow being a great place to live and work and taking action to deliver positive changes this decade.

We have continued to roll out the Sustainable Travel Zone, launched earlier this year. Highlights since June were the introduction of free travel between Hatton Cross and Heathrow terminals on the Piccadilly line and improved timetables on several bus and coach routes to the north, west and south of the airport.

In July, it was confirmed that Heathrow has successfully retained the Wildlife Trust's Biodiversity Benchmark Award for the 14th year running, recognising our continued commitment to biodiversity and nature and we also celebrated passing a milestone as 4,000 species have now been identified on Heathrow's biodiversity sites.

To date in 2022, the Heathrow Employment and Skills Academy has supported 409 candidates through job offers. In addition, 1,142 Security Officers have been directly recruited, supporting the target of 10,000 early career opportunities by 2030. 2,676 experiences of workdays have been delivered so far this year through the Virtual Work Experience programme, T-Level placements, and Essential Skills Masterclasses for young people with additional learning needs. This supports the target within Heathrow 2.0 of 15,000 by 2030.

The first Heathrow Business Summit since 2019 is scheduled for 15th November. In response to feedback from local SMEs, chambers and business organisations, extensive preparation is being done with tier 1 suppliers to maximise the opportunity of bringing potential suppliers and Team Heathrow companies together.

In September, we marked National Inclusion Week by hosting an event to bring together colleagues from across Heathrow to explore how we can work collectively to continue to make progress.

Key regulatory developments - The CAA published its Final Proposals for the next five-year regulatory period to start in 2022, known as H7, on 28th June 2022. This proposed an average charge of £24.14 (2020 CPI) across the H7 period. Our analysis shows that the CAA's proposals, as currently set out, are not deliverable or financeable due to errors in the CAA's forecasts of key regulatory building blocks. If these errors are not rectified, it will restrict investment in the UK's hub airport just when the country's economic recovery needs it most.

We responded to the CAA's Final Proposals on 9th August 2022, detailing why implementation of its Final Proposals for H7 would result in an airport that falls far short of what our passengers expect. We are aligned with the CAA on the key outcomes consumers expect in H7 - but in advance of its Final Decision, the CAA must now reconsider its forecast of the key building blocks to ensure the price control is a deliverable and investable proposition which can deliver on these outcomes.

Our response to the CAA included updated forecasts for H7 passenger traffic, as set out in our June 2022 investor report, and requested for the CAA to correct the basic errors across the building blocks of its Final Proposals. These include errors in its passenger traffic, commercial revenue and operating costs forecasts, which are undeliverable. We also included further evidence of the need for our £4.6 billion (2020 CPI) capital investment plan, which has been built based on extensive consumer insight to deliver for consumers in H7. Finally, we reiterated key points made in our previous submissions - in particular calling for the CAA to recognise: the inherent uncertainty currently faced by Heathrow when calibrating its price control; the need to set an appropriate Weighted Average Cost of Capital (WACC) for the period, which reflects the risk to which Heathrow is exposed; and the need for an appropriate Regulatory Asset Base (RAB) adjustment following the impact of COVID-19.

The CAA will continue its H7 process through 2022. Subject to changing CAA timelines, we currently expect it to publish its Final Decision on the H7 settlement in Q4 2022 before implementing the H7 licence towards the end of the year.

Expansion developments - While we have paused work to expand Heathrow during COVID-19, recovery from the pandemic has shown the pent-up demand from airlines to fly from Heathrow, as well as how critical Heathrow is for the UK's trade routes. We are currently conducting an internal review of the work that we have carried out and the different circumstances we find the aviation industry in, and this will enable us to progress with appropriate recommendations. The Government's ANPS continues to provide policy support for our plans for a third runway and the related infrastructure required to support an expanded airport.

Brexit - The UK exited the European Union on 1 January 2021. As part of the Withdrawal Agreement, flights can continue without disruption between the UK and EU. Aviation connectivity is seen as a priority for both parties and will continue to be so in the future.

From a border perspective, EU citizens can continue to use electronic gates at immigration upon arrival into the UK. Since 1 October 2021, unless they hold EU Settled Status, EU arrivals must now present their passport at the UK border as a valid ID. Heathrow has worked with Government and Border Force to manage changes to border and passenger processes and ensure minimal disruption. Longer-term, Heathrow is working with the Government to deliver on its objective of 'the world's most effective border' through the 2025 UK Border Strategy. As the UK's biggest port by value and only hub airport, Heathrow has an integral role to play in helping the Government make 'Global Britain' a reality.

From a passenger perspective, we continue to make the case to Government to expand the number of eligible cohorts using e-Gates - such as visa holders and those with Electronic Travel Authorisation (ETA) and e-visas - as well as ensure sufficient resourcing of Border Force.

From a freight perspective, we are pushing the Government to remove outdated 'Canalisation' regulations, thereby making the cargo processing time at Heathrow quicker - in some cases halving the time it takes to process goods at the airport. Additionally, the Government believes now is the right time to review and reset the UK's import controls. It will publish a new Target Operating Model (TOM) in the Autumn, which will set out a new regime of global border import controls which will apply equally to goods from the EU and goods from the Rest of the World and will target the end of 2023 as the revised delivery date.

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 accounts are prepared in accordance with UK adopted international accounting standards.

The Directors have prepared the financial information presented within these interim consolidated financial statements on a going concern basis as they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

Cash flow and liquidity 

The wider Heathrow Group can raise finance at both Heathrow SP Limited ('Heathrow SP') and Heathrow Finance plc ('Heathrow Finance'). Whilst Heathrow SP operates as an independent securitised group, the Directors have considered the wider group when assessing going concern. In assessing the going concern position, the Directors have considered the uncertainty that regulation could provide as Heathrow enters the next regulatory period (H7), as well as the potential impact of any further COVID-19 impacts on cash flow and liquidity over the next 12 months. The Directors have also considered the period beyond 12 months to December 2023.

Despite a challenging market backdrop, given the long recovery from the COVID-19 pandemic, continued confidence and support for our credit enabled Heathrow to raise £0.4 billion of debt in the nine months to 30 September 2022 with new £200 million and CHF165 million Class A transactions being successfully executed. Consequently, Heathrow SP held cash of £1.7 billion as at 30 September 2022. Total debt maturity within Heathrow SP for the next 12 months from 30 September 2022 is £0.8 billion. The wider Heathrow Group (which includes Heathrow Finance and the cash held at Heathrow SP) has cash of £3.0 billion available. No debt matures outside of Heathrow SP for the next 12 months from 30 September 2022. Taking this into account, the Group has sufficient liquidity to meet all forecast cash flow needs well into 2025 under the current regulatory business plan cash flow forecast or until June 2023 even under the most extreme scenario of no revenue. This includes forecast operational costs, capital investment, debt service costs, scheduled debt maturities and repayments.

Heathrow's Base Case

The Directors have modelled future cash flows for the period beyond 12 months to December 2023 and have considered the following:

· Forecast revenue and operating cash flows from the underlying operations, based on a 2022 traffic forecast of 60-62 million passengers;

· forecast level of capital expenditure; and

· the overall Group liquidity position including cash resources, the remaining committed and uncommitted facilities available to it, its scheduled debt maturities, its forecast financial ratios, projected covenant requirements, and its ability to access the debt markets.

In modelling the recovery from COVID-19, there remains a significant degree of uncertainty given the wide range of potential traffic forecasts being formed by various stakeholders in the global aviation industry, including the CAA. Therefore, there is inherent subjectivity in our forecasting. Passenger traffic continued to increase through Q3, with 44.2 million having travelled through the airport in the 9 months to 30 September 2022. Demand continues to be driven by outbound leisure as passengers take advantage of the removal of restrictions and travel vouchers from cancelled trips over the past two years, with inbound demand weaker due to COVID-19 restrictions in other countries. However, the degree of uncertainty is still significant due to steep inflation and the resultant increase in cost of living particularly for voucher-led outbound leisure, coupled with uncertainty of future travel restrictions caused by potential new COVID-19 variants of concern.

In addition to the inherent passenger forecast uncertainties described above, we do not yet have certainty over passenger tariffs for the H7 regulatory period (the period from 1 January 2022 to 31 December 2026), which is set by the Civil Aviation Authority (the "CAA"). As described on page 5 of these interim consolidated financial statements, the CAA's Final Proposals provide an average H7 tariff of £24.14 in 2020 prices, with a final decision expected later in 2022. Until the H7 tariff is finalised, the CAA has put in place an interim tariff (the "interim tariff") from 1 January 2022.

The Group's base case is based on the CAA's interim tariff for the entirety of 2022, with a 2023 nominal tariff of £31.57 based on the methodology set out by the CAA in their Final Proposals. It is the Directors' view that its own RBP Update 3 is devoid of the errors made in the CAA's Final Proposals and is therefore a realistic tariff supported by a detailed assessment of each individual block which form part of the tariff calculation, nevertheless for prudency, the Directors have used the methodology set out by the CAA in their Final Proposals for the purposes of the base case. Under the base case, the Group will meet all covenants associated with its financial arrangements. The Directors have further considered a severe but plausible sensitivity scenario for financial reporting purposes, described below.

Stress testing

As explained above, even under the most extreme scenario of no revenue, the Group has sufficient liquidity to meet all forecast cash flow needs until at least June 2023.

The Directors have stress tested its base case, described above, with a number of downturn scenarios taking into account the CAA's H7 tariff from the Final Proposals and further decreases in passenger numbers and a resulting drop in EBITDA. In addition, the Directors have modelled out to December 2023 given the close proximity to the subsequent covenant testing period.

Under a severe but plausible downside scenario, the Directors have continued to model the interim tariff for 2022 and an overall H7 tariff in line with the CAA's Final Proposals (£24.14 in 2020 CPI prices). This scenario assumes no RAB adjustment above the £300m already granted. Given the continued uncertainty over potential future travel restrictions in the UK and those markets which Heathrow services caused by any new COVID-19 variants, and a resultant impact on consumer confidence, the Directors have modelled downside passenger forecasts in 2023. Whilst the Directors do not consider this scenario likely, a reduction in 2023 passenger numbers of over 12 million (19% reduction versus the base case) under the severe but plausible downside scenario is forecast to result in an ICR covenant breach at ADIF2 in December 2023, with a reduction in 2023 passenger numbers of over 14 million (22% reduction versus the base case) forecast to result in an ICR covenant breach at Heathrow Finance in 2023.

Should there be a covenant breach, the Directors would need to undertake additional actions including identifying additional cashflow mitigations, such as reductions in costs and the re-profiling of working capital, as well as seeking a further covenant waiver or amendment from creditors. During 2021 some of these actions, including re-profiling of payments and working capital, were tested successfully; during Q3 2021, the Group also successfully agreed a further ICR covenant waiver at Heathrow Finance for the period ended 31 December 2021 which follows the agreement of a waiver for the ICR covenant and an amendment to the RAR covenant from Heathrow Finance creditors which resulted in no breach occurring in relation to the financial year ended 31 December 2020. Whilst the Directors are confident to be able to execute some mitigations already tested and receiving support from its creditors if required, there is no certainty a further covenant waiver would be agreed particularly since unfavourable passenger tariffs may impact access to liquidity due to weaker access to debt capital markets at affordable prices. These factors indicate the existence of a material uncertainty which could cast significant doubt upon the Group and the Company's ability to continue as a going concern.

Conclusion

Having had regard to both liquidity and debt covenants, and considering severe but plausible downsides, the Directors have concluded that there will be funds available to meet the Group and Company's funding requirements for at least 12 months from the date of this Q3 Press Release, and that it is accordingly appropriate to adopt a going concern basis for the preparation of these results.

The Directors consider that the underlying credit quality of the business means that it can secure, if necessary and in the event of a severe but plausible downside, the timely support of its debtholders as it successfully secured in 2020 and 2021.

Nevertheless, the impact of COVID-19 continues to create considerable uncertainty with regard to forecast passenger numbers and the corresponding uncertainty in the final decision from the CAA on passenger pricing for the H7 regulatory period. Specifically, if passenger pricing was such that the Group were unable to secure minimum cashflow generation to protect an investment grade credit rating, access to liquidity at affordable prices beyond 2023 may be compromised. These uncertainties may result in the Group needing to take further action, including seeking future further covenant waivers or amendments from creditors. This indicates the existence of a material uncertainty which could cast significant doubt upon the Group and Company's ability to continue as a going concern.

This Q3 Press Release does not include the adjustments that would result if the Group and the Company were unable to continue as a going concern.

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 Accounts for the year ended 31 December 2021.

Summary performance

In the nine months ended 30 September 2022, the Group's revenue increased by 203% to £2,106 million (2021:£695 million). Adjusted EBITDA increased to £1,252 million (2021: £117 million). The Group recorded a£463 million profit after tax (2021: £1,323 million loss).

(1) Adjusted operating costs excludes depreciation amortisation and fair value adjustments on investment properties.

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

(3) Adjusted operating (loss)/profit excludes fair value adjustments on investment properties.

(4) Adjusted loss before and after tax excludes fair value adjustments on investment properties and financial instruments, and the associated tax impact of these including, in the prior year, the impact of the UK corporation tax change.

Revenue

In the nine months ended 30 September 2022, revenue increased 203% to £2,106 million (2021: £695 million).

Aeronautical revenue increased by 315.7%. This increase is predominantly due to higher passenger numbers and an increase in aero charges, set by the CAA's H7 interim tariff. This has been partially offset by an adverse mix of aircrafts and cargo volume. Aeronautical revenue per passenger decreased 4.4% to £30.56 (2021: £31.98).

Retail revenue increased by 238.5%, driven by higher departing passengers, car parking revenue, premium services and the mix of retail services available in the nine months of 2022, compared to last year when the governmental restrictions on non-essential shops were in place in the first five months. Retail revenue per passenger increased 22.2% to £9.34 (2021: £12.00).

Other revenue increased by 37.9%. Other regulated charges increased by 21.1% predominantly because of higher passenger numbers. The significant increase in Heathrow Express revenue is distorted by the lower level of services in 2021 due to the lockdown.

Adjusted operating costs

In the nine months ended 30 September 2022, adjusted operating costs increased 47.8% to £854 million (2021: £578 million). Adjusted operating costs per passenger decreased by 66% to £19.32 (2021: £56.88). The adjusted operating costs per passenger is largely distorted by the fixed nature of our cost base as passenger numbers recover.

Employment costs have increased by 51.4% due to the ramp-up of operations, mainly operations in Terminal 3 and Terminal 4. This includes costs associated with additional colleagues, overtime, recruitment and training. We are also spending more on employment costs following the end of the Government's furlough scheme. For the nine months ended 30 September 2021, Government grants of £21 million were received for reimbursement of employee costs relating to staff furloughed due to COVID-19. Following the end of the scheme in September 2021, no equivalent payments were received in the nine months ended 30 September 2022. The increase in operational and maintenance results from the reopening of operations and higher passengers compared to last year, when we were operating with only one runway and two terminals. Finally, utilities and other costs have been impacted by higher consumption and higher energy prices.

Operating (loss)/profit and Adjusted EBITDA

In the nine months ended 30 September 2022, the Group recorded an operating profit of £831 million (2021: operating loss of £399 million). The profit was driven mainly by higher revenue and an increase in fair value on investment properties.

Adjusted EBITDA was £1,252 million (2021: £117 million).

(Loss)/profit after tax

In the nine months ended 30 September 2022, the Group recorded a profit before tax of £643 million (2021: £1,384 million loss) and a profit after tax of £463 million (2021: £1,323 million loss).

Net finance costs before certain re-measurements increased to £1,127 million (2021: £577 million), driven by additional inflation accretion expense as RPI reached over 12.0% annualised growth for the period, up from 7.1% as at 31 December 2021.

There was a fair value gain on financial instruments of £939 million (2021: £408 million fair value loss), this results from increased volatility in financial markets, in particular at the end of the quarter following the UK Government's mini-budget announcement, and a sharp rise in interest rate expectations in the UK. With the SONIA curve increasing almost fourfold and being the underlying basis for discounting our swap portfolio, it has caused a substantial impact on the derivative valuations.

Taxation

The tax credit for the nine-month period ended 30 September 2022, before certain re-measurements, was £91 million (2021: £194 million tax credit), at an effective tax rate of 20.6% (2021: 18.2%). This rate represents the best estimate of the effective tax rate expected for the full year, applied to the pre-tax profit of the nine-month period, before certain re-measurements. The effective tax rate is higher (2021: lower) than the statutory rate of 19% (2021: 19%). This is because most of the current year tax movements relate to deferred tax which is measured at the 25% post-April 2023 statutory tax rate. This is partially offset by non-deductible expenses primarily related to non-qualifying depreciation.

The total tax charge for the nine-month period ended 30 September 2022, after certain re-measurements is £180 million (2021: £61 million tax credit), representing the sum of the tax credit on the loss before certain re-measurements of £91 million and the deferred tax charge of £271 million on certain re-measurements. In the period, the Group paid £1 million of Corporation Tax (2021: nil)

Cash position

In the nine months ended 30 September 2022, the Group had £1,683 million (31 December 2021: £2,626 million) of cash and cash equivalents and term deposits, of which cash and cash equivalents were £210 million (31 December 2021: £216 million). In the nine months ended 30 September 2022, there was a decrease of £6 million in cash and cash equivalents (2021: an increase of £1,202 million). In addition, in the nine months ended 30 September 2022, there was a decrease of £937 million in term deposits (2021: a decrease of £871 million). We continue to strengthen our cash management which includes enhanced monitoring across our commercial partners and further diversification of our bank counterparties with whom we have cash deposits.

Cash generated from operations

In the nine months ended 30 September 2022, cash generated from operations increased to £1,252 million (2021: generated £326 million). The following table reconciles Adjusted EBITDA to cash generated from operations.

In the nine months ended 30 September 2022, £2 million (2021: £10 million) of payments were made in respect of exceptional costs provided for in 2020 that related to the business transformation programme.

Capital expenditure

Total capital expenditure in the 9 months ended 30 September 2022 was £360 million (2021: £170 million) excluding capital creditors movements, which equates to capital additions or, £318 million (2021: £148 million) including capital creditors movements, which equates to purchases in the statement of cash flows. We have invested £275 million on various programmes to ensure the airport's safety and resilience.

Investment has focused on main tunnel works, design for cargo tunnel refurbishment to ensure fire safety standards are maintained, airport apron development (Kilo taxiway area), back-office systems upgrades and renewal of assets that have come to the end of their economic life.

We also invested £2 million in the period (2021: £5 million) on projects related to expansion. Expansion-related capital expenditure included Category B costs associated with the consent process and early Category C costs predominantly relating to early design costs. Since 2016, Heathrow has invested £383 million in Category B costs and £132 million in Category C costs, a total of £515 million (before capitalised interest and after £10 million of re-work impairment) is carried in our balance sheet as assets in the course of construction.

Restricted payments

The financing arrangements of the Group and Heathrow Finance plc ("Heathrow Finance") restrict certain payments unless specified conditions are satisfied. These restricted payments include, among other things, payments of dividends, distributions and other returns on share capital, any redemptions or repurchases of share capital, and payments of fees, interest or principal on any intercompany loans. No payments to ultimate shareholders were made during the period.

In the first nine months ended 30 September 2022, total restricted payments (gross and net) made by Heathrow SP amounted to £1.1 billion (2021: nil). This comprised the payment of interest and principal on the debenture between Heathrow SP and Heathrow Finance. This rebalances liquidity across the Group, increasing the liquidity position at Heathrow Finance to £1.3 billion.

RECENT FINANCING ACTIVITY

In the first nine months of 2022, we raised £396 million of new debt. This funding complements our robust liquidity position and provides additional duration and diversification to our £16 billion debt portfolio. In March, we priced £200 million of new Class A debt in the private placement market across 20-year and 30-year tranches, which settled in June 2022. In May, we returned to the CHF market raising £136 million equivalent maturing in 2027. In June, we made an early payment of accretion on our inflation swaps totalling £250 million. In August, we priced £60 million of new Class A debt in the private placement market with a maturity of 2047. Finally, in September, we successfully concluded the refinancing of our Revolving Credit Facility at a size of £1.32 billion, up from £1.15 billion, providing additional protection to our liquidity position over the H7 period and showing continued appetite for Heathrow debt.

FINANCING POSITION

Debt and liquidity at Heathrow (SP) Limited

At 30 September 2022, Heathrow SP's consolidated nominal net debt was £14,514 million (31 December 2021:£13,332 million). It comprised £13,982 million in bonds, £1,430 million in other term debt, £751 million in index-linked derivative accretion, and £34 million of additional lease liabilities. This was offset by £1,683 million in cash and cash equivalents and term deposits. Nominal net debt comprised £12,406 million in senior net debt and £2,108 million in junior debt.

The average cost of Heathrow SP's nominal gross debt at 30 September 2022 was 1.83% (31 December 2021: 1.25%). 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 September 2022 was 8.46% (31 December 2021 3.64%). The increase in the average cost of debt since the end of 2021 is largely due to a recent increase in the inflation rate, which led to a higher accrual of accretion on our inflation linked debt and swap portfolio versus the comparable period, with a lesser impact coming from the roll off of low coupons from the Interest Rate Swaps re-profiling exercise. Excluding the impact of our swap portfolio reprofiling initiated in 2020, Heathrow SP's average cost of debt at 30 September 2022 was 2.76% excluding index-linked accretion and 9.39% including index-linked accretion.

The average life of Heathrow SP's gross debt as at 30 September 2022 was 10.4 years (31 December 2021: 10.5 years).

Nominal net debt excludes any restricted cash and the debenture between Heathrow SP and Heathrow Finance. It includes all the components used in calculating gearing ratios under Heathrow SP's financing agreements including index-linked accretion and additional lease liabilities entered since the transition to IFRS 16.

We have sufficient liquidity to meet all our forecast needs until June 2023 under the extreme stress-test scenario of no revenue, or into 2025 under all traffic scenarios considered. This includes forecast operational costs and capital investment, debt service costs, debt maturities and repayments. This liquidity position takes into account £2,938 million in cash resources as well as liquidity at Heathrow Finance plc as at 30 September 2022.

Debt at Heathrow Finance plc

The consolidated nominal net debt of Heathrow Finance amounted to £15,623 million (31 December 2021: £15,440 million). This comprised Heathrow SP's £14,514 million nominal net debt, Heathrow Finance's nominal gross debt of £2,364 million and cash and term deposits held at Heathrow Finance of £1,255 million.

Financial ratios

At 30 September 2022, Heathrow SP continues to operate within required financial ratios from the common terms agreement. Heathrow Finance's gearing ratio has now returned below pre-pandemic levels. Gearing ratios are calculated by dividing consolidated nominal net debt by Heathrow's RAB.

At 30 September 2022, Heathrow's RAB was £18,674 million (31 December 2021: £17,474 million). Heathrow SP's senior (Class A) and junior (Class B) gearing ratios were 66.4% and 77.7% respectively (31 December 2021: 64.6% and 76.3% respectively) with respective trigger levels of 72.5% and 85%. Heathrow Finance's gearing ratio was 83.7% (31 December 2021: 88.4%) with a covenant of 92.5%.

PENSION SCHEME

We operate a defined benefit pension scheme (the BAA Pension Scheme) which closed to new members in June 2008. At 30 September 2022, the defined benefit pension scheme, as measured under IAS 19, was funded at 111.4% (31 December 2021: 107.6%). This translated into a surplus of £306 million (31 December 2021: £343 million). The £37 million decrease in the surplus in the nine months is largely due to actuarial losses of £46 million, attributable to a loss on assets which outstripped actuarial gains on scheme liabilities resulting from a 3.15% increase in discount rate and a 0.25% increase in inflation assumptions and service costs of £20 million offset by finance income of £5 million. In the nine months ended 30 September 2022, we contributed £24 million (2021: nil) into the defined benefit pension scheme including £15 million (2021: nil) in deficit repair contributions.

KEY MANAGEMENT CHANGES

There have been no key management changes since the last results announcement on 26 July 2022. 

OUTLOOK

Following a strong Summer, we are increasing our traffic outlook for 2022 to a range of 60 million to 62 million passengers. This range reflects the uncertainty of short-term demand due to the current economic climate impacting the cost of living, the potential for new variants of COVID-19 as we head into Winter and the ongoing impact of the war in Ukraine. Consequently, adjusted EBITDA for 2022 is expected to be circa £1.6 billion. We will provide an updated financial forecast for 2022 and 2023 in our next Investor Report, due to be published in December.