Civil Aviation Authority

Q6 Capex Review
Heathrow Airport

Final Report
November 2013

Ltd

Contents
Executive Summary
1.

Introduction
1.1
1.2
1.3

2.

Background
Q6 price control process
HALs FBP, RBP and ABP

Review of cross-cutting issues

2.1
2.2
2.3

Background
Constructive Engagement
Project costing
2.3.1 Definition of cost
2.3.2 Estimating procedures
2.3.3 Base and project specific costs
2.3.4 Project on-costs
2.3.5 Risk allowances
2.4 Benchmarking
2.4.1 Principles
2.4.2 Benchmarking for the regulatory settlement
2.4.3 Benchmarking in practice
2.4.4 Summary
2.5 HALs Gateway process
2.6 Procurement
2.7
Development and core capex
2.8
Independent Fund Surveyor
2.9
Integrated Baseline Reviews
2.10 Post-project reviews

3.

Assessment of Q6 capex programme

3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8

Methodological approach
Q6 joint priorities
Airline affordability
Historic and current QSM scores
Proposed HAL project portfolios RBP and ABP
LACC/AOC capital plan
Individual airline views
Review of selected projects
3.8.1 T2A Phase 2 and T2C
3.8.2 T3 refurbishment and enhancement
3.8.3 T4 infrastructure Improvements
3.8.4 T5 security capacity
3.8.5 Northern Perimeter
3.8.6 Enabling the new generation of wide-bodied aircraft
3.8.7 Airfield efficiency and resilience
3.8.8 Commercial IT and telecoms
3.8.9 Automation of the passenger journey
3.8.10 De-icing facilities
3.8.11 Additional fuel infrastructure
3.8.12 T3IB (roll-over)
3.9 Timing and profile of expenditure
3.10 Differences between HAL and airline priorities

3.11

3.10.1 Current position

3.10.2 Q5/Q5+1 roll-over projects
3.10.3 Airfield/resilience projects
3.10.4 T1 & T2 projects
3.10.5 T3 projects
3.10.6 T4 projects
3.10.7 T5 projects
3.10.8 Terminal (non-specific) projects
3.10.9
Baggage projects
3.10.10 IT projects
3.10.11 Surface access projects
3.10.12 Other projects
Conclusions

Appendices
Appendix A: Comparison of preliminary HAL and LACC/AOC Q6 capex plans
Appendix B: HALs RBP/ABP Project Gateway status (as at 19 July 2013)
Appendix C: Airfield map (effective July 2013)
Appendix D: Glossary
Appendix E: Terms of Reference

Executive Summary
1)

This Final Report has been prepared by Alan Stratford and Associates Limited
(ASA) on behalf of the UK Civil Aviation Authority (CAA). It provides an
assessment of Heathrow Airport Limited (HAL)s proposed capital expenditure
(capex) programme for the quinquennial period from 1st April 2014 to 31st
March 2019 (designated as Q6). The review forms part of the CAAs statutory
requirement to establish the potential level of any price cap at regulated
airports.

2)

HAL has prepared three capital plans for Q6. A Full Business Plan (FBP) with
a capital project portfolio amounting to 3 billion over the five year period was
submitted to the CAA in January 2013. HAL regarded the level of the WACC
(weighted cost of capital) shown in the CAAs Initial Proposals for Q6 as
unacceptable to its shareholders and subsequently prepared a Revised
Business Plan (RBP) with a reduced capital portfolio amounting to 2 billion.
At the request of the CAA, HAL has also prepared a third business plan, its
Alternative Business Plan (ABP), representing an update of its earlier 3 billion
FBP, but has limited the projects it is progressing through its Gateway approval
procedure to those in the RBP.

3)

Our assessment excludes all asset replacement projects during Q5, which are
evaluated in a separate study for the CAA. The total portfolio of non-asset
replacement projects in the FBP amounts to 1.5 billion, the RBP to 0.7 billion
and the ABP to 1.6 billion

4)

We recognise that there has been an extensive two year period of Constructive
Engagement for Q6, in which many of the project preparation and delivery
processes were jointly agreed with the airlines and the priorities and objectives
for Q6 were set. This has been well-documented in the Q6 Capital Efficiency
handbook. Despite a broad level of agreement over the capital delivery
procedures for Q6, there are still substantial differences in the scale of the
capital investment, with HAL now opting for a 2.0 billion plan and the
LACC/AOC preferring a 3.1 billion plan

5)

There has been some refinement of the project cost estimating process for Q6,
although this is largely dependent on HALs estimating cost database, which
comprises some 400 facilities costs, broken down by differing degrees of
granularity. Of these 160 facilities relate to Heathrow, with the others those of
other airport or non-airport facilities. In general, however, there is a strong
influence of Heathrow (and other BAA or ex-BAA) facilities within this database
which could distort the estimates if, for example, there was a Heathrow factor
within the costs. HAL has also advised that their cost consultants and
suppliers provide a further source of cost information

6)

We note that HAL has set target reductions of between 1.6% - 2.7% in its addon percentage for project on-costs. These on-costs include the allocation of
the staff costs of HALs Capital Solutions division. We note that the Q6 capital
budget is likely to be significantly less than that in Q5, so a considerable
reduction in staff numbers will be needed. We also note that project on-costs
include early design costs and we would recommend that these should be
allocated directly against project cost rather than in an on-cost pot

7)

HALs estimating cost database provides the main source of information

supporting their benchmarking process, although occasionally an external
benchmarking report on a specific project is commissioned. Since this
database was established HAL have firmed up their definition of project cost.
They have not, however, reviewed data generated prior to this (and held in the
database) so that structural and cost allocation adjustments can be made. It is
considered, that for certain project types, this process is undertaken to ensure
that benchmarking data can be used in a more meaningful, proactive way.
HAL has responded to this by stating that adjustments to historic data did not
justify the significant amount of work required. The labelling of data in the
database also needs to be reviewed along with identified scope of works to
ensure that relevant data is selected for use in benchmarking. It is understood
that the Works Breakdown Structure and Data Collection templates have been
reviewed and reissued to address this issue.

8)

HAL undertake benchmarking in order to generate confidence in their

estimates. The process appears to be used as a means of validation of bottom
line cost. The data and process could however be used to much greater effect
to drive through value. It is considered that a more dynamic approach could be
adopted without too much impact/inconvenience on workload.

9)

All project cost estimates take account of risk (and opportunity) costs through
an appraisal of the key risk elements, their likely probabilities and their cost
impacts. In Q6, HAL intend to cost projects on a P80 basis during the
development phase (ie up to Gateway 3). Once projects transition through
Gateway 3, they will be recosted on a P50 basis. This is expected to result in a
build-up of surplus funds at the development phase which could be re-allocated
to projects by mutual agreement with the airlines.

10)

The introduction of and Independent Fund Surveyor (IFS) role is a new concept
for Q6. The IFS (or IFSs) will be appointed jointly by HAL and Heathrow AOC
Limited and will provide an independent monitoring role for all key project
expenditure during Q6. The funding for the IFS will be provided through HALs
capital budget for Q6. We regard the IFS as a positive step in ensuring capital
efficiency, although we note that in their RBP HAL has significantly reduced the
budget (to 3.0 million). This reduction is strongly rejected by the LACC/AOC

11)

HAL recognise that the reduced capital programme in the RBP would mean it
would be unable to fulfil its vision and priorities for Q6 as agreed with the
airlines during Constructive Engagement and set out in the FBP. The focus in
the RBP is to maintain its current position in terms of the passenger
experience, resilience and hub capacity rather than endeavour to improve
these to develop Heathrow as Europes hub of choice as set out in the FBP.
The LACC/AOC have indicated that they totally reject these new priorities
which were not agreed with them

12)

In terms of phasing, a higher proportion of expenditure in both the RBP and the
ABP is theoretically incurred in the first two years, rather than the following
three years of the quinquennium. It should be noted that, at present, many Q6
projects are in their infancy, so it would be a challenge for HAL to meet this
timetable

13)

We have prepared a detailed review of 12 major projects in Q6. These

represent some 53% of all non-asset replacement capital expenditure in the
RBP and 57% in the ABP

14)

The Terminal 2 project commenced in Q5 with the partial construction of the

main T2A building and completion of the satellite pier, T2B. In Q6, two projects
are proposed - completion of T2A Phase 1 (ie the roll-over costs) and T2A
Phase 2 / T2C

15)

In the case of the T2A Phase 1 roll-over costs, there are differences in the
project scope between the ABP (159.7m) and the RBP (55.1m). In the latter
case, it is proposed not to complete two stands (Stands 234 / 235) or provide a
through taxiway (Kilo taxiway) linking T2A and T2B until T7. This will result in a
loss of pier service and increased taxiing times. The LACC/AOC opposes this
and we concur that it is not sensible to build new rectilinear terminals and
satellites and not to connect these properly.

16)

There is also a substantial difference between the T3A Phase 2 / T2C costs in
the ABP (219.8m) and the RBP (5.0m). The project scope in the ABP
covers the preliminary works (tunnelling etc) necessary for the next stage of the
T2 project. In the RBP, the cost covers just the necessary planning
permissions etc required for the next stage of work. The reduced project scope
would delay the overall T2 programme by about two years, which HAL
acknowledge would impact pier service levels in Q7/Q8, although they have not
quantified this. It is our view, however, that the work could be delayed until Q7.

17)

HAL has allocated a budget of 36.7m for a new transfer security facility in T3
in both the RBP and ABP. The ABP also includes a further 41.0m for other
improvements to this terminal. With an expected future life of some 20-25
years, it is recognised that Q6 is the last opportunity for significant investment
in T3. The LACC/AOC plan includes these improvements together with some
11.0m expenditure on new facades in the South Wing and Arrivals areas.

18)

A budget of 52.8m has been included in the RBP for infrastructure

improvements to T4. This rises to 72.0m in the ABP. Both the RBP and the
ABP cover the upgrading of two stands to Code F (A380) capability together,
the joining of Reclaim Belts 6 &7 to cater for A380 operations and an upgrade
of the LV system. The A380 requirements are based on known future A380
operations by T4 carriers and the LV upgrade is required for safety reasons
so these items are clearly essential. The ABP also includes a new coaching
gate (1B), the refurbishment of the Arrivals Hall and Forecourt and new HV
infrastructure. The LACC/AOC plan includes further expenditure on the short
stay car parks and the Immigration Hall. We understand that the proposed
increase in the capacity of T4s short stay car park would also be used for any
overspill resulting from a shortage of capacity in the long-stay car park. On
balance, we believe that this additional expenditure is justified and we note
that HAL endorsed expenditure on improved T4 car parking in their initial Q6
business plan..

19)

A project to improve transfers security in T5 has been significantly refined since

the FBP and is included at 23.0m in both the RBP and ABP. HAL has some
further 8.0m expenditure allocated to T5 in the ABP (5.0m for expansion of
the CIP lounges and 3m for baggage reclaim improvements for A380 flights).
The LACC/AOC has a significantly higher budget (210m) for T5 improvements
including a further 65m for the CIP lounges and 70m for an extension to the
T5C satellite pier. Much of this expenditure, however, is dependent on the
BAs future A380 fleet operations particularly whether it exercises its options
for a further seven aircraft. Given these uncertainties, we remain unconvinced
that the full 210m budget is justified.

20)

A 10m project to provide additional car parking space along the Northern
Perimeter road is shown in both the RBP and ABP and is accepted by the
airline community. The ABP also includes a 20.2m project to extend the PRT
(Passenger Rapid Transit) system from the business car parks to the CTA
(Central Terminal Area). The airlines, however, feel that this would not
represent value for money as it is not an effective means of transporting
passengers. In our view, this project might perhaps be commercially viability
but the case is difficult to prove and, in view of the budget constraints should
be excluded,

21)

The project Enabling wide-bodied growth is a mix of airfield works including

taxiway widening for A30 aircraft, runway RETs (Rapid Exit Taxiways), a
runway RAT (Rapid Exit Taxiway) and new remote stands. 86.8m is
budgeted in the RBP and 182.7m in the ABP. The LACC/AOC is not in favour
of the reduced scheme as the lack of remote stands would impact pier service
in T2, the lack of the RETs would impact punctuality and congestion, whilst the
RAT is an enabler for the ending of the Cranford Agreement and would
improve departure rates on Runway 09L

22)

The Airfield efficiency and resilience project is a collection of IT and modelling

initiatives by HAL in conjunction with NATS designed to improve airfield
efficiency. A budget of 70.7m is allocated in the ABP and 29.0m in the RBP
reflecting a reduced selection of initiatives. The LACC/AOC feels that the full
70.7m budget is required. We concur with this, with the proviso that suitable
commercial agreements with NSL and NCRL can be reached

23)

The project Automation of the passenger journey covers replacement of the

existing CUSS (Common User Self Check-in) machines and the introduction of
self bag drop, self boarding gates and information kiosks at the airport. The
budget in the ABP is 60.0m to cover partial introduction of these technologies
and 8.5m in the RBP for CUSS replacement only. The LACC/AOC attaches
considerable importance to this project and has allocated a budget of 120m.
In our view this is justified, apart from the self-boarding gates which have a low
passenger priority and relatively small opex savings. We believe a budget of
80.0m - 90.0m would be more appropriate.

24)

A project for remote de-icer pads at the runway holds has been under
consideration for some time following the Begg Report on winter resilience at
Heathrow, but was not included in the FBP or RBP. A budget of 48.0m is now
shown in the ABP. The project would appear to be justified although there is
concern that a suitable commercial arrangement for their operation has not
been agreed with the airlines

25)

A commercial project to provide a common 4G IT infrastructure and

improvements in LAN/WLAN connection speeds across all Heathrows
terminals is budgeted at 14.0m in both the RBP and ABP. It is expected to
deliver a total EBITDA of 13.7m in Q6 and is included in the LACC/AOC
separate C list of commercial projects with a full payback in Q6

26)

A 28.6m project to cover the enabling works for new fuel storage
infrastructure was shown in the FBP but was subsequently removed from the
RBP and ABP. In reverse to the existing business model, HAL now contend
that the enabling works should be borne by the fuel companies themselves and
then passed through to the airlines in the fuel price. The LACC/AOC has
included the full cost of the infrastructure (130m) in their capital plan. We can

see no reason, however, why the existing business model should no longer
apply and we therefore support this project on this basis (ie with a budget of
28.6m). We recognise, however, that further commercial negotiations with
HAFCO are required to bring this project to fruition.
27)

We have undertaken a preliminary review of the roll-over costs of T3IB

(Terminal 3 Integrated Baggage Facility), which is costed at 35.0m in the RBP
and ABP. These roll-over costs are derived from a recent 75.0m cost
estimate increase, bringing the total estimate cost of the project to 435.0m.
The airline community has made strong representations to the CAA about this
(and previous) cost increases for the T3IB project. Our preliminary assessment
suggests that some 41.5m of the 75.0m cost increase is not substantiated
and that therefore there is a prima facie case for the CAA to reject these rollover costs from the Q6 capital budget. It should be noted, however, that some
of this 41.5m unsubstantiated cost has or will occur in Q5+1, with the
remainder in Q6.

28)

In terms of the forthcoming Q6 settlement, we feel that If HAL and the airlines
were to agree that a capex budget of around 3 billion were acceptable within
the overall framework of Q6, there could be agreement on the project portfolio
itself, although there remain important differences between the ABP and the
Airline Plan. It should be noted, however, that many of the proposed projects
are relatively immature (ie at Gateway 2 or earlier), so changes in project
scope and/or costs may still occur through mutual consent.

29)

We also believe that there may be some scope for a reduction in a 3 billion
budget if this proves necessary, although given the immaturity of many of the
Q6 business cases it may prove difficult to make these judgements at this
stage. There is some scope to delay the second phase of the T2A/T2C to Q7,
although we feel that HAL needs to further assess this.
In our view, the
business cases for certain projects in HALs ABP (eg Back Office IT or
additional baggage enhancements) look less convincing than others and could
be rejected. The resulting costs savings from such adjustments might amount
to between 200m-250m Further cost reductions might also be achieved for
asset replacement in Q6 although we have not assessed this.

30)

There is also a question mark as to the appropriate extent of HALs contribution

to the Crossrail project (beyond any work required within the airport site). This
issue is beyond the scope of our report.

31)

In summary therefore, we believe that, whilst a project portfolio of around 3.0

billion would provide the most long-term benefits, this might be reduced to
between 2.7 - 2.8 billion (excluding any reduction to the asset replacement
programme) without any major impact to the passenger experience or
operational performance. Whilst this could provide an overall budget ceiling, we
note that nearly all the Q6 projects / business cases are relatively immature (at
Gateway 1 or 2) and are therefore subject to agreed changes in scope, the
selection of appropriate options and refinement of the cost estimates before
they can proceed.

1.

Introduction

1.1

Background

This Final Report has been prepared by Alan Stratford and Associates Limited (ASA)
on behalf of the UK Civil Aviation Authority (CAA). It provides an assessment of
Heathrow Airport Limited (HAL)s proposed capital expenditure (capex) programme
for the quinquennial period from 1st April 2014 to 31st March 2019 (designated as
Q6). The review forms part of the CAAs statutory requirement to establish the
potential level of any price cap at regulated airports.
This Report follows an earlier Interim Report on the then-proposed 3 billion capital
programme as outlined in HALs Full Business Plan (FBP) submitted to the CAA in
January 2013. The Interim Report covered the cross-cutting issues involved in
capital planning and delivery and made some preliminary assessment of the overall
programme and selected projects1. The report also took account of the views of the
airlines including the Heathrow LAAC/AOC2 on this 3 billion programme.
Following the publication of the CAAs Initial Proposals for Q6, HAL reconsidered its
position and prepared a Revised Business Plan (RBP) which incorporated a reduced
2 billion capital investment programme over the five years. The reduction in the
programme was made in response to the CAAs proposals on the Q6 WAAC
(Weighting Average Cost of Capital), which HAL felt was unacceptable to its
shareholders. Following this, Heathrows airlines made further submissions to the
CAA to disapprove of this reduced 2 billion plan and the CAA asked HAL to prepare
an updated Alternative Business Plan (ABP) based on a 3 billion budget. HAL has
indicated that, in terms of progressing the Q6 capital programme through the
Gateway process, they are engaging only on projects as they stand in the RBP.
As requested by the CAA, this report provides an assessment of the 3 blllion ABP
although we take account of any differences with the earlier 3 billion FBP, the 2
billion RBP and the views of the airlines. The report also includes some further
analysis on the cross-cutting issues, notably on cost estimation and on-costs, and
gives an update on the status of some 11 projects including one further project
(Additional fuel infrastructure) which was initially included in the FBP but has
subsequently been dropped from the RBP and ABP. It should be noted that the
assessment excludes asset replacement projects, which are evaluated in a separate
study for the CAA undertaken by Steer Davis Gleave (SDG).
This study has been undertaken by a review of the relevant business cases and
supporting documentation prepared by HALs Capital Solutions Group. A number of
meetings have been held with HALs staff and AOC/airline representatives and any
questions raised to HAL have been formally answered through a written response
under the IRS scheme.

For the purposes of this report, the term project is used for the various business cases in HALs and
the LACC/AOCs Q6 capital plans. Strictly speaking, the business cases will be converted into
projects at Gateway 3.
2
LACC/AOC London Airport Consultative Committee / Airline Operators Committee. For the
purposes of this report, the AOCs views are considered identical to those of its parent body, the
LACC.

The original Terms of Reference for our assignment for the CAA are provided in
Appendix E.

1.2

Q6 price control process

Airport charges at Heathrow are regulated by the CAA using a Regulated Asset Base
(RAB) based single till. The capital expenditure programme represents one of the
key building blocks for the regulatory settlement. These building blocks need to be
defined and assessed using a bottom-up approach bearing in mind the nature of
the inter-relationships between them. In this way, the traffic forecasts can, for
example, define the level of investment in new infrastructure capacity or investment
in new commercial facilities can increase revenue under a single till.
This evaluation is made on a bottom-up basis by assessing individual projects in the
overall Q6 capex programme. For the purposes of this second stage of the project,
we have added a further six projects to the seven initially assessed in the Interim
Report. (One project, Baggage Standard 3 HBS has been dropped as it is now
regarded as asset replacement).
We also report on the current views of the airlines in the context of the two current
proposals (the 2 billion RBP and the 3 billion ABP). The LACC/AOC and individual
airlines/alliances have indicated that that they believe that the general level of capital
investment required in Q6 is about 3 billion, although this is subject to an acceptable
level of airport charges in Q6 (and projected for Q7). There are, however, still
differences between the airlines preferred project portfolio and HALs current 3
billion plan (ABP).

1.3

HALs FBP, RBP and ABP

As indicated above, there are significant differences between the initial 3 billion
FBP, the revised 2 billion RBP and the subsequent 3 billion ABP.
The overall priorities and targets for each plan are given in more detail in Section 2.2.
In terms of the allocation of funding, the total budgeted for asset replacement against
non-asset replacement is given in Figure 1.1 below:
Figure 1.1 FBP, RBP and ABP by Asset Replacement v Non-Asset Replacement
mill
FBP
% of total
RBP
% of total
ABP

% of total

Asset Replacement
Non-Asset
Replacement

1,531.2

51.0%

1,318.4

66.1%

1,458.8

48.4%

1,473.8

49.0%

674.8

33.9%

1,555.1

51.6%

Total

3,005.0

100.0%

1,993.2

100.0%

3,013.9

100.0%

These figures indicate that the level of asset replacement is broadly similar under all
three plans but, in the RBP, its proportion of the total capex budget is substantially
higher than in the FBP or ABP.
The asset replacement projects include some
254.9m for Baggage Standard 3 Hold Baggage Screening machines which is strictly
a compliance (or early asset replacement) project.
The business cases have been defined in seven programmes representing the main
themes for the capex portfolio. HAL defines a programme as a temporary
organisation created to direct and oversee the implementation of a set of related
projects and activities in order to achieve certain outcomes and benefits that help

deliver our strategic objectives. In practice, these programmes will alter as business
cases are translated into defined projects at the delivery stage. As indicated in
Section 2.7.1, it is proposed that, for the purposes of project delivery, the business
cases are grouped into programmes of related projects..
Figure 1.2 HALs FBP, RBP and ABP by Programme
million
FBP
Passenger Experience
321.5
Terminal 2
400.1
Surface Access
222.3
Airfield Resilience
445.0
Baggage
532.4
Asset Replacement
904.9
Business Systems & Technology
166.7
Others
12.1
Total
3,005.0

RBP
187.4
60.1
57.0
233.5
486.1
828.2
135.9
5.0
1,993.2

ABP
358.4
401.5
214.3
422.4
538.3
864.7
152.3
60.1
3,013.9

It should be noted that some projects that could be defined as Asset Replacement
are included under other categories.

2.

Review of cross-cutting issues

2.1

Background

This section provides a critique of the cross-cutting issues involved in the

identification and delivery of capital projects at Heathrow. It includes an overview of
the Construction Engagement process for consultation between Heathrow and its
airline users which, for Q6, commenced in summer 2011 and underpins the
collectively agreed proposals for the setting of the price cap for this qunquennium.
The review focusses on key factors relating to the potential capital efficiency of the
overall Q6 capex programme and its projects. These are as follows:

The nature of HALs project costing process

The cost estimating and cost tracking process

The nature of and level of project on-costs

The nature of and level of risk and opportunity allowances

The use of project cost benchmarking

The nature of HALs Gateway process for project approval, which was
updated in Q5

The nature of HALs project preparation and delivery process, which has also
been revised in Q6

The current proposals for an inflation allowance for the Q6 settlement

The nature of the proposed split between development and core capex and
the implications for project efficiency

The proposals for an Independent Funds Surveyor (IFS) to provide on-going

quality assurance for capex spend in Q6

The nature of HALs Integrated Baseline Reviews of the capex programme

which commenced in Q5 and will continue in Q6

The nature of the proposed post project reviews and their implications in
terms of capital efficiency and value for money

The study does not consider project procurement procedures apart from a brief
comment on their current status. Whilst we recognise that this is a key issue in
procurement procedures for Q6 are currently under discussion with the CAA as part
of the new licencing arrangements. In an amendment to the original Terms of
Reference, the study does not review the inflation allowance in Q6 as this is now
covered in a separate CAA study.

2.2

Constructive Engagement

2.1

Background

The Constructive Engagement (CE) process for Q6 commenced in summer 2011

and followed a consultation document Setting the Scene for Q6 published by the
CAA in July 2011.
The process evolved from the CE procedures in Q5 and involved both a top-down
approach led through a governance body, the Joint Steering Team (JST) and a
bottom-up approach through a number of specialist workstreams reporting to the
JST. These included both a Capital Efficiency and a Capital and Solutions working
group.
Q6 CE was based on several key assumptions including continuation of the 480,000
ATM cap and that the capital programme should be based on the 2 Runway
Masterplan which, in the longer-term, rationalises passenger processing capacity into
two buildings (T2 and T5) from that originally in T1,T2, T3 and T5. The speed of
development of the masterplan is dependent on traffic growth, the investment
programme and future Government policy. Whilst projects in Q6 have been defined
around this masterplan, consideration has been given where appropriate to the
implications of a possible future 3 Runway Masterplan.
In late 2011, HAL tabled three potential scenarios for capital expenditure in Q6.
These were Scenario (a) Minimal Capital Expenditure with a budget of 2.0 billion,
Scenario (b) Step towards the Masterplan with a budget of 3.0 billion and Scenario
(c) Masterplan Priority with a budget of 4.0 billion. In the FBP submitted to the
CAA, HAL put forward a capex plan based on Scenario (b) - 3.0 billion. In their initial
submissions to the CAA, the LACC/AOC and the airlines made it clear that their
position on this capex budget was subject to their assessment of affordability of
airport charges in Q6 (and beyond) once the full set of building blocks for the
regulatory settlement are established.
The overall strategic framework for the FBP was based on an emerging programme
of Q6 joint priorities and a set of Q6 programmes. The programmes represent
groups of related projects to deliver each priority. A small number of projects are
shown as others.
Following the CAAs initial proposals for Q6, HAL prepared a Revised Business Plan
(RBP) based on a 2 billion budget, which was effectively Scenario (a) above. As
indicated earlier, HAL stated that this proposed reduced budget was due to the high
WACC (Weighted Average Cost of Capital) put forward by the CAA which they
indicated was unacceptable to their shareholders. HAL were subsequently asked by
the CAA to put forward a new 3 blllion capital budget (the ABP) based on their latest
assessment of the potential projects. They have however stressed that they are now
only progressing projects as they stand in the RBP which is their current preferred
option.
The Constructive Engagement process formally ended on 3rd December 2012.
Whilst the FBP was not officially an output of CE, many of the capital delivery
processes in Q6 were agreed jointly with the airlines over this period. It is our view
and that of HAL and the LACC/AOC that considerable progress was been made in
reaching consensual agreement, particularly in the area of capital delivery, to the

credit of all parties concerned. Nevertheless there are still areas of disagreement on
some areas of capital efficiency, on the size of the overall capital programme and on
the nature and costs of some individual projects.

2.3

Project costing

2.3.1

Definition of costs

A project costing or estimate has a number of constituent elements, all of which will
have a different calculation methodology. In the case of Heathrow Airports Limited
(HAL), the individual elements used are as follows:

Base costs:

Project specific costs:

On-costs:

Risk allowance

The methodology to derive these elements of total project cost are set out below:

2.3.2

Estimating procedures

The EC Harris paper Guidance on Estimation at Concept and Strategic Level (2)3
includes significant detail of the component costs which comprise these elements
together with methodology of how the estimates will be prepared.
This methodology, is intended to be the standard used by EC Harris in the support
they provide. This has been fully adopted by HAL. Discussions with EC Harris
confirm that they expect to provide significant input into the independent cost
estimates, completing between 40% and 50% directly.
Like many process related points, although it is acknowledged that HAL is seeking to
improve and standardise their processes, it appears that their adoption has been
relatively recent or in some instances, is still being developed. As such the quality of
their implementation will continue to be improved as these processes are fine-tuned.
As a result, the expected increased accuracy of estimates and control of costs is
likely to lag behind implementation. Consequently, the success of the new
arrangements is likely to become clear over the period of Q6 as outturn costs are
realised. It is recommended that sufficient and specific time be devoted within the
post project review process, to understand the degree of adoption of the new
processes and the benefits that have accrued as a result (making time to understand
and implements any lessons learned).

The current form of this document, which was published in May 2013, is an amendment used since 1st
January 2012 to reflect nuances needed for Gateway 2 which has only recently been approached by Q6
business cases.

The following flowchart has been distilled from the guidance document:
HALs Cost Estimating Process
Estimating Procedure

Commercial
Manager Produces
Initial 3PE

Should there be insufficient clarity the process will either be

abandoned or a SPE only process (right hand side) will be followed.
Assuming there is reasonable development of the scope etc, the full
3PE route (left hand side) will be followed.

Complete and
Validate CPS

Produce SPE

Base Costs
Project Specific Costs
On-costs

Workshop to
Validate 3PE

Agreed 3PE

Risk Manager via

Primavera

Distributed Project
Outcomes

This is the basic process used

throughout a projects development
(give or take). As projects crystallise,
and the ranges of the 3PE narrow,
at a point, the P value will change
from 80 to 50, this combined with
the narrower range will reflect the
greater certainty of costs.

The SPE will be put together by a variety of means

reflective of the information available they are (in
order of max information available), 1) Database
elemental values, 2) Database project values or other
available values/projects.
Where relevant, a 3PE will be produced and validated
to show (based on industry experience and analysis)
what an optimistic and pessimistic estimate may be
based on an understanding and assessment of the
opportunities and risks respectively.

Risk Manager via

Primavera

Specific software will be used to produce

a distribution of probabilistic outcomes
after running multiple iterations
(10,000) in order to create a distribution
bell curve.

Establish P
Values

From the distribution curve it is possible to read off the relevant P values be
they the P50 (50% confidence), P80 (80%) or (P95) which are used at different
parts of the projects development depending on the level of development and
certainty of the technical solution and underlying costs.

Review and Report

Outcomes

Outputs will be subjected to review and benchmarking against other estimation

methods. Once satisfied, the output will be captured in the relevant
template/business case and reported.

The salient points of the specific methodology are further discussed in the following
sections:

2.3.3

Base and project specific costs

A key source of information supporting provision of a Single Point Estimate (SPE) is

the Data Collection Analysis (DCA) library. This is a data warehouse of cost
information which is understood to have been established and is periodically added
to with information based on scheme costs (at estimate, contract or outturn stage).
The DCA is considered in greater detail in Section 2.4; however the following points
are noted:

Given that capital projects are relatively unique it may not have wide coverage
or significant depth of appropriate information;

Evidence provided by HAL indicates that information for some schemes is held
at a granular level and for others held for large units of cost (for example:
carousels);

It is understood that HALs specific taxonomy/work breakdown structure used

to categorise costs will also be used to capture contracts priced submissions.

The DCA is used to derive base and project specific costs. Further specific
comments on the DCA are set out in the section on Benchmarking with comments
on how the SPEs are used in the section on Risk below.
The EC Harris guidance suggests that SPEs should be built up through the
information held at a granular level in the first instance and if this is not available, that
more aggregated data be used to produce the estimate. In addition to the DCA
information (or instead of, if no information exists), the existence of other benchmarks

and projects will be examined to validate or produce the SPE. How the SPE is
manipulated from this point is discussed in the section on Risk below.

2.3.4

Project on-costs

Breakdown of project on-costs

On-costs are recovered on the aggregate of base and projects specific costs (and by
implication risk). They are based on a percentage calculation to recover a number of
costs controlled by HAL and in particular the MSP unit. These are based on a
sample of Q5 projects which represent 60% of the Q5 spend, which along with the
relative turnover, generate the on-cost percentage. In terms of Q6, the Q5 on-cost
percentages have been referenced in order to identify targeted improvements.
HAL On-costs by contributing element

These costs are recovered against projects based on calculated percentages with
some variation for the known greater or lesser requirement of certain project types.
The following table shows the project archetypes together with the original on-cost
recovery percentage and stretch target:
HAL Original and stretch on-cost recovery percentages by archetype
Terminals
Piers and Satellites
Car Parks
Pavement & Infrastructure

Q6 Target (%)
18
15-19
16
16-17

Q6 Stretch Target (%)

17.5
14.5-18.5
15.6
15.7-16.7

Target Reduction (%)

2.7
2.7
2.2
1.6

As can be seen, depending on the project archetype, target and stretch target oncosts for Q6 range between 15% - 19% and 14.5% - 18.5% respectively.
Meaningful benchmarks are not readily available, however, it is understood that HAL
do periodically benchmark this information. They have supplied the following rates
received for similar based industries with large infrastructure programmes:

Sector
Water
Rail
Utilities
Environment Agency

On-cost range
11%-20%
12%-25%
17%-24%
12%-18%

Should these on-cost figures be comparable in terms of their constituent

components, HALs rates could be considered competitive. For Q6, on-cost
percentages are considered to be representative of the market and should therefore
hold good for the foreseeable future. However, it is worth noting that the risk of
under or over recoverability rests with the airlines and the extent that budgeted costs
are greater (or lesser) than that recovered through the established percentages will
reduce (or increase) the budget available for works. There are a number of risks with
this assumption:
The analysis provided shows a number of heads of expenditure which comprise the
sum recoverable from capital projects (see below). Examining the list it is clear that
(all else being equal), there will be greater certainty in some costs than others. For
example, Design Consultants and Specialist Support which account for 34% (22%
and 12% respectively) are likely to vary considerably depending on the uniqueness
and complexity of the scheme and are consequently more volatile. Indeed, we are
surprised that the cost of early design work for projects is not allocated directly
against the projects themselves rather than within an overall on-cost pot, which is
then redistributed to the projects. This can potentially distort the true project cost and
both we and the LACC/AOC recommend that HAL, in conjunction with EC Harris,
reappraisal this procedure.
Staffing numbers
HALs internal costs make up nearly 30% of the total cost of on-costs. It is
understood that this cost is based on the current Capital Solutions division within
HAL which has some 288 staff..
We understand that current expectations are to make an appropriate reduction in the
headcount based on the agreed level of capital spend in Q6 settlement together
with an assessment of the workload for project preparation and delivery. Clearly a
significant reduction will be given that the capital budget in Q6 is likely to be less
than one half that in Q5 and the stretch on-cost targets are more stringent.
It is noted that expenditure further declines over the term of Q6. As a result, to
minimise disruption and potential future severance costs, HAL will need to plan and
take action as soon as possible in order to accommodate future headcount
reductions.
In order to manage this transition, a Q6 Development Steering Group chaired by the
Development Director has been established. This group has set a target to
commence a formal consultation process with staff in January 2014 ahead of the
commencement of the Q6 budget period.
The required reduction in staffing is significant; this will need to be carefully managed
and monitored to ensure that:

The reductions are made in good time;

The required reductions are achieved, and

That there is not significant reduction in the interim and therefore adverse
service impact can be avoided.

It is considered, even if managed well, that it is likely that (due to the loss of
economies of scale) there will be a negative effect on on-cost rates.
Our review of selected projects in Q6 suggests that the cost estimates prepared to
date include on-costs at the stretch target rates although it is possible that further
adjustment may be required once a more refined cost estimate in produced at
Gateway 3 (see Section 2.6)

2.3.5

Risk allowances

Risk in project budgeting is incorporated in the estimating process in a number of

distinct ways:

At an initial estimating stage:

As part of the build-up of the SPE which, as noted previously, is the first step in
determining an estimate. Risk is captured via a workshop attended by
technical and commercial staff in order to consider the risks inherent in the
project (corporate risks affecting all projects are captured elsewhere) which is
then quantified with the assistance of HALs risk manager;

For immature projects (Up to Gateway 3 for Q6):

On a P80 basis the risk being equal to the difference between the P80 value
and the most likely estimate (the most likely estimate contains an element of
risk itself), and

More mature projects (post Gateway 3 for Q6):

On a P50 basis adjusted for specific risks.

As discussed, the estimating process employed by HAL utilises 3PEs, the initial
version of which will be produced by the Commercial Manager prior to being
validated by others in a specific workshop. Once agreed, the 3PEs are analysed on
a Monte Carlo basis via Primavera, a third party risk analysis tool, in order to
provide a distribution of potential project cost estimates at varying degrees of
confidence.
Based on an assessment of the likely risk (and opportunity4) items, their potential
probabilities of occurrence and the cost impact of occurrence, a Monte Carlo
simulation analysis can be run to derived an S-curve of the distribution of overall
estimated project cost. Based on the distribution, the P50 value is the cost estimate
with a 50% probability that it will not be exceeded. The P80 value is the cost estimate
with an 80% probability that it will not be exceeded.
At Gateway 3, it is expected that the technical solution and the estimates (SPE and
3PE) will have evolved to a level that would give the project team increased
confidence. This would be manifested in pricing on the basis of the P50 risk value.
At this trigger point any excess funds would be returned to the portfolio for
reallocation rather than being carried forward to be managed at a programme level
see below).
4

An opportunity is the reverse of a cost risk item (ie a possibility of a cost-saving)

These risk premia and cost increases generally appear to be managed at a

programme level. To the extent that a project needs funds over and above that
allocated, an application will be made to the programme who will manage any
increases/decreases within an overall control total (should it be the case that the
programme will overspend, an application can be made to the portfolio holder).
It is noted that the process for risk in the form discussed, has been adopted by others
bodies with high infrastructure costs such as the Ministry of Defence and the Nuclear
sector. However, it needs to be followed through in substance and with the right
tools and information. As previously noted, it appears that although there is the will
to improve processes, they are, in their current form, relatively new and their success
cannot yet be effectively assessed
The success of the new arrangements will only become clear in due course and it is
recommended that sufficient and specific time be devoted, as part of the post project
review process, to understand their application and impact as part of the general
(and specific to process in its own right) post project reviews. We do not know
whether HAL has ever undertaken a post-hoc review of the extent to which the risks
on projects materialise (ie to gauge the probabilities and cost impacts for future cost
estimates.
Depending on the project it is likely that there will be a marked movement between
P80 and P50 risk adjusted values and as a result, a reduction in expected spend. As
set out above, this excess development capital expenditure will be returned to the
portfolio for reallocation at Gateway 3. Depending on the project and the frequency
of the Gateways, this could create a situation of perpetual underspending and give
the portfolio very little opportunity to bring forward projects or take action to maintain
momentum. To help address this it is considered that either:

A process could be put in place to give earlier warning of issues (either

formally or informally, and/or

In year budgets could be over programmed on the assumption of reduced

budgets/slippage (accepting that this brings other risks).

This point is especially relevant at the current stage of the portfolios development as
almost all of the Q6 projects are in their infancy and therefore currently costed on a
P80 basis.

2.4

Benchmarking

2.4.1

Principles

HALs consultant, EC Harris, notes that cost benchmarks are considered to provide
a high level of indication of the likely cost of a similar product if replicated at a given
time and location5
It is important to expand upon this recognising that benchmark data can be used to
inform risk, to drive through value and to support continuous improvement. To this
end benchmarking is more dynamic; not just an indicator of cost but operating as a
tool performing a variety of functions.

EC Harris Facility Benchmarking paper, September 2012

In order for the benchmarking process to return accurate and useable data it is
essential that there is consistency in the way that historic supporting data is dealt
with. Primarily there should be consistency in structure and scope of works should
be sufficiently detailed so that decisions can be made about whether or not the data
is appropriate to support the benchmarking purpose.
HAL has advised that the status of data (ie whether it is based on competitively
tendered sums, final accouint data etc) is included in the database and on the
detailed analysis, Where possible, abnormals and project speciifics are identified
separately; however, in some cases ie contractors final accounts, these costs cannot
be specifically identified.

2.4.2

Benchmarking for the regulatory settlement

HALs approach to estimating for Q5 was primarily focused on single point estimates
informed by benchmarking data generated from 70 facility benchmark rates.6

Their costing methodology for Q6 (as set out in the Capital Efficiency Handbook)
proposes a three-point estimate considering time, cost and risk. The intent of this
approach is to more comprehensively inform HAL of impact on capital expenditure.
Cost ranges of minimum, most likely and maximum cost are identified with
confidence generated through Monte Carlo simulation (see Section 2.3.2). Estimates
for Q6 are then informed through internal and external estimating rates and
benchmark data.7
The benchmark results (in the Handbook these are based on data contained in
documents 1 4 overleaf) are used to identify an average total cost/m GIA or per
unit with an efficiency target then identified of between 2% and 4%. The
benchmarking data is rebased using the BCIS All in Tender Price Index (All in TPI) at
Q1 2012 and HAL proposed that this will be updated for the regulatory settlement
using the index at Q2 2013 (this is an error and should be Q3 2013).
The Q6 benchmark targets are noted as:

New build terminals;

Piers;
Multi-storey car parks;
Taxiways;
Stands; and
Toilet refurbishments.

A review of HALs benchmarking processes and reports has been carried out with
reference to the following documents:
1.
2.
3.
4.
5.

Facility Benchmarking paper September 2012 (EC Harris)

Q6 Key Facility Benchmark Targets Baggage (July 2012)
Q6 Facility Benchmark Targets Toilet Refurbishments
Q6 External unnamed terminals
HAL Capital Efficiency Handbook, FBP Part D, Revision 14, dated 22 January
2013

From this review it is apparent that:

6
7

IRS 84.01 Estimating and On-Costs presentation, 30 July 2013

HAL Capital Efficiency Handbook, FBP, Part D, Revision 14, dated 22 January 2013, page 54

Adjustments made to raw benchmarking data for abnormal (project specific)

and on-costs are not transparent. Now that these elements have been set by
HAL (see Section 2.3.1) the definitions need applied in a logical, coherent
manner for these benchmarking exercises regardless of whether data is
generated internally or externally;

A number of the projects used for benchmarking have been adjusted to

normalise their location. The BCIS All in TPI has been used for UK projects but
no detailed index series is provided for adjustment of international project data.
It is suggested that HAL clarify the updating process for international data for
these exercises;

Most of the benchmarking data is focussed on total cost figures and the results
have been used to identify average prices against which efficiency adjustments
have been set. Because the facilities benchmarked are airport specific,
comparative project data is not available in terms of volume, quality or typical
structure. Many of these are other projects at Heathrow or the former BAA
airports, Gatwick and Stansted. This limits the benefit of the benchmark
exercise (at present it appears to be a means of validation against the norm)
and the results need to be considered accordingly so that targets represent
value improvement and are achievable. Where structured data is available
then it would assist if percentage distribution of cost is analysed and further
targets set against the results. This will drill into what constitutes balanced
design, balanced cost and delivery of value;

References to the TPI in all the documents analysed have been inconsistent
and in some instances incorrect regardless.

2.4.3

Benchmarking in practice

HALs Estimating Rate Database is the primary source of benchmarking data with
additional data obtained from external consultants.
It currently contains data for just over 400 facilities. 160 of these are Heathrow
facilities. The remainder are a mix of other airport facilities and non-airport facilities.
69 per cent are new build with 31 per cent refurbishment. HAL have been asked to
split this data which has returned varying totals suggesting that it may not be
sufficiently categorised.
HAL note that data is structured according to their Estimating and Cost Planning
Definitions Programme Controls which is aligned to industry best practice (ref
footnote 8). The intent is that this provides for consistent comparison against both
internal and external benchmarks.
Data is captured at four levels:

Project analysis;
Facility analysis;
Elemental analysis;
System analysis.

HAL have confirmed that the elemental analysis follows best practice guidance which
is then extended to capture HAL specific elements and costs. Analysis of data

submitted by HAL (IRS 112) does not however support this in that the elemental
structure does not reflect that set out by BCIS (inclusion of envelope for example). It
is possible then that external data will have to be restructured to reflect HALs
structure.
HAL have now defined project specific costs and on-costs but some of the data held
in their database was generated prior to agreement of these definitions. HAL have
been asked what their intent is for this existing data and their response is:
The analysis sheets have been provided in accordance with the requirements at
the time. Adjustment would involve re-allocation of some on-costs[HAL] do not
consider that retrospectively adjusting the data to suit current definitions would have
a material enough impact on the base data to warrant the considerable effort
involved9
The sample data submitted identifies that benchmarking is carried out using base
cost data. The consequence of HALs response to retrospective adjustment is that
this will render the base cost data potentially unsound which may skew the
benchmarking results.
HAL have released a detailed benchmarking exercise for multi-storey car parks
(MSCP) with supporting analyses.
The principle behind updating historic UK costs is sound. The BCIS All in Tender
Price index (TPI) has been used, which HAL have adopted as best practice. If HAL
produce their own inflation index (see 2.4.3.3) then it is suggested that this is used to
rebase historical data.
The UK data in the database is updated quarterly based on the latest TPI release.
HAL is aware that there are more frequent updates to the TPI (often at intervals as
short as two weeks) but consider a quarterly update is sufficient. It is however
suggested that since updates can include amendment to recently historic indices
HAL should ensure that (if they continue to reference the TPI) their updates are run
to coincide with BCIS TPI releases.
International data (the volume/value of this has been queried but not established) is
reported in its local currency and users of the data are required to make adjustments
for location/inflation based on their current knowledge. Reference is made to the
Turner & Townsend International Cost Survey as a source of international cost data.
This has limitations in that the survey is conducted annually (and is therefore quickly
out of date) and is based on a limited number of countries and construction types.
In the absence of industry recognised international indices this approach is not
considered inappropriate providing the guidance is applied with intelligence and in
mind of project specific features/functionality/criteria. It is also suggested that
international data is clearly categorised, it sits outside or in a separate section of
HALs database and that it is used for reference only (i.e. not as a key informer).
Further observations on the MSCP exercise are as follows:

There are instances where the project data is duplicated.. It is recommended

that only a single instance of a project is used and that nature of the cost
(construction decision cost, final account cost etc) is clearly reference on all
IRS-112 070813

data collection and analysis (DCA) sheets and benchmarking summaries (this
is not evident in the data provided in IRS-112 070813) ;

Benchmarking is carried out on total base cost only. There is no indication that
HAL benchmark elemental costs or elemental distribution of cost. This
immediately limits the usefulness of the process, with it becoming a bottom line
validation tool as opposed to anything dynamic to drive through efficiency and
value in design;

The benchmarking is carried out using project data and not facility data (facility
and elemental data is held in the DCA). This can significantly skew the output.
Removing facility base cost data from the MSCP exercise reduces the range
cost per car park space and as a consequence significantly reduces the
average cost per space; replacing project data with relevant facility data would
not be of any negative consequence because of the base cost approach;

The scope of work is not adequately described and this makes selection of
appropriate cost data for benchmarking purposes difficult, unless the project is
known by the user,

The elemental costs are not necessarily supported by robust systems costs
with much of the breakdown being based on cost/m gross internal area or
element area rates (HAL have subsequently advised that this is being
addressed through quality checks on DCAs and the requirements for more
information to be included);

Build up figures do not always transpose directly into element figures,

suggesting an informal, unrecorded means of adjustment between the two (or
an error in transposing);

There is no evidence that detailed analysis is carried out on the impact of data
being for a Heathrow project, an airport project or a non-airport project. Data is
mixed in the benchmarking overview and it therefore cant be established if the
base cost of a Heathrow project or an airport project carries a premium. It is
important to understand this in consideration of procurement management,
inflation and the ability to secure competitive construction prices.

Whilst the benchmarking exercise considers base cost only the MSCP project
analyses suggest that other on costs plus risk, opportunities and inflation costs are
calculated as a standard percentage. It is not clear if this percentage is calculated at
project level and then dispersed through to facility level or if HAL apply standard
percentages generally.
It is suggested that, where it is possible to split project cost into facility costs, costs
associated with these elements are calculated on a per facility basis in view of each
projects particular profile. This would then allow benchmarking of these costs which
would assist HAL in understanding the effectiveness of procurement routes and
related design development.
It is also suggested that these on-costs are benchmarked to ensure continuing
efficiency.

It is also noted that although HALs estimating methodology is based on three point
estimating there is no apparent analysis of construction duration and risk aligned to
cost in the benchmarking process.

2.4.4

Summary

The basis of a sound benchmarking system is in place but its application could be
improved and the following is suggested:

The analysis data needs to be consistently labelled according to agreed

terminology. This will allow data to be easily categorised and more accurately
applied;

Collection and analysis of data at both contract commitment and out-turn stage
of a project will further allow HAL to objectively measure what has happened to
a project whilst it has been on site against what was anticipated to happen as
defined by the contract documents. This will support the drive for value in
future projects to a greater degree. Using contract data for benchmarking
purposes, without consideration of what materialised for individual projects, is
likely to lead to a benchmarking profile that is not achievable and/or does not
represent a value improvement;

Avoid use of estimated data consider contract or out-turn costs, avoid

multiple instances of the same project in the benchmarking process;

Historic data that is used frequently for benchmarking is restructured so that it

reflects industry best practice. This could be done over time on a project by
project basis so that it is efficient and focussed;

Project and facility scope is adequately defined;

If the TPI remains the means of basing and rebasing data, the database should
be updated in line with TPI releases to capture changes to historic indices;

Analyse the difference between Heathrow projects, airport projects and nonairport projects to identify if there is a Heathrow or airport premium;

Benchmark elemental cost to drive through value and efficiency in design;

Benchmark risk and time aspects of projects so that these impact of these on
cost can be better understood;

The inclusion of project/facility data is reviewed with the benchmarking results

to ensure that only appropriate data is included and the results arent skewed;

Benchmarking data is applied effectively to drive through efficiency and value

as opposed to it being base cost validation

It is concluded that use of benchmarking as a dynamic tool to test estimates,

measure project risk and set improvement targets should be implemented as
standard procedure for Q6. However benchmarking needs to be supported by a
robust cost database with parameters around the cost transparent and understood.
Greater use of independent benchmarking consultants as suggested in the Q5 report
may also assist in generating more comparative data for both UK and international

airports. In addition there should be consistency in the measure of inflation and how
this is applied to normalise and then forecast cost. The application of benchmarking
as a means of cost validation (as set out in the Handbook and implied through the
MSCP exercise) only partly exposes its potential to effectively support projects and to
derive value from them.

2.5

Gateway process

HAL has a new Heathrow Gateway Process covering stages G0 to D8 inclusive

which was developed during Q5 and implemented in 2012.
HALs project governance process has been developed to align with industry best
practice through the application of principles of the Association of Project
Management (APM) and Office of Government Commerce (OGC), now Major
Projects Authority. It has been developed around a Gateway assurance model.
Projects are reviewed at key points (Gateways) throughout their life to ensure that
the project is still on track and has the appropriate project management systems in
place to ensure delivery.
There are seven stages in the project lifecycle. Before proceeding to the next stage
each project must carry out a stage Gateway review which ensures that current stage
works have been completed and that the project is ready to proceed into the next
stage.
Governance and assurance of the project lifecycle is built around the stage gateway
process and has two key components:

At each gateway, specific Exit criteria need to be met (has the project done
what it should have done to date?); as well as 'Entry' criteria (does the project
have all the plans in place to maximise the chance of success of the next
stage?); and a review of the project business case must be held to ensure its
continuing validity.

The utilisation a Project Complexity Assessment model at the outset of the

gateway process to ensure that the governance & assurance requirements of
a particular project are tailored, within the overall mandated framework, to
respond efficiently to the particular complexities and attributes of that project
rather than adopting a 'one size fits all' approach dependent purely on EAC.
The Project Sponsor is accountable for ensuring that an appropriate
Assurance Plan is in place and being executed.

The gateway process is, in part, web enabled and contained on the Heathrow Hub
giving accessibility to and acting as a reference point for all project teams. The hub
includes and sets out the process, procedures, templates and sign-offs required at
each of the Gateways G0 to D8.
The Gateway Process utilises five key project documents:

Brief
Business case
Project management plan
Sanction request
Acquisition strategy

Further specialist documents are also needed at individual gateways

The main gateways are defined at the end of each key process as follows:

G0 - Strategy
G1 - Initiate
G2 - Options
G3 - Solutions development
G4 - Definition
G5 - Implementation
G6 - Transition
G7 Close down
D8 - Operation

At present nearly all Q6 projects in HALs RBP and ABP (except Q5 roll-over) are at
G0 or G1 with more projects expected to transition to G2 in the current year (ie
Q5+1) or in the first year of Q6. A list of all projects showing their Gateway status as
at 19 July 2013 is given in Appendix B.
The relationship between the current Gateway process and that used for the majority
of Q5 (DGS/IGS 2004) is shown in the diagram below.
.

In addition to the changes to the Gateway progress, HAL is planning a new project
delivery procedures in Q6 in which business cases that transition through G3 are
combined into a project delivery package (or packages) for implementation. It is
expected that these packages will be largely defined on a geographic basis.

2.6

Procurement

HALs procurement procedures were independently evaluated in the post-hoc review

of Q5 capex expenditure and capital efficiency. This report raised a number of
concerns about HALs procurement procedures in place at this time including the
selection process for and the allocation of contracts within CBI (Complex Build
Integrator) Framework contracts. In particular, the report recommended that, for

maximum capital efficiency and value for money, all contracts should be awarded
through a competitive tender process. In the case of the CBI framework contracts, it
was recommended that there should be a second stage tender amongst the selected
framework contractors for individual project contracts. A further concern was the
type of contracts awarded. A significant number of contracts during Q5 had been
awarded as NEC Option E (cost reimbursable) contracts, which it was felt should
only be used if the project scope was inadequately defined.
The airlines also indicated that, in Q5, they had no input or involvement in the
procurement process. Whilst we recognise that this is ultimately the responsibility of
HAL, we would hope that, in Q6, the IFS will be able to provide some oversight of the
procurement process.
HAL have advised that its procedures in Q6 (including the award of Framework
Contracts for Complex Build Integrators-CBIs) are currently under review. HAL are
also in discussions with the CAA over the procurement process in Q6. In view of
this, we have not addressed the future procurement procedures in Q6 in this report
although we acknowledge that this is an important element of capital efficiency.

2.7

Development and core capex

During the course of the Constructive Engagement process, HAL and the airlines
agreed (in conjunction with the CAA) to designate capital expenditure in Q6 as either
development or core capex. This enables the development of less mature project
scope to meet the time schedule required for the delivery of benefits and provides an
element of flexibility to meet evolving stakeholder requirements.
Core capex is defined as projects where the scope, costs, risk and time schedule is
well defined. It will normally include all projects which have passed G3 representing
construction or implementation decision. Core capex will be costed using a P50 risk
approach, thereby providing a sound target for efficient project management.
Under the Constructive Engagement proposals, development capex will have a lower
definition of scope, cost, risk and time schedule for delivery. It is expected that the
majority of projects in Q6 (except for Q5 and Q5+1 roll-over) will be considered as
development capex at the start of the quinquennium. Development capex will be
costed using a P80 risk approach. Once development capex projects transition
through Gateway 3, they will be recategorised as core capex and recosted using P50
risk allowances. The majority of a projects expenditure will therefore be incurred as
core capex, although a proportion (eg for project design, preliminary works etc) may
occur as development capex. The allowed return (WACC) is expected to be identical
for both development and core capex.
Given that the overall Q6 capex budget is based on P80 costs, it is expected that a
surplus fund will accumulate as projects transition to core capex. It is not known
exactly how much will accumulate in this way. In principle, this will be the difference
between the P80 and P50 project costings (as at the CAA settlement). It is obviously
possible that, for some projects, the latest P80 and P50 costings may have increased
by G3 (eg due to under-scoping or changes in labour or materials costs) although
conversely some may have reduced. We suspect that, in practice, project costings
are more likely to increase between the CAA settlement and G3 (eg through agreed
scope changes through Change Control) although this should not be a justification
for a lack of definition in earlier costings.

We have not been provided with a full list of projects costed on a P50 basis, although
looking at a selection of costings provided to us, we believe that the P50 costs are
approximately 5.5% - 6.5% lower than P80 costs this would suggest that around
6% of the budget should theoretically accumulate as a surplus (less any changes to
the costings as shown above). The budget surplus would be monitored by the IFS
and would theoretically available for further project scope or a rebate on airport
charges provided this not needed to fund any budget overspend during Q6.
We can see advantages in this approach in that it theoretically gives some flexibility
for additional as yet undefined project scope or alternatively provide a rebate on
airport charges during what may be a difficult financial period for many airlines.
We do have, however, have some caveats. We do not feel that P80 budgets should
be used as a buffer for possible increases in project costings between budgets at the
CAA settlement and those at G3. Furthermore, given that P50 costings represent the
most effective benchmark for cost control, we believe that all project expenditure
(including design work etc) is best managed against P50 rather than P80 costs
(whilst still retaining the difference between the P80 and P50 costs at a programme
level. We understand from HAL that this is their intention, although there would need
to be a strong justification for the use of the cost differential. Indeed, there is an
argument that project managers might be given more stringent targets eg P20 to
attempt to add greater control over project costs. The IFS will need to play a key role
in monitoring these costs and advising all parties as to what level of budget surplus
should be anticipated on the basis of efficient capital budget and expenditure
throughout the Q6 period.
The progression from development to core capex through the Gateway process is
illustrated in the diagram below.

2.8

Independent Fund Surveyor

The introduction of and Independent Fund Surveyor (IFS) role is a new concept for
Q6.
The objective of the IFS role is set out in the HAL Q6 Capital Efficiency Handbook at
Section 610, the first paragraph of which states:
The objective of the introduction of an Independent Fund Surveyor is
to provide an on-going assessment of the reasonableness of all key
decisions made on key projects and, in undertaking Development
projects the capital is being used effectively to deliver the outcomes
determined by the business case.
The second paragraph sets out the principle and timing of engagement of the IFS
and aligns the IFS role to identified projects ie those which are defined and consulted
upon:
The principle of an Independent Fund Surveyor is aligned to identified
projects; as such there is a presumption that at the time of
appointment the nature, scope, benefits and business case have been
defined and agreed by HAL and consulted with the Airline Community.
The role relates to monitoring the delivery of the same.
The precise details of the IFS appointment are still to be determined, although it is
understood that this will be a Framework Agreement with several companies, each
focussing on individual projects or project groups.
Fee levels for the IFS are stated as capped at 0.5% of the EAC (Estimated Cost at
Completion) of the selected projects which will be defined as Key Projects as
provided in the CAAs Heathrow Consultation and Information Protocol (revised
Annex G) dated November 2011. The precise list of key projects in Q6 still needs to
be defined, although it is likely that these will be largely (but not exclusively) nonasset replacement projects.
It is difficult to judge the overall input needed from the IFS(s) during Q6. This may
vary from project to project dependent on their complexity and possibly on whether
certain issues emerge (as, for example, has been the case for T3IB). In the ABP
(and in the initial FBP), HAL has set aside a Q6 budget for the IFS role of 9.5million.
This equates to some 0.33% of the overall capex plan. In the RBP HAL has
significantly reduced the IFS budget to 3.0 million (0.15% of the overall capex plan).
This reduction is strongly rejected by the LACC/AOC.
The timetable for the appointment of the IFS has slipped (due in part to a pause
period required by HAL so that they could fully understand the implication of CAS
proposals) but HAL have now confirmed that frameworks are scheduled to be
awarded on 1 November 2013.
It may take a little time to bed down the precise contribution of the IFS in view of the
learning curve required. The staff resources available, particularly within the airline
community, for the on-going assessment and monitoring of projects is limited. There
10

HAL Capital Efficiency Handbook, FBD Part D, Revision 14, dated 22 January 2013, pages 14 to 16
inclusive

is no doubt, therefore, that an independent IFS will play a key role in ensuring that
capital is being used efficiently during Q6.

2.9

Integrated Baseline Reviews

HAL undertook Integrated Baseline Reviews (IBRs) on T5 in Q4 then throughout Q5

on the Q5 CIP. They intend to continue with these reviews during Q6. The outline
approach to carrying out IBRs is set out in the HAL Q6 Capital Efficiency Handbook
at Section 1311.
The fundamental difference between Q5 and Q6 is that the portfolio will commence
with a baseline. This was not in place at the commencement of Q5 as the HAL
approach, in managing the projects/programme/portfolio, was revised during Q5 and
the IBR approach introduced.
The key aspects of the IBRs during Q6 are that:

They will be carried out at least annually.

They will test and challenge each project and programme.
The IBR outputs presented to the Development Executive and Airlines.
Their coverage will include: acquisition, cost, schedule, risk and change.

HAL should clarify whether its intention is to baseline review each project and
programme or focus primarily on Developments Key Projects. We consider the
former is a better approach. HAL should consider drafting a simple procedure to
support the IBR review process and involving one of the IFS providers as an integral
part of the HAL team which carries out each of the IBR reviews.
We expect the
IBR approach, implemented in a robust manner, will provide positive benefits, in
terms of delivery cost certainty and schedule confidence, throughout Q6.

2.10

Post-project reviews

For most key projects, HAL undertake post-project reviews (PPRs) in which they
examine whether projects have been achieved within budget and their planned time
schedule and whether the expected benefits have been achieved.
Whilst we recognise that such post-projects were undertaken in Q5 and that, in most
cases, the expected benefits (eg improved service times or target increases in QSM
scores etc) appear to have been achieved. We feel, however, that with the
assistance of an IFS, these could be improved through a more formal process. We
have been advised by HAL that, in Q6, the PPRs will concentrate on the time, cost
and quality of the outputs delivered by the projects. Benefits realisation reviews will
be conducted by programmes and aligned to programme gateways.
It is recognised that the assessment of the financial and other benefits will be a
challenge. The business cases (particularly as they stand at Gateway 1 or 2) will
evolve into deliverable project packages after Gateway 4, which are expected to be
largely defined on a geographic basis. It is important not to lose sight of the derived
benefits within these project packages. It may also be difficult to precisely identify
how target reductions in opex or increases in commercial revenue have been
achieved as this may be due to a variety of factors, not just the particular capital
11

HAL Capital Efficiency Handbook, FBD Part D, Revision 14, dated 22 January 2013, page 37

project reviewed. Similar considerations will also apply for improvement in QSM
scores etc.

3.

Initial assessment of Q6 capex programme

3.1

Methodological approach

In our initial assessment of the Q6 capex programme given in our Interim Report we
provided an overview of the 3 billion programme proposed in the FBP, an
preliminary appraisal of the business cases for seven selected projects and a
summary of the main differences with the airlines on this particular project plan.
The projects chosen for this initial evaluation were selected jointly by ourselves, HAL
and the airlines and were as follows: The costs shown are as per the FBP.
BC No
B005
B009
B012
B017
B020
B029
B054

Project
Baggage Standard 3 Hold Baggage Screening
Northern Perimeter
Airfield Efficiency and Resilience
T4 Infrastructure Improvement
Commercial IT and telecoms
Automation of the passenger journey
T2 Phase 2 and T2C

FBP-m
254.9m
43.0m
70.7m
82.9m
14.0m
30.0m
219.8m

`1
The seven projects total some 715.3m, representing approximately 41% of the
proposed Q6 FBP programme (excluding asset replacement).
In our subsequent assessment of RBP and ABP, we have extended this to an
appraisal of 12 projects following discussions with the CAA. Project B005 has been
dropped as this is now regarded as asset replacement. Two further terminal
projects, an airfield project, a roll-over project from Q4 (T3IB) and project for de-icing
facilities have been added for more detailed appraisal. We also examine a further
possible project for additional fuel infrastructure which was included in HALs FBP but
subsequently excluded from the RBP and ABP.
The full list of projects now reviewed is as follows:
BC No
B054
B016
B017
B018
B051
B009/B088
B011
B012
B020
B029
B035
B033

Project
T2A Phase 2 and T2C
T3 refurbishment and enhancement
T4 infrastructure Improvements
T5 security capacity
T3IB roll-over
Northern Perimeter
Enabling the new generation of wide-bodied aircraft
Airfield efficiency and resilience
Commercial IT and telecoms
Automation of the passenger journey
De-icing facilities
Additional fuel infrastructure

RBP-m
5.0m
36.7m
53.8m
23.0m
82.1m
10.6m
86.8m
29.0m
14.0m
8.5m
-

ABP-m
219.8m
77.7m
72.0m
23.0m
82.1m
30.8m
182.7m
70.7m
14.0m
60.0m
48.0m
-

Our evaluation of B054 (T2A Phase 2 and T2C) includes some comment on B050
(T2A Phase 1 completion) and the implications of the use of the T1 transfer baggage
sorter for the early phase of T2.

The reviewed projects total some 349.5m in the RBP (representing some 52% of all
non-replacement capex) and 880.7m in the ABP (57% of non-replacement capex).
In addition to our review of these 12 projects, we provide a summary of the main
differences between the HAL and the LACC/AOC capital plans and give some brief
comments on this where appropriate. This summary is shown in Section 3.9.

3.2

Q6 agreed joint priorities

Q6 priorities were jointly defined by HAL and Heathrows airlines through the
Constructive Engagement process which commenced in summer 2011. This
confirmed the agreed vision for Heathrow as: the UKs direct connection to the world
and Europes hub of choice by making every journey better.
Building on this vision and based on certain key assumptions including continuation
of the current 480,000 ATM cap, the R2 masterplan and the current single till RAB
based regulatory process, a strategic framework was jointly developed showing the
joint priorities and service propositions throughout Q6. This framework, which was
not contingent on any particular level of capex spend, is presented in the figure
below.
HALs FBP Q6 Strategic Framework

This strategic framework was used to underpin HALs Full Business Plan with a 3
billion capital budget which was submitted to the CAA in January 2013.
HAL
referenced all Q6 projects against these joint priorities and service propositions in
their business cases.
Following publication of the CAAs Initial Proposals for Q6, HAL subsequently
amended its capital programme in a Revised Business Plan with a reduced 2 billion
budget. This programme was based on a revised set of priorities and targets,
although these were not agreed with the airlines. The key differences in these
between the FBP and RBP are shown in the table below.

Comparison of Priorities and Targets in HALs RBP and FBP

As such, the RBP is expected to sustain existing levels of passenger experience,

and hub capacity whilst reducing the underlying operating cost by some 9.4% in
comparison to a saving of some 6.8% in the FBP. Certain other assumptions are
inherent in the RBP including continuation of the Cranford Agreement.
Implementation of the RBP will have some impact on the overall T2 programme and
service levels during Q6 and Q7
As HAL point out on p21 of the RBP, with the proposed 2 billion capital programme
in Q6, (Heathrow) will enter Q7 with passenger experience at lower levels than other
European hub airports, with punctuality under pressure and some further capacity
constraints. We have not assessed these overall impacts under the FBP, RBP and
ABP except insofar as we look at the expected benefits of certain projects.
It should be noted that, at no point has the LACC/AOC or the airlines endorsed this
revised set of service propositions or the concept of reduced 2 billion capex budget
in RBP.
In July 2013, HAL were requested by the CAA to prepare an Alternative Business
Plan (ABP) with a 3 billion capex budget (effectively an update of the earlier FBP).
The strategy framework for this and operational assumptions are the same as in the
FBP.
At present, HAL are only taking forward projects in the RBP through the Gateway
process although some analysis on other projects in the ABP is being undertaken at
the request of the airlines.

3.3

Airline affordability

The airline position on the overall level of the Q6 capex programme is that it will
ultimately depend on affordability. At present, the LACC/AOC have totally rejected
HALs 2.0 billion RBP and has significant reservations about several projects in their
3.0 billion ABP. It has prepared its own plan based on a 3.0 billion portfolio, with a
further list of some eight commercial projects totalling 97m, which are in HALs ABP
but pay back to HAL during Q6. These would be included in the RAB so therefore
the LACC/AOC capex plan for Q6 amounts to some 3.1 billion. The LACC/AOC
recognise, however, that the level of capex in Q6 will ultimately depend on airline
affordability of the proposed airport charges in Q6 (and projected in Q7).

3.4

Historic and current QSM scores

A key purpose of capital investment is to improve the passenger experience at

Heathrow. HAL measures this through a number of quantitative and qualitative
methods, including ASQ (airport service quality) statistics for individual facilities and
QSM (quality service monitor) survey data from passengers.
For the purposes of our report, we reproduce the trends in the QSM scores since
July 2009, shown on a moving 12 month average basis.
Heathrow QSM scores (MAA basis on scale 1-5)
T1 Dep
T1 Arr
T3 Dep
T3 Arr
Jul-10
4.02
4.01
4.07
4.00
Jul-11
4.08
4.05
4.07
4.01
Jul-12
4.09
4.09
4.13
4.04
Jul-13
4.14
4.14
4.19
4.12

T4 Dep
4.13
4.11
4.18
4.19

T4 Arr
4.09
4.06
4.10
4.22

T5 Dep
4.22
4.18
4.25
4.23

T5 Arr
4.24
4.20
4.22
4.22

These figures illustrate the difference between the experience of passengers using
T5 and those using other terminals at Heathrow. There has been some closing of
the gap over the past 12 months, particularly in T4, although the experience of arrival
passengers in T3 is still significantly below that of T5. This may however be largely
due to border control issues rather than the airport facilities in these areas. . .

3.5

Phasing over Q6

HAL has provided the phasing of capital programme in the FBP, RBP and ABP,
which is shown in the table below. In general terms, a higher proportion of
expenditure is theoretically incurred in the first two years, rather than the following
three years of the quinquennium.. HAL argue, however, that the delay in not
progressing those projects in the ABP but not in the RBP through the Gateway
system has shifted the phasing of the ABP later in the quinquennium in comparison
to that in the FBP.
HALs Proposed Q6 Capital Programme (FBP, RBP & ABP)
milliion
2014/15
2015/16
2016/17
2017/18
FBP
660
697
591
591
% of total
22.0%
23.2%
19.7%
19.7%
RBP
505
552
424
307
% of total
25.3%
27.7%
21.3%
15.4%
ABP
614
705
638
516
% of total
20.4%
23.4%
21.2%
17.1%

2018/19
464
15.5%
206
10.3%
541

17.9%

Total
3,003
100.0%
1,993
100.0%
3,014

100.0%

It should be noted that, at present, many Q6 projects are in their infancy, so we

believe it would be a challenge for HAL to meet this timetable. HAL has stated that
the phasing has been developed to balance off the competing demands of delivery of
benefits (ie opex reduction, capacity increase etc) against a sensible construction
schedule. The phasing shown is approximate as it is largely based on the project P80
cost estimates rather than the P50 figure which is a more realistic estimate of
actual expenditure. We would also expect some savings in the transition to the P50
estimate and it is unclear when these savings would themselves be spent (if at all).

3.6

LACC/AOC capital plan

On behalf of the airline community at Heathrow, the LACC/AOC has prepared its own
alternative capex plan, which comprises three lists of projects:
(a)

A list of 44 projects assuming a 500m provision for T2 Phase 2 including early

work on the T2 baggage system

(b)

A list of additional projects to be included if T2 Phase 2 is costed at 220m (ie

the preliminary works as identified in the RBP). This amounts to some 12
further projects totalling 287m

(c)

A list of a further eight commercial projects totalling 97m which are expected
to pay back during Q7. These projects are included in both HALs RBP and
ABP.

The LACC/AOC plan is shown in Section 3.8 and Appendix A, although for the
purposes of our study and reconciliation with HALs FBP and RBP, we have used
different project categories.
.3.7

Individual airline views

Whilst in general terms the airlines at Heathrow concur with the collective view of the
LACC/AOC, several of the main airlines and airline alliances at Heathrow have
submitted separate representations to the CAA which include their personal views on
the capex programme for Q6.
We have seen certain early representations from British Airways and Virgin Atlantic
which were submitted to the CAA prior to their initial proposals but we have not
seen any (draft) final representations subsequently submitted.
In the case of the early representations, British Airways presented its case for further
development of T5 and its views on the capital inefficiency of the T3IB project. Virgin
Atlantic strongly supported the development and refurbishment of T3, its home
terminal, although its representation was made prior to the decision to base the new
Virgin domestic operation, Little Red, in T2. It should be noted that, whilst we
comment on the roll-over costs of T3IB, we have not investigated any historic cost
over-runs in Q5 or Q5+1 in this particular study12.

12

T3IB cost over-runs in Q5 (but not Q5+1) were evaluated in an earlier CAA study Q5 Capex and
Consultation Review Heathrow Airport, Alan Stratford and Associates Ltd, April 2013

3.8.1 Terminal 2 - (T2 Phase 1 roll-over and T2A Phase 2 / T2C)

Summary
BC050 T2A Phase 1 roll-over
Project value (Q6)
FBP (3 blllion)
160.4m
RBP (2 billion)
55.1m
ABP (3 billion)

159.7m

Summary of scope
All outstanding T2 roll-over items
As above excluding Stands 234/235 and through
Kilo taxiway
All outstanding T2 roll-over items

Project value (Q6)

219.8m
5.0m
219.8m

Summary of scope
Design and enabling works for T2A Phase 2 / T2C
Planning consent work only
Design and enabling works for T2A Phase 2 / T2C

BC054 T2A Phase 2/T2C

FBP (3 blllion)
RBP (2 billion)
ABP (3 billion)

Project scope
The construction of Terminal 2 (T2) represents a major step in the development of
Heathrow as a future two terminal airport under the R2 masterplan. This review
covers the current position re-roll-over expenditure in Q6 relating to the first stage of
T2 (T2A Phase 1), which started in Q5 and further expenditure in Q6 on the next
phases of T2 (T2A Phase 2 and T2C).
T2A Phase 1 roll-over
The first phase of T2, which comprised the first stage of the main T2 terminal (T2A
Phase 1 and the first satellite terminal T2B) was the largest individual component of
Q5 expenditure. T2B opened in December 2009 and is currently used on a
temporary basis as additional pier capacity for T1 through access via T1s Europier.
T2A Phase 1 and the connection to T2B are scheduled to open on a soft basis (ie
through the phased introduction of airlines) in June 2014.
T2A Phase 1 and T2B have been allocated to the Star Alliance airlines, Aer Lingus
and Virgin domestic services. (Virgin acquired various services from Bmi following its
take-over by British Airways. These services have now been assigned to T2A
following a terminal occupancy review undertaken by HAL in early 2013).
The total EAC of the T2 project is difficult to track due to substantial changes in the
programme in Q5. The current (July 2013) EAC of the main T2A Phase 1 building is
1,153m, which represents an increase of 30.7m in comparison to the EAC
estimate in August 2012 (1,122m).
HAL has advised that some 15.9m
represented cost savings (including inflation gains) in Q5, which were offset against
increased expenditure of 47.4m in Q5+1. The expected EAC over Q6 has reduced
by 0.9m between these two estimates. It is understood that the increased
expenditure in Q5+1 was due to programme change and was endorsed at the
CIPWG.
It should be noted that the T2A Phase 1 roll-over costs (ie Business Case 05) now
technically includes not only outstanding T2A Phase 1 items but also certain other T2
items in Q6 including the completion costs for the associated multi-storey car park
(MSCP) and T2B Phase 2. In the ABP, these roll-over costs amount to 159.7m.

The 104.9m reduction in the roll-over cost in the RBP is due to the omission of the
proposed Stands 234 and 235 serving T2B and the lack of completion of a through
taxiway (Kilo) between T2A and T2B and safeguarding of tunnels under this taxiway.
The location of these works is shown in the diagrams below.
HAL has indicated that the lack of completion of stands 234 and 235 (as in the RBP)
will reduce pier service standards for T2 carriers from 97% to 95%, although this
would still be within initial T2 targets. The LACC/AOC argue, however, that there
would be differences between the T2A and T2B carriers. They state that pier service
for United and Air Canada in T2B would reduce from 99% to 93% (below the target
level). HAL also maintain that the retention of the two existing Europier stands (139
and 141) for the remaining life of T1 in Q6 will de-risk the airline move sequence prior
to closure of this terminal. Following the closure of T1, the two stands would be
retained for remote parking.
Proposed status of T2A Phase 1 roll-over works in the RBP

Proposed status of T2A Phase 1 roll-over works in the ABP

The impact of the lack of a through taxiway (ie the use of two cul-de-sac taxiways)
will result in longer taxiing times. Some TAAM modelling work has been carried out
on this which indicates that on westerly operations, some arrivals traffic will require at
least two minutes additional taxiing time, whilst on easterly operations both arrivals
and departures traffic will require at least two minutes additional taxiing time. HAL
has indicated that further TAAM modelling work is required on this.
T2A Phase 2 / T2C
The completion of the T2 project (T2A Phase 2 / T2C) is designed to provide capacity
for a mid 2020 traffic scenario and is expected to be fully delivered by 2026 (ie two
years into Q8).
The key elements include:

T2A Phase 2 (including demolition of T1, FCC and MSCP1, the extension of
the T2A building, associated new stands and operational readiness

Fully integrated baggage system (T2A, T2B and T2C including inter-terminal
connectivity and T31 tunnel fit-out)

Tracked Transit System (TTS) serving T2A, T2B and T2C

Enabling works for T2C

T2C satellite and associated stands

Under the FBP and the subsequent ABP, the project expenditure in Q6 (219.8m) is
expected to be largely design, enabling works etc with expenditure focussed on the
end of the five year period. A provisional breakdown of this expenditure is as follows:
Component
T2A Phase 2 including the design and development requirements to Gateway 4
(Definition) and the demolition of MSCP1, Eurolounge & Pier 3
T2C design and development to Gateway 3 (Solutions Development)
Infrastructure services
Airfield works - dependent on the options for the Eastern Maintenance Base
(EMB)

Q6 cost
130m
17m
13m
60m

Under the schedule proposed in the FBP and ABP, the project is expected to be fully
delivered by 2026 (ie two years into Q8). Under the RBP the project expenditure is
just 5.0m to cover the relevant planning approvals etc for the next phase of T2.
HAL accept, however, that the reduction in T2A Phase 2 / T2C expenditure as
budgeted in the RBP could delay completion of the full T2 project by about two years.
HAL acknowledge that there would be some loss of pier service as a result of any
delay together with increased risks of continuation with the T1 baggage system. In
practice, however, the timing of T2A Phase 2 / T2C may depend on the outcome of
the Airports Commission and its implications for Heathrow.
T2 Phase 1 baggage system
Due to the proximity of LULs Piccadilly line under the first phase of the T2A building,
it was not possible to build a basement to house the main departure baggage system
in Phase 1 of T2. Although other options were explored, it was agreed that T2 Phase

1 baggage would be handled via the existing T1 baggage system until the second
stage of T2, when a baggage basement would be constructed under the extension to
the T2A building in Phase 2.
Although the T1 terminal is planned to close by the end of 2016, the existing
baggage system will be retained until around 2023/24 with all T2 Phase 2
construction taking place alongside the live T1 baggage link.
Two Q5 projects (T1 baggage system transitions and T1 baggage systems
prolongation) have upgraded the system for the additional capacity needed for its
combined use for T1 and T2 until 2018 and for any further requirements to serve
T2. However, given the systems overall age and its recent failure history, there has
been some concern, particularly amongst the airline community, as to the risks of
retaining the system for the next 10 years.
HAL have advised us that they have been working on possible contingency plans for
dealing with a prolonged outage of T1 baggage system in a T2A/T1 scenario for
several months. However, In view of the concern expressed, HAL and the airlines
jointly commissioned a study from Suisseport A.G. to assess the likely risk of failure
of failure of one or more components of the system and possible contingency
measures that might be applied.
The Suisseport A.G. study indicates that the actual departures component of the T1
system (excluding transfer processing) has sufficient capacity to handle combined
T1/T2A traffic levels and that there is 100% potential redundancy in the system for
the failure of any single component. This conclusion does however depend on strict
adherence to the manufacturers maintenance standards and on-going support from
the supplier being available. Beumer Crisplant, the supplier, has pledged to provide
support for the system until at least 2023. We understand that an Inspection Report
in 2009 highlighted instances of poor maintenance by Babcock, the T1 O&M
contractor. HAL has advised us that Babcock has confirmed that the deficiencies
that we identified have been addressed.
The main area of concern is the T1 transfer sorter. This performs three principal
functions:

Transfer break and sort

Hold baggage screening
Link to departure sortation

In the event of failure of the sorter, bags that are already sorted (ie from T3, T4 and
T5) can enter the baggage system through one of three inputs and can then be
processed through the HBS and the departure part of the system albeit with some
loss of capacity. This capacity is expected to be sufficient to meet demand until the
new T2 baggage system is operational. In the case of intra-T1 or T2A bags,
however, there is no capacity for transfer break and sort due to the lack of input
docks.
The transfer sorter is a single point of failure of the T2 baggage system with an
average of about 2.5 outages of one hour or more experienced every year. (Outages
of less than one hour are regarded as less important as there is sufficient buffer
within Minimum Connect Times to avoid a significant level of missed bags).

A graph showing the history of T1 transfer sorter stoppages per month, including
stoppages of one hour or more and their associated average downtime is shown in
the graph below:

Source: Suisseport study June 2013

Suisseport conclude that, whilst the average number of stoppages of one hour or
more has remained fairly constant, average length of downtime seems to have
increased. The analysis, however, excludes stoppages after 1st July 2013
HAL advise that, whilst they maintain records of system outages, no formal records
are kept on the number of missed bags as a result of the T1 transfer sorter failures
as this information would need to come from the airlines and the handlers. The
evidence however suggests that, in the vast majority of cases, this is less than 50
missed bags per failure. We would recommend that all parties should collaborate to
compile such data in the future.
There are currently contingency measures in place for manual break and sort of all
transfer bags on inbound aircraft at T1 using Building 139 (see diagram below). This
facility currently used for T3 transfer sortation and processes around 12,000 bags per
day. In the event of a T1 transfer sortation failure, the throughput increases to
around 14,000 bags per day but the facility is capacity constrained at peak times
due to the limited number of input docks. Some T3 carriers will move to T2 when the
new terminal opens, so the net impact of the additional T2 bags would be similar.
Once T3IB opens all T3s transfer product will leave Building 139 leaving an
average throughput of some 6,000 bags per day.
Whilst there is (or will be) sufficient capacity for the use of Building 139 as a
contingency measure, bags will need to be driven by tug and dolly from either T1 or
T2 and then back to the T1 or HBS screening and flight make up. The additional
impact of this on the total processing time has not been measured or modelled by
HAL.
HAL has undertaken some high-level assessment of the impact of adding an
illustrative 20 minutes to the processing times of intra-T1 and T2 bags. They estimate
that, due to short Minimum Connect Times, about 3% of bags would miss their
outbound flights. Over a full day this would represent some 2,500 x 3% = 75 bags
although, based on an average stoppage of four hours, this would equate to around
17 bags. We would however, wish to see more analysis of these figures, particularly

in view of the knock-on effects (eg on arrivals unloading operations) due to shortages
of handler resources as staff are re-assigned under the new contingency operations.
We would also ideally wish to assess the situation based on current missed bag
statistics when the T1 transfer sorter fails, assuming that these can be obtained from
the relevant airlines and handlers.
As an alternative to Building 139, HAL has identified another area, the T1 domestic
arrivals dock (see figure below ), which could be used for contingency transfer and
sort operation once the bulk of T1 domestic flights are transferred to T2. This is
considerably closer to T1 and would reduce the additional 20 minutes required for the
processing of intra-T2 and T1 bags. The precise layout of this area and the system
requirements are yet to be determined, although HAL anticipate that the fit-out cost
would be unlikely to exceed 5m-10m. In any event, the costs of these alternative
contingency arrangements would need to be assessed against the expected benefits
(ie the comparative reduction in the number of missed bags).
Proposed location of T1 transfer sorter contingency arrangements

The Suisseport A.G. study also evaluates the risk of failure of related facilities (eg T1
or T2A check-in, the arrivals baggage system etc) although no statistical analysis is
provided. In any event, we understand that HAL and the airlines are currently
satisfied that appropriate contingency measures for such failures are, or will be in
place.
Costings
The Q6 cost of 219.8m represents just 5.7% of the overall cost of the project (=3.8
billion). Risk (at P80) is 11.6% and on-costs are 12.2% of total cost. Comparable
figures (at construction decision) for T2B Phase 1 are risk (at P50) at 7.3% and oncosts at 13.1% of total cost.
Airline views
The LACC/AOC capital plan includes the full budget allocation for T2A Phase ! rollover and T2A Phase 2 / T2C as shown in the ABP. A further contingency of 225m
is also provisionally included for a possible T2 baggage solution in Q6.

Our discussions with HAL and with the airline community suggest, however, that
HALs proposed use of the T1 domestic arrivals dock in the event for the failure of the
T1 transfer sorter is likely to be acceptable. In any event, it is unclear how any
contingency reserve might be spent as a new T2 baggage system cannot be built
without the main T2A Phase 2 programme and indeed can only be installed on
completion of the main terminal building.
Our views
We agree with HAL that the proposed contingency arrangements for the T1 transfer
sorter appear to the best option and that no further contingency budget could
practicably be spent in Q6 to mitigate this risk. (The contingency shown in the
LACC/AOC capital plan is designed to bring forward a new T3 baggage system,
although in practice this could not be delivered until the construction of the T2A
Phase 2 terminal building).
In terms of the T2A Phase 1 roll-over costs, we not believe that it is sensible to delay
the construction of Stands 234/235 or the development of a through Kilo taxiway to
Q7 and we are not convinced that the original agreed targets for T2 (eg for pier
service) would be met. We do however suggest that there may be some scope to
delay the second phase of T2A/T2C to Q7, although we feel that HAL needs to
further assess this. We acknowledge, however, that the LACC/AOC does not share
this view. In any event, we suspect that the project will become more urgent if the
Airports Commission (and the Government) rule in favour of new runway capacity at
Heathrow. If this is the case, then a reappraisal of the Q6 (or an early Q7) settlement
will be necessary. If it does not, then a delay in the T2A Phase 2/T2C project is likely
to be more appropriate.

3.8.2

T3 refurbishment and enhancement

Summary
BC 016/116 T3 security and other infrastructure improvements
Project value (Q6)
Summary of scope
FBP (3 blllion)
25.0m
Allowance for Passenger Facing Works
RBP (2 billion)
36.7m
New Transfers Security Facility
ABP (3 billion)
77.7m
New Transfers Security Facility
New Faade
Arrivals Forecourt
Premium Drop-off Facility
International Departure Lounge improvements

Project scope
Based on the QSM scores for T3, it is recognised that several facilities in this
comparatively old terminal require improvement to meet appropriate passenger
experience standards.
In particular, the forecasted increase in connecting
passengers (eg based on a Summer 2020 schedule) suggests that the existing
transfers security facility will be inadequate during or shortly after Q6. Given the
expected life span of T3 (approx. 10-12 years), Q6 will effectively be the last
opportunity for any significant infrastructure improvements.
In the FBP an allowance of 25.0m was made for various passenger facing works in
T3. This did not specifically include the transfer passenger security although an
allowance for additional security lanes was included as part of a separate business
case (B068 Security SQR harmonisation).
In the RBP the project was redefined as a new transfer passenger security area to be
built on a specially constructed mezzanine floor above the baggage reclaim area.
This would increase the total number of transfer security lanes and is costed at
36.7m.
The space made vacant in the existing transfer security area could
potentially be redeveloped as a new airline reticketing facility whilst the existing
airline ticketing facility could be converted into additional departure lounge space with
additional seating/retail space. This would alleviate congestion in these areas,
particularly at peak times. There is, however, no budget within the RBP for this
additional redevelopment.
In the ABP, HAL has allocated a total of 77.1m for the connections security project
and further infrastructure improvements. A list of HALs proposed improvements in
priority order and their indicative costs, together with the LACC/AOCs proposals for
this project (not in any priority order) are shown in the table below.
Priority
1
2
3
4
5
6
7
9
10

Facility
Transfers security
New faade (B-G)
Arrivals forecourt
Passenger drop-off
IDL works (SGR 4.0)
Total proposed in ABP
Arrivals concourse refit
Arrivals faade (Zone A)
Southwing faade
IDL works (SQR 3.8)
Total evaluated

HAL ABP
35.1m
20.8m
10.5m
2.8m
8.5m
77.1m
4.5m
5.9m
4.7m
92.2m

LACC/AOC Proposed
37.0m
21.0m
10.5m
3.0m
8.5m
4.5m
6.0m
5.0m
95.5m

Benefits
As indicated above, the project will provide faster throughput in transfers security
and, in the case of the ABP, reduced crowding in the IDL and an overall improved
passenger experience (eg from the new facades).
It should however be noted that the current (2013) QSM passenger experience
scores for T3 departure passengers is 4.16 (out of a maximum of 5.0) and 4.10 for
T3 arrivals, representing a substantial improvement over previous years although
these scores are lower than those for T4 and T5.
There are no specified benefits included in the financial analysis although one
option for the renovated IDL includes some additional retail space and the other
some loss of retail space. Any additional (or loss of) retail revenue is likely to be
minor.
Options
The options for reconfiguration of T3 are limited as it is not possible to expand the
footprint of the main T3 building,
The recommended option for the new transfer security facility (the mezzanine floor)
will require some new load-bearing columns within a baggage conveyor. There may
be some minor disruption to baggage reclaim operations during construction.
Two options have been presented for the reconfiguration of the IDL. Option A
provides an additional 304 seats and 370 sq m of retail space. Option B provides a
further 400 seats but involves a net loss of 83 sq m of retail space.
This project is currently at Gateway 1 (Initiate).
Costings
The costings in the RBP and ABP have been prepared by EC Harris on a P80 basis.
Further costings have made as three-point estimates.
EC Harris state that elemental benchmarking has been undertaken against Heathrow
T2A, T5A, T5B and T5C new build terminals, Dublin T2 new build, Gatwick South
Terminal Extension and Stansted Terminal Extension. These, however, all represent
substantially different types of project.
Airline views
The LACC/AOC consider that a full spend of some 95.5m is required for this project
reflecting their strong priority for terminal upgrade projects in Q6. Whilst we concur
generally that some infrastructure upgrading is certainly required in T3, some of the
improvements, particularly to the facades, might be regarded as cosmetic in the
context of a limited budget in Q6.

3.8.3 T4 infrastructure improvements

Summary
BC 017/117 T4 infrastructure improvements
Project value (Q6)
FBP (3 blllion)
82.9m

RBP (2 billion)

53.8m

ABP (3 billion)

72.0m

Summary of scope
Upgrade stands for two A380s
Coaching gate !B
Reclaim belt 6/7
Arrivals hall and forecourt refurb
LV upgrade
HV infrastructure
Car park enhancements
Sierra taxiway
Upgrade stands for two A380s
Reclaim belt 6/7
LV upgrade
Upgrade stands for two A380s
Coaching gate !B
Reclaim belt 6/7
Arrivals hall and forecourt refurb
LV upgrade
HV infrastructure

Project scope
T4 currently caters for 39 airlines at Heathrow, including those in the Skyteam
alliance. The traffic pattern displays morning and evening peaks and there is a
growing requirement to cater for A380 operations.
The initial project scope as defined in BC017 in the FBP involved improvements to
the terminal, stand and taxiway infrastructure as follows:

Stands -

Upgrading of two Code E to Code F (A380) stands

Conversion of one Code E to Code C stand
Conversion of Stand 463 to an equipment storage area
Refurbishment of Gate 1b as a coaching point

Third A380 baggage reclaim belt (created by joining Belts 6 and 7)

Arrivals hall and forecourt refurbishment reconfiguration of existing space

Short-stay car park (SSCP) - provision of additional capacity through at grade

car parking linked to the existing car park. Modifications to the road layout are
also required

Upgrade of HV/LV system to comply with the latest safety standards

The upgrading of Sierra taxiway

The required scope was based on HALs traffic forecasts (and terminal occupancy
assumptions) as at October/November 2012. These forecasts assumed that there
will be no increase in passenger demand at peak periods due to airline relocations
(eg MH will transfer with Oneworld to the CTA, UA consolidates operations in T2 and
IL relocates to T5).

In the RBP, the project scope was reduced to cover the upgrading of the stands to
hold two A380 aircraft, the third A380 reclaim belt and an LV upgrade. The scope in
the ABP is as per the RBP, plus the coaching gate 1b, the arrivals hall and forecourt
refurbishment and the introduction of HV infrastructure. In both the RBP and the
ABP, the cost for the upgrading of Sierra Taxiway has been transferred to B011
(Enabling the new generation of wide bodied aircraft).
Benefits
Terminal 4 is now 27 years old and many of its facilities no longer meet current and
future airline and passenger requirements. The key project benefits are the provision
of necessary capacity for wide-bodied (including A380) growth, the upgrading of the
LV infrastructure, which is life expired and represents a significant business risk and,
in the case of the project as defined in the ABP, improvements to the T4 building
improve the overall passenger experience
The business cases do not quantify any specific financial benefits from the project.
Options
It is understood that a number of project options for the A380 stands will be reviewed
including a reduction in the overall number required (x4 not x5 as proposed in the
currently preferred option). It should be noted that Arups have undertaken a strategic
options study for T4 which was completed in May 2012.
This covered the full
development of T4 in Q6 and beyond. Arups identified that the long-term
development costs could range from approx 275m-325m under a do minimum
option to approx. 1,050m-1,100m in a maximum investment option.
Arups and Atkins have already undertaken some preliminary design work on the
project, although the project is still at Gateway 1.
Costings
The P80 cost of the project scope as defined in the RBP are estimated at 53.8m
and in the ABP at 72.0m. These costings have been prepared by EC Harris in
conjunction with HAL and are calculated on a Three Point Estimate basis.
A high proportion of the cost relates to the A380 stands (35.0m) and baggage belt
(4.0m) and is expected to be delivered in Year 1 of Q6 (2014/15).
Airline views
In their capital plan, the LACC/AOC have allocated a total budget of 57.0m for this
project, covering the A360 stands (35.0m), the baggage belt (4.0m), the
Immigration Hall (3.0m), the Arrivals Hall (5.0m) and both the long and short stay
car parks (10.0m). An LV upgrade (19m) is included in their Engineering Asset
Replacement project giving a total proposed T4 expenditure of 76m, which is
broadly in line with HALs ABP.
It should be noted that whilst the T4 building needs long-term facility upgrades, the
QSM scores for arrivals passengers, in particular, have improved significantly over
the past four years (see Section 3.4) and are now comparable to those in T5.

3.8.4

T5 Security Capacity

BC 018/118 T5 Security Capacity

Project value (Q6)
FBP (3 blllion)
75.0m
RBP (2 billion)

23.0m

ABP (3 billion)

23.0m

Summary of scope
Provision of new 36 lane central security search
area behind BA bag drop in current landside area
Creation of new escalator transfers arrival route
plus five additional search lanes
As per RBP

Project Scope
T5 security facilities are currently problematic; the central search area is at capacity
primarily at the northern search cone where public transport routes point the
passenger towards and congestion is caused when peak transfer passengers
arrive. The problem is primarily in the northern component where transfers feed into
and there is little scope to push O/D (origin/destination) traffic through the southern
area. The facilities overall have lacked resilience to market moves such as BA
purchase of bmi and up gauging to larger aircraft.
The project scope from the FBP has changed considerably and the focus will now be
on the revised project with business case dated July 2013 rather than the 75m
project in the FBP which involved a landside single security area and attendant
operational disruption and high capital costs.
Following stakeholder meetings with BA, a more tactical project has been devised,
involving the creation of a new transfers route by means of an additional escalator
from the arrivals and a routing to the existing southern security area. The latter would
have five new lanes added to it.
Benefits/Costs
A solution to the problem would reduce Heathrows security waiting times both for
O/D and transfers and also improve the airports QSM scores for these areas. It
would also help Heathrow maintain its upper quartile position in the ASQ scores and
improve terminal connection times. The new project still has retail impacts as an
airside area next to the southern cone has to used; this leads to a revenue loss of
just under 3m per annum. As the buggy route is removed some 270k is lost on
extra PRM costs to compensate. There are also additional security staffing costs to
man the five additional lanes which total about 570k per annum.
Options
As mentioned above the initial scheme in the FCP was rejected and was never fully
designed. Following structural and MEP feasibility studies at least 8 options were
examined and a scheme with two escalators passing down two levels but avoiding
mid floor beams was chosen.
There was a T5 CIP lounge component to this project which is now dealt with
elsewhere in the capital plan.

Costings
The usual EC Harris three point estimates were completed; enabling works, gate
seating changes, reconfiguring arrivals and departures levels and installing
escalators costing 16.1m including 1.5m on-costs and 2,5m risk. Another 6.8m
has been allowed for CSA and connections security works.
The current scheme is only fixed conceptually with many more options on detailed
routings and operational processes to be completed. Gateway 2 is due for
September 2013 and Gateway 3 in October next year.
Airline views
Airline views would appear to be supportive of this project and the current solution in
particular.

3.8.5

Northern Perimeter

Summary
BC 009/109 Northern Perimeter
Project value (Q6)
FBP (3 blllion)
43.0m

RBP (2 billion)
ABP (3 billion)

10.6m
10.6m +
20.2m (PRT)

Summary of scope
Additional car parking spaces (2460)
Consolidation of car hire
PRT into CTA
Additional car parking spaces (750)
Additional car parking spaces (750)
PRT into CRT shown as a separate business case

Project scope
This project, as originally conceived in the FBP, was designed to improve the car
parking for CTA and T5 passengers provided along the Northern Perimeter road.
The scope covered:
(a)

Increasing car parking capacity by 6.4% by providing an additional 1,585 deck

and 875 surface spaces

(b)

Consolidation of all existing passenger, staff and car rental car parks to single
sites

(c)

Improvement of the Northside road network and wayfinding

(d)

Provision of PRT connectivity from the car parks to the CTA

(e)

Increased commercial returns from increased car parking usage and yields (eg
as a result of capacity improvements, the PRT etc)

(f)

Reduced opex savings eg through consolidated bussing operations etc

Subsequent meetings with stakeholders indicated that there was no buy-in from the
car rental companies and that there were no benefits from consolidation of other car
parks. As a result, the focus of the project in the RBP and ABP changed to the
provision of extra car parking capacity for T5 in the business and long stay car parks.
The project brief was to provide between 750 to 1300 additional car parking spaces
as close to T5 as possible, with a minimum requirement of 250 T5 Business parking
spaces. Certain adjustments to other car parks, wayfinding etc would also be
necessary to facilitate the above.
A wide range of options have been explored (see below) through joint workshops,
meetings etc with stakeholders. Three possible options (Strategy A, B and D) have
now been identified one of which has been recommended (Strategy A) at the G2
Gateway..
Strategy A involves a new single storey deck in the T5 business park increasing the
total number of spaces from 1,250 to 1,500 (ie an additional 250 spaces) and a
redesign of the N2 area to provide 1,000 T5 long stay spaces together with
consolidated bussing operations. A further option (Strategy D) provides 360 more
business parking spaces but would require land acquisition (the Beach). At this

stage (Gateway G2) the possibility of such land acquisition is continuing to be

explored.
The business case for this project is identical in both the RBP and ABP although
the PRT component originally in the scope of the project in the FBP is now shown as
a separate project in the ABP (B088) and is budgeted at 20.2m.
The objective of the PRT is to improve the passenger experience in terms of their
first and last impressions of Heathrow and to provide incremental car parking and
sponsorship revenue. Extension of the system to the CTA business car parks would
provide equivalence with T5 users. HAL has indicated that the T5 PRT has a very
high QSM satisfaction rating (4.7 out of 5.0) representing the highest score of all
facilities at the airport. They estimate that the PRT to the CTA would carry
approximately 1,200 passengers per day.
The precise routing of the system within the CTA has not been finalised and at
present there are two options (high and low cost) for the location of the stations.
Benefits
The business case for the proposed new T5 car parking is estimated to provide total
benefits of 22.2m in Q6 and Q7 (primarily from increased car parking revenue)
which is offset by 8.4m in additional opex (ie a net gain of 13.8m). This must be
assessed against the capital costs of 10.6m. This is based on an assumption of a
0.25% increase in modal split (ie towards the use of T5 car parking) growing to a
maximum increase of 0.75%. We have not analysed these financial benefits in
detail. We would, however, contend that these seem high, particularly as additional
revenue is only generated when the extra capacity is utilised, although HAL maintain
that they have taken account of demand variation across the year. We understand
that the HAL is proposing to re-assess the financial benefits following the selection of
the preferred option at G2. HAL also contend that the project has some sustainability
benefits, notably a reduction in CO2 and NOx emissions and reduced noise largely
as a result of a reduction in kiss and ride traffic.
HAL has prepared a summary of the costs and benefits of the PRT (Business Case
088), which is shown below:

This analysis suggests that the net annual financial benefits from the project will be
some 3.1m pa, representing approximately 7.00 per passenger journey. Based on
HALs figures, the project would pay back in mid-Q7. It should be noted that the
airlines have strong reservations about the benefits of this project and we have some
concerns that the increase in car parking revenue may not be achieved.
Options
Some 14 options for additional T5 parking (plus a Do Nothing scenario) were
evaluated during the G2 stage. Of these, one option (development of the existing T5
Business Parking had four sub-options) Seven of these identified options were
rejected without detailed assessment as they supported a need to relocate contractor
parking which through internal consultation was established as no longer being
required. From these, three preferred options were selected (Strategy A offering
1,250 additional spaces, Strategy B 900 additional spaces and Strategy D 1,370
additional spaces with Strategy A (see above) nominated as the recommended
option (with continuation of discussions for land acquisition (the Beach) for Strategy
D..
The PRT project has two possible options: a low cost option with CTA stations at the
coach park and MSCP2 (representing a total track length of 650m) and an
aspirational high cost option with stations in the forecourt and in front of T2 (with a
total track length of 840m)
Costings
Although a budget of 10.6m is shown within the business case, the detailed
costings for the three preferred Strategies are less than this.
Strategy A is costed at 7.0m, Strategy B at 8.0-9.0m and Strategy D at 6.8m
excluding land acquisition costs (all on a P80 basis).
Some benchmarking against decked car parking projects at Gatwick has been
undertaken by Arup, who are HALs consultants for this project. This would suggest
that the decked car parking component of Strategy A is line with these projects. No
other benchmarking of airport (or non-airport) car parks has been undertaken.
The PRT project has been benchmarked against the T5 PRT system. Interestingly,
HALs figures suggest that the capital cost for the T5 system (which was the first to
be introduced) had a higher capital cost (32m) but has less users (approx. 1,000
passengers per day) in comparison to the CTA PRT with a capital cost of 20.2m
and a forecasted 1,200 passengers per day.
Airline views
There has been good shareholder consultation throughout the development of this
project through joint working group sessions, the Surface Access Portfolio
Stakeholder Board and the Landside Shareholder Engagement.
The LACC/AOC support the Northern Perimeter project as defined in the RBP and
ABP although thy have included it on their commercial payback project list rather
than their main 3 billion portfolio. They totally reject BC008 (PRT to the CTA).

3.8.6 Enabling the new generation of wide-bodied aircraft

Summary
BC 011/111 Enabling the new generation of wide-bodied aircraft
Project value (Q6)
Summary of scope
FBP (3 blllion)
158.5m
Bravo North Taxiway and Sierra A and C works
PLUS Pier 4A remote stands, RETs and RAT and
FEGP for new aircraft types
RBP (2 billion)
86.8m
Bravo North Taxiway and Sierra A and C works
only
ABP (3 billion)
182.7m
As per FBP but with taxiway Sierra C works
transferred from T4 Infrastructure and a new
noise wall.

Project Scope
This project originally (ie in FBP) excluded Sierra C works which were then part of
the T4 Infrastructure project. As a result the FBP total was 158.5m total, whereas
the ABP is some 182.7m. The RBP has reduced scope with only Bravo North
Taxiway and Sierra A and C works included ie a project just carrying out taxiway
widening for Code F aircraft and costing 86.8m. The RBP excludes any works on
Pier 4A remote stands, RETs and RAT and FEGP for new aircraft types which are
included in the ABP/FBP. The ABP also now includes scope for a noise wall.
For the purposes of this report we will focus on the ABP version of B011. A380
departures are forecast to be running at about 35 a day by 2018 with almost 45
forecast by 2030; this aircraft in particular causes problems because of its wingspan,
but airlines will also be investing in other new generation wide bodied aircraft such as
the B787 and A350.
Benefits/Costs
Currrent sub optimal A380 taxi routes to and from T4 add around 7 minutes to their
taxi times leading to 5m additional operating costs for airlines at Heathrow due to
1m extra fuel burn and 0.5m delay costs by A380s directly, and another 1m extra
fuel burn and 2.3m delay costs for all departing and arriving aircraft due to knock-on
extended taxi times. This in turn leads to 6.3k tonnes of increased CO2 emissions.
These increased taxi and runway hold times are also bound to increase block times
and adversely impact on overall punctuality and delays to passengers.
The Sierra taxiway improvements would allow A380s using T4 to operate on the
souithern runway, thereby avoiding the problem of runway crossings from T4 using
the current Code F clearance taxiway. Such crossings would reduce reliability of
operations and potentially reduce runway capacity and resilience.
In addition without these aircraft it is unlikely that HAL will meet its passenger
forecasts.
The above benefits would be enjoyed for both the ABP and RBP schemes.
In addition the provision of RETs would reduce missed approaches and help meet
minimum separation distances which would improve the resilience of the operation

and reduce delays. A RAT for runway 09L would reduce departure delays and
improve resilience as well as helping improve Heathrows noise footprint on
easterlies. The development of pier 4A wide body stands would enable long stay
aircraft to be towed off pier served stands and thus improve pier service in T3 and
enable up-gauging of aircraft generally.
Provision of FEGP for B787s would avoid use of APUs and GPUs improving
operational performance and reducing emissions.
There are also some small reductions in operating costs only 24k per annum from
2016/17 onwards resulting from the use of LED lights.
Options
This is really a programme of different airfield projects most of which has been
subject to optioneering. Fast time runway and airfield simulation has been used to
generate the best options for taxiways, RETs and RATs. The current configuration for
the taxiways for the northern runway relies on a complex sequence of airfield
construction and operational protocols whereby A380s initially use Alpha taxiway
whilst Bravo is being constructed which is itself a temporary solution;
Sierra taxiway sections A and C also have a complex development strategy with a
road relocated and 4 stands reconfigured (latest thinking).
Different options for building remote stands on the area occupied by Pier 4A have
been identified but this work has ceased. Similarly options work on RETs has been
stopped three preferred options having been identified.
Costings
The usual EC Harris three point estimates were completed; for Bravo taxiway
enabling works (demolition of Pier 4A), the taxiway works and prelims cost 35.3m
with 2.5m project specifics, 5.7m on-costs and 6.6m risk bringing the total to
50m or 57.6m at P80 level. For Sierra C, enabling works and relocating roads and
stands cost 10.3m with 3.2m project specifics, 2.7m on-costs and 3m risk
bringing the total to 19m or 21.6m at P80 level.
The breakdown by individual component is as follows; Bravo North taxiway and
partial demolition of pier 4, 57.6m: provision of 4 Pier 4A Code E remote stands,
60.5m: Northern runway RETS (x4) 27.9m: FEGP upgrades 6.9m: 09L RAT and
noise wall 10m: Sierra taxiway changes 19.7m.
The project has relatively well defined benefits and has passed Gateway 2 with
Gateway 3 scheduled for February 2014 for the reduced RBP scheme.
Airline views
The full ABP scheme has a lot of airline support; they are not in favour of the reduced
scheme due to:
The exclusion of the Code E Remotes. This will increase towing distances
and, in the opinion of the airlines (but not HAL), impact on pier service levels
in T2

The exclusion of the RETs for the northern runway from the HAL RBP would
mean no improvement in arriving flights ability to exit the runway, and
therefore no improvement in congestion or punctuality

The 09L RAT and noise wall is an enabler for the ending of the Cranford
Agreement. It would allow more efficient use of 09L by enabling easterly
alternation which HAL does not currently do. This would result in balanced
runway usage, whether on easterly or westerly operations.

In our opinion, these points are reasonable.

3.8.7 Airfield efficiency and resilience

Summary
BC 012/112 Airfield efficiency and resilience
Project value (Q6)
FBP (3 blllion)
70.7m

RBP (2 billion)

29.0m

ABP (3 billion)

70.7m

Summary of scope
As RBP but with datalink comms, automated stand
allocation, turnround management, vehicle
tracking, airbridge links, Ops freedom works, Cat
2/3 GBAS, plus reduction in scope for SMAN (an
integrated AMAN/DMAN), runway incursion
protection options
Time Based separation, Airspace changes,
RTA/Queue management, Surface Management,
GBAS
See FBP

Project scope
This project is a collection of IT and modelling initiatives by HAL in conjunction with
NATS designed to improve airfield efficiency. The scope of the project is entirely
driven by the rise in proportion of A380 and Code F aircraft generally in the fleet mix
at Heathrow which because of wake vortex issues will lead to increases in arrivals
delay of around 35 minutes in 2019 compared to the under ten minutes scheduled for
today. This in turn leads to model forecasts of only 59% flights being punctual but
subsequent rotational delay and off schedule congestion would mean much higher
levels of delay in reality. The aim is therefore to deliver wide body growth (and hence
increased passenger numbers) within the 480k ATM cap and at acceptable levels of
delay/punctuality.
Benefits/Costs
Benefits for this project would be significant and many as follows:

Delays significantly detract from the passenger experience and are probably
the key performance indicator for passengers
Enables passenger growth which brings revenue growth for airlines and HAL
Also reduces the level of cancellations and disrupted days with airline airport
and passenger benefits
Improves minimum connect times and reduced missed bags
Improves noise performance by reducing ground and airborne holding and less
night flights
Reduces airline fuel burn
Lower carbon and NOx emissions from lower fuel burn
Reduces airline operating costs by more efficient use of crew, aircraft and
handling operations

It is estimated that doing nothing would lead to additional airline operating costs of
over 500m over Q6 and the project would deliver capability improvements of 178m
over Q6. Both these together would deliver annual cost savings of over 300m by the
end of Q6.
In terms of metrics the following targets have been adopted

Reduced air holding from 7.4 to 5 mins per flight

Reduced ATFM delay from 2.8 to 1 minutes per flight
More reliable schedule 80% punctuality for arrivals and departures
Reduction in disrupted days from 38 to 29
Reduced unscheduled night flying from 554 flights to 496
Reduced ground holding from 20.5 minutes to 18
Reduced taxi-in times from 7.5 mins to 6.5

It is estimated that some 71m capital and an additional 7.8m of operating costs will
be involved in Q6.
Options
HAL considered only limited options for this project do nothing, reducing the growth
of code F aircraft or reducing the number of slots. Clearly none of these alternatives
would be acceptable to HAL or its stakeholders. However, in reality this programme
is really a collection of projects each of which has its own risks and opportunities
many of which are not well understood at present. These projects are as follows:

Approach efficiency; a series of initiatives such as serve by schedule protocol,

independent parallel approaches, arrivals datalink protocols, GBAS landing
aids, time based separation on arrivals (used primarily in hind winds)

Departures efficiency; another suite of solutions such as optimised airbourne

departure routes, departures datalink protocols, and full DMAN procedures

Enabling Mixed Mode operations; implementing mixed mode for use on a

tactical or planned basis according to Government policy

Ground movements of aircraft; again a collection of solutions such as real time

monitoring of runway occupancy, automated taxi guidance systems, stand
allocation and runway incursion systems, vehicle tracking and access controls
for airbridge operations.
Airfield Management; improved airfield capacity modelling and the integration
of AMAN and DMAN tools.

These solutions require significant collaboration between a wide group of

stakeholders (HAL, NSL, NERL, airlines and ground handlers) with DfT and CAA
SRG approval required for many projects. The projects will also form key parts of the
UK Future Airspace Strategy and the EUs SESAR R&D programme.
Costings
The total estimated P80 cost is 70.7m. The project is relatively mature and has
passed through project gateway 1 with G2 scheduled for October. The departures
efficiency and airfield management phases have expenditure scheduled for the first
two years only.
Key assumptions behind the costings include aircraft demand based on a 2019
forecast schedule, delay costs as calculated by the University of Westminster, and
the renegotiation of the current NATS contract expiring in April 2014.
There is a detailed programme of 21 workstreams each with their own business
driver, capital and operating costs and outline schedule. Assurance by C&C has

been provided for almost all workstreams, though the impact on the NATS contract
financial terms is unknown. A Monte Carlo analysis of the IT items was carried out
giving a P80 value of 53.6m. Risks would appear to be moderate and based
around lack of available specialists, the need for complex stakeholder discussions on
process, and safety/policy approvals.
The RBP costings have been calculated as follows (compared to the same elements
in the FBP):
million
Time-based separation
Airspace changes
RTA/Queue management
Surface management
GBAS
Total

FBP
8.0m
10.0m
1.2m
6.7m
4.85m
30.75m

RBP
5.0m
6.0m
4.0m
10.0m
4.0m
29.0m

This means that there are excluded works of some 31m but with savings of 7.4m
through budget absorption. The excluded works comprise datalink comms,
automated stand allocation, turnround management, vehicle tracking, airbridge links,
Ops freedom works, Cat 2/3 GBAS, plus reduction in scope for SMAN (an integrated
AMAN/DMAN), runway incursion protection options and all risk allocation.
HAL expects to be able to sustain current levels of punctuality with this reduced
scope as the wide bodied fleet increases. By implication more punctual schedule
than today will not be delivered nor will at least some of the airline cost savings which
were forecast to be over 100m per annum by the end of Q6.
Airline views
.

Airlines are generally a big supporter of this project; they are however wary of the
complexity of the NSL and NERL interfaces and concerned about value issues when
negotiating with another monopoly supplier. There is a wide variety of stakeholder
involvement required to deliver new concepts, operating procedures and safety signoff. Consequently, the full scope of the project is unknown. The airlines are,
however, against the RBP scope reduction for the following reasons

The enhanced surface management being excluded will mean that landing
and departure flight phases will be less well integrated

The excluded New Stand Allocation System would have provided more
dynamic updates and better use of infrastructure

The projects being excluded will lead to lower punctuality and resilience

There will be a loss of SESAR functionality as part of the Single European

Sky project no introduction of emerging results or promising results from the
validation of common projects currently being underway across Europe

We believe that the airlines views are valid.

3.8.8 Commercial IT and telecoms

Summary
BC Commercial IT and telecoms
Project value (Q6)
FBP (3 blllion)
14.0m

RBP (2 billion)
ABP (3 billion)

14.0m
14.0m

Summary of scope
4G common infrastructure, Improving WAN
connection speeds, Commercial deployment, NRC
infrastructure
As above
As above

Project scope
HAL currently offers two streams of commercial IT/Telecoms; one it provides itself
direct to consumers (B2C) and one it provides B2B via the outsource contract with
CAP Gemini but operated by SITA. It believes that there is not a consistent
comprehensive product available due to the lack of a coherent plan with suite of
offerings. This project provides investment to enable such a plan to be realised
involving the right products and technology adoption. It is included in the Revised
Capital Plan.
Benefits/Costs
Benefits for passengers would comprise access to Wi-Fi and Internet services
comparable to those available elsewhere, especially with the advent of 4G. ASQ
would be used to measure satisfaction
For the airline community improved technology offerings would be available with
lower cost and better service IT. These would either be in competitive markets or via
the Other Regulated Charges mechanism. CAP Geminis quarterly customer
satisfaction survey would be used to track progress in the areas of price, SQ, product
and technology adaption.
Capex totals almost 14m but is front end loaded in Q6 due to the advent of 4G. It is
assumed that revenue will increase by 17m over Q6 (9m from 4G and 8m from
B2B via the SITA contract) and by 28m over Q7 with additional operating costs of
3.6m over Q6. The project is therefore forecast to deliver EBITDA of 13.7m so is
almost cash neutral but likely to lead to a modest reduction in airport charges over
Q6.
Capital spend has been identified in four areas:

Provision of a 4G common infrastructure offering for Heathrow terminals 6m

Improving WAN connection speeds over the Heathrow campus by new
ports/routers; this is important for the NRCs - 1m
Commercial deployment - 2m
NRC infrastructure mostly moves, adds and changes - 4m

Options
HAL considered only limited options for this project do nothing, or just some of the
areas identified above. The airport feels it needs to invest in both the public and
airline community products both from a customer service perspective and from the
need to take advantage of new revenue sources. The investment in the Heathrow
common IT infrastructure for operational purposes would make little sense if these
commercial add-ons were not taken advantage of.
Costings
The total estimated P80 cost is 14.0m.
For IT capex a three point estimate is provided for each line item by the assurance
supplier C&C. A Monte Carlo analysis is then completed leading to an overall P80
value for the project. For BC020 the estimates were a mixture of allowances and
benchmarks. The 4G costs were benchmarked using 3G expenditure, WAN
connection was an allowance and the other two items were mixtures of allowances
and benchmarks.
The costings can only be regarded as very high level estimates, little more than
allocations, given that 4G licencing has not been completed, the market is still
untested and that other products may arrive in Q6 which are currently unknown.
However, risks are relatively low and are mostly around avoiding operational
disruption and ensuring third party buy-in.
This project is included in full in the ABP and the RBP. The latter is unsurprising
given the positive contribution it would make to HALs commercial revenues.
The project is relatively immature and has not passed through any project gateways.
Airline views
.

As this project has a payback within Q6 the airlines are generally supportive of it.
However, there was a specific query about whether the business case contains all
the relevant costs and revenues (especially NRCs) and a reminder that such
forecasts should be part of the overall regulatory forecasts. The project is included in
the airlines C list ie to be included whatever level of capex is agreed provided the
project fully pays back in Q6.

3.8.9 Automation of the passenger journey

Summary
BC029/129 Automation of the passenger journey
Project value (Q6)
Summary of scope
FBP (3 blllion)
30.0m
Allowance for:
- Check-in product development
- Self-bag drop
- Self-service kiosks
- Info kiosks & PRM assistance points
RBP (2 billion)
8.5m
Check-in product development only
(Replacement of CUSS IT assets at end of life
ABP (3 billion)
60.0m
Increased allowance for:
- Check-in product development
- Self-bag drop
- Self-service kiosks
- Info kiosks & PRM assistance points

Project scope
This project provides a portfolio of new technologies to improve the passenger
journey and provide financial and other operational benefits to Heathrows airlines.
The project scope in the FBP and ABP potentially covers

Check-in product development (CUSS check-in and self tagging)

Self bag drop

Self-service kiosks for check-in / Flight rebooking kiosks in Connections and

baggage recovery kiosks in Reclaim

Information kiosks and PRM assistance points

In addition to these items, a further technology, self-boarding gates, has been

identified in the aspirational scope for the overall business case, but these would not
be implemented until Q7.
In the RBP, the project scope is limited to the replacement of the existing CUSS
check-in terminals only. These terminals would be integrated with the CUPPS
(Common Use Passenger Processing Systems) which links to airline check-in and
DCS (Departure Control) systems. The CUPPS systems at Heathrow are paid for by
the airlines. Some work has been undertaken by IATA to assess how this might be
achieved at Heathrow; however here is some debate with the airlines as to whether
this is necessary at this point due to evolving technologies and the growth of mobile
check-in. In view of this, HAL believe it will be necessary to replace the existing
CUSS terminals (or fully refurbish them) in Q6.
The aspirational scope for this project involving full implementation of these
technologies across all terminals is estimated at between 120m-130m. In the
FBP, the budget allocated was 30m. This, however, only covered a limited number
of self bag drop units (x50) in T5 and T2. The budget in the ASP has been increased
to 60m.

An initial breakdown of the likely costs of each component is given in the table below.
It should be noted that the Aspirational scope cost covers all items requested by the
airlines. It is costed as a most likely estimate so the P80 costs are likely to be
higher.
B029/129 Automation of the Passenger Journey - Breakdown of Budgeted Expenditure
FBP
RBP
ABP
Aspirational
scope
Self Bag Drops
12m
Not shown
73m
Self Boarding Gates
Not shown
28m
CUSS Asset Replacement
9m
9m
Not shown
9m
Self Service/Info Kiosks
9m
Not shown
9m
Total Budget
30m
9m
60m
119m

In terms of the technologies involved, the self bag operation is a two step process
involving the self tagging of bags and entry into the self bag drop unit without any
interaction with an airline member of staff. The units cater for common airline use for
both international and domestic flights. Further technologies proposed include
mechanical barriers at boarding gates and barriers at Flight Connections to validate
passenger tickets.
HAL has been working with IATA (eg the Passenger Experience Management Group
Fast Travel Programme), the Border Agency and interested airlines at Heathrow to
develop these initiatives. There have already been some trials (eg bag drop facilities
in T3 (BA) and in T1 (Star Alliance).
HAL have undertaken some market research amongst passengers to identify the size
of the need for each type of automated process and their likely usage / expected
behaviour. Of the different types, e-passport gates achieved the most positive
overall score, followed by automatic ticket presentation, CUSS, gate barriers, self
boarding, self bag drop and self bag tagging. Baggage recovery kiosks, information
kiosks and wayfinding technologies achieved the lowest overall scores. HAL have
also prioritised the different technologies with BA, OneWorld, Star Alliance and
Virgin).
Automation of the Passenger Journey Priority and Benefits Matrix

HAL has also assessed the extent of introduction of these technologies at other
major international airports, which is shown in the table below:
Frankfurt (FRA)
Munich (MUC)
Paris (CDG)
Amsterdam (AMS)
Copenhagen (CPH)
London Gatwick (LGW)
Manchester (MAN)
Sydney (SYD)
Houston (HOU)
Vancouver (YVR)

Self Bag Drop

Trial/Impl
Trail/Impl
Planned
Trial/Impl
Trial/Impl
Planned
Trial/Impl
Planned
Trial/Impl

Self Boarding
Trial/Impl
Trial/Impl
Trial/Impl
Trial/Impl
Planned
Planned
-

Biometrics
Trial/Impl
Planned
Trial/Impl
-

Benefits
HAL have identified the key benefits to be savings in airline opex (eg from self bag
drop), capacity increases (eg in the check-in concourse as a result of reduced
passenger processing and queuing times), improved passenger experience (as
measured by ASQ scores) and a reduction in human errors for border control
activities (eg at the pier gates).. .
HAL estimate that the airline opex savings from self-bag drop (based on one host for
four self-bag drop units) to potentially be as follows:

10% usage by LHR passengers - 2.3m pa

25% usage by LHR passengers - 5.8m pa
50% usage by LHR passengers - 11.6m pa

The likely usage during the course of Q6 is difficult to estimate and there will
undoubtedly be a proportion of passengers who will continue to use standard checkin desk procedures.
The airline opex savings from self-boarding gates are estimated at 2.5m pa for
implementation in T2 and T5 and 4.8m for full implementation across all terminals.
On the negative side, there are some HAL operational, maintenance and additional
IT costs although these are significantly outweighed by the airline cost savings. It
should, however, be noted that the airline cost savings are HAL estimates only and
have yet to be validated by the airlines.
Options
In the FBP, a minimum investment scenario was proposed, with a total budget of
30.0m in Q6. This involved:

Self bag drop Replacement of 20% of check-in desks with self bag drop in
T2 & T5. None in T1, T3 or T4
Self boarding None
CUPPS Replacement of all existing CUSS units
Information kiosks and PRM (Passenger Reduced Mobility)

The airline community felt that this level of investment was inadequate and that there
should be no discrimination between terminals. The LACC/AOC has allocated a

figure of 120m in its 3.0 billion budget for full cross-airport implementation of the
project in Q6.
In the ABP, the budget for this project has been increased to 60.0m although the
business case does not provide a breakdown of the funding by the individual
technology or by terminal. Whilst the budget now has more flexibility, the LACC/AOC
still believe that it is insufficient.
In the RBP, the budget is reduced to just 8.5m to cover the CUSSP equipment only.
Again, this is rejected by the airlines, who feel that replacement could, in any case,
be delayed and would prefer to sweat the assets.
Costings
All cost estimates to date have been prepared on a P80 basis, with allowances of.
7.7% for project specifics, 8.0% for on-costs and 15.4% for risk. We note that in the
costings prepared to date (eg for the FBP), the equipment and IT costs amount to
about one-third of the overall project cost with the remainder comprising the
necessary building and reconfiguration works and the allowances. In our view, the
risk allowance appears excessive, despite the uncertainties around the
reconfiguration requirements (eg for the check-in areas)..
The self bag drop equipment cost projections have been based on the equipment
used in the T3 and T1 trials. It is understood that this has Triple A (Accounting and
Authorising of Hold Baggage for Carriage By Air) compliance in line with DfT
requirements. However, it is expected that unit costs will decrease as the market
expands in the next 3-4 years and on the basis of the number of units ordered.
Airline views
As indicated above, the project is strongly supported by the airlines and has the
direct involvement of IATA and the DfT in trials of the technologies. The trials of the
self bag drop, self boarding gates and information kiosks have proved successful
and a biometric process trial at CUSS terminals was also carried out in T5 in
November 2012. A study on passenger risk assessment using these technologies
has been proposed, which would be jointly funded by HAL and the DfT.
Our views
We are generally supportive of this project, although we note that there are still
uncertainties over the Triple A certification of the equipment and pro-active
engagement with the DfT and the Home Office is needed to bring this project to
fruition. We also feel that further input could be provided by the airlines on the likely
benefits. (There would appear to be some disagreement with the airlines as to the
extent of the airline operational cost data provided to HAL).
Whilst we are in favour of self bag drop, the CUSS replacement and the information
kiosks, we recognise that self boarding gates rank low in the list of passenger
priorities and have a relatively low opex saving to the airlines (and none to HAL). If
the Q6 capital budget is limited (ie less than 3.0 billion), we feel therefore that this
component of the project might be delayed until Q7 pending further trials and
passenger and airline experience at other international airports where this has been
introduced. We acknowledge, however, that the LACC/AOC do not share this view.

3.8.10 De-icing facilities

BC De-icing facilities
FBP (3 blllion)
RBP (2 billion)
ABP (3 billion)

Project value (Q6)

60.0m

Summary of scope
Not included
Not included
4 Code F de-icing pads on both 09R and 27L
thresholds and 2 Code F pads on the 09L and 27R
thresholds with an extra single Code F pad for
southside access to 09R and 27L.

Project Scope
This is a new project not previously included in the FBP or the RBP but is now in the
ABP. It originates from the Heathrow Winter Resilience Enquiry (the Begg report), in
particular recommendation 2:

.that BAA work with airlines, NATS and other relevant stakeholders to review and
invest in the aircraft de-icing processes and infrastructure to ensure the airport can
maintain its flow rate in inclement weather.
Although no specific recommendations were made on infrastructure, the evidence
submitted by BALPA highlighted the problems with on-stand de-icing and advocated
remote facilities. In 2012 work was undertaken to look at the impact of de-icing on
efficiency and airfield performance; it concluded that there was 22m inefficiency with
further costs from excess taxiing and aircraft holding. On a worst case single day
over 4m inefficiency was observed.
Benefits/Costs
It should be highlighted however that these quoted costs of overall inefficiencies in
de-icing did not just refer to having on-stand versus remote de-icing or poor
infrastructure generally.
The causes of the above inefficiencies were a variety of factors including lack of
stand capacity, fragmented service provision, lack of co-ordination, inconsistent
processes and standards, and poor training and lack of modern equipment. A
Steering Group was set up which supported the concept of off-gate de-icing and
single service provision, and a model developed which identified the optimum pad
size (7 code F bays) and location (runway holds) to support a resilient and punctual
operation.
Options
Based on initial design and costings, 48m could facilitate four Code F pads on both
09R and 27L thresholds and two Code F pads on the 09L and 27R thresholds with
an extra single Code F pad for southside access to 09R and 27L.The infrastructure
would incorporate glycol recovery and recycling facilities as well as an electronic
message board and control system. De-icing rigs would incorporate blending of
glycol and air to minimise cost and environmental impact.

Costings
A full business case for this project has not yet been produced so the 48m should
be viewed as a high level estimate of a particular type of investment. Operating costs
of the new facility are excluded.
The business case is highly immature and it is unclear which Gateways (if any) have
been passed. There does not appear to be any delivery timescale given the
continuing discussions on project scope and implementation.
Airline Views
After a series of Steering Group meetings and working groups, the LACC/AOC has
now proposed the a jointly commissioned study is undertaken into the relative
performance of aircraft de-icing at Heathrow. They have expressed reservations
about the detail of the operational processes behind the suggested concept as well
as about having a single supplier of the de-icing service.

3.8.11

Additional fuel infrastructure

BC Additional fuel infrastructure

Project value (Q6)
FBP (3 blllion)
28.6m
RBP (2 billion)

ABP (3 billion)

Summary of scope
Groundworks and infrastructure for the site for 6
additional tanks on site GA 17A
Without any HAFCO agreement the project is
effectively deferred indefinitely
As above

Project Scope
This project was conceived in Q5, underwent project governance in that
quinquennium and was treated as a rollover project into Q6 with 28.3m allowed in
the FBP as a resilience item. This would have covered enabling scope including site
clearance plus the provision of HV power and fire water and drainage services, with
HAFCO, the Heathrow Fuel Consortium undertaking the infrastructure construction
itself including six storage tanks, pipelines and associated tunnel. The project would
have been jointly delivered by 2017.
Since this time the project has been removed from the ABP and RBP completely with
the statement:
:Heathrow has only provided funding in the past for basic enabling works. Fuel
companies fund the actual storage infrastructure. Heathrow still supports the project
including the provision of land, but it is suggested that enabling costs should be
incorporated into the existing funding model airlines have with fuel companies.
.
The Q5 activity was essentially concentrated on finding a suitable new site for fuel
storage which was completed with airline endorsement in 2011 when Grass Area
17A was identified (next to the 470 stands near T4). The activity then concentrated
on reaching acceptable Heads of Terms with HAFCO, but negotiations have reached
an impasse with HAFCO reputedly refusing to take on liability for construction and
on-going operations.
Benefits/Costs
The main rationale for the project is the current very low level of storage capacity of a
maximum of 2.2 days compared to 4.2 at Gatwick, 9 at Amsterdam, and 11 at Paris
CDG. This means that the risk of supply of fuel interruption is high despite having
three supply pipelines and limited road and rail delivery capability; this was the basis
of the recommendation for six extra tanks made by the 2009 study jointly
commissioned by HAL, the airlines and HAFCO.
The contingency of road tankering fuel into the airport, as was required post the
Buncefield explosion in 2005, causes significant departure delays and cancellations
particularly as the super cooling of the tankered fuel can cause aircraft wing surfaces
to ice up and require de-icing.
HAL now also appear to be casting doubt on the fuel forecasts carried out under the
2009 study; in particular they cite monthly and daily fuel uptake in 2013 and believe
that annual daily demand will not rise above 21.5m litres much less than figures
around 25m forecast by DfT and BA for 2018.

Given that the lack of current progress with HAFCO discussions and discussions
over a suitable business model it could be some time before this project recommences despite HAL and airlines both seemingly still supporting it in principle.
The timescales for delivery are therefore uncertain but presumably the infrastructure
could be in place by 2018 assuming an acceptable business model and HAFCO
Heads of Terms can be agreed in the next six months.
Options
Seven airport locations were examined up to 2009 with GA 17A being the only option
suitable. It is not proposed to revisit this as HAL and airlines agree on the site.
Costings
Governance for initial site costings were completed in Q5 up to Gateway 2 and again
it is not proposed to review these.
Airline Views
The views of the airline community are that the resilience risks of the existing
infrastructure remain significant with a one day drop in fuel supplies in December
2012 almost invoking the emergency contingency plan. The airlines want the existing
project pushed forward but prefer another business model whereby HAL contract
HAFCO to construct the storage facilities and take on the assets into the RAB (to the
value of 130m). Their belief is that this will give them an improved commercial
position though their main priority really is that this project needs to be completed
urgently and that HAL should inject more effort into doing this. It is understood that
the Commission for Aviation Regulation in Ireland is considering a fully RAB based
fuel storage solution for Dublin Airport.
HAL Paper to CAA
HAL have recently (20 August) provided a paper on this topic to CAA which
summarises the infrastructure, roles and responsibilities and fuel demand picture,
although we understand that the LACC/AOC has not received a copy of this.. The
paper also assesses the business delivery options of the traditional route (HAL
enabling works and HAFCO doing fuel infrastructure), HAFCO doing all the works,
and HAL doing all the works and broadly finds that the traditional model works best
which is at variance with the statement made above for RBP/ABP purposes. The
paper repeats that without any agreement with HAFCO this project cannot go ahead
but feels that adequate resilience exists with the existing infrastructure.
Our views
We have the following thoughts on this project:

The physical assets required and their location would appear to be agreed and
the debate is around timing and the business model

We have requested data on the number of warnings on fuel at Heathrow and

were told that there has been one red warning (contingency plan imminent or
underway) in October 2012 and one amber (risk of contingency plan being
implemented at short notice) since then. However generally we feel that the
airlines are best placed to analyse risk as it is they who will have to live with the
consequences. If the airlines believe that 6 extra tanks are required as per the

2009 study, and are prepared to pay for them then HAL should facilitate this.
The bases of some of the forecasts are in any case uncertain.

The business model of the airport providing enabling works and the consortium
building the rest is long established and was used for the T5 Perry Oaks facility;
we know of many circumstances where this is used at other airports. We agree
with HALs conclusion that there does not appear good reason to change the
business model.

The sticking point would appear to be HAFCO refusing to accept liability for
construction and operation. We do not understand this as surely they are the
best party to undertake this; our suspicion is that this stance is purely a
negotiating position and needs to be robustly tested, perhaps with CAAs
assistance.

HAL should use the existing business model and ensure that charges to
airlines are transparent and the basis of calculation is understood, is
reasonable and can be independently verified

HAL should seek to progress the project along these lines as quickly as
possible though of course subject to good commercial sense.

3.8.12

T3IB roll-over

Introduction
This project is treated differently than others in our review as it commenced in Q5.
We therefore comment on the additional roll-over costs of 35m projected in Q6 and
included in HALs RBP and ABP.
T3IB (Terminal 3 Integrated Baggage) is a three storey baggage facility adjacent to
T3, incorporating the T3 departure baggage system, arriving bag capacity, an early
bag store and HBS, with interfaces for transfer bags through the T3-T5 baggage
tunnel and the eastern campus via the WIB (Western Interface Building). It was
initially estimated to cost 257m in out-turn prices
This project has had a well-documented series of difficulties during construction with
a number of cost increases and project delays. As part of the Q5 capital expenditure
review undertaken by ASA for the CAA, an extensive a deep dive forensic was
conducted on the project and 30m of inefficiencies was identified. HAL has advised
that they have previously written to the CAA rebutting these inefficiencies.
At the time of publishing our Q5 review (April 2012) the projects Estimated Final cost
was 360m. By June 2013 this has increased to 435m but with no change to the
timescale and minimal impact on project deliverables.
Based on information supplied by HAL this overspend of 75m is split between 40m
in Q5 (almost all in Q5+1) and 35m in Q6. The latter is therefore an additional
rollover item of capital expenditure for Q6.
We have been asked to report on this issue to CAA, although this was not strictly
speaking part of our brief and we have not had the time to conduct another forensic
investigation as per Q5 at the same time as investigating the capex issues and
projects included in our terms of reference for Q6.
This assessment is therefore only able to come to some initial prima facie views and
suggest a way forward for CAA to consider.
Airline Views
The AOC and BA have made separate submissions on this issue calling for any
overspend on the project (the existing 75m and any subsequent increases) to be
disallowed from the RAB, and for the 35m Q6 rollover in HALs capital programme
to be ignored. Their main contention is that had they known that the project was
going to cost this much they may well have chosen a different option or project which
would have provided them with better value.
Cost Overrun
HAL split the 75m overspend into the following areas:

Main building works contract with Ferrovial Agroman UK - 20.7m, all in Q5+1

Baggage Installation contract with Vanderlande Industries - 22.8m with 5.1m

in Q6

Existing Baggage Hall works (cut-ins) with Mace and VI - 17.6m, all but
0.75m in Q6

Project Delivery (all other items including on-costs)

Investigation of the Main Building Works Contract

We have undertaken some initial analysis on documentation provided to us by HAL
(T3IB programme update on EAC increase to Alan Stratford and Associates IRS
87). Our preliminary conclusions are as follows:

The statement in the introduction that most of the 75m increase is an

estimate for future spend is therefore not correct as a significant proportion
of it relates the FAUK contract and this is due to substantially complete in
October 2013. In addition HAL have reached agreement with FAUK that there
will be no further exposure to consequential cost claims (see Appendix C of
HALs document).

Of the 20.72m, 9.11M represents the implication of programme change and

the impact of inclement weather plus embargos around the Olympics and
Immigration industrial action. For weather to be considered a compensation
event under the NEC contract it needs to be clearly demonstrated, using
weather data, that the conditions experienced occur less frequently than once
in ten years. This is relatively straight forward to demonstrate using data
provided by the Met Office. The NEC contract also requires the issue of a
comprehensive project programme. In compiling this FAUK should have given
due regard to anticipated weather conditions and (assuming FAUK knew that
the Olympics were scheduled to happen at the time of entering into contract (!))
made reasonable allowances for the impact of the Olympics. If weather data
proves that weather should be considered a compensation event then,
providing FAUK have followed the contractual requirements for submission of
programme data, then the impact of this and other programme events should
be capable of calculation. If the Olympics and Immigration issues were not
foreseen then there should be evidence of notification from FAUK and/or
instruction from HAL clarifying the impact on the project works. Getting to the
bottom of this aspect (set out in 2.1) is essential as it either paves or blocks the
way for the other programme related issues. Please note that it is not a given
that costs should be paid because of delay to the works.

Of the 20.72m, 3m relates to increase in scope of works. To better

understand this we would need to see the original scope, would need to clarify
FAUKs design responsibility and also establish what extent of the scope is
driven by regulatory requirements (e.g. thermal insulation).

2.1m is for additional resources required for health and safety. Again it is
difficult to see why H&S implications werent clear at the outset and why FAUK
didnt properly price for them.

5.21m is for provisional sums and it is implied in the IRS that this is the total
extra cost relating to provisional sums. This needs clarifying along with the
scope, value and quantity of provisional sums originally captured in the contract
works.

3.50m is for subcontractor contract entitlements. Details of this would need to

be known in order to comment further
The programme update contained in Appendix C refers to design errors resulting in
rework and this needs further exploration. It also refers to a contract conversion from

cost plus to target cost with a 60/40 pain/gain share (HAL/FAUK). The impact of this
arrangement is not evident with no visible operation of a pain/gain approach in the
information supplied.
A saving has been achieved by reducing FAUKs fee and excluding costs caused by
problems in FAUKs design and integration. These excluded costs must have
transferred into another pot so this generates a potentially misleading picture (as
opposed to a saving), although the extent of this is not known.
In summary, the information provided does not validate the increase in
costs. However, works procured under the NEC contract should have been
effectively administered and consequently there should be an audit trail to allow
further detailed investigation if needed.
Baggage Installation contract with Vanderlande Industries (VI)
The following observations can also be made about this contract

Withdrawal of discount due to non integration with the WIB (5.7m) and non
realisation of savings (1.9m). It is unclear why these discounts/savings have
not been realised.

Test bags and handlers during system testing plus O&M training support (two
items totalling 2.65m). It is unclear why these costs were not allowed for
originally.

A lot of additional costs eg work area re-sequencing, disruption, mitigation of

disruption, mezzanine sundry works, interface resources totalling 2.56m; it is
unclear why these were not included in original estimates or why they are true
additional costs.

There is also a last section titled Disruption Impacts claimed by BI which HAL
say are still under negotiation these total 8.9m. Presumably at least some
of these claims will be disallowed

We also believe HAL are still looking for further efficiencies across the works in
view of the cost increases experienced. This could represent 3-4m savings.

Existing Baggage Hall Works

There is more of a reasonable claim by HAL for cost over-runs in this area as the
design works have had to follow the main works to allow the change of the Transfer
Docks location to be incorporated following airline agreement. There has also been
some peripheral changes in scope with the need for an interim OOG facility and a
storage area for ULDs.
However there is still a need to analyse the 18m cost increase to ascertain that
these additional costs could not reasonably have been anticipated when the original
27m cost estimate was produced.
Project Delivery
Given that there is a high proportion of on-costs contained in this section it follows
that any disallowable costs from the preceding sections will have corresponding
additional disallowable costs under project delivery. Under the circumstances we

believe HAL charges and additional risks (totalling 6.77m) should in any case be
borne by HAL.
Interim Conclusions
The extent of the possible disallowable costs can thus be estimated as follows;

FAUK possible 50% of 20.7m i.e. 10.35m

VI possible 50% of items cited above totalling 12.8m i.e. 6.4m
VI possible 100% of 8.9m item cited above
VI reduction in fees - 3.5m
Cut-ins 25% reduction of 17.6m i.e. 4.4m
Project Delivery - 8m

This totals some 41.5m so we believe there is enough prima facie evidence for CAA
to disallow the 35m Q6 rollover. That is not to say that all the disallowable monies
arise in Q6 some do arise in Q5+1.
However, further more detailed analysis would be required to come to come to a
more properly costed disallowable sum.

3.9

Timing and profile of capex

We understand the agreed capex plan will be phased over the five year period and
submitted to the CAA on a P80 basis for all projects (except roll-over).
An outline phasing of the FBP, RBP and ABP is given in Section 3.5. It is expected
that an agreed plan will be refined as the timing of the project gateways are
themselves defined in more detail.

3.10

Differences between HAL and airline priorities

3.10.1

Summary of current position

The LACC/AOC has prepared its own capital plan for Q6, which is based on a main
list of 42 projects totalling 3 billion and incorporates a 280m contingency allowance
for early commencement of T2 Phase 2 with more focus on baggage. As they are
still considering as to whether this will be necessary, they have identified a further 11
projects totalling 287m to be included in the plan if this contingency is regarded as
not required. It is our understanding that, whilst no formal decision has been taken,
the LACC/AOC and the airline community are likely to accept that the 280m
contingency allowance will not be necessary. The LACC/AOC project lists exclude
eight projects totalling 97m in HALs RBP and ABP which have a full commercial
payback in Q7. In comparative terms, therefore, the LACC/AOCs preferred capital
plan amounts to 3,097m.
This section summarises the key differences between this plan and HALs 2 billion
RBP and 3 billion ABP. These differences are also highlighted in LACC/AOCs
submission to the CAA although we have queried a number of their points with HAL.
A full listing of projects in the RBP and ABP and the LACC/AOC capital plan is given
in Appendix A.
The LACC/AOC has stressed that any agreement on the capital plan is dependent on
the impact on airport charges, which itself is dependent on the building blocks of the
regulatory settlement including the WACC and the airport operating cost. Given the
current uncertainty over these issues, the LACC/AOC reserve their position on their
3.1 billion plan, which is subject to a satisfactory agreement on the resulting airport
charges. Equally HAL has made its position clear that, unless an acceptable level of
WACC is included in the CAA settlement, they will be forced to adopt the 2 billion
RBP.
LACC/AOCs stance is that they totally reject the 2 billion RBP which does not
provide the necessary level of investment to meet the agreed joint objective of Q6 to
make Heathrow Europes hub of choice. HAL argue that fulfilment of this objective
would merely be delayed, although clearly this would depend on the settlement in Q7
having an appropriate level of investment, WACC and airport charging regime.
There are substantial differences between HALs RBP and the LACC/AOCs own
plan. These differences cover all types of (non-asset replacement) project but
particularly terminal-related improvements. Most of the other types of project
(airfield, resilience etc) are included in both the RBP and the LACC/AOC lists
although there are significant reductions in the scope and cost budgets in the RBP.

There are still considerable differences between HALs ABP and the LACC/AOCs list
although we feel that it should be possible for the two parties to agree a mutually
acceptable plan, if an overall budget of around 3 billion is feasible in the context of
the settlement.
In line with our Terms of Reference, we have reviewed in detail some 12 key projects
in Section 3.5 and we have highlighted any differences between HAL and the
LACC/AOC in terms of their scope and budget. This section considers the overall
plan and key areas of disagreement in the context of both the RBP and ABP.
For the purposes of categorisation, we have split all possible projects (excluding
asset replacement) into 11 groups as shown below:
millions
Q5/Q5+1 roll-over
Airfield/resilience
Terminal 1&2
Terminal 3
Terminal 4
Terminal 5
Terminal (non-specific)
Baggage
IT
Surface access
Other
Total (Non-Asset Replacement)
Total (Asset Replacement)
Total

RBP

ABP

187.2
149.5
35.1
36.7
61.8
30.7
91.7
67.7
7.0
7.4
674.8
1,318.4
1,993.2

291.8
389.0
249.9
77.7
80.0
35.7
104.7
35.5
124.2
152.0
14.7
1,555.1
1,458.8
3,013.9

LACC/AOC
Main list
251.0
394.0
248.0
87.0
57.0
116.0
60.5
280.0
120.0
7.0
6.1
1,626.6
1,373.5
3,000.1

LACC/AOC
Additional
67.0
8.5
6.0
94.0
55.0
57.0
287.5
287.5

LACC/AOC
Commercial
11.0
8.0
30.0
35.0
84.0
13.0
97.0

It should be noted that several projects are cross-category and our definitions
(including the distinction between asset and non-asset replacement) may differ from
those of HAL and the LACC/AOC. Nevertheless, we have reconciled our total
budget figures to theirs.
Our comments on the key areas of difference in each project category are shown
below.

3.10.2

Q5/Q5+1 roll-over projects

millions

BC No

Terminal 2 Phase 1
Completion
T3IB Q5 Rollover
Additional Rollover
Sub-total

B050
B051
B089

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

55.1
82.1
50.0
187.2

159.7
82.1
50.0
291.8

159.0
47.0
45.0
251.0

The LACC/AOCs 3.1 billion plan assumes that Stands 234/235 and Kilo taxiway
are included in the T2A Phase 1 roll-over costs. They do not accept the recent
75.0m cost increase in T3IB so their plan excludes the additional amount accruing
in Q6 (=35.1m).

3.10.3

Airfield/Resilience projects

millions

BC No

RBP

ABP
10.6
20.2

LACC/AOC
Main list
-

LACC/AOC
Additional
-

LACC/AOC
Commercial
11.0
-

Northern Perimeter
PRT
CTA redevelopment (Lead
Plan version)
Enabling New Generation of
Wide Bodied aircraft - Airfield
Airfield Efficiency and
Resilience
Ops Efficiency and Continuous
Improvement
Security Fixed Post
Modernisation
Additional Fuel Infrastructure
Deicing
APOC
Cargo Centre Southside
Air Quality -vehicle charging
Waste Management
Infrastructure
Sub-total

B009
B088

10.6
-

B010

15.0

B011

86.8

182.7

179.0

B012

29.0

70.7

70.0

B038

5.7

5.7

B026
B033
B035
B043
B062
B073

10.3
2.2
-

10.3
48.0
2.2
13.8
5.0

10.0
130.0
-

50.0
2.0
15.0
-

B055

5.0
149.5

5.0
389.0

5.0
394.0

67.0

11.0

There are significant differences in the budgets for airfield and resilience projects
between HALs RBP and ABP. As described in Sections 3.8.6 and 3.8.7, the budget
in the RBP for projects Enabling the New Generation of Wide Bodied Aircraft (B011)
and Airfield Efficiency and Resilience (B012) are both less than 50% of those in the
ABP, with resulting impacts on future pier service, punctuality and resilience. As
shown in Section 3.8.11, the LACC/AOC plan includes an allocation of 130m for
additional fuel infrastructure but excludes a budget of 20.2m for extension of the
PRT to the CTA, which is included in HALs ABP but not in the RBP.

3.10.4

Terminals 1 & 2 projects

millions
Terminal 1
T1 Closure
Airline Moves
Terminal 2
T2A Phase 2 and T2C
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B030
B037

8.1
22.0

8.1
22.0

8.0
20.0

B054

5.0
35.1

219.8
249.9

220.0
248.0

The key difference between HALs RBP and ABP is the T2A Phase 2 / T2C project,
which we comment on in Section 3.8.1. The LACC/AOCs plan has included the full
amount in the ABP. As indicated in this earlier section, we have some reservations
as to whether the full budget for the T2A Phase 2 / T2C project needs to be included
in the current Q6 settlement.

3.10.5

Terminal 3 projects

millions
T3 Refurbishment and
Enhancement
T3 Transfers
T3 Faade (B-G)
T3 South Wing Faade
T3 Arrivals Forecourt &
Concourse
T3 Arrivals Faade
T3 Premium drop off
T3 IDL Works (Seating)

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B016

36.7
-

77.7
-

37.0
21.0
5.0

15.0
6.0
3.0
-

8.5

36.7

77.7

87.0

8.5

Subtotal

In the RBP, HALs capex expenditure on T3 infrastructure is limited to improvement

of the transfer security area only (see Section 3.8.2). The LACC/AOC regard this as
inadequate for the terminal to be competitive against other terminals (at Heathrow
and elsewhere) over its expected future life (20-25 years).
HALs budget in the ABP (77.7m) also includes a new faade in the main check in
area to provide additional circulation space, a premium drop area in line with
Heathrows other terminals and an arrivals forecourt and additional IDL seating. The
LACC/AOC plan includes all these items (with a further allowance of 4.5m for a refit
in the arrivals forecourt pending further information from HAL), together with new
faades in the Southwing and in the Arrivals areas.

3.10.6

Terminal 4 projects

millions
T4 Infrastructure Improvement
T4 IDL Masterplan Phase 4
and enhancements
T4 A380 stands
T4 A380 baggage belts
T4 Immigration Hall
T4 Arrivals Hall
T4 Long and short-stay car
park
T4 HV Upgrade
Subtotal

BC No

RBP

ABP
72.0

LACC/AOC
Main list
-

LACC/AOC
Additional
-

LACC/AOC
Commercial
-

B017

53.8

B081

8.0
-

8.0
-

35.0
4.0
3.0
5.0

61.8

80.0

10.0
57.0

6.0
6.0

The 18.2m difference between HALs RBP and ABP relate to the HV upgrade and
continuation of the work in the Arrivals Hall which commenced in Q5. Additional items
in the LACC/AOCs plan include improvement to both the long and short stay car
parks and the Immigration Hall. Some further T4 improvements (eg the T4 A380
baggage belt and TBF) are included in a separate baggage project (Improved
Baggage Capacity and Resilience see Section 3.8.8 below)..

3.10.7

Terminal 5 projects

millions
T5 Concessions
T5 Security Capacity
T5 CIP expansion
T5 Additional Baggage
Reclaim
T5 B & C Additional MUPs
T5A Direct Lounge Access &
Landside Offices
T5 Additional Stand 574
T5 PRM & UM Facilities
T5 South Extension
T5 Code F stands to A380
capability
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B022
B018
B082

7.7
23.0
-

7.7
23.0
5.0

23.0
70.0

8.0
-

3.0
15.0

5.0
-

9.0
5.0
70.0

30.7

35.7

116.0

10.0
94.0

8.0

HALs RBP and ABP includes an allowance for improvements to T5 security (see
Section 3.8.4), reconfiguration of the concessions and, in the case of the ABP, an
allowance for expansion of the CIP lounges (eg to cover the additional flights handed
by BA following its take-over of bmi and future A30 operations). The LACC/AOC
plan includes substantially higher capital expenditure for T5, with a further 174.3m
allocated for improvements on both its main and additional project lists. These
included a further 65m for CIP expansion (particularly in the T5A North Gallery),
70m for a T5C South Extension to improve pier services and a new narrow-bodied
stand (9m) for remote towing operations to provide increased flexibility. Further
expenditure is also allocated to provide extra resilience for A380 operations
although it should be noted that BAs fleet plan for Q6 (including the exercise of its
options for additional A380 aircraft) has not yet been finalised.

3.10.8

Terminal (non-specific) projects

millions
Enhanced Terminal Facilities
for Passengers
Commercial Advertising and
Sponsorship
Wayfinding
UKBF Accommodation
Security SQR Harmonisation
Commercial BAU fund
PCA Additional Infrastructure
Commercial Projects - Positive
- No payback in Q
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B045

19.5

19.5

B024
B014
B092
B068
B041
B034

31.8
4.8
3.5
30.1
2.0

31.8
10.0
4.8
3.5
30.1
5.0

32.0
3.5
25.0

5.0
-

30.0
-

91.7

104.7

60.5

50.0
55.0

30.0

The main difference between HALs RBP and ABP is an allocation of 10m for a
wayfinding project. The LACC/AOC plan includes an extra 20m for the PCA (Pre
Conditioned Air) project as they regard HALs budget of 5m as insufficient.

3.10.9

Baggage projects

millions
Improved baggage capacity
and resilience
T2 Baggage Contingency
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B006

35.5
35.5

280.0
280.0

57.0
57.0

HAL has a budget of 35.5m in the ABP only for additional expenditure to improve
baggage capacity and resilience. This includes an allowance of 21m for baggage IT
works. It is rather unclear as to what is included in this or indeed in the LACC/AOCs
budget of 57m as there would appear to be considerable overlap with other
projects.
As indicated in Section 3.8.2, the LACC/AOC has earmarked a
contingency of 280m for early T2 baggage works although their current plan (ie
the inclusion of the additional project list seems to suggest that this will not be
required).

3.10.10

IT projects

millions
Automation of the Passenger
Journey
Commercial IT and telecomms
Ebusiness development for
Heathrow
Premium Passenger Products
& Services
Commercial systems
replacement and upgrades
Innovation, Reseach and Trials
Back Office IT
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B029
B020

8.5
14.0

60.0
14.0

120.0
-

14.0

B023

7.6

7.6

8.0

B025

6.0

6.0

10.0

B044
B058
B064

2.6
29.0
67.7

2.6
5.0
29.0
124.2

120.0

3.0
35.0

A significant difference between all three capex plans is the budget allocated for the
Automation of the passenger journey project (see Section 3.8.9). Two projects
(Innovation, Research and Trials and Back Office IT) are excluded from the
LACC/AOC plan as they believe that they should be self-funding and that any costs
associated with the first should be incorporated in individual projects that require
such activity..

3.10.11

Surface access projects

millions
Crossrail
Surface Access Development
Fund
T2 Access to Heathrow
Express
Crossrail Contribution
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B008

5.0

5.0

5.0

B056

2.0

10.0

B072
B094

7.0

137.0
152.0

2.0
7.0

HALs ABP includes a contribution of 137m towards Crossrail, although further

appraisal of this is needed by the CAA. Both the RBP and ABP also include
allowances for a surface access development fund. Both items are omitted from the
LACC/AOCs plan although this does include an allowance for cosmetic
improvement to the proposed route between T2 and Heathrow Express. (An earlier
50m project in HALs FBP has now been cancelled as the potential reduction in the
length of the route would be minimal).

3.10.12

Other projects

millions
Visitor Centre
Noise Compliance
Funds for Independent Funds
Surveyor
Hillingdon Community Trust
LACC Project Manager
VIP lounge
Design Allowance
Subtotal

BC No

RBP

ABP

LACC/AOC
Main list

LACC/AOC
Additional

LACC/AOC
Commercial

B059
B039

2.4

0.2
2.4

B076
B077
B078

3.0
2.0
7.4

9.5
2.0
0.6
14.7

9.5
2.0
0.6
19.0
-25.0
6.1

The 7.3m difference between HALs RBP and ABP for this group of projects is
largely due to a reduction in the budget for the IFS (see Section 2.9) and that for the
LACC Project Manager, which historically has been funded under HALs capex
budget. These reductions are strongly contested by the LACC/AOC. Their plan also
includes 19m for an additional VIP lounge (particularly for the Middle East carriers)
and an offset item of 25m for design costs that they understand will be completed in
Q5+1 (not Q6).

3.11

Conclusions

Our review of the HALs capital project preparation and delivery processes for Q6
suggests that there has been some refinement since Q5 in line with best industry
practices although we have made certain recommendations as to how this might be
improved to increase overall capital efficiency. We have not, however, evaluated the
new proposed procurement procedures for Q6, which will represent a key
determinant of this efficiency.
The context of the level of capital spend is that it must be acceptable to HAL and its
shareholders and affordable to the airlines within the Q6 settlement. Our
assessment indicates that there are still substantial differences between HAL and the
airline community on the level and composition of the Q6 capital budget. There is
little doubt that a reduced capital budget of 2 billion would jeopardise Heathrows
competitive position as a leading European hub, particularly in terms of its punctuality
performance, resilience and the introduction of automated passenger processing.
If HAL and the airlines were to agree that a capex budget of around 3 billion were
acceptable within the overall framework of Q6, then we broadly feel that there could
be agreement on the project portfolio itself. It should be noted, however, that many
of the proposed projects are relatively immature (ie at Gateway 2 or earlier), so
changes in project scope and/or costs may still occur through mutual consent. The
main areas of disagreement between HALs and the LACC/AOCs 3 billion plan are
the budget allocations to passenger processing automation, for improvements in T5

and for new fuel farm infrastructure which the LACC/AOC regard as insufficient.
Conversely HAL has included allowances for a contribution to Crossrail and for
additional roll-over costs, notably for T3IB.
We do feel that there may be some scope for a reduction in a 3 billion budget if this
proves necessary, although given the immaturity of many of the Q6 business cases it
may prove difficult to make these judgements at this stage. As indicated in Section
3.8.1, there may be some scope to delay the second phase of the T2A/T2C to Q7.
We feel that HAL needs to further assess this, although we acknowledge that the
LACC/AOC do not share our view. In any event, we suspect that the project will
become more urgent if the Airports Commission (and the Government) rule in favour
of new runway capacity at Heathrow13. If this is the case, then a reappraisal of the
Q6 (or an Q7) settlement could be necessary. If it does not, then a delay in the T2A
Phase 2/T2C project is likely to be more appropriate. In our view, the business cases
for certain projects in HALs ABP (eg Back Office IT or additional baggage
enhancements) look less convincing than others although we concur with the
LACC/AOC that a 60m spend on passenger processing automation might prove to
be inadequate (although further work needs to be undertaken on the precise airline
requirements and the likely future costs). The resulting costs savings from such
adjustments might amount to between 200m-250m Further cost reductions might
also be achieved for asset replacement in Q6 although we have not assessed this.
There is also a question mark as to the appropriate extent of HALs contribution to
the Crossrail project (beyond any work required within the airport site). This issue is
beyond the scope of our report.
In summary therefore, we believe that, whilst a project portfolio of around 3.0 billion
would provide the most long-term benefits, this might be reduced to between 2.7 2.8 billion (excluding any reduction to the asset replacement programme) without
any major impact to the passenger experience or operational performance. Whilst
this could provide an overall budget ceiling, we note that nearly all the Q6 projects /
business cases are relatively immature (at Gateway 1 or 2) and are therefore subject
to agreed changes in scope, the selection of appropriate options and refinement of
the cost estimates before they can proceed.

13

The Airports Commission is due to publish its final report in summer 2015.

Appendix A
Comparison of HAL and LACC/AOC Q6 capex
plans

COMPARISON OF HAL FBP, RBP & ABP & LACC/AOC Q6 CAPITAL PLANS
000s

FBP

RBP

ABP

LACC/AOC
Main List

LACC/AOC
Additional

LACC/AOC
Commercial

Q5/Q5+1 roll-over
B050
Terminal 2 Phase 1 Completion
B051
T3IB Q5 Rollover
B089
Additional Rollover
Subtotal

160,375
51,102
211,477

55,111
82,097
50,000
187,208

159,688
82,097
50,000
291,785

159,000
47,000
45,000
251,000

Airport-wide/resilience
B009
Northern Perimeter
B088
PRT
B010
CTA redevelopment (Lead Plan version)
B011
Enabling New Generation of Wide Bodied aircraft - Airfield
B012
Airfield Efficiency and Resilience
B038
Ops Efficiency and Continuous Improvement
B026
Security Fixed Post Modernisation
B033
Additional Fuel Infrastructure
B035
Deicing
B043
APOC
B062
Cargo Centre Southside
B073
Air Quality -vehicle charging
B055
Waste Management Infrastructure
Sub-total

43,032
15,000
158,529
70,699
5,664
10,250
28,266
5,425
13,768
5,000
9,127
364,760

10,600
86,842
28,993
5,664
10,250
- 2,200
5,000
149,549

10,600
20,156
15,000
182,700
70,699
5,664
10,250

50,000
2,000
15,000
67,000

11,000
-

48,000
2,200
13,768
5,000
5,000
389,037

179,000
70,000
10,000
130,000
5,000
394,000

8,147
22,000
5,000
35,147

8,147
22,000
219,773
249,920

8,000
20,000
220,000
248,000

11,000

Terminal 1 & 2

B030
B037
B054
Subtotal

T1 Closure
Airline Moves
T2A Phase 2 and T2C

17,547
20,000
219,773
257,320

COMPARISON OF HAL FBP, RBP & ABP & LACC/AOC Q6 CAPITAL PLANS
000s
Terminal 3
B016

T3 Refurbishment and Enhancement

T3 Transfers
T3 Faade (B-G)
T3 South Wing Faade
T3 Arrivals Forecourt & Concourse
T3 Arrivals Faade
T3 Premium drop off
T3 IDL Works (Seating)

Subtotal
Terminal 4
B017
B081

T4 Infrastructure Improvement
T4 IDL Masterplan Phase 4 and enhancements
T4 A380 stands
T4 A380 baggage belts
T4 Immigration Hall
T4 Arrivals Hall
T4 Long and short-stay car park
T4 HV Upgrade

Subtotal
Terminal 5
B022
B018
B082

T5 Concessions
T5 Security Capacity
T5 CIP expansion
T5 Additional Baggage Reclaim
T5 B & C Additional MUPs
T5A Direct Lounge Access & Landside Offices
T5 Additional Stand 574

FBP

RBP

ABP

LACC/AOC
Main List

LACC/AOC
Additional

25,000
25,000

36,675
36,675

77,700
77,700

37,000
21,000
5,000
15,000
6,000
3,000
87,000

8,500
8,500

82,858
-

53,800
8,000
-

72,000
8,000
-

35,000
4,000
3,000
5,000
10,000

82,858

61,800

80,000

57,000

6,000
6,000

7,657
75,485
-

7,657
23,005
-

7,657
23,005
5,000
-

23,000
70,000
3,000
15,000
5,000
-

9,000

8,000
-

LACC/AOC
Commercial
-

COMPARISON OF HAL FBP, RBP & ABP & LACC/AOC Q6 CAPITAL PLANS
000s
Terminal 5 (cont)
T5 PRM & UM Facilities
T5 South Extension
T5 Code F stands to A380 capability
Sub-total
Terminal (non-specific)
B045
Enhanced Terminal Facilities for Passengers
B024
Commercial Advertising and Sponsorship
B014
Wayfinding
B092
UKBF Accommodation
B068
Security SQR Harmonisation
B041
Commercial BAU fund
B034
PCA Additional Infrastructure
Commercial Projects - Positive - No payback in Q
Sub-total
Baggage
B006

Improved baggage capacity and resilience

T2 Baggage Contingency

Sub-total
IT
B029
B020
B023
B025
B044
B058

Automation of the Passenger Journey

Commercial IT and telecomms
Ebusiness development for Heathrow
Premium Passenger Products & Services
Commercial systems replacement and upgrades
Innovation, Reseach and Trials

FBP

RBP

ABP

LACC/AOC
Main List

LACC/AOC
Additional

LACC/AOC
Commercial

83,142

30,662

35,662

116,000

5,000
70,000
10,000
94,000

8,000

19,520
31,796
10,000
31,600
30,099
5,000
128,015

19,520
31,796
4,768
3,500
30,099
2,000
91,683

19,520
31,796
10,000
4,768
3,500
30,099
5,000
104,683

32,000
3,500
25,000
60,500

5,000
50,000
55,000

30,000
30,000

33,980
33,980

280,000
280,000

57,000
57,000

35,500
35,500

30,000
13,980
7,576
10,000
2,572
10,000

8,500
13,980
7,576
6,000
2,572
-

60,000
13,980
7,576
6,000
2,572
5,000

120,000
-

14,000
8,000
10,000
3,000
-

COMPARISON OF HAL FBP, RBP & ABP & LACC/AOC Q6 CAPITAL PLANS
000s
IT (cont)
B064
Sub-total

Back Office IT

Surface Access
B008
Crossrail
B056
Surface Access Development Fund
B072
T2 Access to Heathrow Express
B094
Crossrail Contribution
Sub-total
Other
B059
B039
B076
B077
B078

Visitor Centre
Noise Compliance
Funds for Independent Funds Surveyor
Hillingdon Community Trust
LACC Project Manager
VIP lounge
Design Allowance

FBP

RBP

ABP

LACC/AOC
Main List

38,484
112,612

29,036
67,664

29,036
124,164

120,000

5,000
2,000

5,000
10,000

100,000
10,000
50,000 160,000

7,000

137,000
152,000

LACC/AOC
Commercial

35,000

5,000

2,000

7,000

9,500
2,000
550
19,000
25,000
6,050

190
2,428
9,500
2,000
550
14,668

2,428
3,000
2,000
7,428

Total (Non-Asset Replacement)

Total (Asset Replacement)

1,473,832
1,531,151

674,816
1,318,394

1,555,119
1,458,764

1,626,550
1,373,500

287,500
-

84,000
13,000

TOTAL

3,004,983

1,993,210

3,013,883

3,000,050

287,500

97,000

Sub-total

190
2,428
9,500
2,000
550
- 14,668

LACC/AOC
Additional

Appendix B
HALs RBP/ABP Project Gateway status
(as at 19 July 2013)

List of business cases and gateway status as at 19th Jul 2013

Prepared 23/08/13, based on info from PSB presentations 12/6 & 17/7
RBP

ABP

Business Case

Ref

'000

Prior Gateway

Ref

'000

Prior Gateway

Engineering Asset Replacement

Rail Asset Replacement
IT Asset Replacement
Baggage Asset Replacement
Baggage Standard 3 Hold Baggage Screening
Improved baggage capacity and resilience
Crossrail
Northern Perimeter
CTA redevelopment (Lead Plan version)
Enabling New Generation of Wide Body Aircraft - Airfield
Airfield Efficiency and Resilience
Wayfinding
Operational Systems Critical Asset Replacement
T3 Refurbishment and Enhancement
T4 Infrastructure Improvement
T5 Security Capacity
Commercial IT and telecoms
T5 Concessions
Ebusiness development for Heathrow
Commercial Advertising and Sponsorship
Premium Passenger Products & Services
Security Fixed Post Modernisation
Surface Water Management Infrastructure
Metering & Energy Demand Management
Automation of the Passenger Journey
T1 Closure
CTA & Cargo Tunnels
PCA Additional Infrastructure
Deicing
VIP Strategy - Commercial and facility
Airline Moves
Ops Efficiency and Continuous Improvement
Noise Compliance
Commercial BAU fund
APOC
Commercial systems replacement and upgrades
Enhanced Terminal Facilities for Passengers
Consolidated HAL landside Ops/Eng facility

B101
B102
B103
B104
B005
B008
B009
B111
B112
B015
B116
B117
B018
B020
B022
B023
B024
B025
B026
B127
B028
B129
B030
B131
B134
B037
B038
B039
B041
B043
B044
B045
-

575,000
50,000
75,140
149,155
254,858
5,000
10,600
86,842
28,993
20,800
36,675
53,800
23,005
13,980
7,657
7,576
31,796
6,000
10,250
15,200
13,000
8,500
8,147
115,000
2,000
22,000
5,664
2,428
30,099
2,200
2,572
19,520
-

Wave 1 & 2 G1

B001
B002
B003
B004
B005
B006
B008
B009
B010
B011
B012
B014
B015
B016
B017
B018
B020
B022
B023
B024
B025
B026
B027
B028
B029
B030
B131
B034
B035
B036
B037
B038
B039
B041
B043
B044
B045
B047

600,000
62,300
100,000
165,893
254,858
35,500
5,000
10,600
15,000
182,700
70,699
10,000
20,800
77,700
72,000
23,005
13,980
7,657
7,576
31,796
6,000
10,250
21,700
13,000
60,000
8,147
130,000
5,000
48,000
6,615
22,000
5,664
2,428
30,099
2,200
2,572
19,520
15,357

Wave 1 & 2 G1 *

Terminal 2 Phase 1 Completion

T3IB Q5 Rollover
Other Q5 Rollover
T2A Phase 2 and T2C
Surface Access Development Fund
Innovation, Research and Trials
Visitor Centre
Cargo Centre Southside
Back Office IT
Waste Management Infrastructure
Energy and Utilities Management - Supply
Security SQR Harmonisation
Asset Management Programme
Air Quality - vehicle charging
Funds for Independent Funds Surveyor
Hillingdon Community Trust
LACC Project Manager
T4 IDL Masterplan Phase 4 and enhancements
T5 CIP expansion
PRT
Additional rollover
UKBF Holding Rooms
Crossrail Contribution

B150
B051
B052
B154
B156
B164
B165
B066
B068
B169
B176
B077
B081
B089
B092
-

55,111
82,097
28,739
5,000
2,000
29,036
5,000
19,502
3,500
2,000
3,000
2,000
8,000
50,000
4,768
-

1,993,210
Key
* indicates that only the RBP elements of the business case are being progressed

G1
G1

G1
G2
G1

G1
G1
G1
G1
G1
G1
G1

G2
Q5 G3

G1
Q5 G2
G1

Q5 G4/G5
Q5 main works G4
Various Q5 stages

G1

B050
B051
B052
B054
B056
B058
B059
B062
B164
B165
B066
B068
B069
B073
B076
B077
B078
B081
B082
B088
B089
B092
B094

159,688
82,097
28,739
219,773
10,000
5,000
190
13,768
29,036
5,000
19,502
3,500
20,000
5,000
9,500
2,000
550
8,000
5,000
20,156
50,000
4,768
137,000

3,013,883

G1 *
G1

G1
G2 *
G1 *

G1 *
G1 *
G1
G1
G1
G1
G1*

G2
Q5 G3

G1
Q5 G2
G1
Q5 G4/G5
Kilo 234/5 excl
Q5 main works G4
Various Q5 stages

G1

Appendix C
Airfield map (effective July 2013)

Appendix D
Glossary

GLOSSARY
09L/27R
09R/27L
ABP
AMAN
AOC
APM
ASQ
ATFM
ATM
CAA
CAA SRG
CBI
CE
CIP
Code F
COPI
CPI
CTA
CUSS
CUSSP
DCS
DfT
DMAN
EBITDA
ECH
FBP
FEGP
GBAS
HAFCO
HAL
HBI
HV
IATA
IDL
IFS
JST
LACC
LUL
LV
MSCP
MUPs
NATS
NEC
NERL
NSL

Northern runway
Southern runway
(HAL's) Alternative Business Plan
Arrivals Manager (ATC Planning System)
(Heathrow's) Airline Operators Committee
Association of Project Managers
Airport Service Quality (Statistical Measure)
Air Traffic Flow Management
Air Transport Movement
Civil Aviation Authority
Civil Aviation Authority Safety Regulation Group
Complex Build Integrator
Constructive Engagement
Commercially Important Passenger
Code F stands (for A380 aircraft)
BIS (Dept for Business, Innovation & Skills) Construction Output Price Index
Consumer Price Index
Central Terminal Area
Common User Self Service (Check-in kiosks)
Common User Self Service (Check-in kiosks) - Plug-in Applications
Departure Control System
Department for Transport
Departures Manager (ATC Planning System)
Earnings before Interest, Tax, Depreciation & Amortisation
EC Harris
Full Business Plan
Fixed Electrical Ground Power
Ground-based Augmentation System (Aircraft Landing)
Heathrow Airport Fuel Company Consortium
Heathrow Airport Limited
Heathrow Blended Index
High Voltage
International Air Transport Association
International Departure Lounge
Independent Funds Surveyor
Joint Steering Team
London Airport Consultative Committee
London Underground Limited
Low Voltage
Multi-storey Car Park
(Baggage) Make-up Positions
National Air Traffic Services
New Engineering Contract (sponsored by the Inst of Civil Engineers)
NATS En-route plc
NATS Services Limited

OGC
P50
P80
PRM
PRT
Q5
Q5+1
Q6
QSM
R2 masterplan
R3 masterplan
RAB
RAT
RBP
RET
RPI
RPIJ
SESAR
SMAN
SQR
SSCP
T3IB
TPI
TTS
UM
WACC
WAN

Office of Government Commerce (now the Major Projects Authority)

Cost estimate with a 50% probability that its value will not be exceeded
Cost estimate with an 80% probability that its value will not be exceeded
Passengers with Reduced Mobility
Personal Rapid Transport (System)
Quinquennium 5 (April 2008-March 2013)
Quinquennium 5+1 (April 2013-March 2014)
Quinquennium 6 (April 2014-March 2019)
(HAL's) Quality Service Monitor
(HAL's) 2 runway masterplan
(HAL'a) 3 runway masterplan
Regulated Asset Base
Rapid Access Taxiway
(HAL's) Revised Business Plan
Rapid Exit Taxiway
Retail Price Index
Retail Price Index using Jevons (geometric mean) calculation
Single European Sky ATM research programme
Sequencing Manager (ATC Planning System)
Service Quality Rebate
Short-stay Car Park
Terminal 3 Integrated Baggage (Facility)
BCIS (British Chartered Institute of Surveyors) All-in Tender Price Index
Tracked Transit System
Unaccompanied Minors
Weighted Average Cost of Capital
Wide Area Network

Appendix E
Terms of Reference

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

SPECIFICATION
Terms of Reference
Q6 Capex Review: Heathrow and Gatwick Airports
Context
The CAA is currently considering the most appropriate regulatory arrangements to put in
place at each of the three airports subject to economic regulation: Heathrow, Gatwick and
Stansted. The present price controls expire in March 2014. As part of this work the CAA is
establishing the potential level of any price cap under a RAB based framework. The CAA is
also undertaking work on alternative forms of regulation such as price monitoring, long run
incremental costs and pegging prices to charges at comparator airports.
One of the key building blocks of a RAB-based price control is capital expenditure (capex).
Capital expenditure can be thought of as made up of three elements:

Capex renewals, where existing assets are renewed or replaced with assets
generating similar outputs;

Compliance, where capex is required to meet health and safety standards or

government regulations; and

Capex Enhancements, where capex provides increased outputs, for example

improved service quality or greater reliance.

In its initial business plan Heathrow forecast capex assumed a capex strawman of 3bn 1.
Annex A sets out the potential projects included in the strawman. Of the 3bn capex,
around 1bn relates to capex renewals, 0.3bn to compliance and 1.7bn to capex
enhancements.
In its initial business plan Gatwick identified potential projects assumed 1.2bn of capex2.
Annex B sets out the projects included in the business plan. Of the 1.2bn capex, around
0.4bn relates to assets renewals, less than 0.1bn to compliance and 0.8bn to capex
enhancements.
1

Q6 Initial Business Plan, Heathrow Airport Limited, August 2012. This document can be accessed at:
http://www.heathrowairport.com/static/Heathrow/Downloads/PDF/Q6_Heathrow_Initial_Business_Plan.pdf
2

Initial Business Plan to 2020, Gatwick Airport Limited, April 2012. This document can be accessed at:
http://www.gatwickairport.com/Documents/business_and_community/Public%20Regulation%20Pages/Econo
mic%20regulation/2012/Beyond%20Q5%20business%20plan%20(public%20version)%20%20issued%2019%20April%202012.pdf

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

One of the potential innovations being considered by the CAA for Q6 is a two-tier approach
to capex, where capex is split into:

core capex: projects that are well defined which are likely to be subject to capex
triggers3; and

development capex: projects that are less well defined, which could be included in
the initial price cap, or included in the price cap during the control period following
consultation/agreement from airlines.

The Q6 policy update document provides further details of the core and development capex
approach4.
Requirement
This request for advice is split into two parts:

A review and projection of Heathrows Q6 capex allowance for Q6; and

A review and projection of Gatwicks Q6 capex allowance for Q6.

Tenderers can bid for the work at Heathrow or Gatwick or Heathrow and Gatwick combined.
Where tenderers are bidding for work at both airports, separate prices should be provided for
each airport.
This review is limited to an assessment of capex relating to enhancements and compliance.
Capex relating to renewals is being considered as part of a separate consultancy study
which is examining maintenance and renewals expenditure.
The review is split into three phases:

Phase one: review of cross project issues;

Phase two: initial assessment of enhancement and compliance project allowances;
Phase three: full assessment of enhancement and compliance project allowances.

The assessment of project allowances should include an evidenced assessment of the scale
of capex efficiency.
The assessment should draw on the following existing and on-going studies:

Mid Q5 review of capex at Heathrow and Gatwick Airport, Currie and Brown 5;
Heathrow Q5 capex review, Alan Stratford and associates, completion end
December 2012;
Gatwick Q5 capex review, URS, completion end December 2012;

Capex triggers remove the capital expenditure allowance for a project if the outputs are not delivered on
time.
4

Q6 policy update, CAA, May 2012. This document can be accessed at:
http://www.caa.co.uk/docs/5/Q6PolicyUpdate.pdf
5

These reports can be accessed at: http://www.caa.co.uk/docs/5/ergdocs/HeathrowCapexReport.pdf and

http://www.caa.co.uk/docs/5/ergdocs/GatwickCapexReport.pdf

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

Review of maintenance and renewal expenditure, SDG, Interim report January 2013,
draft final report March 2013, update report August 2013;
Deliverables from constructive engagement at each of the airports, Heathrow report
completed 3 December, Gatwick and Stansted reports due end of December 2012.
These deliverables may include airline prioritization for Q6, although airlines views on
the overall capex programme may be subject to affordability constraints.

The work should also draw on the work undertaken by the airports themselves, particularly
on benchmarking expenditure..
Phase One: Review of the cross project issues
This part of the research should consider the cross cutting issues that can impact on the
costs across projects. This consideration should include:

Benchmarking of project costs, where available the Contractor should assess the
benchmarking of unit costs to identify the efficient costs of capital schemes going
forwards. This should draw on the work undertaken by the airport and include an
assessment of whether appropriate benchmarks and adjustments have been used
(for example in relation to risk) and comparisons with other benchmarks available to
the contractor.
On-costs, whether the adjustment for on costs is appropriate, for example in relation
to other airports and other sectors;
Contingency and risk, whether the allowances for risk and contingency is appropriate
given the stage in the projects development and the relationship between project and
portfolio risk adjustments,
[is the allowance for input price inflation appropriate, for example given the historic
relationship between construction and retail prices and the outlook for the economy
going forwards.

The output of Phase 1 should be an interim report setting out the analysis and assessment
for each of the topics list above (and any other issues the contractor considers relevant).
Phase Two: Initial assessment of enhancement and compliance capex expenditure
Based on the analysis undertaken as part of Phase One, the review of existing and on-going
studies and the contractors own assessment of the overall capex programme and a sample
of Q6 projects, the contractor should provide an initial assessment of the capex allowance
for Heathrow and/or Gatwick airports (as appropriate).
The assessment should be based on the Airports Full Business Plan, published at the end
of January 2013, and the outputs of constructive engagement.
This should involve:

An assessment of whether individual projects are justified given the needs of current
and future airlines and their customers and, where appropriate, the promotion of
competition;

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

An assessment of the efficiency of the Q6 capex programme. This should draw on

the Q5 capex review (including proposed procurement approach), phase 1 of the
study and other information the consultant considers relevant;
An assessment of the efficient timing of capex and profile of expenditure;
An evidenced initial assessment of the Q6 capex allowance.

It should be noted that at the time of the full business plan, a number of projects are likely to
be at early stages of development and this should be taken into account in the initial
assessment.
Phase Three: Full assessment of enhancement and compliance capex expenditure
Based on Phase Two of the study, any updated business plan submitted by the airports by
20 July 2013, and further work undertaken by the contractor. The Contractor should provide:

For each project that is proposed for the core capex program (where appropriate), an
assessment of:
o Whether the project is justified given the needs of current and future airlines
and their customers, and where appropriate the promotion of competition;
o the appropriate cost allowance for Q6 (and year within Q6) (and for the
project overall where it spans more than one control period);
For the development program, whether the overall allowance for development
expenditure is appropriate given the range and nature of projects proposed by the
airport.

Given the nature of the development of the capex program, the main focus of the study is
likely to be in Phase Three and, to a lesser extent, Phase One of the study.
Timescales
The CAA anticipates that the draft report for Phase one of the study will submitted by 31st
January 2012, Phase two by 8th March 2013 and Phase three by 17th August 2013. A final
published report is expected after Phase two and Phase three of the study. Airport
commercial confidentiality should be taken into account when considering the form of the
final report.

Action

Date

Issue of ITT

15 December 2012

Return of tenders

4 January 2012 (12 noon)

Appointment of Contractor

w/c 7 January 2012

Kick off meeting

w/c 7 January 2012

Draft interim (phase one) report

31 January 2013

Draft final (phase two) report

8 March 2013

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

Draft final (phase three) report

17 August 2013

Final report

One week after comments

Output
The final report (s) will take the form of long form report. The draft final report will be shared
with stakeholders before publication. All supporting analysis and spreadsheets should be
supplied on request to the CAA. If required by confidentiality issues separate reports, or
separate report sections, should be produced for each airport.
Stakeholder engagement and the CAAs process.
The contractor is expected to work closely with the CAA and stakeholders to maximise the
potential buy-in with the reports findings. The Contractor should assume regular meetings
with the CAA on at least a three to four weekly basis. The Contractor should also assume
significant engagement with each of the airports to understand their cost base and the
airlines to understand their views. Proposals should make clear how tenderers intend to
manage the consultation process between airports and airlines and clearly state the
involvement they expect from the CAA.
Cooperation
Protection must be given to confidential information that is released in the course of this
review. The terms of reference includes confidential information and should not be released
to third parties. This includes the release of information about the detailed capex plans of
one airport to other airports. The CAA reserves the right to use its formal powers to request
information.
Request for proposals
The CAA requests receipt of proposals for meeting these terms of reference by 12 noon
Friday 4 January 2013. The CAA expects to appoint the adviser in w/c 7 January 2012.
The proposal shall include:

An understanding of the issues raised in the terms of reference;

The proposed approach to be taken on the study. This should encompass the key
issues that are likely to arise in the study and how the contractor intends to address
these;
Potential data requirements, data sources and likely availably. The CAA is likely to
place particular weight on tenderers who have ready access to the required
benchmarking data;
Any potential conflicts of interest envisaged by the tenderer and how these might be
addressed;
The key outputs expected from each task and the study overall;
A workplan setting out the time input by task and individual;
The relevant experience of the tenderer and named individuals to undertake the
study and their roles on the project. All experience should be related to a member of
the proposed study team
The key risks in undertaking the study and how these will be mitigated; and

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

Unit prices (hourly / daily rates) and the total fixed price for the Phases one and two
of the study. Phase three of the study should be separately priced. The unit rates
should be assumed for any follow-on work in the subsequent year to update the
work.

The tenderer may submit a proposal for the work at either Gatwick airport or Heathrow
airport or for both Airports. Where a bid is submitted for both airports, each airport should be
individually priced.
The CAA will give the following weights to proposals: price (30%) and quality and value
added (70%).

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

Annex A: Heathrow initial Q6 capex projections

Title
Engineering Asset Replacement
IT asset replacement
Baggage Asset Replacement
Rail Asset Replacement
Baggage Standard 3
Surface Water Management Infrastructure
Energy and Utilities Management
Air Quality Compliance
Energy and Utilities Management - Supply
Waste Management Infrastructure
Asset replacement total

Heathrow categorisation of spend

Asset replacement and compliance

Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
Asset replacement and compliance
1,320 Asset replacement and compliance

Commercial systems replacement and

upgrades
Security Fixed Post Modernisation
New commercial products and services
Commercial advertising and sponsorship
Commercial BAU Funds
Automation of passenger journey bag drop
T5 concessions
Deck T5 Business Parking
Additional Car Park Capacity & Staff / Public
Swap
Cargo Centre Southside
VIP - refresh
T5 Reconfigure Domestic Gates - and integrate
CTA
T5 Transfers Security
Enhanced terminal facilities for passengers - T3
& T4
Wayfinding
T4 Gate Room Reconfiguration
T4 Landside Arrivals & Forecourt Refresh
T3 Check-in and Arrivals Minor Enhancements
CTA redevelopment
Additional PRT on Northern Perimeter

Competitive cost of operation

T3IB Q5 Rollover
Other Q5 Rollover
Additional fuel infrastructure
CTA tunnel
Cargo tunnel
NCTA Bravo Taxiway Realignment (incl Pier 4

Hub capacity and resilience

Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience

Competitive cost of operation

Competitive cost of operation
Competitive cost of operation
Competitive cost of operation
Competitive cost of operation
Competitive cost of operation
Competitive cost of operation
Competitive cost of operation
Competitive cost of operation
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience
Enhance passenger experience

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

Title

demolition)
Additional 4 RET's on Northern Runway
Code E remote stands over Pier 4a (incl Pier 4a
demolition)
Efficient & Resilient Airfield
T5 Reclaim Reconfiguration - extend 4 existing
belts
T4 - One additional Code F stand (total of 3)
Sierra Taxiway Enhancement including
pavement work
T4 LV / HV Electrical Capacity
T4 Additional Reclaim Capacity
Real Time Heathrow Integration
Additional FEGP for B787's
T5 B&C Additional MUPs & Bag Check Units
Baggage IT Improvements
Consolidated HAL landside Ops/Eng facility
Business Support systems
Ops Efficiency and Continuous Improvement
Commercial IT and telecoms
Pier 7 re-lifing
APOC
09L RAT
E Business
Asset Management Programme
Consolidated Car Rental Facility
Innovation and Trials
Visitor Centre
Q6 Contingency
Crossrail
Surf Access Development Fund
Terminal 2 Phase 1 Completion
T1 closure - mothball
Airline Moves
T2A Phase 2 and T2C Design & Enabling
T2 access to Heathrow Express
TOTAL

Heathrow categorisation of spend

Hub capacity and resilience

Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Hub capacity and resilience
Other
Other
Other
Other
Other
Other
Other
Other
Surface Access
Surface Access
Terminal 2 related
Terminal 2 related
Terminal 2 related
Terminal 2 related
Terminal 2 related
3,008

Ref. 1778 (Services Order 02) 16 December 2012

Q6 Capex Review: Heathrow and Gatwick Airports

Annex B: Gatwick initial Q6 capex projections

Title

Airfield asset stewardship

Facilities asset stewardship
Commercial asset stewardship
Compliance and risk
IT asset stewardship
Additional long stay capacity
Long stay car parking
NT short stay car park
PTI and surface access
Early bag store
ST baggage and Pier 1
Upgrade check-in and bag drop and NT ceilings
and floors
NT security
CIP departures
NT IDL reconfiguration and expansion
ST IDL capacity
ST IDL reconfiguration (phase 3 & 4 food court)
Delivery of 95% pier service (North Terminal)
Pier 3 modernisation
Pier 5

68
183
43
14
57
29
14
20
39
24
69
42

Asset stewardship
Asset stewardship
Asset stewardship
Asset stewardship
Asset stewardship
Surface access
Surface access
Surface access
Surface access
Check-in concourse
Check-in concourse
Check-in concourse

28
2
105
79
25
158
60
1

Security
Departure lounge
Departure lounge
Departure lounge
Departure lounge
Piers
Piers
Piers

Arrivals border zones

NT baggage reclaim
ST baggage reclaim
CIP arrivals
Car rental
Digital media return
Passenger service improvements through IT
Additional staff car park capacity
Consolidated motor transport facility
Future capital planning post 2019
Hanger facilities
NT energy centre
Runway safeguarding
TOTAL

20
3
12
2
5
5
14
4
4
10
6
6
4
1,154

Heathrow categorisation of spend

Arrivals border zones

Reclaim
Reclaim
Onward travel and arrivals
Other passenger facing products
Other passenger facing products
Other passenger facing products
Non passenger facing products
Non passenger facing products
Non passenger facing products
Non passenger facing products
Non passenger facing products
Non passenger facing products

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