IAG urges UK PM Burnham to cap Heathrow fees as £49bn runway expansion looms

British Airways and Iberia's parent company, IAG Group, has made a direct appeal to incoming UK Prime Minister Andy Burnham regarding Heathrow Airport's upcoming expansion plans. The request centers on capping passenger charges at Heathrow in the wake of a government-approved runway expansion project set to cost £49 billion. The airport's third runway project is a major infrastructural development that aims to increase capacity but has raised concerns about potentially soaring passenger fees.

Earlier this year, the Labour government under Keir Starmer approved Heathrow Airport Ltd’s proposal for a third runway expansion, choosing it over a competing bid from a private consortium backed by IAG and the Arora hotel group. The approved plan features a new runway constructed over the M25 motorway on the airport’s west side, along with new taxiways, terminal buildings, and other infrastructure. Heathrow aims to obtain planning permission by 2029 and fully commission the new runway by 2035.

Heathrow Airport has warned the UK government that it will proceed with funding for the expansion only if it receives the green light from the Civil Aviation Authority (CAA) to increase its controversial passenger charges. These fees, which passengers pay in addition to their airfare, currently stand at an average of £26.57 — already higher than fees at comparable international airports, which average £22.27.

The airport plans to raise the charges to £33.80 per passenger between 2027 and 2031, a move that airlines based at Heathrow strongly oppose. These airlines argue that elevated fees contribute to passengers choosing alternative airports with lower airfare components, thus impacting Heathrow’s competitiveness. Consequently, the airlines are lobbying the CAA to cap fees at £23 per passenger, favoring a more moderate increase.

IAG contends that the current funding model for Heathrow's expansion—known as the Regulated Asset Base (RAB)—incentivizes the airport to overspend on development costs. Under RAB, any increase in project expenditure can be recovered by raising passenger fees, potentially leading to unchecked cost inflation. Heathrow has signaled it could pull funding for the runway project if denied permission to raise fees, effectively halting capacity expansion plans.

The Civil Aviation Authority has shown some sympathy to IAG’s position but is reluctant to impose a flat cap on passenger charges set at the airlines’ preferred level. Instead, the CAA appears to favor allowing Heathrow to increase fees while introducing stricter controls such as new rules to mitigate cost overruns and requirements for competitive tendering in project procurement. This approach aims to balance financial viability and cost discipline.

IAG CEO Luis Gallego highlighted concerns that without reform, Heathrow’s expansion costs could potentially double from £49 billion to as much as £100 billion over the next 25 years. Such an outcome would drive passenger fees up to an estimated £50 per traveler, further exacerbating the affordability issue. Gallego emphasized the need for a cap on charges and increased competition to better serve passengers’ interests and keep costs manageable.

The regulatory review process by the CAA has recently reached a consultation milestone regarding the funding model for Heathrow’s expansion. An update on the outcome is expected by the end of the month, followed by continued work with a second update projected for autumn. However, the final decision on the precise funding framework remains pending, leaving the ultimate structure of passenger charges unresolved as the expansion project moves forward.

IAG’s intervention places pressure on the incoming UK Prime Minister to make a pivotal decision on Heathrow’s financial model for its biggest expansion in decades. The stakes involve balancing infrastructure growth, passenger affordability, and ensuring the airport remains a competitive European hub. The outcome will significantly influence the aviation landscape around London and the UK’s air transport capacity into the mid-21st century.