hEATHROW'S THREE-PHASE PLAN

The COVID-19 outbreak continues to represent a seismic challenge for the aviation industry, including Heathrow. In response to the crisis, we have put together a three-phase plan.

Protecting our business

Safety and security ​remain our first and non-negotiable priority. We have reviewed the entire Heathrow airport experience to ensure that our passengers and colleagues are kept safe. We have added safety measures across the passenger journey following close collaboration with Public Health England and best practice.

COVID-19 continues to have a significant impact on our financial performance. Following the rapid actions management had taken to protect the financial resilience of the business, we have now realised over £200 million of our minimum £300 million operating cost savings target, and we remain on track to deliver this target by the end of the year. However, with a recovery now expected to be much more gradual and take longer to gather pace than previously expected, we must go further and ensure that the business is able to continue successfully navigating the turbulent years ahead. The lack of Government support to waive business rates, in contrast to other industries and airports outside England, puts increased pressure on the business to reduce costs that we can control. Unfortunately, that means that we must now look at reducing colleague costs. Our first priority has always been to protect as many frontline jobs as possible. Following discussions with our union partners over a series of months, we are able to offer a job at market-rate salaries above the London Living Wage for every frontline colleague that wants to remain with the business. We are naturally disappointed that our unions have recommended a rejection of the offer and that Unite is currently balloting their members for industrial action. In the event of a vote for industrial action, we will activate robust contingency plans that will ensure Heathrow remains open and operating safely throughout any coordinated action.

In October we took the prudent and proactive step to raise an additional £1.4 billion in the global bond markets. This debt financing strengthens our liquidity position and completes our 2021 funding programme. In addition, we also signed a new £750 million facility at ADI Finance 2 with net proceeds to be injected into the Heathrow Finance Group to help to provide further headroom to our group gearing covenant level.

With regards to our operations we now have over 80%   of incumbent airlines flying,   5 new airlines and 2 more due to join us by the end of the year. We have been working closely with our airline partners to encourage hand backs of unused slots as a result of the suspension of the slot usage rule, and that has allowed us to bring in those new entrants.   On the retail side, we now have around 77%   of outlets open across Terminals 2 and 5. We have expressed our concerns at the Treasury's announcement of scrapping tax-free shopping for international tourists. The decision will leave Britain as the only country in Europe without a tax-free shopping scheme for international visitors, undermining the UK's competitiveness as an international shopping destination.

Winning the recovery

Creating an environment where passengers feel safe and confident to fly is fundamental to winning the recovery. In August our colleagues stepped up and took part in trialling three rapid point of care testing solutions. The trials aim to understand how these tests might be quickly conducted outside of a laboratory. Findings have been shared with Government. They will complement the Government's own learnings about the usability of rapid point of care tests and will strengthen the research being in this area by trialling alternative suppliers. These testing trials are in addition to our proposed testing facility in partnership with Collinson and Swissport, which stands ready and is awaiting a Government green light.

We welcome the newly created Government's Global Travel Taskforce and its commitment to implement a testing regime by 1^st December 2020. This taskforce will consider how testing could be introduced to safely reduce the length of quarantine, for instance by implementing "test and release" after 5 days of quarantine. Whilst this is a step in the right direction, travellers needed a firm commitment that a testing regime would be introduced in the near future. The UK's hub airport is no longer the busiest airports in Europe, competitors such as Charles de Gaulle have exceeded us in terms of passenger numbers as they benefit from a testing regime. Without a rapid move to testing, the UK will fall even further behind its European competitors and the economic recovery will fail to get off the ground.

Building back better

Climate change remains the single greatest challenge facing society and our industry over the medium to long term. Climate change has remained a live debate during the crisis and a clean and resilient recovery will be required so that as an industry we can build back better. Our focus remains on taking the lead in getting the aviation industry to net zero-carbon by 2050. We welcome the Government's announcement of aligning aviation within the UK's target net zero carbon emissions by 2050 and we also welcome oneworld member airlines committing to the same goal. Around 20 of the 90 airlines that operate at Heathrow representing around 70% of air transport movements have committed to achieving net zero carbon emissions by 2050 or are already carbon neutral for some of their flight operations.

COVID-19 has highlighted the level of demand risk to which Heathrow is exposed in contrast to regulated entities in other sectors. In its Q6 settlement, the CAA acknowledged that through Section 22 of the Civil Aviation Act 2012 (CAA12)  Heathrow could request that its price control be reopened at any time during the regulatory period if Heathrow was impacted by an extreme event before the end of the settlement. The CAA confirmed it would assess any request on its merits at the time it was submitted. In recognition of the extreme nature of the COVID-19 impact. Heathrow has requested that the CAA reopen the current price control and has proposed a mechanism under which the CAA would adjust the Regulatory Asset Base ('RAB') to allow Heathrow to recover excess losses incurred during 2020-2021 over an extended period of time. This would ensure that Heathrow could continue to operate in the interests of consumers while smoothing the impact of this change on passengers over future years. In October, the CAA responded with a consultation document asking for more evidence that regulatory action is needed urgently and ahead of the H7 price control. We are extremely disappointed with this consultation and believe that a further delay in implementing the review of whether the Licence should be reopened, would have a materially adverse impact on consumers. It risks further job losses at Heathrow and will make future improvements for passengers much more expensive. We intend to respond robustly to the CAA with the required evidence.  

Strategic priorities

While we navigate the COVID-19 crisis, our strategic priorities remain:

-  Mojo:   protecting our colleagues and talent;

-  Transforming customer service:   protecting our service and reputation;

-  Beating the plan:   protecting long-term value to ensure we are viable, financeable and competitive;

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

The following performance metrics were set for each of the four strategic priorities prior to the COVID-19 outbreak and provide a picture for the 9 months ended 30 September 2020. As Heathrow adapts to these circumstances, we will look to update them. All indicator definitions are available in the glossary section of this report.

MOJO

Mojo performance indicators (1)	2019	2020
Colleague promotions	174	106
Managerial training	1,069	348
Lost time injuries	0.40	0.14

(1)  For the 9 months ended 30 September

TRANSFORM CUSTOMER SERVICE

Service standard performance indicators (1)	2019	2020
ASQ	4.16	--- (2)
Experience as "excellent" or "very good" %	82.0	--- (2)
Baggage connection %	99.0	99.2
Departure punctuality %	80.4	87.3
Security queuing %	96.4	95.3
Connections satisfaction	4.14	--- (2)

(1)  For the 9 months ended 30 September

(2)  Passenger satisfaction and research has been temporarily suspended

BEAT THE PLAN

Passenger traffic

(Millions) (1)	2019	2020	Var % (2)
UK	3.6	1.2	(66.7)
Europe	25.1	8.4	(66.6)
North America	14.2	3.6	(74.9)
Asia Pacific	8.6	2.5	(70.6)
Middle East	5.8	2.0	(64.9)
Africa	2.6	0.9	(65.4)
Latin America	1.1	0.4	(66.5)
Total passengers	61.0	19.0	(68.9)

(1)  For the 9 months ended 30 September

(2)  Calculated using unrounded passenger figures

Other traffic performance indicators (1)	2019	2020	Var % (2)
Passenger ATM	356,317	143,252	(59.8)
Load factors (%)	80.2	61.5	(23.3)
Seats per ATM	213.2	215.2	1.0
Cargo tonnage ('000)	1,189	811.8	(31.7)

(1)  For the 9 months ended 30 September

(2)  Calculated using unrounded passenger figures

SUSTAINABLE GROWTH

Climate change remains the single greatest challenge facing society and our industry over the medium to long term. Our challenge is to protect the benefits of aviation in a world without carbon. That means the aviation industry around the world needs to "build back better" from the COVID-19 crisis - recovering in a way that sets us firmly on a path to net zero. The last quarter has seen increasing Government and corporate commitment to action. The oneworld alliance of airlines has committed to net zero by 2050. At a UK level, we welcome the Government's recognition that there is a need to accelerate action to decarbonise aviation. We look forward to contributing to the Government's 'Jet Zero Council', which held its first meeting in July, bringing together aviation, Government and environmental leaders to drive action on sustainable fuel and future zero emission technology.

Over the next decade, lower carbon sustainable aviation fuel ('SAF') represents the best way to accelerate a reduction in carbon. SAF can be utilised by existing aircraft without waiting for a 25-year replacement cycle. The challenge is an economic one - the small volumes of SAF currently produced are expensive. A Government package of supply side regulations, demand incentives and financial support is needed, pursued with urgency and purpose.

The two key steps we are advocating for in the UK are a fuel blending mandate to drive supply, and a restructuring of Air Passenger Duty ('APD') to cut the price of SAF for airlines who use it. These asks build on those of UK air industry coalition, Sustainable Aviation, which is also calling for loan guarantees from Government, matched by private investment, to open the first two to three UK plants by 2025. Through the global "Clean Skies for Tomorrow Coalition" run by the World Economic Forum, we are advocating for a similar package of measures in the UK and globally and building support for ICAO to set a net-zero goal at its next Assembly.

Key regulatory developments

COVID-19 related RAB adjustment:

In October the CAA published its latest consultation document responding to our request to adjust the RAB to recover excess losses expected to be incurred as a result of the COVID-19 crisis. The CAA have requested further evidence that regulatory action is needed urgently ahead of the H7 regulatory reset in 2022. We intend to respond robustly to the CAA with the required evidence.

Regulatory timetable:

We will be submitting our revised business plan ('RBP') in the coming months, which the CAA will then use to form their proposals for setting the H7 price control. We expect the CAA to publish initial proposals in Summer 2021.

Expansion developments

In early October we proceeded with the hearing of our appeal at the Supreme court. There is no fixed timetable for a court judgement to be issued but we currently expect that this will happen in early 2021.

Brexit

The Brexit transition period is due to end on 31 December, at which point the UK would enact a new Trade Agreement with the EU or engage on WTO terms from 1st January 2021. As it stands, talks on the Future Trade Deal are ongoing.

From an aviation perspective, the UK and EU continue to negotiate a Comprehensive Air Transport Agreement (CATA), with both parties publicly stating that aviation is a priority in talks and committing to ensuring future air connectivity. Air Service Agreements are also being renegotiated with key countries that were previously covered by EU membership, with the USA, Canada and Japan already negotiated.

If the UK were to leave the EU without a deal, the UK has said it is working to draw up a bare-bones aviation contingency agreement to ensure planes will continue to fly on 1 January 2021. Heathrow continues to work with Government and internally on our contingency plans and the preparations needed for EU Exit.

Financial Review

Basis of presentation of financial results

Heathrow (SP) Limited ('Heathrow SP') is the holding company of a group of companies (the 'Group'), which includes Heathrow Airport Limited ('HAL') which owns and operates Heathrow airport, and Heathrow Express Operating Company Limited ('Hex Opco') which operates the Heathrow Express rail service. Heathrow SP's consolidated accounts are prepared under International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB') and as adopted by the European Union ('EU').

The directors have prepared the financial information presented within this trading update for Heathrow SP on a going concern basis as they have a reasonable expectation that the entity has adequate resources to continue in operational existence for the foreseeable future.

The wider Heathrow Group can raise finance at both Heathrow SP and Heathrow Finance Plc ('Heathrow Finance'). Whilst Heathrow SP operates as an independent securitised group, the directors have considered the wider group when assessing going concern. In assessing the going concern position the directors have considered the potential impact of COVID-19 on cash flow and liquidity over the next 12 months and the corresponding impact on the covenants associated with financing arrangements. The directors have also considered the period beyond 12 months to December 2021.

The directors have modelled future cashflows to include the impact of COVID-19 related disruption and have considered the following:

‒ forecast revenue and operating cash flows from the underlying operations,

‒ forecast level of capital expenditure, and

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

In modelling the impact of COVID-19 on passenger numbers there is a significant degree of uncertainty given the evolving current environment and the wide range of potential forecasts being formed by various stakeholders in the global aviation industry. This element of our forecasting is therefore inherently subjective.

Management use Alternative Performance Measures ('APMs') to monitor performance of the segments as it believes this more appropriately reflects the underlying financial performance of the Group's operations. These remain consistent with those included and defined in the Annual Report and Accounts for the year ended 31 December 2019.

The Group has separately presented certain items on the income statement as exceptional as it believes it assists investors to understand underlying performance and aids comparability of the Group's result between periods. The exceptional items are material items of expense that are considered to merit separate presentation because of their size or incidence. They are not expected to be incurred on a recurring basis.

Revenue

In the 9 months ended 30 September 2020, revenue declined 58.7% to £951 million (2019: £2,302 million). Revenue declined by 71.6% during the third quarter alone compared to the same period last year.

9 months ended 30 September	2019 £m	2020 £m	Var. %
Aeronautical	1,379	530	(61.6)
Retail	536	197	(63.2)
Other	387	224	(42.1)
Total revenue	2,302	951	(58.7)

 

Aeronautical revenue declined by 61.6%. Aeronautical revenue per passenger increased 23.5% to £27.93 (2019: £22.62). The decline in aeronautical revenue is predominantly due to reduced passenger numbers. Fewer aircraft movements also drove revenue down. Revenue per passenger is largely distorted due to the reduced passenger numbers and an increase in cargo movements which are charged on a per movement basis.

9 months ended 30 September	2019 £m	2020 £m	Var. %
Retail concessions	252	84	(66.7)
Catering	48	16	(66.7)
Other retail	84	37	(56.0)
Car parking	93	34	(63.4)
Other services	59	26	(55.9)
Total retail revenue	536	197	(63.2)

 

Retail revenue declined by 63.2% driven by reduced passenger numbers. Retail revenue per passenger increased 18.1% to £10.38 (2019: £8.79). Retail income per passenger is largely distorted due to the reduced passenger numbers.

9 months ended 30 September	2019 £m	2020 £m	Var. %
Other regulated charges	181	99	(45.3)
Heathrow Express	87	23	(73.6)
Property and other	119	102	(14.3)
Total other revenue	387	224	(42.1)

 

Other revenue decreased by 42.1%. Other regulated charges declined 45.3% predominantly as a result of fewer passengers and aircraft movements impacting the ability to recover running costs. Heathrow Express saw a 73.6 % decline in revenue due to fewer passengers. Property and other revenue decreased 14.3% driven by targeted rent support as a result of terminal consolidation.

Adjusted operating costs

Adjusted operating costs decreased 17.9% to £692 million (2019: £843 million). Adjusted operating costs per passenger increased by 163.7% to £36.47 (2019: £13.83). Operating costs were down 30.1% during the third quarter alone compared to the same period last year .

9 months ended 30 September	2019 £m	2020 £m	Var. %
Employment	278	212	(23.7)
Operational	204	170	(16.7)
Maintenance	132	104	(21.2)
Rates	88	88	0.0
Utilities and Other	141	118	(16.3)
Adjusted operating costs	843	692	(17.9)

 

The reduction in operating costs reflect the £200 million of savings realised through management initiatives. These initiatives were largely implemented across April and May while their effect will continue compounding until the end of the year.   This was partially offset by increased business resilience costs and a provision for expected credit loss on debtors increasing to £21 million or £1 million higher than reported as at June 2020. Operating costs per passenger are largely distorted due to the reduced passenger numbers and the fixed nature of our cost base in the medium term.

Operating profit / (loss) and Adjusted EBITDA

In the 9 months ended 30   September 2020, the Group recorded an operating loss of £746 million (2019: operating profit of £869 million). In addition to lower revenue, the loss was driven by a reduction in the non-cash fair value of our investment properties of £278 million and exceptional items of £188 million.

Adjusted EBITDA decreased 82.2% to   £259 million (2019: £1,459 million), resulting in an Adjusted EBITDA margin of 27.2% (2019: 63.4%).

9 months ended 30 September	2019 £m	2020 £m
Operating profit/ (loss)	869	(746)
Depreciation and amortisation	585	539
EBITDA	1,454	(207)
Exceptional items(1)	-	188
Excl. Fair value loss on investment properties	5	278
Adjusted EBITDA	1,459	259

(1)  Please see exceptional items section for further information.

Exceptional items

In the 9 months ended 3 0 September 2020, there was an exceptional charge of £188 million (2019: nil) to the income statement.

9 months ended 30 September	2019 £m	2020 £m
Business transformation	-	(103)
Asset impairment and write-off	-	(85)
Exceptional pre-tax charge	-	(188)

 

As a consequence of the impact of the COVID-19 outbreak and the delay to Expansion (following the Court of Appeal's ruling to suspend the Airports National Policy Statement), the Group has carried out a detailed review of its organisational design to simplify operations and reduce costs. As a result, in the 9 months to 30 September 2020 the Group has incurred
£103 million of exceptional costs relating to this transformation programme. The Group has also reviewed their asset portfolio, notably assets under construction. Certain projects have been placed on hold while some projects are unlikely to be re-started in the foreseeable future. This resulted in an exceptional write-off of previously capitalised costs of £85 million in the period. This cost includes £10 million of spend related to expansion, where costs already capitalised will require re-work as a result of the estimated delay of at least two years. These costs remain on the RAB and continue to generate a return.  

Loss after tax

In the 9 months ended 3 0 September 2020, the Group recorded an operating loss before tax of £746 million (2019: operating profit of £869 million) and a loss after tax of £1,376 million (2019: £91 million loss).

9 months ended 30 September	2019 £m	2020 £m
Operating profit / (loss)	869	(746)
Net finance cost before certain remeasurements	(577)	(506)
Fair value loss on financial instruments	(368)	(265)
Loss before tax	(76)	(1,517)
Taxation (charge) / credit	(15)	141
Loss after tax	(91)	(1,376)

Net finance cost before certain re-measurements was £506 million (2019: £577 million) due to the   RPI growth rate for the annualised 12-month period to September 2020 falling to 1.6%, down from 2.8% in the same prior period   as the global economic crisis continues due to the COVID-19 pandemic.

Fair value losses on financial instruments decreased to £265 million (2019: 368 million) as a result of lower than expected growth in the 1-20 year RPI curve, and an average downward shift of the 6-month LIBOR curve.

Taxation

The tax credit for the 9-month period ended 30 September 2020, before certain re-measurements and exceptional items, was £132 million (2019: £78 million charge), at 16.8% (9 months ended 30 September 2019: 26.3%). This represents the best estimate of the annual effective tax rate expected for the full year, applied to the pre-tax loss of the 9-month period, before certain re-measurements and exceptional items. The effective tax rate being lower (2019: higher) than the statutory rate of 19% (2019: 19%) is primarily due to non-deductible expenses reducing the tax credit for the year (2019: non-deductible expenses increasing the tax charge for the year). The total tax credit for the 9-month period ended 30 September 2020 is £141 million (9 months ended 30 September 2019: £15 million tax charge).

For the period, the Group was refunded £67 million (9 months ended 30 September 2019: paid £70 million) in corporation tax from HMRC.

Cash position

In the 9 months ended 30 September 2020, there was a decrease of £652 million in cash and cash equivalents compared with an increase of £100 million in the 9 months ended 30 September 2019.

At 30 September 2020   the Group had £2,028 million (31 December 2019: £1,540 million) of cash and cash equivalents and term deposits, of which cash and cash equivalents were £163 million (31 December 2019: £815 million).

We have further strengthened our cash management controls given our significantly increased cash position. These controls include enhanced monitoring across our commercial partners and further diversification of our bank counterparties with whom we have cash deposits.

Cash generated from operations

In the 9 months ended 30 September 2020, cash generated from operations   decreased 85.3% to £215 million (2019: £1,463 million). The following table reconciles Adjusted EBITDA to cash generated from operations.

9 months ended 30 September	2019 £m	2020 £m
Cash generated from operations	1,463	215
Exclude:
Decrease in inventories and trade and other receivables(1)	(53)	(79)
Decrease in payables	27	24
Decrease in provisions	4	5
Difference between pension charge and cash contributions	18	14
Cash payments in respect of exceptional items	-	80
Adjusted EBITDA	1,459	259

(1)  Includes movement in Group deposits

Capital expenditure

Total capital expenditure in the first 9 months of 2020 was £370 million (2019: £649 million).

We invested £304 million (2019: £489 million) in a variety of programmes to ensure the safety and resilience of the airport. We also invested £66 million in the period (2019: £160 million) on plans to expand the airport mostly before the Court of Appeal's judgement was announced, and the subsequent wind-down of the project.

Investment has focused on Hold Baggage Screening (HBS) upgrade works, main tunnel works, design for cargo tunnel refurbishment to ensure fire safety standards are maintained and renewal of assets that have come to the end of their economic life.

Expansion-related capital expenditure included Category B costs associated with the consent process and early Category C costs predominantly relating to early design costs. Since 2016, Heathrow has invested £380 million in Category B costs and £127 million in Category C costs, a total of £507 million (before capitalised interest and after £10m of re-work impairment) is carried in our balance sheet as assets in the course of construction.

Restricted payments

The financing arrangements of the Group and Heathrow Finance plc ("Heathrow Finance") restrict certain payments unless specified conditions are satisfied. These restricted payments include, among other things, payments of dividends, distributions and other returns on share capital, any redemptions or repurchases of share capital, and payments of fees, interest or principal on any intercompany loans.

In the 9 months ended 30 September 2020, total restricted payments paid by Heathrow SP amounted to £27 million (net) or £107 million (gross) excluding cash pushed down from Heathrow Finance.

Net restricted payments included:

‒ £107 million (2019: £295 million) payment made by Heathrow SP to Heathrow Finance to primarily fund the £100 million (2019: £300   million) dividends paid to ultimate shareholders. This payment was made in February reflecting cumulative outperformance and before the significant impacts of COVID-19 on our industry were clear or anticipated,

‒ a net cash inflow of £80 million from Heathrow Finance to Heathrow SP (2019: net cash outflow of £277 million from Heathrow SP to Heathrow Finance).

For the remainder of 2020, no further restricted payments are to be made of out of the Group as a result of the trigger event that occurred in relation to the forecast ICR for Class A and Class B debt for the year ending 31 December 2020. In effect, this means that cash is trapped within the Group and cannot be distributed to Heathrow Finance to service debt, nor to pay dividends to ultimate shareholders.

RECENT FINANCING ACTIVITY

In the first 9 months of 2020 we have raised £130 million of new debt. This funding complements our robust liquidity position and provides additional duration and diversification to our £15 billion debt portfolio. 2020 funding activities have comprised £80 million in Class A debt and £50 million of Heathrow Finance debt.   We also drew £2,091 million of debt signed prior to the reporting period.

Debt drawn signed prior to the reporting include:

‒ £900 million Class A revolving credit and working capital facilities,

‒ £250 million Class B revolving credit facilities,

‒ £381 million Class B delayed drawdown bonds closed in March 2020,

‒ £75 million Class B term debt maturing in 2035, and

‒ £485 million of Heathrow Finance facilities with maturities ranging between 2026 and 2029.

In addition, we repaid a £400m Class B bond and made   £4m of scheduled repayments on the EIB loan. £22.5m of undrawn Heathrow Finance debt was also cancelled.

After the reporting period end, we accessed the Euro, Sterling and Canadian dollar bond markets raising £1.4 billion Sterling equivalent via three transactions. These transactions further strengthen our strong liquidity position and complete our funding plan set out in the June Investor Report.  

In addition, we signed a new £750 million facility at ADI Finance 2 to be drawn in December with net proceeds to be injected into the Heathrow Finance Group to provide further headroom to the Group.

Lastly, we have restructured a proportion of existing and completed a series of new interest rate swap transactions. These actions help reduce interest payments over the next two years. This prudent step will contribute to creating more headroom to covenant levels in the short run as traffic recovers.

FINANCING POSITION

Debt and liquidity at Heathrow (SP) Limited

At 30 September 2020, Heathrow SP's consolidated nominal net debt was £13,082 million (31 December 2019:
£12,412 million). It comprised £12,148 million in bond issues, £1,606   million in other term debt, £201 million in index-linked derivative accretion, £1,150 million in revolving credit and working capital facilities and £5 million of additional lease liabilities post transition to IFRS 16. This was offset by £2,028 million in cash and cash equivalents and term deposits. Nominal net debt comprised £11,415 million in senior net debt and £1,667 million in junior debt.

The average cost of Heathrow SP's nominal gross debt at 30 September 2020 was 2.55% (31 December 2019: 3.41%). This includes interest rate, cross-currency and index-linked hedge costs and excludes index-linked accretion. Including index-linked accretion, Heathrow SP's average cost of debt at 30 September 2020 was 3.40% (31 December 2019: 4.75%). The reduction in the average cost of debt since the end of 2019 is mainly due to recent financing activities at a lower cost.

The average life of Heathrow SP's gross debt as at 30 September   2020 was 10.5 years (31 December 2019: 11.5 years).

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

The accounting value of Heathrow SP's net debt was £13,868   million at 30 September 2020 (31 December 2019: £12,684 million). This includes £2,028 million of cash and cash equivalents and term deposits, and £362 million lease liabilities as reflected in the statement of financial position and excludes accrued interest.

We have sufficient liquidity to meet all our forecast needs for at least 12 months under the extreme stress-test scenario of no revenue, or into 2023 under our traffic forecast. This includes forecast operational costs and capital investment, debt service costs, debt maturities and repayments. This liquidity position takes into account £2.4 billion in cash resources as well as undrawn debt and liquidity at Heathrow Finance plc as at 30 September 2020 as well as funding raised after the reporting period end.

Debt at Heathrow Finance plc

The consolidated nominal net debt of Heathrow Finance increased to £15,199 million (31 December 2019 :
£14,361 million). This comprised Heathrow SP's £13,082 million nominal net debt, Heathrow Finance's nominal gross debt of £2,514 million and cash and term deposits held at Heathrow Finance of £397 million .

Financial ratios

At 30 September 2020, Heathrow SP continues to operate comfortably within required financial ratios. Heathrow Finance's gearing ratio remained within required default covenant level although headroom has reduced significantly. Gearing ratios are calculated by dividing consolidated nominal net debt by Heathrow's Regulatory Asset Base ('RAB').

At 30 September 2020, Heathrow's RAB was £16,472 million (31 December 2019: £16,598 million). Heathrow SP's senior (Class A) and junior (Class B) gearing ratios were 69.3% and 79.4% respectively (31 December 2019: 66.6% and 74.8% respectively) with respective trigger levels of 72.5% and 85%. Heathrow Finance's gearing ratio was 92.3% (31 December 2019: 86.5%) with a covenant of 95.0%.

As a result of the forecasting and trigger event that had occurred in relation to the forecast Interest Cover Ratios ('ICRs') for Class A and Class B debt for the financial year ending 31 December 2020, a distribution lock-up continues to remain in place within Heathrow SP and will have no adverse effect on Heathrow SP's creditors.  

PENSION SCHEME

We operate a defined benefit pension scheme (the BAA Pension Scheme) which closed to new members in June 2008. At 30 September   2020, the defined benefit pension scheme, as measured under IAS 19, was funded at 98.9%
(31 December 2019: 100.8%). This translated into a deficit of £50 million (31 December 2019: £33 million surplus). The
£83 million increase in the deficit in the 9 months is due to actuarial losses of £97 million, attributable to a decrease in the net discount rate of 0.5% offset by contributions in excess of current service cost of £14 million. In the 9 months ended
30 September 2020, we contributed £32 million (2019: £37 million) into the defined benefit pension scheme including £15 million (2019: £17 million) in deficit repair contributions. Management believes that the scheme has no significant plan-specific or concentration risks.

KEY MANAGEMENT CHANGES

There have been no key management changes since the last results announcement.

OUTLOOK

Given our recent traffic outturn, UK Government quarantine policy, emergence of a second wave and slow progress on testing regime, we have revised our traffic outlook downward compared to our June investor report.

We anticipate traffic to decline by an additional 6.6 million to 22.6 million passengers against our previous guidance in June, with Adjusted EBITDA underperforming our June Investor Report by around £70 million to c.£290 million. We are also expecting a larger deterioration in traffic for 2021 with passenger volumes declining 54% versus 2019 to 37.1 million passengers. Given the progress made in our business protection plan around cost savings, swaps reprofiling to save interest costs over the next few years, capital injection into the Heathrow Finance group and additional costs reductions under consideration, our forecast assumes no covenant breaches to occur in 2021.

Full financial forecasts will be provided in our December investor report.