26/08/2020 - London Luton Airport Ltd loan proposal
London Luton Airport has been vital to the town’s development and growth over recent years.
It has spared the town from would have otherwise been catastrophic service cuts during years of austerity when our funding from government has reduced from £120m to £10m.
This is because the council has a company called London Luton Airport Ltd (LLAL), which owns the airport, and due to the airport’s growth in recent years, the company has been able to pay millions of pounds to the council annually to fund vital services.
In addition to the money it provides to the council, LLAL provides millions of pounds of funding each year to community organisations to support people in need and also invests in future economic growth and job creation. Last year, after paying all operating costs, LLAL provided £29m to the council and £9.9m to charities and community groups.
The Covid-19 pandemic has had a major impact on the aviation industry which has led to a dramatic fall in LLAL’s income. However, local services, jobs and businesses still depend on LLAL’s success now and in the future.
LLAL requires a loan to ensure it can in the short-term continue to provide vital funding to the town while the aviation sector recovers. Many companies across the UK are having to borrow money due to the pandemic, including other publicly owned airports such as Manchester.
As LLAL is so important to our local economy and in providing vital public funds to support the most vulnerable people, the council is working with the company to get the town through this period.
Following a decision of the council’s executive on 14 September 2020, it will be borrowing £60m and then lending it to LLAL. This is because the council is able to borrow money at a cheaper rate of interest than LLAL can.
LLAL will repay interest on the loan to the council at a higher rate than what the council borrows it at. As a result, the council gets interest payments from LLAL which it can use to fund local services.
Without this loan, LLAL could possibly become insolvent and cease trading, meaning it would not be able make further dividend payments that the council can then use to fund services or make donations to local charities which support and help vulnerable people. At worst, the council could lose control of the airport, and the benefit of the income it generates, altogether.
You can listen to an interview with Luton Council’s portfolio holder for finance, Councillor Andy Malcolm, on BBC Three Counties Radio (timing from 2:09, 15 September 2020).
Questions and answers
As there has been media and social media commentary on this issue, we’ve prepared a questions and answers (Q&A) to set out the facts, correct some misinformation in circulation and hopefully help people better understand the situation ad proposal.
Now the loan has been approved, how much money will LLAL provide for the council next year?
Including the interest it needs to pay, LLAL would be able to provide £32m back to the council to support vital frontline services.
Instead of lending money to LLAL, why couldn’t the council borrow money to help protect services?
Government rules state that councils cannot use borrowing to fund services.
How can you be sure LLAL will be able to pay back the loan?
The fall in passenger numbers is an immediate but temporary response to the travel restrictions imposed through Covid-19.
National forecasts indicate three to four years for passenger numbers to be restored. During this period LLAL will make interest payments on the loan and will pay back the full amount at the end of the loan period.
Is the loan secured?
Yes, it is secured through a charge that becomes a fixed charge on LLAL’s capital assets. LLAL owns London Luton Airport, land around the airport including:
- the business park
- Century Park
- Stirling Place
- Luton DART
The value of these assets exceed LLAL’s borrowing.
Has the council borrowed money to lend to LLAL previously?
Yes. LLAL has borrowed money to invest in a range of developments which will see a return through future economic growth, jobs and prosperity. Just like with this loan, by the council borrowing on its behalf at a lower rate, it gets the additional benefit of interest payments which are used to fund services.
Has LLAL got any reserves or any other income it could have used instead?
LLAL has reserves but these have been used to cover its huge drop in income this year and to ensure the company has been able to continue to provide funding for important community projects which supported the most vulnerable people in our communities during the peak of the crisis.
Why don’t you sell the airport?
If the airport were to be sold neither the council nor the community and voluntary sector would continue to receive any of the annual revenue currently provided through our ownership of the airport.
It is expected this would lead to the most serious impact ever experienced on services across Luton. The council is also not able to use any proceeds from the disposal of the airport to fund services.
What would happen if the LLAL became insolvent or ceased trading?
The law requires that councils hold airport assets in arms-length companies so another company would need to be set up which would also need to be properly funded by the council. At worst, the council could lose control of the airport, and the benefit of the income it generates, altogether.
Could the airport operator be encouraged to increase its pricing, and in turn the income that LLAL and the council receive?
The income LLAL and in turn the council receive is linked to the number of passengers that use the airport and is not linked to pricing. The airport operator carefully considers their charges to airlines to make sure London Luton Airport remains competitive in relation to other airports in the UK market.
Could work on the Luton DART be stopped to save money?
Work on the DART is already at a very advanced stage and the project continues to provide quality jobs and training for a local workforce. We are also contractually committed to the project so it would not only be wasteful, it would cost additional money to stop it.
Misinformation and myth-busting
I have heard that as a result of the loan being approved, 2,000 low-income families in Luton will have to pay £200 a year more in council tax, and that 15 children’s centres would have to close?
This claim is absolutely incorrect. The loans would have no negative impact on council budgets or tax payers. Cuts to services have been forced upon the council because we have yet to receive bespoke support from government due to our loss of commercial income from the Covid-19 pandemic.
I have heard that loans from the council to LLAL are not secured?
This claim is incorrect. They are secured loans.
I have heard that Luton pays more council tax to fund the airport
This is not true. The income the council receives from the airport directly pays for services. Luton council’s tax rate remains the lowest in Bedfordshire.
How is Luton Council funded?
Thanks to successful activities over the last decade, commercial income now makes up a larger proportion of Luton Council’s revenue than council tax. Last year this amounted to 38 per cent, or £53m.
Council tax provides a smaller 36 per cent of income. Council tax is capped and the council cannot increase it any more. The council currently has the lowest council tax in Bedfordshire.
How much income does the council get from the airport?
Before Covid-19, LLAL had been able to pay an increasing revenue each year to fund services, rising from £7m in 2013 to £29m last year. Despite the Covid-19 pandemic the council will still receive £17m from LLAL this year to fund services.
Has the council been too reliant on the airport?
Since 2010, Government grant to Luton has gone from £120m to £10m. The council’s response to crippling years of austerity has been to create innovative income streams to decrease our reliance on government funding, including making best use of our biggest asset which is the airport. This enterprising approach is what has kept the town afloat during these years. Airport income amounts to about half of our commercial income.
Why are the council and LLAL continuing to invest in the airport when travel is likely to be curtailed for the foreseeable future?
Because we are focused on supporting and improving people’s lives, and driving economic and employment growth, we see it as vital that LLAL continues to plan for the future and that prudent investment in our stewardship of the airport can continue to benefit future generations. This will be essential for supporting the local, regional and national recovery that will need to take place after the pandemic.
Since 2013, LLAL’s ongoing investment in the airport has delivered a £21m yearly increase in revenue to the council and significantly offset the need for harder cuts to vital frontline services in Luton.
The law requires that councils hold airport assets in arms-length companies so another company would need to be set up which would also need to be properly funded, in terms of working capital, by its shareholder, the council. At worst, the council could lose control of the airport, and the benefit of the income it generates, altogether.
How much does LLAL currently owe the council?
As of 31 August 2020, LLAL owed the council £289m. By the end of the Medium Term Financial Plan (MTFP) this will be £388m, including approvals for DART of £225m and the stabilisation plan £60m. Pre-project borrowing (pre 2017) was £43m, DCO £50m, Bartlett £7m, K Block £3m. As LLAL is undertaking capital projects, the level indebtedness will rise until completion/entry into commercial service. Each borrowing, consistent with the MTFP, follows the council’s approval process.
If LLAL had to be wound up why would the council have to set up another airport company?
The Airports Act 1986 requires any local authority that owns and operates to transfer it to a private limited company. Any such company has to (i) comply with Companies Act 2006 and related legislation and (ii) the directors have to act independently in discharging their obligations and decision making. The shareholder has different rights and obligations.