IN FULL: Extent of council's dependence on Luton Airport income laid bare in executive report

The council's net dividend and interest income from its airport company, London Luton Airport Ltd (LLAL), has increased significantly over the years - from £7.6m in 2012/13 to £33.5m in the original budget planned earlier this year.

This would have funded around 23% of Luton Borough Council's total expenditure on services, according to the executive committee report.

Due to the coronavirus pandemic, LLAL is unable to make dividend payments to the council for at least two years, and has developed a financial stabilisation plan.

An emergency budget approved by the borough council this month will result in 365 redundancies as part of attempts to plug a £22.2m budget gap.

But questions remain over other aspects of the council's financial relationship with the airport.

The contract between LLAL and its operating company - London Luton Airport Operating Limited (LLAOL) - includes clauses relating to ‘force majeure’.

These appear in many commercial contracts and relate to what happens when an event occurs outside the control of the parties, which prevents one of them fulfilling their obligations.

Exactly how each of these clauses will apply in the current circumstances “is now a subject of considerable legal interest and interpretation”, said the report.

“Now LLAL is receiving no concession-fee income, its financial position is completely different.

“The cash holdings of the company were used to fund capital expenditure, rather than being held as cash to back its reserves.

“The stabilisation of the company will require it to borrow £59.6m, as its reserves previously used to finance capital projects amounting to £16.9m are not cash-backed.

“It also needs to borrow to finance past and future borrowing costs capitalised on the direct air rail transport (DART) and (DCO) schemes amounting to £24.7m while the assets are in the course of construction.

“And there are extra costs for the DART project amounting to £18m.”

Senior councillors in the ruling Labour group have consistently said they were forced to rely on airport income due to the impact of years of austerity.

Liberal Democrat group leader councillor David Franks says the total amount that London Luton Airport Limited (LLAL) owes the council is in the region of £400m, with a further £83m loan proposed.

All that is a far cry from February, when a balanced budget was set by the local authority for 2020/21.

The council has been the airport company’s sole source of borrowing.

Debenture loans have been made on the basis the company should not seek any other source of funds, as the alternative lender would have a claim on some of LLAL’s assets in the event of a default, added the report.

“Therefore, a key factor in LLAL’s financial stabilisation plan is to request further borrowing from LBC.

“This report doesn’t request specific approval of any further loans to LLAL, although amounts of loan are included in the capital programme.

“It should be noted that when considering these requests, the executive will need to assess the robustness of LLAL’s financial stabilisation plan.

“It would also consider the potential further impact of the ‘force majeure’ clauses in the contract.

“If the council is unable to support the plan, then the gross income from LLAL included in the council’s budget, currently £43.7m for 2020/21, is at risk, and not just for the next few years.

“LLAL’s community funding programme would also be put at risk.”