CAA Issues Its Price Control Decisions For Heathrow And Gatwick Airports

Date: 11 March 2008

CAA ISSUES ITS PRICE CONTROL DECISIONS FOR HEATHROW AND GATWICK AIRPORTS

The Civil Aviation Authority (CAA) is today publishing its decisions for price controls for Heathrow and Gatwick airports for the five years from 1 April 2008 to 31 March 2013. The CAA’s package of price caps and incentives will enable and encourage BAA to deliver genuine service quality improvements and to invest to raise the level of facilities and service that can be delivered to passengers and airlines. The outcome for passengers should be decently modern airports and consistently high service standards.

The CAA has set the following maximum charges:

Heathrow
£12.80 per passenger in 2008/09, an increase of £2.44 on a like-for-like basis, representing a 23.5 per cent increase in real terms from the current (2007/08) price cap, with allowed charges subsequently increasing in each of the following four years by no more than retail price index (RPI) inflation plus 7.5 per cent each year.

Gatwick
£6.79 per passenger in 2008/09, an increase of £1.18 on a like-for-like basis, representing a 21.0 per cent increase in real terms from the current (2007/08) price cap, with allowed charges subsequently increasing in each of the following four years by no more than RPI inflation plus 2.0 per cent.

At both airports, the difference from the CAA’s November proposals is in the first year increase, which is £0.83 per passenger or 7 percentage points greater at Heathrow and £0.72 per passenger or 12 percentage points greater at Gatwick.

The main reasons for the differences since November are (i) additional investment, particularly at Heathrow, the need for which has largely been endorsed by the airlines operating at each airport; and (ii) additional security costs at both airports, but with greater impact at Gatwick, which, in the CAA’s view, are necessary both to reduce queues for passengers and to meet Department for Transport security requirements and the Government’s drive to restore more normal arrangements across the UK for passengers’ hand baggage. Otherwise, these decisions are aligned with the recommendations made by the Competition Commission, updated for subsequent airport-airline agreements, information received since the Commission completed its report, and the final round of consultation on the CAA’s November 2007 proposals.

The CAA recognises that the resulting increases in airport charges are significant. However, these higher airport charges are essentially paying for the modernisation of Heathrow and Gatwick, in terms of both facilities and service, for the direct benefit of the passenger. At Heathrow, this entails paying for the full capital and operating costs of Terminal 5 as it comes into service on 27 March 2008, the construction of the Heathrow East Terminal by 2013, and bringing the rest of the airport up to comparable modern standards. At Gatwick, the next quinquennium will see the construction of a major new pier, the redevelopment of the South Terminal check-in area and forecourt access, and a new baggage system.

In terms of service, the CAA’s decision provides for shorter security queuing times, enhanced levels of service across the airports (such as more reliable equipment and cleaner terminals), and greater and more immediate information to passengers from BAA (including displayed in the terminals themselves) of how it is performing against the standards it has been set.

It is important that airlines and passengers receive the services that they are paying for in airport charges. The CAA therefore confirms its earlier proposals for stronger incentives on each airport in the coming five-year period to deliver higher and consistent service quality and improved infrastructure.

These stronger financial incentives include:

Investment
A greater proportion of the investment programme at each airport will be subject to ‘triggers’, under which penalty payments are incurred each month for late delivery of specified outputs from projects. The CAA has decided to set triggers covering over 60 per cent of Heathrow’s and Gatwick’s respective capital programmes for Q5, under which around 5 and 4 per cent respectively of airport charge revenue would be at risk during Q5 in the event that these projects were not delivered on time.

Service quality
A broader range of services will be subject to financial incentives, with enhanced targets most notably for passenger security processing, which should deliver a quicker and more reliable experience for passengers – queues less than 5 minutes for 95 per cent of the whole day. The CAA proposes to increase the maximum level of rebates for poor service performance from 3 to 7 per cent of total airport charge revenue (up to around £63 million at Heathrow in 2008/09, and £17 million at Gatwick). The CAA has also introduced bonuses for performance above target, to promote continuous improvement in service beyond the enhanced minimum standards set by the CAA. These bonuses can be up to 2¼ per cent of airport charge revenue for passenger service performance above targets, delivered consistently across all terminals (up to around £20 million at Heathrow in 2008/09, and £5 million at Gatwick).

The CAA has maintained its earlier proposals for the price caps to be based on a pre-tax real weighted average cost of capital of 6.2 per cent at Heathrow and 6.5 per cent at Gatwick as recommended by the Competition Commission. Before doing so, the CAA has analysed recent turbulence in the financial markets, but found that while there had been movement in some individual components of the cost of capital, overall the Competition Commission’s recommendations remained valid.

Commenting on these decisions, which are informed by the recommendations of the Competition Commission and build on agreements reached between the airports and airlines, as well as over two and half years of consultation, Dr Harry Bush, CAA Group Director, Economic Regulation, said:
“These decisions build on the enduring themes of the CAA’s previous regulatory proposals in this review. Passengers and airlines deserve better than they have been provided with at Heathrow and Gatwick in recent years. However, the resulting improvements in airport facilities and service standards - some £5 billion of investment over the next 5 years and a halving of security queuing times - have to be paid for in increased charges.

“But airlines and passengers need to be sure that they are getting the enhanced facilities and services that they are paying for. Hence, the CAA’s emphasis on greater financial incentives – with BAA being penalised a lot more if it fails service standards and earning bonuses if it exceeds them (but only if passengers in every terminal benefit).

“The price caps have been carefully based on investment programmes emerging from airport–airline discussions and also on a shared airline-airport desire to improve quality of service, in particular for passengers at security. The CAA hopes that the constructive engagement between airports and airlines that underlies much of this pricing decision will continue in the future to the benefit of their shared customers.”

The CAA’s price control decision documents is available here:
www.caa.co.uk/docs/5/ergdocs/heathrowgatwickdecision_mar08.pdf

The CAA’s November 2007 proposals document is available here:
www.caa.co.uk/docs/5/ergdocs/priceproposals_nov07.pdf

The Competition Commission’s report is available here:
www.caa.co.uk/default.aspx?catid=5&pagetype=90&pageid=8779

For further media information telephone Chris Mason on 020 7453 6026.

Notes to Editors

1. All figures are in 2007/08 prices, unless otherwise stated.

2. The CAA’s decisions have been made following publication of its 20 November 2007 proposals and a subsequent final round of consultation. This concluded formally on 21 January 2008, and was followed by oral hearings on 28/29 January 2008. The CAA also extended its deadline for final written submissions to 31 January 2008, reflecting the extent of the additional evidence which was then being generated through consultation.

3. The CAA’s like-for-like comparison reflects the fact that from 2008/09 airport charges will remunerate a broader range of services and facilities than at present (notably airport air navigation services and the infrastructure costs of baggage systems) and that these other charges on airlines will cease from 2008/09. Adjusting the 2007/08 price caps upwards for these additional costs provides a better comparison of the net price impact on airlines and passengers of the CAA’s proposals.

4. The Competition Commission issued its full report to the CAA on 28 September 2007, following its six-month inquiry, which was initiated by the CAA’s mandatory price control reference on 30 March 2007. The CAA published the Commission’s report, excised of commercially confidential information, on 3 October 2007.

5. The Commission recommended that maximum airport charges at Heathrow rise to £10.96 in 2008/09, with charges subsequently increasing by no more than retail price index (RPI) inflation plus 7.5 per cent each year. For Gatwick, the Commission recommended maximum airport charges rise to £5.48 in 2008/09, with charges subsequently increasing annually by no more than RPI inflation minus 0.5 per cent.
Comparison of CAA decisions (March 2008), CAA proposals (November 2007) and Competition Commission recommendations (September 2007)

6. As part of the price control decision, the CAA is providing for contingent funding within the airport charge caps for the currently estimated costs of developing further proposals for the expansion of capacity at Heathrow (through a third runway and mixed mode), with safeguards to ensure that users ultimately pay only the necessary and efficient costs of any such development in the coming five-year period. This economic regulation decision on maximum charges in Q5 is separate from, and does not prejudge, the outcome of the Government’s own recent public consultation and forthcoming decisions on a possible third runway and mixed mode operations at Heathrow Airport.

7. With regard to security costs, the CAA has provided adequate resources within its price caps for each airport to deliver current security requirements, set by the Department of Transport, and higher service standards, set by the CAA. The DfT in January 2008 allowed Heathrow Airport to return to the previous regime whereby passengers are allowed more than one item of hand baggage, subject to their own airlines’ policies. The price cap provides adequate resources for Gatwick Airport to do so as well, subject to DfT’s decision.

8. The Competition Commission’s price control inquiry (under the Airports Act 1986) is separate from its continuing market investigation into BAA’s airports (under the Enterprise Act 2002). The Commission is required to report by the end of March 2009, but aims to do so earlier – any enquiries regarding this investigation should be addressed directly to the Competition Commission itself.

9. Two other UK airports are currently subject to price control by the CAA: Manchester and Stansted. The price controls currently applying at these airports have been extended by 12 months to run until end March 2009. Following a policy review in 2007, the Government announced on 15 January 2008 that Manchester Airport would be de-designated from price control at the end of the current price control period, i.e. from April 2009 onwards. The Government also decided that Stansted Airport should remain designated for price control. As a result, the CAA issued its consultation on options for price control of Stansted Airport on 25 January 2008. It intends to make a price control reference to the Competition Commission of Stansted Airport by the end of April 2008, informed by responses to its January consultation paper and further analysis and evidence gathering.