CAA confirms Stansted Airport will have to pay back up to £10 million if it delivers poor service

Date: 13 March 2009

CAA CONFIRMS STANSTED AIRPORT WILL HAVE TO PAY BACK UP TO £10 MILLION IF IT DELIVERS POOR SERVICE

· The Civil Aviation Authority confirms that up to £10 million per year of Stansted Airport’s revenue will be at risk under an incentive scheme to encourage better services for passengers and airlines
· The CAA’s price control decisions, based on the total revenue recommended by the Competition Commission, remain unchanged from CAA December proposals
· Price control will support competition between Stansted and other airports for the benefit of passengers and airlines

Stansted Airport could be obliged to pay back up to £10 million in charges if the operator provides poor service to passengers and airlines, following the CAA’s (CAA) decision on the economic regulation of the airport for the five-year period April 2009 to March 2014, which was announced today.

Under the incentive regime, poor standards of service for passengers for security queues, baggage systems, terminal facilities or for services delivered directly to airlines could put at risk up to £10 million, equivalent to seven per cent of Stansted’s airport charges from passenger flights. A similar scheme at Heathrow and Gatwick has seen BAA paying out nearly £9 million in rebate payments across both airports to airlines so far in 2008/09.

The CAA’s price control decision maintains the price caps the CAA put forward in December, which are lower than those recommended by the Competition Commission to reflect an adjustment to take account of airport revenues from cargo and other non-passenger flights.

The price caps will remain flat at £6.53 per passenger for the first two years and will then rise to £6.85 (2009/10 prices) by 2013/14, consistent with annual increases of RPI +1.63 per cent for the final three years of the control. The price caps will rise in the last three years of the price control to ensure that regulation supports the development of competition, whilst also enabling Stansted and other competing airports to bring forward efficient plans for expansion to meet demand from their users.

The decision document also sets out in more detail the steps that the CAA will take to ensure that the future price control framework is better able to meet the challenges of a more competitive airport market. This includes a CAA programme of work to identify alternative approaches to price regulation that do not impede the development of competition, and to assess periodically the state of competition in the airport market. This work will be taken forward in consultation with airlines and airports, and the CAA welcomes the commitment from both groups to engage in this work programme.

The CAA’s Group Director of Economic Regulation, Harry Bush, said: “Stansted’s price control is about ensuring that this airport, and those with the potential to compete with it, develop in a way that meets the needs of users. This is why we have brought in an incentive scheme to improve services for passengers and airlines. Going forward we will now be working on developing our approach to economic regulation to meet the challenges of a developing airport market and to ensure that the benefits of increased competition from the forthcoming sale of Gatwick, and from the potential sale of Stansted, are delivered to passengers and airlines.”

For further media information, please contact Mark Wiltsher on 020 7453 6026 or Nic Stevenson 020 7453 6024.

Notes to Editors

1) How does the CAA’s price control compare with the proposals put forward by the Competition Commission
The CAA’s price control is derived from both the Commission’s analysis of cost ‘building blocks’ and its estimate of the airport’s Regulated Asset Base, and from the CAA’s own assessment of the resulting price profile against its statutory duties. It has also been informed by views and evidence submitted in response to consultation, and by further evidence from economic developments in recent months.

In reaching its decision on the price control, the CAA has had regard to the Commission’s recommendations. It has also considered carefully the impact of economic regulation of Stansted airport on the development of competition, investment and capacity at Stansted and at other competing airports across the UK.

In the CAA’s view, there is strong evidence that prices charged at Stansted have an impact on other airports, notably Luton. Setting the price caps too low would harm investment to meet passenger demand at both Stansted and other competing airports. Against this, the CAA has weighed the risk that if the price cap were too high, and Stansted were to develop and exploit more market power than is currently in prospect, the resulting levels of charges would penalise passengers and airlines.

The CAA believes that its decision strikes the right balance in protecting passengers and airlines while allowing price caps to rise in coming years to enable investment. It should be noted that the price cap is the maximum revenue per passenger which the airport can levy through airport charges, rather than a mandatory price increase. The price cap does not preclude the airport setting published charges below the cap and/or the airport and airlines negotiating prices below the published charges – both of which have occurred at Stansted in recent years.

Price control decision
CAA decision for price cap on airport charges from passenger flights:
(Revenue yield £ per passenger)
(Increase in price cap (retail price inflation plus X%)

2009/10
2009/10 prices = 6.53

2010/11
2009/10 prices = 6.53
RPI+0%

2011/12
2009/10 prices = 6.63
RPI+1.63%

2012/13
2009/10 prices = 6.74
RPI+1.63%

2013/14
2009/10 prices = 6.85
RPI+1.63%

CAA decision for price cap on airport charges for non-passenger flights:
Airport charges for landing and parking should be no higher than those for comparable passenger aircraft

2) Service quality incentive scheme

In response to the Competition Commission’s finding that Stansted Airport’s service performance has been at times unacceptably low during the past five years, the CAA has implemented a regime of service standards with financial incentives, in the form of rebates from the airport to the airlines when standards are not met. This would put at risk up to 7 per cent of Stansted’s airport charge revenue from passenger flights, if it were to fail to deliver on all of the service measures throughout any one financial year. The rebates are focused particularly on those areas which are most critical to the efficient operation of the ‘low cost’ airline model at Stansted, and which would thus be likely to deliver benefits to passengers.

The incentive scheme covers a range of areas, such as:
· Passenger security queues;
· Performance of baggage systems (both outbound and inbound);
· Measures of passenger service from terminal facilities: cleanliness, availability of seating, way-finding and flight information; and
· Services delivered directly to airlines, such as the availability of power supplies, pier-served stands.

Similar schemes at Heathrow and Gatwick have seen overall performance improve, but BAA still incurred some £4.9m and £3.8m respectively in rebate payments in the first 10 months of 2008/09 for areas where it was falling short of the standards set by the CAA.

3) Planning application for a second runway at Stansted Airport
The CAA’s economic regulation of Stansted Airport under the Airports Act 1986 is entirely distinct and separate from the statutory processes, under the Town & Country Planning Act 1990, by which BAA has applied for planning permission to develop a second runway, terminal and associated infrastructure at the airport. Aspects of the CAA’s economic regulation may be relevant to the planning inquiry, and the CAA will therefore be providing the Inspector with its price control decision document and previous analysis as supporting evidence. In line with the Competition Commission’s recommendation that investment in a second runway at Stansted is an issue to be considered at a later stage, the CAA has not examined the case as part of this price control review. Nor do its statutory functions give it the locus to comment on the wider economic appraisals of such a development conducted by the Government. The Secretary of State for Communities and Local Government announced on 2 March 2009 that she had decided to delay her formal announcement of the SG2 planning inquiry timetable for a short time, in order to enable BAA to consider the findings and implications of the Competition Commission’s final report on BAA Airports (due to be published no later than 28 March 2009).

4) Department of Transport’s (DfT) report into reforming the framework for the economic regulation of UK airports

On 9 March 2009, as part of its consultation on reform of the economic regulation of airports, the DfT proposed giving the CAA a primary duty to passengers and allowing the CAA to adopt a more flexible approach to regulating airports. Assuming these proposals come into force, the CAA would have much more flexibility to ensure that future regulation at Stansted is tailored to protect passengers’ interests. The DfT has also indicated that it does not intend the passage and implementation of new legislation in this area to change the basis upon which the price controls and other economic regulations are now being implemented for Stansted Airport for the five-year period starting 1 April 2009. It remains open to the CAA to revise price controls within the quinquennium, in accordance with the provisions of the Airports Act 1986.

5) CAA Stansted Price Control Proposals Document
Copies of the price control document are available from the CAA website at www.caa.co.uk/docs/5/ergdocs/20090313StanstedPriceControl.pdf