CAA issues its mandatory reference of Stansted Airport to the Competition Commission

Date: 29 April 2008

CAA ISSUES ITS MANDATORY REFERENCE OF STANSTED AIRPORT TO THE
COMPETITION COMMISSION


The Civil Aviation Authority (CAA) has today issued its formal, mandatory reference of the Stansted Airport price control to the Competition Commission and has set out a number of options for the price control design.

The choice between these options depends upon the extent of competition now and in future – which could be affected by the Competition Commission’s own market inquiry into BAA’s airports – and establishing which is best suited to delivering investment in the right facilities at the right time.

Getting the design and level of the price cap right is important as it affects the prices paid by airport users, the service quality received by passengers and the investment that the airport could undertake. Further, as Stansted competes for passengers and airline services, the price cap could also affect price, service and investment at other UK airports and the evolution of competition in the airports market.

The price cap options identified by the CAA and in consultation responses vary in the extent to which they:
· rely on competition – and associated commercial negotiation between the airport and its airline customers – to constrain pricing and protect the interests of airport users;
· base the price cap on historic costs derived from the airport’s past operation and regulation rather than the prices that an operator would normally charge to pay for necessary and efficient investment; and/or
· protect the commercial interests of airlines currently operating at the airport.

The CAA has also identified issues around the practical implementation of different options and ways of implementing transitional arrangements, so that any changes are introduced over a period of time.

Speaking today, Dr Harry Bush, the CAA’s Group Director of Economic Regulation, said:
“Devising an approach to regulating Stansted is unusually challenging. It needs to take proper account of uncertainties around forecasting of market trends, the scale of the proposed investment and the strongly held – but sharply differing – views of the airport and its principal airline customers. And, importantly, to do so in a way that benefits passengers.

“The extent to which Stansted is – and can be – subject to competitive pressure should inform the design and level of the price cap for Stansted as this will affect pricing and investment at other airports and the prospects for future competition.

“I look forward to receiving the Commission’s views and recommendations on the future regulation of Stansted later in the year.”

Following the January consultation document, the CAA has:
· further refined the price cap options, including a sixth option identified by airlines in their responses to the January consultation, focusing on how these options could be implemented in practice;
· undertaken initial analysis of Stansted operating costs and commercial revenues, identifying some scope for further airport efficiency improvements;
· considered the airport’s efficiency in undertaking and consulting upon capital investment projects, which suggests that whilst investment in the current price control period was delivered efficiently in terms of timing and cost, there is scope for improved information to airlines, in line with previous CAA analysis; and
· requested information from BAA to justify the commercial case for its airport expansion plans and from airlines to enable the CAA to understand better the market position of the airport.

The document, ‘Airport Regulation: price control review - CAA reference to the Competition Commission for Stansted Airport’ is available at: www.caa.co.uk/docs/5/ergdocs/stansted_reference_apr08.pdf

For further information contact Chris Mason on: 0207 453 6026.

Notes to editors

1. On 15 January 2007, the Secretary of State for Transport announced her decision that Stansted should remain designated under Part IV of the Airports Act 1986 for price control purposes. As a consequence, the CAA is today referring Stansted Airport to the Competition Commission as it is required to do by the Airports Act.

2. The CAA issued a consultation document on 25 January 2008, ‘Price control review – consultation on the framework and options for the economic regulation of Stansted Airport’, which can be downloaded from http://www.caa.co.uk/docs/5/ergdocs/stanstedconsultation_jan08.pdf

3. The Commission is expected to take six months to conduct its own inquiry before reporting back to the CAA in autumn 2008. Thereafter, the CAA will have regard to the Commission’s recommendations and then issue its own proposals in late Autumn for consultation, before making price control decisions in March 2009, for the five year period starting April 2009. The full timetable is set out below:

Date and Review stage

29 April 2008 - CAA refers Stansted to Competition Commission

October 2008 - Competition Commission reports

December 2008 - CAA publishes proposals

February 2009 - Deadline for responses

February 2009 - Oral hearings

March 2009 - CAA publishes decision

1 April 2009 - New price control comes into effect

4. In performing its functions under the Airports Act, including setting price controls, the CAA has to act in a manner best calculated to meet its duties set out in section 39(2) of the Airports Act. These are:

a. to further the reasonable interests of users of airports within the United Kingdom;

b. to promote the efficient, economic and profitable operation of such airports;

c. to encourage investment in new facilities at airports in time to satisfy anticipated demand by the users of such airports; and

d. to impose the minimum restrictions that are consistent with the performance by the CAA of its functions.

5. The CAA also has to take account of the international obligations of the United Kingdom as may be notified to it by the Secretary of State. The CAA also applies the Better Regulation Commission's principles of good regulation. These are to act in a way that is proportionate, consistent, accountable, transparent and targeted only at cases where action is needed. A fuller description of the legal framework within which the CAA conducts its price control functions is set out in chapter 2 of the CAA’s document published today.

6. The Stansted price control is not part of the Competition Commission’s current market inquiry into BAA’s UK airports. That market inquiry is being progressed under the Enterprise Act 2002. The Commission’s price control recommendations to the CAA, expected by late October 2008, are likely to be informed by the Commission’s provisional findings in its market inquiry, which are anticipated to be issued in August 2008.

7. On 22 April 2008 the Secretary of State for Transport announced a review of the economic regulation of the UK airport system. The Secretary of State said that if legislation is required as a result of this review it would be taken forward in a future legislative session; therefore this review will not make changes to the basis on which the current price caps at Heathrow and Gatwick are set, or to the price cap which will take effect at Stansted from 1 April 2009.