UK Civil Aviation Authority publishes update on economic regulation of Heathrow Airport Limited

The UK Civil Aviation Authority (CAA) has today published a package of measures relating to our economic regulation of Heathrow Airport Limited (HAL). 

The documents cover:

  • Confirmation of our policy to allow Heathrow to recover the costs it incurred efficiently as part of its expansion programme;
  • The CAA's latest update on the efficiency of HAL's capital expenditure during the current price control period (Q6)
  • The CAA's decision relating to HAL's request for an increase to its regulatory asset base (RAB) of £2.6bn to account for the losses incurred because of the pandemic. The CAA has agreed to a limited, early adjustment to HAL's RAB of £300m and will consider this issue further as part of the next price control (H7); and
  • The CAA's view on some of the key issues it will be considering as part of H7, which will come into effect from January 2022. 

Commenting on the CAA's decision to allow a limited, early adjustment to HAL's RAB, Paul Smith, Director at the CAA, said: 
 
“Following Heathrow's request for a RAB adjustment we have taken the decision that an early intervention on the scale of its request is disproportionate and not in the interests of consumers. The other issues raised by Heathrow as part of its request will be dealt with during the next price control review.

We do, however, recognise that these are exceptional circumstances for the airport and there are potential risks to consumers if we take no action in the short term. The decision we have announced today will incentivise and allow Heathrow to maintain investment, service quality and be proactive in supporting any potential surge in consumer demand later this year.”

 


Further details on Heathrow Economic Regulation

The CAA has today set out a package of measures relating to our economic regulation of Heathrow Airport Limited (HAL).

In this, our overriding priority will always be furthering the interests of consumers of the airport. We also recognise that the pandemic has had a devastating impact on the aviation sector, including HAL and its airline customers. And there remains a high degree of uncertainty as to how quickly international travel will recover. 

RAB adjustment 

Due to the effect of the pandemic, HAL requested an adjustment to its Regulatory Asset Base (RAB) of £800m now, and a total of £2.6bn at the end of 2021. This would be recovered through airport charges from 2022.

Following a review of evidence from all stakeholders and consistent with our previous statements, we have decided that an early adjustment of the size of HAL's request would be disproportionate and not in the interest of consumers. It would also be better to deal with many of the issues raised by HAL during the next H7 price control review

We do, however, recognise that these are exceptional circumstances and there are potential risks to consumers in the short-term

We are therefore allowing a much smaller RAB adjustment of £300m to incentivise HAL to plan effectively, reopen its terminals in a timely way for a summer recovery, and generally invest to benefit its consumers.

In coming to this decision, we have focused on quality of service and investment and also considered the financial position of the notionally efficient company (which is consistent with the approach we use in setting price controls), with a lower assumed level of gearing than the actual company. We are clear that any risks to HAL's actual financing are a matter for its shareholders, not for consumers to resolve.

We will also consider whether any further RAB adjustment should be made as part of the next price control. But only if it brings long-term benefits to consumers. 

H7 way forward 

We anticipate the next price control (H7) will run for five years from January 2022.

A key development will be a new traffic or revenue risk sharing mechanism. This would help manage the ongoing uncertainty about future passenger volumes by sharing the risk more equitably between the airport and airlines.

In addition, we propose developing a sharper set of tools to incentivise more efficient capital spending by HAL.

And we have set out our initial views on HAL's revised business plan (submitted December 2020) for the next control period.  This included proposals to significantly increase airport charges for consumers.  We have said that to allow us and other stakeholders to gain an accurate appraisal of its plan, HAL needs to provide further information in a number of areas, particularly its capital plan.

Early costs and Q6 spending

In our latest update on the efficiency of HAL's Q6 capital expenditure we have confirmed our decision to allow HAL to recover the costs (c£500m) it spent on its expansion programme, between 2017 and 1 March 2020. Heathrow can start recovering these costs from the beginning of H7 by adding them to its RAB, which will be subject to an efficiency review. 

Not doing so would undermine the confidence of investors in the regulatory framework for HAL, and their willingness to invest in providing better services for consumers.  

We have also reviewed the efficiency of HAL's wider capital programme and while we have not found evidence of inefficiency in relation to the bulk of its programme, we have identified problems with a small number of projects. This includes some of the expenditure for Heathrow's cargo tunnel project, which means it will not be able to recover a proportion of the costs for this project.