CAA consults on Heathrow Airport charges

The UK Civil Aviation Authority (CAA) has today published a consultation on its initial proposals for the next price control at Heathrow Airport Limited (HAL). This will ultimately set the maximum charges the airport operator can charge its airline customers for using the airport for the next five years.

The CAA recognises that there is still significant uncertainty in the shape of the aviation industry's recovery from the COVID-19 pandemic. These proposals will deliver affordable charges for consumers and allow the airport to continue to invest in service quality, while also supporting consumer demand as the industry recovers.

The package of measures set out in the consultation include:

• A five-year control period, which will allow the airport to smooth charges for consumers and provide investors with medium-term certainty. The control period will come into force in summer 2022.
• A potential range of airport charges per passenger from £24.50 to £34.40, an increase from £22 per passenger in 2020. The CAA will work closely with Heathrow, airlines and other stakeholders to narrow this range over the next few months.
• No additional adjustment to Heathrow's regulatory asset base to account for losses caused by the pandemic on top of the £300 million the CAA allowed earlier this year in response to HAL's request for an adjustment of £2.3bn last year.
• The introduction of a new traffic risk sharing mechanism to prevent either the airport or consumers bearing all the risk of the uncertainty as a result of the industry's ongoing recovery.
• The introduction of an interim price cap for 2022 to protect consumers from any undue increase in airport charges while the full proposals for the H7 period are finalised.

Commenting on the initial proposals, Richard Moriarty, Chief Executive at the UK Civil Aviation Authority, said:

“While international air travel is still recovering, setting a price control for Heathrow Airport against the backdrop of so much uncertainty means we have had to adapt our approach. Our principal objective is to further the interests of consumers while recognising the challenges the industry has faced throughout the Covid-19 pandemic. These initial proposals seek to protect consumers against unfair charges, and will allow Heathrow to continue to appropriately invest in keeping the airport resilient, efficient and one that provides a good experience for passengers.

“We look forward to working with all stakeholders as we refine this package of measures in the coming months, before setting out our final proposals next year.”

Heathrow Airport Limited had requested the CAA increase the cap on its charges per passenger to between £32 and £43.

The consultations on the interim price cap and the wider initial proposals will run until 17 November and 17 December 2021 respectively.

The CAA has published an explanatory note on its website, which sets out the package of measures in more detail.

-ENDS-

Notes to Editors

An interim price control of £30 per passenger is to be implemented from January 2022. This will protect consumers in the gap between the current price control finishing and the next one starting.

There is a separate consultation on the interim price control, which will run until 17 November 2021.

Explanatory note

The CAA has today set out our initial proposals for the next price control (H7) for Heathrow Airport Limited (HAL).

In developing these proposals, our priority has been to further the interests of consumers of the airport. We recognise that the pandemic has had a devastating impact on the aviation sector, including HAL and its airline customers. Our proposals seek to allow HAL to continue investing in service quality for passengers while avoiding an excessive increase in prices that would dampen consumer demand.

Five year control period

The proposed price control we are consulting on will last a five year period, as we believe it will provide a stable, affordable base to build the recovery of traffic at the airport while allowing HAL to fund its operations and finance ongoing investment in service quality. It will allow us to smooth prices over the full period, and will avoid drastic fluctuations in the charges paid by users of the airport.

Proposed range of charges

The impact of the pandemic, and the uncertainty around how quickly the industry will recover, means it is very difficult to forecast with confidence one of the fundamental elements of the price control for Heathrow - the expected number of passengers over the five year period.

Recognising this uncertainty, our initial proposals set out a range of airport charges per passenger from £24.50 to £34.40. We will test different scenarios with the industry, while continuing to monitor the sector's recovery over the coming months. This means we will be able to hone our assumptions and narrow this range as we finalise the price control next year.

Request for RAB adjustment

We announced earlier in the year our decision to increase Heathrow's regulatory asset base (RAB) by a limited and targeted £300m. This followed a request by the airport to adjust its RAB by £2.3bn to take account of the losses incurred by the operator during the pandemic. At the time that we announced this decision, we said we would review the outstanding proposal for the remainder of the request at the next price control, so we could take account of all relevant factors at the same time.

Following this, we have decided that no further adjustment to Heathrow's RAB will be made to account for the airport's losses that have resulted because of the pandemic. We do not believe doing so would be in the interest of consumers. In addition, measures we have set out in these initial proposals will reduce the future risk to Heathrow by introducing the introduction of a traffic risk sharing mechanism and an explicit revenue allowance to take account of the risk created by future pandemics.

Traffic risk sharing mechanism

To manage uncertainty in passenger numbers, we are introducing a new traffic risk sharing mechanism. Our initial proposals are based on a 'mid case' projection of traffic volumes for the airport over the next five year period. Should actual traffic levels be lower than this projection, then we will allow Heathrow to recover part of the difference by charging slightly higher prices in future price control periods. Similarly if traffic is higher than expected, we will ensure that Heathrow shares the benefits with consumers by reducing the amounts that Heathrow can charge in future price control periods.

Interim price control

Given the challenge of setting a price control against the backdrop of uncertainty, we have adapted the timetable for the development of these proposals so that we, and stakeholders, could benefit from the latest available information about the outlook for traffic. In practice this means that we are issuing initial proposals later than originally planned.

We, therefore, also need to set an interim price control to commence in January 2022 and to be in place until our final proposals have been implemented. This interim price control is subject to consultation, but is expected to be approximately £30 per passenger. This is significantly lower than Heathrow's recent consultation to airlines on an interim charge, which was £38.

Timeline

The consultation on the initial proposals runs for eight weeks. We expect to issue our final decision in spring next year, before they come into force in summer.