London Airports Respond to CAA Price Caps

(Photo: HAL)
(Photo: HAL)
(Photo: HAL)

The UK’s Civil Aviation Authority (CAA) has announced new passenger charge caps for Heathrow and Gatwick while deregulating Stansted.  Under the Civil Aviation Act 2012 for the economic regulation of UK airport operators, the CAA conducts market power assessments (MPA) to judge their power within the aviation market and whether they need to be regulated.  The CAA’s most recent MPA was its sixth and ran for a period of two years.  It determined which airports passed the assessment and therefore requires an economic licence from April 1, 2014.


As expected, the CAA’s price review published on January 10 requires Heathrow and Gatwick to continue their regulated status, though Stansted has been de-regulated, giving operator MAG the power to determine what levies are necessary.


Although the CAA had previously said Heathrow would be allowed to increase its charges in line with inflation, Heathrow and Gatwick’s price rises will be limited to 1.5% below the rate of inflation from April 1.  These rules will run until December 31, 2018, for Heathrow and until March 31, 2021 for Gatwick.  Heathrow had asked for a rise of 4.6% above the RPI inflation rate but the CAA says that passengers will benefit from lower prices as a result.  Its Chair, Dame Deidre Hutton commented: “[Passengers] will see prices fall, whilst still being able to look forward to high service standards, thanks to a robust licensing regime.”


Heathrow has stated the CAA’s price caps will result in its per passenger airline charges falling in real terms from £20.71 in 2013/14 to £19.10 in 2018/19.


Its Chief Executive, Colin Matthews, commented: “We are concerned by the degree of change since the CAA’s final proposals just a short while ago.  In October the CAA accepted the need for changes to their April proposals, but has now reverted to a draconian position.


“We want to continue to improve Heathrow for passengers. We will review our investment plan to see whether it is still financeable in light of the CAA’s settlement.”


A statement from Heathrow says its rate of return on capital investment was set by the CAA at 5.35% in its initial proposal, increased to 5.6% in its October final proposal, and has now been reduced again to an: “unsustainable level of 5.35%.”


It adds: “The CAA’s final decision includes aggressive operational, commercial and passenger forecasts.  It requires Heathrow to reduce operational expenditure by more than £600 million, stretches commercial revenue targets by in excess of £100 million, which includes revenues from retail and car park charges, and assumes significant passenger volume growth.  The settlement leaves little spare resource available to manage the consequences of potential disruption at Heathrow.”


Gatwick said it: “acknowledges that the CAA has continued to accept its Contracts and Commitments framework as the best way forward for regulation and we are pleased that the CAA has recognised the significant progress the airport has made under new ownership. However, Gatwick is very disappointed with key elements of the CAA’s final decision, including the over-optimistic long term passenger forecasts, the reduction in the cost of capital, and the more onerous monitoring regime.  We are surprised by these major changes, which have been made since the CAA published its final proposals just three months ago.


“With the progress London Gatwick has made in negotiating commercial agreements with our airlines we continue to disagree with the CAA that the airport has Substantial Market Power (SMP), and as a result requires an economic licence.  We are also concerned that the CAA has changed, yet again, the definition of the Gatwick airport market.”


Stewart Wingate, CEO of London Gatwick, added: “I am delighted in the progress that the airport is making to bring more competition to the London aviation market through the commercial arrangements currently being negotiated with its airlines. “These discussions have only been possible under our Contracts and Commitments framework, which has latterly been supported by the CAA.


“However, I am disappointed that the CAA’s final decision appears not to acknowledge the importance of these ground-breaking commercial negotiations and has concluded, under its new definition, that the airport does have market power and requires an economic licence.  We are also disappointed at the CAA’s view of a fair price, as well as the intrusive nature of their monitoring requirements.  The airport will need to review the detail of the CAA final decision and consider its position.”


Airport charges per passenger at Gatwick are currently £8.80 (2014 prices) and would remain unchanged (2014 prices) for seven years under Gatwick’s Contract and Commitments framework.


The CAA’s price assessment at RPI – 1.6% p.a. would equate to airport charges per passenger in 2018/19 of £8.07 (2014 prices).


However, over at Stansted things were much more upbeat.  MAG Chief Executive Charlie Cornish commented: “Since MAG acquired Stansted in February last year we’ve focused on building strong commercial relationships with airlines and delivering a better experience for passengers.
“After just 10 months, our approach to running Stansted is already yielding big benefits for passengers and airlines.  The long term growth deals we’ve agreed with airlines – including Ryanair, easyJet and Thomas Cook – will see Stansted continue to grow rapidly over the next decade, offering passengers more choice in terms of destinations and frequencies.
“The CAA’s decision to step back from regulating Stansted is a welcome endorsement of the changes we’ve made, and a positive recognition by the CAA that in Stansted’s case competition rather than regulation will deliver the best outcomes for passengers and airlines.
“Stansted is flourishing in a competitive environment, as we build long-lasting commercial partnerships with airlines and deliver excellent service to our customers.”


It is not clear if the UK Airport Commission’s recent interim report on how to best improve runway capacity in the south-east of England has influenced thoughts about future airport regulation.