The Civil Aviation Authority today published its final proposals for consultation on how charges to airlines levied by the BAA London airports should be regulated for the five years from 1 April 2003. The main objectives of the proposals, which are broadly in agreement with the recommendations from the Competition Commission, are to boost investment, particularly at Heathrow with Terminal Five, and to provide improved services for airport users. The CAA proposes to set maximum price caps per passenger at the BAA London airports for the five years from 1 April 2003 as follows:

/// Heathrow: £6.48 in 2003/04 then increased by RPI + 6 .5% in each year /// Gatwick: £4.32 in 2003/04 then increased by RPI in each year /// Stansted: £4.89 in 2003/04 then increased by RPI in each year.

In making these proposals the CAA has carefully considered the report from the Competition Commission on the future regulation of the airports, which has also been published by the CAA on its website today 1. The CAA has concluded that the price caps recommended by the Competition Commission for Heathrow and Gatwick meet the CAA’s statutory objectives. In particular they will enable BAA to implement its current £7.7 billion ten year investment programme aimed at boosting capacity at London airports, especially Terminal Five at Heathrow, and to improve the quality of service experienced by travellers and airlines in the face of the pressure on existing capacity from growing demand.

At Stansted the CAA proposes a higher price cap than that recommended by the Competition Commission, in recognition of the greater competition faced by the airport and the uncertainty surrounding the traffic forecasts on which the Commission’s recommendations were based. However, the CAA believes that market conditions will continue to determine prices at Stansted and so it is probable that the airport will opt to set prices at levels below the price cap.

As the price cap recommended by the Competition Commission at Heathrow is broadly in line with that originally suggested by the CAA and should allow BAA to progress its development programme including Terminal 5, the price cap proposed by the CAA for 2003-2008 is consistent with the existing “single till” framework. This means that the expected profits from airport retail activities will have been taken fully into account in the maximum levels of airport charges. Since the CAA submitted its advice to the Competition Commission in February 2002 recommending a movement away from this approach as part of a wider package of policies to better address investment and service quality issues, the Commission has examined the issues involved and debated them thoroughly with interested parties, including the CAA, and recommended a continuation of the current single till approach. Given this, and in the absence of strong support from market participants for a move away from a single till, the CAA is recommending price caps consistent with a continued single till approach for the next control period 2.

There were several areas where the CAA does not fully agree with the Commission’s recommendations. The CAA continues to propose that the price caps for each airport should in future be set on an airport-by-airport basis, without reference to the costs, assets or performance of the other BAA airports. This means that in future, charges at Heathrow will not be increased to guarantee returns on developments at other airports. The CAA was unconvinced by the Commission’s arguments against this change. In addition, the CAA proposes that the pass-through of the costs of meeting new Government security standards should be reduced from the current 95 per cent (as recommended by the Commission) to 75 per cent of costs above a specified level, and that at Heathrow there should be a modest financial incentive for BAA to increase the number of aircraft movements in peak periods.

The CAA and the Commission are in broad agreement on other proposals including:

- a clawback of the capital expenditure overspend in the current five year review period resulting from the delay to Terminal 5 being given planning permission;—providing rebates for users if certain service quality standards are not achieved;—a cost of capital of 7.75 per cent pre tax real at each airport.

The CAA’s proposed price caps reflect the set of policies outlined above.

The CAA believes that long term capacity and quality problems beyond Terminal 5 need to be addressed by the airports with their customers and this discussion needs to be supported by the regulatory process. The Commission has endorsed the enhanced information disclosure and consultation proposals agreed to by the airports, which should assist airlines to interact more effectively with the airports. This policy requires that airports present better information on development options addressing capacity constraints and service quality concerns to their customers together with the consequences for airport prices, with a view to achieving greater strategic agreement. The proposed Government Aviation White Paper should assist this process by clarifying public policy on airport development.

Compared to charges in 2002/03 the price cap proposals will result in real increases in the maximum allowed charges to airlines by the end of 2003/08 of around £2.10 per passenger at Heathrow. At Gatwick and Stansted there will be no real increase in the maximum allowed charges (although Stansted does not currently use the full amount allowed in the cap so there could be increases in the charges currently levied). Airport charges make up a relatively small percentage of airline costs, and airport users should benefit from improved facilities and services.

The proposals will now be subject to consultation with industry until mid January. It is envisaged that in the light of responses and hearings the CAA will make a decision on the price caps in February 2003 to take effect on 1 April 2003. The CAA’s decision is final; the Airports Act does not allow for an appeal.

In addition, as required by the Airports Act, the CAA will impose a condition on Heathrow to implement the Competition Commission’s public interest finding addressing certain arrangements for taxis at Heathrow and providing for service quality rebates at Heathrow and Gatwick.

The CAA proposals: Heathrow, Gatwick and Stansted Airports, CAA Proposals for Consultation, November 2002, are available on the CAA website: www.caa.co.uk/erg/ergdocs/baapricecapsnov02.pdf.

The Competition Commission report: BAA plc: a report on the economic regulation of the London airports companies (Heathrow Airport Ltd, Gatwick Airport Ltd and Stansted Airport Ltd) is available from http://www.caa.co.uk/erg/default.asp?page=1322. (1) Published version has excisions authorised by the Secretary of State (2) As a continuation of the single till potentially allows losses from surface access projects to be offset by higher airport charges the CAA is also proposing that the CAA would have to be satisfied that such projects generate net benefits in terms of the CAA’s statutory objectives.

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