British Airways: Airport Price Hike Unjustified

10th Jan 2003

British Airways has today urged the Civil Aviation Authority to revise its proposed new pricing regime at Heathrow Airport which will allow the airport operator, BAA, to raise landing charges by up to 50 per cent over the next five years.

The airline believes the new proposals are stacked against airlines and passengers and are not justified by the need to fund the BAA’s capital programme.

British Airways’ chief economist, Andrew Sentance, said: “The CAA’s proposals would allow BAA to make excess profits over the next five years. This is perverse when airlines are suffering severe financial pressures.

“The CAA should moderate its proposed increases in the interests of a healthy aviation industry and to avoid extra costs being passed on to passengers.”

The airline has today submitted a detailed response to the CAA as part of the consultation process. In its submission the airline warns that:
á An increase in airport charges of 6.5 per cent above inflation at Heathrow from April 2003 - 2008 means that airlines are being asked to pay £300m in advance for airport services which they and their passengers won’t benefit from for many years. This will enable the BAA to receive more money than it needs to run Heathrow airport and, in turn, will allow it to make excess profits at the expense of airport users.


á The scale of the increase in charges is unnecessary because they have been based on unrealistic and exaggerated costs. An unreasonably high cost of capital (i.e. the cost of borrowing to fund the building of new airport infrastructure) has been allowed - 7.75 per cent - compared with BAA’s historic cost of capital of below 7 per cent. Other UK utility regulators use a cost of capital of 6-6.5 per cent. Financial analysts’ estimates are in the range of 6-7 per cent.

á The risks associated with Terminal 5 do not justify such a high cost of capital and no consideration has been given to the risks faced by airlines who, at a time when the industry is clearly in great difficulty, should not be faced with significant cost increases. For this reason, the House of Commons transport select committee last year urged the CAA to moderate any increase in charges resulting from the current review - advice which does not appear to have been properly reflected in the current proposals.

á It is the airlines using Heathrow, rather than the airport operator, which are exposed to the risks associated with the volatility of the airline industry. Between 2000/1 and 2001/2, British Airways, suffered a reduction in pre-tax profit of nearly £350m, whereas BAA profits fell by just £42m. In difficult market conditions, airlines cut prices to attract more passengers - supporting the business of the airport at the expense of their own profit margins.




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