CAA sees widespread criticism from aviation sector following pricing review

CAA sees widespread criticism from aviation sector following pricing review

The UK Civil Aviation Authority has published its final decisions on economic regulation at Heathrow, Gatwick and Stansted Airports after April 2014.

Despite attempts to lower the cost of travel for passengers, the moves have been universally criticised by the aviation sector.

The decisions announced have been made using powers set out in the Civil Aviation Act 2012, which requires a more flexible approach so regulation reflects the unique circumstances of individual airports.

The CAA has therefore assessed the market power of Heathrow, Gatwick and Stansted (passenger market only for Stansted).

It has decided passengers would not benefit from further regulation of Stansted, but that Heathrow and Gatwick will both require airport licences from April 2014 onwards.

At Heathrow, the CAA’s price control decision will see prices fall in real terms by 1.5 per cent per year between 2014 and 2019.

This has changed from the CAA’s Final Proposals published in October, which suggested prices rising in line with inflation.

The changes have been made as passenger traffic forecasts have strengthened since October, and the cost of capital has been revised.

“This decision places affordability centre-stage, while ensuring there is still a supportive environment for capital expenditure - with provision for nearly £3 billion of investment,” argued the CAA in a statement.

The move was predictably criticised by the airport.

Colin Matthews, Heathrow chief executive, said: “In October the CAA accepted the need for changes to its April proposals, but has now reverted to a draconian position.

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

However, Virgin Atlantic argued the decision did not go far enough.

Virgin chief executive Craig Kreeger explained: “We were baffled at the CAA’s decision in October to increase the Heathrow settlement from their original recommendation.

“Today’s decision is a far cry from the reduction needed to mitigate the incredibly steep price rises customers have seen in Heathrow airport charges in the last few years.

“Prices at Heathrow are already triple the level they were ten years ago, and coupled with ever increasing Air Passenger Duty, customers flying to and from the UK are facing some of the highest travelling charges in the world.

“We will be carefully considering our right to appeal on behalf of our passengers who will ultimately pay the price for the CAA’s decision.”

At Gatwick the CAA offered it support to the diversity the airport offers to its various airlines, so passengers receive a tailored service.

It therefore based regulation on the airport operator’s own commitments to its airline customers.

These and various airport-airline contracts cover price, service quality, investment and other issues normally covered by a regulatory settlement, and should enable a more flexible and commercial approach.

The CAA is backing the commitments with a licence, to allow the CAA to step in to protect users, for instance if there are reductions in service quality that are against the passenger interest.

The CAA will monitor the application of the new framework to ensure that prices are fair and that service quality is sustained.

The licence will also provide for CAA scrutiny of most second runway costs before they can be passed on to airlines and passengers.

The airport licences will ensure that issues like cleanliness, queuing times, seating availability and information provision are addressed in the passenger interest.

“For the first time, there will be a requirement for Heathrow and Gatwick airports to put in place robust plans to ensure they are better prepared for disruption and can manage it effectively when it does occur,” the CAA added.
Gatwick was also disappointed with the decision.

Chief executive Stewart Wingate explained: “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.”

At Stansted, the CAA has completed its assessment for Stansted’s passenger market, taking into account the long-term contracts the airport now has in place with its main airline customers, and determined that the airport does not have substantial market power.

This means the airport will not be economically regulated by the CAA from April 2014 onwards.

Responding to this decision Charlie Cornish, chief executive at Stansted owner MAG, said: “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 ten 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 today 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.”