The UK’s Civil Aviation Authority may allow BAA to increase charges to airlines by 15.6 percent at Heathrow and by 8.2 percent at Gatwick over the next five years from 2008.
The CAA is also looking at boosting penalties for BAA if it fails to hit performance targets.

The proposed package of price caps and incentives may enable and encourage BAA to deliver genuine service quality improvements, according to the CAA, and to invest to raise the standard of service that can be delivered to passengers and airlines.

Full statement

CAA ISSUES ITS PRICE CONTROL PROPOSALS FOR HEATHROW AND GATWICK AIRPORTS

The Civil Aviation Authority (CAA) is today publishing its proposals for price controls for Heathrow and Gatwick airports for the five years from 1 April 2008 to 31 March 2013. These proposals are informed by the recommendations of the Competition Commission and build on agreements reached between the airports and airlines, as well as over two years of consultation. The proposed package of price caps and incentives will enable and encourage BAA to deliver genuine service quality improvements and to invest to raise the standard of service that can be delivered to passengers and airlines. The CAA will make its final price control decisions in March 2008.

The CAA proposes (subject now to two months’ further consultation) the following maximum charges:

Heathrow
£11.97 per passenger in 2008/09. On a like-for-like basis, this represents a 15.6 per cent increase in real terms from the current (2007/08) price cap, with allowed charges subsequently increasing in each of the following four years by no more than retail price index (RPI) inflation plus 7.5 per cent each year.

Gatwick
£6.07 per passenger in 2008/09. On a like-for-like basis, this represents an 8.2 per cent increase in real terms from the current (2007/08) price cap, with allowed charges subsequently increasing in each of the following four years by no more than RPI inflation plus 2.0 per cent.

These proposals are closely aligned with the recommendations made by the Competition Commission (CC), updated for airport-airline agreements made and information received since the Commission completed its report.

The CAA recognises that the resulting increases in airport charges, particularly at Heathrow, are significant. However, these increases reflect the increased costs of security operations, the cost of recent capital projects and allowances for significant additional capital expenditure. The increases in the price cap allow BAA to raise the standard of service provided by Heathrow and Gatwick to passengers and airlines, and continue to invest to improve service delivery in the future.

The CAA considers that the best way to ensure that passengers and airlines receive good service at an appropriate price is to provide BAA with incentives to improve its own operating, investment and commercial performance. The CAA agrees with the Commission’s analysis and recommendations that there should be increased incentives on each airport to deliver higher and consistent service quality and improved infrastructure.

These increased financial incentives include:

Investment
A greater proportion of the investment programme at each airport should be subject to ‘triggers’, under which penalty payments are incurred each month for late delivery of specified outputs from projects. The CAA’s proposals, building on the approach it introduced in 2003, provide for triggers covering some 60 per cent of Heathrow’s capital programme for Q5 and around 40 per cent of Gatwick’s, under which some 4 and 3 per cent respectively of airport charge revenue would be at risk during Q5 in the event that the specified projects were not delivered.

Service quality
A broader range of services should be subject to financial incentives, with enhanced targets for existing incentives, most notably for passenger security processing (average queuing no longer than 5 minutes), which should deliver a quicker and more reliable experience for passengers. This follows an adverse finding by the Competition Commission in relation to security queuing and queue times at the airports. The CAA proposes to increase the maximum level of rebates for poor service performance from 3 to 7 per cent of total airport charge revenue (up to around £60 million at Heathrow in 2008/09, and £15 million at Gatwick). It also considers that positive financial incentives, in the form of bonuses for performance above target, would help over time to align the airport operator’s incentives with passengers’ expectations for continuous improvement in service beyond the enhanced minimum standards set by the CAA. The CAA proposes that each airport should be able to earn bonuses of up to 3 per cent of airport charge revenue for good passenger service performance above targets, delivered consistently across all terminals (up to around £25 million at Heathrow in 2008/09, and £6 million at Gatwick).

Ultimately, passengers’ experience of Heathrow and Gatwick will depend not just on BAA’s performance, but also on the services delivered by airlines, their agents, and the Border and Immigration Agency. The CAA believes there should be greater transparency on the levels of service provided to passengers by all these parties and better coordination between them, led by the airports. It has tasked BAA with improving the publication of performance information at each airport, starting with its own services.

The CAA agrees with the Commission’s recommendations that its proposals should be based on a pre-tax real weighted average cost of capital of 6.2 per cent at Heathrow and 6.5 per cent at Gatwick. The CAA also recognises that these proposals are being issued during a period of significant turbulence in the capital markets, which could affect the appropriate cost of capital allowance. The CAA’s final Q5 price cap determination for Heathrow and Gatwick will be made in March 2008, by which time there will be a further three months’ worth of market information which may be relevant to an assessment of the appropriate price caps. The CAA will therefore, in line with the Competition Commission’s advice, keep market developments under review and may need to revisit its proposed cost of capital for each airport and in light of the information then available.

Commenting on these proposals, Dr Harry Bush, CAA Group Director, Economic Regulation, said:
“Passengers and airlines deserve better than they have been provided with at Heathrow and Gatwick in recent years, but need to recognise that improvements have to be paid for. The CAA considers it only right that, as airlines and passengers face the prospect of paying more to use each airport (significantly so at Heathrow), there should be greater financial incentives on the airport operator to deliver the facilities and services that give rise to those price increases. The challenge for economic regulation of the airports is to send sufficiently strong and credible incentives to BAA that it recognises that it is in its own commercial interests to move in this direction. The challenge facing BAA as operator of these airports is to deliver a better service to passengers and airlines, based on refreshed and expanded infrastructure.

“These proposals go a long way to strengthening the incentives on BAA to continue to enhance facilities and service performance at each airport. The CAA recognises, though, that achieving positive results for passengers consistently over time will require a high degree of effort by BAA to manage its own resources well, but also to engage effectively with airlines, the Border and Immigration Agency, and other stakeholders. There needs to be greater cooperation among all organisations responsible for services at each airport, and more transparency about standards of service they are offering to passengers.”
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