Four of the largest airlines operating from the UK (bmi, easyJet, Ryanair and Virgin Atlantic) have joined forces to call for a fundamental overhaul of how the UK’s biggest airports are regulated, as airport regulation has failed.The announcement by the UK Civil Aviation Authority (CAA) of dramatic price rises at Heathrow and Gatwick clearly demonstrates that the system is broken and needs to be changed. Over the next five years, the regulator will allow charges at Heathrow to increase from £10.36 to £19.31 - a rise of 86%; whilst at Gatwick charges will increase by 49% from £5.61 to £8.36. These increases, which will inevitably hurt consumers, follow a substantial increase in charges at Heathrow and Gatwick in the past five years and a doubling of charges at Stansted in the last year. Stansted charges are also proposed to double in the coming five years.

That these price increases are significantly less than those demanded by BAA is a cause for alarm not celebration, as BAA has demonstrated that it is expecting the travelling public to pick up the bill for Grupo Ferrovial’s highly-leveraged speculative acquisition. This was financed through £1.59 billion of its own money against £8.72 billion of borrowings. During its bid defence in 2006, the previous BAA management explicitly used the assumption of a lighter regulatory regime in order to dramatically increase the value of the company. This resulted in BAA being sold for a premium of around 49% above its previous long-term market.

 

BAA’s ability to cynically “game” the system has been aided by an outdated regulatory regime and a regulator that is failing to fulfil its statutory duties. In fact, since the sale of BAA, the Regulator has consistently skewed decisions in favour of BAA and to the detriment of the airlines and the travelling public. This is evidenced by:

 

  * Inflation ++ price increases at Heathrow and Gatwick
  * Anti-consumer proposal to give BAA effectively unlimited pricing power at Stansted
  * Failing to prevent appalling levels of service at our main airports
      * Ignoring the findings of the Competition Commission five years ago
      * Allowing BAA to opt out of its service quality commitments in August 2006
      * Failing to establish a meaningful mechanism for measuring queues
      * Failing to regularly monitor and independently measure service standards at Heathrow and Gatwick and failing to ask BAA to report on service standards at Stansted

 

The problem lies with the Regulator (in the form of the Economic Regulation Group of the CAA) and the way in which our airports are regulated (principally the Airports Act 1986).

 

The CAA should be worried about the consequences of Grupo Ferrovial’s debt mountain, which may threaten BAA’s financial sustainability. The CAA should require BAA to publish regular reports setting out how it will maintain financial stability.

 

It is clear to us that the regulation of BAA’s London airports has failed and needs to be changed. The Airports Act 1986 may have been a suitable framework 20 years ago, but it is no longer fit for purpose - consumers need greater competition and better protection that that currently afforded under the Act. Not only does the current system (a fixed percentage return on a Regulated Asset Base) encourage BAA to over-build and gold-plate its airport facilities, but it also perpetuates the assumption that only one company is allowed to construct and operate every single aspect of the airport experience.

 

The most pressing need is to introduce competition into the system, through three mechanisms.

 

  * Firstly, all four of our airlines support the break-up of the BAA London airport monopoly but this must be accompanied by a price controls regime which better protects the interests of the travelling public - replacing one highly-indebted monopoly owner with another would simply compound the problem
  * Secondly, the CAA should be examining options to allow companies other than BAA to build and operate terminal infrastructure on the airport sites.
  * Thirdly, each airport must be free to expand in order to provide the capacity that would facilitate meaningful inter-airport competition

 

The OFT’s decision to refer its investigation into BAA to the Competition Commission and the comments made by the Secretary of State for Transport following the CAA’s proposal to remove price controls at Stansted demonstrate that the Economic Regulation Group of the CAA is not protecting the interests of consumers and is skewing its decisions in favour of BAA’s shareholders.

 

The CAA is responsible for airport regulation. That system has broken down and BAA’s financial troubles demonstrate the need for both action and leadership or consumers will end up picking up the bill for Grupo Ferrovial’s acquisition. To date, the Economic Regulation Group of the CAA has shown no acknowledgement of the problems or that it has the leadership to plan, propose and implement a new system for managing our airports. The travelling public using the UK’s principal airports deserves better from those that are charged with protecting their interests. A change is needed. And it is needed now.
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