The UK Civil Aviation Authority (CAA) has published for consultation its initial proposals for the economic regulation of Heathrow, Gatwick and Stansted airports in London to ensure passengers are protected after April 2014. The initial proposals are set out under powers granted by the Civil Aviation Act 2012 that allow an unprecedented degree of regulatory flexibility, ensuring the CAA’s proposals reflect the unique circumstances of each airport. The CAA’s final proposals for regulation and draft licences for each airport will be published in October 2013 and final decisions on market power, economic regulation and final licences for each airport will be published in early 2014.

The CAA is required to assess the level of market dominance at airports it proposes to regulate, explaining clearly why regulation will achieve better outcomes for consumers than the market, and then set out its proposals. To qualify for regulation, an airport must have, or be likely to get, substantial market power, and economic regulation must be likely to improve outcomes for passengers.

“Protecting consumers and improving their experience is the core focus of our regulatory decision making. Few passengers flying from Heathrow, Gatwick and Stansted fail to notice their differences, so it should be no surprise that our regulatory approach also differs at each airport,” said Andrew Haines, Chief Executive, CAA. “The proposals we have published reflect their individual circumstances, ensure passengers are protected when they travel, and allow for continuing improvements in service and competition.”

“Aviation is a strategic industry for the UK supporting some 1.4 million jobs and over GBP 70 billion in economic activity. But the toxic combination of government policies and decisions—high costs, restricted hub capacity and APD which is the highest aviation tax in the world—is eroding the UK’s status as Europe’s biggest aviation hub.”

Tony Tyler
Director General & Chief Executive Officer, IATA

At Heathrow, the CAA found clear evidence of substantial market power, and is proposing a traditional price control mechanism. After a decade when prices have risen, largely to enable major capital investments, including new terminals to enhance passenger experience, the CAA is now looking to encourage further investment whilst improving value for passengers in other ways, with charges capped at RPI minus 1.3 per cent for the five years from April 2014.

At Gatwick, substantial market power persists, as neither low-cost carriers nor full service carriers can easily switch to other airports and still serve the London market. However, because Gatwick’s market power is weaker than Heathrow’s, the CAA would like to implement a flexible regulatory approach that is based upon price and service quality commitments agreed between Gatwick and their airline customers, underpinned by a licence from the CAA. This approach would require effective airport-airline collaboration, and so far the airport has not yet made acceptable proposals along these lines, says the CAA. It has set out the price cap that would apply if this remains the case, with prices capped at RPI plus 1 per cent for the five years from April 2014.

As the CAA set out in December, Stansted shows the weakest evidence of market power today, but the CAA believes that as of today it may have substantial market power, and this is likely to grow stronger between 2014 and 2019 as capacity around London becomes even more constrained. Regulation at Stansted will take the form of the CAA monitoring price and service quality – this will ensure that users are protected while minimising the regulatory burden on airport and airlines. However, the CAA may impose more detailed regulation unless prices at Stansted reduce over time.

The CAA decision will disappoint the management of the three London airports, especially at Heathrow where the current charge figure for the period 2009-2014 is RPI plus 7.5 per cent for Heathrow. The proposal is also far below the numbers being mentioned by Heathrow bosses which could have seen charges increase from around £19.33 per passenger now to as much as £27.30 by 2019. It is also a reduction at Gatwick where airlines are currently paying RPI plus 2 per cent.

In a strong response to the UK CAA announcement, Tony Tyler, Director General and CEO of the International Air Transport Association (IATA) described the initial price proposals “like prescribing a placebo to treat a very serious illness” that “does not even begin to address” Heathrow’s cost problems seriously.

“Everybody recognises the enormous potential to reduce costs to rebuild the competitiveness of Heathrow and London’s other airports. But with such a weak price cap, we are missing an opportunity to do something meaningful. Over the last decade, airlines continuously cut costs to survive, while the regulator allowed Heathrow charges to triple,” he said.

“Aviation is a strategic industry for the UK supporting some 1.4 million jobs and over GBP 70 billion in economic activity. But the toxic combination of government policies and decisions—high costs, restricted hub capacity and APD which is the highest aviation tax in the world—is eroding the UK’s status as Europe’s biggest aviation hub,” he added.

“In the past the CAA has rewarded Heathrow for inefficiency and it is now the most expensive hub airport in the world.  Its charges have tripled in the last eleven years with inflation-busting increases year-on-year.”

Willie Walsh
Chairman and Chief Executive Officer, IAG

Airline users of the three airports have responded to the CAA’s announcement. Willie Walsh, Chief Executive of International Airlines Group, the parent of Heathrow’s largest carrier British Airways, says the CAA plans will result in increase in prices at Heathrow while he calls the Gatwick proposals "totally unacceptable".

The Irishman said Heathrow Airport is “over-priced, over-rewarded and inefficient” and these proposals “fail to address” the situation. “In the past the CAA has rewarded Heathrow for inefficiency and it is now the most expensive hub airport in the world. Its charges have tripled in the last eleven years with inflation-busting increases year-on-year,” he added. At Gatwick he said the new proposals “are completely unjustifiable, totally unacceptable and directly contravene the CAA’s new remit to represent customers’ interests”.

The new Chief Executive at Virgin Atlantic, Craig Kreeger has described the proposals at Gatwick as “baffling”. Coupled with ever increasing Air Passenger Duty, passengers flying to and from the UK are facing some of the highest travelling charges in the world. “In the current climate most businesses are having to deliver the same level of service more efficiently and airports should not be exempt from this economic reality. This makes it all the more baffling to see the Gatwick proposals of an inflation-busting increase,” he said.

Meanwhile Gatwick’s largest user, easyJet says continued regulation of Gatwick will protect the interests of all passengers who use the airport. The low-fare carrier says it agrees in principle with the CAA’s approach, as its preference is always to “engage constructively with airports to reach commercial agreements which are in both parties interests - and the interests of passengers”. However, it says it has been “unable to reach a mutually agreeable commercial deal” with Gatwick, which it warns “reflects the market power which Gatwick wields and shows the need for continued regulation”.

Budget carrier Ryanair, the largest operator at Stansted Airport, called on the UK CAA to do more to tackle what it describes as “excessive airport charges and falling passenger numbers” at Stansted. Following the doubling of charges at Stansted in the last five years traffic has declined by around a quarter, says the carrier, suggesting the CAA’s proposal to monitor charges at Stansted over the next five years will do “nothing to constrain Stansted’s absolute pricing power” over its airline users and passengers. This proposal “falls lamentably short” of what is required to restore traffic growth and consumer choice at Stansted, it claims.

“We call on the CAA to require that airport charges at Stansted reduce by the rate of inflation minus 10 per cent every year for the next five years. This will bring charges closer to competitive levels and will result in traffic recovery and growth at Stansted,” said Michael O’Leary, Chief Executive Officer, Ryanair.

The Board of Airline Representatives in the UK (BAR UK) has also welcomed publication of the proposed new economic regulatory scheme at London's three major airports as “a step in the right direction” but warned they do not go far enough to drive the level of efficiency gains at airports that airlines and their passengers are seeking. "It is encouraging that the CAA has listened to industry concerns over the need for a more flexible market based approach than previous regimes and we are cautiously optimistic that the final regulation will better meet the needs of consumers and the airline industry,” said Dale Keller, Chief Executive Officer, BAR UK.

A spokesperson for Heathrow Airport has said the airport will examine the CAA’s proposals for the Q6 regulatory settlement carefully over the coming weeks before responding fully but in a statement said: “Our first impression is that a 5.35% return on capital will put passenger service at risk by not attracting the necessary investment in Heathrow for the short, medium and long term. We, and everyone interested in the health of our country's transportation infrastructure, must consider whether this is a risk worth taking.”

“In the current climate most businesses are having to deliver the same level of service more efficiently and airports should not be exempt from this economic reality.  This makes it all the more baffling to see the Gatwick proposals of an inflation-busting increase.”

Craig Kreeger
Chief Executive Officer, Virgin Atlantic

Gatwick Airport has similar concerns and says the CAA has “yet to grasp fully the opportunity presented by the airports market becoming more competitive after the break-up of the BAA monopoly”. It welcomes the fact that the CAA would like to implement the Contracts & Commitments framework as the preferred approach to regulation as it believes competition, not regulation, is the best way to promote better services and more choice for passengers and airlines, but “does not accept” the CAA’s initial substantial market power findings and the consequent need for an economic licence. It adds the CAA’s suggested regulated price control level “is too demanding” and is based on “unrealistic assumptions”.

“London Gatwick’s transformation over the last three years has shown that separate ownership and the competition that this has brought, has been good for passengers and airlines. The CAA must not hold us back through imposing heavy handed regulation, red-tape in the form of a licence and an inflexible price control, but should allow us to build on this success,” said Stewart Wingate, Chief Executive Officer, Gatwick Airport.

“Our Contracts and Commitments framework gives a clear legally-binding pathway from economic regulation at Gatwick. It will remove the costs of regulation, improve incentives and speed up investment. It will also allow us to incentivise those airlines who choose to grow at the airport. The deal means airlines and passengers win on price, service and the quality of facilities,” he added.