Civil Aviation Auth.


Civil Aviation Authority
29 November 2002

News Release

29 November 2002

This amendment replaces the CAA Airport Proposals announcement released today at
7.30 am under RNS number 4286E.  The hyperlinks have been amended.  All other
details remain unchanged.  The full amended text appears below.


The Civil Aviation Authority today published its final proposals for
consultation on how charges to airlines levied by the BAA London airports should
be regulated for the five years from 1 April 2003.  The main objectives of the
proposals, which are broadly in agreement with the recommendations from the
Competition Commission, are to boost investment, particularly at Heathrow with
Terminal Five, and to provide improved services for airport users.  The CAA
proposes to set maximum price caps per passenger at the BAA London airports for
the five years from 1 April 2003 as follows:

Heathrow:  £6.48 in 2003/04 then increased by RPI + 6 .5% in each year

Gatwick:  £4.32 in 2003/04 then increased by RPI in each year

Stansted: £4.89 in 2003/04 then increased by RPI in each year.

In making these proposals the CAA has carefully considered the report from the
Competition Commission on the future regulation of the airports, which has also
been published by the CAA on its website today(i).  The CAA has concluded that
the price caps recommended by the Competition Commission for Heathrow and
Gatwick meet the CAA's statutory objectives.  In particular they will enable BAA
to implement its current £7.7 billion ten year investment programme aimed at
boosting capacity at London airports, especially Terminal Five at Heathrow, and
to improve the quality of service experienced by travellers and airlines in the
face of the pressure on existing capacity from growing demand.

At Stansted the CAA proposes a higher price cap than that recommended by the
Competition Commission, in recognition of the greater competition faced by the
airport and the uncertainty surrounding the traffic forecasts on which the
Commission's recommendations were based.  However, the CAA believes that market
conditions will continue to determine prices at Stansted and so it is probable
that the airport will opt to set prices at levels below the price cap.

As the price cap recommended by the Competition Commission at Heathrow is
broadly in line with that originally suggested by the CAA and should allow BAA
to progress its development programme including Terminal 5, the price cap
proposed by the CAA  for 2003-2008 is consistent with the existing 'single till'
framework.  This means that the expected profits from airport retail activities
will have been taken fully into account in the maximum levels of airport
charges.  Since the CAA submitted its advice to the Competition Commission in
February 2002 recommending a movement away from this approach as part of a wider
package of policies to better address investment and service quality issues, the
Commission has examined the issues involved and debated them thoroughly with
interested parties, including the CAA, and recommended a continuation of the
current single till approach. Given this, and in the absence of strong support
from market participants for a move away from a single till, the CAA is
recommending price caps consistent with a continued single till approach for the
next control period(ii).

There were several areas where the CAA does not fully agree with the
Commission's recommendations. The CAA continues to propose that the price caps
for each airport should in future be set on an airport-by-airport basis, without
reference to the costs, assets or performance of the other BAA airports.  This
means that in future, charges at Heathrow will not be increased to guarantee
returns on developments at other airports. The CAA was unconvinced by the
Commission's arguments against this change. In addition, the CAA proposes that
the pass-through of the costs of meeting new Government security standards
should be reduced from the current 95 per cent (as recommended by the
Commission) to 75 per cent of costs above a specified level, and that at
Heathrow there should be a modest financial incentive for BAA to increase the
number of aircraft movements in peak periods.

The CAA and the Commission are in broad agreement on other proposals including:

  • a clawback of the capital expenditure overspend in the current five year
    review period resulting from the delay to Terminal 5 being given planning
  • providing rebates for users if certain service quality standards are not
  • a cost of capital of 7.75 per cent pre tax real at each airport.

The CAA's proposed price caps reflect the set of policies outlined above.

The CAA believes that long term capacity and quality problems beyond Terminal 5
need to be addressed by the airports with their customers and this discussion
needs to be supported by the regulatory process.  The Commission has endorsed
the enhanced information disclosure and consultation proposals agreed to by the
airports, which should assist airlines to interact more effectively with the
airports. This policy requires that airports present better information on
development options addressing capacity constraints and service quality concerns
to their customers together with the consequences for airport prices, with a
view to achieving greater strategic agreement.  The proposed Government Aviation
White Paper should assist this process by clarifying public policy on airport

Compared to charges in 2002/03 the price cap proposals will result in real
increases in the maximum allowed charges to airlines by the end of 2003/08 of
around £2.10 per passenger at Heathrow.  At Gatwick and Stansted there will be
no real increase in the maximum allowed charges (although Stansted does not
currently use the full amount allowed in the cap so there could be increases in
the charges currently levied).   Airport charges make up a relatively small
percentage of airline costs, and airport users should benefit from improved
facilities and services.

The proposals will now be subject to consultation with industry until mid
January. It is envisaged that in the light of responses and hearings the CAA
will make a decision on the price caps in February 2003 to take effect on 1
April 2003.  The CAA's decision is final; the Airports Act does not allow for an

In addition, as required by the Airports Act, the CAA will impose a condition on
Heathrow to implement the Competition Commission's public interest finding
addressing certain arrangements for taxis at Heathrow and providing for service
quality rebates at Heathrow and Gatwick.

The CAA proposals: Heathrow, Gatwick and Stansted Airports, CAA Proposals for
Consultation, November 2002, are available on the CAA website:

The Competition Commission report: BAA plc: a report on the economic regulation
of the London airports companies (Heathrow Airport Ltd, Gatwick Airport Ltd and
Stansted Airport Ltd) is available from

Notes to Editors

The CAA is required by the Airports Act 1986 to set limits on user charges at
designated airports every five years.  The designated airports are the three
BAA-owned London airports - Heathrow, Gatwick and Stansted (and Manchester
Airport).  The CAA sets the maximum charges at the airports following
recommendations from the Competition Commission.

The Airports Act requires the CAA to set the price caps best calculated to
further reasonable user interests, to promote efficient and profitable airport
operation, and to encourage timely investment while imposing minimum

The review timetable is now as follows:

•         Written consultation ends - 10 January 2003

•         Announcement of final price caps - February 2003

•         New price caps take effect - 1 April 2003

New price caps will be set for the five years for each of the four airports from
1 April 2003 to 31 March 2008.

The present charging formula for Heathrow and Gatwick taken together is RPI-3
per cent and for Stansted, RPI+1 per cent.  Actual charges per passenger in 
2001/02 were: Heathrow £5.60, Gatwick £4.25 and Stansted £4.39.

The CAA intends to publish its separate proposals for airport charge controls at
Manchester Airport, together with the Competition Commission's separate report,
during December 2002.


(i) Published version has excisions authorised by the Secretary of State

(ii) As a continuation of the single till potentially allows losses from surface
access projects to be offset by higher airport charges the CAA is also proposing
that the CAA would have to be satisfied that such projects generate net benefits
in terms of the CAA's statutory objectives.

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