Civil Aviation Auth.

CAA announcement

Civil Aviation Authority
23 November 2006

News Release

23 November 2006

UK CIVIL AVIATION AUTHORITY INDICATES EMERGING THINKING ON PRICE REGULATION OF
BAA'S LONDON AIRPORTS

Speaking at the Global Airport Development conference in Rome today the CAA's
Group Director, Economic Regulation, Dr Harry Bush, indicated that the CAA was
on track to set out in December its initial proposals on the issues involved in
setting BAA's price caps for the period 2008-13. He said that, while the CAA's
proposals remained to be firmed up, some directions were emerging, and it was
timely to give some indication of these in respect of Heathrow and Gatwick.
However, as the CAA identified in its December 2005 consultation paper, the
regulatory challenge at Stansted is somewhat different and remains under
consideration.

The CAA has been engaged with its advisors in a detailed evaluation of the
issues around the setting of an appropriate cost of capital for BAA's airports.
Dr Bush commented that:

'For capital intensive businesses, in particular Heathrow which has been engaged
in a substantial and continuing investment programme, the setting of an
appropriate return on capital is of key importance to both the airports'
incentives to invest and airport users' charges. It is therefore incumbent on
the CAA carefully to identify the key issues, some of which will undoubtedly
benefit from Competition Commission scrutiny next year from a cross-regulator
perspective. In the meantime, the CAA will be exhibiting its own preliminary
analysis of the emerging evidence on cost of capital, including from market
developments. In so doing, it will be mindful of the continuing need to
incentivise investment, so that airlines and passengers benefit in a timely way
from enhanced facilities and extra capacity, and to pay due regard to regulatory
consistency and commitments. It will also consider the risks to investment over
time of too low a cost of capital as compared with the impact on airport charges
arising from setting the allowance too high.

'The CAA has made it clear that the choice of financing arrangements is a matter
for the airports' owners. It is not the CAA's intention to accommodate any
particular set of financing arrangements but rather to take a view on an
allowance that would permit an efficiently financed company to earn its cost of
capital while undertaking the continuing investment planned at the airports.

'The CAA will be setting out its thinking in full in December but its current
assessment, taking account of the reducing cost of debt generally and the
increasing proportion of debt in company financing compared to that assumed in
2003, points towards a marked reduction in the cost of capital allowed compared
with the 7.75 per cent (real terms, pre tax) allowed in 2003.'

Dr Bush also spoke about the continuing need for improved efficiency in costs
and operating processes at BAA's airports. He indicated that the evidence the
CAA had assembled suggested that, while in some areas BAA was a good performer,
the challenge was to bring the rest to the standard of the best as well as to
seek continuous improvement generally.

Dr Bush cautioned against mechanistically translating any reductions in the cost
of capital allowance, or increased efficiencies, into price caps, in particular
at Heathrow:

'The need to remunerate investment undertaken since 2003, not currently
reflected fully in prices; to pay for ongoing investment; to reflect lower
traffic growth at Heathrow than forecast; and to recognise legitimate cost
pressures, not least on security, mean that the direction of prices at Heathrow
is likely to remain significantly positive in real terms.'

The CAA wrote to BAA airports and airlines in September encouraging them to work
together at BAA's airports to overcome difficulties arising from enhanced
security standards. Dr Bush commented:

'The enhanced security standards imposed on the airports following 10 August
severely tested both airports and airlines, and showed that more could be done
to improve the way they work together. Unless they do, passengers suffer. BAA is
already discussing these issues with its airline customers. The CAA welcomes
this and wishes both sides to give consideration to how best to build greater
resilience into current arrangements so that any future changes in security
requirements could be better dealt with. In particular, the CAA wishes
consideration to be given to the appropriateness of the current passenger
queuing standard, and whether staffing up for a faster processing of passengers
in normal circumstances would provide a more secure base against which to cope
with security changes to the benefit of passengers. The CAA will want to
consider the cost implications in its reviews alongside other operating cost
issues.'

For further information contact the CAA Press Office on 020 7453 6030.


Notes for Editors

The CAA is responsible for the economic regulation of designated airports under
the terms of the Airports Act 1986.  Four airports are designated for these
purposes: BAA's London airports (Heathrow, Gatwick and Stansted) and Manchester
airport.  Under the Airports Act, the CAA is required to set maximum limits on
airports charges at designated airports.  In doing so, the CAA must set maximum
limits in a manner best calculated to:

(a) further the reasonable interests of users of airports within the United
Kingdom;

(b) promote the efficient, economic and profitable operation of such airports;

(c) encourage investment in new facilities at airports in time to satisfy
anticipated demands by the users of such airports; and

(d) impose the minimum restrictions that are consistent with the performance by 
the CAA of its functions under those sections.

The CAA published, in February 2003, the results of the last review of BAA's
London airports, covering the five year period up to 31 March 2008.  In 2006/07,
the price caps are £8.51 at Heathrow, £4.73 at Gatwick and £5.83 at Stansted.
For Heathrow, the maximum increase per annum is set at RPI plus 6.5 per cent;
and for Gatwick and Stansted at RPI.


Timetable for BAA designated airports reviews

December 2006                 CAA publishes initial price control
                              proposals for consultation

February 2007                 Consultation closes

End March 2007                CAA makes price control
                              reference to Competition
                              Commission

September 2007                Competition Commission reports
                              to CAA on price control reference

November 2007                 CAA publishes firm proposals for Q5

January 2008                  Consultation closes, oral hearings

March 2008                    CAA price cap decision for Q5

April 2008                    Q5 starts 1 April


Security

The costs of security staff and facilities at BAA's designated airports form a
significant part of the cost base which is recovered through regulated airport
charges.  Following the heightened security status imposed at UK airports from
August 2006, BAA has been reviewing with its airline users the levels of
resourcing and operating processes necessary to meet the new security
requirements in a sustainable manner and to provide adequate resilience to cope
with any future changes.  The CAA has encouraged this process, and will consider
the outputs from this in the early part of 2007 as it develops its initial price
control proposals prior to making the mandatory reference to the Competition
Commission. In the current price caps, BAA can recover 75% of the additional
costs (above a minimum threshold) arising from new security requirements. (The
thresholds are £14m at Heathrow, £6m at Gatwick and £3m at Stansted.)

The CAA has set a standard under which 95% of passengers should queue for no
more than 10 minutes at security in Heathrow and Gatwick. If the standards are
not met BAA has to pay rebates to airlines.


Cost of capital

At the last price control decision in February 2003, the CAA set price caps on
the basis of an assessed cost of capital for each airport of 7.75%, on a pre-tax
real basis.  As part of the current price control review, the CAA is conducting
an assessment of the costs of capital in order to inform the level of the price
controls in the next five year period (1 April 2008 to 31 March 2013).  The CAA
will publish, for consultation, analysis and evidence on this issue as part its
initial price control proposals in December 2006.


                      This information is provided by RNS
            The company news service from the London Stock Exchange