Civil Aviation Auth.

CAA Announcement

Civil Aviation Authority
20 November 2007


News Release

20 November 2007


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(1) 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.'


The CAA's proposals document is available here:

www.caa.co.uk/docs/5/ergdocs/priceproposals_nov07.pdf

The Competition Commission's report is available here: 

www.caa.co.uk/default.aspx?catid=5&pagetype=90&pageid=8779


For further media information telephone Chris Mason on 020 7453 6026.


Notes to Editors


1.      All figures are in 2007/08 prices, unless otherwise stated.


2.      The CAA's proposals are published today for a final round of
consultation. All parties will be able to submit further written evidence to the
CAA up to 21 January 2008. There will also be an opportunity for those with most
direct interest to make any further representations at oral hearings, which the
CAA plans to convene at the end of January 2008. The CAA remains on track to
make its final price control decisions in respect of Heathrow and Gatwick in
March 2008, in order to allow for new price controls to come into effect at each
airport for the five-year period starting 1 April 2008.


3.      The CAA's like-for-like comparison reflects the fact that from 2008/09
airport charges will remunerate a broader range of services and facilities than
at present (notably airport air navigation services and the infrastructure costs
of baggage systems) and that these other charges on airlines will cease from
2008/09. Adjusting the 2007/08 price caps upwards for these additional costs
provides a better comparison of the net price impact on airlines and passengers
of the CAA's proposals.


4.      At Heathrow, the CAA also sets out in its proposals document its
analysis of the regulatory implications of the potential expansion of Heathrow
via a third runway, following the Government's forthcoming consultation on this
issue, and invites comments on how it might address the costs which could be
incurred in developing this option during Q5.


5.      The Competition Commission issued its full report to the CAA on 28
September 2007, following its six-month inquiry, which was initiated by the
CAA's mandatory price control reference on 30 March 2007. The CAA published the
Commission's report, excised of commercially confidential information, on 3
October 2007.


6.      The Commission recommended that maximum airport charges at Heathrow rise
to £10.96 in 2008/09, with charges subsequently increasing by no more than
retail price index (RPI) inflation plus 7.5 per cent each year. For Gatwick, the
Commission recommended maximum airport charges rise to £5.48 in 2008/09, with
charges subsequently increasing annually by no more than RPI inflation minus 0.5
per cent.

CAA's proposed maximum levels of airport charges per passenger in Q5, and
comparisons with CC recommendations

£/pax, 2007/08 prices (except where otherwise stated)

2007/08     Reclassification   Adjusted    % real       2008/09      2008/09 price % real       2012/13
price cap   of costs into      2007/08     increase in  price cap    cap (2008/09  annual       price cap
            airport charges    price cap   price cap    (2007/08     prices) = C*  increase in
                                           from adj.    prices) = C* (1+RPI1+X1)   airport
                               = A + B     2007/08 to   (1+X1)                     charge price
                                           2008/09                                 cap from
                                           price cap                               2008/09 to
                                                                                   2012/13
     A              B               C           X1           D             E            X2           F

CAA proposals

Heathrow
   9.28            1.08           10.36       15.6%        11.97         12.29         7.5%        15.90

Gatwick
   4.91            0.70           5.61         8.0%         6.07         6.23          2.0%        6.57

Competition Commission proposals

Heathrow
   9.28            0.35           9.63        13.8%        10.96         11.24         7.5%        14.55

Gatwick
   4.91            0.27           5.18         5.8%         5.48         5.63         -0.5%        5.38

Notes:

CAA reclassification impact at Heathrow comprised of: ANS £0.73, baggage
infrastructure & fuel levy combined £0.35

CAA reclassification impact at Gatwick comprised of: ANS £0.43, baggage
infrastructure & fuel levy combined £0.27

The reclassification of costs into airport charges is offset completely (at the
aggregate level of each airport) by reductions in other BAA and NATS charges for
relevant services at each airport

RPI1 = actual RPI inflation between financial year 2007/08 and 2008/09, RPI2 =
actual RPI inflation between financial year 20008/09 and 2009/10, etc

Q4 security claim (equivalent to £0.20 per passenger in one year in 2008/09 at
Heathrow, £0.44 per passenger in one year in 2008/09 at Gatwick) is factored
into price caps at each airport across Q5 as a whole

CC reclassification impact at Heathrow comprised of: baggage infrastructure &
fuel levy combined £0.35

CC reclassification impact at Gatwick comprised of: baggage infrastructure &
fuel levy combined £0.27


7.      The Competition Commission's price control inquiry (under the Airports
Act 1986) is separate from its continuing market investigation into BAA's
airports (under the Enterprise Act 2002). The Commission is required to report
by the end of March 2009, but aims to do so earlier - any enquiries regarding
this investigation should be addressed directly to the Competition Commission
itself.


8.      Two other UK airports are currently subject to price control by the CAA:
Manchester and Stansted. The price controls currently applying at these airports
have been extended by 12 months to run until end March 2009. The Government is
currently conducting a policy review on whether these airports should remain
designated for price control. If either or both are to remain so, then the CAA
expects to bring forward price control proposals, for consultation, by the end
of December 2007, before making a mandatory reference to the Commission in
respect of the relevant airport(s) in Spring 2008.


--------------------------


(1) See Notes to Editors, paragraph 3


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