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Tuesday 20 December, 2005

Civil Aviation Auth.

CAA Airports Consultation

Civil Aviation Authority
20 December 2005

News Release

20 December 2005


The Civil Aviation Authority (CAA) has today published its first major
consultation paper on its policy for the forthcoming reviews of airport price
controls at BAA's Heathrow, Gatwick and Stansted airports, and at Manchester

Under the Airports Act 1986, the CAA is charged with setting price controls
every five years at each of the airports. Today's paper is primarily focused on
BAA's London airports, where new price controls from April 2008 to March 2013
are due to be set in early 2008, but also describes regulatory policy which is
likely to be relevant to the Manchester Airport review. The CAA is seeking views
from stakeholders to help the CAA decide how best to conduct the reviews.

In fulfilling its statutory function to set price controls, the CAA must strike
a balance which is best calculated to further the reasonable interests of
airport users, to promote efficient, economic and profitable airport operation,
to encourage investment in time to satisfy anticipated demand, and to impose the
minimum restrictions necessary. Today's paper sets out how the CAA proposes to
reach such a balance and the policy principles it is planning to adopt.

The CAA is proposing to retain two important elements of the existing regulatory
regime, namely:

   •  the regulation of each of BAA's airports on a 'stand-alone' basis,
      i.e. setting price caps by reference to each airport's own air traffic, 
      costs, and assets; and

   •  continuing to set the next caps on airport charges using a 'single
      till' approach, i.e. setting caps on airport charges by reference to the 
      costs of the airport as a whole, and taking into account projected 
      commercial revenues.

The CAA is also proposing to undertake a detailed scrutiny of BAA's projected
costs and revenues, with a view to ensuring that the caps on airport charges are
based on a projection of efficiently incurred costs. This will involve
assessment of:

   •  BAA's airport operating costs (informed by a CAA-led project designed
      to compare the efficiency of sampled processes carried out by BAA with
      comparable processes in other organisations, including - but not limited 
      to - other airports);

   •  BAA's projected commercial revenues; and

   •  BAA's cost of capital.

This work is designed to complement the output from airline/airport discussions
on projected passenger numbers, service quality, capacity requirements and
capital expenditure, under a framework the CAA has called constructive
engagement established by the CAA in order to inform the price control review.

The CAA document reports on the progress of constructive engagement at the
different airports, in line with its previously announced intentions. Progress
at Heathrow and Gatwick has been good and the CAA looks forward to the results,
due in late Spring 2006.  However, at Stansted no substantive progress has been
made in the six months to date.  Given the risk that there may be no substantive
output from discussions between the airport and airlines at Stansted in the next
six months, the CAA has decided to proceed with a more standard regulatory
scrutiny of Stansted's forecasts and capital plans. However the CAA remains open
to receipt of evidence from all parties, and to the possibility that dialogue
between Stansted airport and airlines in the first half of 2006 on topics
identified for constructive engagement may lead to a more substantive exchange
of views, which could deliver evidence, or agreement, which could be taken into
account by the CAA.

This review takes place against a background of strong growth in the demand for
air travel. As traffic has grown, airport capacity in the South East of England
has continued to fill up, with opportunities for incremental increases in
capacity progressively being exploited. These circumstances suggest the need for
a step-change in investment in new airport infrastructure, but uncertainties in
the rates of growth at individual airports mean that the timing of major
investment - including investment in a new runway and associated infrastructure
- will be a key issue for this review. The need for investment in airport
infrastructure in the South East of England was also highlighted by the
Government in its 2003 White Paper.

The CAA sets out in the document some options for dealing with uncertainties in
the rate of growth of demand, including measures such as stand-alone regulation
designed to ensure that the costs of  airport investments are kept to a minimum,
and that - as far as possible - investment is properly phased to meet demand.
The CAA is considering setting price controls that give flexibility so as to
enable the strength of demand for new capacity to be assessed (and so better
informing the decision on the timing of the investment). If demand for new
investment exists, such flexibility would also allow prices to follow a path
consistent with the CAA's duty to encourage investment in time to satisfy
anticipated demand. In suggesting this approach, the CAA recognises that if it
led to prices in 2008 to 2013 that were higher than they otherwise would be,
there would need to be compensating adjustments in future price control periods.

Dr Harry Bush, CAA Group Director, Economic Regulation, said:

'The CAA's task in the airports review is to set the framework of economic
regulation, to the long term benefit of passengers, airlines and airports.  Our
proposed regulatory approach should help ensure that airlines and passengers,
over time, receive the service and capacity at airports that they need, at an
efficient cost.

'The CAA's proposals should enable BAA's airports to cope with the changes in
demand which they are facing, and should provide incentives to bring forward the
right investment at the right time. We look forward to working with airlines,
passengers' representatives and airports over 2006 and beyond to develop these
initial proposals in the light of feedback and other evidence, so that the CAA's
price control proposals reflect the best available information about the
development of the UK air transport market and the impact of regulation.'

Following the CAA's extension by one year of the current price control, the new
price cap for Manchester will be set for the period April 2009 to March 2014.

The document is available on the CAA website at
default.aspx?categoryid=5&pagetype=90&pageid=629.  The closing date for
consultation responses is Monday, 20 March 2006.

For media enquiries contact Chris Mason on 020 7453 6026.

Notes for Editors

The CAA is responsible for economic regulation of BAA's London airports and
Manchester, in accordance with its statutory duties. Maximum charges at
designated airports (currently Heathrow, Stansted, Gatwick and Manchester) are
set by the CAA as the independent economic regulator. The CAA's decisions are
made under its duties set out in section 39 of the Airports Act 1986, which
require the CAA:

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

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

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

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

The CAA published in February and March 2003 the results of its Quinquennial
Reviews of BAA's London airports and of Manchester Airport up to March 2008.
The 2004/05 price caps are £7.08 at Heathrow, £4.44 at Gatwick, £5.03 at
Stansted and £6.36 at Manchester. For Heathrow the maximum increase per annum is
set at RPI plus 6.5 per cent; for Gatwick and Stansted at RPI; and for
Manchester at RPI - 5 per cent. In line with its statutory obligations, in the
forthcoming reviews the CAA proposes to apply RPI-X price caps which provide
incentives on airport operators to bear down on costs.

Timetable for airports reviews

December 2005                            CAA consults on policy issues for the
May 2006                                 CAA summarises the consultation
                                         responses and publishes its developing
                                         thinking on the policy issues for the
June 2006                                Price Control Business Plans published 
                                         with input from constructive engagement
September 2006                           CAA consults on initial price control
January 2007                             CAA conducts oral hearings
February 2007                            CAA makes references to Competition
August 2007                              The Competition Commission reports
                                         to the CAA
October 2007                             CAA publishes the CC's report and firm
                                         price cap and any public interest
January 2008                             CAA conducts oral hearings
February 2008                            CAA publishes its decision
April 2008                               New price cap and any public interest
                                         conditions take effect.

                      This information is provided by RNS
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