Information  X 
Enter a valid email address
  Print      Mail a friend       More announcements

Friday 30 March, 2007

Civil Aviation Auth.

CAA Announcement

Civil Aviation Authority
30 March 2007

News Release

30 March 2007


The UK Civil Aviation Authority (CAA) today published its reference to the
Competition Commission, as required by statute, and accompanying regulatory
analysis and proposals for two of BAA's airports designated for price control,
Heathrow and Gatwick. Two key themes in the CAA's proposals are improving the
quality of service to passengers and encouraging timely investment to improve
each airport's infrastructure. This is a key stage in the CAA's periodic review
of price controls for these airports, which started in December 2005 and
culminates in new price controls set in March 2008 for the five-year period from
1 April 2008.

In today's publication, the CAA puts forward recommendations, building on its
initial proposals of December 2006, and reflecting recent consultation and
analysis, which are very similar to these earlier proposals. The indicative
ranges for the maximum rate of increase in airport charges remain as set out in
the CAA's initial proposals: RPI+4 to RPI+8 per cent at Heathrow (compared to
the current rate of growth in price caps of RPI+6.5 per cent), RPI-2 to RPI+2
per cent at Gatwick (compared to the current rate of growth of RPI+0 per cent).
The CAA has also maintained its recommendations for the cost of capital, a range
for Heathrow of 5.9 to 6.2 per cent, and 6.3 to 6.7 per cent for Gatwick,
pending examination by the Competition Commission.

The main changes since December reflect:

•  a greater emphasis on service quality to passengers with:

      o  CAA support for better service standards to deliver a reduction in
         queuing time in security;

      o  greater financial penalties on BAA where passenger service falls short;

      o  incremental bonuses for BAA if passenger service across each airport is
         significantly above agreed standards, to encourage continuous 
         improvement in performance;

•  renewed emphasis on the importance of timely investment through:

      o  extending into Q5 the use of financial trigger payments to reward the
         completion of key capital projects;

      o  recognition that the cumulative effect of missing such triggers should
         provide a significant disincentive to any unwarranted delay in capital

      o  CAA preparedness to take back allowed returns where BAA fails to
         deliver investment previously forecast for financial rather than 
         operational or related business reasons; and

•  an overall downward revision to projected operating costs of 3 per cent 
   (Heathrow) and 0.2 per cent (Gatwick), reflecting enhanced costs for security 
   offset by reductions in other areas following further analysis (for example, 
   on utility costs).

Commenting on this, Dr Harry Bush, CAA Group Director, Economic Regulation,
'The CAA's recommendations to the Competition Commission in support of its price
control reference build on and largely confirm the CAA's initial proposals. The
CAA considers that it has struck an appropriate balance in challenging BAA to
continue to improve its operating efficiency and service quality, and providing
adequate rewards for timely investment at Heathrow and Gatwick.  It now awaits
the Competition Commission's analysis and advice on these important issues.

'The CAA wants to see a better passenger experience at Heathrow and Gatwick.
That is partly about new facilities, such Terminal 5 at Heathrow. But it is also
about better service, efficiently and well delivered. The CAA's proposals to
increase the penalties for poor performance and to introduce rewards for 
improving performance are intended to sharpen further BAA's focus on the

The full document is available on the CAA website at

For media enquiries contact Chris Mason on 020 7453 6026.

Notes to Editors

CAA's economic regulation of UK airports

The CAA is responsible for the economic regulation of airports under the terms
of the Airports Act 1986.

In exercising its functions, the Act requires the CAA to set maximum limits in a
manner best calculated to:

(a)  further the reasonable interests of users of airports within the United
(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 regulatory functions,

and in doing so, to take into account such of the international obligations of
the UK as may be notified to it by the Secretary of State.

Setting price controls

The Airports Act 1986 requires the CAA to set maximum limits on airport charges
at airports designated for this purpose by the Secretary of State for Transport.
These airports are: BAA's London airports (Heathrow, Gatwick and Stansted) and
Manchester airport. Before setting new controls, the CAA is required by the
Airports Act to refer the price controls for each airport to the Competition
Commission, which then conducts its own review lasting around six months before
reporting back to the CAA. The CAA must have regard to the Competition
Commission's report, but the CAA is the final decision-making body with respect
to price controls.

In March 2007, the CAA extended the current price controls on Stansted Airport
by 12 months, so that they will expire on 31 March 2009. This extension was
implemented in order to allow time during 2007 for the Department for Transport
to conduct its own policy review of the criteria for the Government to decide
whether an airport be designated for price control by the CAA, and then to
consider the cases for de-designating Stansted and Manchester airports. If
Stansted Airport were to remain designated for price control, the CAA would
bring forward a reference to the Competition Commission in spring 2008.

Current price controls at Heathrow and Gatwick

The CAA published, in February 2003, the results of the last review of BAA's
London airports, covering the five-year period between 1 April 2003 and 31 March
2008. In 2006/07, the price caps are £8.51 per passenger at Heathrow and £4.73
at Gatwick. (In 2007/08, the price caps are projected to be £9.05 at Heathrow
and £4.79 at Gatwick in 2006/07 prices.) For Heathrow, the maximum increase per
annum is set at RPI plus 6.5 per cent; and for Gatwick RPI plus 0 per cent.

Future price controls at Heathrow and Gatwick

The timetable for this review of Heathrow and Gatwick airport is:

30 March 2007               CAA makes price control reference to Competition Commission for Heathrow and
                            Gatwick airports
September 2007              Competition Commission reports to CAA on price control reference
November 2007               CAA publishes firm proposals for the 5th Quinquennium (Q5)
January 2008                Consultation closes, oral hearings
March 2008                  CAA announces price cap decision for Q5
April 2008                  Q5 starts 1 April

The CAA has asked the Competition Commission to report within a period of six
months, i.e. by end September 2007. Thereafter, the CAA anticipates that, having
regard to the Commission's report, it would publish its own firm price control
proposals by November 2007 for a further period of consultation, before making
its final decision by March 2008 for Heathrow and Gatwick price controls for the
five-year period starting 1 April 2008.


Rising demand and the need to upgrade existing infrastructure and services is
evident in the scale of BAA's investment programme, focused currently at
Heathrow on the new Terminal 5 that will open in 2008. Significant further
investments are planned in airfield and terminal infrastructure, to enable
better use of the existing runway capacity and to give an improved passenger
experience. Capital expenditure at Heathrow and Gatwick is projected by BAA to
be some £3.3 billion (2006/07 prices) in the five years from 2008 compared to
£6.0 billion (2006/07 prices) in the current price control period.

Service quality

In the current price controls for Heathrow and Gatwick, each airport operates
against a set of service quality standards with rebates paid by the airport to
the airlines for any failure to meet these standards. Each airport is exposed to
a maximum level of rebates in any one year of 3 per cent of total airport
charges, comprised of 1 per cent related to aerodrome congestion, 0.5 per cent
related to passenger survey scores for various terminal facilities, and 1.5 per
cent for other services including security queuing and airline-facing services.
In total some 0.9 per cent relates to passenger-facing activities.  The CAA's
recommendations to the Competition Commission include proposals: to double the
rebate levels for passenger-facing services (from 0.9 to 1.8 per cent of airport
charges); to include new service measures proposed by the airlines and airports
(to which rebates of around 0.5 per cent would be attached at Heathrow); to
introduce bonuses for improving performance across the airport in
passenger-facing services (maximum bonuses worth 1.8 per cent of airport
charges); and to rebalance the remaining rebates away from aerodrome congestion
(rebates down to 0.5 per cent from 1 per cent) and towards the other
airline-facing service elements (where maximum rebates would rise from 1.1 to
1.6 per cent). Overall, maximum rebates at Heathrow would rise from 3 per cent
to 4.5 per cent of airport charges, with the opportunity for BAA to achieve a
bonus of 1.8 per cent. The same approach would apply at Gatwick where BAA and
the airlines are continuing discussions on the scope and definition of any new
service quality measures which might be introduced.

Draft Statement of Regulatory Policy

In the document published in support of its price control reference, the CAA has
also included a draft statement of regulatory policy, which examines the
consistency of the CAA's regulatory policy since the last price control review
and sets out the CAA's proposed approach for the future. As part of this, given
the recent change in ownership and financial structure of BAA, which have
resulted in the airport operator taking on greater financial risks, the CAA
proposes to prevent such risks being transferred to users through a number of
measures. These include re-affirming its policy of setting price caps by
reference to regulatory fundamentals and not to accommodate particular financing
arrangements (or stress to such financing), and applying financial incentives
for the delivery of investment programmes.

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

a d v e r t i s e m e n t