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Tuesday 11 March, 2008

Civil Aviation Auth.

CAA Announcement

Civil Aviation Authority
11 March 2008

News Release

11 March 2008


The Civil Aviation Authority (CAA) is today publishing its decisions for price
controls for Heathrow and Gatwick airports for the five years from 1 April 2008
to 31 March 2013.  The CAA's package of price caps and incentives will enable
and encourage BAA to deliver genuine service quality improvements and to invest
to raise the level of facilities and service that can be delivered to passengers
and airlines. The outcome for passengers should be decently modern airports and
consistently high service standards.

The CAA has set the following maximum charges:
•    Heathrow

     £12.80 per passenger in 2008/09, an increase of £2.44 on a like-for-like(1)
     basis, representing a 23.5 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

     £6.79 per passenger in 2008/09, an increase of £1.18 on a like-for-like 
     basis, representing a 21.0 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 

At both airports, the difference from the CAA's November proposals is in the
first year increase, which is £0.83 per passenger or 7 percentage points greater
at Heathrow and £0.72 per passenger or 12 percentage points greater at Gatwick.

The main reasons for the differences since November are (i) additional
investment, particularly at Heathrow, the need for which has largely been
endorsed by the airlines operating at each airport; and (ii) additional security
costs at both airports, but with greater impact at Gatwick, which, in the CAA's
view, are necessary both to reduce queues for passengers and to meet Department
for Transport security requirements and the Government's drive to restore more
normal arrangements across the UK for passengers' hand baggage.  Otherwise,
these decisions are aligned with the recommendations made by the Competition
Commission, updated for subsequent airport-airline agreements, information
received since the Commission completed its report, and the final round of
consultation on the CAA's November 2007 proposals.

The CAA recognises that the resulting increases in airport charges are
significant.  However, these higher airport charges are essentially paying for
the modernisation of Heathrow and Gatwick, in terms of both facilities and
service, for the direct benefit of the passenger. At Heathrow, this entails
paying for the full capital and operating costs of Terminal 5 as it comes into
service on 27 March 2008, the construction of the Heathrow East Terminal by
2013, and bringing the rest of the airport up to comparable modern standards. At
Gatwick, the next quinquennium will see the construction of a major new pier,
the redevelopment of the South Terminal check-in area and forecourt access, and
a new baggage system.

In terms of service, the CAA's decision provides for shorter security queuing
times, enhanced levels of service across the airports (such as more reliable
equipment and cleaner terminals), and greater and more immediate information to
passengers from BAA (including displayed in the terminals themselves) of how it
is performing against the standards it has been set.

It is important that airlines and passengers receive the services that they are
paying for in airport charges.  The CAA therefore confirms its earlier proposals
for stronger incentives on each airport in the coming five-year period to
deliver higher and consistent service quality and improved infrastructure.

These stronger financial incentives include:
     •    Investment

          A greater proportion of the investment programme at each airport will 
          be subject to 'triggers', under which penalty payments are incurred 
          each month for late delivery of specified outputs from projects. The 
          CAA has decided to set triggers covering over 60 per cent of 
          Heathrow's and Gatwick's respective capital programmes for Q5, under 
          which around 5 and 4 per cent respectively of airport charge revenue 
          would be at risk during Q5 in the event that these projects were not 
          delivered on time.
     •    Service quality

          A broader range of services will be subject to financial incentives, 
          with enhanced targets most notably for passenger security processing, 
          which should deliver a quicker and more reliable experience for 
          passengers - queues less than 5 minutes for 95 per cent of the whole 
          day. 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 £63 million at Heathrow in 2008/09, and £17 
          million at Gatwick). The CAA has also introduced bonuses for 
          performance above target, to promote continuous improvement in service 
          beyond the enhanced minimum standards set by the CAA. These bonuses 
          can be up to 21/4 per cent of airport charge revenue for passenger 
          service performance above targets, delivered consistently across all 
          terminals (up to around £20 million at Heathrow in 2008/09, and £5 
          million at Gatwick).

The CAA has maintained its earlier proposals for the price caps to 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 as recommended by the Competition Commission. Before
doing so, the CAA has analysed recent turbulence in the financial markets, but
found that while there had been movement in some individual components of the
cost of capital, overall the Competition Commission's recommendations remained

Commenting on these decisions, which are informed by the recommendations of the
Competition Commission and build on agreements reached between the airports and
airlines, as well as over two and half years of consultation, Dr Harry Bush, CAA
Group Director, Economic Regulation, said:

'These decisions build on the enduring themes of the CAA's previous regulatory
proposals in this review. Passengers and airlines deserve better than they have
been provided with at Heathrow and Gatwick in recent years. However, the
resulting improvements in airport facilities and service standards - some £5
billion of investment over the next 5 years and a halving of security queuing
times - have to be paid for in increased charges.

'But airlines and passengers need to be sure that they are getting the enhanced
facilities and services that they are paying for.  Hence, the CAA's emphasis on
greater financial incentives - with BAA being penalised a lot more if it fails
service standards and earning bonuses if it exceeds them (but only if passengers
in every terminal benefit).

'The price caps have been carefully based on investment programmes emerging from
airport-airline discussions and also on a shared airline-airport desire to
improve quality of service, in particular for passengers at security.  The CAA
hopes that the constructive engagement between airports and airlines that
underlies much of this pricing decision will continue in the future to the
benefit of their shared customers.'

The CAA's price control decision documents is available here:

The CAA's November 2007 proposals document is available here:

The Competition Commission's report is available here:

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 decisions have been made following publication of its 20 November 
     2007 proposals and a subsequent final round of consultation. This concluded 
     formally on 21 January 2008, and was followed by oral hearings on 28/29 
     January 2008. The CAA also extended its deadline for final written 
     submissions to 31 January 2008, reflecting the extent of the additional 
     evidence which was then being generated through consultation.

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.   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.
5.   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.

Comparison of CAA decisions (March 2008), CAA proposals (November 2007) and Competition Commission recommendations 
(September 2007)

£/pax, 2007/08 prices (except where otherwise stated)
  2007/08    Reclassification    Adjusted      % real      2008/09      2008/09       % real      2012/13
 price cap    of costs into      2007/08    increase in   price cap    price cap      annual     price cap
             airport charges    price cap    price cap     (2007/08     (2008/09   increase in
                                             from adj.     prices)      prices)      airport
                                             2007/08 to                            charge price
                                              2008/09                                cap from
                                             price cap                              2008/09 to
CAA decisions, March 2008

   9.28            1.08           10.36        23.5%        12.80        13.13         7.5%        16.99

   4.91            0.70            5.61        21.0%         6.79         6.97         2.0%        7.34
CAA proposals, November 2007
   9.28            1.08           10.36        15.6%        11.97        12.29         7.5%        15.90

   4.91            0.70            5.61         8.0%         6.07         6.23         2.0%        6.57
Competition Commission recommendations, September 2007

   9.28            0.35            9.63        13.8%        10.96        11.24         7.5%        14.55

   4.91            0.27            5.18         5.8%         5.48         5.63        -0.5%        5.38


     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

     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
6.   As part of the price control decision, the CAA is providing for contingent 
     funding within the airport charge caps for the currently estimated costs of 
     developing further proposals for the expansion of capacity at Heathrow
     (through a third runway and mixed mode), with safeguards to ensure that 
     users ultimately pay only the necessary and efficient costs of any such 
     development in the coming five-year period. This economic regulation 
     decision on maximum charges in Q5 is separate from, and does not prejudge, 
     the outcome of the Government's own recent public consultation and 
     forthcoming decisions on a possible third runway and mixed mode operations 
     at Heathrow Airport.
7.   With regard to security costs, the CAA has provided adequate resources
     within its price caps for each airport to deliver current security 
     requirements, set by the Department of Transport, and higher service 
     standards, set by the CAA. The DfT in January 2008 allowed Heathrow Airport 
     to return to the previous regime whereby passengers are allowed more than 
     one item of hand baggage, subject to their own airlines' policies. The 
     price cap provides adequate resources for Gatwick Airport to do so as well, 
     subject to DfT's decision.
8.   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.
9.   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. 
     Following a policy review in 2007, the Government announced on 15 January 
     2008 that Manchester Airport would be de-designated from price control at 
     the end of the current price control period, i.e. from April 2009 onwards. 
     The Government also decided that Stansted Airport should remain designated 
     for price control. As a result, the CAA issued its consultation on options 
     for price control of Stansted Airport on 25 January 2008. It intends to 
     make a price control reference to the Competition Commission of Stansted 
     Airport by the end of April 2008, informed by responses to its January 
     consultation paper and further analysis and evidence gathering.


(1) See Notes to Editors, paragraph 3

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

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