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Friday 28 February, 2003

Civil Aviation Auth.

CAA Sets Airport Price Cap

Civil Aviation Authority
28 February 2003



News Release

28 February 2003



CAA SETS A PRICE CAP FOR BAA TO DELIVER £7.4 BILLION INVESTMENT PROGRAMME

The CAA today published its decision on how charges to airlines levied by the
BAA London airports will be regulated for the five years from 1 April 2003. The
maximum price per passenger that BAA can charge from 2003 will be:


•    Heathrow: £6.48 in 2003/4 then increased by RPI+6.5 per cent in each year

•    Gatwick: £4.32 in 2003/4 then increased by RPI in each year

•    Stansted: £4.89 in 2003/4 then increased by RPI in each year

These price cap increases are necessary to enable BAA to deliver services to a
growing market through a major investment programme, its £7.4 billion ten year
plan to boost long-term capacity at its London airports, which includes the
fifth terminal at Heathrow.  This development programme is broadly supported by
airlines, reflecting the view that demand for each airport will grow over the
next five years if capacity is available.  It will also improve the service to
customers and airlines.

BAA is expected to deliver the key parts of its capital programme on time; if it
does not do so the price cap will be tightened automatically at the airport
concerned. The CAA has also implemented in agreement with BAA a framework for
improving the information provided to airlines as a basis for consultation.  The
CAA has listened carefully to representations from interested parties, including
the airlines and BAA, and given particular consideration to whether prices at
Heathrow need to increase above the rate of inflation.  While the CAA fully
recognises the current financial difficulties faced by some airlines, it
believes that setting a price cap that might risk delay to BAA's long-term
investment programme would not meet its statutory duties.  It has decided to
adopt broadly the proposals it announced in November 2002, which closely
followed the recommendations of the Competition Commission to the CAA.

After hearing the views of the industry on its November proposals the CAA, which
endorses the critical importance of ensuring that airport security is not
compromised, has made a minor amendment to its proposed treatment of the costs
of additional Government security requirements.  The CAA has modified the
threshold for the additional security costs above which BAA will be able to pass
on to airlines 75 per cent of these additional security costs as proposed in
November.  The costs of all existing and anticipated security requirements will
be fully funded by BAA through the price caps, and BAA has made it clear that it
will not compromise security.

The CAA has given BAA an incentive to increase the number of flights in peak
hours at Heathrow, as travelling at these times is clearly valued highly by
passengers. It has amended its November proposal so that this incentive is
conditional upon the introduction of rebates for excessive airport-related
delays to flights at the airport.

As proposed in November, the price caps will now be set on a stand-alone basis:
the price cap for each airport is set in relation to that airport's own market,
assets and costs, and without reference to the performance of other BAA
airports.

The CAA does not expect its decision to materially affect airfares; airport
charges make up a relatively small percentage of airline costs.  In addition,
the CAA believes that market conditions will continue to determine prices at
Stansted and so it is probable that the airport will opt to set prices at levels
below the price cap.  The maximum increase per passenger at Heathrow will be
only 43 pence on average each year over the five years - around £2.15 per
passenger in real terms by the end of 2003/08.  At Gatwick and Stansted, maximum
prices will be similar to the current maximum allowed prices.

The price caps do not reflect expenditure on new runway projects. Should BAA
propose such projects following the planned Government Air Transport White
Paper, the CAA will then discuss with BAA the implications for future price
caps.

The Competition Commission found that BAA was acting against the public interest
in two ways:

•   By not linking prices to the quality of service airlines and passengers 
    receive at Heathrow and Gatwick. The CAA has therefore imposed conditions 
    that will make that link through financial penalties, and is confident that 
    airport users will benefit over the next five years.

•   By imposing a levy on taxi drivers to finance taxi information desks in 
    terminals without justifying whether the desks provided a cost efficient
    service. The CAA has therefore imposed a condition to halt the levy, unless
    within six months BAA can justify its continuation.


The CAA decision: 'Economic Regulation of BAA London Airports (Heathrow, Gatwick
and Stansted) 2003-2008' is available on the CAA website:

www.caa.co.uk/erg/ergdocs/baadecision200308.pdf


NOTES TO EDITORS


The CAA is required by the Airports Act 1986 to set limits on user charges at
designated airports every five years.  The designated airports are the three
BAA-owned London airports - Heathrow, Gatwick and Stansted (and Manchester
Airport).  The CAA sets the maximum charges at the airports following
recommendations from the Competition Commission.

The Airports Act requires the CAA to set the price caps best calculated to
further reasonable user interests, to promote efficient and profitable airport
operation, and to encourage timely investment while imposing minimum
restrictions.

New price caps are being set for the five years for each of the four airports
from 1 April 2003 to 31 March 2008.  The CAA intends to publish its final
decision on airport charge controls at Manchester Airport in mid-March.

The current charging formula for Heathrow and Gatwick taken together is RPI-3
percent, and for Stansted RPI+1 per cent.  For 2002/03, estimated actual figures
are £6.13 at Heathrow and £4.32 at Gatwick, and the maximum allowable figure at
Stansted is £4.93; these figures have been adjusted to bring them in line with
the 2003/04 price caps.  The Heathrow figure has been further adjusted to
include the transfer baggage charge that was previously collected separately,
which is around 43 pence a passenger.


                      This information is provided by RNS
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