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Wednesday 29 November, 2006

Civil Aviation Auth.

Speech on Airport Regulation

Civil Aviation Authority
29 November 2006

News Release

29 November 2006


Speaking at the Future of Air Transport conference later today Dr Harry Bush,
Group Director, Economic Regulation at the UK Civil Aviation Authority, will
highlight the importance of investment in the UK airports sector to the aviation
industry and to the experience of passengers travelling through UK airports. He
will draw a distinction between the four designated airports for which prices
are regulated by the CAA and the majority of UK airports where investment is
determined by competitive and commercial interaction. He particularly identifies
the risks that could arise should an overly interventionist Airport Charging
Directive come forward from the European Commission:

'For most UK airports, it is competition - the interaction of airports, airlines
and passengers - which is delivering the investment, and the competitive
pricing, that is needed. That is reflected in the substantial growth of regional
airports and their increasing importance to the UK - catering for 42 per cent of
traffic in 2005 compared with 35 per cent 10 years ago. Where competition
delivers in this way, to the benefit of all, economic regulation is at best
unnecessary, and at worst could serve to undermine the competitive process. The
CAA would therefore be very concerned if, through a proposal from the European
Commission for an Airport Charging Directive, economic regulation were to be
extended to airports the market power of which does not warrant it - the more so
at a time when the Transport Select Committee has recently recommended that the
Government consider reducing the role of economic regulation at Manchester and
Stansted, an issue which the CAA was already considering, and on which we will
have more to say when we publish our price cap proposals for BAA airports in

Turning to the BAA price control review and its relevance to investment Dr Bush

'The current five year regulatory control period has seen significant investment
at BAA's London airports. BAA is to be congratulated on the so far excellent
progress made at T5 and its willingness to invest more at Heathrow, to meet the
needs of airline customers, than was allowed for in the CAA's regulatory
determination. However, the need to modernise and, possibly in due course,
expand Heathrow will require more investment still. The CAA recognises the
importance of the regulatory incentives it sets to the delivery of that
investment.  In particular, the allowance it makes for the cost of capital -
essentially the company's return - is central. In setting this return, the CAA
also has to take account of market and other evidence and also of its statutory
duties taken in the round. So it is important that the company should be willing
- and be seen to be willing - to respond to reasonable returns.

'There are also other ways to incentivise investment. In the current five year
period the CAA has applied trigger incentive mechanisms to ensure timely
delivery of projects, and there could be scope to broaden this concept to
encompass more general incentives on delivery of the investment programme should
circumstances or the company's prospective approach warrant it.'

For further information contact the CAA Press Office on 020 7453 6030.

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 CAA must 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 functions under those sections.

Setting price controls

The Airport 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.

Current price controls at BAA's designated airports

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 at Heathrow, £4.73 at Gatwick and
£5.83 at Stansted.  For Heathrow, the maximum increase per annum is set at RPI
plus 6.5 per cent; and for Gatwick and Stansted at RPI.

Future price controls at BAA's designated airports

The CAA is currently engaged on a review of these price caps. The timetable for
this review is:

December 2006                              CAA publishes initial price control proposals for consultation

February 2007                              Consultation closes

End March 2007                             CAA makes price control reference to Competition Commission

September 2007                             Competition Commission reports to CAA on price control reference

November 2007                              CAA publishes firm proposals for Q5

January 2008                               Consultation closes, oral hearings

March 2008                                 CAA price cap decision for Q5

April 2008                                 Q5 starts 1 April

Airport Charges Directive

Following consultation with industry in April 2006 the European Commission
indicated its intention to propose legislative text for a Directive on airport
charges by the end of 2006. The Commission undertook an impact assessment on a
range of options for a Charges Directive in August 2006 as part of which it
considered whether any such Directive should apply to all European airports with
more than two million passengers (this threshold would catch 18 UK airports).

Cost of capital

At the last price control decision in February 2003, the CAA set price caps on
the basis of an assessed cost of capital for each airport of 7.75%, on a pre-tax
real basis. As part of the current price control review, the CAA is conducting
an assessment of the costs of capital in order to inform the level of the price
controls in the next five year period (1 April 2008 to 31 March 2013). The CAA
will publish, for consultation, analysis and evidence on this issue as part its
initial price control proposals in December 2006.

Transport Select Committee recommendation

House of Commons Transport Select Committee Report, The Work of the Civil
Aviation Authority, published 8 November 2006, page 45 paragraph 128 and page 64
recommendation 32: 'We recommend that the Government review the continuing need
for the designation of airports subject to economic regulation by the CAA as a
matter of principle, and that it publish an assessment of the relative merits of
this approach compared to the use of standard competition legislation to
regulate the abuse of dominant position by airports.  The Government should
consider de-designating Manchester and Stansted as a first step.'

Financial incentives on investment

Under the current price control review, a proportion of revenue at both Heathrow
and Gatwick is tied to the achievement of certain milestones in the capital
expenditure programme. Specifically:

                            Airport             Description        Completion date      Percentage annual
                                                                                       airport charges at
Diversion of the twin       Heathrow       Enabling project for     31 March 2005        1/6% per month
       rivers                                       T5

Completion of early         Heathrow        T5 stands which can     31 March 2005        1/6% per month
  release aircraft                           be used from the
       stands                              Central Terminal Area

Handing over to NATS        Heathrow       Enabling project for     31 March 2006        1/6% per month
of the Visual Control                               T5

   Core Terminal 5          Heathrow          Milestone in T5       31 March 2007        1/6% per month
   building being                                 project

    Terminal 5 ,            Heathrow          Milestone in T5       31 March 2007        1/6% per month
  Satellite 1 being                               project

Gatwick: Opening date       Gatwick        Adds pier service in     31 March 2006        1/12% per month
      of pier 6                               North Terminal

So far all the milestones have been met and currently the CAA is consulting on
whether the weatherproofing of the core T5 terminal and satellite has been

In its May 2006 consultation document, 'Airport Regulation - Price Control
review - policy update', the CAA observed that if one of the side effects of
operating within a highly indebted structure was a higher risk of deferral of
investment than would be in users' interests, then the CAA might consider
whether it would make sense (and be practical) to tie a greater proportion of
revenues to the investment programme.

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

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