Regulation in the passenger interest, supporting investment and driving competition

The UK Civil Aviation Authority (CAA) has today published for consultation its final proposals for the economic regulation of Heathrow and Gatwick airports to protect passengers after April 2014.

The proposals are tailored so each airport remains globally competitive and can deliver the customer experience that passengers expect of airports in the 21st century. They challenge airports to operate more efficiently, and to work more closely with airlines to develop competitive offerings for travellers.

Heathrow

Heathrow has called for a 4.6% annual real-terms increase in its charges over five years. Its airlines have asked for a 9.8% per year cut. We propose a price control that will not allow prices to rise by more than inflation (measured by RPI). That compares to our initial proposals for RPI minus 1.3%. A key reason for this is due to an increase in the cost of capital driven by higher debt costs, offset to some degree by more challenging targets for operating efficiency.

The proposals will put an end to over a decade of prices rising faster than inflation at Heathrow. This has supported significant investment in Heathrow over the last decade and our current proposals will also create a supportive environment for further capital expenditure.

Gatwick

Gatwick has set out a series of price commitments to its users, with the average price to grow by RPI + 0.5% per year for seven years. The CAA has today published its detailed analysis that suggests that this is a fair price. In addition, we believe that the airport’s commitments are in passengers’ interests, so they are the basis of our final proposals. They will be backed by a licence to ensure that they are honoured. The licence will also ensure the CAA can continue to act where appropriate to protect users, for instance if there are reductions in service quality that are against the passenger interest.

Stansted

Since taking over ownership of Stansted in April, Manchester Airport Group (MAG), has reached long-term commercial agreements with its two principal customers, easyJet and Ryanair. We announced on 17 September that we would consult on how these may affect the market power assessment before making a final decision on whether Stansted should be regulated and if so, on the appropriate regulatory approach for the airport.

Our final proposals for all three airports would take effect if the CAA makes a final decision in January that they have substantial market power that requires regulation.

Commenting on the final proposals, Dame Deirdre Hutton, CAA Chair, said: “Our proposals demonstrate how we can regulate airports more flexibly where this seems best for passengers, but also setting a tough efficiency challenge. We expect the airports to work closely with airlines to provide high-quality services to passengers.

“Tackling the upward drift in Heathrow’s prices is essential to safeguard its globally competitive position. The challenge for Heathrow is to maintain high levels of customer service while reducing costs. We are confident this is possible and that our proposals create a positive climate for further capital investment, in the passenger interest.

“Gatwick has tabled a revised price offer to airlines that we consider fair, and its new commitments framework offers a chance for a more commercially driven and tailored approach. To protect the diverse interests of passengers, we propose a licence based on the commitments. We would monitor the success of such a new approach and adjust our regulation over time to ensure it remains proportionate.”

The proposals are made using powers set out in the Civil Aviation Act 2012, which allows more flexibility than in the past, so the CAA’s current regulatory proposals reflect the unique circumstances of each airport. The CAA is required to assess the level of market dominance at airports it proposes to regulate, explaining clearly why regulation will achieve better outcomes for consumers than the market and then set out its proposals. To qualify for regulation, an airport must have, or be likely to get, substantial market power, and economic regulation must be likely to improve outcomes for passengers. CAA will publish its decision on market power for both Gatwick and Heathrow and, where appropriate, its final decision on the necessary form of regulation in January.

An overview of the CAA’s consultations for the airports can be seen here, with links through to the separate documents: Preparing for a future with passengers at its heart.

The consultation documents for each airport along with several associated documents can be found here: Economic Regulation of Heathrow, Gatwick and Stansted

A briefing about airport economic regulation, setting out why regulation is necessary and the CAA’s approach is available here: CAA Briefing Note.