CAA announce price caps for Heathrow and Gatwick
11.03.08
The Civil Aviation Authority (CAA) announced today that airport operator BAA can substantially increase the landing fees it charges airlines at Heathrow and Gatwick over the next 5 years. The settlement will lead to airlines passing some of the increase on to passengers in terms of increased ticket prices, with British Airways saying that the CAA's decision ‘to allow BAA to ramp up airport charges significantly demonstrates conclusively that the airport regulation system has failed’.
The maximum charges at Heathrow are £12.80 per passenger in 2008/09, an increase of £2.44 - or a 23.5% rise in real terms from the current 2007/08 price cap. Charges may subsequently increase in each of the following four years by no more than retail price index (RPI) inflation plus 7.5% each year. This means passenger charges at Heathrow could rise by 90% by 2012/13 to around £19.70.
At Gatwick the rate will be £6.79 per passenger in 2008/09, an increase of £1.18 - or 21%. Charges may subsequently increase in each of the following four years by no more than RPI inflation plus 2%.
The CAA also ruled that BAA's rate of return on its investments should be no more than 6.2% at Heathrow and no more than 6.5% at Gatwick. This compared with a figure of 7.75% for both airports that BAA had enjoyed for the last 5 years and had hoped for from the current review.
The landing charge fees are higher than those proposed by the CAA last November. 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 CAA cited the need to improve and modernise facilities at both airports and the additional airport security now needed as reasons for the increase. It says the raised prices will also lead to better services, such as shorter security queues, cleaner terminals and better information.
The CAA admitted that the resulting increases in airport charges are ‘significant’. Paul Ellis, BA's airport policy and infrastructure general manager, said of the price caps: ‘When BAA's new owners, Ferrovial, bought them, the CAA said they would not be influenced by Ferrovial's high debt levels. In practice, they have ignored their own policy and caved in to intense pressure from BAA by setting excessive price increases. Heathrow passengers will pay, on average, 17% more than the Competition Commission recommended last September.’
'These overly generous charges far exceed what is required to upgrade facilities across Heathrow through investment in infrastructure and improved service quality levels. The CAA must hold BAA to account throughout the five year period to ensure the airport operator delivers improvements and does not divert funds to pay off Ferrovial's debts.'
While BA bemoaned the new price controls, BAA complained that the settlement did not give it enough. A spokesman said: 'the review does not recognise sufficiently the scale of the task we are embarked on; the pressures of handling such large infrastructure projects; the full cost of the increased security requirements; as well as the impact of the credit market turmoil.' However, BAA said it remains committed to transforming Britain's airports, and will spend £4.8bn in the next five years doing so.
The BAA spokesman added that it intends to implement the refinancing of its business which includes a migration of existing bondholders into an investment grade, ring-fenced structure backed by the designated assets of the group (the three London airports and Heathrow Express) by the end of the second quarter of this year. Plans for the refinancing are 'well advanced' and the operator is actively engaging with key parties including the rating agencies, he said.
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