British Airways has warned that it will consider a future outside Heathrow after the regulator revised its proposals to cut landing charges – despite agreeing that the airport was badly managed and staff overpaid.
Airlines cried foul as the Civil Aviation Authority (CAA) ruled that charges will rise at the rate of inflation over the next five years instead of the RPI minus 1.3% rate it had proposed in the spring – and well above the real terms cut demanded by airlines.
Heathrow, which has argued for increasing returns to shareholders to ensure foreign investment continued, said the settlement would be “the toughest [it] has ever faced” and claimed it could have “serious and far-reaching consequences for passengers”.
British Airways, which accounts for just over half of the traffic at the London hub, said it was a “bad day” for its customers. Willie Walsh, chief executive of the airline’s parent company IAG, said the CAA had let down its passengers by ignoring calls for cuts. He said: “As the only hub airport in the UK, Heathrow exerts monopoly power over its users. Like other airlines at Heathrow, we cannot move to a better-run UK hub that offers customers real value for money.”
But, Walsh added, the cost of Heathrow meant alternative hubs were “more attractive and realistic”. The IAG boss has previously mooted the idea of focusing on Madrid, the base of BA’s sister airline Iberia. Walsh recently said he no longer backs a third runway at Heathrow, at a time when the government’s Airports Commission is considering expanding capacity in the south-east.
Walsh said: “No such alternative exists today but these excessive charges combined with a complacent management team at Heathrow make an alternative hub look more attractive and more realistic. We will carefully consider our next steps.”
The CAA said that its decision to freeze rather than cut landing charges at Heathrow reflected the increasing cost of raising capital for investment. But while it had accepted some of Heathrow’s arguments, the regulator claimed that it had toughened up on operating costs – and concurred with BA’s view that the airport needed better management.
Iain Osborne, group director of regulatory policy at the CAA, said: “We think that with the right management focus they can do a lot to increase operating efficiency. Pay is too high; too much overtime being worked. Throughput rates for security are lower than other airports.”
However, Heathrow’s chief executive, Colin Matthews, who has argued that its shareholders needed rewarding to continue the investment that has transformed the airport over the last five years, said: “This proposal is the toughest Heathrow has ever faced. The CAA’s proposed cost of capital of 5.6% is below the level at which Heathrow’s shareholders have said they are willing to invest. The CAA’s settlement could have serious and far-reaching consequences for passengers and airlines at Heathrow.
“We want to continue to improve Heathrow for passengers. Instead, the CAA’s proposals risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre for international investment.”
But Osborne said the owners – largely foreign sovereign wealth funds – were getting a fair return for a low-risk business. “There’s no reason that passengers should pay more to meet the ambitions of its shareholders.”
However, other airlines accused the CAA of caving in to Britain’s largest airport. Virgin Atlantic said it was “deeply disappointing to see the CAA has bowed to pressure from Heathrow Airport Limited and its shareholders” and said that higher charges were “another hammer blow for both UK consumers and overseas visitors”. It called on the CAA to “urgently review its recommendations”.
Osborne insisted: “We’re not balancing airlines against airports but the passenger interest in lower charges against the passenger interest in better services.”
The CAA meanwhile said Gatwick airport could increase landing charges by RPI plus 0.5% annually for seven years, under a more flexible arrangement. Gatwick gave a “cautious welcome” to the proposals.
However, easyJet, the airport’s largest customer, said it was disappointed with the increase in proposed average charges and warned that leeway given to Gatwick over a possible second runway was a “licence to print money”. It claimed it could lead to passengers paying £28 more per flight.
The CAA has deferred a ruling on Stansted regulation after the airport, under the new ownership of MAG, struck deals with its largest customer Ryanair in recent weeks.
HACAN tweeted: If BA is seriously looking at life outside Heathrow, it would be a game-changer: 3rd runway would be history
A day earlier:
CAA proposes Heathrow charges rise in line with inflation
Britain’s aviation regulator has proposed that Heathrow cap its landing charges so that they rise in line with inflation, but the country’s busiest airport has hit back and said the cap could have “serious and far-reaching consequences” for passengers.
3 Oct 2013
Britain’s aviation regulator has proposed that Heathrow cap its landing charges so that they rise in line with inflation, but the country’s busiest airport said the cap could have “serious and far-reaching consequences” for passengers.
London’s Heathrow airport had submitted a plan to the UK’s Civil Aviation Authority (CAA) seeking to raise tariffs for airlines by 4.6pc above inflation, as measured by the retail prices index (RPI), for the five years from April 2014.
“Tackling the upward drift in Heathrow’s prices is essential to safeguard its globally competitive position,” CAA chairman Deirdre Hutton said in a statement as the agency published its final proposals for consultation.
The regulator had initially proposed that the annual increase at Heathrow should be RPI minus 1.3pc, but said a key reason for today’s proposal inline with inflation was “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”.
Today’s announcement from the regulator was not welcomed by Colin Matthews, boss of Heathrow, who said the “proposal is the toughest Heathrow has ever faced” and warned that the group will “now carefully consider our investment plans”.
He said the cap could have “serious and far-reaching consequences for passengers and airlines at Heathrow”. Plus the proposals “risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre of international investment”.
If the proposals are accepted it will put an end to over a decade of prices rising faster than inflation at Heathrow.
Airlines at the UK’s busiest airport had asked for a 9.8pc a year cut over the five years and a statement from the Board of Airline Representatives in the UK (BAR UK) said the CAA’s decision for Heathrow was “bad news for the UK’s international competitiveness”.
“Airline CEO’s will be reaching for their oxygen masks in the knowledge that they will be forced to pass on excessive airport charges to their customers for the next five years,” said Dale Keller, chief executive of BAR UK.
“Following increases exceeding 300pc over the past 11 years, the latest settlement allowing further RPI [inflation] increases escalates costs to consumers and weakens the international competitiveness of the UK’s only hub airport.”
Sir Richard Branson’s airline Virgin Atlantic issued a statement to say it was “deeply disappointing to see the CAA has bowed to pressure from Heathrow Airport Limited and its shareholders”.
It added that the decision to increase charges was a “hammer blow for both UK consumers and overseas visitors wanting to travel to this country”.
At Gatwick, the CAA said it was satisfied with London’s second biggest airport’s plans to to raise average prices by 0.5pc above RPI for seven years.
Gatwick said it “cautiously welcomes” the CAA’s endorsement of its proposed increase in charges.
“We will now re-double our efforts to work with our airlines partners to make this work in the best interests of all parties, and in particular for passengers,” said Stewart Wingate, CEO of London Gatwick.
The price rises at Gatwick mean core airport charges will increase from £8.80 per passenger in April 2014 to £9.11 in 2020/21, Gatwick said.