CAA writes to Heathrow setting out its expectations, including preventing airline cost rises
Andrew Haines, the CEO of the CAA, has written to John Holland-Kaye to tell him that airport charges should be kept down, despite the huge costs of the runway and terminal etc. The CAA is the body that controls Heathrow’s charges to airlines. Mr Haines said the CAA “expects to see constructive engagement between the airport and its airline customers to drive value for money and efficiency.” The CAA will soon publish (November) their proposals on how Heathrow can recover planning and construction costs. The letter to Heathrow says: “But a new runway project cannot simply be treated as ‘business as usual’ and it will require airport-airline engagement to be taken to a deeper and much more productive level by both sides.” And “You will have seen the Government’s aspiration that airport charges should remain close to current levels, indeed the Secretary of State was clear on this being a goal inches announcement.” And the CAA is keen to work with Heathrow, the airlines and other interested parties on the appropriate framework for the recovery of future construction costs, and their immediate priority is a clear timetable for this. There will also be a CAA consultation on key options for the economic regulation framework, to be published by the end of June 2017. There will also be a series of consultation documents through 2017 in which the CAA “will seek to build and expand on its regulatory principles.”
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CAA sets out expectations to Heathrow Airport for delivering a new runway
Following the Government’s announcement of Heathrow as its preferred location for a new runway, the CAA has today written to John Holland-Kaye, the airport’s chief executive, setting out its expectations for the efficient delivery of this new infrastructure.
25.10.2016 (CAA press release)
– Regulator writes to chief executive of Heathrow Airport setting out clear expectations for delivery of the new runway, following Government announcement
– Value for money and cost efficiency will be crucial to the process
– Airport must manage the legitimate concerns of local communities
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Following the Government’s announcement of Heathrow as its preferred location for a new runway, the CAA has today written to John Holland-Kaye, the airport’s chief executive, setting out its expectations for the efficient delivery of this new infrastructure. The letter itself is at http://www.caa.co.uk/
As the UK’s independent aviation regulator, the CAA has consistently made the case for additional aviation capacity to prevent consumers facing less choice, lower service quality and higher airfares in the future. The regulator has also been clear that any new capacity must consider the legitimate needs and concerns of affected local communities. The CAA now has a role to play in determining how much Heathrow can charge airlines, and ultimately consumers, for the building and financing of the project.
The regulator has emphasised to Heathrow the importance of the airport making it clear how it will deliver on its recent promises not to increase prices as the runway development progresses. The CAA expects to see effective engagement between the airport and its airline customers to drive value for money and efficiency. The regulator has also told the airport to set out clear plans for engaging with local communities and addressing their legitimate concerns around issues such as compensation, operational procedures and participation in the airspace change process.
Andrew Haines, Chief Executive of the CAA, said:
“The need for additional aviation capacity is clear and we welcome the Government’s announcement. We now expect Heathrow to set out how it will meet its promise not to increase prices and deliver a cost efficient programme in conjunction with its airline customers. We also expect the airport to ensure the legitimate concerns of communities near the airport are properly and fully considered and that a credible package of measures to manage those concerns is in place.”
As well as setting the maximum amount the airport can charge airlines and also establishing minimum service standards for the airport, the CAA also has other roles to play. These include implementing Government policy on airspace changes to ensure the best balance is reached between safety, efficiency and community impact; and that the design and operation of the new runway meets the required safety standards.
The CAA has published a number of policy documents relating to the principles it has established for its approach to the required economic regulation. This includes a consultation on how the chosen scheme can recover planning and construction costs and we expect to publish our final proposals for this shortly. Further consultation documents will be published in the coming months.
For media enquiries contact the CAA Press Office on 00 44 (0)207 453 6030 or press.office@caa.co.uk. You can follow the CAA on Twitter @UK_CAA.
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Notes to editors
The letter sent by the CAA to Heathrow Airport is available here http://www.caa.co.uk/WorkArea/DownloadAsset.aspx?id=4294981598
More information on the CAA’s economic regulation role in new airport capacity is available in this In Focus document. [This page says: “On 25 October, the Government announced its proposal to allow additional runway capacity to be developed at Heathrow Airport, subject to a consultation and going through parliamentary process.
Here we explain the CAA’s role in the process going forwards.” The document is at http://publicapps.caa.co.uk/docs/33/CAP%201466%20Heathrow.pdf
The CAA is the UK’s aviation regulator. Its activities include: making sure that the aviation industry meets the highest technical and operational safety standards; preventing holidaymakers from being stranded abroad or losing money because of tour operator insolvency; planning and regulating all UK airspace; and regulating airports, air traffic services and airlines and providing advice on aviation policy.
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“What is the CAA’s economic regulation role in new airport capacity?”
The CAA’s document (25th October 2016) says:
On 25 October, the Government announced its proposal to allow additional runway capacity to be developed at Heathrow Airport, subject to a consultation and going through parliamentary process. Here we explain the CAA’s role in the process going forwards
The CAA is the UK’s independent aviation regulator, with responsibility for economic regulation, airspace policy, safety regulation and consumer protection. We will lead the economic regulation of new airport capacity.
We understand the vital importance of our role and will, along with others, aim to ensure that the airport delivers any new runway in an economic, efficient and timely manner.
Our duties are set out in the Civil Aviation Act 2012 (the “Act”). Our primary duty is to further the interests of users of air transport services regarding the range, availability, continuity, cost and quality of airport operation services. Passengers and air cargo owners are therefore at the heart of our decisions.
The role of economic regulation
Under the Act, in 2014 we granted Heathrow Airport Ltd (Heathrow) a licence which allows them to levy charges for their services up to certain limits and subject to service quality standards, also set by us. We have strong powers to compel compliance with the licence through enforcement orders and to exact penalties for breaches. The principal purpose of this economic regulation is to protect consumers from the adverse effects of companies with substantial market power.
The legislation defining the breadth of our powers and responsibilities is similar to that governing other UK independent economic regulators. Over the past 30 years, independent economic regulation has provided a stable and consistent framework which has encouraged new businesses to enter markets, compete and invest billions of pounds in new infrastructure. This has encouraged Heathrow to invest around £11 billion in infrastructure projects since 2003/4, improving the quality of service and facilities offered to passengers.
The CAA’s economic regulation of new airport capacity
We currently set a price cap on Heathrow’s airport charges under a traditional Regulatory Asset Base (RAB) model on a 5-year cycle. Broadly speaking, the cap on airport charges is calculated with reference to the amount of investment, an estimated fair return on that investment (based on the risks involved) and the level of efficiently incurred operating expenses. A single till approach is used, where the commercial and other revenues are then deducted from the total revenue requirement.
With a new runway under design and construction, we will continue to regulate the existing operations at the airport. This will be done through periodic reviews of its licence, monitoring the effective operation of the airport, as well as regulating the costs and delivery of the new runway.
Any new runway will be privately financed by the airport’s investors and paid for by airlines through airport charges which then has a knock-on impact on the ticket prices of consumers flying with those airlines. As with our work on existing operations, we will regulate the construction of the new runway in the interest of passengers and cargo owners and in accordance with all our statutory duties. We will expect Heathrow and the airlines operating at the airport to encourage productive engagement and discussions which support the ongoing development of the scheme.
The nature of this project, however, is unprecedented in terms of its economic regulation. The expansion of Heathrow will be a global first: no other major airport expansion of such scale and complexity has been financed by private capital. We are giving very careful consideration to how we will regulate the airport to ensure that the new runway is delivered efficiently, with regard to both financing and construction costs.
Scrutiny of the cost and design of new airport capacity
Expansion must deliver good value for money for the consumers who will pay for it and we note the aim of Government to see airport charges at Heathrow maintained as close as possible to their current level.
It is therefore crucial that the aviation community scrutinise the design of the runway, to help us ensure that it is cost efficient. In the normal course of Heathrow’s 5-year regulatory cycle, we undertake a process called constructive engagement, where we harness the unique and strong position of the airlines to help drive efficient airport design and delivery. In the period following the Government announcement, we will facilitate intensive discussions between the airport and airlines on the cost and design of the scheme.
Consultation(s) on economic regulation
We have already published a number of policy documents identifying distinct categories of cost and broad principles for how Heathrow can recover its planning and construction costs. Our current plans are to publish a series of consultation documents through 2017 in which we will seek to build and expand on our regulatory principles.
We recognise the need for certainty and progress, but we must be diligent in our approach. We recently ran an initial consultation on the regulatory treatment of planning costs. We intend to publish our final proposals in November 2016. This will reduce the uncertainty faced by Heathrow and its investors and encourage investment to proceed in a timely way. Securing planning permission is a sizeable and complex task, and Heathrow is likely to incur a significant amount of expenditure years before additional capacity becomes operational.
Subsequent consultations will set out our views on other elements of the economic regulation framework, including:
■ the overall timetable for the regulatory process;
■ the long-term nature of capacity expansion and any implications for the length and structure of the regulatory price control cycle;
■ risk allocation and the implications for the allowed return on capital;
■ views on pre-funding;
■ the treatment of surface access costs; and
■ compensation to local communities (e.g. in relation to noise and blight)
Many of our decisions on these issues will require changes to the licence when implemented. These changes are subject to appeal, permitting Heathrow and the airlines an opportunity to challenge our decision making within the framework.
The settlement for expansion will be subject to equal rights of appeal from airlines and the airport. We will therefore fulfil our obligation to act in a balanced way and be scrutinised accordingly.
This document focusses on the economic regulation of new capacity. We will also publish further information on airspace and environmental factors in which we have a role to play.
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And the FT said:
Robert Wright, Transport Correspondent
Plans for a new, third runway at Heathrow airport look set to become embroiled in deeper controversy over costs after the airports regulator said it expected charges to customers to hold steady during construction work.
A statement from the Civil Aviation Authority appears to rule out any increases in charges while the runway is built. Heathrow has said only that it will hold prices steady “on average” up until 2048, but that they will rise in some years and fall in others.
Airlines pay Heathrow £19.33 per departing passenger, which adds to the price of tickets. International Airlines Group, the parent company of British Airways, which is the biggest user of Heathrow, has warned that if the charge rises further, it will be uneconomic for many passengers.
Airlines have demanded that Heathrow’s shareholders finance the £16.5bn cost of building a third runway and that charges to users should not rise.
The CAA told the Financial Times: “We expect Heathrow to set out how it will meet its promise not to increase prices and deliver a cost-efficient programme in conjunction with its airline customers.”
The battle over who pays to expand Europe’s busiest airport by passenger numbers is likely to be prolonged.
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