CAA proposes Heathrow charges rise in line with inflation over next 5 years
The airport regulator, the Civil Aviation Authority, has proposed that Heathrow should cap its landing charges so that they rise in line with inflation for the 5 years 2014 – 2019. Heathrow is complaining about this, as it wants a much larger increase in its charges and says this price cap would have “serious and far-reaching consequences” for passengers. Heathrow had submitted its request to the CAA for charges to be allowed to rise by 4.6% above the Retail Price Index (RPI), which is a measure of UK inflation. The CAA had initially proposed that the annual increase at Heathrow should be RPI minus 1.3% but said a key reason for its proposal to allow rises in line with inflation was “due to an increase in the cost of capital driven by higher debt costs”. If the proposals are accepted it will put an end to over a decade of prices rising faster than inflation at Heathrow. Airlines like BA at Heathrow had asked for a 9.8% a year cut in landing charges over the 5 years. The CAA propose allowing charges at Gatwick to rise by 0.5% above RPI for 5 years, and is yet to decide on charges at Stansted. The CAA’s final proposals for all 3 airports would take effect if the CAA makes a final decision in January.
.
Tweet
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.
.
.
The CAA website says:
Regulation in the passenger interest, supporting investment and driving competition
3.10.2013
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.
Notes to Editors
1. The CAA’s consultation on its final proposals for regulation and draft licences for each airport will run until 04 November 2013.
2. Final decisions on market power, economic regulation and final licences for those airports found to have market power will be published in early 2014.
3. The CAA is the UK’s specialist 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 from an economic standpoint.
http://www.caa.co.uk/application.aspx?catid=14&pagetype=65&appid=7&mode=detail&nid=2291
.
.
Comments from AirportWatch members:
Seems to me that ONLY by charging nearer to a market rate that reflects the restricted supply of landing slots at Heathrow can we hope that:
1) flights that do not need to be at LHR would move elsewhere, hence reducing the supply problem
2) that flights overall might reduce
3) that the owners would be able to profit without having to push the UK into another runway or two i.e. they could stop making the false arguments about needing an extra runway for the good of the country when in fact it would only be for the good of BAA (= Heathrow airport).
2) that flights overall might reduce
3) that the owners would be able to profit without having to push the UK into another runway or two i.e. they could stop making the false arguments about needing an extra runway for the good of the country when in fact it would only be for the good of BAA (= Heathrow airport).
It strikes me as quite reasonable that market forces should be allowed to come to bear in this case – i.e. there is a restricted supply, charges that reflect this would cause redistribution and possibly curtailing of demand. If there is so much demand for Heathrow, the airlines and passengers will bear the cost. That is how markets are meant to work.
In addition the premium at LHR might reasonably reflect the premium that users receive there in terms of choice of airline and route, travel time to reach the airport, and other costs that they save versus using Gatwick etc and having to change at another hub etc
What is the argument against this?
—————
The main argument against this would, of course, come from the Heathrow airlines, especially British Airways (‘BA’) because if Heathrow Airport Limited (‘HAL’) were to be deregulated and able to charge whatever the market would bear (i.e. a market clearing price), its airport charges would soar. This would cost the airlines a great deal of money because they already try to charge whatever the market can bear. It would in fact be a ‘double whammy for the airlines because it would also decimate the value of their Heathrow slots because the secondary market in slots would collapse. Indeed this would be the evidence that a market clearing price had been reached.
It is questionable whether passengers would end up paying higher fares because airlines operating out of Heathrow already charge whatever the market will bear. This is what gives them the so-called ‘Heathrow premium’, and it is the Heathrow premium which explains why Heathow slots change hands for such high prices. It arises because local market demand outstrips capacity, and the existence of the Heathrow premium helps explain why Willie Walsh is not desperately lobbying for extra capacity at Heathrow.
So, increasing Heathrow’s airport charges would simply transfer profits from the airlines – especially BA – to the airport operator, HAL. Using an example of a £10 (i.e. about 50%) increase in airport charges, this would generate an extra £700m a year profit for HAL at the expense of the airlines using Heathrow. This would be a huge profit transfer and obviously the airlines would fight like terriers to oppose it.
.
Heathrow Airport attacks regulator’s price-control plan
3 October 2013 (BBC)
Plans to cap Heathrow landing fees are a “good deal” for passengers, says Richard Moriarty from the Civil Aviation Authority
Heathrow Airport has criticised proposed new price controls on the annual fees it can charge airlines.
The Civil Aviation Authority (CAA) on Thursday said that Heathrow’s yearly rise between 2014-18 should not be more than the retail price index (RPI).
But the airport’s chief executive Colin Matthews said this could restrict investment and have major consequences for passengers and airlines.
The CAA also proposed capping rises at Gatwick airport to RPI plus 0.5%.
Heathrow airport has been more expensive than others, says travel expert Simon Calder, due to “arcane” charges
Airports charge airlines for use of their facilities, including landing fees, security and use of terminals.
Heathrow had submitted a plan, rejected by the CAA, seeking to raise annual tariffs for airlines by 4.6% above RPI inflation.
Dame Deirdre Hutton, chairwoman of the CAA, said in a statement: “The proposals will put an end to over a decade of prices rising faster than inflation at Heathrow.
“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.”
But Mr Matthews said: “This proposal is the toughest Heathrow has ever faced. 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. We will now carefully consider our investment plans before responding fully to the CAA.”
Despite the criticism, the CAA’s price control is an improvement on a draft proposal earlier this year that Heathrow’s five-year cap should be RPI minus 1.3%.
‘Disappointing’Airlines said that the CAA’s final proposals on Thursday were too lenient and that it had bowed to pressure from Heathrow and its shareholders.
Willie Walsh, head of British Airways’ parent group IAG, said: “With this settlement, Heathrow will continue to levy charges well above other major hub airports.
“We want a Heathrow that is efficiently run, fairly rewarded and priced comparably with other airports. We will carefully consider our next steps,” he said.
Virgin Atlantic said in a statement that the CAA’s proposal was “deeply disappointing”.
For Gatwick, the CAA’s price control will cover seven years from April 2014. The owners of the West Sussex airport gave the proposal a “a cautious welcome”.
Gatwick chief executive Stewart Wingate said: “The CAA’s proposal to take forward our commitments framework would deliver an improved future outcome for passengers in terms of service quality, facilities and price.
“We will now redouble our efforts to work with our airlines partners to make this work in the best interests of all parties, and in particular for passengers.”
A CAA proposal on a charging regime at Stansted for 2014-19 is expected next week, with a final ruling on all three airports due in January.
http://www.bbc.co.uk/news/business-24377802
.
.