CAA publishes Competition Commission’s Stansted Airport charges report

6.11.2008   (eGov monitor)

The Civil Aviation Authority (CAA) has today published the Competition Commission’s
(CC’s) report and recommendations on charges at Stansted Airport, which will govern
how much the airport’s owner, BAA, can charge airlines during the five-year period
beginning April 2009.

The report is available on the CAA website at:

and on the CC website at:  

The CC is recommending an increase in the maximum level of airport charges at
Stansted to £6.26 per passenger,1 compared with the current level of actual charges
of £6.05 per passenger (all in 2007/08 prices), with an increase of no more than
RPI+1.75 per cent each year during the rest of the five-year period. These figures
compare with prices proposed by BAA of £6.38 per passenger, with an annual increase
of RPI+7.1 per cent.

In addition to its conclusions on airport charges, the CC also found that Stansted
Airport had acted against the public interest in the period since the last reference
to the CC by failing to consult adequately with airlines on the development of
the airport and its capital expenditure plans; by failing to manage as effectively
as possible the security queuing process; and by failing to offer appropriate
landing charges for larger cargo aircraft.

The CC is, therefore, recommending that the CAA requires BAA to improve the consultation
process; introduce a service quality rebate scheme, similar to those at Heathrow
and Gatwick, which will impose financial penalties on BAA if it fails to meet
agreed standards; and offer off-peak discounts on landing charges for the largest
cargo aircraft.

The CAA will now consider the CC’s recommendations, before carrying out a further
round of consultation and announcing its final decision in March 2009.

CC Deputy Chairman Christopher Clarke, Chairman of the Stansted inquiry and also
of the CC’s market investigation into BAA airports, said:

We believe our recommendations will provide the necessary incentives for BAA
to meet existing and future customers’ needs by operating efficiently and by continuing
to develop the airport.

Our inquiry has not been straightforward. It has been conducted against a background
of uncertain and deteriorating economic and financial conditions, which, in particular,
have made it difficult to forecast passenger numbers for the next five years and
to assess the appropriate level of return which the airport should be allowed
to earn. The CAA will need to keep these issues under review before making its
final determination in March next year. Also, our terms of reference from the
CAA were unusually broad, and, for a number of reasons, less preparatory work
had been undertaken.

The reference was delayed by more than a year while consideration was given to
the CAA’s proposal to the Department for Transport (DfT) that Stansted should
be de-designated, which would have removed the need for price control regulation.
Following the DfT’s decision not to de-designate, the CAA’s terms of reference
to us requested advice on the level of competition at Stansted, both currently
and throughout the five years, as well as on the appropriate form of price regulation.
Consistent with its own assessment of competition at Stansted, the CAA proposed
a precautionary approach to price regulation, suggesting that reliance should
be placed on market forces, with a cap set as a safeguard. This is in contrast
to the current approach which allows the airport a return on its regulatory asset
base (RAB), which in March 2008 the CAA confirmed was still the appropriate approach
for both Heathrow and Gatwick.

Whilst we considered a number of options for setting the price control, there
were a number of factors which persuaded us that we should retain the current
RAB-based method, appropriately adjusted for uncertainties over the capital expenditure
programme. These included Stansted’s strong competitive position, the practical
difficulties in introducing significant changes in a limited timeframe and the
current review of airport regulation by the DfT and by ourselves in our market
investigation into all BAA’s airports.

Another challenge has been to determine an appropriate capital expenditure programme,
which is a key element in determining an appropriate price cap. ‘Constructive
engagement’ between Stansted and its airline customers was short-lived, being
terminated by the CAA at the end of 2005 due to lack of progress. We took the
view that an airport’s airline customers are generally in a much better position
than the regulator to suggest what development is needed at the airport, even
recognizing their self-interest. We therefore sought to rekindle discussions between
BAA and the airlines with the encouraging result that agreement has been reached
on the scope and phasing of almost the whole of the five-year capital expenditure
programme for the airport’s existing facilities. This is now forecast to cost
£85 million (in 2007/08 prices) compared with the £239 million initially put forward
by BAA. Many projects have been reduced in scale, some deferred until later and
others removed altogether.

With regard to BAA’s proposals for a new runway, terminal and associated facilities,
which were expected by BAA to cost £1.1 billion over the five-year period (and
£2.3 billion overall), BAA has agreed to our suggestion that, given the uncertainty
surrounding this project, all construction costs should be excluded at this stage
but, should circumstances change in the course of the quinquennium (for example,
if planning approval is granted), it would be open to BAA to seek an interim determination
by the CAA. The CAA would then seek to re-set the price caps for the remainder
of the quinquennium in the light of the information available at that time. We
are therefore recommending that only £40 million (in 2007/08 prices) should be
included in the capex forecasts, which represents BAA’s anticipated expenditure
to the point of gaining planning approval. We would hope that the progress we’ve
made in bringing the parties together and our preliminary assessment of BAA’s
spending plans for the second runway project will assist in this process.

We are recommending a cost of capital, which determines the rate of return allowed
on new and existing assets at Stansted, of 7.1 per cent in real pre-tax terms,
which compares with 6.5 per cent at Gatwick and 6.2 per cent at Heathrow.

In addition to our conclusions on airport charges, we have found that Stansted
has acted against the public interest in three important areas. The CAA is required
to act on these and we are therefore recommending that the CAA requires BAA to
improve its process of consultation with the airlines on the development of the
airport; to introduce a service quality rebate scheme, similar to the schemes
in operation at Heathrow and Gatwick; and to offer the largest aircraft operating
at the airport an off-peak discount for landing charges, as is available for all
other aircraft.