Gatwick Airport produces new Business Plan to 2024 with prices based on customer contracts
Gatwick Airport has produced its Revised Business Plan to 2024 (the last one went to 2020) which sets out their proposals for the coming years. They are putting forward a new deal that would allow Gatwick and its airline customers to develop bilateral, tailored contracts to replace the current system of regulation. The CAA invited Gatwick to propose such a framework in October 2012. Gatwick says this would give better levels of quality, price and service to airlines and passengers. Gatwick says this will promote competition between airports, and mean lower charges for airlines and passengers. Under the deal, passenger fees will rise from £8.80 in 2014 to a maximum of £10.68 in 2020/21. This means an increase of RPI+1.3% over a 7 year period rather than RPI +.3.3%. Gatwick claimed that if it stays within the current regulatory framework, the maximum per passenger fee would rise to £11.45 in 5 years. The CAA will come to a decision on the initial proposal on the airline contracts framework on 30 April 2013 and make a final decision in January 2014. Gatwick is planning to invest a further £1 billion in the airport between 2014 and 2019.
The Gatwick Airport business plan to 2024 ( link ) says:
The main elements of our vision for Gatwick are as follow:
• Improvements in all elements of the passenger journey through our airport, leading to a much better experience for all types of passengers, while at times delivering further operating efficiency;
• Growth in traffic from around 34 million passengers today, to around 37 million passengers as we approach 2020; [37m is the same as the DfT forecast made in Jan 2013]
• Growth in non-aeronautical spend per passenger through innovation and improved offerings; and
• £1bn of capital expenditure between 2014 and 2020, thereby continuing the rate of improvement since the airport changed hands.
14 February 2013 (Gatwick Airport’s press release)
Gatwick Airport has today put forward a new deal that would allow Gatwick and its airline customers to develop bilateral, tailored contracts through a legally-binding Contracts & Commitments framework. The new framework – designed to replace the current system of regulation – would deliver better outcomes for airlines and passengers in terms of quality of airport facilities, service levels and price.
The new deal at Gatwick would mark a radical change from regulation to match the radical change in Gatwick’s ownership and would be the best way to promote competition between airports and further the interests of passengers.
By removing wasted costs of regulation, improving incentives and speeding up investment, Gatwick can offer airlines a lower price path over a longer period of time than would be the case if it continues to operate within a regulatory framework.
Under Gatwick’s new deal it has been calculated that, following a one-off price adjustment, the maximum average price level under its proposed Contracts & Commitments framework would increase by RPI+1.3% over a seven year period.
This equates to an increase in the per passenger fee from £8.80 in 2014 to a maximum per passenger fee of £10.68 in 2020/21. This outcome would ensure Gatwick’s prices remain highly competitive when compared to other London airports. However, charges to airlines with contracts may well be at prices lower than these levels.
(This price compares favourably with a maximum average price level increase of RPI+3.3% which would otherwise result under a five-year regulatory framework, taking the maximum per passenger fee up to £11.45 by 2018/19).
Long-term certainty over the average price path combined with a legally-binding commitment to maintain and improve service standards at the airport, together with the option of entering contractual relationships tailored for individual airlines make this new deal at Gatwick the best outcome for everyone.
Stewart Wingate, Gatwick’s Chief Executive Officer, said: “Competition is by far the best mechanism for promoting the interests of passengers. It is the very reason why the Competition Commission took the decision to break up the BAA monopoly and why Gatwick is now thriving under separate ownership.
“Our proposed new deal for Gatwick moves that competition judgement on further and is a better deal for airlines and their passengers than a regulatory outcome. Free from regulation, we would be able to respond more quickly to the changing needs of airlines and their passengers and we would be able to step up the pace of improvement in the passenger experience. The deal means airlines and passengers win on price, service and the quality of facilities.
“A decision to allow competition, rather than regulation, to protect the interests of passengers would be, in my view, the most important step the CAA could take when it considers this plan.”
Competition in London and the South East is set to increase and so it is critical that Gatwick be able to continue improving the quality of its service offering. Gatwick is therefore proposing to put forward an investment of a further £1 billion in the airport between 2014 and 2019 to build on the improvements delivered to passengers over the past three years.
The additional £1 billion investment would enable Gatwick to continue creating the right facilities for passengers and airlines and to deliver an improved passenger experience at every step of the airport journey. Examples of where this investment will be made include:
- Continued transformation of our check-in areas in partnership with our airlines to reduce queues and deliver a smoother experience.
- A new state-of-the-art security area in North Terminal which will make use of the same award-winning technology processes and customer service introduced in Gatwick’s £45 million South Terminal security area opened in 2011.
- Redevelopment of Pier 1 – the UK’s oldest pier – will see the existing pier demolished and a two-storey replacement built. Facilities will include a new baggage system, allowing passengers to use automated fast-bag drops, and new gate rooms linked to five new aircraft stands by air bridges. Airlines will also have the option to offer ‘day before’ check-in, through a new automated bag store system.
- Extension of Pier 6 to provide a world-class, 95% pier service – a key requirement for passengers. The project will also increase the number of A380 stands.
- Continued partnering with UKBF to improve immigration queues and the overall passenger experience following work already progressed to make facilities in South Terminal lighter, brighter and with an improved layout.
Gatwick’s full business plan to 2024 is available at: www.gatwickairport.com/a-new-deal
Gatwick wants prices based on customer contracts
Thu Feb 14, 2013 (Reuters)
(Reuters) – London’s Gatwick airport on Thursday published its business plan for the next 10 years, saying it favoured setting prices charged to airlines based on bilateral contracts rather than pure regulation.
Gatwick, which is investing 1 billion pounds over the next five years as it looks to grow to 37 million passengers by 2020, is required to publish the business plan so that aviation regulator the Civil Aviation Authority (CAA) can set price caps for the five years from April 2014.
The airport, owned by Global Infrastructure Partners, said its “contracts and commitments” proposal would see prices rise by the retail price index (RPI) plus 1.3 percent over seven years.
A less favoured “regulatory basis” proposal would see prices increase by RPI plus 3.3% over five years.
Both proposals are stated after a one-off 10.7% increase in April 2014.
The CAA is expected to publish its initial proposals by end-April 2013 with a final decision on airport charges in January 2014.
Earlier this week London’s Heathrow airport said it wants Britain’s Civil Aviation Authority (CAA) to allow it to increase charges for airlines to use the airport between 2014 and 2019.
If approved, the charges would increase from the equivalent of £19.33 per passenger for 2012/13 to an upper limit of £27.30 in 2018/19.
Gatwick outlines plans for ‘radical’ changes
Gatwick Airport has set out proposals for a radical change in the way it operates, claiming it will mean lower charges for airlines and passengers.
It says the new deal, which would be free from regulation, would allow it to respond more quickly to its customers’ needs, improve facilities and service, and keep prices more competitive.
“By removing wasted costs of regulation, improving incentives and speeding up investment, Gatwick can offer airlines a lower price path over a longer period of time than would be the case if it continues to operate within a regulatory framework,” it said.
Under the new deal, passenger fees will increase from £8.80 in 2014 to a maximum per passenger fee of £10.68 in 2020/21.
Gatwick claimed that if it stays within the current regulatory framework, the maximum per passenger fee would rise to £11.45 in just five years.
The CAA invited Gatwick to propose a ‘Contracts and Commitments Framework’ in October 2012.
It will come to a decision on the initial proposal on 30 April 2013 and make a final decision in January 2014.
“Competition is by far the best mechanism for promoting the interests of passengers,” said Gatwick CEO Stewart Wingate.
“It is the very reason why the Competition Commission took the decision to break up the BAA monopoly and why Gatwick is now thriving under separate ownership.”
Gatwick’s proposal comes just days after Heathrow outlined plans to raise airline fees to fund future development.
Gatwick is planning to put forward an investment of a further £1 billion in the airport between 2014 and 2019.
The airport said this would be used to:
– Continue the transformation of its check-in areas in partnership with airlines to reduce queues
– Develop a new state-of-the-art security area in North Terminal, using the same processes and customer service introduced in Gatwick’s £45 million South Terminal security area opened in 2011
– Replace Pier 1, the UK’s oldest pier, with a two-storey replacement
– Install a new baggage system and new gate rooms linked to five new aircraft stands by air bridges
– Extend Pier 6 to provide a “world-class, 95% pier service”, which will also increase the number of A380 stands.
Gatwick Airport’s website says:
- The maximum level of charges that Gatwick can levy. In practice this has meant the CAA determining annual increases in revenue from airport charges per passenger restricted to not more than the rate of inflation (Retail Price Index) plus or minus x percentage points.
- Gatwick’s conduct in relation to customers, business partners and suppliers. The regulator is required to ensure that Gatwickacts in the interest of users.
Please find below the CAA’s determination for the latest quinquennium (known as Q5) covering the period from 1 April 2008 to 31 March 2013 published in March 2008. You can find additional information on the CAA website.
- CAA regulatory decision document – March 2008
In February 2011 the CAA consulted on extending the current five-year regulatory period by one year to end on 31 March 2014 and published its decision in March 2011 formalising the extension.
CAA Q5 extension consultation document – February 2011
Gatwick’s response to the CAA’s Q5 extension consultation – March 2011
CAA’s Q5 extension decision – March 2011
Joint Gatwick Airport and airlines agreement on the Q5 extension – March 2011
The formal process of Constructive Engagement at Gatwick for the period beyond the end of Q5 commenced on 1 April 2012 with the publication of Gatwick’s initial business plan below. Prior to its publication Gatwick wrote the letter below to the CAA.
The Initial Business Plan to 2020 (April 2012) for Gatwick is at http://www.gatwickairport.com/Documents/business_and_community/General%20PDFs/GAL%20Business%20Report%20public.pdf
This says (Page 11)
…. (providing good facilities for passengers) ….This sometimes requires additional investment, and is therefore likely to mean some increase in airport charges, although as we highlight below, we believe some of our proposals should reduce the total cost of operating from Gatwick. We also believe that this has to be set against our shared interest in ensuring passengers continue to use Gatwick; the fact that airline charges at Gatwick compare well with our competitors, and the higher airline yields that airlines are able to obtain from Gatwick passengers.
and now today (14th Feb 2013):
Revised Business Plan to 2024
This says (Page 49 -50)
An analysis of supply and demand shows that at current regulated prices, there is an imbalance, with demand outstripping available supply at some times of the day. This is the case in the Summer in particular, but also at times during the Winter. This imbalance
remains the case despite Gatwick under separate ownership introducing a more ‘peak-based’ structure of charges. This indicates that even if prices (in terms of an average aggregate charge) at Gatwick were to increase above current levels there would be airlines, either incumbent or new entrant, that would be willing to pay an increased price to utilise Gatwick’s facilities.
An airport in a competitive market, in thinking about its charges, would take into account the charges levied by its direct competitors and more distant potential providers of supply. An airport, by comparing the level of its charges with those of direct competitors and a broader set of comparators, can gain an insight to whether the current level of prices is broadly
appropriate, or whether a downward or upward movement in prices would be more appropriate.
Such comparisons would need to pay attention to relative levels of service, capacity utilisation, traffic mix and other factors to ensure the appropriate lessons were drawn.
Gatwick and the CAA have produced various pieces of analysis as part of the work to assess Gatwick’s market power. Comparing charges at a range of appropriate
comparator airports demonstrates that Gatwick’s charges are relatively low. For example, Gatwick’s charges are around 50% of those levied by Heathrow. Against our other direct competitors, our charges are slightly higher than those of Stansted and Luton airports. In comparing these charges, we of course need to be cognisant of the differences in the product on offer by the various airports and any additional charges that are levied where costs are not recovered through airport charges to airlines.
Flybe has criticised “ludicrous” landing charges at Gatwick Airport after its complaint about a sharp hike in the fees was rejected.
The Exeter-based airline had complained to the UK Civil Aviation Authority about the London airport’s decision to increase summer landing charges by 62.5 per cent, while winter charges were reduced to zero. Other charges were kept at the same level.
Flybe complained that structuring charges in this manner unreasonably discriminated against it and other operators of small aircraft at Gatwick.
The CAA found that although the revised charges – which came into effect in April 2011 – discriminate against airlines using small aircraft, the discrimination was not unreasonable, because Gatwick’s objective of increasing the efficient use of its single runway justified the changes.
A Flybe spokesman said: “We are now in the frankly ludicrous position that Gatwick charge the same amount of landing fee to our 78-seater turboprop as they do to an A380, which could have 800 passengers aboard.”
The CAA ruled that while some passengers may be harmed by the changes to Gatwick’s charging structure, the numbers involved are likely to be small and the adverse effects would be balanced by benefits to other passengers.
The airline’s spokesman added: “Flybe is obviously disappointed that the CAA, after some two years of consideration, found that Gatwick were within their rights to discriminate against operators of small, regional aircraft by means of significant landing fee rises and we will continue to press the Government to correct such a system.
“Flybe is pleased, but perplexed, by the CAA’s admission that passengers have been and will be harmed by Gatwick’s policy, though we strongly disagree with the CAA’s findings on the extent of this harm.
“Flybe also notes Gatwick’s recent change of charging policy for 2013/14 (applying increased charges to all aeronautical charges and not just loading landing charges), which followed our complaint, and we question whether this now supports Flybe’s assertion all along, that the policy did indeed have a negative impact on regional access to London.”
EASYJET STATEMENT IN RESPONSE TO THE LONDON GATWICK ‘NEW DEAL’ POLICY FRAMEWORK ANNOUNCEMENT
All the evidence shows that Gatwick is a monopoly airport and therefore should continue to be regulated.
Without regulation passengers face the risk of higher charges.
easyJet can see no justification for the price increases proposed by Gatwick Airport today which, rather than keeping costs low, represents an increase of around 60% over five years.
The airlines at Gatwick believe that the improvements outlined today could be delivered with a decrease in charges of RPI minus 9% every year over the five year period.
Gatwick Airport’s so called “new deal” is simply smoke and mirrors and these proposals don’t provide value for money for passengers.