Heathrow, Gatwick and Stansted face regulatory shake-up by CAA and pricing changes
Date added: April 21, 2013
The CAA has the responsibility of setting the maximum level of airport charges, every 5 years, for Heathrow, Gatwick and Stansted -the 3 “designated” airports. On 30th April the CAA is expected to announce its initial plans. It will make a final decision in January 2014. The landing charges generally rise a bit faster than the rate of inflation and the RPI (retail price index) and charges are passed on to passengers, increasing air fares. Since the last 5 yearly review, the three airports now each has a different owner, whereas before all three were BAA owned. The CAA is not expected to allow Heathrow to increase its landing charges of 5.9% a year above inflation – which it has requested – and which have enraged the airlines. Gatwick airport has been campaigning to be permitted to strike commercial deals with major customers such as easyJet, which it says would reduce its fares. Gatwick already has different landing charges in summer and winter. The CAA’s announcement is expected to trigger intense lobbying by airports and airlines over the regime for Heathrow, Gatwick and Stansted.
Heathrow, Gatwick and Stansted face regulatory shake-up
London’s top three airports are facing the biggest regulatory shake-up for a quarter of a century, with the Civil Aviation Authority (CAA) poised to introduce different pricing regimes at each of Heathrow, Gatwick and Stansted.
In a radical departure, the CAA is looking to replace the outmoded regulatory formula at Stansted and give Gatwick more freedom to strike commercial deals. The regulator is also expected to force Heathrow to cut planned hikes to landing charges of 5.9pc a year above inflation that have enraged the airlines.
The regulatory changes could unleash lower fares, though the CAA is mindful of the need to encourage airport investment.
The CAA will unveil its initial thoughts on April 30 for maximum landing charges per passenger at Britain’s three regulated airports for the next five-year period starting in April next year.
This sixth regulatory period marks a crucial split with the past, however, because it is the first time that all three airports are in different hands following the forced break-up of the BAA monopoly.
BAA, which is now renamed Heathrow, sold Gatwick to Global Infrastructure Partners for £1.5bn in 2009, while in January it offloaded Stansted to Manchester Airports Group for a similar sum.
Changes of ownership have coincided with a new licensing regime for UK regulated airports that has, sources say, allowed the CAA to abandon its previous “one-size-fits-all regulation”.
An added complication is the review by the Davies Commission into UK hub airport capacity, where any “game-changing” decision in 2015 would force the CAA to revisit its pricing proposals.
At Stansted, the CAA is considering exempting the airport from the industry-wide pricing formula based on a “regulated asset base” (RAB) – the regulator’s proxy for an airport’s value – which rises in line with investment in new facilities, such as terminals and runways.
Michael O’Leary, chief executive of Ryanair, which is responsible for 70pc of Stansted’s traffic, has long complained that RAB-based regulation encourages “gold-plating”. He argues that the current regime gives airport operators an incentive to build “Taj Mahal” facilities on the basis that the more they spend the more the regulator lets them charge per passenger.
He is also livid that Stansted’s £1.3bn RAB is inflated by £156m of costs associated with the abortive plans to build a second runway at the airport.
The CAA would acknowledge Stansted’s facilities do not reflect its low-fare customer base but is balking at calls from Mr O’Leary to cut the airport’s RAB to between £700m and £800m and base charges on that.
Instead it is looking at alternative formulas. These include benchmarking charges against those at similar European airports or removing price caps altogether and simply monitoring any above-inflation rises. The CAA would then intervene to settle disputes.
The latter approach, similar to the one used in Australia, could pave the way for Ryanair to strike a long-term deal with Stansted’s new owners over the charges.
Freedom to strike similar deals could also underpin the new model for Gatwick, which wants to be removed from the CAA’s pricing regime.
Gatwick chief executive Stewart Wingate has claimed that charges would be lower if it was free to strike commercial deals with major customers such as easyJet. One industry source said: “The CAA is likely to call for them to prove it, while remaining as a regulatory backstop. It’s not going to turn down a 10-year deal that’s in everyone’s interests.”
Only at capacity-constrained Heathrow is the current top-down, RAB-based formula likely to remain.
Heathrow has infuriated airlines with plans to raise charges per passenger from £21.96 to £27.30 over the next five-year period, which it claims are necessary to support a £3bn investment programme – less than £11bn invested over the past decade that included building Terminal 5.
It says its proposals “strike the right balance between continuing to invest for passengers and keeping charges at a level that is affordable for airlines”.
But the carriers are up in arms. The CAA is expected to force Heathrow to cut its proposed price hikes, though by how much is unclear.
The CAA’s April 30 announcement is expected to trigger intense lobbying by airports and airlines over the regime for Heathrow, Gatwick and Stansted. It will make its final decision in January.
Changes of ownership have coincided with a new licensing regime for UK-regulated airports that has allowed the CAA to abandon its previous “one-size-fits-all regulation,” the newspaper quotes sourcs as saying.
An added complication is the review by the Davies Commission into UK hub airport capacity, where any “game-changing” decision in 2015 would force the CAA to review its pricing proposals.
Gatwick chief executive Stewart Wingate has claimed that charges would be lower if it was free to strike commercial deals with major customers such as easyJet.
The CAA’s announcement is expected to trigger intense lobbying by airports and airlines over the regime for Heathrow, Gatwick and Stansted. It will make a final decision in January.
2.7. The highest level of economic regulation applies at those airports that have been designated by the Secretary of State. In 1986, the Secretary of State designated Heathrow, Gatwick, Stansted and Manchester airports. Manchester airport was subsequently de-designated from 1 April 2009. No new airports have been designated since 1986. At the designated airports, the CAA must set maximum limits on airport charges for successive periods of five years. link
Gatwick chiefs: Heathrow hub would raise cost of flights
19 April 2013 (Evening Standard)
Holidaymakers would see the cost of flying from the South-East rise if Heathrow is allowed to become a super-hub airport, Gatwick chiefs warned today.
In a submission to the Davies Commission, Gatwick warned that letting the west London airport expand to three or four runways would lead to a “premium” charged on flights. The Sussex airport argued there was evidence that airlines at dominant hubs were able to exploit their market position.
Stewart Wingate, chief executive of Gatwick Airport, said: “A mega-hub airport would be yesterday’s solution to tomorrow’s problem.”
Gatwick highlighted the benefits of competition with figures showing that a return flight to Moscow on easyJet in mid-May from the Sussex airport would cost £145, compared with £354 on BA from Heathrow. But Heathrow rejected Gatwick’s core argument, saying hub airports used transfer passengers to support long-haul routes which otherwise would not be viable.
Willie Walsh said that the proposals by Heathrow Airport Holdings would be damaging for passengers and would only serve the interests of shareholders in the airport.
Heathrow is 37% owned by the Spanish infrastructure investor Ferrovial. Other investors include the sovereign wealth funds of China, Qatar and Singapore. The Chinese Investment Corporation, for example, owns 10%.
Heathrow submitted the application for the increase in landing charges as part of the regulatory review currently being undertaken by the Civil Aviation Authority (CAA).
“The last regulatory review awarded Heathrow ridiculous price increases – RPI +7.5% per annum at a time when the airline industry was going through significant change and cost reduction and cost control,” Mr Walsh said.
“This time round we are looking to the CAA to stand up and fulfil their obligations.”
Heathrow has argued that it needs the increase despite completing the bulk of its major investment plan in new terminals.
Officials say that new baggage facilities and piers for the A380 super-jumbo plane mean that there will still need to be high levels of expenditure during the next five-year review period, which starts in April.
But Mr Walsh dismissed the arguments, saying that the airport could operate much more efficiently.
He called on Dame Deirdre Hutton, the chairman of the CAA, to stand up for passengers and said that Heathrow should be facing a real-terms cut in landing charges.
Mr Walsh argued that the last review had favoured investors.
“It was very much a carrot approach to provide incentives to the airports to spend money. In effect this was a licence to print money because the more the airport invested the higher the returns.
“Dame Deirdre Hutton has to ensure that the interests of the consumer are at the heart of what they do and clearly allowing increases way in excess of the rate of inflation cannot be seen to be in the interests of the consumer.
“The spotlight is firmly on her and the board.”
IAG has made a submission to the CAA review that argues Heathrow is a monopoly service provider that can lower its cost of capital, become more efficient and still invest in the airport.
He said British Airways would have little flexibility but to move flights to Gatwick if the increases were agreed at Heathrow.
As The Daily Telegraph revealed last week, the CAA may apply different rules to Heathrow, Gatwick and Stansted. Gatwick could be given the chance to strike commercial deals directly with airlines, a move that could put Heathrow at a disadvantage as the far larger airport will be obliged to stick to CAA-agreed charges.
Mr Walsh said that if the CAA agreed to new charges it would be another hurdle in the way of Heathrow becoming an airport that provided value for money.
He said that the last round of CAA-agreed charges had meant Heathrow had become one of the most expensive hub airports in the world.
“It is a headwind against the UK economy,” Mr Walsh said. “It is the UK’s only hub airport, connecting us to critical growth markets.
“And the UK needs to work out how we move from a period of austerity to a period of growth.
“We have to be conscious about the UK’s uncompetitive position globally. The UK is becoming very uncompetitive in terms of access and I think we are suffering.
“The shareholders of Heathrow have benefited significantly over the last few years and the consumers haven’t.”
British Airways would have little flexibility but to move flights to Gatwick if the increases were agreed at Heathrow.”
Go on then Willie, why don’t you? Surrender some Heathrow slots.
. . . . .
Hi ‘Willie’ . Here’s how a market works. Lets say there is something that a lot of people want and there is not much of it. Like landing slots at Heathrow. What you do is, increase the price . That way, we get the best possible fit of demand and supply. Get it?
. . . . .
Or as the letter writer to the Economist put it :
SIR – Demand exceeds supply when prices inaccurately reflect economic value. An alternative solution to adding capacity at Heathrow or building new airports is to increase take-off and landing fees. Travellers who value flying through Heathrow would be willing to pay more to avoid congestion and travel delays, and those with less urgent needs would find alternative routes. I wonder why The Economist advocates central planning when economics provides simpler, market-clearing solutions.
Peter Lenk. Ross School of Business, University of Michigan, Ann Arbor, Michigan
London Gatwick Airport has outlined the case for competition to be allowed to deliver increased connectivity for London and the UK with the rest of the world.
Gatwick said that the Airports Commission should not accept Heathrow’s argument that a traditional “hub” airport is the only way to retain the UK’s existing links to the world in the airport’s response to the Airports Commission’s connectivity and economy paper submitted today.
According to Gatwick’s submission, the UK already has excellent air connectivity and London serves more destinations than any other European city. Having recently announced new direct links to Moscow and Jakarta, Gatwick now serves half of the world’s fastest growing economies.
Gatwick’s view is that the Commission should recommend making the most of existing capacity in the short to medium term, and not be swayed by demands for an expanded or new “hub” airport in order to improve connections with emerging markets. IATA figures show that the majority (93 per cent) of journeys using London airports are for passengers that either begin their journey from our airports or fly to them as a final destination. As a result, at only 7 per cent of journeys, the importance of ‘transfer’ passengers is exaggerated.
Gatwick believes the cost of air travel should be a vital consideration in the Commission’s research. Connectivity is not just about availability, but also affordability. Gatwick’s vision for the future of UK aviation capacity is one where true competition between the UK’s major airports will drive greater connectivity and greater passenger choice, convenience and cheaper fares.
Stewart Wingate, CEO of Gatwick Airport said: “It is true we will need additional capacity in the future. Without it, connectivity will be severely affected and the passenger experience will be impacted by unacceptable delays and rising prices.
“However, relentless suggestions that traditional “hubs” are the answer is misleading. Evidence shows that the London market is predominantly an Origins & Destinations market which means that most passengers begin or end their journey in London. A mega-hub airport therefore would be yesterday’s solution to tomorrow’s problem.
“We must not be blindly led to believe that because some of our European competitors serve more marginal routes to emerging markets, that we are falling behind them or that this is happening because Heathrow is full. If real competition is allowed to flourish, as it has at Gatwick, new routes will be created where there is market demand. For example, already this year Gatwick has added a route to Indonesia, demonstrating that competition is capable of delivering the connectivity needed by London and the UK. easyJet has also added a route to Moscow providing lower fares than the competing routes from Heathrow, again showing that competition is the answer ”
Gatwick Airport wants freedom from regulation on prices by the CAA
With Heathrow and Stansted, Gatwick is one of only 3 UK airports that is subject to a price regime set by the CAA. It is arguing that should be allowed to negotiate landing charges directly with airlines, rather than being regulated, through entering into individual commercial agreements with airlines. Gatwick says such deals, which would be struck under a legally-binding framework, could incentivise airlines to offer more routes. Gatwick says even for airlines that didn’t strike commercial agreements, charges would still be lower, increasing by 1.3% above the RPI over the next 7 years. By comparison, under continued regulation, charges would increase 3.3% above RPI over 5 years – which would mean landing charges rising from £8.80 per passenger in 2014, to £11.45 by 2018/19. But Virgin Atlantic is not keen on the idea, and nor is easyJet. Virgin says “The CAA must continue to regulate to ensure that Gatwick delivers services our passengers need at a price which is good value for money.” https://www.airportwatch.org.uk/?p=576
Heathrow Airport produces its 5 year business plan with large rise in landing charges to pay for £3 billion investment
Heathrow Airport has produced its business plan for Q6 (which is the 6th period of 5 years, from April 2014 -2019). It plans to spend some £3 billion on infrastructure, like work on Terminal 2. As Heathrow and the CAA over-estimated the number of passengers using Heathrow over the past 3 years, their income has been lower. Therefore Heathrow plans to raise its landing charges per passenger, by as much as 30 -40% by 2019 – much more than inflation. It said its prices “inevitably” had to rise in order to ensure a “fair return” to its investors. The CAA will publish its final decision on whether it has approved Heathrow’s proposals in January 2014. Launching the investment plans, Colin Matthews said the airport envisaged passenger numbers increasing from just under 70m now to around 72.6m by 2018-19. Heathrow’s 5-year plan is separate from any decision on whether a 3rd runway is built. Maximum airport charges allowed by the CAA are calculated using a complex formula taking into account the total value of Heathrow’s assets, return on capital invested and forecast number of passengers. https://www.airportwatch.org.uk/?p=592,
In essence, the price cap limits the ability of designated airports to pass on costs to their customers by way of airport charges. The cap operates as a maximum price (typically expressed as maximum average revenue yield per passenger), and it is not a guarantee that the airport will be able to charge at that level. So a designated airport could price below its cap where it wishes to or is forced to do so by commercial pressures. For instance, if the airport has excess capacity, it could reduce prices as a strategy to stimulate demand or as a necessary response to airlines threatening to switch their flights to another airport because they consider pricing at the level of the cap to be too high.
The five-yearly regulatory process for determining price controls is a significant exercise. The CAA is required to make a reference to the UK Competition Commission for this body to consider what the maximum amounts of airport charges should be and whether the airport operator has pursued any course of conduct operating against the public interest, either in relation to its charges or operational activities. The Competition Commission’s investigation generally lasts six months; in practice, the reference needs to be made about a year before the CAA makes its final determination. The costs of any Competition Commission investigation are generally met by the airport(s) concerned.
The CAA will then consider the Competition Commission’s recommendations (the CAA must have regard to the Competition Commission’s conclusions but is not bound by them), together with any other evidence and the need to fulfil its statutory duties as set out above, before issuing its final determination.
Although not subject to regulation, in recent years expected income from unregulated activities has been taken into account in setting the level of airport charges, such that the airport operations as a whole, including services to airlines and commercial activities (eg, retail and car parking), would make no more than a reasonable rate of return. Under this “singletill” approach (as opposed to the “dual-till” approach where income from unregulated activities would not be taken into account), the profits from such activities, in particular some of the highly profitable commercial activities have in effect been used to reduce the level of airport charges to airlines.
As with other UK regulated utility sectors, price caps for designated airports have to date generally been set on an RPI+/-X basis, based on an allowed return on the Regulatory Asset Base (RAB) – although there was a move away from this in the case of Stansted in the most recent price control determination. The price cap is thus set so as to allow a reasonable return on the RAB, comprising new and existing assets – in particular, to allow new investment to earn the cost of capital necessary for such investment to be made – after allowing for depreciation, an appropriate level of operating costs and income other than airport charges.
The price cap has been typically expressed as a maximum allowable yield per passenger, adjusting for RPI year-on-year within the five-year period. Changes in costs and revenues and in assumed traffic volumes are addressed going forward when price controls are re-set for the following five-year period. Generally, there is no retrospective adjustment for shortfalls in income or for additional costs (except in relation to the cost of certain specified additional security requirements).
Airport operators typically recover their allowable revenues through three types of airport fees and traffic charges: passenger fees, based on the number of passengers on board departing aircraft; landing charges, calculated in accordance with the take off weight of the aircraft and adjusted, where applicable, in accordance with each aircraft’s noise-rating and emissions, and the time of day; and aircraft parking charges, based on the duration of the ground stay and aircraft weight.