Heathrow may be able to persuade the CAA to let it get back some money, in higher charges, due to huge Covid losses

The Civil Aviation Authority has been considering whether to allow Heathrow to increase its airport charges, in order to recoup the £2.8 billion that it says it had lost due to Covid (a few months ago). The CAA had rejected Heathrow’s revised request to hike charges by £2.8bn, labelling it “disproportionate”. But it now concedes that there has been “a further material deterioration in the outlook for the aviation industry” – due to further Covid travel restrictions – since it launched a consultation on the rises in October 2020. CAA director Paul Smith said: “In these exceptional circumstances we are persuaded that there are real issues we need to address to protect Heathrow’s consumers. However, in our view Heathrow’s proposals are not in the best interests of consumers.”  Heathrow has been threatening legal action against the CAA.  The airport already has over £15bn of debts.  The CAA has added two new options, for the H7 period, which starts on 1 January 2022, and will consult on them until 5th March. They are: Package 1 No intervention before H7, but consider interventions at H7  and Package 2 Targeted intervention now and consider further intervention at H7. The largest airline at Heathrow, IAG, has always opposed the CAA allowing higher charges.
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Heathrow lands partial victory in £2.8bn Covid charges row

The watchdog insists Heathrow’s request to increase charges by £2.8bn are not in the best interest of customers

By Oliver Gill (Telegraph)
5 February 2021

Heathrow has forced Britain’s aviation regulator into a partial climbdown in a multibillion-pound row over increasing airport charges to cover losses suffered as a result of coronavirus.

The Civil Aviation Authority rejected Heathrow’s revised request to hike charges by £2.8bn, labelling it “disproportionate”.

However, the watchdog conceded “a further material deterioration in the outlook for the aviation industry” since it launched a consultation on the rises in October.

CAA director Paul Smith said: “In these exceptional circumstances we are persuaded that there are real issues we need to address to protect Heathrow’s consumers. However, in our view Heathrow’s proposals are not in the best interests of consumers.”

A spat between what was Europe’s busiest airport and the regulator erupted last year after the CAA rejected Heathrow’s demand to increase charges to cover losses suffered from a collapse in air travel.

It welcomed just 22m people in 2020 compared with almost 81m passengers in 2019. The fall in passengers has put pressure on the airport’s finances, which are weighed down by more than £15bn of debts.

The CAA’s rejection, which was subject to a consultation, sparked a war of words in which Heathrow threatened to take legal action unless the regulator backed down.

Friday’s confirmation included two compromise options that would allow for Heathrow’s regulatory framework to be adjusted so that it could recoup part of its losses. A further one-month consultation on such proposals has been launched.  [See the CAA document ]

Colm Gibson, a regulatory expert at consultancy Berkeley Research Group, said: “The CAA has a financing duty – in this case, to consider how it can secure Heathrow’s ability to finance the provision of airport operation services. I suspect these are exactly the circumstances where that duty is intended to apply, ultimately ruling out a ‘do nothing’ scenario, and pushing the CAA to take action to support Heathrow.”

A spokesman for Heathrow said: “The CAA has accepted that doing nothing is not an option. We have proposed a reasonable adjustment that will lower future charges and increase investment in the airport – creating jobs and improving service.

“The CAA must ultimately take a decision – but failure to act in the right way will see confidence in effective regulation evaporate.”

A spokesman for British Airways owner IAG, Heathrow’s biggest airline customer, said: “We welcome the CAA’s confirmation that Heathrow’s proposal is not in consumers’ interest. We will continue to engage in the regulator’s consultation process to ensure that Heathrow does not charge consumers twice.”

https://www.telegraph.co.uk/business/2021/02/05/heathrow-lands-partial-victory-28bn-covid-charges-row/

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CAA website on this:

https://publicapps.caa.co.uk/modalapplication.aspx?appid=11&mode=detail&id=10142


CAA consultation: 

https://consultations.caa.co.uk/economic-regulation/hal-covid-related-rab-adjustment-update/

Economic regulation of Heathrow Airport Limited: Response to its request for a covid-19 related RAB adjustment – Updated consultation

In October 2020, we published a consultation document in response to the request made by Heathrow Airport Limited (HAL) in July 2020 for the CAA to change its approach to the calculation of HAL’s regulatory asset base (RAB) to take account of the impact of the covid-19 pandemic.

Closes 5 March 2021

This update and consultation document provides our latest views on HAL’s request and our developing thinking on whether HAL’s price control framework should be changed in response to the circumstances created by the covid-19 pandemic. In particular the document sets out:

  • our framework for identifying and assessing options for intervention;
  • the assessment of options, including HAL’s proposal for a RAB adjustment, in the light of this framework and the views of HAL and airlines in response to the October 2020; and
  • our next steps and timetable for dealing with these matters.

Consultation document and appendices

Views invited

We welcome views on all the issues raised in this document and, in particular, the questions highlighted in teh summary.

Please e-mail responses to economicregulation@caa.co.uk

We cannot commit to take into account representations received after the closing date.

We expect to publish the responses we receive on our website as soon as practicable after the period for representations expires. Any material that is regarded as confidential should be clearly marked as such and included in a separate annex. Please note that we have powers and duties with respect to information under section 59 of the Civil Aviation Act 2012 and the Freedom of Information Act 2000.

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CAA document says:

With the objectives from paragraph 19 in mind, we have identified the following
broad packages of possible policy measures and interventions.

[H7 means the period after 1st January 2022]

Package 1: No intervention before H7, but consider interventions at H7

Package 1 would involve no immediate regulatory intervention, but we would
consider the key issues around HAL’s cost of capital, the appropriate profile of
charges and the incentives for investment and quality of service later in 2021, as
part of the H7 price control review. This would include consideration of whether
some adjustment for lost revenues in 2020 and 2021 would further the interests
of consumers. We would consider these issues in the round as part of our work
to develop new price control arrangements for HAL.

Package 2 – Targeted intervention now and consider further intervention at H7

Package 2 allows both for consideration of issues at the H7 price review and for
more immediate regulatory intervention now, ahead of the H7 price control
review.
The triggers for the more immediate interventions could include:

  • HAL’s financeability, because of the very significant pressure on its financial
    position and the potential for issues with HAL’s financeability to create
    difficulties for consumers, for instance because of possible disruption to
    investment or quality of service, but recognising the important role of
    shareholders in taking appropriate actions to support the business;
  • the impact on HAL’s cost of capital (if there are clear advantages in taking
    regulatory action ahead of the H7 price review) consistent with appropriately
    managing risks and avoiding undue increases in the cost of finance that
    would feed through to higher prices for consumers; and/or
  • other shorter term issues linked to ensuring HAL maintains an appropriate
    level of investment and quality of service.

It is important to note that there are significant challenges with calculating the
size and scale of any intervention of this type, ahead of considering the
appropriate intervention as part of the H7 price review under package 1.

 

 

 

We welcome views from stakeholders on any aspects of this consultation and in particular on:

– whether we have identified an appropriate framework to assess the case for regulatory intervention in HAL’s price control arrangements given the exceptional circumstances arising from the impact of the covid-19 pandemic;

– the detail of our preferred framework and whether we have considered an appropriate range of regulatory interventions for assessment;

– our assessment that package 1 and package 2 represent the best way forward. This means that we would consider the issues and appropriate intervention in the round as part of the H7 price review, while considering for decision around the end of March 2021 whether we should make an intervention ahead of the H7 price review; and

– the case for early interventions ahead of the H7 price control review, which we are considering under our package 2 of regulatory interventions, and how any such interventions should be calibrated to further the interests of consumers.

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