Airlines Oppose The Measures Scheduled for April, 2014 Implementation
The UK Civil Aviation Authority (CAA) has published for consultation its final proposals for the economic regulation of Heathrow and Gatwick airports to protect passengers after April 2014. The CAA says 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 travelers.
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 notice posted on the CAA website says.
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 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 published its detailed analysis that suggests that this is a fair price. They say that the airport’s commitments are in passengers’ interests, so they are the basis of our final proposals. They will be backed by a license to ensure that they are honored. The license 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.
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."
The 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.
"Our proposals demonstrate how we can regulate airports more flexibly where this seems best for passengers, but also setting a tough efficiency challenge," said Dame Deirdre Hutton, CAA Chair. We expect the airports to work closely with airlines to provide high-quality services to passengers. Tackling the upward drift in Heathrow’s (pictured) 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," Hutton said. "To protect the diverse interests of passengers, we propose a license 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.
easyJet said in a notice posted on its website that the CAA is right to view Gatwick as a monopoly airport and the continued regulation of Gatwick is necessary to protect the interests of all passengers who use the airport.
"easyJet agrees with the proposed new approach of allowing the airport and its airlines to engage constructively to reach agreements, within a regulatory framework, which are in both parties interests - and the interests of passengers," according to the statement. "However, easyJet is disappointed with the increase in proposed average charges of RPI +0.5% as this is based on the airport’s proposals and ignores those of the airlines who gave evidence to support a lowering in charges which would have led to a reduction in fares paid by passengers.
"Our greatest concern is about the lack of regulatory control of a proposed second runway at Gatwick where the CAA has handed GAL a license to print money and has significantly enhanced the value of the future sale of GAL by private infrastructure fund GIP.
British Airways said in a statement last month prior to the release of the report that the new fees at Heathrow would be to the detriment of all airport-users. The airline said that the proposed $973 million increase in fees over the next five years "will maintain Heathrow’s position as the most expensive hub airport in the world and will continue the upward trajectory of charges levied by the airport."
Buying Business Travel reports that Virgin Atlantic said in a statement "It is deeply disappointing to see the CAA has bowed to pressure from Heathrow Airport Limited and its shareholders. The decision to further increase charges at the airport for the next five years is another hammer blow for both UK consumers and overseas visitors wanting to travel to this country.
“Prices at Heathrow are already triple the level they were 10 years ago and coupled with ever increasing Air Passenger Duty, passengers are facing some of the highest charges in the world and this is deterring inbound tourism and foreign investment.”
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