Following the Civil Aviation Act 2012, the CAA is required to assess the level of market dominance at airports, explaining why regulation will achieve better outcomes for consumers.
While Heathrow proposed a 4.6% annual real-terms increase in its charges over five years, its airlines requested a 9.8% annual cut.
The CAA has proposed a price control that will not allow charges to rise by more than inflation (measured by RPI), instead of its initial suggestion of RPI minus 1.3%.
It says this is due to an increase in the cost of capital driven by higher debt costs, and will put an end to more than a decade of prices rising faster than inflation at the airport.
Dame Deirdre Hutton, CAA chair, claims: “Tackling the upward drift in Heathrow’s prices is essential to safeguard its globally competitive position.”
Heathrow, however, disagrees. Chief executive, Colin Matthews, says: “This proposal is the toughest Heathrow has ever faced.
“The CAA’s proposed cost of capital at 5.6% is below the level at which Heathrow’s shareholders have said they are willing to invest.”
He adds: “The CAA’s proposals risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre for international investment.”
The airport highlights the past decade’s investments, including Terminals 2 and 5, but states that its return on investment had decreased to 6.2% in Q5 (2008-2014).
An airport statement argues that the CAA’s proposal “provides no incentive for shareholders to fund improved facilities”.
Heathrow’s own proposals, submitted to the CAA in July, suggested raising airport charges from the current €24.69 per passenger to €30.67 in 2019.
While the airport has expressed its disappointment with the CAA proposals, its airlines are likewise dissatisfied with the suggestions.
The Board of Airlines Representatives in the UK (BAR UK) says the proposals are “bad news” which have “angered the airline community”.
Dale Keller, BAR UK’s chief executive, fumes: “Airline CEOs will reaching for their oxygen masks in the knowledge that they will be forced to pass on excessive airport charges to their customers for the next five years.
“The CAA’s new primary duty to consumers has failed its test flight by instead rewarding operating inefficiencies and excessive shareholder returns at the monopoly that is Heathrow.”
He points out Heathrow’s charges have increased by more than 300% in the last 11 years and that further RPI increases will weaken the international competitiveness of the UK’s only hub airport.
The CAA’s proposals also look at Gatwick and state the airport has suggested “a fair price”.
Gatwick has set out price commitments to its users, with the average charge to grow by RPI plus 0.5% annually for seven years.
The authority says these commitments are in passengers’ interests, but claims they will be backed by a licence to ensure they are honoured.
The airport itself says it “cautiously welcomes” the endorsement, adding: “It would mark a step in the right direction to creating a more competitive operating environment for the airport and its airline partners.”
But BAR UK’s Keller says airlines are “concerned” that the commitments “may not go far enough to protect consumers from profiteering”.
In response, a Gatwick statement says even if the CAA finds it doesn’t have substantial market power, it will still deliver on its commitments.
It promises: “[These] will be included in the airport’s conditions of use as legally enforceable contractual obligations.”
CEO, Stewart Wingate, remarks: “We will now redouble our efforts to work with our airline partners to make this work in the best interests of all parties, and in particular for passengers.”
The CAA’s recommendations would increase airport charges at Gatwick from €10.49 to €10.86 by 2021.
Both airports have expressed their intent to respond fully to the proposals in due course.
The CAA plans to publish its decision on market power for Heathrow and Gatwick and its final decision on regulation in January.