CAA Proposes Regulatory Changes to Enable Airports to Increase Investment and Improve Service Quality.

Business Editors

LONDON--(BUSINESS WIRE)--Nov. 2, 2001

The Civil Aviation Authority today sets out proposals to help tackle future airport congestion and to improve the quality of airport services.

Under its mandatory five-year review of airport charges at Heathrow, Gatwick, Stansted and Manchester airports, the proposed changes to the regulatory regime will strengthen incentives for new infrastructure investment and introduce measures to improve service quality, for example to reduce flight delays that are attributable to the airports.

The CAA's proposals lay out the preferred approach for setting the upper limit on airport charges paid by airlines for the five years commencing 1 April 2003.

As part of specific efforts to reduce overcrowding and delays at Heathrow and Gatwick, the CAA seeks to reform the system of price restrictions to give the airport operator, BAA, greater incentives to invest in passenger capacity and in improving services to customers.

At Stansted and Manchester Airports, which are less congested, a more flexible price cap is proposed to protect airlines and customers while allowing the airports to develop with minimum regulatory restrictions.

The CAA originally planned to announce these proposals at the end of September, but following the terrorist attacks in the United States on 11 September it decided to defer their publication. Since then the CAA has reassessed its conclusions. While it has re-affirmed its core proposals, the CAA's modelling of the regulatory price caps is at this stage purely illustrative due to current uncertainties about the impact of traffic volumes and costs on the airports' medium term business plans.

The illustrative numbers suggest that the proposals will allow Heathrow and Gatwick airports to increase charges in real terms to airlines relative to the current so-called `single till' approach that has been adopted in the past. The CAA considers that price increases need to be permitted to secure greater investment and improve the efficient use of existing capacity.

The proposals are as follows:

Heathrow and Gatwick Airports

-- Charges for existing passenger and runway usage numbers to be independent of BAA's retail and other commercial activities (moving from the `single till' system to a revised regulatory cost base `RRCB').

-- BAA to receive a premium per passenger for meeting additional demand at Heathrow if Terminal 5 is given planning permission.

-- BAA to receive a premium per passenger for creating additional runway slots at Heathrow, to encourage more efficient use of runway space.

-- A framework to facilitate more direct contracting between the airports and users for use of airport facilities and the provision of airport services.

-- Creation of a service quality term in the price cap covering dimensions of service that are important to airlines and passengers (possibilities include airbridge availability and airport signage) and delays attributable to the airport.

-- The cost base should be adjusted so as to reimburse airlines through the price cap for Terminal 5 pre-funding because of delays to the project.

Stansted Airport

-- A cap on charges set in relation to Stansted's RRCB

Manchester Airport

-- A cap on charges set in relation to Manchester's RRCB

Other key proposals:

-- Greater disclosure by airports of strategic business plan information to customers.

-- An end to the current system by which airports can automatically pass additional security costs to airlines. The final price caps will reflect expected airport costs in this area, including those arising in consequence of the events of 11 September.

-- Stansted Airport's asset base no longer to be cross-subsidised from charges at Heathrow and Gatwick.

CAA Group Director, Economic Regulation, Doug Andrew said: "The problems of congestion and delays at BAA's London airports will not go away. They are amongst the cheapest airports in Europe but are also amongst the most highly valued.

"Under these proposals, the CAA has faced the challenges arising from congestion and set out a package of measures that will help airport operators reduce the many hours lost in delays and improve the quality of service for millions of travellers using Britain's busiest airports. Where the proposals result in higher airport charges we do not believe that this will result in higher air fares. At the congested airports fares are determined by available airline capacity and this is not adversely affected by these proposals.

"Given the projected long-term growth in the demand for air travel, even in the conditions prevailing since September 11, and that development of significant airport infrastructure is a long term undertaking, the CAA's proposals aim to deliver the best incentives for achieving, cost-effectively, the required investment in new capacity, together with improved service quality and the best possible use of existing capacity. Given this we aim to minimise the burden of regulation on Manchester and Stansted, the less congested airports."

In developing its provisional proposals the CAA has not had any knowledge of the Government's decision on BAA's planning application for Terminal 5 at Heathrow and has sought neither to predict nor to pre-empt that decision. Once the decision has been announced the CAA will take any resulting revisions to BAA's plans fully into account as it further develops its proposals.

The deadline for responses to the proposals is 2 January 2002. The CAA plans to publish its final report and recommendations and refer the airports to the Competition Commission by the end of February.

A full version of today's publication, "Heathrow, Gatwick, Stansted and Manchester Airports' Price Caps: 2003-2008, CAA Preliminary Proposals - Consultation Paper" is available on the CAA website: www.caaerg.co.uk (Click on `News').

Notes to Editors

The CAA is required by the Airports Act 1986 to set limits on user charges at designated airports every five years. The designated airports are the three BAA owned London airports - Heathrow, Gatwick and Stansted - and Manchester Airport which is owned by a consortium of local authorities. The CAA sets the maximum charges at the airports following recommendations from the Competition Commission.

The Airports Act requires the CAA to set the price cap most likely to further reasonable user interests, to promote efficient and profitable airport operation, and to encourage timely investment while imposing minimum restrictions.

The review timetable is now as follows:

-- 2 January 2002- submissions on CAA review proposals close

-- End February 2002 - CAA publishes final report and

recommendations and makes references to the Competition Commission

-- End August - Competition Commission reports to the CAA

-- End September - CAA publishes Competition Commission reports and its own proposals on charges and any public interest matters

-- October - CAA considers written representations and holds hearings with main parties

-- End November - CAA announces final decision on price caps and public interest matters

-- April 2003 - New price caps take effect.

New price caps will be set for the five years for each of the four airports from 1 April 2003 to 31 March 2008.

The present charging formulae for Heathrow and Gatwick taken together is RPI-3 per cent and for Stansted, RPI+1 per cent. For Manchester it is currently RPI-5 per cent. Charges per passenger for 2000-01 were:- Heathrow (pound)5.23, Gatwick (pound)4.06, Stansted (pound)4.36, Manchester (pound)6.73.

Charges at Heathrow and Gatwick are low by international standards. According to the Transport Research Laboratory, which carries out an annual survey of charges at 40 international airports, Heathrow's charges in 2000 were 75% of Frankfurt's and Paris CDG's and 80% of Amsterdam's. Gatwick's charges were 75% of Heathrow's. Charges at Heathrow would have had to increase by 33% and Gatwick's by 80% to equal Frankfurt's charges in that year.