CAA’s ‘final’ proposals for London airport prices may be trying to reconcile the irreconcilable


The UK CAA’s mind-numbingly long and complex review of airport charges at Heathrow, Gatwick and Stansted is almost complete. In the five-yearly process, the regulator consults with airports and airlines. It publishes proposals and amends proposals, trying to reconcile the irreconcilable.

Between 2007 and 2012, aeronautical income per passenger at Heathrow almost doubled; at Gatwick it rose by more than two thirds; and at Stansted it grew by 43%. They all beat the 14% increase in the UK’s Retail Price Index over this period. Airlines now want prices to fall, while airports seek further increases to pay for planned capital expenditure and to reward investors.

The usual result of the review is that neither side is pleased. After the publication on 3-Oct-2013 of the CAA’s ‘final’ proposals for price caps from 2014 to 2019, the usual result looks likely again at Heathrow. At Gatwick, the CAA might just find common ground between the two sides. At Stansted, it seems the regulator has been by-passed entirely. Final decisions are due in Jan-2014.

Increase in aeronautical income per passenger for Heathrow, Gatwick and Stansted and increase in UK RPI: 2012 vs 2007 (%)

Initial proposals too high for the airlines

The Civil Aviation Authority (CAA), which acts as economic regulator of the three airports, published initial proposals in Apr-2013 for setting price caps for the next five year period (referred to as the sixth quinquennium, or Q6) starting on 1-Apr-2014.

These proposals were met with disapproval by the airlines at each of the airports, who felt that the proposed price caps were too high. Heathrow users were particularly upset, since they had already experienced huge increases in Q5 and Heathrow’s average aeronautical yield, at more than GBP18, was well over twice that at the other two airports.

Aeronautical income per passenger for Heathrow, Gatwick and Stansted (GBP): 2006 to 2012

The key element of the CAA’s regulatory proposals is the price cap, based on a formula limiting annual increases in aeronautical revenue per passenger to RPI plus or minus a certain amount, where RPI is the Retail Price Index. The CAA arrives at its price caps after a complex process that considers likely traffic, capital expenditure, operating expenditure and retail income. I

t also considers each airport’s weighted average cost of capital (WACC), which represents the return that airport investors require. A summary of the initial proposals, published by the CAA in Apr-2013, is shown in the table below.

Summary of CAA initial proposals for price regulation in Q6**



Q5* price cap

CAA initial proposals Q6**




Year 1

Subsequent years


Price cap




RPI + 23.5%

RPI + 7.5%


RPI - 1.3%




RPI + 21.0%

RPI + 2%


RPI + 1%

CAA price cap approach to continue if ‘Commitments and Contracts’ approach fails



RPI + 0%

RPI + 1.63%



Price monitoring regime proposed. CAA would investigate if increases exceed RPI/2

For more detail of the initial proposals and the airlines’ responses to them, see our related report published in Apr-2013:

CAA’s price proposals for London’s airports: the battle begins as airlines go on the attack

Final proposals for Heathrow and Gatwick, but not Stansted

The Q6 price caps in the CAA’s initial proposals were significantly lower than those of Q5, but not low enough for the airlines. After further consultation with interested parties, including the airlines, the CAA published its final proposals on 3-Oct-2013 (summarised in the table below). It is worth noting that these do not represent its final decision, which will be announced in Jan-2014 after a final period of consultation.

The final proposals are a little tougher on Heathrow and a little more lenient on Gatwick. Nevertheless, as discussed later in this report, Heathrow’s airlines remain the least content among users of the three airports.

In the case of Stansted, the CAA is engaging in further consultation on its level of market power, following its recent long term deals with Ryanair and easyJet (the two biggest airlines at Stansted). This could possibly lead to Stansted being excluded from price regulation.

Summary of CAA final proposals for price regulation in Q6**


CAA initial proposals Q6**

CAA final proposals Q6**



Price cap


Price cap



RPI - 1.3%


RPI + 0%



RPI + 1%


RPI + 1.6% (CAA ‘fair price’)





RPI + 0.5% (LGW commitment)




Further consultation on market power; may no longer be regulated

Based on the CAA’s final proposals and assuming, for illustrative purposes, that RPI averages 3% per annum in Q6, aeronautical charges per passenger will grow by 13% at Heathrow (in line with RPI) and 15% at Gatwick between 2014 and 2018. We choose a figure for the projected annual increase in RPI of 3% per annum for two reasons. First, this is roughly the average increase in RPI over the past 10 years. Second, while the Bank of England’s inflation target is 2%, this target is based on the Consumer Price Index (CPI), which has typically been lower than RPI.

Projected increase in aeronautical income per passenger for Heathrow, Gatwick and Stansted and increase in UK RPI: 2018 vs 2014 (%)

Heathrow: pricing is to be capped at RPI

Heathrow Airport wanted an increase of RPI+4.6%, lower than its original proposal of RPI+5.9%, but still much higher than the airlines’ suggestion of RPI-9.8%. The difference between the two sides is enormous: Heathrow’s proposal would lead to a 34% increase over five years, while the airlines want a 25% cut in charges (assuming RPI at 3%).

Acting as referee, the CAA’s final proposal of RPI+0 moves slightly closer to Heathrow’s position, compared with its initial proposal of RPI-1.3%. The CAA justified its upward revision by saying that Heathrow’s WACC had increased due to higher debt costs, although this was partly offset by “more challenging targets” for operating efficiency.

Heathrow Airport aeronautical income per passenger, net retail income per passenger (GBP) and passenger numbers (million): 2007 to 2012

CAA's proposal is the '…toughest Heathrow has ever faced'

This will be the first time in more than a decade that Heathrow’s airport charges do not rise faster than inflation, a prospect that the company’s CEO Colin Matthews does not relish. Calling the CAA’s proposal the “toughest Heathrow has ever faced”, he argued that the proposed WACC of 5.6% represents a return “below the level at which Heathrow’s shareholders have said they are willing to invest”.

Mr Matthews added: “We want to continue to improve Heathrow for passengers. Instead, the CAA’s proposals risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre for international investment. We will now carefully consider our investment plans before responding fully to the CAA”.

London Heathrow Airport charges (USD) for 2012 and 2013 for Combined Landing / Terminal Charges with Baggage / Check-in

Airlines argue that it still '…allows the UK’s monopoly hub to ignore its inefficiencies'

The airlines are also still far from happy. Dale Keller, CEO of the Board of Airline Representatives in the UK (BAR UK) said: “… 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. … the latest settlement allowing further RPI increases escalates costs to consumers and weakens the international competitiveness of the UK’s only hub airport".

Data from CAPA's airport charges database demonstrate that Heathrow is significantly more expensive than its major rival hubs in Europe (Amsterdam, Frankfurt and Paris CDG).

Heathrow’s biggest airline, British Airways, took a similar line to that of BAR UK, saying the CAA has "neglected its new primary statutory duty to further the interests of passengers by endorsing a settlement that allows the UK’s monopoly hub to ignore its inefficiencies and over-reward investors by imposing excessive charges on users".

Virgin Atlantic, Heathrow’s number two carrier, called further increases in charges at the airport “a hammer blow for both UK consumers and overseas visitors”, noting that “prices at Heathrow are already triple the level they were 10 years ago”.

Combined Landing / Terminal Charges with Baggage / Check-in (USD) for London Heathrow Airport, Paris Charles De Gaulle Airport, Frankfurt Airport, Amsterdam Airport Schiphol

Charges at Heathrow increasingly make an alternative hub more attractive says Willie Walsh

Willie Walsh, CEO of British Airways’ parent company IAG, said the airport’s customers faced the burden of forking out almost an extra GBP1 billion over the next five years, adding the airline would carefully consider its next steps. He raised the possibility that BA may eventually seek a new home: “…Like other airlines at Heathrow, we cannot move to a better-run UK hub that offers customers real value for money. No such alternative exists today but these excessive charges combined with a complacent management team at Heathrow make an alternative hub look more attractive and more realistic.”

In the context of the Davies Commission, which has been tasked by the UK Government to look into long term options for additional airport capacity in the southeast of England, this stance by IAG is significant. In the past, for BA to consider even the remotest possibility of any other hub would have been unthinkable.

Heathrow also has an eye on the longer term possibilities for UK airport capacity: "Whether [the Commission’s] final recommendations support a new runway at Heathrow or a new hub airport elsewhere, the level of financing required will be unprecedented. International investors will not fund billions of upfront investment in UK infrastructure if the lesson from history is that their return will be cut as soon as they have built it".

See related report: Heathrow Airport’s slot machine: hitting the jackpot again?

Gatwick: RPI+0.5% is 'fair price'

At Gatwick, the CAA’s initial proposal was to encourage airport-airline discussions as an important factor in the airport’s future development and in agreeing prices.

This approach, known as ‘Contracts and Commitments’ is seen as preferable to the traditional method of setting price caps based on the airport’s regulatory asset base (RAB).

Combined Landing / Terminal Charges with Baggage / Check-in (USD) for London Heathrow Airport, London Gatwick Airport Peak, London Stansted Airport Peak

Gatwick Airport has lowered its originally proposed increase of RPI+6.9%, much higher than the airlines’ plan of RPI-9%, to a new set of price commitments, with an average increase of RPI+0.5% over seven years. Under the CAA’s final proposals, the regulator agreed that Gatwick’s position is fair. Indeed, the CAA calculated a ‘fair price’ under the RAB-based price cap approach of RPI+1.6%, which is slightly higher than the RPI+1% it used in its initial proposals.

In addition to considering price caps, the CAA believes that Gatwick’s commitments on matters such as service quality are in passengers’ interests. These commitments are to be backed by a licence to ensure they are honoured.

Gatwick Airport aeronautical income per passenger, net retail income per passenger (GBP) and passenger numbers (million): 2007 to 2012

Cautious welcome from Gatwick; easyJet is "disappointed"

The airport cautiously welcomed the CAA’s final proposal and its CEO Stewart Wingate said: "The CAA's proposal to take forward our Commitments framework would deliver an improved future outcome for passengers in terms of service quality, facilities and price. We will now re-double our efforts to work with our airlines partners to make this work in the best interests of all parties, and in particular for passengers.”

Gatwick’s biggest airline, easyJet, declared itself to be “disappointed” with the proposed price cap. CEO Carolyn McCall agreed with the CAA that Gatwick is a monopoly airport and that its continued regulation is necessary “to protect the interests of all passengers who use the airport”. While she said that easyJet agrees with allowing the airport and its airlines to engage constructively to reach agreements, she argued that the proposed price cap was “based on the airport’s proposals and ignores those of the airlines who gave evidence to support a lowering in charges...”.

As at Heathrow, the work of the Davies Commission on future airport capacity is at the front of airlines' minds. “Our greatest concern is about the lack of regulatory control of a proposed second runway at Gatwick”, said Ms McCall, adding that “the CAA has handed GAL a licence to print money”. Nevertheless, easyJet's response is relatively muted compared with the often very emotive language used in this process.

See related report: EasyJet works the Gatwick slot machine as Flybe cashes out

The regulator was by-passed at Stansted

The CAA noted that Manchester Airport Group (MAG), the new owner of Stansted Airport, had recently reached long-term commercial agreements with Ryanair and easyJet, the two biggest carriers at the Essex airport.

See related report: Ryanair’s new growth deal with London Stansted Airport: mutual love-in?

Having announced on 17-Sep-2013 that it would consult on how these agreements may affect its ‘market power assessment’, the CAA has not published any final proposals relating to Stansted pending that consultation. The current consultation will also consider whether Stansted should be regulated and, if so, what should be the regulatory approach.

If it judges that competitive developments mean that Stansted no longer has monopoly pricing power, it could be removed from economic regulation altogether.

Combined Landing / Terminal Charges without Baggage / Check-in (USD) for London Luton Airport, London Stansted Airport Peak, London Stansted Airport Off Peak

The CAA previously felt that Stansted may have market power and expected this to strengthen over the next five years, as capacity constraints in the London area tighten. It proposed to move away from a fixed price cap, replacing this with a “price monitoring regime” requiring Stansted to enable the CAA to highlight any areas of regulatory concern.

Under its initial proposals, the CAA also proposed a ‘show cause’ trigger on price increases of half RPI (RPI/2). This meant that, if Stansted were to increase prices by more than RPI/2, the CAA could impose a price freeze if Stansted could not justify its performance to the CAA’s satisfaction.

The CAA acknowledged that one uncertainty that could alter its approach to regulation at Stansted would be if the change of ownership established different behaviours and relationships with the airlines. This is exactly what has now happened.

Stansted Airport aeronautical income per passenger, net retail income per passenger (GBP) and passenger numbers (million): 2007 to 2012

Ryanair CEO Michael O’Leary responded to the CAA’s initial proposals in Apr-2013 by calling for airport charges at Stansted to be reduced by RPI-10%. The recent 10 year agreement between MAG and Ryanair is based on price discounts, subject to the achievement of targets on passenger numbers.

These discounts have not been disclosed, but Mr O’Leary has a track record of only committing to growth at an airport if he gets the deal that he wants. It certainly seems likely that he negotiated a better deal with MAG than he would have received from the regulator.

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