UK CAA steps up airport regulation and assesses airport market power

The new rules complement Government proposals to update the CAA’s nascent watchdog role under which the authority will have increased powers to regulate airport performance, for example, during periods of bad weather.

The CAA has been accused of being toothless following a succession of adverse winter weather debacles which culminated in the country’s primary gateway airport being closed down for several days during a period of relatively moderate (by international standards) snowfall at the end of 2010. (On the subject of airport pricing Ryanair’s Michael O’Leary has been particularly scathing about it).

As a result, a report was commissioned, led by a notable transport economist (and non-Executive Director of BAA), Professor David Begg, and which was published at the end of Mar-2011. Its main conclusion was that London Heathrow Airport must improve its resilience to ensure that it "never closes as a result of circumstances under its control". Despite similarly heavy snowfalls in the previous winter and several weeks before the Dec-2010 crisis, “BAA failed to learn the lessons”.

Consequently, BAA announced plans to develop a GBP50 million "Heathrow resilience investment plan", which the airport operator will recommend to airlines and the CAA this month.

Heathrow Partnership: another talk shop or enforcer?

Then, on 12-Apr BAA announced it had secured agreement from the CEOs of BA, Virgin Atlantic, and British Midland International – which represent the three largest carriers at the airport and more than half its capacity by seats – as well as ANSP NATS and the CAA, to establish a "Heathrow Partnership" that will “meet regularly” to discuss operational issues.

The CAA has had to revise guidance on competition following BAA’s sale of London Gatwick Airport to GIP and the Competition Commission’s ruling that BAA must also sell London Stansted Airport and either one of Edinburgh and Glasgow airports in Scotland.

Gatwick, Stansted and Heathrow will be the subject of the CAA’s initial scrutiny. Among factors to be taken into account are service quality and the relationships with its users, financial and pricing performance; and the airports’ investment record.

Lack of investment

In recent years Heathrow in particular has come in for criticism over lack of investment and it appeared that the Ferrovial-led consortium that owns it was hedging its bets as the British government became increasingly desperate to ensure there was a functioning, capable international gateway airport in the capital in advance of the 2012 Olympic Games, and the ensuing arrival of the world’s media. The position has improved somewhat and, according to BAA, around GBP100 million is being spent each month on upgrading and improving facilities at Heathrow in the UK's biggest privately funded regeneration project. Central to this is a GBP2.2 billion replacement for Terminal 2, which is set to open in 2014 (albeit two years too late for the Olympics, for which it was intended).

The airport’s physical constraints have made it increasingly congested with any attempt at expansion beyond its present footprint endlessly debated and all too often denied. The change of government in May-2010 made matters even worse as it became clear that the cobbled-together coalition government does not understand the value of air transport and is not enthusiastic about extra capacity, especially at Heathrow.

So, we have the rather strange situation where the government is giving more leeway to the CAA to challenge constraints to effective airport performance, service quality and investment, many of which emanate from the government in the first place.

Iain Osborne, the CAA’s group director of regulatory policy said the guidelines would “give us a more flexible set of tools to help to place the passenger at the heart of economic regulation.”

Competition guidelines

As part of its function of protecting consumers the CAA is publishing a set of competition guidelines, which explain how it will approach the analysis of an airport’s market power. The CAA undertakes analysis of the market power held by airports in order to protect consumers from anti-competitive behaviour and ensure that regulation is fit-for-purpose.

In the past much of that work has focussed on airport charging mechanisms and ownership of airports in the southeast of England and southern Scotland, where in both cases there was (and still is in Scotland) domination by BAA. On the subject of airport charging, in the north Manchester Airport was removed from the list of price-controlled airports two years ago on the basis of increased competition from other (and privately owned) airports within a 50-mile radius, leaving just the three London airports; Heathrow, Gatwick and Stansted.

In Feb-2011 the CAA announced it was seeking to extend by one year its five-year price control plan for Heathrow and Gatwick. The five-year plan was put in place in Apr-2008, when the CAA set the maximum charge for Heathrow at GBP12.80 per passenger. The increased cap for each of the following four years was set at a maximum of 7.5% plus the rate of inflation. At Gatwick, the maximum charge was set at GBP6.79 per passenger, with the annual maximum charge for the subsequent four years to rise by 2% plus inflation.

The current price control plan for these two airports is scheduled to expire at the end of Mar-2013, but the CAA seeks to keep it in place for another year to enable it to develop the next price control plan "in line with reforms to the framework for economic regulation planned by the Government". The new framework under consideration, which would initially apply to Heathrow, Gatwick and also London Stansted, would allow "more proactive and responsive regulation tailored to the circumstances of each airport, not just developing a one-off settlement every five years" according to the CAA.

At the end of Mar-2011 the CAA then announced it had extended price controls at Heathrow and Gatwick airports in anticipation of new government legislation. Gatwick will cap increases in airport charges at a rate equivalent to the retail price index (RPI) less 0.5% for the financial year ending 31-Mar-2014, which compares with the current RPI plus 2%. Gatwick agreed to the cap after reaching a “negotiated settlement” with airlines, the CAA said. Heathrow’s cap for increases in charges remains unchanged at RPI plus 7.5%, according to the airport.

23.5% Heathrow charges increase a blow to domestic route operators

The charging structure attracted strong criticism from UK carriers when it was announced in Mar-2008 because it meant that charges at Heathrow and Gatwick increased by 23.5% and 21%, respectively, in 2008/09 compared with 2007/08, a move that has had an adverse effect particularly on domestic route operators.

In comparison, concerns about service quality levels and competition expressed in ways other than by pricing evaluation, came in to play rather later in the day, partly as a result of the CAA’s review of the "southeast monopoly" by BAA and partly arising from the new government’s desire to include customer service as a plank of its new airport strategy, whenever that comes.

According to the CAA, the new competition guidelines are designed to support these processes and are intended to help stakeholders understand how the CAA will undertake its analyses. They have been developed to complement the CAA’s work to regulate airports in a flexible and proportionate way, which will be supported by the Government’s proposals to modernise the CAA’s outdated legislative framework and place the passenger at the heart of economic regulation. They also aid regulatory certainty for stakeholders by providing guidance on how changes in the competitive environment will be assessed; something that is particularly important following BAA’s sale of Gatwick and the Competition Commission’s ruling that BAA must also sell Stansted.

A more flexible set of tools

Commenting on the publication, Iain Osborne, Group Director of Regulatory Policy for the CAA said: “Publishing today’s guidelines is part of our ongoing work to improve how regulation works to protect passengers, supported by Government’s proposed reforms to give us a more flexible set of tools to help to place the passenger at the heart of economic regulation. We have worked closely with industry in developing the guidelines and believe they will give our stakeholders a more certain understanding of how future market power assessments will be carried out by the CAA.”

The guidelines are based around broad principles and are designed as a high-level guide to how future in-depth economic analysis will be undertaken. They set out the issues that will be considered as part of future competition assessments and highlight the links between those issues and relevant existing guidance and case law. However, they are not an attempt actually to make a competition assessment or judge how much market power an individual airport holds, nor do they try to pre-empt the in-depth process of analysis and consultation that would lead to such a judgement being taken. The CAA will now be turning its attention to the analysis of Heathrow, Gatwick and Stansted, in close cooperation with stakeholders.

Southampton stands alone

Rather strangely, perhaps, BAA’s Southampton Airport is not included in the CAA’s pricing overview of the southeast England airports and may not be in any other sense. Though only a small airport (1.7 million passengers in 2010) it is to all intent and purpose a London airport, close by the M3 motorway, which is also the access, at the other end, to Heathrow Airport.

More to the point, Southampton has just this month launched campaigns to attract new passengers from the London metropolitan region. A spokesperson noted that there are 7.6 million people living within 90 minutes of the airport and the campaign is aimed at raising awareness of Southampton as a viable alternative to the busier London airports. Thus it will be competition with other BAA airports, notably Heathrow, as well as with Gatwick. Which begs the question: did the Competition Commission not deem it worthy of inclusion in its enforced sell-off regime?

Background information:

The CAA’s competition guidelines can be found at their website.

The CAA is the UK's specialist aviation regulator. Its activities include: making sure that the aviation industry meets the highest technical and operational safety standards; preventing holidaymakers from being stranded abroad or losing money because of tour operator insolvency; planning and regulating all UK airspace; and regulating airports, air traffic services and airlines and providing advice on aviation policy from an economic standpoint.