COMPETITION
COMMISSION News Release (31/08) issued by COI News Distribution
Service. 4 November 2008
The Civil Aviation
Authority (CAA) has today published the Competition
Commission's (CC's) report and recommendations on
charges at Stansted Airport, which will govern how much the
airport's owner, BAA, can charge airlines during the
five-year period beginning April 2009. The report is available on
the CAA website at: http://www.caa.co.uk/default.aspx?catid=78&pagetype=90&pageid=10232
and on the CC website at http://www.competition-commission.org.uk.
The CC is recommending an increase in the maximum level of
airport charges at Stansted to £6.26 per passenger,1 compared with
the current level of actual charges of £6.05 per passenger (all in
2007/08 prices), with an increase of no more than RPI+1.75 per
cent each year during the rest of the five-year period. These
figures compare with prices proposed by BAA of £6.38 per
passenger, with an annual increase of RPI+7.1 per cent.
In addition to its conclusions on airport charges, the CC also
found that Stansted Airport had acted against the public interest
in the period since the last reference to the CC by failing to
consult adequately with airlines on the development of the airport
and its capital expenditure plans; by failing to manage as
effectively as possible the security queuing process; and by
failing to offer appropriate landing charges for larger cargo aircraft.
The CC is, therefore, recommending that the CAA requires BAA to
improve the consultation process; introduce a service quality
rebate scheme, similar to those at Heathrow and Gatwick, which
will impose financial penalties on BAA if it fails to meet agreed
standards; and offer off-peak discounts on landing charges for the
largest cargo aircraft.
The CAA will now consider the CC's recommendations, before
carrying out a further round of consultation and announcing its
final decision in March 2009.
CC Deputy Chairman Christopher Clarke, Chairman of the Stansted
inquiry and also of the CC's market investigation into BAA
airports, said:
We believe our recommendations will provide the necessary
incentives for BAA to meet existing and future customers'
needs by operating efficiently and by continuing to develop the airport.
Our inquiry has not been straightforward. It has been conducted
against a background of uncertain and deteriorating economic and
financial conditions, which, in particular, have made it difficult
to forecast passenger numbers for the next five years and to
assess the appropriate level of return which the airport should be
allowed to earn. The CAA will need to keep these issues under
review before making its final determination in March next year.
Also, our terms of reference from the CAA were unusually broad,
and, for a number of reasons, less preparatory work had been undertaken.
The reference was delayed by more than a year while consideration
was given to the CAA's proposal to the Department for
Transport (DfT) that Stansted should be de-designated, which would
have removed the need for price control regulation. Following the
DfT's decision not to de-designate, the CAA's terms of
reference to us requested advice on the level of competition at
Stansted, both currently and throughout the five years, as well as
on the appropriate form of price regulation. Consistent with its
own assessment of competition at Stansted, the CAA proposed a
precautionary approach to price regulation, suggesting that
reliance should be placed on market forces, with a cap set as a
safeguard. This is in contrast to the current approach which
allows the airport a return on its regulatory asset base (RAB),
which in March 2008 the CAA confirmed was still the appropriate
approach for both Heathrow and Gatwick.
Whilst we considered a number of options for setting the price
control, there were a number of factors which persuaded us that we
should retain the current RAB-based method, appropriately adjusted
for uncertainties over the capital expenditure programme. These
included Stansted's strong competitive position, the
practical difficulties in introducing significant changes in a
limited timeframe and the current review of airport regulation by
the DfT and by ourselves in our market investigation into all
BAA's airports.
Another challenge has been to determine an appropriate capital
expenditure programme, which is a key element in determining an
appropriate price cap. 'Constructive engagement' between
Stansted and its airline customers was short-lived, being
terminated by the CAA at the end of 2005 due to lack of progress.
We took the view that an airport's airline customers are
generally in a much better position than the regulator to suggest
what development is needed at the airport, even recognizing their
self-interest. We therefore sought to rekindle discussions between
BAA and the airlines with the encouraging result that agreement
has been reached on the scope and phasing of almost the whole of
the five-year capital expenditure programme for the airport's
existing facilities. This is now forecast to cost £85 million (in
2007/08 prices) compared with the £239 million initially put
forward by BAA. Many projects have been reduced in scale, some
deferred until later and others removed altogether.
With regard to BAA's proposals for a new runway, terminal
and associated facilities, which were expected by BAA to cost £1.1
billion over the five-year period (and £2.3 billion overall), BAA
has agreed to our suggestion that, given the uncertainty
surrounding this project, all construction costs should be
excluded at this stage but, should circumstances change in the
course of the quinquennium (for example, if planning approval is
granted), it would be open to BAA to seek an interim determination
by the CAA. The CAA would then seek to re-set the price caps for
the remainder of the quinquennium in the light of the information
available at that time. We are therefore recommending that only
£40 million (in 2007/08 prices) should be included in the capex
forecasts, which represents BAA's anticipated expenditure to
the point of gaining planning approval. We would hope that the
progress we've made in bringing the parties together and our
preliminary assessment of BAA's spending plans for the second
runway project will assist in this process.
We are recommending a cost of capital, which determines the rate
of return allowed on new and existing assets at Stansted, of 7.1
per cent in real pre-tax terms, which compares with 6.5 per cent
at Gatwick and 6.2 per cent at Heathrow.
In addition to our conclusions on airport charges, we have found
that Stansted has acted against the public interest in three
important areas. The CAA is required to act on these and we are
therefore recommending that the CAA requires BAA to improve its
process of consultation with the airlines on the development of
the airport; to introduce a service quality rebate scheme, similar
to the schemes in operation at Heathrow and Gatwick; and to offer
the largest aircraft operating at the airport an off-peak discount
for landing charges, as is available for all other aircraft.
Notes for editors
1. The CC is an independent public body, which carries out
investigations into mergers, markets and the regulated industries.
2. Enquiries should be directed to Rory Taylor on 020 7271 0242
or rory.taylor@cc.gsi.gov.uk.
3. The Airports Act 1986 requires the CAA to set maximum limits
on airport charges at airports designated for this purpose by the
Secretary of State for Transport. These airports are: Heathrow,
Gatwick and Stansted. Before setting new controls, the CAA is
required by the Airports Act to refer the price controls for each
airport to the CC, which then conducts its own review lasting
around six months before reporting back to the CAA. The CAA must
have regard to the CC's report, but the CAA is the final
decision-making body with respect to price controls.
4. In March 2007, the CAA extended the current price controls on
Stansted Airport by 12 months, so that they will expire on 31
March 2009. This extension was implemented in order to allow time
for the DfT to decide whether Stansted and Manchester airports
should continue to be designated for price control by the CAA. The
DfT decided that Stansted should continue to be subject to price controls.
5. BAA plans to expand Stansted's capacity over the next
decade with two large projects: Stansted Generation 1 (SG1), which
consists of work to increase Stansted's capacity to 35
million passengers a year by 2015/16 (approval was recently
granted for this development by the Government lifting existing
planning restrictions) and Stansted Generation 2 (SG2), which
involves the construction of a new runway and terminal at
Stansted. A public inquiry on this development is expected to
start in spring 2009.
6. The price review for Stansted Airport is separate from the
CC's ongoing market investigation into BAA airports. The CC
has assessed the price control options on the basis of the current
ownership structure and system of regulation, rather than by
anticipating any changes that may result in the future, either
from the market investigation or from the DfT's review of the
airports' regulatory system. The Secretary of State for
Transport has stated that the current basis of price controls at
Stansted from 1 April 2009 will remain in force for the duration
of the five-year price control period.
7. The members of the Stansted price control review group were
Christopher Clarke (Group Chairman and CC Deputy Chairman), Laura
Carstensen, Dr John Collings, Professor Jonathan Haskel, Richard
Holroyd, Professor Peter Moizer and Professor Sudi Sudarsanam. The
Inquiry Director was Andrew Wright.
8. For further information on the inquiry go to: http://www.competition-commission.org.uk/
inquiries/ref2008/stansted/index.htm.
1This is equivalent to £6.56 in 2008/09 prices.