What is an airport charge?
30. There are two types of relevant charge under
the Airports Act 1986. Section 36 of the Act defines 'airport
- charges levied on operators
of aircraft in connection with the landing, parking or taking
off of aircraft at the airport (including charges that are to
any extent determined by reference to the number of passengers
on board the aircraft, but excluding charges payable by virtue
of [section 73 of the Transport Act 2000 (charges for services)
[and penalties payable by virtue of sections 38C and 78A of the
Civil Aviation Act 1982])]; and
- charges levied on aircraft passengers in connection
with their arrival at, or departure from, the airport by air.
Fifth quinquennial review of charges
31. Airport charges are set over five year periods.
At present we are in the fourth of these, and the CAA is currently
consulting on the level of charges that will apply in the fifth
quinquennium between 2008 and 2013. It published its final price
control proposals on 20 November 2007, and is expected to publish
its decisions in March 2008. It is possible that the CAA's estimate
of the cost of capital will increase, given the uncertainty in
the financial markets.
The basis of charges
32. Airport charges are reviewed on the grounds of
providing for an appropriate level of new investment and a rate
of return commensurate to the cost of capital necessary for such
investment to be carried out.
The specific factors taken into consideration are:
Capital expenditure (capex)
Capex describes the
expenditure required for the acquisition of a long-term asset.
Regulatory Asset Base (RAB)
The RAB is a proxy value of the airport's
regulated operating assets, upon which the owners of the airports
earn a return.
Cost of capital
The cost of capital is the weighted average
of its two components: the cost of debt and the cost of equity.
Depreciation of assets
The rate at which assets reduce in value.
Operating expenditure (opex)
Opex is an airport's operating expenditure
on the day-to-day running of business (e.g. for staff, utilities,
day-to-day maintenance etc).
Other non-regulated income comes from
retail sales, property and non-aeronautical revenues (mainly other
charges to airlines).
Forecasts of traffic
The assumptions regarding numbers of passengers
passing through the airport over the specified period.
Regulatory Asset Base regulation and 'gold-plating'
33. In both its written and oral evidence to the
Committee, easyJet questioned the appropriateness of basing charges
upon a regulatory asset base (RAB). In its written submission
to the Committee, it argued that:
Regulatory Asset Base (RAB) regulation does not
work well for large or lumpy investment, and dictates price paths
that are inconsistent with those that would be expected in a competitive
market. For example, under RAB regulation, prices charged by an
airport increase significantly when new investment is undertaken,
and then fall over time as passenger numbers increase. However
in a competitive market, we would expect to see the reverse pattern.
34. In oral evidence to the Committee, Mr Nicol explained
that in easyJet's view, RAB regulation enabled BAA to "spend
and spend and spend and we [the airlines] are the ones who have
to pick up the bill."
When we asked Mr Nicol what the alternative to RAB regulation
would be, he argued that the only real solution would be to have
someone other than BAA owning the new facilities.
35. Whether anyone would want to take up such an
opportunity is, in our view, doubtful. If BAA retained
control of all the other airport facilities, such ownership would
be very isolated and would not alter BAA's dominant position to
any real extent. The real problem in the airports sector is
that there is a need for economic regulation at all. The fact
that regulatory asset base regulation brings problems of its own
is another issue entirely. Piecemeal ownership of terminals by
companies other than BAA is not radical enough a solution to the
problem of BAA's monopoly.
36. The ability to "spend, spend, spend"
leads, according to easyJet, to BAA over-investing in new facilities
to maximise the value of its regulatory asset base:
The level of gold plating which we felt was going
on at Stansted was just too high. It is a relatively small thing,
but to give a cast iron example, the suitability of the infrastructure
to take the A380. No Stansted operator operates anything like
an A380. No airline that I can think of is going to put an A380
into Stansted in the coming decades, so why are we the users,
particularly easyJet and Ryanair, going to be expected to pay
37. The construction of a second runway at Stansted
has now been overshadowed by the consultation on development at
Heathrow. This point about accommodating the A380 arose in a recent
Westminster Hall debate on that expansion. In the debate, it was
argued that the advent of quieter aeroplanes such as the A380
might mean less local opposition on noise pollution grounds to
airport expansion. The Government was urged to mandate lower noise
levels from airlines and aeroplane manufacturers.
38. The long-term business case for the A380 as a
'superjumbo' is predicated upon a healthy continuation of the
'hub and spoke' model of air travel. The point about Stansted
is that it is notand almost certainly never will bea
hub and spoke airport, so there is no point preparing it for an
aeroplane that is designed with that purpose in mind. Other new
aeroplanes will presumably be less polluting as the technology
improves, but this is unlikely to show a benefit for many years.
Service quality and rebates
39. In our report on passengers' experiences of air
travel, we agreed with the CAA "that the [regulatory] regime
could be further improved by introducing penalties for poor performance."
A small proportion (4% at Heathrow and 3% at Gatwick) of revenue
depends on these penalties. The final price control proposals
published by the CAA on 20 November 2007 make 60% of Heathrow's
and 40% of Gatwick's capital programmes for the next five years
subject to rebates.
40. The quality of service provided by BAA was brought
up by all of the airlines in their oral evidence. Dr Paul Ellis
from British Airways said that "we have had poor service
in respect of the management of security at the BAA airports in
the most recent year or so."
Don Langford of American Airlines said that "over the past
few years BAA has actually been less responsive to operational
Langford gave the example of getting flight crew through security
control posts. He told us that there had been occasions when air
crew had been held up because they were sitting behind deliveries
of non-time critical supplies.
41. This is exactly the sort of problem that rebates
are designed to avoid. When we put the point about prioritisation
of crew at checkpoints to BAA, Mr Kyran Hanks (Economics and Regulation
Director) pointed out that "as part of the next regulatory
settlement there has been an agreement made with the airlines
at both Heathrow and Gatwick to put a service quality incentive
on the airports to minimise the queues at those control posts."
42. Appendix C of the Civil Aviation Authority's
price control proposal document sets out 'triggers' for BAA to
pay rebates to airlines in respect of poor service. Triggers set
on capital projects, such as the refurbishment of Heathrow's Terminals
1-4 and the construction of new facilities, ensure that money
BAA receives from the fees it charges gets spent on the projects
it has agreed with the regulators.
43. Service quality will be assessed in seven key
- The availability of seats in
- The cleanliness of terminal facilities
- The ease of way-finding
- The display of flight information
- The length of central security queues
- Passenger sensitive equipment
- The efficiency of baggage carousels in arrival
44. We pressed the CAA and Competition Commission
on why they felt that BAA needed a programme of incentives to
meet minimum standards of service quality. Mr Martin Stanley of
the Competition Commission explained that "it would be a
strange regulator [
] that says, 'Here is the money that
you can get for landing charges over the next five years but it
does not matter what service quality.'"
45. It was, and remains, our view that BAA should
be doing a lot of things covered by the incentives anyway. We
have no issue with the principle of performance-related pay as
applied through service quality rebates. We do, however, regret
the apparent need for such targets. If there were no position
of market power in the UK airports sectorif there was real
competition for trafficairport owners would not need incentives
from an external regulator.
46. In its report on the economic regulation of the
London airports, the Competition Commission stated that "the
total amount of revenue at risk needs to be sufficiently large
to incentivize BAA to maintain the agreed standards."
They "note that, in many anti-trust regimes, penalties for
infringement may be equal to 10 per cent of an enterprise's revenue
and that this is considered an appropriate incentive to compliance."
47. We believe that the percentage of revenue
subject to rebates should be higher, as suggested by the Competition
Commission. The comparison of the regulation of BAA to an anti-trust
regime lends further weight to our view that BAA's market position
is fundamentally anti-competitive.