Select Committee on Transport Fourth Report

6 Options

Competition between terminals

Reorganisation and competition between terminals

75. One way of increasing competition would be to have more competition between terminals at Heathrow. This arose in oral evidence from easyJet. When questioned about alternatives to regulatory asset base regulation (where the value of an airport's assets form part of the basis of the charges it is allowed to make to airlines), Mr Toby Nicol said that:

76. In Adding capacity at Heathrow airport, the Department for Transport states that:

    BAA is currently undertaking a programme of relocation of airlines at Heathrow to make best use of the airport and to co-locate airline alliance members in the same part of the airport. In 2008, British Airways will move the majority of its flights to Terminal 5. After this, BAA plan to group other airlines together by alliance to reduce transfer times for passengers. OneWorld will operate from Terminal 3, SkyTeam from Terminal 4 and Star Alliance from Terminal 1 and subsequently from the Heathrow East terminal.[89]

77. Such reorganisation along alliance lines would seem to work in favour of competition between terminals. However, Mr Kyran Hanks, BAA's Economics and Regulation Director, told us that "there is not the space for that kind of competition at any of our London airports."[90] This view was echoed by Jonathan Moor, Director of Airports Strategy at the Department for Transport:

    One thing I would say is that because they are looking specifically at development restrictions this is not as easy as it is maybe in some places like America. If you look at JFK Airport, they have nine different terminals there. We already know how difficult it was to get a fifth terminal at Heathrow Airport, so one of the key problems for us in the South East is that the development restrictions and the capacity restrictions will make it very difficult to have inter-terminal competition within an airport.[91]

78. Competition between terminals at Heathrow could have been a radical solution to the problem of competition at Heathrow. If neither the Government nor BAA believe that inter-terminal competition is an option at Heathrow, then it makes the prospect of divestment even more likely.


79. In the course of previous inquiries into the aviation sector, we have recommended that the BAA group be broken up.[92] BAA stated:

    We consider the case for break-up to be weak, in that it does not appear to have considered the fundamental questions surrounding the delivery of new capacity. Genuine competition would only be possible with that new capacity. T5 is the future. BAA has ambitious plans for all its airports and a stable ownership structure is a key aspect of transforming airports.[93]

In its written evidence, BAA poses several questions to us:

  • How can there be competition between airports without spare capacity?
  • How can price-controlled airports compete on price?
  • How would separate owners deliver capacity any faster than BAA?
  • How would the inevitable delays in delivering service improvements and new capacity, caused by break-up, be addressed?
  • Would separate owners have the necessary skills and experience?
  • Would separate owners have the financial strength of BAA?[94]

80. This gives us the opportunity to set out a few key points in response. Any airport that were sold off would not be price-controlled, as it would be in a position of market power, and thus would be free to compete on price. Two of the things BAA does not have a monopoly on are skills and experience, and we are not persuaded that it would necessarily deliver new capacity faster than any other potential owner. We are confident that any new owner would have (at the very least) the financial strength of BAA, and might well be stronger.

81. There are more limitations on supply than there are on demand in the aviation sector, and there are no signs that this will change. To assume that spare capacity is necessary for competition is to deny the possibility of competition altogether. We have heard evidence from the CAA that there is indeed competition, particularly in the point-to-point and low-cost sectors. If competition is taking place without spare capacity—as the CAA say that it is—then it must be possible.

82. EasyJet's Communications Director, Toby Nicol, argued that "what would be worse than a single monopoly controlling Heathrow, Gatwick and Stansted would be three individual monopolies."[95] He explained that "they all have a monopoly of their local markets. Stansted, Gatwick and Heathrow do, and in effect what you would do is simply create mini-monopolies rather than a big monopoly."[96] However, in a supplementary written submission, Mr Nicol clarified easyJet's position: "easyJet supports the break-up of BAA, but […] this should not be at the expense of effective regulation of BAA's three London airports."[97]

83. We agree that breaking up BAA's monopoly would not remove the need for effective regulation. What it would remove though—through the removal of substantial market power—would be the need for the kind of economic regulation in the form of price controls. Further, and in all likelihood deliberate, 'blurring' of the passenger markets as described by Unite would result in increased potential competition between airports and, because there would be separate economic interests, increased actual competition for passengers.

Which airport?

84. There has been speculation in the media to the effect that BAA and Ferrovial have plans to sell off either Gatwick or Stansted.[98] As the airport in the South East least likely to see development and extra capacity in the next fifteen years, Gatwick is possibly more expendable than Stansted. In August 2007, The Business reported that there would be a 'feeding frenzy' if BAA were forced to sell Gatwick.[99] It will be for the Competition Commission to consider all the options facing BAA, and we await its findings and recommendations.

85. BAA's monopoly position in the UK airports sector is unnecessary. Indeed, it is bad for passengers and bad for the aviation industry. We do not agree that the status quo is a necessary condition of sustained investment and development. We are firmly of the view that increased competition is possible and could have huge benefits for both airlines and passengers. We look forward to the Competition Commission's analysis of all the issues, and hope that it undertakes detailed cost-benefit analyses of all the possible outcomes.

88   Q 173 Back

89   Adding capacity at Heathrow airport, para 3.16 Back

90   Q 272 Back

91   Q 339 Back

92   Passengers' Experiences of Air Travel, para 64. See also The Work of the Civil Aviation Authority, para 142. Back

93   Ev 76 Back

94   Ev 80 Back

95   Q 183 Back

96   Q 184 Back

97   Ev 124 Back

98   e.g. 'Something in the City: Airport for sale?'', The Evening Standard, 4 October 2007, p 37 Back

99   'London City airport eyes Gatwick as BAA empire faces break-up', The Business, 18 August 2007 Back

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