Understanding Regulation

Facts, Analysis and Comment

Airport Regulation

History


The Civil Aviation Authority (CAA) is responsible for controlling the prices paid by airlines for landing and taking off at London's Heathrow, Gatwick and Stansted Airports - if it believes it necessary to do so.

The CAA's legislation originally predated the privatisation of the British Telecom which establishing licensing as a regulatory tool. London's three main airports were collectively privatised as BAA plc in the 1980s. Regulatory discussions were accordingly held only every five years (quinquennial reviews), involved a mandatory reference to the Competition Commission (CC), and focussed on price, rather than service quality. This weakness became all too apparent in the late 2000s when passengers at the main London airports suffered from severe delays following the tightening of check-in security, and again just before Christmas 2010 when a mere 25cm of snow caused 5+ days of chaos at Heathrow. Some relatively small penalties were introduced into the regime in 2008 and Martin Cave led a useful review of airports regulation, published in 2009. In particular, Mr Cave recommended that the CAA should focus on much more on the passenger experience rather than the narrow issue of airport income and expenditure.

Then, following the 2010 problems, and taking account of the Cave Report, Ministers made more substantial improvements via legislation, including the abolition of the mandatory CC reference.  (The CC itself was subsequently subsumed into the Competition and Markets Authority - CMA.) The new legislation also permitted either the airports or the airlines to appeal the CAA's price determination to the CMA. This threatened to make the CAA's task much harder as, in order to avoid an appeal, they would need to establish a price acceptable to the airports, the airlines and themselves. This may have been a factor in their deciding to release Stansted from price controls - see further below.

Forced Sale of Gatwick & Stansted

A further complication was that the CC carried out a separate Market Investigation in 2007-9 and concluded that BAA - who once owned Heathrow and Gatwick and Stansted - should sell both Gatwick and Stansted so as to encourage competition and so benefit passengers. 

Price Controls

The CAA was at the forefront of promoting 'constructive engagement' between the airports and their customers in the run up to the 2007 quinquennial (5 yearly) reviews - see also the introduction to utility regulation.

In the case of Heathrow, the CAA has determined the following charges, allowing big increases through to 2013-14 in order to fund new terminals: 2008-09:- £11.97 per passenger + RPI+7.5% every year thereafter. 2013-14:- £20.71 per passenger + RPI-1.5% every year thereafter.

Gatwick was price controlled until 2013-14. The CAA then adopted a novel approach: 'The CAA supports more diversity in what Gatwick offers to its various airlines, so passengers receive a tailored service. It has therefore based regulation on the airport operator's own commitments to its airline customers. These and various airport-airline contracts cover price, service quality, investment and other issues normally covered by a regulatory settlement, and should enable a more flexible and commercial approach. The CAA is backing the commitments with a licence, to allow the CAA to step in to protect users, for instance if there are reductions in service quality that are against the passenger interest. The CAA will monitor the application of the new framework to ensure that prices are fair and that service quality is sustained. The licence will also provide for CAA scrutiny of most second runway costs before they can be passed on to airlines and passengers. The airport licence will ensure that issues like cleanliness, queuing times, seating availability and information provision are addressed in the passenger interest. For the first time, there will be a requirement for Heathrow and Gatwick airports to put in place robust plans to ensure they are better prepared for disruption and can manage it effectively when it does occur.'

In the case of Stansted, the CAA used to believe that price controls were not necessary, as Stansted was competing for traffic from elsewhere, and the vast majority of their movements were by Easyjet and Ryanair who accordingly had significant buyer power. Both the CC and the Department for Transport, however, believed that effective competition had not yet been established, and so price controls were imposed. Ryanair was particularly keen on price controls as they did not want to have to pay for what they regarded as over-grand plans to lay down a second runway and build expensive new terminal facilities.  The CAA changed its mind in late 2012, much to the delight of Ryanair, and decided to impose price controls, although the owners of Gatwick were upset, for they had been hoping that Stansted would have been allowed to increase its landing charges above the new cap, so possibly leading to airlines moving some flights to Gatwick. But the CAA announced in January 2014 that, following its sale by BAA, Stansted would indeed in future be free of price control.

Miscellaneous Facts

There are six international and three general aviation 'London' airports. The numbers are millions of passengers pa

London Heathrow - 72
London Gatwick - 35
London Stansted - 18
London Luton - 10
London City - 3
London Southend - 1

London Biggin Hill
London Oxford

London Heliport

 

Martin Stanley