UK CAA Cap on Charges at Heathrow
The Heathrow Observer
June 29, 2022.
The UK Civil Aviation Authority has published its Final Proposals for the maximum charges that Heathrow Airport Limited (HAL) can charge airlines for using the airport for the next five years.
Using Office for Budget Responsibility inflation forecasts, the average maximum price per passenger that airlines will pay Heathrow will fall from £30.19 today to £26.31 in 2026. When the effects of inflation are removed, this is equivalent to nearly a six per cent reduction every year from today’s level up to 2026.
This pricing profile reflects expected increases in passenger numbers as the recovery from the pandemic continues and the higher level of the price cap in 2022, which was put in place in 2021 to reflect the challenges from the pandemic at the time.
While passenger numbers are expected to continue to recover in 2022 and into 2023, the proposals include new mechanisms to deal with the remaining uncertainty in respect of passenger numbers. Following extensive analysis and consultation to set the level of the cap, the Civil Aviation Authority has set expectations for the appropriate level of efficiency to expect from HAL and an appropriate return for capital providers to ensure it can efficiently finance its regulated activities.
The package of measures set out in the proposals include:
A five-year control period, which will allow the airport to reduce charges for consumers and provide investors with medium-term certainty. The control period, known as H7, runs from 2022 to 2026.
Affordable charges for consumers, which will also support the recovery in passenger numbers.
Allowing Heathrow to appropriately invest in keeping the airport safe, secure and resilient, while at the same time providing a good experience for passengers. This includes investing in next generation security equipment and a new baggage system for Terminal 2.
Richard Moriarty, Chief Executive at the UK Civil Aviation Authority, said: “Today’s announcement is about doing the right thing for consumers. We have listened very carefully to both Heathrow Airport and the airlines who have differing views to each other about the future level of charges. Our independent and impartial analysis balances affordable charges for consumers, while allowing Heathrow to make the investment needed for the future.”
What the Final Proposals will mean for consumers?
Our primary duty as the UK’s aviation regulator is to protect the interests of consumers, both in the short and long term, and today’s announcement will bring considerable passenger benefits. This will include allowing significant investment to improve Heathrow for passengers, such as £1.3bn upgrading Terminal 2’s baggage facilities and introducing new generation security scanners to help reduce queues in the future.
Heathrow is among the most expensive airports in the world for its charges to airlines and it is important to note that the H7 five-year period will see airport charges reduce over time from today’s level.
What are the next steps?
It is expected that Heathrow Airport Limited will begin to consult on its future airport charges in approximately August 2022, in line with expectations set out in the Airport Charges Regulations 2011 (ACR11).
After considering responses received to the Final Proposals, the Civil Aviation Authority will publish a Final Decision on the modifications we make to Heathrow’s licence. We currently intend to publish that Final Decision in Autumn 2022.
What did the Civil Aviation Authority consider when making this decision?
Because of the uncertainties involved in forecasting passenger traffic levels as the aviation industry recovers from the pandemic, this has been a challenging review. During the review, it has become clear that both Heathrow Airport Ltd and the airlines using the airport have starkly divergent views on the level of charges for the next five years.
Over the course of the price control period to the end of 2026, increased demand is expected to result in a sustained recovery in the aviation sector. Spring 2022 has seen sharp increases in demand driven particularly by UK outbound leisure passengers taking advantage of the relaxation of UK and international travel restrictions.
Passenger numbers in May 2022 were approximately 79% of pre-pandemic levels. However, uncertainties persist into 2023 and beyond and passenger numbers at Heathrow are predicted to return to 2019 levels by at least 2025.
After considering responses we receive to the Final Proposals, the Civil Aviation Authority will publish a Final Decision on the modifications we make to Heathrow’s licence. We currently intend to publish that Final Decision in Autumn 2022.
The CAA has released its Final Proposals for the H7 price control period which runs from January 2022 - December 2026. The CAA is now undertaking a consultation on the proposal to which Heathrow will respond. The CAA will consider the feedback it receives during this consultation before making a final decision on the H7 price control which is expected later this year.
Heathrow CEO John Holland-Kaye said: “As the industry rebuilds, our focus is to work alongside airlines and their ground handlers to give passengers a reliable and consistent journey through Heathrow. The CAA continues to underestimate what it takes to deliver a good passenger service, both in terms of the level of investment and operating costs required and the fair incentive needed for private investors to finance it. Uncorrected, these elements of the CAA’s proposal will only result in passengers getting a worse experience at Heathrow as investment in service dries up.
“Economic regulation should drive affordable private investment in Britain’s infrastructure to the benefit of users, not hamper it. The CAA’s proposal will undermine the delivery of key improvements for passengers, while also raising serious questions about Britain’s attractiveness to private investors.
“We will take time to assess the CAA’s proposal in more detail and will provide a further evidence-based response to this latest consultation. There is still time for the CAA to get this right with a plan that puts passengers first and encourages everyone in the industry to work together to better serve the travelling public.”
Unlike airlines, Heathrow’s prices are set by the CAA – which means the airport’s profits are capped in the good times, though losses are unlimited in the bad times. While Heathrow’s prices remain controlled by the CAA, unregulated airlines have been able to benefit from the capacity constraints at the airport to generate £25bn in extra airfares since 2012.
The H7 regulatory period runs from January 2022 – December 2026. The CAA has already instituted an interim H7 charge of £30.19. The CAA has confirmed today that the 2022 charge will remain unchanged at £30.19 and fall by the Consumer Prices Index minus 5.74% in each subsequent year through to December 2026. This is subject to consultation, and a final decision is expected in the autumn.
Supported by the appropriate incentives, Heathrow’s plan would invest a further £4bn in the service passengers want without adding to ticket prices. Airlines set their fares to what the market will bear not their cost base, and they have already increased fares by up to 100% this year.
Heathrow has encouraged the CAA to utilise regulatory depreciation, delaying investor returns in H7 to the next regulatory period, which would smooth the passenger charge from Heathrow’s proposal of £41.95 to £34. This is the same approach the CAA successfully used to enable the construction of Terminal 5.
Airports around the world are increasing their prices in the aftermath of the pandemic. While airlines often point to more limited price increases at continental airports like Amsterdam, Frankfurt and Paris – they fail to mention that these airports received billions of pounds in state aid during COVID while Heathrow received virtually none.