The CAA managed to upset both regulated airports and airlines with its pricing regime for the next five years announced last week. Ian Taylor explains
You can’t please all the people all the time, as the Civil Aviation Authority – somewhat like football referees – well knows.
Indeed, you can’t please some people at all – Ryanair, for example. And sometimes you just can’t please anyone.
That certainly appeared the case last Friday when the CAA issued its final decision on London airport pricing and regulation.
In essence, the CAA decided what has gone up must come down, but only after a nine-month process during which the authority argued ‘yes it must, no it mustn’t, yes it must’.
The headline decision was on what Heathrow charges airlines, with the CAA reversing a previous decision to allow charges to rise with inflation over the next five years and instead pegging increases at 1.5% below the Retail Price Index (RPI) until 2019.
The CAA characterised this as a promise of lower prices and higher standards – a combination we don’t see occurring very often these days let alone at Heathrow?
The regulatory about-face must have pleased British Airways no end, given the CAA had first proposed a cap of RPI -1.3% last April but reverted to RPI +0% in October. What produced the double U-turn?
The decision drew criticism from all sides. Heathrow responded with a thinly-veiled threat to cut back (“review”) its investment plans while Virgin Atlantic chief executive Craig Kreeger declared himself “baffled” by the failure to cut prices further and threatened to appeal the ruling.
If the Bank of England ever hits its target inflation rate of 2%, Heathrow charges would rise 0.5% a year.
Who would notice with the way fares change with every online search and with every ancillary addition?
Heathrow suggested the ruling meant charges per passenger would fall from an average £20.71 this financial year to £19.10 in 2018-19.
It described the resulting return on investment as “unsustainable”. But from the passenger’s point of view, a £1.60 reduction in real terms over five years amounts to what?
Kreeger pointed out the “steep price rises” at Heathrow in the last few years. Yet such a reduction is unlikely to be reflected in fares despite the CAA insisting it was “good news for passengers”. The airlines will swallow it.
Heathrow chief Colin Matthews suggested: “The settlement leaves little spare resource to manage the consequences of potential disruption” – which sounds like a threat.
Recall that the sharp rises in charges at the airport over the previous regulatory period followed some shambolic episodes, not least following the introduction of heightened security measures in 2006.
The airport had proposed charges rise above £25 per passenger by 2019.
A near 8% drop in current revenue (let alone planned revenue) over five years does not sound like something the airlines would embrace warmly so why should Heathrow’s investors?
It’s an irony that one of those likely to be least impressed with the decision is the Qatar Investment Authority, which owns part of Heathrow and is represented on the Heathrow board by Akbar Al Bakir, chief executive of BA’s Oneworld partner Qatar Airways.
So what is the CAA case for its U-turn? It suggested the revision was possible because “passenger traffic forecasts have strengthened since October”.
Note it does not say passenger traffic has strengthened since October but “forecasts” of traffic.
Forecasts can vary for any number of reasons so this could bear some scrutiny. However, there has been an upturn in traffic at Heathrow in the past year (+3.4% over the course of 2013).
There has also certainly been an improvement in the economy – though whether this will extend to 2019 is another matter.
But Heathrow remains constrained. Its ability to increase traffic depends on airlines operating bigger aircraft which are more full (and aircraft as big as the A380 cost more to handle).
In any case, how to explain the CAA’s move from the original proposal of RPI -1.3% to +0%? Did traffic fall between April and October? Did the economy stutter? Or did Heathrow get in the CAA’s ear and BA subsequently trump it?
Whatever, the CAA also decided to maintain its regulation of Gatwick, cap annual rises in charges at a similar RPI -1.6% and impose a new monitoring regime on the airport.
Gatwick had planned for inflation-proof charges. It described the monitoring plans as “onerous” and “intrusive” and the CAA’s long-term passenger forecasts as “over optimistic”.
The CAA also announced an end to its regulation of Stansted, prompting an angry response from Ryanair which accused the authority of “regulatory failure”.
That’s right: Ryanair, that champion of regulation. Before we know it the carrier will be claiming to look after its passengers.