By Kate Holton
LONDON Jan 10 London's Heathrow warned it could
struggle to grow its business after accusing the industry
regulator of imposing a "draconian" cap on the prices Britain's
biggest airport can charge airlines.
Britain's Civil Aviation Authority (CAA) said on Friday it
would insist that Heathrow set its prices at 1.5 percent below
inflation from April 2014 after finding that the airport -
Europe's busiest - had too much market power.
Heathrow said it might appeal the cap, which was much lower
than expected for the next five years, but airlines said the
move did not go far enough as the hub still had some of the most
expensive charges in the world.
The cap is well below an interim suggestion made by the
regulator for prices in line with inflation. It is also well
below Heathrow's original request for a rise in tariffs of 4.6
percent above inflation, as measured by the retail prices index
The previous five-year tariff was RPI plus 7.5 percent.
"We want to continue to improve Heathrow for passengers,"
Chief Executive Colin Matthews said. "We will review our
investment plan to see whether it is still financeable in light
of the CAA's settlement."
The airport, to the west of London which has expanded in
recent years with Terminal 5 and the redevelopment of Terminal
2, said the new price limit would result in a fall in the cost
charged per passenger from 20.71 pounds in 2013/14 to 19.10
pounds in 2018/19 in real terms.
It said this would result in a rate of return on capital
investment of an "unsustainable" level of 5.35 percent compared
with the 6.7 percent it was seeking.
The CAA said it was confident its proposals would still
allow Heathrow to invest sufficiently while reducing prices for
consumers. It said it had toughened the regulation after seeing
passenger traffic forecasts strengthen and the cost of capital
revised at the airport.
But Heathrow questioned the CAA's forecasts for the next
five years in terms of passengers and costs, and said it would
have to cut operational expenditure by more than 600 million
pounds and increase commercial revenue targets by more than 100
million pounds by increasing retail and car park charges.
Heathrow, whose owners include Spain's Ferrovial
and the sovereign wealth funds of Qatar, China and Singapore, is
the third busiest airport in the world, with almost 200,000
passengers arriving and departing each day.
Analysts at Mirabaud said the news was very bad for
Ferrovial. But they noted that it could be balanced by the
increasing chance that Heathrow will be allowed to expand from
two runways to three by 2030 as part of a government review to
address a capacity crunch that could slow economic growth.
Ferrovial, which has been steadily reducing its stake in
Heathrow and now holds 25 percent, declined to comment.
The regulator had been reviewing the market power of the big
airports - and whether this needed to be curbed by price caps -
following complaints from the airlines.
British Airways, the dominant airline at Heathrow,
said the price curbs were a step in the right direction to
address the excessive charges, while Virgin Atlantic noted that
prices at the airport were triple the level they were 10 years
ago. Virgin is the second largest airline at Heathrow.
"Coupled with ever increasing Air Passenger Duty, customers
flying to and from the UK are facing some of the highest
travelling charges in the world," said Craig Kreeger, Virgin
For rival airports Gatwick and Stansted, the CAA said it
would accept and monitor Gatwick's proposal to agree fair terms
with individual airlines and not regulate Stansted at all.
Ryanair, Europe's largest airline by passenger
numbers, condemned the CAA decision not to regulate Stansted,
one of the low-cost airline's biggest bases.
"Today's decision is an example of the CAA's regulatory
failure which will again harm consumers as Stansted will be able
to further increase airport charges whenever it wishes, without
any reference to competitive price levels," Ryanair's Director
of Legal & Regulatory Affairs, Juliusz Komorek said.