Heathrow Prices Capped as CAA Looks to Rein In Airport Charges

London’s Heathrow Airport will need to cap airline charges at 1.3 percent below inflation over the next five years, following a decade of price increases, the U.K.’s Civil Aviation Authority said.

Charges at Europe’s busiest hub should be linked to the U.K.’s retail price index minus 1.3 percent, the London-based regulator said in a statement today. At London Gatwick, the world’s busiest single-runway airport, the CAA proposed a price cap of RPI plus 1 percent for the five years to April 2019.

The U.K. regulator sets the maximum amount London’s three largest airports - Heathrow, Gatwick and Stansted - can charge and must approve their five-year plans before they go into effect. Heathrow Airport Ltd. in February proposed spending 3 billion pounds ($4.65 billion) between 2014 and 2019, bringing the total amount spent on the hub since 2003 to 14 billion pounds and driving a 41 percent increase in the average charge per passenger over the next five years to 27.30 pounds in 2019.

“Protecting consumers and improving their experience is the core focus of our regulatory decision-making,” CAA Chief Executive Officer Andrew Haines said in a statment today. Heathrow and Gatwick have “substantial market power” as airlines cannot easily switch to other airports and still serve London, the CAA said.

Almost four in five long-haul flights out of the U.K. start at London Heathrow and continued investment is essential to ensure the airport remains ahead of its European and Gulf rivals, Chief Executive Officer Colin Matthews said in February.

Service at Risk

“Our first impression is that a 5.35 percent return on capital will put passenger service at risk by not attracting the necessary investment in Heathrow for the short, medium and long term,” Heathrow said in an e-mailed statement today. The next round of funding will go towards completing Terminal 2, adding taxiways and retooling the airport’s baggage system.

The CAA should drop regulatory oversight of Gatwick, owner Gatwick Airport Ltd. said in a statement today. The proposed price control level of RPI plus 1 percent would limit the airport’s ability to invest and is based on “unrealistic” traffic growth, financing and efficiency assumptions, it said.

“The CAA must not hold us back through imposing heavy handed regulation, red-tape in the form of a license and an inflexible price control,” Gatwick CEO Stewart Wingate said in a statement today.

Stansted, London’s third-largest airport, showed “the weakest evidence of market power,” the CAA said, adding that price controls could be warranted at a later date as capacity around London becomes more constrained. The regulator’s final proposals will be published in October 2013 and take effect April 2014.

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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