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Heathrow Prices Capped as U.K. Reins in Airport Charges

April 30 (Bloomberg) -- The U.K. aviation regulator’s plan to cap fees charged by London’s biggest airports drew the ire of both airlines and Heathrow airport, with one side calling it too lax and the other describing it as a threat to growth.

Heathrow Airport will need to cap airline charges at 1.3 percent below the U.K.’s retail price index for the five year period starting April 2014, the Civil Aviation Authority said today. At London Gatwick, the world’s busiest single-runway airport, the CAA proposed a price cap of RPI plus 1 percent

The U.K. regulator sets the maximum amount London’s three largest airports can charge airlines to use their facilties and must approve the five-year plans of Heathrow, Gatwick and Stansted. While the fees drive up ticket prices for passengers, they also underpin investment such as Heathrow’s 3 billion-pound ($4.65 billion) proposals intended to keep the pace with rivals including Paris’s Charles de Gaulle and Frankfurt Airport.

“Heathrow airport is over-priced, over-rewarded and inefficient and these proposals, which will result in an increase in prices, fail to address this situation,” said Willie Walsh, chief executive officer of British Airways parent International Consolidated Airlines Group SA. Walsh said charges at the hub have tripled over the past 11 years.

The price cap for Heathrow was previously set at RPI plus 7.5 percent after the regulator assumed a five-year total of 371.8 million passengers, which significantly exceeded the actual traffic, the CAA said.

Service Threat

A 3 billion-pound investment over the next five years, as proposed by Heathrow in February, would bring the total amount spent on the airport since 2003 to 14 billion pounds and drive a 41 percent increase in the average charge per passenger to 27.30 pounds in 2019.

Today’s CAA proposals are likely to “put passenger service at risk by not attracting the necessary investment in Heathrow for the short, medium and long term,” Heathrow Airport Ltd. said in a statement.

Seeking to maintain its position as London’s main long-haul airport, Heathrow has boosted service standards and upgraded its facilities to mirror advances in Asia and the Middle East. Its new Terminal 2, scheduled to open to flights next year, features a streamlined check-in zone with 56 self-service bag drops, and shorter walks to gates giving more time for shopping. Gatwick has similarly focused on improving the passenger experience.

“These airports have done good work to invest to improve the customer service, but those kinds of investments come with efficiency savings,” Craig Kreeger, the CEO of Virgin Atlantic Airways Ltd., said in an interview. “The job of managing expenses is a task of a lot of little details.”

’Unrealistic’

The CAA should drop regulatory oversight of Gatwick altogether, owner Gatwick Airport Ltd. said in a statement. The proposed price control 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.

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.

“This proposal falls lamentably short of what is required to restore traffic growth and consumer choice at Stansted,” Ryanair Holdings Plc, Europe’s biggest discount airline, said in a statement.

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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