Heathrow Says Fee Cap Risks Investment as Airlines Seek Cut

Heathrow Airport said proposals capping fees at Europe’s busiest travel hub risk driving away investors, even as airlines led by British Airways argue that passengers will desert the hub because of the impact on fares.

Heathrow should be allowed to lift charges by no more than the rate of inflation as determined by the U.K.’s retail price index in the five years from next April, down from RPI plus 7.5 percent previously, the Civil Aviation Authority said today. Airlines had sought a 9.8 percent annual reduction, it said.

The regulator sets the maximum amount that London’s top airports -- Heathrow, Gatwick and Stansted -- can charge airlines to use their facilities. While fees drive up ticket prices, they also underpin investment such as a 3 billion-pound ($4.87 billion) spending plan intended to allow Heathrow to keep pace with rival hubs Paris Charles de Gaulle and Frankfurt.

“Heathrow exerts monopoly power over its users,” Willie Walsh, chief executive officer of British Airways parent IAG SA, said in a statement. “These excessive charges combined with a complacent management team at Heathrow make an alternative hub look more attractive and more realistic.”

Heathrow is fighting to remain London’s hub airport after Boris Johnson, the city’s mayor, said he favored a four-runway facility at the existing Stansted site or at new base in the Thames estuary. Heathrow, which submitted plans for a third runway in June delivering extra flights as early as 2025, would be replaced by a new borough housing 250,000 people.

Credit Profile

The CAA proposal “is the toughest Heathrow has ever faced,” CEO Colin Matthews said in a statement, adding that it risks the hub’s competitive position and “the attractiveness of the U.K. as a center for international investment.”

Heathrow has spent 11 billion pounds over the past 10 years boosting service standards and upgrading its facilities to mirror advances in Asia and the Middle East. Its new Terminal 2, due to open next year, features streamlined check-in zones with self-service bag drops and shorter walks to gates, giving more time for shopping.

“In the current climate, most businesses are having to deliver the same level of service more efficiently and airports should not be exempt from this economic reality,” Virgin Atlantic Airways Ltd. CEO Craig Kreeger said in a statement.

The new price cap won’t effect Heathrow’s credit profile, though it’s likely to trim growth in earnings before interest, tax, depreciation and amortization by about 5 percent annually from double-digits before, RBC Europe Ltd. analyst Roger Appleyard said in an investor note. The airport may choose to trim its 2.9 billion-pound capital expenditure plans, he said.

‘Upward Drift’

Initial CAA proposals said prices should be allowed to rise by no more than RPI minus 1.3 percent. Heathrow had responded by asking the CAA to allow yearly changes in fees at the RPI inflation rate plus 4.6 percent.

“Tackling the upward drift in Heathrow’s prices is essential to safeguard its globally competitive position,” Deirdre Hutton, the CAA’s chairman, said in the statement. “Our proposals create a positive climate for further capital investment, in the passenger interest.”

At London Gatwick, the world’s busiest single-runway airport, the CAA proposes that prices should be allowed to rise at 0.5 percent more than RPI on average for a seven-year period, adopting a plan presented by the hub’s owner.

The CAA said it would retain the power to intervene if, for example, there are reductions in service quality that harm passengers’ interests. EasyJet Plc, Gatwick’s biggest customer, said it backed the plan to allow the airport and airlines to reach agreements within a regulatory framework but was “disappointed” with the proposed increase in charges.

The CAA said it’s assessing whether Stansted, bought by Manchester Airport Group this year and the biggest base for Ryanair Holdings Plc, should still be regulated.

(Updates with credit impact in ninth paragraph.)
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