BA considers life outside Heathrow as CAA backtracks on charges

Regulator rules charges will rise at faster rate than first proposed – despite agreeing airport is badly managed and staff overpaid

British Airways has warned that it will consider a future outside Heathrow after the regulator revised its proposals to cut landing charges – despite agreeing that the airport was badly managed and staff overpaid.

Airlines cried foul as the Civil Aviation Authority (CAA) ruled that charges will rise at the rate of inflation over the next five years instead of the RPI minus 1.3% rate it had proposed in the spring – and well above the real terms cut demanded by airlines.

Heathrow, which has argued for increasing returns to shareholders to ensure foreign investment continued, said the settlement would be "the toughest [it] has ever faced" and claimed it could have "serious and far-reaching consequences for passengers".

British Airways, which accounts for just over half of the traffic at the London hub, said it was a "bad day" for its customers. Willie Walsh, chief executive of the airline's parent company IAG, said the CAA had let down its passengers by ignoring calls for cuts. He said: "As the only hub airport in the UK, Heathrow exerts monopoly power over its users. Like other airlines at Heathrow, we cannot move to a better-run UK hub that offers customers real value for money."

But, Walsh added, the cost of Heathrow meant alternative hubs were "more attractive and realistic". The IAG boss has previously mooted the idea of focusing on Madrid, the base of BA's sister airline Iberia. Walsh recently said he no longer backs a third runway at Heathrow, at a time when the government's Airports Commission is considering expanding capacity in the south-east.

Walsh said: "No such alternative exists today but these excessive charges combined with a complacent management team at Heathrow make an alternative hub look more attractive and more realistic. We will carefully consider our next steps."

The CAA said that its decision to freeze rather than cut landing charges at Heathrow reflected the increasing cost of raising capital for investment. But while it had accepted some of Heathrow's arguments, the regulator claimed that it had toughened up on operating costs – and concurred with BA's view that the airport needed better management.

Iain Osborne, group director of regulatory policy at the CAA, said: "We think that with the right management focus they can do a lot to increase operating efficiency. Pay is too high; too much overtime being worked. Throughput rates for security are lower than other airports."

However, Heathrow's chief executive, Colin Matthews, who has argued that its shareholders needed rewarding to continue the investment that has transformed the airport over the last five years, said: "This proposal is the toughest Heathrow has ever faced. The CAA's proposed cost of capital of 5.6% is below the level at which Heathrow's shareholders have said they are willing to invest. The CAA's settlement could have serious and far-reaching consequences for passengers and airlines at Heathrow.

"We want to continue to improve Heathrow for passengers. Instead, the CAA's proposals risk not only Heathrow's competitive position but the attractiveness of the UK as a centre for international investment."

But Osborne said the owners – largely foreign sovereign wealth funds – were getting a fair return for a low-risk business. "There's no reason that passengers should pay more to meet the ambitions of its shareholders."

However, other airlines accused the CAA of caving in to Britain's largest airport. Virgin Atlantic said it was "deeply disappointing to see the CAA has bowed to pressure from Heathrow Airport Limited and its shareholders" and said that higher charges were "another hammer blow for both UK consumers and overseas visitors". It called on the CAA to "urgently review its recommendations".

Osborne insisted: "We're not balancing airlines against airports but the passenger interest in lower charges against the passenger interest in better services."

The CAA meanwhile said Gatwick airport could increase landing charges by RPI plus 0.5% annually for seven years, under a more flexible arrangement. Gatwick gave a "cautious welcome" to the proposals.

However, easyJet, the airport's largest customer, said it was disappointed with the increase in proposed average charges and warned that leeway given to Gatwick over a possible second runway was a "licence to print money". It claimed it could lead to passengers paying £28 more per flight.

The CAA has deferred a ruling on Stansted regulation after the airport, under the new ownership of MAG, struck deals with its largest customer Ryanair in recent weeks.

Article Source : http://www.guardian.co.uk
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