AIRPORTS STATISTICS 2002/2003

Transcription

1 STATISTICAL SERIES The UK Airports Industry AIRPORTS STATISTICS 2002/2003 Alan Cruicksank Peter Flanagan Jan Marchant

2 The University of Bath School of Management is one of the oldest established management schools in Britain. It enjoys an international reputation for the quality of its teaching and research. Its mission is to offer a balanced portfolio of undergraduate, postgraduate and post-experience programmes, research and external activities, which provide a quality of intellectual life for those involved in keeping with the best traditions of British universities.

3 The UK Airports Industry AIRPORTS STATISTICS 2002/2003 Series contributors Alan Cruickshank and Peter Flanagan Compiled by Jan Marchant The University of Bath All Rights Reserved ISBN

4 Centre for the study of Regulated Industries (CRI) The CRI is a research centre of the University of Bath School of Management. The CRI was founded in 1991 as part of the Chartered Institute of Public Finance and Accountancy (CIPFA). It transferred to the University of Bath School of Management in It is situated on the 8 th floor of Wessex House (North), adjacent to West car park. The CRI is an interdisciplinary research centre investigating how regulation and competition are working in practice, both in the UK and abroad. It is independent and politically neutral. It aims to produce authoritative, practical contributions to regulatory policy and debate, which are put into the public domain. The CRI focuses on comparative analyses across the regulated industries. CRI activities and outputs include: Regulatory statistics, information and analysis Discussion papers and Occasional papers Regulatory Briefs, Reviews and International series Research Reports and Technical papers Seminars, courses and conferences Direct links with regulated industries, the regulators, the academic community and other interested parties are an important feature of the work of the CRI. The CRI is non-profit making. Its activities are supported by a wide range of sponsors. BAA CIPFA Department of Trade and Industry Environment Agency National Audit Office NERA National Grid Transco Network Rail OFWAT RSM Robson Rhodes Royal Mail Thames Water United Utilities Wessex Water Further information about the work of the CRI can be obtained from:- Peter Vass, Director-CRI, School of Management, University of Bath, Bath, BA2 7AY or CRI Administrator, Jan Marchant, Tel: , Fax: , mnsjsm@management.bath.ac.uk and from the CRI s web site, which includes events and the publications list. Publications and publications list can be obtained from Jan Marchant as above.

5 AIRPORTS STATISTICS 2002/2003 PREFACE This is the ninth volume in the CRI statistical series covering the UK airports industry. The statistics are intended to facilitate objective comparisons between airports. The statistics help fulfil the CRI's objective to promote a greater understanding of the regulated network industries which play such an important part in providing essential public services. The CRI s series of statistics is intended to be accurate, relevant and accessible to a wide range of readers. It therefore sets the statistics in context by providing background information on the industry and its regulation. In this way the volume is both an industry brief as well as a statistical series. This volume includes an Overview by Peter Flanagan and Alan Cruickshank of BAA, and they have also edited and updated the briefing texts before each chapter which provide information on: the regulatory environment industry structure trends in passenger numbers. The statistical tables have been compiled by Jan Marchant, who has also formatted the publication. The accounts from which the financial information in this publication is derived are, for the most part, prepared in accordance with the requirements of the Companies Acts. In addition, those airports subject to economic regulation under the Airports Act 1986 must disclose certain economic regulatory information, and this has also been included in the publication. Acknowledgements The CRI is grateful to the participating airports for providing the financial and operating information requested, and particularly for the assistance of Joanna Hopton, Chairman - Airport Finance Working Group. Without their co-operation this publication would not have been possible. The CRI also wishes to thank Peter Flanagan and Alan Cruickshank as series editors and contributors. Whilst it is intended to be informative and a contribution to the better understanding of the airports industry, it does not necessarily represent the views of the organisations and individuals from whom facts and figures have been obtained. Responsibility for any omissions or errors in publication remain with the CRI. Comments or suggestions on the statistics will be very welcome, addressed to: Peter Vass, Director - CRI, School of Management, University of Bath, Bath, BA2 7AY, Tel: , Fax: Peter Vass Director, CRI December 2003 iii

6 THE UK AIRPORTS INDUSTRY STATISTICAL NOTES 1. Year-end for all accounts is 31 st March 2003, with the exception of London City Airport and Newcastle Airport, whose year-end is 31 st December Heathrow, Gatwick, Stansted and Manchester Airports (shown in capitals) are the four airports designated for price cap regulation as well as being subject to economic regulation by the Civil Aviation Authority (CAA). 3. The standard table layout in Airport Statistics 2002/2003 includes subtotals for three airports groups: BAA, Manchester Airport plc and TBI. These subtotals should be used with caution: they reflect the industry structure in 2002/ Highlands & Islands Airports Limited (HIAL) comprises the following airports: Barra, Benbecula, Campbeltown, Inverness, Islay, Kirkwall, Stornoway, Sumburgh, Tiree and Wick. 5. London Southend and London Biggin Hill belong to the holding company Regional Airports Ltd (RAL). These are not represented with a subtotal in this edition. 6. This year s accounts for Biggin Hill Limited include trading from a new contract at RAF Northolt. 7. Glasgow Prestwick has again been omitted in the appendices due to lack of data, but has been included in the tables for comparative purposes. 8. n/a denotes data not available and - denotes data not calculable. 9. Percentage changes for profit and loss are shown as a plus (the + sign is not shown) where there is an improvement in performance, ie, an increase in profit or a reduction in a loss. Where the percentage change is preceded by a minus, this is where there has been a worsening of performance, ie, a reduction in a profit or an increase in a loss. 10. All percentage changes are rounded to the nearest whole number. 11. As some figures are unavailable, totals and subtotals should be used with caution, especially % changes. Figures may not add exactly because of rounding. 12. Most figures in the tables in chapters 2, 3 and 4 are rounded to the nearest thousand or million. Percentage changes calculated from these rounded figures may be slightly different to those shown in the % change since columns, which are calculated from the unrounded raw data. 13. Percentage changes in the tables are, wherever possible, calculated from unrounded figures (eg, figures as shown in the appendices) whereas tables themselves may show rounded figures for ease of presentation. iv

7 CONTENTS Preface Statistical notes Overview The political environment European regulatory initiatives Traffic and industry trends Profit generated by airport charges Profit generated by other operational activities 1 The Regulatory Environment The history of airport price caps The role of the regulator International obligations The regulatory review for BAA London price caps Manchester Airport price cap Competition Conclusions AIRPORTS STATISTICS 2002/ Economic Regulation Table 2.1 Profit and (Loss) Generated by Airport Charges Table 2.2 Profit and (Loss) Generated by Other Operational Activities Table 2.3 Profit and (Loss) Generated by Non-operational Activities Table 2.4 Economic Regulation: Total Profit and (Loss) 3 Operational Trends Table 3.1 Terminal Passengers Table 3.2 Transit Passengers Table 3.3 Total Cargo Tonnage Table 3.4 Air Transport Movements Table 3.5 Average Number of Employees 4 Financial Trends Table 4.1 Operating Income Table 4.2 Operating Expenditure Table 4.3 Operating Income and Expenditure per Passenger Table 4.4 Operating Profit and (Loss) Table 4.5 Operating Profit and (Loss) per Passenger Table 4.6 Net Profit and (Loss) Table 4.7 Dividends Table 4.8 Fixed Assets at year-end and Additions to Fixed Assets during the Year Table 4.9 Total Assets and Liabilities at Year-end Table 4.10 Net Assets at Year-end Appendix A: Glossary 33 Appendix B: Statistical Information 2002/ Appendix C: Economic Regulation Accounting Information 2002/ Appendix D: Profit & Loss Accounts 2002/ Appendix E: Balance Sheets 2002/ Appendix F: Contact Points for the UK Airports Industry 63 iii iv vii v

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9 AIRPORTS STATISTICS 2002/2003 OVERVIEW Peter Flanagan and Alan Cruickshank The political environment On 16 th December 2003, the government published its White Paper entitled The Future of Air Transport following its regional air services consultations. The following briefly summarises the key conclusions of the White Paper. The White Paper establishes a strategic framework for the development of airport capacity in the UK over the next 30 years. Although it does not include any specific authorisation of any particular development, the policy framework established will allow the relevant bodies to plan ahead. The government recognises the huge importance of aviation to the economy on local, regional and national scales. It also appreciates the impacts of aviation on global climates and local populations. The White Paper aims to balance these benefits and externalities. Within this approach a balance is required which: 1. Recognises that failure to provide additional capacity for aviation would significantly damage the economy, both locally and nationally. 2. Reflects that people s desire to travel by air has increased (fivefold in the last 50 years), enabling them to take advantage of increased affordability and flexibility. 3. Seeks to reduce impacts of airports on those who are situated nearby, and on the natural environment. 4. Ensures that, over time, aviation pays for the external costs (both to society and the environment) that its operating activities impose. 5. Minimises the need for new airport development by making best use of existing capacity where possible. 6. Respects the rights and interests of those affected by airport development. 7. Provides greater certainty for all parties concerned in the planning of future capacity, whilst also remaining sufficiently flexible to recognise and adapt to uncertainties inherent in long-term planning. The government places a clear emphasis on action aimed at reducing the effects of airport transport and development on people and the environment. With regards to this the following is proposed: 1. At a global level, the government will press for stronger action by international bodies, proposing to bring aviation within the European emissions trading scheme, to help limit greenhouse gas emissions. 2. Tackle local/national impacts of airports using a range of measures: new legislation; economic instruments; improved technology; and stringent planning attached to airport development. Peter Flanagan, Senior Manager, Economics and Regulation, and Alan Cruickshank, Head of Aviation Policy BAA vii

10 THE UK AIRPORTS INDUSTRY 3. Reduce noise impacts that affect local communities near airports. This may be achieved by offering sound insulation or, in more severe cases, the purchasing of property. Taking into consideration these concerns over the environment, the government came to the following conclusions in the White Paper: Scotland The development of a new central Scotland airport is not supported. Terminal facilities and other enhancements at Edinburgh, Glasgow Prestwick, Aberdeen, Dundee and smaller island airports should be developed to support growth. Measures should be taken to allow possible additional runway construction at Glasgow International and Edinburgh, with possible runway extensions at Aberdeen and Inverness. Wales Cardiff should remain the main airport serving South Wales. Hence, access to Cardiff airport must be improved and terminal facilities developed. The proposal for a South East Wales airport is not supported. There is potential for new intra-wales services, and interest in developing a route development fund to support new services. Northern Ireland The Northern Ireland authorities should review the form of the planning agreement at Belfast City airport, if so requested. Development of increased capacity at Belfast International Airport within its existing boundary is supported. Proposals for the future development of City of Derry Airport should be given early consideration in conjunction with the Government of the Republic of Ireland. Northern England Additional terminal capacity at Manchester airport accompanied by measures to decrease those affected by noise and improved access is supported. Increased capacity within its existing boundary, improved access and possible runway extension is supported at Liverpool John Lennon Airport. Proposals to develop Blackpool and Carlisle Airports to be decided locally. Runway extensions and increased terminal facilities are supported at Teesside and Leeds Bradford Airports. At Leeds Bradford Airport, measures to reduce noise and improve access are also required. Midlands A new airport between Coventry and Rugby is not supported. Birmingham Airport is the preferred location for an additional runway, providing noise is limited and access improved. The extension of passenger and freight services at East Midlands Airport is supported, providing noise impacts are controlled. The case for a new runway will be kept under review. Proposals to develop Coventry Airport, Wolverhampton Business Airport and RAF Cosford for civil use should be decided locally. viii

11 PETER FLANAGAN and ALAN CRUICKSHANK South West Expansion of Bristol airport is supported, including a runway and new terminal, and thus an airport north of Bristol is not supported. Additional terminal capacity within existing boundaries of Bournemouth airport is supported providing actions are taken to minimise impacts on environmentally sensitive sites and improve access. Proposals to develop Exeter, Plymouth and Newquay airports should be decided locally. Action to support new services and protect existing routes, including Isles of Scilly may be considered. South East Provision should be made for two new runways in the South East by 2030; the first at Stansted (around 2011 or 2012) and the second at Heathrow (within ) if stringent environmental limits can be met. The government supports the growth of Luton up to the maximum use of a single fulllength runway broadly on the current alignment, provided that environmental impacts and areas affected by noise are kept to a minimum. The government will not overturn the 1979 planning agreement, preventing a second runway at Gatwick before After then, a new runway at Gatwick would be considered if the conditions attached to the construction of a third runway at Heathrow are not met. Land should therefore be safeguarded for this. The option to develop an airport at Cliffe or at any other alternative new sites is not supported. The option to develop two or three extra runways at Stansted, two extra runways at Gatwick and a second runway at Luton are not supported. The development of Alconbury for passenger and freight services is not supported, but the potential for relocation there of aircraft maintenance operations from Cambridge is recognised. Subject to relevant environmental considerations, there is scope for London City, Norwich, Southampton and some smaller airports in the South East to develop, thereby meeting local demand. It should be noted that in conjunction with this proposed expansion, the White Paper also highlights the need for enhancements to be made to long-distance rail networks, in order to cope with increased demand. To conclude, the government believes that the policies outlined in this White Paper will facilitate the achievement of three goals. These are economic prosperity, access to flights at affordable costs and the mitigation of environmental impacts of aviation. European regulatory initiatives Single European Sky There have been a number of major European regulatory initiatives in The most far ranging of these has been progress towards the creation of a Single European Sky. This seeks to bring about joined-up thinking between EU member states in terms of the ix

12 THE UK AIRPORTS INDUSTRY organisation of airspace. Although almost all stakeholders support the vision of a single sky, there have been a number of significant difficulties which have had to be overcome. These have included the balance between civil and military airspace and fears from labour organisations. In the European Commission s words: The European Commission has drafted legislation with the objective of achieving the goal of a Single European Sky. The objectives of the proposed legislation are to improve and reinforce safety, to restructure European airspace as a function of air traffic flow, rather than according to national borders, to create additional capacity and to increase the overall efficiency of the air traffic management system (ATM). This can be achieved by a more effective and integrated air traffic management architecture and by ensuring that this architecture is based on demand driven service provision. The legislation also proposes to significantly enhance international co-ordination and to remove many of the administrative and organisational bottlenecks in the area of decision-making and enforcement processes in ATM. The legislation referred to above comprises four separate regulations, which are all now reaching the end of the legislative approval process: laying down the framework for the creation of the single European sky; on the provision of air navigation services in the single European sky; on the organisation and use of the airspace in the single European sky; on the interoperability of the European air traffic management network. Security A new EU regulation on aviation security was adopted at the end of It is not thought that there will be a major effect on UK airports as the Department for Transport s security requirements already meet or exceed those required under the new regulation. EU-US Open Aviation Area negotiations A long-awaited ruling by the European Court of Justice suggests that it is the beginning of the end for bilateral air service agreements between individual countries. The judgement was that certain provisions in bilateral agreements held by most EU states were illegal, as they covered areas governed by European laws. As a result of this, EU member states gave the European Commission the authority to negotiate an Open Aviation Area with the United States of America, and to negotiate with non-eu amendments to existing bilateral air service agreements so that they no longer conflict with EU laws. Whilst it will take some time, possibly years, to negotiate an open aviation area, it now appears inevitable that the aviation industry will be released from this regulatory constraint and be able to operate in a way which many global industries take for granted. The implication for airports of a fully liberalised environment should be beneficial as airlines are x

13 PETER FLANAGAN and ALAN CRUICKSHANK more able to respond to the changing market conditions and offer services and products in the most optimal way. The end is nigh for the most obvious example of regulation in this area, the limitation on the number of airlines able to fly from Heathrow to the USA. Slot allocation After a number of abortive attempts to improve the European legislation governing slot allocation, 2003 has seen two significant steps forward. Firstly, the European Commission appointed the consultancy NERA to investigate options for bringing market mechanisms to bear on the slot allocation process. At the time of going to press, it was believed that NERA s final report was with the Commission and would be published early in The second significant step came with the publication of a draft new regulation created by the Italian Presidency of the European Community. This proposes a number of technical amendments to the existing regulation, something which had been attempted previously, but leaves out the more controversial elements of previous drafts. At the time of going to press, the text for a new regulation had just been adopted by the Transport Council (comprising EU transport ministers). Ground handling, including assistance to passengers with reduced mobility Towards the end of 2003, it emerged that the European Commission were getting ready to propose a revision of the existing Ground Handling Directive. It was, however, unclear what the main changes would be in this new piece of legislation. Possible areas could be requirements for the legal separation of an airport s ground handling business from its main business activities, and changes to the level of competition required at different sizes of airports. It is unlikely that any new ground handling legislation will be launched until later in 2004, given the changes that will occur in the European Parliament and the College of Commissioners in the middle of next year. However, the European Commission may bring forward an earlier piece of legislation in this area to provide additional protection to passengers with reduced mobility. The precise nature of this legislation, which could have a substantial impact on airports, is as yet unclear but it will certainly include a ban on airlines refusing to book flights for passengers with reduced mobility, and a ban on airlines refusing to carry these passengers. Denied boarding compensation Despite the fact that many airlines and airports entered into voluntary commitments on passenger service in 2001 and 2002, the European Commission brought forward legislation to compensate passengers who have their flights cancelled, substantially delayed or who are denied boarding due to over-booking. This legislation has been working its way through the European legislative process despite strong opposition from parts of the airline industry and from several EU member states, including the UK. The no-frills airlines have been particularly incensed by the proposals as the levels of compensation will, in many cases, be significantly higher than the fares paid by their passengers. It remains to be seen whether the legislation will be changed in any meaningful way as it goes through the very last stages of the legislative process. xi

14 THE UK AIRPORTS INDUSTRY Traffic and industry trends Trends in passenger numbers Trends in passenger numbers since 1989/90 are shown in Figure 1. The figures plotted include both terminal passengers, who join or leave an aircraft at the airport, and transit passengers, who are passing through the airport, arriving and departing on the same aircraft. These passengers do not as a rule pass through the commercial outlets at the airport. The year was characterised by passenger numbers recovering towards the levels seen prior to September 11 th, 2001, though March 2003 was adversely affected by the conflict in Iraq and the late Easter holiday (subsequent months, though not included in this review, were also adversely affected by the SARS outbreak). Domestic and European scheduled routes were particularly strong. North Atlantic and other long haul routes showed some improvement over 2001/02. The continuing success of the low cost carriers was a major factor in the overall improvement in the year, both on domestic and short haul European routes. Charter traffic was however 1% down on the year, and the charter share of total terminal passengers fell by 2% to 20%. In total, passenger numbers at the 28 reporting airports increased by 5.1% to 186.5m (compared to a decrease in 2001/02 of 0.3%). London airports (BAA s Heathrow, Gatwick and Stansted airports, Luton International and London City) accounted for 63.1% of the total; passenger traffic grew by 3.9% in the year. Heathrow continued to recover from the effects of 11 th September, up by 4.3% on 2001/02; this stemmed from the general recovery in scheduled traffic and the transfer of British Airways routes from Gatwick. Gatwick s passenger numbers consequently declined, but this was partly offset by the introduction of new carriers and routes, and the airport ended the year 2.8% down. Stansted again reported the strongest performance, up 18.9%, as the low cost carriers continued to develop new routes across the UK and Europe. Luton and London City maintained passenger numbers at 2001/02 levels (8.2 million). Luton achieved an 11% increase in its international scheduled traffic to offset the depressed charter market. Scottish airports (Glasgow, Edinburgh, Aberdeen, Highlands & Islands) increased passenger traffic by 8.4% in the year, and account for 9.9% of UK passengers. Airports benefited from the increased low cost carriers route networks, in particular from Glasgow and Edinburgh to Cardiff and East Midlands. Manchester Airport reported passenger numbers slightly down on the previous year at 18.6 million, reflecting a difficult year, with market share declining from 10.7% to 10.0%. Elsewhere, Liverpool (+30.5%), Newcastle (+21.9%) and Bristol (+24.4%) all saw passenger throughput rise significantly. Regional airports in total (excluding Manchester, London and Scotland) increased their passenger throughput by 12.8%. Figure 1: Total passenger numbers (terminal plus transit) (from tables 3.1 and 3.2) xii

15 PETER FLANAGAN and ALAN CRUICKSHANK 120 Millions of passengers BAA London airports Other participating airports Manchester airport /89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 These traffic trends illustrate the changing and polarised airline world where some airlines are facing major troubles while others are proving successful. Those facing difficulties include Air Canada and United Airlines who have both experienced prolonged periods under bankruptcy protection. The other end of the spectrum includes the continued very significant and profitable traffic growth enjoyed by Southwest and Westjet in North America and Ryanair and easyjet in Europe. Other European airlines have sought to capitalise on the success of the no-frills business model, including Flybe and JET2 who have brought substantial growth to UK regional airports. The trend towards the creation of global airlines alliances has continued with early indications of real consolidation in the moves by Delta, Continental and Northwest in the USA and by Air France and KLM in Europe. Carriers such as British Airways and bmi british midland, both partners in major alliances, have sought to respond to these new challenges and it remains to be seen how they will fare in the medium to long term. Profit generated by airport charges Figure 2 shows the fluctuating trend of profits/losses generated by activities covered by airport charges over the last 13 years (see also Table 2.1). The graph shows separately BAA London Airports and Manchester Airport all of which are subject to price cap regulation and other participating airports. The Civil Aviation Authority ( CAA ) requires airports to report separately profits from activities covered by airport charges and from other operational and non-operational activities. The year to March 2003 highlighted the continuing impact that the terrorist attacks of 11 September 2001 had on aviation. For airports, some recovery in passenger numbers helped to mitigate the decline in airport charges revenues, but this was more than offset by higher costs, particularly relating to more stringent security requirements and insurance costs. Together with the relatively fixed nature of underlying costs, this has led to costs increasing xiii

16 THE UK AIRPORTS INDUSTRY by 26% in the year and a decline in profits generated from these activities. BAA s London airports reported profits from this source declining by 9 million. Heathrow s small improvement of 1m was offset by larger declines at Gatwick and Stansted. Manchester also reported a decline in profits of 4 million. With a few exceptions, this trend was mirrored by the other reporting airports across the UK. Revenue from airport charges remained broadly unchanged in the year at 1.1billion, compared to a 5% increase in passenger numbers to million. This was due mainly to the reduction in yield at the price cap regulated airports, and yield dilution due to traffic mix changes. Airport charges yield per passenger reduced by 4.4% on average across all airports from 5.90 to For those airports subject to economic regulation, namely Heathrow, Gatwick, Stansted and Manchester, the average yield was 5.06 per passenger, a decrease of 3.1% over the previous period. 2 Figure 2: Profit/loss generated by airport charges (from table 2.1) millions BAA London airports Other participating airports Manchester airport (10) (20) (30) (40) (50) 88/89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 1 The 2001/02 figures are adjusted for an accounting policy change at Stansted whereby marketing support expenditure is now netted off against revenue. 2 The 2001/02 figures are adjusted for an accounting policy change at Stansted whereby marketing support expenditure is now netted off against revenue. xiv

17 PETER FLANAGAN and ALAN CRUICKSHANK Profit generated by other operational activities Other operational activities include activities not covered by airport charges, including retail and property, but excluding certain activities defined as non-operational. Figure 3 shows that, overall, profits from other operational activities increased by 10.5% to 590m. Revenues were up 4.3%, broadly in line with the improvement in passenger numbers. Reported costs were however down by 1% overall. BAA airports reported profits from other operational activities up by 7.0% in the year, compared to passenger growth of 4.7%. The recovery in passenger numbers over the previous year (though still only 2.5% above the levels of two year previous), helped to generate increased retail income. Net retail income per passenger grew by 1.5% in the year, compared to an increase in costs per passenger of 0.6%. In the London area, Heathrow, Stansted and Luton all achieved increases in profits from non airport charges activities in excess of passenger number increases. Stansted and Luton continued to benefit from the growth of the low cost carriers. London City also reported an increase in profit from this source of 22.6%. Gatwick s profit dipped by 2.9%, in line with the drop in passenger numbers. Manchester reported an increase in profits from this source of 30.2%, primarily generated by a reduction in costs of 17.7%. Regional airports (other than London, Scotland and Manchester) together recorded increases in profits from other operational activities of 8.9%, with Bristol in particular increasing profits from this source by 82.7% following another impressive year of passenger growth of 24.4%. For details of the profits earned by each reporting airport refer to Chapter 2; for details of revenue and costs, see Appendix C. Figure 3: Profit/loss generated by other operational activities (from table 2.2) 450 millions BAA London airports Other participating airports Manchester airport /89 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 xv

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19 AIRPORTS STATISTICS 2002/ THE REGULATORY ENVIRONMENT The principal aspects of regulation are airport licensing and safety, economic regulation, international obligations, traffic regulation, aviation security and noise. This section looks in some detail at the framework for economic regulation of airports. The regulatory system aims to provide safeguards against distortion of the air travel market through predatory pricing or other monopoly abuses by airport operators. It also aims to prevent lax cost control and inefficiency. Under the system established by the Airports Act 1986 economic regulation applies to all those airports whose annual turnover has exceeded 1m in at least two of the three previous financial years. These airports must seek permission from the Civil Aviation Authority (CAA) to levy charges and must also meet certain conditions in the presentation of their accounts. At present, the CAA s Economic Regulation Group regulates forty-five airports which exceed the 1m turnover threshold under the Airports Act and the Airports (Northern Ireland) Order The history of airport price caps Under the Airports Act, airports can also be designated for price cap regulation as well as being subject to economic regulation. Currently, Heathrow, Gatwick, Stansted (owned by BAA plc) and Manchester are the only four designated airports. These airports are subject to a revenue yield RPI-X price cap. The revenue yield approach applies the price cap to the ratio of revenue to a major output, ie, revenue per unit of output. In this case, airport charges are regulated by a price cap in terms of revenue per passenger handled. The basic charges to which the price cap applies are: the runway charge; the aircraft parking charge; the departing passenger charge. The formula to govern the revenue which may be raised through airport charges is set every five years. Prior to setting the price caps, the CAA is obliged to refer the designated airports to the Competition Commission (CC), formerly the Monopolies and Mergers Commission (MMC), which then makes recommendations which the CAA considers, but is not obliged to follow, when setting the price limits. Between 1987 and 1992, BAA s London airports were subjected to RPI-1 capping on airport charges. Following MMC recommendations, the CAA proposed price caps for the next five year period beginning 1 April The CAA s final decision came after consultation with the aviation industry, including BAA: price caps for 1992 to 1997 were set at RPI-8 for the first two years, RPI-4 for the third year and RPI-1 for the remaining two years. A similar process determined the price caps for BAA s London airports for the five year period that commenced on 1st April Heathrow and Gatwick's combined charges were subject to an RPI-3 formula but within this combined price cap the differential between the two airports charges was required to rise by at least 1% each year. This resulted in charges at Heathrow rising relative to those at Gatwick. For Stansted the price cap was RPI+1. 1

20 THE UK AIRPORTS INDUSTRY Following the delay in the conclusion of the public inquiry into terminal 5 at Heathrow (completed in March 1999), the CAA decided to extend the regulatory period for the London airports by one year to March 2003 to enable the next review to take into account the decision on terminal 5 (see above). Manchester Airport s five year price cap periods used to start one year later than for BAA. Its price cap formulae were RPI-1 for and RPI-3 for The CAA decided in 1997 that the price cap for the five year period commencing 1st April 1998 would be RPI-5. Following the extension to BAA s review period, both BAA s and Manchester s reviews took place at the same time. There is an additional security component to the formula for both BAA and Manchester, giving RPI-X+S. The security component, S, allowed the airports to pass through 75% of any additional security costs imposed by government between 1987 and 1992 (Manchester 1988 and 1993). Subsequently, S was set at 95% for The formulae also allowed recovery of some of the intra-eu duty and tax free revenue which was lost following the withdrawal of allowances on 30 June For BAA s London airports this is achieved by a D factor; for Manchester it was taken into account when calculating X. The role of the regulator The economic regulation of airports by the CAA dates from the 1986 Airports Act. The objectives of the CAA are to: further the reasonable interests of airport users; promote the efficient, economic and profitable operation of airports; encourage investment in new airport facilities to satisfy anticipated user demand; impose the minimum amount of regulation consistent with these duties. When imposing the initial limit on charges and before making any subsequent amendments to the limits on charges the CAA is compelled to refer the case to the Competition Commission. The Commission is then charged with investigating and reporting on: the question as to what are the maximum amounts that should be capable of being levied by the airport operator by way of airport charges at the airport; whether an airport operator has at any time during the relevant period pursued a course of conduct which has operated against the public interest and if so whether the adverse effects could be remedied by the imposition of further conditions on the airport operator. These courses of conduct relate to the levying of airport charges and any other operational activities carried out by the operator. Airports regulation is therefore unique amongst the regulated industries in that the Competition Commission has a direct interventionist role rather than being limited to receiving references from other regulators, the secretaries of state and the director general of 2

21 AIRPORTS STATISTICS 2002/2003 fair trading. There is therefore no appeals body within the current system of regulation for airports. The Airports Act 1986 and associated price control conditions do not include any explicit protection for airport users in respect of quality of service. The Competition Commission and the CAA may, however, take account of service quality when determining appropriate price controls. The CAA s Safety Regulation Group is responsible for airport safety but security is a matter for the Department for Transport. The CAA also advises the Secretary of State on traffic distribution rules and capacity allocation schemes, having regard to the reasonable interests of air transport service users. International obligations Although the CAA is the airports economic regulator, the international nature of the airports business means that there are certain international agreements which have to be observed. To this end the Secretary of State has the power to override the price controls imposed upon the designated airports by the CAA in order to meet the UK s international obligations. Article 15 of the Chicago Convention provides a basic framework of non-discrimination, stipulating that no airline should be penalised with regard to access or level of charges compared with a national carrier. The 1977 US/UK Air Service Agreement, known as Bermuda 2, provides more detail about the structure of charges. Further agreement in 1994 meant that Bermuda 2 was amended to eliminate passenger charges from the definition of user charges. The 1983 memorandum of understanding between the US and the UK meant that the UK could look for no more than a reasonable rate of return on investment. In particular, when computing revenues that contribute to the rate of return, no distinction could be made as to the sources of airport revenues, including duty free sales and other commercial revenues (the so-called single till ). The March 1994 arbitration settlement cancelled the 1983 memorandum of understanding and the single till is no longer an international obligation, although the settlement acknowledged that there was at the time no intention to depart from the single till principle. So, although the price cap mechanism only applies to airport charges, its level is determined after taking into account the expected profitability of an operator s commercial activities. This single till principle is one of the sources of charging inefficiencies at British airports. Commentators have highlighted the ludicrous result of commercial success leading to reduced airport charges at Heathrow and Gatwick in spite of growing congestion due to limited capacity. The International Civil Aviation Organisation (ICAO) - a branch of the UN - held a conference in Montreal in June 2000 on the Economics of Airports and Air Navigation Services. One item discussed was reform of the current ICAO guidelines to member states and in particular the recommendation that airport related income from commercial as well as operational activities be taken into account when setting airport charges. A majority of member state representatives felt that the time had come to drop this recommendation and a joint IATA/ACI working paper concluded following the conference that the guidelines should now be permissive of offsetting or not offsetting commercial revenues. An increasing number of airports worldwide in Europe, USA, Australia and South Africa now publish dual till accounts and (at least partially) price on a non-offsetting basis. 3

22 THE UK AIRPORTS INDUSTRY ICAO guidelines also provide for: a reasonable rate of return as the basis for airport charges; non discrimination between airport users The regulatory review for The price review completed in 2002 covered airport charges for the period for BAA s London airports and Manchester. All CAA, BAA, Manchester Airport and airline papers are available on the website The review formally began in July 2000 when the CAA announced that it intended to review the current issues in airport regulation. Following a consultation period, CAA published in October 2000 a position paper entitled The CAA Approach to Economic Regulation and Work Programme for the Airport Reviews. This set out its interpretation of its statutory objectives and covered a number of possible lines of approach which it intended to follow. This was followed in November 2001 by CAA s Preliminary Proposals for Price Caps for Heathrow, Gatwick, Stansted and Manchester and a public hearing was held in January CAA s recommendations, which accompany the airports reference to the Competition Commission were made publicly available in March The Commission reports on BAA London airports and Manchester airport were completed in October 2002, a two month extension to the normal review period of six months, (this extension was to permit them adequate time to deal with the issue of single versus dual till). The Competition Commission report, together with the CAA proposals were published in November (for BAA London) and December 2002 (for Manchester). The CAA final decision was published in February 2003 for BAA London airports and in March 2003 for Manchester airport. BAA London price caps The CAA decided on price caps for the BAA London airports as shown in Table 1; Table 1: CAA decision on price caps on revenue yield at BAA airports 2003/4 2004/5 2005/6 2006/7 2007/8 Heathrow % +6.5% +6.5% +6.5% Gatwick % 0.0% 0.0% 0.0% Stansted % 0.0% 0.0% 0.0% The Competition Commission s policy views differed from the CAA s February 2002 proposals in a number of respects. The main difference was the Commission s recommendation to retain the single till (the CAA originally proposed the introduction of a revised regulatory cost base, or dual till ). The CAA s decision also reflected the following policies that were consistent with the recommendations made by the Commission: 4

23 AIRPORTS STATISTICS 2002/2003 a clawback to be adopted of part of the capital expenditure underspend at Heathrow in Q3 resulting from the delay to terminal 5 being given planning permission and of the advanced revenue allowed in Q3; the use of a cost of capital of 7.75% pre-tax real at each airport; setting a cap on a revenue yield basis where compliance is determined against published prices (not allowing for any unpublished discounts), allowing for the recovery of transfer baggage infrastructure costs (at Heathrow) through the cap on airport charges, and setting separate caps for non-passenger flights; providing for rebates to users if certain service quality standards are not achieved;. instituting the framework for enhanced information disclosure by the airport to users that was previously agreed with BAA. The CAA adopted a different approach to the Competition Commission s recommendations in the following areas: for the future, the price caps for each airport to be set in relation to that airport s own market, assets and costs, without reference to the costs, assets or performance of the other BAA airports; the price cap (on a gross yield basis) at Stansted was higher than proposed by the Commission; an explicit incentive for Heathrow in relation to air traffic movements in peak periods, such that if BAA were able to increase capacity above a specified level to allow such movements to increase, it would gain additional revenue; the pass through during the review period of the costs of newly identified security measures was reduced from 95% to 75% above a specified de minimis level; the threshold for cost pass through for new security requirements would be over the whole quinquennium rather than per annum. Manchester Airport price cap For Manchester airport the Competition Commission recommended a price cap of RP-8.9% for each year in Q4. The CAA decided on a more flexible price cap, as set out in Table 2; Table 2: CAA s decision on price caps on revenue yield 2003/4 2004/5 2005/6 2006/7 2007/8 Manchester % 5% 5% 5% Again the Competition Commission s policy views differed from the February 2002 CAA proposals in a number of respects. As with the London airports the main difference was the Competition Commission s recommendation to retain the single till. 5

24 THE UK AIRPORTS INDUSTRY The CAA s decision also reflected the following key policies that were largely consistent with the recommendations and public interest finding made by the Commission: providing for rebates to users if certain service quality standards were not achieved; instituting the framework for enhanced information disclosure by the airport to users that was previously agreed between the CAA and Manchester. The CAA adopted a different approach to the Competition Commission s recommendations in the following areas: the cost of capital for Manchester was set at 7.75% pre-tax real in line with the BAA London airports rather than the 7.5% recommended by the Competition Commission; Manchester was allowed to derive some benefits from projected gains in retail revenues per passenger as reward for the effort involved; full allowance were made for Manchester s budget proposals for operating expenditure including expenditure on sales and marketing support; Manchester s projections of expenditure in relation to Runway 2 were adopted when setting the price cap; as with the London airports the pass-through of the costs of new security requirements was reduced from 95% to 75% above a specified de minimis level; the threshold for cost pass through for new security requirements would be over the whole quinquennium rather than per annum. In imposing a more flexible price cap of RPI-5% the CAA took a number of factors into account: the Competition Commission s proposals for a reduction in real charges by 8.9% a year would have resulted in Manchester s charges being lower (in real terms) by 2008 than current charges at many other UK airports. The CAA considered that this would have run the risk of damaging Manchester s development and emerging competition to Manchester with long run disbenefits to users; a cap requiring cuts in airport charges of the scale recommended by the Competition Commission carried the danger of Manchester reducing its service quality; the Competition Commission placed weight on the possibility of Manchester applying for an interim review of the price cap should external events reduce its rate of return to below expectations. The CAA considered that such a reliance would be likely to dilute the desirable incentive properties of price cap regulation. 6

25 AIRPORTS STATISTICS 2002/2003 Competition Airports are nodes in the network of air corridors that cover the globe. The promotion of competition is not currently a feature of airport regulation; indeed, the CAA has no legal obligation to promote competition between airports. BAA was privatised as a near monopoly in the supply of airport services to the London area. However, its market share has fallen gradually over time with the increasing importance of regional airports and passengers transferring via competing European hubs such as Paris, Amsterdam and Frankfurt. A competition review was announced by the Chancellor in his March 1999 budget to investigate BAA s ownership of the three largest airports serving London. Following much debate the review was concluded in November 2000 by the Deputy Prime Minister stating that BAA should keep these airports. The review also concluded that airlines should be allowed to trade airport take off and landing slots, and that newly created ones should be auctioned. Landing slots at congested airports are preciously guarded by existing operators because of their high commercial value. A set of rules dominated by grandfather rights is used to allocate slots between carriers. Under these rights at Heathrow the existing airline holding a slot retains it for the next period (95% of runway traffic is allocated by this method). Under EC Regulation 95/93 an airline must relinquish its slot if it fails to use it for a minimum number of times (80% of allowable use). Despite new entrants being allowed 50% of slots relinquished in this manner, as well as 50% of newly created slots, plus those voluntarily returned to the slots co-ordinator, there is in practice little new entrant access by these means due to the small number of slots involved. Further EU legislation in this area is currently being discussed but finding a compromise with Member States is likely to be difficult. Apart from airport charges, airlines also pay ground handling charges for airport services such as check-in, baggage handling and ramp services. Such services are provided on a competitive basis, either by third party operators or by the airlines themselves (selfhandling). The licensing of these handling activities is governed by recent EU and U.K. legislation. Conclusions One of the biggest issues at the recent airport reviews was how best to enable the provision of new capacity through investment incentives. Capacity additions are not only becoming more expensive on a unit cost basis but are also subject to increasingly time-consuming and unpredictable planning procedures. The 2002 price cap reviews for Manchester and BAA s London airports explored a number of innovative solutions to the issues of incentivising capacity additions and investment. Although a move to a dual till was eventually rejected, the CAA has introduced service quality measures and output triggers as incentivisation measures, and has set price caps to encourage delivery of the airports investment plans. The decision on the NATS price caps served to demonstrate the importance of flexibility on the part of the regulator to changes in circumstances in the air transport sector. 7