AIRPORTS STATISTICS 2000/2001

STATISTICAL SERIES The UK Airports Industry AIRPORTS STATISTICS 2000/2001 Stuart Condie Peter Flanagan Jan Marchant

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.

The UK Airports Industry AIRPORTS STATISTICS 2000/2001 Series editors Stuart Condie and Peter Flanagan Compiled by Jan Marchant The University of Bath 2001 All Rights Reserved ISBN

AIRPORTS STATISTICS 2000/2001 PREFACE This is the seventh 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 concerned 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 Stuart Condie, Peter Flanagan and Alan Cruickshank of BAA, and Stuart Condie and Peter Flanagan 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 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 information requested. Without their co-operation this publication would not have been possible. The CRI also wishes to thank Stuart Condie and Peter Flanagan as series editors, and Alan Cruickshank, Head of Aviation Policy, BAA, who has contributed to the Overview along with the editors. 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: 01225 383197, Fax: 01225 383221. Peter Vass Director, CRI March 2002 iii

THE UK AIRPORTS INDUSTRY STATISTICAL NOTES 1. Year-end for all accounts is 31 st March 2001, with the exception of Bournemouth, East Midlands and London City Airports, whose year-end is 31 st December 2000. 2. 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 2000/2001 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 2000/2001. 4. Manchester in this year s publication the Manchester Airports Group (MAG) has been presented as including Bournemouth, East Midlands, Humberside and Manchester airports. It should be noted, however, that the acquisition of Bournemouth and East Midlands (from National Express Group) did not take place until the 28 th March 2001. Presenting them as part of MAG does not affect the results of Bournemouth and East Midlands airports as reported, but does reflect the current ownership. 5. Highlands & Islands Airports Limited (HIAL) comprises the following airports: Barra, Benbecula, Campbeltown, Inverness, Islay, Kirkwall, Stornoway, Sumburgh, Tiree and Wick. 6. 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. 7. Glasgow Prestwick has now 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

AIRPORTS STATISTICS 2000/2001 CONTENTS Preface Statistical notes Overview Profit generated by airport charges Profit generated by other operational activities September 11 th 2001 and its consequences Trends in passenger numbers The political environment NATS public private partnership (PPP) iii iv vii 1 The Regulatory Environment Price caps Role of the regulator International obligations The current review Competition Conclusions 2 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 2000/2001 37 Appendix C: Economic Regulation Accounting Information 2000/2001 43 Appendix D: Profit & Loss Accounts 2000/2001 47 Appendix E: Balance Sheets 2000/2001 53 Appendix F: Contact Points for the UK Airports Industry 63 1 9 15 21 v

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AIRPORTS STATISTICS 2000/2001 OVERVIEW Stuart Condie, Alan Cruickshank and Peter Flanagan Profit generated by airport charges Figure 1 shows the fluctuating trend of profits/losses generated by airport charges over the last 11 years (see Chapter 2, table 2.1). For the current year, the total increase in profit for all reporting airports was 39m (+37%). Heathrow contributed 31.8m to this increase. Other airports that reported significant increases were Glasgow + 1.2m (17%), East Midlands + 1.3m (29%), Birmingham + 2.6m (35%), Cardiff + 1.7m (47%) Bristol + 1.9m (35%) and London City + 2.1m (234%). This increased profitability from airport charges was offset by reductions in the reported results of Gatwick - 3.0m (-50%), Manchester - 1.2m (-49%), and Luton - 1.4m (-7%). Figure 1: Profit/loss generated by airport charges (from table 2.1) millions 120 100 80 BAA London airports Manchester airport Other participating airports 60 40 20 0-20 -40 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 BAA s seven airports accounted for 89% of total profit generated from airport charges in the year for the 27 airports taking part (2000 was 88%). For the remaining airports, the net profit from airport charges increased from 8m to 15m. Revenue from airport charges increased by 9% in the year, compared to an increase in passenger numbers of 7%. Yield per passenger increased by 2.5% on average across the 27 reporting airports from 5.62 to 5.76. For those airports subject to economic regulation, namely Heathrow, Gatwick, Stansted and Manchester, the average yield was 5.10 per passenger, an increase of 2.0% over the previous period. This included some recompense, allowed for in the regulatory formulae, for the loss of income at those airports arising from the abolition of intra-eu duty free sales as from 1 July 1999. Stuart Condie, Chief Economist, Alan Cruickshank, Head of Aviation Policy and Peter Flanagan, Senior Finance Manager Strategy, BAA vii

THE UK AIRPORTS INDUSTRY Profit generated by other operational activities Figure 2 shows that, overall, profits from other operational activities grew by 3% ( 14m) to 526 million (see Chapter 2, table 2.2). This reflected some recovery from the previous year, which had suffered from the abolition of intra-eu duty free sales at airports serving EU destinations. Overall, revenue from other operational activities rose by 6% in the year. millions Figure 2: Profit/loss generated by other operational activities (from table 2.2) 450 400 350 300 250 200 150 BAA London airports Manchester airport Other participating airports 100 50 0 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 For details of the profits earned by each reporting airport refer to Chapter 2: for details of revenue and costs see Appendix C. Trends in passenger numbers Trends in total passenger numbers since 1989/90 are shown in Figure 3 (see Chapter 3, tables 3.1 and 3.2). 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 transit passengers do not as a rule pass through the commercial outlets at the airport. The figure indicates the continuing trend of growth in UK passenger numbers throughout the reporting period. In the current year under review, terminal passenger growth was 6.7% to almost 178 million. BAA s seven UK airports accounted for 70% (2000 was 71%) of the total. Stansted continued its strong passenger growth at 23% and a market share of 7%. The four London airports (Heathrow, Gatwick, Stansted and Luton) accounted for 115.1 million passengers, 65% of the total (1999 was also 65%). Luton recorded a growth of 16% to 6.3 viii

STUART CONDIE, ALAN CRUICKSHANK & PETER FLANAGAN million passengers. Scottish airports grew by a modest 4% to 15 million. Manchester grew by 6.7% to 18.6 million to maintain its market share of 11% (1999 was also 11%). Of the regional airports, Birmingham recorded a 9% increase to 7.6m passengers, Liverpool grew by 37% to 2.1 million, and other regional airports by 7% to 19.4 million. Millions of Passengers 120 Figure 3: Total passenger numbers (terminal plus transit) (from tables 3.1 and 3.2) 100 80 BAA London airports Manchester airport Other participating airports 60 40 20 0 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 A category by category analysis shows that the strongest growth was, as last year, in scheduled international traffic, which grew by 8.5% in the year to a total of 106.0 million passengers. Of this increase of 8 million passengers, 6 million passed through the four London airports. Scheduled domestic traffic increased by 6.6%, whereas charter carriers had a difficult year, growing by just 2.5%. The continued success of the low cost carriers (particularly Ryanair, go, buzz at Stansted, and easyjet at Luton and Liverpool) was again a major factor explaining the growth in short haul scheduled international traffic. September 11 th, 2001 and its consequences Whilst the above figures to March 2001 cannot take account of the tragic events of September 11 th 2001, next year s figures will be significantly affected, given the profound impact on the aviation industry across the world. The impact can be illustrated by viewing the traffic statistics for BAA s UK airports, where a growth of 2% in passenger traffic in August 2001 over August 2000 was followed by a decline of 12% in October 2001 over October 2000. However, there have been different impacts in different parts of the industry. October 2001 saw a 20% decline at Heathrow Airport but a 13% increase at Edinburgh Airport. Also, the month saw different levels of decline in different markets, ranging from 31% for the North Atlantic traffic to 11% for European scheduled traffic and 3% for ix

THE UK AIRPORTS INDUSTRY European charter traffic. Some carriers have been bucking this trend, notably the no-frills sector, who have been announcing continuing strong traffic growth, largely unaffected by the events of September 11 th. By January 2002, though, the situation appeared to be improving for most airlines. Again, using BAA s traffic statistics as an illustration, passenger traffic was only 3% lower than in January 2001. It is still too early to draw clear conclusions about the scale and length of the impact on the industry, and there is therefore a high degree of uncertainty about the implications over the next year. This is particularly true for airlines, many of whom are facing immediate financial difficulties and the need for significant restructuring. However, previous difficult times for the aviation industry have been followed by a return to growth, and there seems little reason to doubt that this will not be the case again. The political environment Heathrow s Terminal 5 After the very lengthy planning process, the secretary of state announced his approval for Heathrow s Terminal 5 in November 2001. He stated: Such a development is in the national interest. It will enable Heathrow to remain a world class airport. It will bring benefits to the British economy both locally and nationally. At the same time as giving my approval to the development I have also imposed conditions in order to protect the interests of those living in the vicinity of Heathrow. BAA welcomed the government s decision and recently commented: We have studied the inspector s report and the 690 conditions attached to the decision. We are in the process of obtaining the detailed planning permissions we need before construction can begin with a view to opening the new terminal in the spring of 2008. Open Skies between the UK and the USA For a long period in 2001 it seemed as if the UK and the USA would finally liberalise the air service agreement restricting travel between the two countries. British Airways (BA) and American Airlines were seeking an alliance, as were British Midland and United, and it appeared possible that approval for these alliances might arrive in parallel with a new open skies agreement. However, it was not to be. BA and American rejected the alliance approval conditions set by the US Department of Transportation almost as soon as they were announced. The UK government then pulled out of talks about a new air service agreement, saying that BA/AA s decision had removed: the immediate prospect of a large part of the UK s airline industry gaining effective access to the US domestic market. We must now reflect how the interests of UK consumers and the wider UK economy can be satisfied. Whilst it does not appear that the European Commission can claim the legal right to negotiate x

STUART CONDIE, ALAN CRUICKSHANK & PETER FLANAGAN air service agreements on behalf of member states, there is every chance that the Commission will be given a greater role in this area in the future, and this might lead to a Transatlantic Common Aviation Area - open skies across the Atlantic. A new government aviation policy The early spring of 2002 is a critical milestone for the UK government in the development of a new aviation policy. It proposes to publish consultation documents setting out the issues facing aviation in each UK region. The main focus is expected to be on the capacity problems facing the south east region, and the government s consultation document will set out a number of options for new runways, which will create enormous public interest. The results of appraisals of the economic, environmental and social impacts of each option will be contained in the consultation document. The responses to this consultation will be instrumental in shaping a new aviation white paper which the government is committed to publishing before the end of 2002. This will set out government policy with a thirty year time horizon in mind and will be critical in determining the shape of UK aviation in the coming years. Longer term regulatory changes Whilst not as immediate as the white paper, or having such a significant impact, there are also studies underway, or draft legislation published, in areas such as airport slot allocation, ground handling, environmental impact measurement and control, and the creation of a single European sky in terms of air traffic management. These, to a greater or lesser extent, will shape UK and European air transport in the years ahead. Details of the current periodic review of airport charges are set out in Chapter 1. Security The events of September 11 th challenged the appropriateness and effectiveness of security requirements around the world. The enhanced security measures introduced at British airports following the attacks were implemented swiftly and effectively. This was a potentially difficult process and much praise for its success must go to the security staff at airports who had to cope with, and implement, significant changes to operating protocols and procedures whilst, at the same time, maintaining effective relations with the travelling public. However, the longer-term impact and level of threat have still to be fully analysed, and appropriate mitigating measures determined. Government action, to some degree, will be influenced by discussions at an international level, and the progression of new legislation in the EU is an example of this. The possible change in focus, and the use of new technology, make it extremely difficult to forecast the level of resources and expenditure which will be required in the future. NATS public private partnership In 2001, the UK government announced that The Airline Group had been chosen to be the government's strategic partner in the public private partnership (PPP) for National Air Traffic Services Ltd (NATS). The Airline Group is a consortium of seven UK airlines, including xi

THE UK AIRPORTS INDUSTRY British Airways and Virgin Atlantic. It acquired a 46% controlling stake in NATS, with the government retaining 49% and 5% being held in an employee trust. The deal also secured over 1 billion of investment in NATS over the next ten years. Commenting on the deal, the Minister for Transport Lord Macdonald said: I am delighted that the airlines will be bringing their expertise and commitment as users to this partnership. They will provide the management capability and investment to ensure that NATS can continue safely to meet the growing demand of air travellers in the future. However, the events of September 11th have affected NATS very significantly, bringing a major reduction in revenue. At the time of writing, the UK government and the four banks providing financing for The Airline Group have agreed to provide NATS with loans to cover the company's short term liquidity difficulties, whilst consideration is given to its application to CAA to be able to increase its charges to airlines. xii

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AIRPORTS STATISTICS 2000/2001 1 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, either 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 1994. 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 1992. 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 current five year period that commenced on 1st April 1997. Heathrow and Gatwick's combined charges are subject to an RPI-3 formula, but within this combined price cap the differential between 1

THE UK AIRPORTS INDUSTRY the two airports charges is required to rise by at least 1% each year. The result is charges at Heathrow rise relative to those at Gatwick. For Stansted the price cap is RPI+1. 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 current 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 Overview). 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 1988-1992 and RPI-3 for 1993-1997. 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 current review period, both BAA s and Manchester s reviews now take 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 airport to pass through 75% of any additional security costs imposed by government between 1987 and 1992 (Manchester 1988 and 1993). Subsequently, S has been set at 95%. The current 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 1999 as part of the development of the European single market. 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. 2

AIRPORTS STATISTICS 2000/2001 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 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 of Transport, Local Government and the Regions. 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 3

THE UK AIRPORTS INDUSTRY 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. ICAO guidelines also provide for: a reasonable rate of return concept; non-discrimination against airport users. The current review The current price review covers airport charges for the period 2003-2008 for BAA s London airports and Manchester. All CAA, BAA, Manchester Airport and airline papers are available on the website www.caerg.co.uk. The CAA announced in July 2000 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 three day public hearing in January 2002. CAA s latest recommendations, which accompany the airports reference to the Competition Commission were made publicly available on 6 March 2002. They are as follows: General recommendations regulation should focus on the monopoly services provided by the airport to users; increased contracting and competition, recognising that the strategic and operational interdependency between users and airports, assisted by improved information disclosure, could allow less intrusive economic regulation; congestion on Heathrow and Gatwick runways means that increases in permitted airport charges are likely to result in better use of those airports, with consequent benefits for passengers; users high valuation of additional capacity, particularly at Heathrow, indicates that incentives to invest in new capacity are central; major investments have long lead times and long pay-back periods, both of which can be well beyond the statutory five yearly reviews, emphasising the importance of long term regulatory commitment; a greater focus on service quality is a core part of the regulatory framework at Heathrow and Gatwick; Stansted will have more limited market power than Heathrow and Gatwick over the 2003-2008 period and will remain dependent on the success of low-frills carriers, pointing to a continuation of light-handed regulation. 4

Heathrow, Gatwick and Stansted recommendations AIRPORTS STATISTICS 2000/2001 price caps be set in relation to the assets and costs of each airport on a stand-alone basis; a revised regulatory cost base (RRCB) which should comprise only the costs of monopoly airport services, excluding commercial costs and revenues or surface access infrastructure or activities (except where, on a case by case basis, these are mandated as conditions of planning permission and to do so would be consistent with statutory objectives); enhanced information disclosure and consultation; facilitating more direct contracting between airports and users; no automatic cost-pass throughs; retention of the revenue yield approach to setting the cap; removing revenue from non-passenger flights from the yield calculation and setting a separate condition for these flights; calculating the revenue yield as if airlines who receive unpublished discounts pay the published tariff. For Heathrow in particular a long term price path under which the real price cap for outputs delivered from current capacity and through Terminal 5 would be pre-set in real terms for a 20 year period, with a commitment not to reset the cap at future reviews; average revenue per passenger for outputs handled by existing capacity (passengers up to 60 million once Terminal 5 is opened) to be set on a RRCB; average revenue for outputs post Terminal 5 set at 18 per passenger above 60 million per annum, based on the incremental costs of Terminal 5, triggered by the opening of Terminal 5. an incentive linked to the opening of aircraft parking stands at the Terminal 5 site(expected in 2006/07) that would generate additional revenues of 10 million per annum (in real terms) once the stands are operational; an incentive to deliver additional air transport movements in peak periods; a service quality term as part of the cap, including an element related to airport delays; a reduction of the starting regulatory asset base to reflect Terminal 5 pre-financing and pre-funding in the last quinquennial review (Q3). For Gatwick in particular As for Heathrow, but with no reliance on incremental cost-based incentives for additional outputs for 2003-08 given that no major capacity enhancements are planned, or any additional incentive linked to air transport movements. 5

THE UK AIRPORTS INDUSTRY Impact of proposals on price caps Projected caps on average revenue per passenger under the CAA s recommendations 2000 prices Average 2003-08 Average 2008-13 Heathrow 6.35 9.95 Gatwick 4.65 5.60 Stansted 5.40 7.40 Manchester 6.57 6.49 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 6

AIRPORTS STATISTICS 2000/2001 competitive basis, either by third party operators or by the airlines themselves (self-handling). The licensing of these handling activities is governed by recent EU and UK legislation. Conclusions The airports industry is structurally different from many other regulated entities for the following reasons: the industry has always been very vertically separated (travel agent/tour operators/ airlines/handling agents/airports/air traffic control) even before privatisation; airports have a heterogeneous range of outputs - serving both passengers and airlines; airport charges are paid by airlines who have high market power and are often politically well-connected and litigious; a large proportion of airport costs are related to compliance with safety legislation laid down by the CAA Safety Regulation Group and security legislation specified by the Department of Transport Local Government and the Regions; aviation has always been an international business, so that cross-border airport competition is becoming more significant, and EU and international legislation is increasingly to be taken account of by UK regulators. The main problem facing price controlled airports and their customers today is one of capacity and investment. 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 current regulatory review of Manchester and BAA s London airports will have to try and balance the legitimate interests of all the parties concerned. 7

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2 ECONOMIC REGULATION Introduction AIRPORTS STATISTICS 2000/2001 All airports whose annual turnover has exceeded 1m in at least two of the three previous financial years are subject to economic regulation (unless the owner and operator are not the same or a separate airport company has not been set up). At present this applies to 45 of the UK Airports. As well as having to seek permission from the Civil Airports Authority (CAA) to levy charges, these airports must also meet certain conditions in the presentation of their accounts. The accounts must disclose the income and expenditure attributable to airport charges, other operational activities and non-operational activities. In the Airports Act 1986 airport charges are defined as: charges levied on operators of aircraft in connection with the landing, parking or taking off of aircraft at the airport (including charges that are to any extent determined by reference to the number of passengers on board the aircraft, but excluding charges payable by virtue of regulation under section 73 of the 1982 Act (air navigation services etc.)) and charges levied on aircraft passengers in connection with their arrival at, or departure from, the airport by air. Other operational activities, in relation to an airport, are defined in the Act as any activities which are carried on wholly or mainly for the benefit of users of the airport or the revenues from which are wholly or mainly attributable to payments by such users. Other operational activities include apron services, baggage handling, hangarage, retailing, on-site property rental and car parking. Non-operational activities essentially cover off-site activities such as international diversification and consultancy services. Index to tables 2.1 Profit and (Loss) Generated by Airport Charges 2.2 Profit and (Loss) Generated by Other Operational Activities 2.3 Profit and (Loss) Generated by Non-operational Activities 2.4 Economic Regulation: Total Profit and (Loss) 9

THE UK AIRPORTS INDUSTRY Table 2.1: Profit and (Loss) Generated by Airport Charges Airport Charges Profit and (Loss) % change since: 1988/89 1998/99 1999/00 2000/01 1988/89 1998/99 1999/00 ( 000) ( 000) ( 000) ( 000) HEATHROW (7600) 69,730 84,580 116,333 1,631 67 38 GATWICK (30,700) (269) 5,915 2,939 110 1,193-50 STANSTED (6,500) (16,417) (13,243) (11,639) -79 29 12 Southampton n/a 1,179 1,377 2,132-81 55 Glasgow (400) 5,879 6,985 8,188 2,147 39 17 Edinburgh (1,000) 7,511 7,565 6,976 798-7 -8 Aberdeen (4,300) 3,731 3,073 3,350 178-10 9 BAA (50,500) 71,344 96,252 128,279 154 80 33 MANCHESTER 16,805 8,571 2,523 1,283-92 -85-49 Bournemouth (630) (1,325) (1,415) (1,044) -66 21 26 East Midlands 2,128 3,585 4,649 5,989 181 67 29 Humberside 9 (1,247) (228) 19 111 102 108 Manchester Airport plc 18,312 9,584 5,529 6,247-66 -35 13 Birmingham International 168 5,326 7,349 9,919 5,804 86 35 Newcastle 2,490 7,011 3,124 2,643 6-62 -15 Belfast International n/a 7,607 8,544 8,822-16 3 Cardiff International 664 2,713 3,710 5,444 720 101 47 London Luton (1) (1,190) (8,361) (20,045) (21,377) -1,696-156 -7 TBI (526) 1,959 (7,791) (7,111) -1,252-463 -9 Blackpool (176) (657) (715) (903) -413-37 -26 Bristol 982 3,541 5,331 7,193 632 103 35 Exeter (248) (529) (604) (475) -92 10 21 Highlands/Islands n/a (1,173) (1,052) (1,202) n/a -2-14 Leeds/Bradford 870 (10) 30 80-91 900 167 Liverpool n/a (959) (1,562) (1,558) - -62 0 London Biggin Hill n/a (495) (519) (721) - -46-39 London City n/a 1,089 914 3,054-180 234 Norwich 139 (779) (554) (484) -448 38 13 Prestwick (3,400) n/a n/a n/a - - - Southend n/a (642) (660) (671) - -5-2 Teesside (62) (162) (617) (736) -1,287-354 -19 Total of all airports (31,951) 94,448 104,455 143,554 549 52 37 (1) London Luton - 1999/2000 data amended for prior year adjustment 10

AIRPORTS STATISTICS 2000/2001 Table 2.2: Profit and (Loss) Generated by Other Operational Activities Other Operational Activities Profit and (Loss) % change since: 1988/89 1998/99 1999/00 2000/01 1988/89 1998/99 1999/00 ( 000) ( 000) ( 000) ( 000) HEATHROW 79,600 244,008 228,069 213,622 168-12 -6 GATWICK 56,200 125,405 104,226 113,140 101-10 9 STANSTED 2,600 33,161 33,504 38,630 1386 16 15 Southampton n/a 977 825 1,225-25 48 Glasgow 6,400 17,486 16,262 16,251 154-7 0 Edinburgh 3,100 6,548 6,050 10,128 227 55 67 Aberdeen 1,900 6,038 6,085 7,269 283 20 19 BAA 149,800 433,623 395,021 400,265 167-8 1 MANCHESTER 20,180 55,618 46,180 48,586 141-13 5 Bournemouth (15) 864 764 522 3580-40 -32 East Midlands 1,344 7,976 7,420 6,233 364-22 -16 Humberside n/a 996 686 978 - -2 43 Manchester Airport plc 21,509 65,454 55,050 56,319 162-14 2 Birmingham International 4,264 17,098 14,385 20,203 374 18 40 Newcastle 506 5,872 5,340 5,781 1042-2 8 Belfast International n/a 7,730 8,564 8,685-12 1 Cardiff International 892 4,627 3,753 4,255 377-8 13 London Luton (1) 4,247 17,611 16,180 15,429 263-12 -5 TBI 5,139 29,968 28,497 28,369 452-5 0 Blackpool (160) (4) (91) (44) 73-1000 52 Bristol 646 6,247 4,519 3,297 410-47 -27 Exeter (214) 295 639 560 362 90-12 Highlands/Islands n/a 652 99 23 - -96-77 Leeds/Bradford n/a 4,243 4,106 4,520-7 10 Liverpool n/a 519 557 1,792-245 222 London Biggin Hill n/a 551 578 604-10 4 London City n/a 3,746 2,074 1,723 - -54-17 Norwich 176 1,224 (146) 1,143 549-7 883 Prestwick 800 n/a n/a n/a - - - Southend n/a 564 610 648-15 6 Teesside 31 921 826 1,070 3352 16 30 Total of all airports 183,622 570,973 512,064 526,273 187-8 3 (1) London Luton - 1999/2000 data amended for prior year adjustment 11

THE UK AIRPORTS INDUSTRY Table 2.3: Profit/(Loss) Generated by Non-operational Activities Non-operational Activities Profit and (Loss) % change since: 1988/89 1998/99 1999/00 2000/01 1988/89 1998/99 1999/00 ( 000) ( 000) ( 000) ( 000) HEATHROW 2,900 9,276 11,844 19,256 564 108 63 GATWICK 700 2,735 1,947 3,372 382 23 73 STANSTED n/a 644 814 1,058-64 30 Southampton n/a 0 0 0-0 0 Glasgow 200 1,320 1,525 1,002 401-24 -34 Edinburgh 200 639 1,078 764 282 20-29 Aberdeen n/a 322 357 295 - -8-17 BAA 4,000 14,936 17,565 25,747 544 72 47 MANCHESTER 0 0 0 0 - - - Bournemouth 880 1,186 1,177 1,362 55 15 16 East Midlands (12) 105 113 150 1350 43 33 Humberside 16 0 0 (1,341) -8,481 - - Manchester Airport plc 884 1,291 1,290 171-81 -87-87 Birmingham International 0 0 0 0 - - - Newcastle 0 0 0 0 - - - Belfast International n/a 0 0 0 - - - Cardiff International 0 0 0 0 - - - London Luton n/a 0 0 0 - - - TBI 0 0 0 0 - - - Blackpool n/a 227 88 280-23 218 Bristol 0 0 0 0 - - - Exeter (17) 136 172 171 1106 26-1 Highlands/Islands n/a 0 0 0 - - - Leeds/Bradford 0 0 0 0 - - - Liverpool n/a (176) (819) (6,166) - -3,403-653 London Biggin Hill n/a 35 37 49-40 32 London City 0 0 0 0 - - - Norwich 0 0 n/a 0 - - - Prestwick 0 n/a n/a n/a - - - Southend n/a 130 164 222-71 35 Teesside 0 0 0 0 - - - Total of all airports 4,867 16,579 18,497 20,474 321 23 11 12

AIRPORTS STATISTICS 2000/2001 Table 2.4: Economic Regulation Total Profit and (Loss) Total Profit and (Loss) % change since: 1988/89 1998/99 1999/00 2000/01 1988/89 1998/99 1999/00 ( 000) ( 000) ( 000) ( 000) HEATHROW 74,900 323,014 324,493 349,211 366 8 8 GATWICK 26,200 127,871 112,088 119,451 356-7 7 STANSTED (3,900 ) 17,388 21,075 28,049 819 61 33 Southampton n/a 2,156 2,202 3,357-56 52 Glasgow 6,200 24,685 24,772 25,441 310 3 3 Edinburgh 2,300 14,698 14,693 17,868 677 22 22 Aberdeen (2,400) 10,091 9,515 10,914 555 8 15 BAA 103,300 519,903 508,838 554,291 437 7 9 MANCHESTER 36,985 64,189 48,703 49,869 35-22 2 Bournemouth 235 725 526 840 257 16 60 East Midlands 3,460 11,666 12,182 12,372 258 6 2 Humberside 25 (251) 458 (344) -1,476-37 -175 Manchester Airport plc 40,705 76,329 61,869 62,737 54-18 1 Birmingham International 4,432 22,424 21,734 30,122 580 34 39 Newcastle 2,996 12,883 8,464 8,424 181-35 0 Belfast International (1) n/a 15,337 17,108 17,507-14 2 Cardiff International 1,556 7,340 7,463 9,699 523 32 30 London Luton (2) 3,057 9,250 (3,865) (5,948) -295-164 -54 TBI 4,613 31,927 20,706 21,258 361-33 3 Blackpool (336) (434) (718) (667) -99-54 7 Bristol 1,628 9,788 9,850 10,490 544 7 6 Exeter (479) (98) 207 256 153 361 24 Highlands/Islands n/a (521) (953) (1,179) - -126-24 Leeds/Bradford 1,995 4,233 4,136 4,600 131 9 11 Liverpool n/a (616) (1,824) (5,932) - -863-225 London Biggin Hill n/a 91 96 (68) - -175-171 London City n/a 4,835 2,988 4,777 - -1 60 Norwich 315 445 (700) 659 109 48 194 Prestwick (2,600) n/a n/a n/a - - - Southend n/a 52 114 199-283 75 Teesside (31) 759 209 334 1,177-56 60 Total of all airports 156,538 682,000 635,016 690,301 341 1 9 (1) Belfast - Economic regulation actually applies to the airports operating company Belfast International Airport Limited, rather than the holding company (2) London Luton - 1999/2000 data amended for prior year adjustment 13

THE UK AIRPORTS INDUSTRY 14

3 OPERATIONAL TRENDS Introduction AIRPORTS STATISTICS 2000/2001 This chapter provides some basic statistical information gathered on the UK Airports industry, including data on the number of terminal and transit passengers as well as the number of Air Transport Movements (ATMs) at each airport. Comparisons between airports in this publication are to be made with some caution because of the differences between airports in the way that services are provided. This applies in particular to Table 3.5 which shows the average number of employees at each airport. For example, at some airports air traffic control facilities are provided by the Civil Aviation Authority whereas at others the airport company employs its own air traffic control staff. Similarly, services such as car parking, aircraft refuelling, ground handling services and other commercial activities are provided by retailers at some airports and by the direct employees of airport companies at others. A few airports also contract out office and administration services and have no direct employees. Index to tables 3.1 Terminal Passengers 3.2 Transit Passengers 3.3 Total Cargo Tonnage 3.4 Air Transport Movements 3.5 Average Number of Employees 15

THE UK AIRPORTS INDUSTRY Table 3.1: Terminal Passengers Number of Terminal Passengers % change since: 1988/89 1998/99 1999/00 2000/01 1988/89 1998/99 1999/00 (000s) (000s) (000s) (000s) HEATHROW 38,058 61,037 62,294 64,328 69 5 3 GATWICK 21,057 29,555 30,432 32,134 53 9 6 STANSTED 1,125 7,535 10,024 12,378 1001 64 23 Southampton 470 754 767 868 85 15 13 Glasgow 3,711 6,566 6,793 6,978 88 6 3 Edinburgh 2,125 4,614 5,225 5,618 164 22 8 Aberdeen 1,620 2,626 2,445 2,423 50-8 -1 BAA 68,165 112,687 117,979 124,728 83 11 6 MANCHESTER 9,684 17,405 17,456 18,630 92 7 7 Bournemouth 191 355 304 273 43-23 -10 East Midlands 1,427 2,140 2,218 2,229 56 4 0 Humberside 142 434 362 455 220 5 25 Manchester Airport plc 11,444 20,334 20,341 21,587 89 6 6 Birmingham International 2,888 6,716 7,001 7,619 164 13 9 Newcastle 1,428 2,988 2,966 3,287 130 10 11 Belfast International 2,175 2,669 3,087 3,156 45 18 2 Cardiff International 642 1,250 1,308 1,526 138 22 17 London Luton 2,876 4,385 5,450 6,331 120 44 16 TBI 5,692 8,304 9,845 11,012 93 33 12 Blackpool 148 87 90 78-47 -10-13 Bristol 748 1,824 1,979 2,172 190 19 10 Exeter 170 249 287 321 89 29 12 Highlands/Islands 761 888 810 734-4 -17-9 Leeds/Bradford 726 1,409 1,475 1,603 121 14 9 Liverpool 355 932 1,513 2,069 483 122 37 London Biggin Hill n/a 25 24 25-0 4 London City n/a 1,358 1,388 1,580-16 14 Norwich 186 329 339 371 100 13 9 Prestwick 322 644 n/a n/a - - - Southend 161 5 5 5-97 0 0 Teesside 313 670 732 750 140 12 2 Total of all airports 93,317 159,450 166,774 177,943 91 12 7 16