AIRPORTS STATISTICS 2005/ PDF Free Download

STATISTICAL SERIES The UK Airports Industry AIRPORTS STATISTICS 2005/2006 Peter Flanagan Jan Marchant Mark Morris

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.

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 1998. 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 lectures 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 Economic Consulting National Grid Network Rail Office of Rail Regulation OFWAT Royal Mail Thames Water United Utilities 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: 01225 383197, Fax: 01225 383221 e-mail: mnsjsm@management.bath.ac.uk and from the CRI s web site, which includes events and the publications list. http://www.bath.ac.uk/cri/ Publications and publications list can be obtained from Jan Marchant as above.

AIRPORTS STATISTICS 2005/2006 PREFACE This is the twelfth 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 Mark Morris 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 Andy Reid, 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 Mark Morris as series editors and contributors, as well as Manish Madhas at BAA for his help. 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 February 2006 iii

THE UK AIRPORTS INDUSTRY STATISTICAL NOTES For a number of airports with years ending March 2006, there has been a requirement to implement new accounting standards (for example FRS 17 Retirement Benefits and FRS 21 Events after the Balance Sheet Date). In many cases, this implementation also required the restatement of previous years accounts. This report has, in general, not restated previous years data, and comparisons can therefore highlight unusual year on year changes. In such cases, it is recommended that the reader consults the statutory accounts of the airport companies concerned to obtain further information. 1. Year-end for all accounts is 31 st March 2006, with the exception of Belfast International Airport, Bristol International Airport, Cardiff International Airport, Coventry Airport, London City Airport, London Luton Airport and Newcastle International Airport, whose year-end is 31 st December 2005. Blackpool International Airport data covers the period June 2005-June 2006. 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 2005/2006 includes subtotals for three airports groups: BAA, Manchester Airport plc and TBI. 4. 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. Glasgow Prestwick has again been omitted in the appendices due to lack of data, but has been included in the tables for comparative purposes. 7. n/a denotes data not available and - denotes data not calculable. 8. 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. 9. All percentage changes are rounded to the nearest whole number. 10. As some figures are unavailable, totals and subtotals should be used with caution, especially % changes. Figures may not add exactly because of rounding. 11. 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. 12. 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

CONTENTS Preface Statistical notes Overview The political environment Regulatory initiatives Traffic and industry trends Trends in UK passenger numbers Profit generated by airport charges Profit generated by other operational activities 1 The Regulatory Environment The role of the regulator International obligations Competition The history of airport price caps The regulatory review for 2003-08 The regulatory review for 2008-13 AIRPORTS STATISTICS 2005/2006 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 31 Appendix B: Statistical Information 2005/2006 35 Appendix C: Economic Regulation Accounting Information 2005/2006 41 Appendix D: Profit & Loss Accounts 2005/2006 45 Appendix E: Balance Sheets 2005/2006 51 Appendix F: Contact Points for the UK Airports Industry 61 iii iv vii 1 7 13 19 v

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AIRPORTS STATISTICS 2005/2006 OVERVIEW Peter Flanagan and Mark Morris The political environment The UK Government s aviation policy The December 2003 White Paper set out the UK Government s aviation policy in some detail. During 2006 there has been continued activity in support of White Paper policies. This section summarises some of the key initiatives taken by the Government or the industry in 2006. The Civil Aviation Bill Before the 2005 summer recess, the Government laid before Parliament a Civil Aviation Bill. Announcing it, the Secretary of State, Alistair Darling, said: The Bill aims to implement commitments we made in our White Paper on the future of air transport on protecting the environment and safeguarding passenger interests. The Bill has now progressed through the necessary parliamentary processes and has been enacted. This Act will: clarify and strengthen the measures available to airports for dealing with aircraft noise. The controversial proposals to remove the movement limits from the London airports night flying regime have now been withdrawn from the Bill following defeats in the House of Lords; clarify airports ability to set charges which reflect local emissions from aircraft; provide powers for a levy on the aviation industry to replenish the Air Travel Trust Fund which, along with the ATOL scheme, protects customers of failed tour operators; authorise local authority owned airport companies to undertake certain activities. This will allow local authority airports to be more competitive with privately owned airports; enable the Civil Aviation Authority to recoup the costs of its Aviation Health Unit by a levy on the industry; remove airlines existing right of appeal to the Secretary of State in aviation route licensing cases decided by the Civil Aviation Authority. By eliminating a layer of bureaucracy and speeding up the process this will contribute to better regulation. Night noise In June 2006, the Government announced its conclusions for the night flights regime at BAA s London airports, having run a two stage consultation during 2004 and 2005. Heathrow, Gatwick and Stansted airports are the designated airports where noise is regulated by the Secretary of State under Section 78 of the Civil Aviation Act, 1982. The night restrictions form part of a range of controls applied under this section of the Act. The Government set the new regime from October 2006 to October 2012 and opted to maintain the existing framework for the control of night flights, with seasonal movement and Peter Flanagan, Senior Manager, Economics and Regulation, BAA, and Mark Morris, Aviation Policy Manager, BAA vii

THE UK AIRPORTS INDUSTRY noise quota limits based on a 6.5 hour night quota period (2330-0600). In effect, under this new regime there is no increase in the permitted number of night movements at the noiseregulated airports but there is, however, a reduction in the quota count reflecting the anticipated use of quieter aircraft during the six year period covered by the new regime. New statutory environmental and night noise objectives were also identified for the airports as broad statements of intent for the longer term. In addition the Government decided to introduce a scheduling ban on the very noisiest types of aircraft (QC/16, QC/8 and QC/4) in the eight hour night period (23.00-07.00), and QC/16 and QC/8 aircraft are almost totally banned from operating in the 6 and a half house night quota period (23.30-06.00), other than in very exceptional circumstances. This is in line with BAA s position, and strengthens preexisting voluntary scheduling bans on noisy aircraft at Heathrow and Stansted airports. To address the impacts of night flights on local communities, the Government also announced a new domestic noise insulation scheme based on the noise footprint of the noisiest aircraft operating in the night quota period. For example, at Heathrow this footprint extends to some 41 km 2 enclosing some 41,000 dwellings. Airport operator BAA s view is that the focus should be on reducing noise at source with a negotiated agreement with airlines to phase-out the noisiest aircraft, backed up by a noise insulation scheme during the phaseout period. Airports are currently reviewing the criteria and options for cost efficient implementation of the Government s scheme. In setting this new regime the Government considered that its decision struck an appropriate balance between the need to protect local communities from excessive noise and the benefits that (air) services can bring to the national, regional and local economy. Airport blight compensation schemes The December 2003 White Paper recognises that the prospect of airport development itself could, in many cases, have an effect on property values in the period before statutory protection is available to property owners. This is often referred to as generalised blight. At Stansted, BAA introduced voluntary schemes to address problems caused by blight back in 2004. These schemes cover properties that lie within the extended boundary of the airport as indicated in the White Paper as well as properties which are close to this extended boundary or are special individual cases. Also in 2004 BAA launched a series of Protecting against Blight consultations at Heathrow, Gatwick, Edinburgh and Glasgow airports. In these consultations BAA proposed schemes to protect the value of properties which might later fall within an enlarged airport boundary (the Property Market Support Bond ), and to compensate those who own property beyond the new proposed boundary, but which would then fall within an area of medium-to-high noise levels (the Home Owner Support Scheme ). Following the consultations, BAA has refined the schemes and is now implementing them. Airport noise mitigation schemes The White Paper invited airport operators to address the impacts of aviation on local communities, particularly in respect of relocation assistance for home owners and noise insulation for community buildings in relatively noisy areas. BAA carried out a series of consultations (Protecting against Airport Noise) at Heathrow, Gatwick, Stansted, Glasgow viii

PETER FLANAGAN and MARK MORRIS and Edinburgh in back in autumn 2004, proposing schemes to implement the White Paper policy. Following the consultations, and amendments to the proposed schemes, final schemes were published in summer 2005 and implemented from autumn 2005. To address the impacts of increases in noise as a result of future airport expansion, the White Paper also invited airport operators to offer to buy properties in areas where aircraft noise exceeds 69 decibels and has increased by 3 decibels or more, and offer noise insulation schemes for homes in areas where aircraft noise exceeds 63 decibels and has increased by 3 decibels or more. BAA is developing criteria and options for cost efficient implementation of these proposed schemes. Regional air services to London In December 2005 the UK Government published its guidance on the protection of regional air services to London through the use of Public Service Obligations (PSOs). This guidance aims to clarify the circumstances in which the Government would intervene to protect a regional air service to London. Regulatory initiatives Single European Sky There has been further progress in 2006 towards the creation of a Single European Sky (SES) following the publication during 2005 of draft legislation to support the concept of a significantly more efficient air traffic management (ATM) system. The specific 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; to increase the overall efficiency of the air traffic management system. The first piece of legislation, the regulation on the Common Requirements for the Provision of Air Navigation Services, entered into force on 23 December 2005. While this activity points to potential changes in the organisation of airspace, it is generally recognised that greater capacity to meet traffic growth in the longer term can only come from a more fundamental change in the concepts of air traffic management. As a result the SESAR Consortium project, partly funded by the European Commission, and partly by Eurocontrol, was initiated. The aim is to undertake a two year definition study, with six deliverables, as to how ATM in Europe should develop and to conclude this with a master plan by 2007 (deliverable 5) as well as a defined organisational approach and work programme for the period 2008-2013 (deliverable 6). During 2006 the SESAR Consortium produced its first milestone deliverable an analysis of the value of air transport and the role of ATM in Europe. Work has now commenced on deliverable 2 future performance requirements. The European Commission envisages that the SESAR plan will form the basis for implementing many of the concepts contained in the Single Sky legislation. In all of this, it is important that the wider air transport industry is fully involved and ix

THE UK AIRPORTS INDUSTRY consulted. Within the SES legislation, a representative group know as the Industry Consultation Body has been set up to achieve this objective and airports are represented on this through ACI Europe, the European association of airport operators. EU-US Open Aviation Area negotiations Negotiations continue between the European Commission and the USA seeking to create a more liberal aviation regime governing traffic between, and within, the EU and USA. However, the key issue of the removal of airline ownership and control restrictions in the US remains unresolved. At the time of writing (December 2006), a new draft rule on the ownership and control of US based airlines had just been withdrawn by the US. In the meantime the European Commission believes that it has a responsibility to enforce the outstanding judgement from the European Court of Justice which concluded that certain provisions in existing bilateral agreements between individual EU countries and the USA are illegal. EU-wide air services agreement During 2006 negotiations were successfully concluded on an EU-wide air services agreement between the EU and Morocco, and on the establishment of a European Common Aviation Area which effectively extends the EU open skies arrangements and associated regulatory regime to Norway, Iceland, Albania, Bosnia & Herzogovinia, Bulgaria, Croatia, Macedonia, Serbia & Montenegro, Romania and Kosovo. Slot sanctions During 2005 and 2006 the Government consulted the aviation industry on the formulation of a slot sanctions scheme that is intended to ensure that effective, proportionate and dissuasive sanctions, or equivalent measures, are in place to deal with serious misuse of airport slots. The intention here is to encourage efficient use of scarce airport capacity. The Government published the final form of the scheme in October 2006 and the scheme will come into effect at slot co-ordinated airports (Heathrow, Gatwick, Stansted and Manchester) from 1 January 2007. The scheme will be administered by Airport Co-ordination Ltd (ACL), the UK independent airport slot co-ordinator. ACL will be able to impose sanctions on airlines that repeatedly and intentionally operate air services at times significantly different from allocated slots, or use slots in a significantly different way from that intended at the time that the slots were allocated (eg, using a much larger aircraft) where this causes prejudice to airport operations. ACL already has the powers to impose administrative sanctions on airlines, including withdrawing of slots. These new powers will allow ACL to impose financial penalties on carriers in response to slot misuse. Penalties will not be imposed before a thorough and fair examination of the circumstances surrounding the slot misuse has been undertaken. Slot allocation During 2006 there have been two areas of focus in relation to slot allocation mechanisms. The first is the work undertaken by the UK Department for Transport which reviewed possible allocation methods for primary allocation of airport slots in scenarios when x

PETER FLANAGAN and MARK MORRIS significant new airport capacity is to be added. The work concluded that a form of slot auctioning would best serve the interests of users. It is clear that existing slot legislation does not allow the introduction of auctions within the EU, and so communication from the European Commission on primary slot allocation methods is awaited. This is not expected in the short term. The second area of focus this year has been the expected revision to the existing EU slot regulations. It is believed that the Commission will release a new draft regulation sometime in early 2007, and it is expected that this will formalise the process of secondary slot trading whereby airlines can effectively purchase slots at congested airports. Emissions trading Back in its December 2003 Aviation White Paper, the UK Government stated: We intend to press for the inclusion of intra-eu air services in the forthcoming EU emissions trading scheme, and to make this a priority for the UK Presidency of the EU in 2005, with a view to aviation joining the scheme from 2008, or as soon as possible thereafter. There is widespread support in the UK aviation industry for this course of action. Individual airports and the UK Airport Operators Association have been particularly strong in promoting emissions trading as a mechanism for controlling aviation s emissions in an efficient way. However, not all stakeholders share this view and the UK airports and airline industry has sought to promote the emissions trading concept through discussions with other airlines, airports, and parliamentarians and officials in both the UK and EU. 2005 also saw the publication of a major study for the European Commission into the implications of including aviation emissions in the European Union s emissions trading scheme. The Commission followed this, in September 2005, with the publication of a Communication on Reducing the Climate Change Impact of Aviation. This concluded by saying: Having analysed a number of options, the Commission considers that the best way forward, from an economic and environmental point of view, lies in including the climate impact of the aviation sector in the EU emissions trading scheme. Emissions trading is likely to remain a core part of any future strategy to combat climate change, and the EU ETS will help foster the development of a truly international carbon market capable of tapping the potential for emission reductions across the globe. The Commission is now proposing a series of actions leading to a legislative proposal by the end of 2006 on the inclusion of aviation emissions in the EU emissions trading scheme. Air quality Under the European Commission s Clean Air for Europe (CAFE) programme a strategy on air pollution was adopted in September 2005 with the objective to attain levels of air quality that do not give rise to significant negative impacts on and risks to human health and the environment. A proposed new EU Air Quality Directive is in preparation which is likely to include the introduction of new limit values for fine particles, a new exposure reduction xi

THE UK AIRPORTS INDUSTRY approach to the control of fine particles, clarification on the applicability of limit values and the consolidation of existing daughter directives. The adoption of this proposed new Air Quality Directive is expected sometime in 2007. Security During 2006 there have been unprecedented changes to the way that security operates at UK and European airports. In August 2006 a major terrorist attack on Heathrow was foiled leading to the immediate introduction of very stringent security screening processes at UK airports. A number of amendments to the screening requirements were made during August and September 2006. The European aviation industry worked closely with regulators during this period, and on 6 November 2006 pan-european rules were implemented which harmonised for the first time hand luggage restrictions across most of Europe. Ground handling The position has not changed regarding ground handling: a proposal is still awaited from the European Commission to revise the existing Ground Handling Directive. There was an expectation that the Commission was to release a draft amended directive in November or December 2006 which covered, amongst other things, changes to the level of competition required at different sizes of airports and a suggestion of explicit service standards for ground-handling services. It is now understood that the publication of this revised directive is now postponed. Instead the Commission will concentrate on enforcement of the provisions within the existing directive, with the aim of ensuring that the directive is consistently and correctly applied across EU member states. Assistance to passengers with reduced mobility In July 2006 the European Commission published final legislation covering the protection of passengers with reduced mobility. Amongst other things, the proposal requires airport operators to take responsibility for organising the assistance service throughout their airports, as well as the ability to recharge airline users for incurred costs. Airport operators are now working closely with airlines, and organisations representing disabled passengers, in developing a replacement assistance service. The legislation comes in effect in two phases: 26 July 2007: Articles relating to the booking and carriage of passengers with reduced mobility by airlines; 26 July 2008: Articles relating to the provision of on-airport assistance services by airport operators. Communication on airport capacity In September 2005, the European Commission published a long-awaited consultation paper on Airport Capacity, Efficiency and Safety. This notes that the Commission s attention should now focus more on airport capacity matters, following their successful structural action on air traffic management issues. The paper raises a wide range of issues, suggestions and questions relating to airport operations. xii

PETER FLANAGAN and MARK MORRIS The overall theme is one of whether the EC should play a greater role in tackling issues over airport capacity: for example, by determining where airport capacity should be provided, or in promoting a shift from air travel to rail travel. The industry and other stakeholders provided their responses to this consultation but the key issue remains as to whether further intervention by the European Commission is warranted or welcomed. This communication from the Commission is expected during December 2006. Airport charges directive The European Commission has indicated its plan to issue a draft directive on airport charges during December 2006. The key provisions of this draft directive are thought to centre on increased transparency and consultation with airlines over proposed changes to airport charge levels. EU list of banned air carriers During summer 2006 the European commission published a list of carriers that were to be banned from flying with the European Union on safety grounds. This list was updated in October 2006 and is available on the Commission website. EU Third Aviation Package During July 2006 the European Commission adopted its Proposed Regulation for Common Rules for Air Services in the European Union (commonly known as the Third Package). The proposal focuses on six main areas: Public Service Obligations (PSOs), including new criteria for airports eligible for PSO routes and a requirement for member states to notify the Commission of proposed PSO routes; traffic distribution between airports; including allowing traffic distribution rules to be applied to airports serving the same city or conurbation (rather than the more formal definition of an airport system) on the basis that the airports concerned are served by adequate transport infrastructure; price transparency for passengers and fair price behaviour; including the requirement that information on air fares to the general public have to include all applicable taxes, charges and fees and the banning of price discrimination on the basis of place of residence or nationality within the Community; reinforcement of the requirements for the granting and revoking of aircraft operating licences; strengthening of the requirements for the leasing of aircraft; including stricter safety standards in leasing agreements; removal of inconsistencies between the internal aviation market and services to third countries; including the Commission s intention for it to be responsible for negotiating intra-community traffic rights with non-eu countries. The aviation industry is making its views known on these various elements of the package (particularly in relation to some of the definitions used) as it progresses through the various EU parliamentary processes. xiii

THE UK AIRPORTS INDUSTRY Traffic and industry trends In June 2006, Airport Development & Investment Limited (ADI), a financial consortium led by Gruppo Ferrovial SA, agreed the acquisition of BAA plc. BAA s shares were subsequently delisted from the London Stock Exchange in August. In August 2006, a foiled terrorist plot at Heathrow led to more stringent security measures being introduced. This has had a short term impact on passenger numbers. The longer term implications of the new security measures on the demand for UK air travel will take some time to become clear, and is being assessed by airlines and airports together. Once again in 2005/06, underlying global economic growth has led to record levels of air traffic. Achieving this growth, though, continues to put pressure on airline yields. This, plus upward pressure on costs, for example, from continuing high fuel prices and revenue impacts from increased security measures from August 2006, all make for difficult operating conditions. Low cost carriers appear to be coping with these conditions rather better than their full service counterparts in terms of reported profitability. In the UK, the CAA has noted a continuing increase in the proportion of passengers travelling through regional airports as compared with London airports. Trends in UK passenger numbers Trends in passenger numbers since 1988/1989 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. Both domestic and international scheduled traffic performed well for the year, up by 6% and 8.7% respectively, reflecting both the success of low fares and low cost airlines and the continuing recovery in long haul traffic. Charter traffic again suffered, being 6.3% down in the year, largely as a result of the move to low fares carriers, (although some regional airports Aberdeen, Bristol, Cardiff and Durham Tees Valley actually increased charter volumes). In total, passenger numbers at the 27 reporting airports increased by 5.6% to 221.1m (+ 5.7% in 2004/05). London airports (BAA s Heathrow, Gatwick and Stansted airports, Luton International and London City) accounted for 60.5% of the total; passenger traffic grew by 2.8% in the year. The continuing prosperity of London over the period underpinned the increasing number of visitors to the capital from both international and domestic locations. However, Heathrow passenger volumes decreased marginally by 0.3% to 67.4m. The softening UK economy, the fallout from the London bombings in July, the Gate Gourmet dispute in late summer, lower load factors in some markets, and higher oil prices, all had an impact on Heathrow s passenger numbers for the year. Gatwick, however, had its best year on record, with 32.8 million passengers passing through the airport, up 2.6% on last year, with lower charter volumes outweighed by increased scheduled traffic, reflecting principally further development of routes operated by low fares carriers. Stansted again reported strong xiv

PETER FLANAGAN and MARK MORRIS performance, up 5%, reflecting both the continuing growth of existing and new carriers and the development of new routes across the UK and Europe. The airport served 21 new major routes during 2005. Luton s passenger numbers grew by 21.5% over 2005/06, with growth of 34.8% in total scheduled international traffic outweighing downturns in both scheduled domestic and charter traffic. London City reported an increase of 18.6%, mainly as a result of increased international scheduled traffic (up 25.4%). The growing importance of Canary Wharf to the international financial services community, improved transport infrastructure, congestion at other London airports, and Government preparations in East London for the 2012 Olympics all support this trend continuing to the benefit of London City. 130 Millions of passengers Figure 1: Total passenger numbers (terminal plus transit) (from tables 3.1 and 3.2) 120 110 100 BAA London airports Other participating airports Manchester airport 90 80 70 60 50 40 30 20 10 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 01/02 02/03 03/04 04/05 05/06 Scottish airports (Glasgow, Edinburgh, Aberdeen, Highlands & Islands) increased passenger traffic by 5.1% in the year, and accounted for 9.7% of UK passengers. The strongest annual growth among the BAA Scottish airports was at Aberdeen (+9.4%). Scottish airports continued their strong performance, with a particular increase in international traffic. Airports are continuing to attract new carriers and new destinations helping to drive growth. Manchester Airport reported a 3.5% increase on the previous year at 22.1m, reflecting a strong performance in scheduled international (+12%) and scheduled domestic (+3%) markets. Charter volumes followed the UK trend and were down by 4%. The airport saw continuing increases in the scheduled markets resulting from new routes and extra services in the long haul sector, and also strong growth in low cost flights. Overall, there was a 43% growth in passenger numbers on low cost sector flights in the year. Manchester maintained its share of the overall UK market at 10%. The major regional airports also saw significant increases in traffic, notably Bournemouth (+83%), Bristol (+39%), Belfast (+36%), Liverpool (+35%), Exeter (+30%) and Southampton (+20%). Regional airports in total (excluding Manchester, London and xv

THE UK AIRPORTS INDUSTRY Scotland) increased their passenger throughput by 16.7% and their UK market share by 2% to 20%. Profit generated by airport charges Figure 2 shows the fluctuating trend of profits/losses generated by activities covered by airport charges since 1988/89 (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. In the year to March 2006 profits from airport charges decreased from 142m to 140m. Of the price regulated airports, Gatwick, Stansted and Manchester airports reported losses generated from airport charges. Heathrow reported an increased profit from airport charges. Passenger numbers helped to push up income from this source to almost 1.3bn (+11%), with associated costs at 1.2bn (+12%). The revenue increase compares with passenger growth of 5.6%. The year 2005/06 was the third year of the price control period for the price cap regulated airports. The increased yield per passenger reflects the net effect of the CAA price cap decisions in respect of the BAA London airports and Manchester. xvi 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 (10) (20) (30) (40) (50) millions Figure 2: Profit/loss generated by airport charges (from table 2.1) BAA London airports Other participating airports Manchester airport 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 03/04 04/05 05/06 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 remains unchanged at 649m. Revenues

PETER FLANAGAN and MARK MORRIS were up by 10%, above the improvement in passenger numbers. Reported costs were however were up by almost 20%. 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 400 350 BAA London airports Other participating airports Manchester airport 300 250 200 150 100 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 01/02 02/03 03/04 04/05 05/06 xvii

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AIRPORTS STATISTICS 2005/2006 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 through predatory pricing or other monopoly abuses by airport operators. It also aims to incentivise cost control and efficiency. 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. 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; and impose the minimum amount of regulation consistent with these duties. The Secretary of State may designate airports for price cap regulation. Currently, four airports are so designated, namely Heathrow, Gatwick, Stansted and Manchester. When imposing the initial limit on charges and before making any subsequent amendments to the limits on charges the CAA must make a reference 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, Secretaries of State or the Director General of Fair 1

THE UK AIRPORTS INDUSTRY Trading. This means that there is 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 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 led to Bermuda 2 being 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. The single till principle is one of the sources of charging inefficiencies at British airports. Commentators have highlighted the incongruous result that commercial success leads to airport charges at Heathrow and Gatwick below economic levels 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 which discussed reform of 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 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 as the basis for airport charges; non discrimination between airport users. 2

AIRPORTS STATISTICS 2005/2006 Competition The promotion of competition is not currently a feature of airport regulation in the UK; 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 UK regional airports and passengers transferring via competing European hubs such as Paris, Amsterdam and Frankfurt. A competition review was concluded in November 2000 by the Deputy Prime Minister stating that BAA should keep its 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. An EU law, dominated by grandfather rights, governs the allocation of slots between carriers. An update on slot sanctions and slot allocations is provided earlier in this report. 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 airports (in some cases), third party operators or by the airlines themselves (self-handling). The licensing of these handling activities is governed by EU and UK legislation. In June 2006, The Office of Fair Trading (OFT) announced that it was conducting a market study into the UK airport sector to see whether enhanced competition between airports would lead to greater benefits to consumers. The range of issues explored included the level of aeronautical charges to airlines, the quality of services to passengers at airports, and the prospect for adequate investment at airports to meet the anticipated growth in passenger numbers. In December 2006, the OFT published its report proposing to refer the supply of airport services by BAA within the UK to the Competition Commission (CC) for a market investigation It also made recommendations to the Government in relation to airports in the north of England, recommending: Government publish criteria for de-designation of airports; CAA advises the DfT whether to de-designate Manchester airport before the statutory price control reference to the CC is due; Government consider transferring decisions on designation to the CAA. 1 The OFT is consulting on whether a market investigation by the Competition Commission is the most appropriate way of examining and resolving the issues raised. The consultation runs until 8 February 2007. 1 Office of Fair Trading (2006), UK Airports - Report on the Market Study and Proposed Decision to Make a Market Investigation Reference, December. 3

THE UK AIRPORTS INDUSTRY The history of airport price caps Under the Airports Act 1986, airports can 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, under which price caps are applied to revenue per passenger handled. This covers revenues from runway charges, aircraft parking charges, and departing passenger charges. Price caps are re-set by the CAA every five years. Prior to setting the price caps, the CAA is obliged to refer the designated airports to the Competition Commission (CC), which makes recommendations as to the maximum levels of prices, which the CAA considers, but is not obliged to follows. Between 1987 and 1992, BAA s London airports were subject to RPI-1 capping on airport charges. The CAA set price caps for 1992 to 1997 at RPI-8 for the first two years, RPI-4 for the third year and RPI-1 for the remaining two years. For the five year period that commenced on 1st April 1997, Heathrow and Gatwick's combined charges were subject to an RPI-3 formula; within this, the differential between the two airports charges was required to rise by at least 1% each year, resulting in charges at Heathrow rising relative to those at Gatwick. For Stansted the price cap was 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 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. Manchester Airport s five year 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. There is an additional security component to the formula for both BAA and Manchester ( S ). This allowed the airports to pass through 75% of any additional security costs imposed by government between 1987 and 1992 (Manchester 1988 and 1993). Subsequently, the allowed level of S claims was set at 95% for 1992 2003. 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 1999. The regulatory review for 2003-08 The price review, which began in July 2000 and was completed with publication of the CAA Decision in February 2003 (for BAA) and March 2003 (for Manchester), covered airport charges for the period 2003-2008. All CAA, BAA, Manchester Airport and airline papers are available on the CAA website www.caaerg.org.uk. CAA s recommendations, which accompany its references to the Competition Commission were made publicly available in March 2002. The Commission reports on BAA London airports and Manchester airport were completed in October 2002. The Competition 4