On 19 March 2009 the Competition Commission (CC) announced its final decision in its two year investigation into BAA. As was widely expected, the CC has followed the approach set out in its Provisional Findings decision of August 2008 of requiring BAA to sell three of its seven UK airports. (For a full discussion of the Provisional Findings decision, please see our previous update.)  

Main remedies

The main remedies required by the CC are as follows:  

  • The sale of both Gatwick (where BAA has already started the sale process) and Stansted airports to different purchasers, as well as one of Edinburgh or Glasgow airports.
  • Improved consultation with airlines at Aberdeen airport, as well as publishing specified financial and other information.

The CC also supports the introduction of a licensing regime for the regulation of airports (as proposed by the DfT ), and makes the following recommendations to the CAA and DfT:

  • The consultation process at Heathrow between BAA and the airlines should be strengthened, and independent audits of the service quality regime should be introduced.
  • The regulator should have a new primary objective of promoting the consumer interest, with an ancillary objective to pay due regard to the views of airlines, and to consult passenger groups and airport operators.
  • The CC should act as an appeal body in relation to price control and service quality licence modifications by the CAA, rather than having a mandatory advisory role prior to the CAA’s decision.
  • Legislation should allow terminals to be developed and operated separately from runways.
  • In developing the National Policy Statement on airports, the Department for Transport (DfT) should ensure that the market is not unduly constrained and consider the ambitions of Gatwick’s new owner, including a possible second runway after 2019.

CC's final decision

The CC’s final decision has been widely described as ground breaking because this is the first time that the CC has ordered the breaking up of a company as a remedy in a market investigation. The 19 March announcement confirms that the CC is not afraid to impose very significant remedies in market investigations, creating radical change in market structures. This has ramifications for participants in markets with perceived anti-competitive features generally - notably holders of monopoly or quasi-monopoly positions in former public utilities.

However, the remedies imposed in the BAA investigation in fact represent a relatively well trodden path in a different context - that of merger control. Building on the experience of the CC and the European Commission in dealing with mergers that raise competition problems, there is an established procedure and set of safeguards to be followed when imposing a divestment obligation in order to deal with a competition problem arising from a merger - in fact the CC published guidance on this procedure very recently, in November 2008. A number of familiar elements appear in the CC’s decision regarding BAA:

  • A monitoring trustee will be appointed to oversee the sales process within a specified timetable. Given the difficult current market conditions, the CC has allowed a relatively long period of two years to complete the process, which can be compared to the six months that is usually allowed in merger cases.
  • There will be obligations on BAA to separate the airports from group management and operate them separately during the sales process.
  • The CC will set requirements for the prospective purchasers, most obviously that they must have the appropriate expertise and financial resources to ensure that the airport is able to compete effectively on the market.
  • If the sales do not happen within the deadline, the CC has the power to appoint an independent divestiture trustee to carry out the sales.

Thus, while this is an important development of the CC ’s role as regards market investigations, the sector is not in completely uncharted waters in terms of the operation of the remedies. Parties interested in acquiring any of the three BAA airports to be divested, particularly Stansted and the Scottish airport (where the sale process is yet to begin in earnest), will be able to draw on existing CC practice in order to know what to expect. In other respects, however, the regulatory environment remains in a state of flux. As the CC notes in its decision, there are a number of major elements of the sector’s regulatory structure that have recently been or are currently under review. Over the last year or so, the CAA has made final decisions on price reviews at Heathrow and Gatwick; and the DfT has considered whether to remove price controls at Manchester and Stansted, but decided to remove them only at Manchester - with the CAA therefore setting new price controls for Stansted too.

In addition, there have been significant reviews of the airport sector and role of the CAA by the House of Commons Transport Committee and Sir Joseph Pilling. The DfT is now consulting on a review of the regulatory framework for UK airports, advised by an expert panel led by Professor Martin Cave. This review is designed to cover the Airports Act regime, one of the oldest economic regulation systems in the country. A consultation paper was published on 9 March 2009, with a closing date of 1 June 2009, setting out proposals to introduce a licensing regime for the regulation of airports. The DfT also proposes, as recommended by the CC, that the regulator’s remit should be amended to have as a primary duty promotion of the interests of passengers.

The CC has stated that it has taken account of all the other inquiries where they are relevant to its market investigation, and that it expects other inquiries to take account of the CC’s findings in future too. It certainly appears that the CC and DfT ’s recommendations dovetail on the key issues of support for a new licensing regime, and the shift to make passengers the focus of the regulator’s duty. But whatever the outcome, as a result of all this activity the regulation of the UK aviation sector and the structure of the airport market can be expected to change significantly over the next few years.