The Civil Aviation Authority has begun a consultation regarding its market power assessments for Heathrow and Gatwick airports, as well as its initial proposals for regulating Heathrow, Gatwick and Stansted. Under the Civil Aviation Act 2012, a new system of economic regulation for airports has been introduced, such that from April 2014 the CAA will be able to impose a licensing regime intended to ensure transparent, accountable and proportionate economic policies by airport operators.
As part of its assessment of whether an airport's operator is 'dominant', such that it would require regulation, the CAA uses a three part test, which covers (i) whether the operator has "substantial market power"; (ii) whether competition law provides sufficient protection for consumers without regulation; and (iii) whether the benefits of regulating the operator outweigh the adverse effects.
Market Power Assessment
This test is rather complicated as a result of the unique dynamic that exists between London's key airports, and the CAA had some trouble applying it. However, it concluded that Heathrow is a market in itself, and therefore has SMP because of its qualities as a hub, and its central importance to key airlines.
It also concluded that Gatwick has SMP, though not because of it having some 46% of low cost carrier passengers in its market, but because carriers could not realistically leave Gatwick, as a result of there being so few available slots remaining elsewhere.
The CAA concluded that competition law would be ineffective, due to difficulties in responding to curtail abusive behaviour.
As regards the benefits of regulation, the CAA noted that, despite there being strong incentives to invest and improve the facilities at each airport, there is no guarantee that, absent regulation, prices would remain under control. It therefore concluded that the benefits of regulating outweighed the detriment of doing so.
Following a detailed engagement process, the CAA has developed its initial proposals for economic regulation of the airport operators.
For Gatwick and Heathrow, it intends to impose "challenging but fair" price caps over the coming years, prescriptive minimum standards of passenger service, and a new licence intended to enable the CAA to respond more effectively to passengers. In response to heavy media criticism in the wake of Heathrow's handling of modest snowfall, the airport has also been singled out as requiring measures to strengthen its operational resilience to reduce impact on passengers and service disruption.
Because Stansted was not considered to be as dominant in its market(s), and therefore the danger of abuse is lower, the CAA's initial proposal is that there should be a price monitoring and transparency regime introduced, to increase reporting, publication and transparency of its pricing behaviour. Additionally, the CAA intends to adopt a "show cause" trigger, which identifies a threshold for airport charges, above which the CAA would carry out a full investigation.
After the consultation, the CAA's final proposals and draft licences will be published in October 2013, and final decisions will be published in early 2014.