Introduction

The Competition Commission (CC) today announced its Provisional Findings in relation to its ongoing Market Investigation of BAA’s ownership of seven UK airports. It has identified a number of adverse effects on competition (AECs) arising from BAA’s ownership and has suggested provisional remedies which go beyond what had been expected by many commentators. These include a requirement that BAA divest two of its three London airports, plus one in Scotland.

The decision will lead to close scrutiny of BAA’s airports by the investment community and several parties have already expressed an interest in acquiring BAA assets. Although hurdles to implementation of the Provisional Findings remain, this is a significant announcement and is the first time the CC has used powers under the Enterprise Act 2002 to suggest breaking up a company’s strong market position following a Market Investigation. Other companies in natural monopoly positions, such as former utilities, will be following developments closely.

Key findings

The CC recommends that:

  • BAA should sell off to separate buyers two of its three London airports - Heathrow, Gatwick and Stansted. Gatwick and Stansted are the preferred options, unless it proves impracticable to sell either of them, in which case a divestment of Heathrow could be required;
  • BAA should sell off either Edinburgh or Glasgow airport;
  • BAA should not be required to sell off Aberdeen or Southampton airport, as the CC does not believe doing so would address the PRC identified;
  • BAA may be required to maintain ongoing contractual relations with the new owners of its airports in order to ensure their viability as stand-alone businesses; and
  • the CAA should continue to regulate the airport sector with price capping of landing charges at Heathrow, Gatwick and Stansted to continue for the next five year cycle regardless of the contemplated ownership changes.

The next steps

Interested parties have until 17 September to respond to the Provisional Findings, and the CC aims to publish a final report with agreed remedies by the end of December 2008. Responses to the Provisional Findings may influence the CC’s final decision as to which assets BAA is required to divest, but it is unlikely that it will depart significantly from the position stated in the Provisional Findings.

It is likely that the CC will appoint a Monitoring Trustee to oversee the divestment process. This will be key to ensuring a successful sale of the identified BAA assets and in managing the ongoing implementation of the CC’s remedies, notably with regard to the ongoing contractual links between the current BAA airports once they are under separate ownership.

The statutory deadline for the CC in relation to this investigation is 28 March 2009, but it will seek to have published its Final Report and remedies some time in advance of that. However, there remains uncertainty as to how fast the enforced sale of BAA assets would be pushed through, and there is no specific guidance on this.

There is also the possibility that BAA would seek judicial review of the CC’s Final Decision - for example claiming that the remedies imposed are unreasonable because they are disproportionate and/or contrary to BAA’s legitimate expectations arising from the CC’s published guidance. Such a review would be heard by the Competition Appeals Tribunal, and BAA would have to lodge the application within three months of the CC’s Final Decision. Although there is no fixed timetable for judicial review, the process could take around a year to complete, meaning that the remedies might not start being implemented until early 2010. Although a reversal of the CC’s recommendations on appeal appears unlikely, BAA might feel that delaying the implementation of the divestments is valuable enough strategically to take this course.

Conclusion

The CC has made clear that it sees separate airport ownership as a step which will lead to increased competition in the airport sector, and ultimately better services to consumers. However, lack of capacity remains a major issue, especially for the London airports, and without being able to offer additional capacity to BAA’s existing airline customers it is hard to see how new ownership can create significant additional competition.

The CC is of the view that new owners will push harder for airport expansion than BAA has done in recent years, and that once additional capacity is available, competition will flourish and airport efficiency will improve. Although new runways in particular will take some time to become operational, in such a context, the CC suggests the CAA’s price regulation at Gatwick and Stansted airports might be withdrawn, although regulation would be maintained for Heathrow while it continues to enjoy its “unique” position as a hub airport.

In the longer term, the challenge remains for a market governed by competition, rather than regulation, to make the investments in infrastructure required to improve service levels without the price for such improvements turning out to be higher landing charges - ultimately reflected in higher ticket costs for passengers.

More immediately, there remain a number of issues to be resolved before the suggestions in the Provisional Findings become reality. Both BAA and potential investors will be looking closely at the opportunities created by today’s announcements.