London Heathrow Says Tougher Fee Cap Threatens Spending Plan

Jan 10, 2014 8:56 am ET

(Updates with analyst comment on Ferrovial impact in fourth paragraph, comment from Virgin Atlantic CEO in seventh.)

Jan. 10 (Bloomberg) -- London’s Heathrow Airport said a move by regulators to cut user charges at Europe’s busiest hub will hurt its spending plans, while Ryanair Holdings Plc slammed a decision to scrap price regulation at London Stansted.

For five years from April, fee rises at Heathrow will be capped at 1.5 percent below U.K. inflation as determined by the retail price index, the Civil Aviation Authority said. It cited stronger traffic forecasts for dropping recent moves for fees to track RPI, which had overturned plans for a -1.3 percent cap.

“In October the CAA accepted the need for changes to their April proposals, but has now reverted to a draconian position,” Heathrow Ltd. Chief Executive Officer Colin Matthews said in an e-mailed statement. “We will review our investment plan to see whether it is still financeable.”

The edict could curtail Heathrow’s annual allowable operating profit by 4.4 percent, worth 34 million pounds ($55 million), London-based Citigroup Inc. analyst Andrew Light said in a note. That means dividends at Ferrovial SA of Spain, the airport’s top investor “could be negatively affected.”

The CAA had been reviewing the maximum fees that London’s top airports -- Heathrow, Gatwick and Stansted -- can charge airlines to use their facilities. While the levies drive up air fares, they underpin investment such as a 3 billion-pound ($4.9 billion) spending plan intended to allow Heathrow to keep pace with rival hubs Paris Charles de Gaulle and Frankfurt.

‘Efficiencies’

The regulator took “a step in the right direction to address the excessive charges levied by Heathrow,” British Airways, the airport’s biggest user, said by e-mail, adding that “there is plenty of scope for further efficiencies.”

Heathrow prices are still triple the level of a decade ago according to Virgin Atlantic Airways Ltd. “Today’s decision is a far cry from the reduction needed to mitigate the incredibly steep price rises,” CEO Craig Kreeger said in a statement.

Airlines had sought a cap of 9.8 percent below inflation, likely to result in significant fee cuts. Inflation was running at 2.6 percent in November, based on the latest RPI numbers.

The decision to deregulate Stansted, Ryanair’s biggest base, will “harm consumers,” the region’s largest discount carrier said in a statement today.

‘Regulatory Failure’

Ryanair, which carried 81.4 million passengers last year, is counting on the airport north of London for 25 percent of expansion by 2019, CEO Michael O’Leary said in September. The airline committed to boosting passenger numbers there by 50 percent to more than 20 million over 10 years after agreeing on terms for growth with new owner Manchester Airports Group.

“Stansted will be able to further increase airport charges whenever it wishes, without any reference to competitive price levels,” Juliusz Komorek, Ryanair’s legal and regulatory affairs director, said in a statement. “Today’s decision is an example of the CAA’s regulatory failure.”

Stansted is being deregulated from April because it lacks “substantial market power,” the CAA said, “taking into account the long-term contracts the airport now has in place with its main airline customers.”

MAG welcomed the decision as “a positive recognition by the CAA that in Stansted’s case competition rather than regulation will deliver the best outcomes.”

Gatwick, Europe’s busiest single-runway airport, is being given more freedom in setting charges while the CAA retains the power to intervene. Prices could rise 0.5 percent more than RPI on average for a seven-year period under a plan first presented by U.S.-based Global Infrastructure Partners, the hub’s owner.

CEO Stewart Wingate said he was “disappointed” the CAA still requires Gatwick to operate under an economic license and expressed concern over the “intrusive nature” of monitoring.

--Editors: Christopher Jasper, Benedikt Kammel