Failure: UK Economic Regulation of Airports

The International Air Transport Association (IATA) blasted as a failure the UK’s Civil Aviation Authority’s decision to allow costs at London airports to rise by a massive 50% between 2008 and 2013.

“Failure is the only word to describe the CAA’s decision,” said Giovanni Bisignani, IATA’s Director General and CEO.

For Heathrow the CAA has allowed charges per passenger to rise by 23.5% from April 1st, 2008, followed by increases of 7.5% plus inflation for each of the following four years. In the case of Gatwick, a similar 21% hike from April 1st, 2008 will be followed by increases of 2% plus inflation for each of the following four years.

In 2006, BAA generated an operating profit of 35% at Heathrow, which produced a net return on capital invested of 15.3%, twice the level of the cost of capital set by the regulator. “Economic regulation must produce results that are measured by improved efficiency and quality, not reward excessive monopoly profits and embarrassingly low service levels,” said Bisignani.

“The regulator already allowed a 50% increase between 2003 and 2008 and now the road is being paved with gold for a further 50% increase. Only an out-of-control monopoly could think in such terms. And only a phantom regulator that is the result of a flawed structure could allow this to happen,” said Bisignani. “Compare that to the 64% improvement in labor productivity and 16% reduction in non-fuel unit costs achieved by airlines since 2001.”

“The bureaucrats have proved to be impotent in defending the interests of travelers against monopolies. This decision impacts London’s competitiveness as a world city. If we don’t fix London’s dysfunctional airports, the City’s regular travelers will find a more convenient home. Frankfurt, for example, would be only too happy to welcome them,” said Bisignani.

The problems of a weak regulator and an out-of-control monopoly are well-recognized. The Government has seen fit to commission an independent review of the CAA by Sir Joseph Pilling. The Competition Commission is investigating breaking up the BAA monopoly. And the Parliamentary Select Committee on Transport is about to report on the future of BAA.

“We all agree that there is a problem. These reviews and inquiries must recommend an ambitious agenda for change that will give London the effective air transport infrastructure it needs. The starting point is a new modus operandum for economic regulation to deliver efficient airports. It’s not rocket science. The time for excuses is over. It is now time for action. The UK authorities must act decisively and speedily to get the basics right in order to protect London’s competitiveness,” said Bisignani.