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The CAA proposes new fees for using Heathrow – and airlines are not happy

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The on-going battle between Heathrow Airport and the UK Civil Aviation Authority (CAA) over what it can charge airlines – which falls straight through to the price of your ticket, as one of the ‘taxes and charges’ you pay – has entered its next phase.

Heathrow believes that, since its income is effectively capped by the CAA at below the market rate, it deserves some retrospective protection for the drop in income last year. That said, it still reportedly paid out a £106m dividend to its shareholders and did not need to raise new equity.

The airlines believe that Heathrow has a de facto monopoly on premium air travel in London and should be constrained appropriately, for the benefit of passengers and the wider economy.

The CAA publishes its view on Heathrow's proposed fee increases

As we covered earlier this year, Heathrow Airport has already added an £8.90 surcharge to all tickets issued.

It is fully within its rights to do this, since there is an agreement with the airlines that guarantees a minimum income level to cover the cost of running certain facilities. This income level was not reached in 2020 and the £8.90 surcharge will continue until the difference is made up.

Heathrow’s original proposal to the CAA was for the Passenger Service Charge to increase like this:

  • domestic charges increased from £10.98 in 2021 to £12.26 in 2022
  • short haul charges increased from £15.98 in 2021 to £19.76 in 2022
  • long haul charges increased from £38.33 in 2021 to an astonishing £67.86 in 2022

This won’t be happening.

However, an interim price control averaging £29.50 per passenger is proposed from January 2022. This is up sharply from the current average of £22 per passenger. This interim figure will operate until Summer 2022 when the new five year charging period will begin.

What has the CAA proposed?

The UK Civil Aviation Authority published its thoughts for the 2022-2027 charging period yesterday. It suggests:

  • a (hugely vague) average charge of somewhere between £24.50 to £34.40, compared to the current average of £22 per passenger (the original Heathrow proposal above averages out at £38 per passenger)
  • an interim price cap of £29.50 to be put in place for Spring 2022 whilst discussions continue
  • no additional one-off adjustments on top of the £300 million of additional asset base increase that was allowed earlier this year. This means that Heathrow’s request for a payment of £2,300 million to cover its covid losses (paid via an increase in Regulatory Asset Base) will not happen.
  • an agreement to cap both the upside and downside to Heathrow of actual passenger levels versus forecast levels over the next five years
The CAA publishes its view on Heathrow's proposed fee increases

The CAA was very positive about it’s proposals. CEO Richard Moriarty said:

“While international air travel is still recovering, setting a price control for Heathrow Airport against the backdrop of so much uncertainty means we have had to adapt our approach. Our principal objective is to further the interests of consumers while recognising the challenges the industry has faced throughout the Covid-19 pandemic. These initial proposals seek to protect consumers against unfair charges, and will allow Heathrow to continue to appropriately invest in keeping the airport resilient, efficient and one that provides a good experience for passengers.”

That is one view. Shai Weiss, CEO of Virgin Atlantic, went batshit crazy:

“Today’s initial proposals from the Civil Aviation Authority fail to protect the British consumer, paving the way for Heathrow Airport to introduce unacceptable charges, just as international travel resumes at scale. The world’s most expensive airport risks becoming over 50% more expensive, as Heathrow and its owners seek to recoup their pandemic losses and secure hundreds of millions in dividends to shareholders. It is concerning that the regulator has failed in its first opportunity to step in, and together with industry partners, we will oppose these proposals in the strongest terms to protect passengers.

“Abusing its unique position as the UK’s only hub airport, Heathrow’s proposed increase of charges will hurt the UK’s economic recovery and unfairly hit the pockets of families and businesses around the nation. No other airport in the world is proposing increases on this scale and by becoming unaffordable, competing EU hubs and airlines will benefit.”

Even the CAA admits, in the consultation document, that:

“Increases towards the upper end of our range could cause material consumer detriment.”

Virgin Atlantic claims that the CAA is unduly pessimistic in assuming a 44% fall in passenger numbers in 2022 versus 2019. This is, however, more optimistic than the forecast submitted by Heathrow. Virgin Atlantic believes that passenger numbers are likely to be down by just 5% on 2019 levels.

The CAA proposals are not set in stone. Two industry consultations will now take place, on the interim 2022 price cap and the wider proposals, before the final figures are published.

One upside is that the CAA admits that ‘gold plating’ needs to end. At present, because Heathrow’s agreed returns are based on what it invests in the airport, there is an incentive to – literally – gold plate the toilets if allowed. The more it spends, the more it can earn. The CAA says:

“we consider that stronger incentives are needed to protect the interests of consumers from the increased costs that they would otherwise face were HAL to make inefficient capex investments.”

You can read the full CAA consultation document here.

Comments (72)

  • David S says:

    Can someone at HfP produce a little table covering the core hub airports showing all the costs that flyers need to pay before the plane actually gets into the air. At what point does it become a no brainier to fly from Dublin or Frankfurt or Madrid ?

    • ken says:

      And while they’re at it, could Rhys pack my case and give me a lift to the airport.

    • Peter K says:

      It’s not that easy. It’s the cost of the ticket and convenience that makes it worth/not worth going from a certain airport. The cost of the ticket is only partially airport fees, so comparing just the fees doesn’t give a passenger the information they need.

    • JDB says:

      It isn’t that simple and today’s news only changes things by maybe £10/person! You need to look at a specific trip to see the full breakdown of airline or government/airport charges and of course the cost of getting to DUB, MAD and the general concept of this has been written about a lot on HfP. The UK APD is obviously a big number that is easily ascertainable.

    • John says:

      It becomes a no-brainer to fly from another country, when [price of flights from UK] minus [(price of flights from other country) minus (cost of getting from UK to flight origin ± hotels + risk of things going wrong)] is outweighed by the time saved flying directly from the UK.

      In other words everyone decides for themselves if they want to spend 6 hours to save £500, or whatever the numbers are. And occasionally you can use it as an opportunity for a “free” mini-trip.

      On paid flights, the airport charges are irrelevant to a passenger because they are included in the headline prices advertised by airlines. So you don’t need to care about the price breakdown.

      You do need to care somewhat when making redemptions, because the “base fare” of points is fixed (for now at least); while you can take advantage of zonal discrepancies, the taxes such as APD and airport charges can affect the final amount you pay significantly. However the YQ component also affects the final amount you pay and you don’t need to care about it when booking paid flights either.

      • Paul Pogba says:

        Are there any sites that automate the process of searching for split tickets? I can’t see an option on Momondo, Skyscanner or Google. Quite a few sites were created for the same on the trains a while back.

        • Lady London says:

          I like RometoRio when I’ve really got no clue how to get from one place to another. Sometimes you have to prod it a bit by changing to another likely starting point.

        • Susan says:

          +1 for Rome2Rio. Also airwander.com and flightsfrom.com will help.

      • Mikeact says:

        We invariably go from AMS particularly with KL. Needs a separate short hop KL ticket, but never had a problem. Or via Madrid for Alitalia to the US, again shortish hop from London ,no problem with first flight out in the morning. Accept that in the US may need an internal for final destination, but that goes with any ticket.
        And all on miles/points/Avios.

    • Dubious says:

      The UK CAA publishes a list of passenger-facing airport charges for all UK airports. You can find it on their website (I’m not going to try looking for it whilst using my mobile).
      Does not cover the airports outside the UK though.

    • Mikeact says:

      Or Paris or Amsterdam..

  • ankomonkey says:

    Remember that LHR is just introducing their £5 drop-off fee, additional to what they’re pushing for here. Time to get me some flying goggles and take to the air myself…

  • Track says:

    Meanwhile, certain airlines are treating LGW as a money-making machine, given they operate 1-2/flights per day there.

    The fares on these LGW flights are twice as much as LHR.

    So, will not be catching a direct train to LGW from a local train station. Well, Heathrow has some lounges open.

  • Chas says:

    My first thought, just on reading the headline, was that I couldn’t wait to read what Lady London is going to have to say about this…..

    And then when I got to just the 2nd paragraph I literally laughed out loud at the fact that it believes it needs retrospective protection even before I realised just how much they had paid out in dividends (I had thought it was two-digit millions, not three).

    But what seems just as ludicrous is the CAA’s proposed interim price cap, as they’ve lost so much negotiating power by making such a high opening gambit. Which just goes to show that they don’t have any intent to do any real negotiating on the matter. Heathrow must be rubbing their hands in glee knowing that they’ve already secured c50% of the increase they were asking for.

    • Lady London says:

      We did it all yesterday Chas. Paul Pogba found it on Sky and me, Doug M, Paul again and especially Super Secret Stuff… We all hoed in (hope I haven’t forgotten anybody).

      The CAA really hasn’t got a clue have they

      • Chas says:

        Nope – they haven’t! I’ve been playing catch-up reading the daily chats after a really busy couple of weeks work-wise, so haven’t got to all of your reactions yesterday yet.

        • Lady London says:

          Words missing Tim. I couldn’t care less for the shareholders when Heathrow has taken advantage of its longterm guaranteed profitable quasi-monopoly awarded it by the government to load the company with debt whilst paying out enormous amounts to their owners. Then whilst doing this not only hoovers up every possible scrap of state aid but after that and downgrading most employees compensation to the lowest level or outsourcing ditto, Heathrow licked its lips and went to the regulator demanding a raft of increases across multiple captive customer fees (businesses/airlines and consumer captives) so as to be able to continue and further expand this outrageous ripoff into the future.

          And the regulator fell for it. Anyone with any b*lls and the vaguest financial market nouse would have stared these greedy Heathrow owners down and they would have slunk away rather than lose a guaranteed rent stream.

    • Track says:

      Just look at how PE/private owners loaded utilities with debt, Thames Water..

      The windfall profits of utilities should be safeguarded for future capex and reserves to deal with crises (not taken by the Exchequer either). That might create massive cash sitting on balance sheets alike to insurance companies but at least it will be there when needed.

  • TeesTraveller says:

    The £8.90 exceptional charge appears to be ending at the end of this year. I just did a spot check on a couple of BA and Loganair domestics.

  • Tim says:

    Why has the CAA not sufficiently considered the option of allowing Heathrow to go bust? Let the investors loose money – if they can take the upside then let them take the downside too.

    The runway and terminal will still be there for a new company to use.

    • JDB says:

      A) because the regulator’s remit is to consider not only the interests of the consumer but also the aviation sector in the UK. Letting it go bust would not help anyone save the insolvency practitioners.

      B) if the regulator were to act so irrationally he would be sued and/or no other company would take it on without significant regulatory certainty which would take you back to where you started

      C) the government would not wish to take it on

      D) the shareholders already made a loss of £2bn last year. How much would you like them to lose? Would you have been happy if the taxpayer owned LHR and lost that sum?

      • Tim says:

        I couldn’t care less for the shareholders. They willingly risked their capital in the hope of a profit. If they backed the wrong horse why should I care.

      • Track says:

        D) £2bn loss is not cash loss, but more like full economic cost, plus any type of writedown the management feels like trowing in.

        They have an incentive to operate at loss and amplify losses, it offsets their profits. So HAL will keep lights on with no customers around.

        They behave just as bad as any government owner would do and see the light only by increasing charges for a monopolised service. Not though cost saving and increasing productivity.

  • Ollie says:

    It has always intrigued me that London has 4-8 airports (depending on how you count) and yet there is this ongoing fixation that Heathrow is the only option, and is at capacity, and another runway needs to be built.
    However I do wonder if existing infrastructure (i.e. the other 7 airports) could be used more efficiently. Targeted investments could surely be made at these airports to create a more “Heathrow-like” experience. So, what is it that draws passengers and airlines to Heathrow, which could be replicated elsewhere? I’d say it’s facilities, location (proximity to central London), and “network effects” of being where the majority of other international travel is located.
    Facilities are easiest to fix, with with better lounges, bigger terminal buildings, gold-plated toilets if that’s what draws people to LHR.
    Location is quite difficult to fix, short of building a new airport or a tectonic event moving Stansted closer to London. However, better trains and timetables (already facing their own capacity issues, I know) could be provided at a fraction of the cost of a new runway and make an airport seem closer to Central London. Trains from London already cover distances of some 40 miles in under 25 minutes, if these were directed at airports, with in-town check-in then the convenience of Heathrow could surely be trumped.
    Network effects are difficult to emulate elsewhere, but better London-airport and airport-airport transport might help this. Something I’m yet to see implemented anywhere in the world is airport-airport airside transit. Very difficult to achieve logistically, but if all parties worked together then it could create a virtual “hauptbahnhof” of an airport that could propel London to global super-hub status.
    Of course, none of this will happen because of the siloed incentives of each of the individual competing organisations. It’s similar to the railway mania of the 19th Century, and why we have 20 different rail termini in London.

    • JDB says:

      That was the concept when Heathrow, Gatwick and Stansted were forcibly split up, but LGW has never managed to establish itself as a decent hub despite big investment by its newish owners. LCY has expanded significantly. Ultimately each of the airports has found its niche. Your idea would really also require a second full network airline (like Continental originally at EWR) which we don’t really have as Virgin is still quite limited.

    • Bagoly says:

      Quite right about trains, signalling, and timetables being vastly cheaper than an additional runway.
      LHR-LGW airside transit would require new tracks (Ashford-LGW-LHR-HS2 would make sense) with one pair of tracks between the two airports being airside.
      That’s not going to happen soon, but LHR-Clapham Junction-LGW with baggage racks would be achievable.
      However, as you say, parties don’t work together – see how the Gatwick Express got extended to Brighton so becoming baggage-unfriendly and therefore much less appealing to flyers.

    • Dubious says:

      I’m not sure that it is *just* the proximity to London, it is also the proximity to the M4 corridor.

      The fact that there are also other road connections (M3 and M40) also helps.

      This is *one* of the reasons the Estuary Airport idea to the east side of Greater London was a bad idea.

    • Track says:

      The problem is it is in everbody’s interest but no one particular interest. The moment other airlines and airports can gouge prices, they do so and not invest in facilities/not lobbying the government for a scalable infrastructure investment.

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