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Heathrow passenger charges to decrease by 20% next year

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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 finally come to an end.

On Wednesday, the CAA told Heathrow what it can charge until 2026:

  • For the remainder of 2023, Heathrow will continue to be able to charge a maximum of £31.57 per passenger. This is an interim settlement set by the CAA earlier this year.
  • From next year, per-passenger charges will drop by around 20% to £25.43, remaining broadly flat until the end of the current cap period in December 2026

This is still above 2019 levels, when the cap was set at £22.91, although it is in line with inflation.

Heathrow passenger charges to decrease by 20% next year

In a small victory for the airlines, this is a small reduction of 90p from the final proposals tabled in June 2022, with an average charge of £27.49 over the next five years. The change is largely down to the higher than expected number of passengers in 2022, and represents a significant reduction on the £43 Heathrow was initially targeting.

Airlines still aren’t pleased

Despite the small reduction, the airlines still aren’t happy. Shai Weiss, CEO of Virgin Atlantic, who has been particularly vocal about the negotiations, said:

“After nearly two years of consultation and an abundance of evidence that supports a significantly lower price cap, the CAA has finally adjusted course. However, an average cap of £27.49 until 2026, adjusted for inflation, still penalises passengers at the world’s most expensive airport, which by its own admission, grew more than any other airport last year. The CAA has not gone far enough to push back on a monopolistic Heathrow and fulfil its statutory duty to protect consumers.

Heathrow has abused its power throughout this process, peddling false narratives and flawed passenger forecasts in an attempt to win an economic argument. This process has proven that the regulatory framework, including the formula used to set charges, is fundamentally broken. We’ll review our position carefully. With Easter just weeks away and the start of a busy summer season, we are ready to fly and serve our customers and we expect Heathrow to deliver a quality experience for passengers.”

The biggest issue the airlines are taking is with the forecast passenger numbers. This is because the cap is based on the predicted number of passengers passing through the terminal.

The higher the number of passengers, the more Heathrow can spread out the costs of its operations. After all, the airport need to be open regardless of whether there are 10,000 passengers a day or 100,000.

Heathrow passenger charges to decrease by 20% next year

Virgin Atlantic calls the passenger forecasts “pessimistic”, with the CAA predicting that Heathrow will only return to pre-pandemic volumes in 2025.

IATA, on the other hand, forecasts that total passengers at all UK airports will actually exceed 2019 levels in 2024, and be just 4% short this year. Heathrow, Virgin notes, “typically outperforms regional UK airports and is likely to experience a quicker rebound.”

To give the airlines credit, Heathrow has set a precedent for incorrectly forecasting the rebound of travellers. It revised its 2022 passenger forecasts four times last year, from 43.2 million passengers to 54.4 million passengers, and still managed to be off by 7.5 million passengers. That’s a margin of error of 14%.

It’s not over ….yet

Although this is the CAA’s final settlement, Heathrow does still have the opportunity to dispute the figures by appealing to the Competition and Markets Authority which has the final say on matters relating to new price control arrangements.

For now, Heathrow has simply said it is considering its next steps:

“The CAA has chosen to cut airport charges to their lowest real terms level in a decade at a time when airlines are making massive profits and Heathrow remains loss-making because of fewer passengers and higher financing costs. This makes no sense and will do nothing for consumers at a time when the CAA should be incentivising investment to rebuild service. We will now take some time to carefully consider our next steps.”

What does this mean for you?

In terms of taxes and charges savings on British Airways Avios redemptions, it means nothing.

With both long haul and short haul redemptions now covered by Reward Flight Saver, which adds a fixed cash amount to your redemption, there is no link to the level of airport charges (falling), fuel costs (falling) or Air Passenger Duty (rising). It is just a random number plucked out of the air by British Airways.

Cash tickets may come down slightly, although an economist would be happy to argue with you as to whether the cost of Heathrow flight tickets bears any resemblence to the cost base. It certainly isn’t something that revenue management teams bother about – their job is to sell every single seat for the maximum possible price, juggling pricing over the 355 days that tickets are available.

The final settlement does, at least, provide clarity to the airport on its finances and should finally kick-start the process of long-term planning and investment. According to the CAA:

“The package includes a £3.6 billion capital investment programme. Passengers will benefit from investments such as next generation security scanners and a new baggage system in Terminal 2, which are collectively expected to cost around £1.3 billion and should bring considerable passenger benefits, including an improved security experience and more resilient infrastructure.”

Heathrow is already behind the curve on installing new next-generation security scanners at its terminals, with London City completing the roll out by Easter and Teesside Airport already having done so. The Government has set a deadline of June 2024 for airports to roll these machines out.

Heathrow passenger charges to decrease by 20% next year

Meanwhile, the upgraded baggage system at Terminal 2 will finally allow Heathrow to demolish the empty Terminal 1 building, which is currently providing baggage support for T2. That, in turn, should allow Heathrow to extend and expand the existing terminal.

The CAA also claims that the new settlement will “incentivise Heathrow to provide a good quality service for passengers”, with new performance metrics such as helpfulness of security staff, wi-fi performance and availability of check-in infrastructure now all feeding into the charge cap.

Nonetheless, Heathrow is likely to remain the world’s most expensive airport, a title it held with a 24% margin last year.

Willie Walsh, the IATA Director General and former CEO of IAG and British Airways said:

“Moving forward, it’s clear that the present model for deciding the charges and incentivising better performance at Heathrow needs a fundamental review. We have a short window before we have to go through this again. The UK cannot afford for this situation to continue if it wants to ensure a competitive level of charges that will benefit passengers and improve the connectivity of its only hub airport. And given that Heathrow have succeeded in securing this generous settlement, we’ll be watching their performance this summer and beyond very closely. Any repeat of the failures we have seen over the past few years would be totally unacceptable.”

You can read the CAA’s full adjudication letter here.

Comments (56)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Super Secret Stuff says:

    There’s no way the CMA would raise the price cap if heathrow complained. The CAA analysis has more holes that a leaky civ.

    The forecasting, the shady financing agreements with the parent company and just common sense.

  • JDB says:

    The hypocrisy of Virgin is quite breathtaking! Perhaps they should look at their own ‘charges’. The Heathrow passenger fees pale into insignificance besides such charges and the APD and of course LHR is not the most expensive airport if you compare like with like. The forecasts criticised by VS were of course supplied by the airlines. The airlines succeeded in blocking the installation of a new luggage system when T2 was built, now they complain about the vastly higher cost of retro fitting a new system etc. etc. It’s all just noise.

    • BA Flyer IHG Stayer says:

      Which is why some of us get annoyed when airline surcharges get lumped in with a generic “taxes” description.

  • Willmo says:

    Just out of interest, what exact role does Terminal 1 play in the T2 baggage system?

    • Rob says:

      T2 has no baggage system.

      To save money, the old baggage system underneath the (now closed) T1 was kept. All bags for T2 are sent to/from T1 for handing on the geriatric system there.

      Over the next 5 years T2 will finally get its own baggage operation.

      • Rhys says:

        To add to this, you may have noticed massive building work between T2A and T2B. It’s now almost finished, but a huge chunk of the ramp has been dug up, hollowed out and topped again. This is where the new baggage system will go.

  • Anna Wedder says:

    If you think the airlines are going to give you that £6 back, I have a bridge to sell you. Instead, they’ll quite happily sell first class returns to New York and Singapore for almost £10k and when it boils down to it the CAA’s decision is ultimately about which set of shareholders end up with more of your money.

  • Jack says:

    Heathrow is chaos at the best of time so good riddance that they have not been allowed to raise their already stupidly high fees even more . Last few times I have landed there it has already been some kind of chaos caused by slow security or not having enough staff. Trying to rip people off will not work and people will go elsewhere. Heathrow do not have a leg to stand on honestly good riddance their ridiculous £43 charge has been quashed

    • BA Flyer IHG Stayer says:

      Chaos is over egging it and has been mentioned above not all Heathrow problems are down to the airport.

      Lack of baggage handling staff is down to the airline. Ditto ramp staff.

      If the entire baggage system fails that is down to the airport.

      Uncleared toilets in the terminal area – HAL issue. Dirty toilets in an airline lounge then it’s the airlines fault.

      And where is this elsewhere you’d switch to? All airports and airlines have the same issues both here and abroad.

  • Colin MacKinnon says:

    You know, a tenner either way makes little or no difference to me.

    If I can fly direct from central Scotland (preferably Edinburgh) – and not at 05:30am – then I’ll go for direct flights.

    Unless, like last summer, it was cheaper to fly Athens-Tirana, two night stay, and then BA TIR-LHR-EDI than it was to fly Easyjet direct ATH-EDI!

    I live a bargain, but I also like convenience. And while a “bargain” usually means a cheaper price, there is a value to be put on convenience. And when it comes to flights, £20 extra is usually neither here not there in that calculation.

  • ADS says:

    The brass balls of LHR to complain about their “financing costs” … when it was their shareholders who decided to load up the company with debt

    • Lady London says:

      +1

      Why am I not seeing a forced refund or reduction or retention or offser against future charge amounts, reducing marginal revenue to Heathrow if the number of passengers exceeds a stated total. It’s utterly ridiculous to base the calculation of charges on a per head straight multiplier figure. Heathrow’s costs aew largely fixed, and we all know as a financial device it will alwaya be loaded with debt by its owners. So an amount needs to be agreed as a total for up to ‘n’ passengers, then reducing tranches of additional marginal revenue at a set of agreed highee passenger levels.

      Didn’t see any performance figures rolled in as a condition of receiving each tranche of the fee either.

      I mean, there’s just no comeback. The finest financial minds in the world gather in the UK and this sham of a calculation method is all they came up with? It’s a collusion of unfettered financial interest groups against the consumer. @Anna Wedder has got it right in her comment above.

      Heathrow can barely contain their joy I am sure.

      I would have had more respect if revenuw from the drop off charge had been reduced from the amount gotten by Heathrow as well.

      • JDB says:

        @Lady London – You demonstrate a lot of knowledge in many spheres of travel related issues and act as a consumer champion but your comments suggest that airport regulation and financing are well outside your ken which is fair enough because it is ludicrously and unnecessarily complex and I can see you haven’t read the settlement. The parties each employ dozens of internal analysts and consultants to work on theses issues. Unfortunately, your off the cuff comments/analysis, including those relating to the drop off charge have absolutely no basis in fact. When you have had the opportunity to read the detail, we shall look forward to some considered comments.

    • JDB says:

      @ADS it would appear that you are unfamiliar with the financing of infrastructure/utility businesses that are almost always loaded with debt because otherwise the returns are too low. The regulators of such businesses don’t take issue with that aspect, but there is often a dispute as to the cost of capital. In this instance, uncertainty over future revenues (ie what HAL will be allowed to charge) affects the cost of capital.

      • Bernard says:

        I’m afraid your comment also suggests a lack of understanding of regulation too. CAA works on a theoretical leverage. If HAL has chosen to go beyond that , they shouldn’t demand (as they have) to be bailed out for their own poor business decisions.

  • Erico1875 says:

    All this airline outrage about airport fees. Yet I’m seeing 100% inflation on most fares, especially short haul. That’s mostly down to profiteering

    • Rob says:

      We’d put our ad rates up 100% if we had 3 people each week willing to buy the space.

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