Tensions between the Competition Commission and the Civil Aviation Authority are set to resurface on Wednesday with the publication of a Commission report on the proposed charging regime for BAA’s three London airports.
The CAA, the lead economic regulator for Heathrow, Gatwick, Stansted and Manchester, has long been unhappy with the present system under which it is forced to go to the Commission for a second opinion on its proposals for changes to the price cap regime.
The Commission report to be published on Wednesday is expected to support CAA proposals to drive down the rate of return that BAA can earn, but it is expected to be critical of the CAA’s failure to implement some of its recommendations made five years ago, including the need to increase the transparency of the airport group’s relationship with its World Duty Free (WDF) retailing subsidiary.
BAA, which was bought last year in a highly leveraged takeover by a consortium led by Ferrovial, the Spanish construction, infrastructure and services group, is keen to sell off WDF as part of Ferrovial’s efforts to reduce its heavy debt burden.
It has appointed Merrill Lynch as financial adviser for the transaction but progress on the deal has been held up pending publication of the proposed regulatory regime for the BAA airports for the next five year period beginning in April.
Analysts have suggested that WDF could be worth more than £400m but the value of the business will depend crucially on the terms and conditions of its concession agreement with BAA.
In its report five years ago the Commission expressed concern at the fact that the concession was operated by a subsidiary of BAA “in the absence of competitive tendering” and that there was a lack of competition between outlets selling duty-free products.
The Commission was concerned about the risk that transfer prices could be fixed in order to redistribute profits from such services from BAA to WDF, which is outside the so-called “single till” basis for setting BAA’s charges to airlines.
Under the single till system, BAA’s highly profitable commercial activities, mainly rental income from its retail and other concessions, subsidise the aeronautical charges levied on airlines.
For the period from 2003 to 2008 the CAA had proposed moving from the single till system to a dual till, which would have excluded all the retail operations from the charging regime but the proposal provoked an outcry from BAA’s leading airline customers and was strongly opposed by the Commission.
The Commission’s report will be closely studied by the airlines for its response to the CAA’s controversial proposal to remove completely both London Stansted and Manchester airports from the existing price control regime.
According to the CAA, Stansted does not have, and is not likely to acquire, “substantial market power.” It believes that competition law is sufficient to address the risk of abuse, while continuing regulation runs the danger of distorting the big decisions to be taken on the timing and scope of increasing capacity at Stansted, including the building of a second runway.
The CAA also claims that Manchester airport faces strong competition in some of its local markets with many overlapping routes, in particular with Liverpool and Leeds-Bradford airports.
BAA has already expressed strong concerns about the CAA’s proposed lowering of its rate of return at Heathrow airport, the main profits generator of the group. It also has warned that the CAA’s approach could undermine its ability to invest in a further upgrading of Heathrow, including, most importantly, the planned building of Heathrow East, a state-of-the-art terminal to replace the present Terminals 1 and 2, in time for the London Olympics in 2012.
Separately, the Commission is conducting an investigation for the Office of Fair Trading into the structure of BAA, which is expected to be completed next year and could potentially lead to a break-up of the group’s monopoly of the three main London airports.
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