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Economic regulation

Overview

Heathrow makes up some of the UK's most critical transport infrastructure. As a result we have a range of obligations, in the form of regulation we must fulfil. Various regulatory bodies in the UK influence Heathrow's operations including:

  • The Department for Transport  responsible for UK aviation policy.
  • The Civil Aviation Authority (CAA) , the UK's independent aviation sector regulator, responsible for the price regulation of Heathrow, Gatwick and Stansted airports and more general consumer regulation of UK airports including Aberdeen, Glasgow and Southampton.
  • The Competition and Markets Authority (CMA) is the UK’s competition authority it carries out market and competition investigations and it is also the body to which airports or other persons with a qualifying interest can appeal the CAA’s price determinations.

Airports are governed by the Civil Aviation Act 2012 (the Act). The Act sets out the legal framework governing the economic regulation of airports in the United Kingdom. The Act re-establishes the CAA as the industry (economic) regulator and the duties and functions to which the CAA must have regard.

The CAA’s primary duty is to exercise its functions ‘in a manner which it considers will further the interests of users of airport transport services regarding the range, availability, continuity, cost and quality of airport operation services.’ The users of air transport services are passengers and those who ship cargo. The CAA must also have regard to ensuring that regulated airports can finance their activities; that regulated airports meets all reasonable demand for services; and that services are delivered efficiently.

Before determining whether or not an airport should be regulated the CAA must conduct a market power assessment. The market power assessment is the CAA’s way of formally assessing whether or not Heathrow has significant market power. The CAA has determined that Heathrow has significant market power.

Once a determination is made by the CAA that an airport has significant market power and is to be subject to economic regulation the Act imposes a prohibition which means it would be illegal for the company to charge for services at the airport. The prohibition on charging is removed when the CAA grants a licence to the airport which sets out the basis for the maximum level of charges that may be levied and other licence conditions governing Heathrow’s supply of services to passengers, airlines and cargo handlers.

Economic regulation

The CAA undertakes its duty by adopting a regulatory mechanism known as RPI +/-"X" under Single Till regulation.  This mechanism limits the amount that can be levied by way of airport charges on a per passenger basis over the price control period.

The "X" value is the percentage that the airport can charge on a per passenger basis and is formulated by taking into consideration the "Building Blocks" of the business, a commonly used approach in regulated sectors.

Under this approach, a regulated asset base (RAB) is defined and valued. As time progresses, capital expenditure (capex) is added to the RAB. The RAB drives two of the fundamental building blocks that make up a company's revenue requirement: the cost of capital (the return on the RAB) and the depreciation allowance (return of the RAB). These two building blocks are then added to the projected level of operating expenditure (opex) to calculate the total revenue requirement for the business.

The CAA has adopted a Single till approach to airport regulation. This is a form of cross subsidy and requires that projected revenues from non-regulated charges are deducted from the total revenue requirement. The remainder represents the revenue to be recovered through regulated airport charges, which is expressed as revenue yield per passenger (i.e. required regulated revenues divided by projected passenger numbers).

Other aspects of economic regulation

Heathrow’s licence includes a service quality scheme.  This scheme specifies certain service quality measures against which the CAA has assigned targets for Heathrow to deliver. If Heathrow fails to deliver the assigned targets it is required to make rebates payments to airlines. The total annual amount of penalty payment at risk is 7% of total airport charges.

In the following pages you will find information about how Heathrow Airport is regulated.

Related documents

Economic regulation at Heathrow from 2014: Notice granting the licence

Market power determination in relation to Heathrow Airport – statement of reasons

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Our history

Avro Lancastrian, 1946

From humble beginnings, Heathrow grew to be a major world airport.

Heathrow's history