Economics and regulation
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 Commission is the competition regulator but it is also involved in price control determinations for three London airports which are carried out typically every five years.
Airports are governed by the Airport Act 1986, which establishes a system of economic regulation for those airports with an annual turnover in excess of £1 million. Under the terms of the Airport Act 1986, airports must have permission, granted by the Civil Aviation Authority (CAA), in order to levy charges. Further The Secretary of State determines which airports are "designated" and thus required to operate with price caps.
Heathrow Airport Limited (Heathrow) is currently a designated airport and is therefore subject to price controls imposed by the CAA.
The CAA conducts a regulatory review generally every five years (also referred to as "Quinquennium") prior the setting the price cap. The latest regulatory review took place in 2007/08, where the regulator set the price cap for airport charges effective 1st April 2008 to 31st March 2013. Since then the regulatory period has been extended to 31st March 2014.
The CAA undertakes its duty to economically regulate Heathrow 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", 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
The CAA has also created a mandatory service quality regime for Heathrow. This regime 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 penalty 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.
- Economic regulation of Heathrow and Gatwick airports 2008 to 2013 - published 11 March 2008 (1MB PDF)
- Extension of Q5 Heathrow and Gatwick price controls - Published April 2011 (61KB PDF)