BAA LONDON AIRPORTS INQUIRY
Competition Commission statement on its current thinking
on the single/dual till
1. In its recommendations to the Competition Commission (the Commission),
which accompanied the references of the three BAA London airports for
the five year period beginning on 1 April 2003 (available at www.caa.co.uk),
the CAA proposed that the existing 'single till' regime for airport
charges should be replaced by a system which involves a revised regulatory
cost base - referred to in the industry as a 'dual till'. Under a single
till, commercial as well as aeronautical revenues received by an airport
are taken into account in assessing the appropriate maximum level of
airport charges. Under a dual till, only the returns on aeronautical
assets would be considered. Other things being equal, airport charges
derived using a single till approach are likely to be lower than they
would be under a dual till, because of the significant profits generated
by commercial activities; although under the CAA's proposals airport
charges were based on maintaining the single till at Heathrow for the
five years from 1 April 2003, they would be higher thereafter than
under the single till approach. (Although the Commission recommends
charges for the period 2003/04 to 2007/08, the CAA proposals were also
looking at the longer term.)
2. Over the last four months, the Commission has considered this proposal
very carefully and has taken evidence from the CAA itself, from BAA,
and from many of the airlines and other airport users. The Commission
will not reach a final view on this issue until it prepares its final
report, and it remains open to further arguments and representations
on this point. Its current thinking, however, is that, so far, the
arguments and current evidence for moving to a dual till at any of
the three BAA London airports are not persuasive.
3. Among the reasons that have informed our current thinking on the
single/dual till are:
- There is no evidence that the single till has led to under-investment in aeronautical
assets at the three BAA London airports in the past, nor any expectation that
it will do so over the next five years.
- It is not clear that the dual, as opposed to the single, till would be likely
to lead to better aeronautical investment in the future.
- The dual till could also risk unduly benefiting commercial activities, at the
expense of aeronautical, which may not attract sufficient funds or attention.
- We remain unpersuaded that in practice there would be no effect on air fares
at either congested or uncongested airports if airport charges were to be higher
at the three BAA London airports as a result of a switch to a dual till regime.
A move from the single till to the dual till would in the longer term mean
a substantial transfer of income to airports from airlines and/or their passengers,
potentially undermining regulatory credibility and creating regulatory uncertainty.
- Nor do we see significant benefits from any deregulation of commercial activities.
We are not convinced that the current profits of those activities should be
characterised as locational rather than monopoly rents. In so far as airport
charges affect fares, the current relatively high profits of commercial activities
are applied to the benefit of passengers; the dual till approach may require
increased regulation of such activities.
- It is not clear that the dual till would have a significant beneficial effect
on efficiency in the utilisation of aeronautical facilities, in particular
of scarce runway capacity.
We also note:
- It is difficult, conceptually, to separate commercial and aeronautical activities.
Commercial revenues at the three BAA London airports cannot be generated without
aeronautical facilities.
- As airlines have brought in the customers who make commercial operations at
the three BAA London airports profitable, it is reasonable that they should
also share in their benefits.
- It is difficult, in practice, to allocate both investments and operating costs
between aeronautical and commercial activities. To the extent that some of
the judgements that have to be made are arbitrary, future disputes about cost
allocation could harm relations between the airport and its users.
- Introducing the dual till at all three airports on the grounds of regulatory
consistency does not seem to be compatible with ICAO
guidelines that each airport should be looked at on its merits.
- No useful parallels can be drawn at this time from overseas airports
which use the dual till in whole or in part, as their circumstances
are different from those of the three BAA London airports.
- Nor are we convinced that the dual till approach would act as an effective
incentive on BAA to maintain or improve performance by providing 'something
to lose' (through reversion to a single till approach) at future regulatory
reviews should it fail to do so.
The Group is currently undecided whether the above factors would preclude
the dual till for the indefinite future, but in the light of them, the
Group is currently minded to exclude the dual till approach for the
purposes of the price control we are currently required to propose.
4. In recommending the appropriate level of airport charges, we recognise
the CAA's concern that there must be adequate incentives for BAA to
invest in the three London airports including Terminal 5 at Heathrow,
and to maintain and improve quality of service to both airlines and
passengers. Our current view is that there are more appropriate means
than application of the dual till to ensure that airport charges adequately
allow for the costs of BAA's investment programme including Terminal
5, for example through providing for an adequate cost of capital, a
possible allowance for a return on assets in the course of construction
and/or incremental costs on opening of T5, or the possible profiling
of charges between the five year period under review and subsequent
quinquennia.
5. Discussion of the single/dual till has overshadowed other elements
of this reference. So one reason for issuing this statement now is to
enable those interested in the subsequent stages of this inquiry to
make any further representations on other aspects of the reference in
the knowledge of the Commission's current thinking on this issue. The
other issues on which we would now like to focus further, relevant both
to the level of airport charges and to whether any of the three airports
has carried out a course of conduct against the public interest, were
summarised in the Issues statement which was published on 31 May and
set out on the Commission's website at http://www.competition-commission.org.uk/inquiries/baa.htm.
They include:
- whether the three London airports should be regulated individually
or as a system
- the appropriate initial level of charges in the regulatory formula
and subsequent level of 'X' in the pricing formula RPI-X;
- whether there has been a lack of investment by BAA and whether BAA's
consultation procedures are adequate;
- the delivery of service quality at the three airports, including whether
the level of airport charges should to some extent be dependent on achieving
quality of service standards; and
- practices in relation to non-regulated charges, including complaints
that some charges may be too high.
6. The Competition Commission is also publishing today its current
thinking on the Manchester Airport inquiry relating to this issue.
Competition Commission
11 July 2002.
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