Final and Initial proposals for H7 price control

Economic regulation of Heathrow airport: H7 final issues – decision (CAP3001) sets out our decisions on both:

• the matters that were remitted to us by the Competition and Markets Authority by its Final Determinations of the appeals of our Final Decision on the H7 price control; and
• the matters that we had not been able to resolve prior to making the Final Decision.

These matters are:

• the approach to calculating the adjustment to revenues for 2020 and 2021;
• the “index-linked premium” used to calculate the cost of debt;
• verification of the “shock factor” used in the passenger forecast;
• the appropriate contributions to the opex allowance for pension deficit repair costs and business rates; and
• treatment of HAL’s revenues from its “Pod parking” product.

The decision sets out our analysis of stakeholders’ views on each of these issues, our decisions on each matter and the statutory notice of the licence modifications we have decided to make to implement them. This decision document also addresses a number of minor, technical and other issues that have emerged since the Final Decision.

We have written to Heathrow (December 2023) to provide our assessment of the responses received to our consultation on draft terms of reference for Independent Review of Heathrow Airport Limited’s cost allocation methodology for Other Regulated Charges, and to confirm the final terms of reference for the independent review.

Responses

• Arora Group
• Heathrow Airport Ltd
• Heathrow AOC
• International Airline Group (IAG)
• Pandox

This letter (November 2023) sets out the CAA’s approach to the independent review of HAL’s cost allocation methodology for Other Regulated Charges and details a draft terms of reference for the Independent Review that HAL should use when procuring the reviewer and facilitating the review.

CAP2591 confirms the high-level principles that HAL should follow when working with stakeholders to develop new protocols and a dispute resolution function for Other Regulated Charges.

CAP2524 sets out our final decision for Heathrow Airport Limited's (HAL) H7 price control review. It includes:

• A Summary document (CAP2524A)
• Section 1 on the regulatory framework (CAP2524B)
• Section 2 on the key price control 'building blocks' (CAP2524C)
• Section 3 on the financial framework (CAP2524D)

The appendices provide further information on the main issues covered in our determination:

• Appendices A – B (CAP2524E1)
• Appendix C (CAP2524E2)
• Appendices D – H (CAP2524E3)
• Consultation on ORC guidance (CAP2524F)
• Consultation on capex incentives guidance (CAP2524G)
• Decision document on recovery of Heathrow West costs (CAP2524H)

We have also published:

• additional information on Opex and commercial revenues
• our final price control model
• our cost of new debt indexation model
• Skylark Consulting Group’s H7 Forecast Update Review (CAP2524I)
• Redacted commercial revenues and Opex model
• Note of adjustments made to commercial revenues post FP

Responses to CAP2524F

• Heathrow Airport Ltd
• Airline Community (AOC/LACC)
• International Airlines Group (IAG)
• Arora Group
• Licensed Taxi Drivers Association (LTDA)
• Pandox

Responses to CAP2524G

• Heathrow Airport Ltd
• Airline Community (AOC/IATA)
• British Airways

This Decision follows the consultation (CAP2488) on setting the interim price cap for 2023 and replaces the holding cap that was put in place by CAA in 2022.

CAP2488 sets out the interim price cap for 2023 and replaces the holding cap that was put in place by CAA in 2022.

This interim price cap replaces the current one-year interim cap that applies to HAL’s charges in 2022,which expires at the end of this year. It is required to protect the interests of consumers in the short term as our final decision and licence modifications for a five-year price control (H7) will not be made until later in 2023.

The proposed interim price cap will be £31.57 (equivalent to £29.68 in 2020) prices per passenger (in nominal prices). This value is in line with our Final Proposals (FPs) issued in June 2022. As with our interim price cap for 2022, once we have set the final price control for the H7 period, any difference between it and this proposed interim price cap for 2023 will be trued up or down. 

Putting this interim price cap in place will enable us to make Final Decisions on the main H7 price control in an orderly way, while avoiding having a gap emerge in the price control arrangements for HAL at the start of 2023. The work to finalise the main H7 price control involves taking account of the representations we received on Final Proposals and assessing whether any changes are appropriate in the light of the new information that has emerged since then, including on issues such as passenger numbers and changes to wide macro-economic factors (in particular inflation and interest rates). We will issue a short statement in the near future confirming the timetable for reaching a final decision on the main price control.

Alongside the consultation on the interim holding cap, we are proposing a small number of specific changes to HAL’s licence to remove obligations under the service quality framework that we consider are no longer needed. 

Following this short consultation, which ends on 22 December 2022 and having taking into consideration stakeholder responses, we expect to publish our decision on the level of the interim price cap promptly in the New Year, with the licence modifications taking legal effect in February 2023.

Responses to CAP2488

• Heathrow Airport Ltd
• Airline Community (LACC/AOC/IATA)
• British Airways
• American Airlines
• Virgin Atlantic/Delta Air Lines (a joint response)

This consultation sets out our Initial Proposals for the Heathrow Airport Limited's (HAL) H7 price control review. It includes:

• This summary document which discusses our overall approach and the impact of the particularly challenging circumstances created by covid-19 on Heathrow airport, the price control review and these Initial Proposals.
• Section 1 which discusses:
  • our proposed approach to the form of regulation for HAL, including our intention to introduce traffic risk sharing arrangements and to set a 5-year price control; and
  • our projections for each of the key price control 'building blocks' (including numbers of passengers, costs and commercial revenues) that have informed our Initial Proposals.
• Section 2 which sets out:
  • our views on HAL's request for a covid-19 related RAB adjustment, the treatment of asymmetric risk, the WACC, finance ability and our provisional range for the H7 price control on airport charges; and
• Section 3 which describes:
  • our proposals for developing stronger capital efficiency incentives and implementing outcome based regulation (OBR); and
  • our approach to dealing with airport charges in 2022 noting the particularly difficult and challenging circumstances that have been created by the pandemic and its impact on the CAA's H7 price control timetable.
• The appendices provide further information on the main issues set out in this consultation.

Initial Proposals

• CAP2265A - Overview
• CAP2265B - Section 1: Overall approach and building blocks
• CAP2265C - Section 2: Financial Issues
• CAP2265D - Section 3: Incentives and other issues
• CAP2265E - Appendices

We are also publishing, alongside these Initial Proposals, a number of supporting consultancy studies.

Reports by external consultants

• CAP2266A - Review of H7 Opex and Commercial Revenues: Initial Assessment and Forecasts, CEPA Taylor Airey, October 2021
• CAP2266B - HAL RBP Update: Capex plan Review, Arcadis, October 2021
• CAP2266C - HAL RBP Update: Review of capex categories and delivery objectives, Arcadis, 2021
• CAP2266D - H7 Forecast Review [Passenger Forecasting], Skylark, October 2021
• CAP2266E - Estimating Heathrow's beta post Covid-19, Flint, August, 2021
• CAP2266F - Review of Consumer Acceptability Testing Research, FTI Consulting, October 2021

Responses to the RBP Capital Plan

• AOC LACC Views on the RBP Capital Plan, September 2021

Responses to CAP2265 H7 Price Control

• AOC LACC
  • Appendix 1 – PA Review of the H7 Opex and Commercial Revenues
  • Appendix 2 – CEPA WACC Review
• ACI Europe
• Airlines UK
• American Airlines
• BAR UK
• British Airways
• Delta Air Lines
• Global Infrastructure Investor Association
• Heathrow Airport
  • A1. H7 Asset Management and Compliance Programme Appendix
  • A2. H7 Security Programme Appendix - Under Review
  • A3. H7 T2 Baggage Programme Appendix
  • A4. H7 Commercial Revenues Programme Appendix
  • A5. H7 Efficient Airport Programme Appendix
  • A6. H7 Carbon & Sustainability Programme Appendix
  • A7. Stakeholder and IFS Engagement Materials - Commercially Sensitive
  • A8. H7 IP Opex Review, Frontier Economics, 2021
  • A9. Airport Operating Cost Efficiency Benchmarking, KPMG, 2021 - Under Review
  • A10. Additional analysis to support operating cost assumptions - Commercially Sensitive
  • A11. H7 IP Commercial Revenue Review, Frontier Economic, 2021
  • A12. Commercial Review, Pragma, 2021
  • A13. Commercial Review – Peer Review, Pragma 2021
  • A14. Changing Retail Spend at UK Airports, Red route / Way Ahead, 2021
  • A15. Outlook for Demand – selected date, OC & C 2021
  • A16. Recovery of Covid-related losses for Heathrow Airport Limited, KPMG, December 2021 – Under Review
  • A17. Cost of Capital Issues for the H7 Price Control, Oxera 2021
  • A18. H7 Capital Efficiency, Jacobs, 2021
  • A19. H7 initial Proposals on OBR Revenue, Frontier Economics independent review if the CAA’s Initial proposals for OBR, Frontier Economic, 2021
  • A20. RBP Update 2
  • A21. Passenger priorities post COVID-19, Insites Consulting, 2021
  • A22. Service Degradation Research, Incite 2021- Under Review 
  • A23. Legal Annex – Commercially Sensitive
• Heathrow Area Transport Forum
• Heathrow Strategic Planning Group
• Hilton Garden Inn
• IAG
• Lot Polish Airlines
• Lufthansa Group
• No 3rd Runway Coalition
• Richmond Heathrow Campaign
• Star Alliance
• Transport for London
• United Airlines
• Virgin
  
  • Appendix 1 – CEPA Response to CAA H7 Initial Proposals – Cost of Capital
  • Appendix 2 – Review of CEPA Taylor Airey review of H7 Opex and Commercial Revenues

Responses to CAP2265 2022 Charges 

• ABTA
• Aegean Airlines
• Air France
• Airlines for America
• Airlines UK
• American Airlines
• AOC LACC
• Avianca
• British Airways
• Heathrow Airport
• IAG
• IC Advisory
• Logan Air and LHR Charges 2022 Spreadsheet
• Lot Polish Airlines
• Lufthansa
• Consumer response
• Star Alliance
• United Airlines
• Virgin Atlantic