Policy paper

Heathrow north-west runway economic regulation: financing and affordability explanatory briefing

Published 21 June 2018

Proposed Airports National Policy Statement

The proposed Airports National Policy Statement (NPS) states an applicant should demonstrate in its application for development consent that: “its scheme is cost-efficient, sustainable and seeks to minimise costs to airlines, passengers and freight owners over its lifetime”. This will be considered by the examining authority.

The proposed Airports NPS clarifies the roles of the planning and regulatory systems. These 2 systems are independent but do nevertheless interact. As the economic regulator of Heathrow Airport, the Civil Aviation Authority (CAA) will assess the efficiency of the final scheme to determine whether the costs can be passed on to airlines through airport charges. The CAA is also a statutory consultee for proposed applications relating to airports — and is expected to assist the examining authority by saying whether it sees any impediments to an applicant’s proposals.

The CAA has the ability to inform the planning process but is not bound by it (which is why the NPS does not set a cap on the charges paid by consumer using the airport), nor does it directly determine the outcome of the planning process because the ultimate decision-maker is the Secretary of State.

Economic Regulation at Heathrow Airport

Heathrow Airport is subject to economic regulation by the CAA because it was assessed to have significant market power, which is not sufficiently addressed by other consumer law.

The CAA’s primary duty is to further the interest of current and future consumers (passengers and cargo owners) through which it considers all of its regulatory duties which includes setting the amount Heathrow can charge airlines to use the airport. The CAA ensures that only expenditure that is efficiently incurred by Heathrow is recovered in the form of airport charges ^{[footnote 1]}.

In 2016, the Secretary of State set out a clear expectation for industry to work together to develop plans for expansion that keep airport charges close to current levels. Since 2016, Heathrow has announced that it has identified potential cost savings of up to £2.5 billion (compared to the scheme assessed by the Airports Commission) through engagement with airlines under the oversight of the CAA.

The CAA has set out in its April 2018 consultation that there are credible scenarios in which capacity expansion can be financed and delivered affordably, with airport charges per passenger remaining close to current levels in real terms and line with the ambition expressed by the Secretary of State on these matters in 2016.

The Secretary of State has recently asked the CAA to continue to oversee engagement between Heathrow and airlines on proposals for expansion with a view to identifying further savings and developing a cost efficient scheme design. This new commission will make sure the consumer is at the heart of plans for expansion, engage all airlines and drive value for money through industry leading benchmarking.

It is important to note that there is a difference between airport charges and the fares that are actually paid by passengers which are set by airlines taking a wide range of factors into account. The Airports Commission found that fares paid by passengers were likely to remain level or fall (even after an increase in airport charges) when compared with fares without expansion due to the benefits of lifting capacity constraints.

Financeability and affordability

There is a link between Heathrow’s ability to finance expansion and the level of airport charges that the CAA allows it to charge its consumers.

The CAA will consider its statutory duty alongside the Secretary of State’s ambition on airport charges. The CAA has also set out a clear position that if a small increase in charges were required to enable financing - and, consequently, unlock the wider benefits of expansion — then this could be in the interest of the consumer. It would not be sensible to tie the hands of the CAA through the imposition of an arbitrary cap on airport charges.

The government and its advisers have conducted considerable assurance work on the financial viability of Heathrow’s scheme. Given the transformative nature of the scheme, there will inevitably be risks and challenges that need to be addressed as the scheme design and regulatory framework are developed. The government has concluded that, so far as can be assessed at this early stage of the process, and assuming current market conditions, Heathrow is in principle able to privately finance expansion without government support.

1. The CAA sets a maximum level of airport charge at Heathrow. This is currently around £21 per passenger, and has fallen by nearly £2 per passenger in real terms since 2014. ↩