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BAA airports market investigation

COMPETITION COMMISSION News Release (12/08) issued by The Government News Network on 22 April 2008

CC sees potential for competition at all BAA airports in England and Scotland and calls for further evidence

BAA's common ownership of seven airports in the UK may not be serving well the interests of either airlines or passengers, the Competition Commission (CC) has suggested in its interim report on its investigation into the market for the supply of airport services by BAA in the UK.

The report on its 'emerging thinking' sets out the CC's current view on
competition in the relevant UK airports markets on the basis of the evidence to date, identifies areas where it is seeking further evidence and outlines its next steps.

No conclusions have been reached at this stage but the CC expects to publish its provisional findings in August and if competition problems are identified, it intends to set out its possible remedies at the same time, whether requiring the sale of one or more of BAA's airports or otherwise.
The full emerging thinking document is available on the CC website at http://www.competition-commission.org.uk. A number of working papers addressing some of the issues in the document in greater detail will be published shortly.

Christopher Clarke, Chairman of the BAA Airports inquiry, said:
BAA dominates the airports markets in the South-East of England and in lowland Scotland, both areas of high economic activity and importance. Currently, there is no competition between BAA's three London airports (Heathrow, Gatwick and Stansted) and only very limited competition from non-BAA airports (including London City and Luton). Similarly, there is no competition between their two airports in lowland Scotland (Edinburgh and Glasgow) although Glasgow does face competition from one non-BAA airport (Prestwick).

One of the principal reasons for structuring the privatized BAA in 1987 to include all three major London airports was to provide adequate airport capacity in the South-East of England. Currently there is a shortage of capacity, notably runway capacity, to meet current and expected future demand. Even if the proposed expansion at both Stansted and Heathrow goes ahead within the expected timescales, this shortage will remain until at least 2015 and probably longer as a new runway at Heathrow could not be built until 2020.

It has long been argued by BAA and others that competition cannot develop between BAA's London airports until the shortage of capacity has been alleviated. However, two of the questions we will be seeking to answer at the next stage are whether and to what extent the shortage of capacity is a consequence of the lack of competition between these airports and also whether alleviation of that shortage can reasonably be expected in the absence of competition.

There are no similar capacity constraints at any of BAA's other four airports at Edinburgh, Glasgow, Aberdeen and Southampton.

Particular features which we have identified as potentially limiting competition include the common ownership by BAA of each of its seven airports and the way it conducts its business. We are particularly concerned by its apparent lack of responsiveness to the differing needs of its airline customers, and hence passengers, and the consequences for the levels, quality, scope, location and timing of investment and levels and quality of service.

We are also concerned about other aspects of BAA's conduct such as its approach to the system of planning airport development which may, in part at least, be related to ownership of several neighbouring airports. Over many years, BAA seems to have taken a sequential approach to development, notably at its London airports, and been prepared to limit development at one airport to concentrate on development elsewhere. While it has successfully undertaken a significant number of smaller projects simultaneously, it seems largely to have limited itself to one major project at a time, for example Terminal 5. The planning system itself is an inherent constraint on at least the timing of airport development, but airport operators are not unique in having to comply and function within it. There are other long-term infrastructure businesses, such those engaged in utilities and energy projects and property development which operate successfully within similar constraints.

There are, however, other features which appear to limit the scope for competition, including aspects of government policy. While the 2003 White Paper provided a much-needed policy framework for airport development, there are certain elements which may have the unintended consequence of introducing constraints which reduce competition.

In particular, by supporting the specific location and timing of additional runway capacity at Stansted and Heathrow, and also by stating that it would not support the development of a new runway at Gatwick before 2019 unless there was demonstrably no alternative way forward, it may have introduced at least two constraints. First, against the background of uncertainty over at least the timing of expansion at both Stansted and Heathrow, it arguably raises the risks of delay to much-needed new capacity becoming available in the South-East on a timely basis. Second, it may make it more difficult for other projects which have not received explicit government support in the White Paper to obtain planning consent even though they can be expected to be considered on their merits.

We are also concerned that the system of economic regulation and the way it is conducted by the CAA may adversely affect competition though it is not yet clear to us whether it is a feature in itself or whether it facilitates or exacerbates other features of the airport services market which themselves limit competition. We recognize that the legal framework for the economic regulation of airports differs significantly from those in other regulated sectors. In setting a five-year price cap, the CAA is obliged to further the reasonable interests of airport users and to promote the efficient operation of airports; however, it has only limited powers to intervene in an airport's business between price caps. Also BAA is not subject to a licence and there are no provisions to ring-fence the assets of any airport or for a special administration regime in the event that BAA were to get into financial difficulties. However, it may also be that the CAA's 'light touch' approach to economic regulation impacts on the levels, quality, scope and timing of BAA's investment as well as on the levels and quality of service, thereby impacting competition.

Overall, our current view is that there is potential for competition at all BAA's airports. Under separate ownership there would be potential for competition between Edinburgh and Glasgow, and between Aberdeen and the other two BAA airports in Scotland, although the evidence on Aberdeen is less strong. We therefore need to consider further the scope for potential competition between Aberdeen and either of the other two airports.

On the south-east airports, there is a very real prospect of competition between the three London airports, and from the BAA London airports to Southampton subject to capacity constraints and regulation. Given the current shortage of capacity, competition in the short term between the London airports, were they separately owned, is unlikely, at least in the near future, to be as intense or effective as competition between regional airports at least for some airlines; but nonetheless there is scope for a degree of competition between them despite capacity constraints. But separate ownership would itself create a greater incentive to expand capacity at the three airports.

While we are purposely setting out our current thinking in some detail, we have reached no conclusions. By being as explicit as possible at this stage, however, we are providing all interested parties with the opportunity to respond and provide further evidence which we will consider before we reach our provisional findings in the late summer. It is quite possible, therefore, that our lines of argument set out in today's report may change between now and then.

The main points in the document are as follows.

The CC is inclined to the view that common ownership of the BAA airports is a feature of the market that adversely affects competition between airports and/or airlines. It is also inclined to the view that shortage of airport capacity, government policy and the regulatory system for airports might also be features that adversely affect competition or exacerbate other features which do so.

The CC has considered each of BAA's airports individually and it is currently inclined to the view that:

(a) There is potential for competition between Edinburgh and Glasgow airports, hence common ownership adversely affects competition between them, although it is currently less clear to us whether there is a competition problem deriving from BAA's common ownership of Aberdeen together with its other airports.

(b) There is a real possibility of competition between the BAA London airports given the willingness of passengers to switch between them, although the scope for that competition is also restricted in the short term by capacity constraints. Common ownership therefore adversely effects competition between them. We also currently see the potential for competition from Heathrow and Gatwick to Southampton, if not vice versa; hence competition problems also derive from BAA's ownership of Southampton.

(c) The capacity constraints adversely affect competition; but nonetheless may well result from aspects of planning restrictions and of government policy which may well also therefore adversely affect competition, and from the way BAA has conducted its business taking account of planning considerations.

(d) The regulatory system applied to the BAA London airports and/or the way it operates may also reinforce or exacerbate other features which adversely affect competition; but BAA's own ownership of the designated airports in turn exacerbates the inadequacies of the regulatory system, reducing the benefit of regulation.

The CC also expresses concern that BAA has a financial structure with a dependence on a single group parent balance sheet that could constrain the ability of the airports adequately to invest or maintain service standards.

The CC will now consider responses to this document and hold further hearings during the summer with a view to publishing its provisional findings report in August.

The CC would like to hear views on the issues statement from all interested parties, in writing, by 30 May 2008. To submit evidence, please email airports@cc.gsi.gov.uk or write to:

The Inquiry Secretary (Airports market inquiry)
Competition Commission
Victoria House
Southampton Row
LONDON
WC1B 4AD

Notes for editors

1. The CC is an independent public body, which carries out investigations into mergers, markets and the regulated industries.

2. The Office of Fair Trading (OFT) made the reference to the CC on 29 March 2007. The CC is now determining whether there are any features of the market that prevent, restrict or distort competition and, if so, what remedial action might be taken. When the OFT referred the BAA airports to the CC for investigation, it identified potential adverse effects on competition relating to a combination of features: joint ownership of airports (with very high regional market shares), regulation, development restrictions and capacity constraints

3. The members of the Airports inquiry group are Christopher Clarke (Group Chairman and CC Deputy Chairman), Laura Carstensen, Dr John Collings, Professor Jonathan Haskel, Richard Holroyd and Professor Peter Moizer.

4. In 2006 BAA was acquired by Airport Development and Investment Ltd (ADI), a wholly-owned subsidiary of FGP Topco Ltd, in which Grupo Ferrovial, SA (Ferrovial) has a holding of 61.06 per cent [of the ordinary shares]. The other two shareholders in FGP Topco Ltd are Airport Infrastructure Fund LP (28.94 per cent), which is managed by Caisse de depot et placement du Quebec and Baker Street Investment Pte Ltd (10 per cent), a subsidiary of GIC Special Investments Pte Ltd. In the UK, Ferrovial owns Belfast City Airport, which is not subject to this reference by the OFT.

5. Under the Enterprise Act 2002 the OFT can make a market investigation reference to the CC if it has reasonable grounds for suspecting that competition is not working effectively in that market.