A break-up for the better?

The UK Competition Commission (CC) this week stunned the aviation world with its announcement that BAA should sell two of its three London airports, and either Edinburgh or Glasgow. This is how Christopher Clarke, chairman of the CC’s inquiry group into BAA, announced the news.

We have provisionally found that there are significant competition problems arising from BAA’s common ownership of seven UK airports (Heathrow, Gatwick, Stansted and Southampton in England, and Edinburgh, Glasgow and Aberdeen in Scotland). This is evident from a large number of factors including its lack of responsiveness to the needs of its airline customers and a lack of initiative in planning capacity. This has resulted in investment that is not tailored to the requirements of airport users and lower levels and quality of service for both airlines and passengers. We have also provisionally found that there are competition problems arising from the planning system, aspects of Government policy and the system of regulation.

Consultation time
We are now turning our attention to possible remedies and have today also published our consultation document on our proposals. Specifically, we are seeking views on which two of BAA’s three London airports should be sold and similarly which of Edinburgh or Glasgow airports should be sold. We do not expect to require the sale of either Southampton or Aberdeen airports.

The problems at Southampton would be remedied by the sale of either Heathrow or Gatwick. At Aberdeen, we are seeking views on whether there is a need for behavioural remedies or some form of regulation. Additionally, we are seeking views on the need for additional behavioural remedies or some form of enhanced regulation at Heathrow, whether or not there is a change in ownership, to address the competition problems arising from it being the only hub airport in the South-East. Having completed our consultation, we will decide on the action we will take and if appropriate, impose the necessary orders. Other remedies will be the subject of our recommendations to Government.

While we accept that constraints on runway capacity in the South-East will limit the scope for the benefits of competition in the short-term, we believe that separate owners would be more active than BAA in exploiting existing opportunities. Over time, we would expect these to increase significantly. In Scotland, where there are no similar capacity constraints, we believe separate owners of Edinburgh and Glasgow would similarly improve their offerings.

BAA has argued to us that there is no scope for competition to develop so long as there are capacity constraints. We take the opposite view; unless the market is opened up to competition, there is a serious risk that the current capacity constraints will persist, certainly for longer than in a better functioning market.

When BAA was privatized in 1987, the London airports were deliberately kept in one group to ensure the provision of adequate airport capacity to meet expected growing demand and support airline competition. Over 20 years later there is a serious shortage of capacity, particularly runway capacity, in the South-East.

Runway delay
The earliest new runway capacity will become available is 2015 at Stansted with no additional runway capacity possible at Heathrow before 2020. While we accept that Government policy and the planning regime have contributed to the lack of capacity, we have found that BAA as the owner and operator of these London airports has played a major role in not pressing for more capacity sooner and in planning terminal and runway capacity on a conservative and sequential process such that its plans for one airport have been influenced by its plans elsewhere. We accept, however, that BAA has been more successful in undertaking several smaller projects simultaneously.

In Scotland, BAA has until recently been noticeably slow to develop new routes at Glasgow and Edinburgh, whilst at Aberdeen, its investment plans are regarded as unambitious despite relatively high levels of profitability. At Southampton, it has shown a reluctance to respond to its customers’ demands.

We have also been struck by the differences in approach to both airline customers and development between BAA and owners and operators of regional airports. We have identified significant competition between several pairs of such airports with benefits which include lower charges, development of new routes and a far greater responsiveness to customers. In terms of capacity development, we note that both Manchester and London City airports have expanded successfully without explicit Government support.

Regulatory remedies
In terms of remedies, we are also seeking views on improvements to the effectiveness of the current system of regulation and the need for a review of certain aspects of Government policy. In regard to regulation, we have found that the Civil Aviation Authority (CAA) is constrained by the current statutory framework and that consideration needs to be given to bring it closer into line with those of other sectoral regulators such as energy, water and telecommunications with better defined duties, objectives and powers, including the protection of the interests of consumers, the promotion of competition and the ability to impose economic licence conditions.

There is also scope for the CAA to play a more active role in facilitating agreement between BAA and the airlines by ensuring an appropriate framework for consultation, which is currently seriously lacking. It should also be more active in ensuring agreed investment programmes are adhered to and changed only by agreement with the airlines, with the CAA being prepared to arbitrate where necessary. The aim must be a more effective system of regulation, not a more intrusive one. This work will be taken forward at the same time as the current review of regulation by the DfT.

The significant problems in the BAA airports market will not be solved overnight and changes in ownership would only be a first step in freeing up the market and providing greater scope for more flexible development. Changes to regulation may similarly be important and there could be benefits available from a less prescriptive Government policy on airport capacity development though we recognize decisions on such policies, which are wholly for Government, will be taken in a broader decision framework.

Further details - http://www.competition-commission.org.uk/
 

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