Britain's Competition and Markets Authority (CMA) has announced it is considering whether to grant permission to British Airways, Virgin Atlantic, Delta Air Lines, and London Heathrow to appeal against a ruling by the UK Civil Aviation Authority (UK CAA) to cap Heathrow's airport charges for 2023.

The regulator decided in March that Heathrow's 2023 charges would remain fixed at a maximum price per passenger of GBP31.57 (USD37.4). The average maximum price per passenger would then fall by about 20% to GBP25.43 (USD30.19) per passenger in 2024 and would remain broadly flat at that level until the end of 2026. The decision covers a five-year period that started in January 2022 and ends in December 2026. The modifications will take retrospective effect on May 1, 2023.

The decision, legally referred to as the "H7 Final Decision on the Economic Regulation of Heathrow Airport Limited (CAP2524)" - has drawn strong criticism from airlines who want a steeper cut, while the airport says it makes no sense and will not benefit consumers.

According to a notice published by the CMA on April 20, the four parties filed on April 17 and 18 for permission to appeal the regulator's decision. The statutory deadline for CAA submissions on whether permissions to appeal should be granted is May 2, 2023. The CMA will then decide on whether or not to grant permission to appeal by May 16. Should permission be granted, applications to intervene must be submitted by May 22. The CMA must take a final decision by August 22. The CMA may extend the appeal period by not more than eight weeks to October 17, 2023.

In its permission for appeal, British Airways argued it would be materially affected by the regulator's decision as it would result in "a further GBP513 million pounds (USD638 million) in passenger charges, an increase to the weighted average cost of capital of GBP720 million (USD895 million), and a GBP300 million (USD373 million) increase to the regulatory asset base (RAB)". "Cumulatively, the materiality of these errors is around GBP1.5 billion (USD1.9 billion)," the airline said. British Airways warned about the potentially harmful impact on consumers and the airline and the potential impact on future price controls. It further contended that the CAA used an outdated and inaccurate model provided by Heathrow Airport in making passenger forecasts. This resulted in the maximum allowed yield per passenger (i.e. the passenger charge) being set too high, contrary to consumer interests, it charged.

In almost identical appeals, Virgin Atlantic and Delta similarly argued that the CAA erred in setting the passenger forecast used to calculate the H7 price control, in calculating the average weighted cost of capital, and when it made an ad hoc upward adjustment of GBP300 million to the regulatory asset base (RAB) of Heathrow. Virgin Atlantic argued the RAB adjustment "creates a significant and lasting distortion to airport charges and unreasonably benefits Heathrow's investors at consumers' expense".

Virgin Atlantic said the CAA calculations did not consider the strong travel recovery since the pandemic. "The CAA decision contained multiple errors of fact and judgment, including pessimistic passenger forecasts that ignore the strength of recovering demand," a Virgin spokesperson told Reuters. "The CAA did not go far enough in its final determination, resulting in excessive Heathrow charges that expose a fundamentally broken regulatory framework," the airline added.

The three airlines have asked that their appeals be considered together.

For its part, Heathrow seeks to appeal the following aspects of the CAA's decision:

  • The Covid-19-related GBP300 million RAB adjustment which Heathrow says was too low. The airport says it lost GBP3.8 billion (USD4.7 billion) in 2020/21 due to the pandemic and consequently seeks an adjustment of GBP2.225 billion (USD2,767 billion);
  • The CAA's estimate of the cost of equity was too low;
  • The CAA's estimate of Heathrow's embedded debt was unreasonably low and failed to provide the airport with an appropriate allowance to service that debt;
  • The CAA was wrong to introduce an additional correction factor in the H7 decision to claw back what it described as "windfall gains" in 2020 and 2021, which in fact, were marked by catastrophic losses for Heathrow.

The CAA's decision allows for a GBP3.6 billion (USD4.2 billion) capital investment programme at Heathrow, including more modern security scanners and a new baggage system in Terminal 2, which are collectively expected to cost around GBP1.3 billion (USD1.5 billion).

By way of background, Heathrow explained that close to GBP1 billion (USD1.2 billion) in maintenance and capital expenditure was delayed due to the pandemic. "It is critical that this missed investment is now caught up." Improvements needed included replacing the 50-year-old Terminal 2 luggage system, new security scanners as mandated by the UK government, and upgrading Heathrow's 1960s-designed cargo area. While work on the airport expansion was paused for now, this would also be a critical investment area in future, it said.

"We believe the CAA has once again focused on driving down charges to airlines, which will not be passed on to passengers, and is undermining the investment needed to deliver the airport service and resilience consumers want," Heathrow said in a statement.

The airport is owned by the Spanish group Ferrovial FER.MC, the Qatar Investment Authority, and other financial investors.