The formula caps increases in charges at the two London airports at no more than 3 percentage points below inflation, endorsing recommendations made by the Monopolies and Mergers Commission in July. Within these price controls, charges for airlines using Heathrow will go up by slightly more than those at Gatwick.
The Civil Aviation Authority also confirmed that charges at Stansted Airport, which is also operated by BAA, would be allowed to increase by 1 per cent above inflation.
Clifford Paice, the CAA's director of regulation, defended the price formula which he said would enable BAA to go ahead with plans to invest up to pounds 1.5bn in the proposed fifth terminal at Heathrow.
The CAA said it would monitor BAA's investment each year to make sure the company kept its side of the bargain and publish its annual review of the company's activities for the first time.
The news was warmly welcomed by the City, which sent BAA shares surging ahead by 14.5p to 519.5p. Analysts suggested the stock could be rerated by investment institutions. Leading transport analysts at Swiss investment banking group UBS suggested BAA should be treated as much as a retailer as a utility, implying that the share price could rise by as much as 20 per cent. Almost half the company's income now comes from retailing concessions inside its airports.
Mr Paice rejected suggestions that the price formula was too generous. "I'm quite satisfied this decision is not only what the airlines want but what the people who use the airlines want," he said.
Russell Walls, BAA's finance director, claimed the controls would be "challenging". He said: "We asked for inflation minus 0 per cent and we got inflation minus 3 per cent."
The price formula also gives BAA an additional pounds 55m to compensate for the withdrawal of the duty-free concession on travel between European Union countries planned for 1999.
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