The CAA is recommending that the owner of the three airports, BAA, limit increases in landing charges levied on airlines to inflation less 3 percentage points from 1997 to 2002. The formula is based on Heathrow Terminal 5 being given the go-ahead once the current public inquiry is complete.
The CAA's recommendations followed a six-month inquiry by the Monopolies and Mergers Commission, which also concluded that there was no case for breaking up BAA's monopoly over the three south-east airports on public interest grounds.
The new formula will reduce the landing charge per passenger at Heathrow from pounds 4.64 to pounds 4.02 over the next five years and represents a further softening of the price curbs on BAA's monopoly over airports in the south- east.
Under the existing five-year price control formula, which ends in April next year, the increase in charges has been capped at RPI-4. The charges account for 28 per cent of BAA's pounds 1.25bn revenues.
However the CAA has also recommended that BAA be allowed to raise its charges by 15 per cent over the two years from 1991-2001 to recover pounds 55m of revenue that could disappear if intra-EU duty-free sales are abolished.
In a market dragged sharply lower by fears of a Wall Street crash BAA shares were the star performer, rising 15p to 493p as the City gave the thumbs up to the new pricing proposals.
However, Sir John Egan, BAA's chief executive, said the new formula, which is in line with the recommendations of the Monopolies and Mergers Commission, was "clearly very challenging".
He said that BAA had asked to be allowed to raise its charges annually in line with inflation and recoup all the duty-free profits it stands to lose if the concession is abolished in 1999.
"It is less than we asked for and could have implications not just for BAA but for our customers, both airlines and passengers, and also our suppliers, not least because of the difficulties it poses for our construction programme."
The view among City analysts, however, was that the new formula would not jeopardise BAA's pounds 4.4bn investment programme over the next 10 years, the centre-piece of which is Heathrow's Terminal 5.
There will now be a one-month public consultation period, with the CAA announcing its final decision at the end of October or early November.
Airlines that gave evidence to the MMC overwhelmingly backed BAA's call that it should be allowed a price control formula that enabled it to fund major investments such as T5.
But local authorities and local resident groups wanted wider environmental issues to be considered.