Airlines will have to pay substantially more in landing fees at the UK's two busiest airports over the next five years, it was announced today.
The Civil Aviation Authority (CAA) said airport operator BAA could increase charges at Heathrow in 2008/09 by 23.5 per cent compared with the charges over the last five years.
The increase at Gatwick will be 21 per cent, with fares likely to rise for air passengers as a result of the new price regime.
At Heathrow the charges will be allowed to rise by no more than 7.5 per cent a year above the retail price index inflation for the period from April 2009 to the end of March 2013, while the Gatwick annual rise will be no more than inflation plus
2.0 per cent a year.
The CAA also ruled that BAA's rate of return on its investments should be no more than 6.2 per cent at Heathrow and no more than 6.5 per cent at Gatwick.
This compared with a figure of 7.75 per cent for both airports that BAA had requested.
The landing charge fees are higher than those proposed by the CAA last November. The CAA cited the additional investment at Heathrow and the additional airport security now needed as reasons for the higher charges.
The CAA said its new price controls provided for "shorter security queuing times, enhanced levels of service across the airports (such as more reliable equipment and cleaner terminals), and greater and more immediate information to passengers from BAA (including displayed in the terminals themselves) of how it is performing against the standards it has been set".
The CAA added that there would be stronger incentives on each airport in the coming five-year period to deliver higher and consistent service quality and improved infrastructure.
For example, a broader range of services will be subject to financial incentives, with enhanced targets most notably for passenger security processing, which should deliver a quicker and more reliable experience for passengers - queues less than five minutes for 95 per cent of the whole day.
Dr Harry Bush, the CAA's economic regulation director, said: "These decisions build on the enduring themes of the CAA's previous regulatory proposals in this review. Passengers and airlines deserve better than they have been provided with at Heathrow and Gatwick in recent years.
"However, the resulting improvements in airport facilities and service standards - some £5 billion of investment over the next five years and a halving of security queuing times - have to be paid for in increased charges."
Dr Bush went on: "But airlines and passengers need to be sure that they are getting the enhanced facilities and services that they are paying for. Hence, the CAA's emphasis on greater financial incentives - with BAA being penalised a lot more if it fails service standards and earning bonuses if it exceeds them (but only if passengers in every terminal benefit)."
Responding to the CAA announcement, Spanish-owned BAA said today: "We remain committed to transforming Britain's airports, and will spend £4.8 billion in the next five years doing so.
"(Heathrow's) Terminal Five, which is officially opened later this week, will only be the start of that process.
"We believe, however, the (CAA) review does not recognise sufficiently: the scale of the task we are embarked on; the pressures of handling such large infrastructure projects; the full cost of the increased security requirements; as well as the impact of the credit market turmoil."
BAA went on: "Our intention is to effect a refinancing by which we will adopt a financial structure consistent with those successfully employed by other UK regulated businesses for a number of years."
The company said the CAA announcement enabled the company to finalise details of its refinancing.
It added that the company intended to implement the refinancing which includes a migration of existing bondholders into an investment grade, ring-fenced structure backed by the designated assets of the group (the three London airports and Heathrow Express) by the end of the second quarter of this year.
BAA went on: "Plans for the refinancing are well advanced and BAA is actively engaging with key parties including the rating agencies.
"Conscious of the existing difficulties in the capital markets, BAA is also working constructively on a bond and bank based financing which can be effected within the same investment grade securitisation structure in order to improve the chance of completing the refinancing in these challenging market conditions.
BAA confirms its intention to start a formal consultation process with leading bondholders under the auspices of the Association of British Insurers in due course and will provide a further update to bondholders at that time."