Review moves BAA closer to break-up

BAA's common ownership of seven UK airports "may not be serving well the interests of either airlines or passengers", a Competition Commission report says today.

The CC's view came in an "emerging thinking" document ahead of its provisional and then final report into BAA and UK airports.

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BAA's seven airports include Heathrow where both BAA and British Airways have come under fire for the shambolic opening of Terminal 5.

The Competition Commission said no conclusions had been reached at this stage but that it expected to publish its provisional findings in August and "if competition problems are identified, it intends to set out its possible remedies at the same time, whether requiring the sale of one or more of BAA's airports or otherwise".

It has been suggested that Spanish-owned BAA could sell Gatwick airport. Its other UK airports are Stansted, Southampton, Edinburgh, Glasgow and Aberdeen.

Christopher Clarke, who is chairing the CC's BAA inquiry, said today: "BAA dominates the airports markets in the south east of England and in lowland Scotland, both areas of high economic activity and importance.

"Currently, there is no competition between BAA's three London airports (Heathrow, Gatwick and Stansted) and only very limited competition from non-BAA airports (including London City and Luton).

"Similarly, there is no competition between their two airports in lowland Scotland (Edinburgh and Glasgow) although Glasgow does face competition from one non-BAA airport (Prestwick).

"One of the principal reasons for structuring the privatised BAA in 1987 to include all three major London airports was to provide adequate airport capacity in the South-East of England. Currently there is a shortage of capacity, notably runway capacity, to meet current and expected future demand.

"Even if the proposed expansion at both Stansted and Heathrow goes ahead within the expected timescales, this shortage will remain until at least 2015 and probably longer as a new runway at Heathrow could not be built until 2020."

Mr Clarke said:

* We are particularly concerned by BAA's apparent lack of responsiveness to the differing needs of its customers and hence passengers

* There is also concern about other aspects of BAA's conduct such as its approach to the system of planning airport development which may be related to ownership of several neighbouring airports

* The system of economic regulation and the way it is conducted by the Civil Aviation (CAA) may adversely affect competition

* It may be that the CAA's "light touch" approach to economic regulation impacts on the levels, quality, scope and timing of BAA's investment as well as on the levels and quality of service, thereby impacting competition

* There is potential for competition at all BAA's airports and separate ownership would itself create a greater incentive to expand capacity at the three (London) airports (Heathrow, Gatwick and Stansted).

The document said: "The CC is inclined to the view that common ownership of the BAA airports is a feature of the market that adversely affects competition between airports and/or airlines.

"It is also inclined to the view that shortage of airport capacity, government policy and the regulatory system for airports might also be features that adversely affect competition or exacerbate other features which do so."

The CC said it was currently inclined to the view that:

* There is potential for competition between Edinburgh and Glasgow airports, hence common ownership adversely affects competition between them, although it is currently less clear to us whether there is a competition problem deriving from BAA's common ownership of Aberdeen together with its other airports.

* There is a real possibility of competition between the BAA London airports given the willingness of passengers to switch between them, although the scope for that competition is also restricted in the short term by capacity constraints. Common ownership therefore adversely effects competition between them.

* We also currently see the potential for competition from Heathrow and Gatwick to Southampton, if not vice versa; hence competition problems also derive from BAA's ownership of Southampton.

* The capacity constraints adversely affect competition; but nonetheless may well result from aspects of planning restrictions and of government policy which may well also therefore adversely affect competition, and from the way BAA has conducted its business taking account of planning considerations.

* The regulatory system applied to the BAA London airports and/or the way it operates may also reinforce or exacerbate other features which adversely affect competition; but BAA's own ownership of the designated airports in turn exacerbates the inadequacies of the regulatory system, reducing the benefit of regulation.

* The CC also expresses concern that BAA has a financial structure with a dependence on a single group parent balance sheet that could constrain the ability of the airports adequately to invest or maintain service standards.

The commission added that it would now consider responses to this document and hold further hearings during the summer with a view to publishing its provisional findings report in August.

A final report is expected by the end of the year.

The CC report said: "Our current view is that, at the South East airports, BAA currently shows a lack of responsiveness to the interests of airlines and other users that we would not expect to see of a business competing in a well-functioning market."

It added that in a table based on passengers' perception of quality of service at 101 international airports in 2007, Heathrow ranked 90th, Gatwick 75th and Stansted 74th.

The CC said rankings were "particularly poor" for security queue waiting times, with Stansted 98th, Heathrow 97th and Gatwick 93rd.

The report said British Airways had told the commission that almost all aspects of quality of service at Heathrow "were affected by the chronic congestion resulting from BAA's failure to invest in runway capacity".

The commission added: "We have seen evidence that BAA has responded to its quality of service problem largely by increasing costs and passing on these increased costs to the airlines, rather than, for example, by improving efficiency."

Commenting on the report today, Paul Charles, director of communications at Virgin Atlantic Airways, said: "It seems the Competition Commission have seen the light. They support the views of every airline and every passenger, that there is no competition at our major airports.

"We now need to see a roadmap laid out for changing their ownership structure and tightening the regulation of BAA."

Baroness Jo Valentine, chief executive of the business group London First, said: "The commission has today acknowledged that 1980s-designed airport regulation isn't working. In adjudicating the relationship between airport operator and airline, regulation has left the passenger on the tarmac. Passenger-centred regulation is the 21st century solution."

The chief executive of BAA, Colin Matthews, accepted that performance needed to improve, particularly at Heathrow.

"We are quite clear - and that's why we restructured the company yesterday - that we must have performance improvements," he said on BBC Radio 4's Today programme.

He added: "The opening of T5 was really a bitterly disappointing moment."

However, Mr Matthews stressed that there had been "difficult circumstances" at the London hub, and it could not be assessed in the same way as smaller UK airports.

"I think that we need to bear in mind that Heathrow is a pretty special case. Recently an American airline paid, I think, £100m for two pairs of slots at that airport.

"So while we debate regulation matters and competition matters I think it is important to realise that the nation's hub is not the same as the other airports, and I think we need to have a particular focus on that."