BAA loses fight with airlines over increase in airport charges

Landing charges at Heathrow, Gatwick and Stansted should be subsidised by the profits BAA makes from retail activities at the three airports, the Competition Commission ruled yesterday.

The ruling is a victory for airlines but a blow for BAA, which had hoped to ring-fence its commercial airport revenues through the so-called "dual till" approach recommended by its regulator, the Civil Aviation Authority.

Under this proposal, retail revenues would have been kept separate from airport charges, resulting in increases in landing fees of £2 per passenger at Heathrow, £1 at Gatwick and £1.70 at Stansted, which is the base for three low-cost airlines.

However, airlines protested at the plans, BMI British Midland warned that they represented "the most retrograde step the airline industry has faced for many, many years". Virgin Atlantic said they would result in a 40 per cent increase in charges with no guarantee of an equivalent improvement in service from BAA.

The Competition Commission has come down on the side of the carriers. It said the change proposed by the CAA would lead to higher fares and "a substantial transfer of income to airports from airlines and/or their passengers".

The commission added that there was no evidence that the current "single till approach", whereby BAA's total revenues are pooled, has resulted in under-investment at the three airports in the South-east nor was likely to do so in the future.

BAA shares fell 6 per cent following the commission's announcement, ending 32.5p lower at 545p. Mike Hodgkinson, BAA's chief executive, said that whatever formula was ultimately chosen, landing charges would have to increase to finance the company's £8.1bn spending programme.

"The core issue in this regulatory review is the need for airport charges to rise to fund investment in new and improved airport facilities including Terminal 5," he said. "The methodology by which higher charges are achieved is a second order issue."

The commission will deliver its formal recommendations to the CAA in the autumn. Although the CAA has the power to make the final decision, in practice it is certain to accept the commission's ruling.