Regulatory changes needed to end Heathrow hell

July 24, 2009

- Rupert Darwall is a guest columnist. The views expressed are his own. A London-based strategist, he is author of Reluctant Managers, a study of Whitehall performance (KPMG, 2006) –

If April is the cruellest month, then July can be awful for people using Heathrow. Business travel is still humming and the holiday season is getting into full swing.

Even with Terminal 5, Heathrow can’t take the strain. Its two runways are used at 98.5 percent capacity and there are simply not enough gates and stands. A ten-minute delay is programmed into Heathrow’s schedule. Because there’s no spare capacity, when things go wrong, the slightest change — even in the weather — can lead to aircraft being held in stacks and flights being cancelled

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You’d have thought that the UK government’s review of the way Heathrow is regulated, consultation on which ended last month, would want to root out what causes Heathrow to be so congested, but you’d be wrong.

Although the Competition Commission believes that the way the Civil Aviation Authority (CAA) regulates Heathrow stifles competition and contributes to the airport’s poor performance, the government seems reluctant to do anything about it.

Perhaps it feels that enough is already being done by forcing BAA <FER.MC>, which owns London’s three main airports, to sell two of them. But that on its own won’t make life any easier for the millions of passengers who are forced to endure Heathrow misery each year.

Heathrow is congested because incentives in the system reward congestion. BAA is paid as a toll collector, not for delivering a punctual and reliable schedule, so it makes more money the more passengers are pushed through Heathrow’s overloaded terminals and runways.

Another perverse incentive is the way BAA’s returns are linked to the size of its regulated asset base. Because the charges it can levy on airlines are capped below market rates and linked firmly to the size of the airport’s regulatory asset base, it encourages the operator to add to its assets to the maximum extent possible, irrespective of the value for money of the new investment. Hence the incredible costs it runs up on new investments. Terminal 5 cost 5 billion pounds and the third runway and terminal 6 are projected to cost 10 billion pounds.

Rewarding BAA for building high cost capacity means the only way for airlines to contain the rise in passenger charges is by sucking in huge increases in transfer passengers to keep passenger charges within the bounds of affordability. The perceived environmental nuisance makes it much harder for Heathrow to get planning approval for new runway capacity needed to reduce congestion.

BAA can’t be blamed for responding to incentives set by the CAA and Heathrow is now better managed than under the old BAA.

Unfortunately all the signs are that the government is blowing the opportunity to get regulation right. The review has focused on the irrelevant area of the CAA’s legal duties. It did not, as the Competition Commission suggested, analyse how the CAA’s regulatory approach has caused Heathrow’s poor performance.

If Heathrow is ever going to be an efficient airport, the place to start is with regulation:
– Give BAA responsibility for defining and managing Heathrow’s current capacity
– Pay BAA for running a punctual airport and penalises it for not doing so
– Replace the incentive for BAA to bloat its investment programme with ones that are better aligned with its customers’ interests

Changing the CAA’s legal duties to put the passenger first without changing the detailed mechanics sounds nice but is a formula for gridlock. The cure for Heathrow hassle lies in a better system of regulation. It isn’t too late for the government to change tack and address the problems of London’s main airport. But if it just leaves the CAA to muddle on under the current system, Heathrow’s passengers face many more summers of misery ahead.
(Edited by David Evans)

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