Recommendation 25

HM Government Acknowledged

The government has noted this recommendation. The CAA is independent of government in its role as economic regulator of Heathrow, through powers granted by the 2012 Civil Aviation Act. As part of that role, the CAA sets a cap on Heathrow’s airport charges per passenger, which are recovered from airlines and ultimately passengers. The cap, or ‘price control’, forms part of a wider regulatory settlement, which normally covers a period of five years. The next ‘price control’, H7, will cover the period 2022–26. Recognising the significant uncertainty about the path of aviation recovery, the CAA has already extended its timetable for implementing the new licence to ensure it has sufficient time to conduct robust analysis and consultations to support its decisions. The CAA’s Final Proposals are now expected in June 2022, with its Final Decision later in the year, for the new licence to take effect in 2023. In setting this timetable, the CAA has sought to ensure it has sufficiently robust information without unduly delaying the setting of the price control, which provides a level of certainty for all stakeholders. To prevent Heathrow unduly increasing prices to the detriment of consumers in the meantime, the CAA has introduced a ‘holding cap’ for the full 2022 year. This will be trued up or down as part of the CAA’s Final Proposals for the H7 price control. That holding cap followed a previous extension of the 2014–2019 price control for a two- year interim period to 31 December 2021, to allow it to continue work on how to adapt the regulatory framework to support the expansion of Heathrow airport. That means that there has not been a wholly ‘new’ price control since April 2014. The CAA has recognised that, even with an extended timetable for finalising its proposals, there will still be uncertainty around demand recovery. It has therefore proposed including a number of new mechanisms and approaches in the H7 licence, so that its arrangements are more robust to uncertainty and demand risk. The most significant of those is a traffic risk sharing mechanism. The CAA believes such a mechanism would further the interests of consumers by ensuring flexibility so that the CAA can set a five-year price control and smooth charges over that period; and would help prevent the prospects of future variability in passenger numbers from unduly increasing perceptions of risk and the costs Heathrow faces in financing the further investment necessary to keep the airport safe, secure and reasonably resilient (which are funded through airport charges). We expect the CAA to publish further information on this and other mechanisms in its final proposals in June 2022.