Heathrow and Gatwick airports and economic regulation
Our main operating bases, Heathrow and Gatwick, are subject to economic regulation by the UK CAA. The CAA sets the maximum level of airport charges, the airport's capital investment programme and service quality standards for five-yearly periods. A new five-yearly settlement came into force on April 1, 2008. Significant benefits of the settlement include:
- Major new capital investment that would be of benefit to our business for example Terminal 5’s Satellite C, an automated transfer baggage link to Terminal 3 where our other Heathrow services and oneworld partners are due to operate, and allowance for ‘mixed mode’ use of Heathrow’s existing two runways and investment in a third;
- A major cut in the cost of capital allowance for the airports – which reduces our airport charges; and
- Raising and extending service quality standards, which benefits our operations and customer service.
But the settlement also includes a large rise in allowed airport operating costs – which adds to our airport charges.
It is unclear if this settlement will stay in place as some other airlines are considering instigating a judicial review in 2008 which may lead to changes. We will seek to protect our interests should such a review take place.
In parallel, the UK Competition Commission is holding an inquiry into the UK airports market – notably BAA’s airports in SE England and Scotland.
This inquiry is expected to issue its formal report in 2008 and must do so no later than March 2009. The report may lead to wide-ranging structural changes to the regulatory arrangements and to the ownership of airports. It may also involve a period of uncertainty during implementation if the Commission’s recommendation is contested by the parties.
We will continue to put the case for a strengthened regulatory structure (with licence requirements on the regulated airports). We will also campaign for the right regulatory or ownership structure to make sure neither prevents urgent attention being given to expanding Heathrow and transforming it into a modern and globally-competitive hub.
Heathrow operational constraints
Heathrow has no spare runway capacity and operates on the same two runways it had when it opened 60 years ago. As a result, we are vulnerable to short-term operational disruption and there is little we can do to mitigate against this. In February 2008 public consultation ended on the UK Government's conclusion that its environmental conditions on Heathrow expansion could now be satisfied and allow full utilisation of Heathrow's two runways and the construction of a short third runway to go ahead. This would create extra capacity and reduce delays, enabling Heathrow to compete more effectively against European hubs like Paris, Amsterdam and Frankfurt.
Industrial relations
We have a large unionised workforce. Collective bargaining takes place on a regular basis and a breakdown in the bargaining process could disrupt operations and adversely affect business performance. Our continued effort to reduce employment costs, through increased productivity and competitive wage awards, increases the risk in this area.
Pandemics
Epidemics, pandemics and other health risks that may occur, can adversely affect demand for air travel. For example, in the Spring of 2003, the SARS epidemic caused concerns among many travellers and resulted in a decline in demand for certain of our routes, most notably those to/from the Far East. Infectious disease experts consider that there is currently a serious risk of a global influenza pandemic.
Safety/Security incident
The safety and security of our customers and employees are fundamental values of ours. Failure to prevent a major safety or security incident could adversely impact our operations and financial performance. One of our Boeing 777 aircraft was involved in a landing accident in January 2008. Investigations by the UK AAIB are ongoing but at this stage the cause does not appear to be related to either the operation or maintenance of the aircraft.
In February 2008, public consultation ended on the UK Government’s conclusion that its environmental conditions on Heathrow expansion could now be satisfied and allow full utilisation of Heathrow’s two runways and the construction of a short third runway to go ahead.