BAA airports: Evaluation of the Competition Commission’s 2009 market investigation remedies 16 May 2016 © Crown copyright 2016 You may reuse this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-government- licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Acknowledgements: This report has benefited from comments received from Eric Pels, Assistant Professor at VU University Amsterdam. Contents Page 1. Summary ............................................................................................................. 2 The 2009 market investigation and the Competition Commission’s interventions 2 Benefits identified ................................................................................................ 3 Potential unintended consequences .................................................................. 16 Costs and proportionality ................................................................................... 16 The CC’s remedies process and lessons learnt ................................................. 17 2. Introduction ........................................................................................................ 19 3. The Competition Commission’s 2009 investigation............................................ 24 Competition problems identified by the CC’s 2009 market investigation ........... 24 Interventions to address competition problems identified .................................. 27 Timing of the CC’s remedies .............................................................................. 30 Benefits expected and the role of runway capacity ............................................ 32 4. Changes in the market since the market investigation reference ....................... 37 Airports’ environment ......................................................................................... 37 Influences on market developments .................................................................. 38 Market trends for passenger numbers and service quality................................. 42 5. Impact of the Competition Commission’s remedies ........................................... 46 Outline of the section ......................................................................................... 46 Impact of remedies in the South-East ................................................................ 47 Impact of divestment remedy in Scotland .......................................................... 86 Impact of behavioural remedies in Aberdeen ..................................................... 96 6. Costs and proportionality ................................................................................. 100 Remedy implementation and monitoring costs ................................................ 100 Proportionality of remedies .............................................................................. 107 Conclusion on costs and proportionality .......................................................... 113 7. Remedies process ........................................................................................... 115 Background ...................................................................................................... 115 Transparency and investigation procedures .................................................... 115 Implementation of the divestments and divestment sequencing ...................... 118 Bidder evaluation criteria ................................................................................. 122 Involvement of the monitoring trustee .............................................................. 124 Conclusions on the CC’s remedies process and lessons learnt ...................... 127 Appendix 1: List of stakeholders Appendix 2: The CC’s 2009 market investigation Appendix 3: Regulatory frameworks: a comparison between Airports Act 1986 and the Civil Aviation Act 2012 Glossary 1 1. Summary The 2009 market investigation and the Competition Commission’s interventions 1.1 In March 2009 the Competition Commission (CC) concluded its market investigation into BAA airports and found there was ‘no competition’ between the seven UK airports owned by BAA. At that time BAA’s airports controlled 81% of London’s runway capacity and serviced 62% of UK passengers. 1.2 Having identified substantial competition problems in relation to BAA airports the CC made several interventions designed to benefit passengers and airlines (the CC remedies). The most significant CC remedy required BAA to sell three airports. As a result of this remedy Gatwick, Edinburgh and Stansted airports have been under new ownership since 2009, 2012 and 2013 respectively. Airports sold by BAA as a result of the CC remedies together served 65 million passengers in 2008 and were valued at a total £3.8 billion on divestment. The CC’s other remedies sought to address problems identified with the regulatory framework and government policy in place at the time, and the competitive position of BAA’s airport in Aberdeen. New regulation for airports, which was influenced by the CC’s recommendations, took full effect in 2014 in the form of the Civil Aviation Act 2012 (CAA12). 1.3 The purpose of this evaluation project has been to assess the initial impact of the CC’s interventions and identify any lessons we can learn from the CC’s remedies development and implementation process. Our research methodology incorporated qualitative evidence gathered from a range of stakeholders from across the industry, together with desk research and a quantitative assessment of consumer benefits to date, undertaken by independent consultants, ICF International (ICF). 1.4 Our evaluation covers a period during which, in addition to the CC remedies, many wider developments have taken place across the aviation sector. These include (i) the global financial crisis and the unusually turbulent subsequent economic climate, (ii) the longer term effects of ‘open skies’ agreements which deregulated airline operations during the period 1987 to 2007, (iii) airline consolidation/increased code-sharing alliances and (iv) the evolution of airline commercial models, such as the historic rise of the low-cost carriers (LCCs) including Ryanair and easyJet, and more recent convergence between LCCs and full service network carriers. 2 Benefits identified 1.5 While it is difficult to isolate with precision the full benefit across the range of the CC remedies, there is strong evidence of positive changes at divested airports. These changes result from a combination of new and separate ownership of airports and the more flexible regulatory framework now in place under CAA12. Benefits arising from the separate ownership of airports and those resulting from the new regulatory framework, which took effect alongside divestments, have interacted and reinforced each other. Stakeholders told us that many of these positive differences would not have arisen without CC intervention. Stakeholders also said that the CC’s remedies were likely to have been an important catalyst for changes at BAA’s airports not subject to divestment, including the UK’s largest airport, Heathrow. 1.6 Positive changes derive primarily from new commercial strategies at divested airports and other airports directly and indirectly affected by the divestments. As well as increased focus on passenger experience, airports’ revised strategies seek to build more productive relationships with airline customers in order to deliver benefits to passengers across key strategic and operational areas. A number of factors indicate increased competition and benefits to passengers: (a) Passenger growth: Divested airports have delivered growth in passenger numbers at measurably higher levels post-divestment than other UK airports as shown in Figure 1.1. The higher passenger numbers at Gatwick, Stansted and Edinburgh indicated by ICF’s analysis are measured after taking account of long-term trends which would otherwise explain changes in passenger numbers at airports, and factors related to the individual characteristics of airports analysed. Gatwick has increased its share of passengers travelling to and from London airports since divestment despite its capacity constraints, as has Stansted. Edinburgh’s share in lowland Scotland has also increased. The increase in passenger numbers is likely to have created benefits to consumers in the form of improved connectivity and choice. As a result of these improvements in connectivity and choice more passengers are able to fly, including some that would not otherwise have done so. These passengers benefit directly from having taken those journeys. Second, expanding supply puts downward pressure on prices for air travel all else being equal. While wider development in the airports and aviation market make it difficult to establish a definite causal link between the CC’s divestment remedies and the increase in passenger throughput, the weight and breadth of evidence clearly suggests that the CC’s intervention was the main driver of the observed changes. 3 Figure 1.1: Estimated cumulative additional passengers at divested airports since divestment (‘000) Source: ICF analysis. (b) Efficiency: Divested airports have increased the efficiency of their capital investment in facilities/services and improved their operational efficiency over time.