oneworld Alliance oneworld Management Company, Inc 2 Park Avenue, Suite 1100 New York, NY 10016 USA

www.oneworld.com

Mr. Iain Osborne Group Director Regulatory Policy Civil Aviation Authority CAA House 45‐59 Kingsway London WC2B 6TE [email protected]

4 November, 2013

Dear Mr Osborne, oneworld Alliance welcomes the opportunity to respond to the Civil Aviation Authority’s (CAA) final proposals for Heathrow Airport economic regulation in the Q6 period (2014‐2019).

Introduction As the operator of the only alliance hub, the importance of the oneworld airlines to Heathrow Airport is clear. HAL must be competitive and cost‐effective in order for the airport and for oneworld members to be able to serve passengers and the UK. oneworld has consistently stressed the need for Heathrow Airport Limited (HAL) to:

• Improve the passenger experience, with a particular focus on Terminal 3 (T3); • Invest in infrastructure to make the airport, and the oneworld hub, more competitive; and • Reduce airport charges for passengers and address its operating costs.

British Airways’ response to the CAA’s final proposals and the LACC airline community response are supported by the other oneworld Alliance members. Our response focuses on the building blocks of the final proposals and our specific investment needs in Q6.

1. Airport Charges oneworld is very disappointed that the CAA’s proposals for airport charges have increased from RPI ‐ 1.3% to RPI +0%. Heathrow charges are at the top of its benchmark peer group. HAL must reduce costs, and can do so through market‐based business practices. CAA must not allow further deterioration in the position with potential airport charge increases. At a time when HAL is reporting substantial increases in earnings of 22%1 the prospect of further increases in airport charges is neither a sustainable or competitive proposition for passengers and airlines.

1 http://mediacentre.heathrowairport.com/Press‐releases/Heathrow‐SP‐Limited‐Results‐for‐the‐nine‐months‐ended‐30‐September‐2013‐ 6ce.aspx

Capital Expenditure – oneworld supports the CAA’s view of the requirement for investment and the size of the GBP 2.885bn capital expenditure outlined in the final proposals. However, we disagree with the CAA’s rationale in using the HAL Alternative Business Plan (ABP) as the basis for the capital plan as the list of projects it includes was not developed in consultation with the airline community. oneworld welcomes the introduction of core and development capital expenditure and the new Independent Fund Surveyor (IFS) role.

Operating Expenditure – There are additional opportunities for OPEX reductions in Q6, as we have stated during Constructive Engagement. HAL is already embarking on significant restructuring programmes in advance of the Q6 settlement, while refusing to acknowledge these savings as part of the Q6 cost and fee calculation. We are concerned that HAL is on track to make OPEX savings above the CAA’s target, but structuring these improvements to further benefit HAL and its shareholders at the expense of passengers and airlines.

Traffic Forecasts – Recent CAA traffic figures show that Heathrow airlines carried 71.6m passengers in the last year.2 The CAA final proposals do not show Heathrow reaching this level of traffic until 2018. It is clear to oneworld that the Q6 forecasts are artificially low and need to be revised.

Weighted Average Cost of Capital (WACC) – The CAA’s proposals for the overall WACC level uses a point outside and above the range recommended by your consultants, PWC. We must avoid a scenario where capital projects are held ransom by arguments about the level of capital expenditure that the WACC does or does not support.

Other • Service Quality Rebate scheme ‐ retention of this scheme by the CAA is supported. • Licence ‐ the CAA’s establishment of a licence for the airport operator is supported. • Governance – oneworld supports the governance proposal outlined in the LACC response.

2. oneworld investment priorities Q5 saw investment in completing T5, building T2 and redeveloping T4, and new baggage systems and connectivity between T5 and T3. The T5‐T3 hub connection, and T3 in particular, where the overwhelming majority of connecting passengers flow between the oneworld airlines, needs to reach competitive equivalence with other Heathrow terminals and other European and global airports to achieve Heathrow’s “hub of choice” vision which has informed the CAA’s final proposals. A modest level of investment in T3 is required to address capacity constraints and to improve the customer proposition.

3. CAA Initial Proposals, HAL Alternative Business Plan, and T3 The CAA’s Initial Proposals recognised the requirement to invest in T3 in Q6 in order to improve the passenger experience ahead of its final closure, forecast in the 2020’s. HAL’s ABP specified a greater level of proposed investment in T3 covering the major projects that oneworld and other airlines previously supported including:

• T3 Connections • T3 Zone B‐G Façade • T3 Arrivals Forecourt • T3 Premium Drop‐Off • T3 Departure Lounge

2 http://www.caa.co.uk/docs/80/airport_data/201308/Table_01_Size_of_UK_Airports.pdf

Page 2 of 3

oneworld supports these projects, and the completion of T3IB. T3 Connections will provide the required security capacity for the oneworld hub to offer a competitive connections experience post‐T1 closure. The other projects allow T3 airlines to improve the customer proposition and achieve a degree of competitive equivalence with the other Heathrow terminals.

As oneworld and other T3 airlines have not had substantive engagement with HAL since publication of the CAA Initial Proposals we are not fully informed on the scope and detail of these projects. Let us illustrate with just two examples of how the lack of engagement with HAL, since the CAA’s Initial Proposals, has frustrated oneworld and not benefited passengers. First, the opportunity to integrate the construction of the Zone B‐G façade with the T3IB cut‐in process has now been lost with HAL recently confirming that the façade project will be done after T3IB cut‐in, further prolonging the disruption passengers will experience in T3 during Q6. Second, the T3 Connections project planning should be further ahead than it currently is.

T3IB ‐ oneworld welcomes the exclusion of GBP 30m of T3IB costs from the RAB but is disappointed that the final proposals provide for yet another cost increase, of GBP 40m. oneworld asks the CAA to re‐ consider in light of the repeated delays and cost increases this project has already caused T3 airlines.

T3 triggers ‐ The T3 Connections project will have a trigger and oneworld would like the CAA to consider whether the other T3 projects can be triggered as a single package. The CAA Initial Proposals acknowledged oneworld’s view that improvements to the passenger experience were required and should be done early in Q6. By triggering these projects as a package oneworld believes this would facilitate HAL’s delivery of the improvements T3 needs for competitive equivalence.

T3 closure ‐ oneworld believes T3 will have a longer life expectancy than current HAL forecasts as there is reduced scope for T2 Phase 2 in Q6 and HAL has now submitted plans to the Airports Commission for a new runway. These projects would slow‐down provision of the new terminal capacity needed to fully close T3. This adds further weight to the need to make these final improvements to T3 early in Q6 in order to ensure passengers and airlines benefit fully.

Conclusion As they stand, the CAA final proposals would allow HAL to outperform the settlement and deliver a much higher return to its shareholders at the expense of passengers and airlines. oneworld believes that there is the scope to limit airport charge increases to a level below inflation and deliver the CAA’s proposed GBP 2.885bn capital programme, including the required investment in T3 to allow the oneworld hub to operate and compete effectively. At the same time it can provide an adequate return, so that all partners, airport, airlines and stakeholders, can operate profitably on a long term basis.

Sincerely,

Dennis Tierney VP Membership & Customer Experience oneworld Alliance

Page 3 of 3