Evaluation of the 2009 Competition Commission's BAA airports market investigation remedies Final Report for the Competition and Markets Authority (CMA) 16 May 2016 This page is intentionally blank Evaluation of the 2009 Competition Commission's BAA airports market investigation remedies Evaluation of the 2009 Competition Commission's BAA airports market investigation remedies Final Report for the Competition and Markets Authority (CMA) A report submitted by ICF Consulting Services Date: 16 May 2016 Job Number J30300693 Joe Sunderland ICF Consulting Services Limited Watling House 33 Cannon Street London EC4M 5SB T +44 (0)20 3096 4800 F +44 (0)20 3368 6960 www.icfi.com Evaluation of the 2009 Competition Commission's BAA airports market investigation remedies Document Control Document Title Evaluation of the 2009 Competition Commission's BAA airports market investigation remedies Job No. J30300693 Prepared by Ben Smithers, Melanie Dubuis, Andy White, Mate Vincze, Meagan Andrews, Helene Beaujet Checked by Joe Sunderland Date 16 May 2016 This report is the copyright of Competition and Markets Authority (CMA) and has been prepared by ICF Consulting Ltd under contract to Competition and Markets Authority (CMA). The contents of this report may not be reproduced in whole or in part, nor passed to any other organisation or person without the specific prior written permission of Competition and Markets Authority (CMA). ICF has used reasonable skill and care in checking the accuracy and completeness of information supplied by the client or third parties in the course of this project under which the report was produced. ICF is however unable to warrant either the accuracy or completeness of such information supplied by the client or third parties, nor that it is fit for any purpose. ICF does not accept responsibility for any legal, commercial or other consequences that may arise directly or indirectly as a result of the use by ICF of inaccurate or incomplete information supplied by the client or third parties in the course of this project or its inclusion in this project or its inclusion in this report. Final Report - 16 May 2016 i Evaluation of the 2009 Competition Commission's BAA airports market investigation remedies Contents Executive summary ............................................................................................................ i Objectives of this study ..............................................................................................................................i Methodology ..............................................................................................................................................i Findings .................................................................................................................................................... ii Overall Impact ......................................................................................................................................... iv 1 Introduction 1 1.1 Objectives of the study ............................................................................................................. 1 1.2 The study’s conceptual framework .......................................................................................... 1 1.3 The study method .................................................................................................................... 3 1.4 Structure of this report .............................................................................................................. 4 2 Background and context 5 2.1 Overview of the UK aviation sector .......................................................................................... 5 2.2 Competition in the market for airport services ......................................................................... 5 2.3 OFT and CC findings in relation to the market for airport services .......................................... 9 2.4 Key trends and wider considerations with respect to the airports market ............................. 14 3 Impacts of the divestment of Gatwick, Stansted and Edinburgh 20 3.1 Competition for passenger throughput................................................................................... 20 3.2 Route development ................................................................................................................ 31 3.3 Passenger and airline switching ............................................................................................ 38 3.4 Service quality ........................................................................................................................ 42 3.5 Airport charges ....................................................................................................................... 51 3.6 Airports’ efficiency .................................................................................................................. 56 4 Impact of the CC’s other remedies 63 4.1 Impact of Aberdeen Airport’s undertakings ............................................................................ 63 4.2 Impact of the CC’s recommendations on Government policy and the economic regulation of airports ............................................................................................................................... 68 4.3 Quantitative evidence with respect to Heathrow Airport ........................................................ 72 5 Summary of impacts and conclusions 76 5.1 Impacts of the CC’s divestment remedies ............................................................................. 76 5.2 Impacts of the CC’s other remedies ....................................................................................... 80 5.3 Conclusions ............................................................................................................................ 80 Annex 1 Selection of indicators for quantitative analysis ....................................... 82 Annex 2 Full summary of data sources reviewed ................................................... 86 Annex 3 Additional service-quality data ................................................................ 93 Annex 4 Methodology for econometric analysis .................................................... 99 Annex 5 Bibliography ........................................................................................... 137 Final Report - 16 May 2016 ii Evaluation of the 2009 Competition Commission's BAA airports market investigation Executive summary This study evaluated the Competition Commission’s (CC) remedies applied to the airport services market. In 2006, the Office of Fair Trading (OFT) undertook a market study, which led to the CC investigating the supply of airport services by BAA within the UK. The CC concluded in 2009 that a number of features of the UK airports market gave rise to an adverse effect on competition. Its key findings relevant to this evaluation were that: ■ common ownership prevented competition between BAA airports, restricted or distorted competition in relation to capacity development at BAA’s London airports and exacerbated inadequacies in economic regulation in relation to BAA’s London airports; ■ Heathrow Airport’s position as the only significant hub airport in the South-East was in itself a feature that restricted competition between airports; and ■ the comparatively isolated geographical location of Aberdeen airport relative to other centres of population was a barrier to entry, which restricted competition. As a result of the CC’s investigation and its recommended remedies for addressing the market features which give rise to these adverse effects on competition, three airports were sold, one became subject to new regulation and changes were made to regulation of the sector. Objectives of this study The Competition and Markets Authority (CMA) is required by the Department for Business Innovation and Skills (BIS) to report annually on independent evaluations of the impact of at least two previous cases, to include one market study or investigation. In 2015, the CMA selected the CC’s 2009 market investigation for evaluation, which led to this study. The core objective of this study was to understand the effects of the CC’s remedies for the UK airports market and to estimate consumer benefits, with a particular focus on airports that were directly affected by the remedies. The remedies considered were: ■ divestiture of both Stansted Airport and Gatwick Airport to different purchasers; ■ divestiture of either Edinburgh Airport or Glasgow Airport; ■ recommendations in relation to economic regulation if airports; and ■ undertakings in relation to Aberdeen Airport, to require the reporting of relevant information and consultation with stakeholders on capital expenditure. In addition, consultation procedures and provisions on quality of service at Heathrow Airport were updated, but these were temporary measures, so were not considered in this evaluation. Methodology This evaluation was based on a conceptual framework that developed hypotheses regarding the anticipated impacts of the CC’s remedies, drawing on the CC’s market investigation. These hypotheses were then tested by gathering and analysing data and other evidence to conclude on whether and to what extent the anticipated impacts were realised in practice. The study combined evidence from a range of sources to provide a comprehensive evaluation of the effect of the remedies. The evidence base included data and