Publication of Competition Commission’s final report in BAA airports market investigation

06 May 2009

Katharine Annesley

On 19 March 2009, the Competition Commission (CC) published its final report in the BAA airports market investigation. The CC found that several features of the market prevent, restrict or distort competition, including the common ownership of airports in the South East and Scotland; the remedies to be imposed include divestiture by BAA Limited (BAA) of Gatwick, Stansted and either Edinburgh or Glasgow airports.

Background

The Office of Fair Trading (OFT) referred the market for the supply of airport services in the UK to the CC on 29 March 2007, requiring the CC to confine its investigation to the effects of features of that market that exist in connection with the supply of airport services by BAA. In the CC’s provisional findings and notice of possible remedies, which were published on 20 August 2008, the CC stated that it had provisionally found that there were competition problems at BAA’s UK airports, and was consulting on possible remedies, including the sale of two of BAA’s London airports, namely Stansted, Gatwick and Heathrow. Following the provisional findings, BAA announced in September 2008 that it had decided to sell Gatwick.

Final report 

The CC essentially confirmed its provisional findings, concluding in its final report that there are several features of the market which prevent, restrict or distort competition. These features include:

  • common ownership by BAA of both the London airports and Edinburgh and Glasgow, which prevents competition between them;

  • Heathrow’s position as the only significant hub airport in the South East/UK, which restricts competition between airports;

  • Aberdeen’s comparatively isolated geographical position, combined with other factors, which restricts airport competition;

  • aspects of the planning system, which act as barriers to entry and expansion;

  • aspects of government policy, which restrict or distort competition between airports; and

  • the current regulatory system for airports, which distorts competition between airlines.

In order to remedy the resulting adverse effects on competition and detrimental effects on customers, the CC’s package of remedies consists of both structural and behavioural remedies imposed on BAA, as well as recommendations to the Department for Transport (DfT). The specific remedies include:

  • divestiture of both Stansted and Gatwick to different purchasers;

  • divestiture of either Edinburgh or Glasgow;

  • strengthening of consultation procedures and provisions on quality of service at Heathrow, until a new regulatory system is introduced;

  • provision by BAA of undertakings in relation to Aberdeen, requiring the reporting of relevant information and consultation with stakeholders on capital expenditure; and

  • recommendations to DfT in relation to economic regulation of airports and air transport policy.

The CC has set out the order in which the divestments must take place; BAA is required to divest Stansted once the sale of Gatwick is complete and finally divest either Edinburgh or Glasgow.  The exact dates by which the divestitures must be completed have not been published, as the CC does not wish to prejudice an effective sales process, but the end date is less than two years from the date of the final report.  If the divestments are not complete by the end of the relevant period, or the CC has reasonable grounds to believe that a divestiture process managed by BAA will not achieve an effective divestiture in a reasonable timescale, a divestiture trustee may be appointed.

Potential for appeal 

BAA has already indicated that it may appeal the CC’s decision to the Competition Appeal Tribunal (CAT), stating that it regards the CC’s analysis to be flawed and the remedies to be impractical in the current economic climate. There have been reports in the press recently that, should BAA be forced to sell any of the three airports for less than 85% of their regulated value, this would constitute a breach of BAA’s banking covenants and could result in the company’s bankruptcy or renationalisation. The CC has noted that the divestitures will have a significant effect on BAA’s business, but it regards them as necessary to remedy the detrimental effects on competition and customers; alternative measures (such as the sale of only one of the London airports, or more effective regulation) were not regarded by the CC as sufficient.

BAA’s decision as to whether to appeal is likely to be influenced greatly by the judgment of the CAT, which recently upheld Tesco’s appeal against part of the CC’s final report and remedies in the groceries market investigation. It should be noted that when the CAT considers appeals under section 179 of the Enterprise Act 2002, it must do so on the basis of judicial review principles and may not consider further the merits of the decision. BAA would therefore need to demonstrate that the CC did not carry out its assessment in a legally correct manner; following the Tesco judgment, BAA may focus most closely on the CC’s proportionality assessment.

Source: CC Final Report, 19 March 2009