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Strategic themes for the review of Heathrow Airport’s Charges (H7)
Industry workshop
17 March 2016
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Agenda
Time Item Lead
1:30pm - 1:40pm Welcome and introduction Stephen Gifford / Rob Toal
1:40pm - 1:55pm Overview of CAA document and Q&A
1:55pm – 2:05pm HAL’s priorities for the review Matt Greenfield, HAL
2:05pm – 2:15pm Airline priorities for the review Andrew Cunningham, AOC
2:15pm - 2:30pm Q&A of issues raised All
2:30pm - 2:45pm Coffee break
2:45pm - 3:10pm Empowering consumers discussion James Tallack
3:10pm - 3:35pm Incentivising outcomes including resilience discussion
Emanuela Michetti and Freya Whiteman
3:35pm - 3:50pm Ensuring efficiency discussion Maggie Kwok
3:50pm - 4:00pm Round up and Next steps Stephen Gifford
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Overview of CAA consultation document
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Content
Background and context
Interaction with new runway capacity Overview of Heathrow Airport Strategic Themes for H7 Constructive engagement H7 Timetable
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Background
The H7 review will consider the regulatory arrangements that should be put in place from then
New arrangements required
The current regulatory controls are due to expire on 31 December 2018
Cap due to expire
The Civil Aviation Act 12 requires us regulate if we determine that the Market Power Test (MPT) has been met
Governed by the law
In 2014 we concluded that HAL had met the MPT in relation to Heathrow Airport
Market power
In our view there has not been a material change of circumstances and a new MPD is not required
No change of circumstances
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Our approach to carrying out the review will be shaped by our duties under the Civil Aviation Act 2012
The Act gives us a single primary duty to further the
interests of users of air transport services
Users of air transport services are defined as present and future passengers
and those with a right in property carried by the service i.e. cargo owners
For simplicity we use the term 'consumers' to mean both present and future
passengers and cargo owners
The scope of our primary duty
concerns the range, availability,
continuity, cost and quality of airport
operation services
We must carry out our functions,
where appropriate, in a manner that
will promote competition in the
provision of airport operation services
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Context for the H7 review
CAA duties and objectives
Policy context
Stakeholders views
Best practice from other
sectors
Market trends H7
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If a new runaway is not built in the
South East, consumers will
suffer from higher prices, reduced
choice and lower service quality
Consumer Benefit
Government is still
developing its response to the
work of the Airports
Commission on new runway
capacity
The H7 process
has therefore been designed to
accommodate work on regulation
of new runway capacity
Government decision
Flexible process
The H7 review will need to proceed with caution given uncertainty on location of new runway capacity
Despite uncertainty it is important that interested parties engage at an early stage on the H7 process
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Overview of Heathrow Airport
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Charges have risen in the last decade in both real and nominal terms
7.9 8.6
9.4
13.5 14.4
15.1
16.8
18.4
21.6
23.2
10.5 11.0
11.6
16.0 17.1 17.1
18.1 19.3
21.9 23.2
0.00
5.00
10.00
15.00
20.00
25.00
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014 (9months)
Airport charges revenue per passenger (nominal)
Airport charges revenue per passenger (2014 prices)
Source: HAL regulatory accounts
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Heathrow’s charges to airlines are high by international standards
Source: ICF analysis with data derived from Leigh Fisher reports; CAA analysis
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Increases in charges have partly been driven by the investment programme
Source: HAL regulatory accounts
1,730
1,344
1,097
882 954 918
1,039
1,266 1,383
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14
Capital Expenditure (£m, 2014 prices)
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Passenger numbers have grown in recent years following a downturn in 08/09
Source: CAA data
67.4 67.3 67.9
65.9 66.1 66.1
70.0 70.3
72.5
73.8
60
62
64
66
68
70
72
74
76
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
Milli
ons
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Growth is forecast to continue, placing further pressure on runway capacity
Source: Airports Commission Final Report
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Strategic Themes for H7
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Following initial engagement with stakeholders, we propose to adopt 4 strategic themes to help shape the H7 review
Incentivising the right
consumer outcomes
Increasing airport
resilience
Promoting cost efficiency
and financeability
Empowering consumers
and furthering their interests
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Constructive engagement (CE)
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We would like to see a settlement
agreed with assurance that it
represents a good deal for consumers
We remain committed to CE but think the process can be improved
Experience
suggests this may be unattainable given inherent
conflicting commercial
tensions
Thus our main objective for CE is
to provide a platform for discussion
Where agreement cannot be reached parties should be able to provide informed views
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H7 timetable
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We will keep the timetable under review pending runway decisions & feedback on how best to structure CE
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Selected questions from our discussion document
How can consumer engagement be improved?
Do you agree in principle with the continued use of Constructive Engagement?
How best can we proceed with H7 given uncertainty about new runway capacity?
Should we extend the current Q6 arrangements?
Do you agree with the proposed strategic themes for H7?
Do you agree with the proposed timetable for the review?
Are there any other issues you consider material to the H7 review?
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HAL’s priorities for the review
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March 2016
H7 Strategic Themes Heathrow’s Priorities
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The current period is improving service and cutting prices
2015 Europe’s Best Airport
(over 25 million)
Best Airport in Western Europe
2015
World’s Best Airport Shopping
2010, 2011, 2012, 2013, 2014, 2015
Terminal 5 – World’s Best Airport Terminal 2012, 2013, 2014, 2015
ASQ Passenger Survey Scores
2013 3.97 (of 5)
Today 4.12 (of 5)
2018 4.20 or above
2014 £23.16
2018 £21.45
-7.4% (in real terms)
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Heathrow aims to give passengers the best airport service in the world
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Our priorities broadly align with the CAA’s
HEATHROW’S PRIORITIES FOR H7 REVIEW • Ensure regulation enables us to deliver the best airport service in the world
• i.e. regulation serves passengers, airlines and the airport – not the other way round
• Fostering investment with a predictable return
• Reducing the burden of the regulatory process to all parties
• Shift towards a more commercial relationship with airlines
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Consumer focus is the right approach for everyone
• Empowering consumers is the right thing to do, aligned with:
• Interests of passengers • Airline businesses • Heathrow’s vision and commercial
incentives • CAA’s statutory duties
• We support the creation of a credible, mutually acceptable Consumer Consultation Group
• More can be done than is being proposed – water and energy have shown that it works when done well
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Incentives for outcomes are also a positive step
• Outcomes will better represent what consumers actually want
• Lots of high quality passenger insight
exists – more is emerging with new consumer tools
• We can work together to agree a great set of consumer and airline outcomes
• e.g. FIDS vs. ease of wayfinding • e.g. ‘one size fits all’ security queue
vs. satisfaction with security journey
• Consumer Challenge Group and airlines will provide assurance that we have the right outcomes
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Increasing operational resilience is important but needs collaboration, not more regulatory intervention
• Operational resilience is critical to the success of the airport and all stakeholders
• Resilience continues to improve thanks to collaborative working on initiatives including; APOC, A-CDM, winter resilience, baggage resilience review, Demand & Capacity Cell, airspace and airfield redesign
• This should not be done through licence conditions or restrictions on airlines’ slots through a reduced movement cap
• Airspace redesign is the silver bullet and needs real CAA focus
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Cost efficiency and financeability are critical to H7 success
• We want to deliver a high quality business plan first time
• Timetable may need some adjustment to optimise the process
• Flexibility with regard to expansion is critical • Continual drive for efficiency is a given
• Important that benchmarking is timely, appropriate and accurate
• RAB / WACC model works well
• We welcome discussions on issues like debt indexation and CPI
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We support a reformed Constructive Engagement alongside an updated timeline
• CE worked well in Q6 for topics including Capex and Forecasting • Some other areas were too detailed, too long and too combative
• Desire for a more focused, higher level, shorter engagement
• Exec level kick-off and periodic review, short working periods, 3 months total duration • Upfront guidance from CAA will help form high quality initial plans • Consumers should be involved to ensure representation throughout
A revised timetable would accommodate these changes
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Airline priorities for the review Andrew Cunningham Heathrow AOC
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Heathrow Airport Price Control Review
Airline Priorities
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Service for our Passengers
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The Services That We Provide
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Much Of Our Service Is Reliant On Airports
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Constant Need For Safety And Security
Focus on Four Priorities
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For Our Passengers
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Facilities To Enable Delivery of Our Service Aspirations
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For Our Operations Within a Cost Base
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Demonstrable to Passengers and Airlines
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Joint Passenger Experience Board
Our Joint Vision Passengers to travel with their bags, on time, every time.
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Delivered Through An Optimal Mix
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Heathrow Airport Price Control Review
Airline Priorities
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Q&A on issues raised
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Agenda
Time Item Lead
1:30pm - 1:40pm Welcome and introduction Stephen Gifford / Rob Toal
1:40pm - 1:55pm Overview of CAA document and Q&A
1:55pm – 2:05pm HAL’s priorities for the review Matt Greenfield
2:05pm – 2:15pm Airline priorities for the review Andrew Cunningham, AOC
2:15pm - 2:30pm Q&A of issues raised All
2:30pm - 2:45pm Coffee break
2:45pm - 3:10pm Empowering consumers discussion James Tallack
3:10pm - 3:35pm Incentivising outcomes including resilience discussion
Emanuela Michetti and Freya Whiteman
3:35pm - 3:50pm Ensuring efficiency discussion Maggie Kwok
3:50pm - 4:00pm Round up and Next steps Stephen Gifford
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Empowering consumers James Tallack
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Key propositions
The interests of “air transport users” in H7 are best represented through effective engagement with relevant consumers to understand their needs and preferences
HAL and the Heathrow airlines are better placed than the CAA to understand consumers’ needs and preferences and generate insight – and the CAA should seek to avoid duplication of research effort
The CAA should focus on assurance – i.e. high quality consumer engagement has been carried out and the findings have been translated appropriately into HAL’s business plan
The CAA should take the final decision on price limits, but that decision should place considerable weight on views and perspectives that flow from robust and credible consumer engagement
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What might effective customer representation and engagement look like?
Informing the development of
business plans at every stage – not
just a validation tool once a plan is developed
Using reputable contractors and
taking account of current good
practice (e.g. on WTP and cost-
benefit analysis)
Offering realistic choices and seeking views on priorities and preferences –
what could be done, and how it might be
done in the most cost-effective way
Understanding different consumer
segments and balancing the
differences between them, including
current and future consumers
Evidence based, with facts gathered
through an appropriate range
of tools – interactive forms of engagement as well
as surveys
Ongoing engagement –
beyond the review and into the control
period
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How might we get the assurance we are looking for? Structure
•Sits within HAL – ongoing challenge •Independence •Clear, robust governance •Transparency
Skills •5-6 people •Economic regulation •Consumer engagement/research •Evidence-based policy/strategy •Business delivery
Style •High level of integrity •Can emphasise with end user needs •Willingness to ask difficult questions
Consumer Challenge
Forum (CCF)
Review HAL’s consumer
engagement process
Scrutinise BP outcomes
and proposals
Report to the CAA
Monitor BP delivery
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CCF – proposed role
Review..
HAL’s engagement process and the evidence emerging from it to ensure consumers’ views are considered as HAL develops and refines its business plan
Scrutinise..
the development of a consumer-focused outcomes framework by providing assurance that outcomes are rooted in evidence of the actual needs and priorities of consumers
Report..
to the CAA on whether there is a clear line of sight between the consumer outcomes identified at the outset of business planning and the final, agreed plan
Monitor..
the delivery phase of the business plan, including providing challenge, advice and scrutiny of HAL’s consumer engagement in preparation for future reviews
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What we could ask the CCF to tell us
Has the CCF been able to fulfil its role
objectively and independently?
Has HAL carried out engagement of
sufficient quality to understand consumers’
expectations and priorities?
How well evidenced is HAL’s assessment
of consumers’ expectations and
the outcomes it has developed in
response?
Are the outcome delivery incentives
appropriate and are the targets
sufficiently challenging?
Is HAL’s proposed level of
performance and approach to
delivery against its outcomes aligned with consumers’
priorities?
Overall, has HAL’s plan responded to
consumers’ expectations and
priorities?
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Governance – roles and responsibilities
▪Final say on CCF guidance and ToRs
▪Set reporting requirements
▪Remuneration of CCF Chair and Members
▪Review CCF guidance document and ToRs
▪Secretariat/admin support
▪Process for engagement with CCF
▪Review CCF guidance document and ToRs
Tripartite process to appoint CCF
Chair and Members?
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Incentivising the right consumer outcomes and increasing airport resilience Emanuela Michetti and Freya Whiteman
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How can we improve the incentives on HAL through the regulatory process?
Consumer outcomes
High-level objectives
consumers value
Developing the SQRB scheme
Assurance provided by CCF
Business plan
Guidelines for robust business
plans
Board certification
Information quality incentives
Wider incentive framework
Totex
Innovation
Pain and gain sharing
We have marshalled our thinking in this area in to 3 broad categories
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Increasing airport resilience
Q6
Wider Capacity Context
Challenging Industry
HOW CAN WE INCREASE AIRPORT RESILIENCE IN H7?
Network Optimisation
Focus on significant disrupted days
Good progress/improvements
Ongoing iterative process
Higher average delay
Uncertainty of runway decision/airspace changes
Increasing demand/capacity constraints
Innovative ways to increase resilience/improve performance and punctuality
Focus on day to day disruption due to capacity constraints
Other areas
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Increasing airport resilience
Initial Focus
Possible incentives to explore
Industry Views
INDUSTRY LED COLLABORATION AND SOLUTIONS
Progress since earlier research
Current/future plans to improve resilience
Updating past analysis
Differential charging
On-time performance/ punctuality
Baggage resilience
Gaps in the licence?
Other areas?
Consumer preferences/trade-offs between capacity, resilience and delay
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Ensuring efficiency and financeability Maggie Kwok
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• We aim to retain the focus on delivering cost efficiency through detailed benchmarking, Constructive Engagement and exploring possible gain-share mechanisms
Strong incentives on efficiency
We plan to explore new areas around helping to ensure that the airport produces a high quality business plan
The overall package of regulatory policies needs to be financeable and we propose to retain the current model of RAB/WACC based on a single till approach
High quality business plans
It needs to be financeable
Comparative analysis of efficient costs and revenues will continue to be an important part of the framework
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Two stages of benchmarking studies
We are contemplating splitting the benchmarking phase into two parts: initial baseline analyses to inform the early stage of the process, and an update towards the end of H7
We provisionally intend to commission priority studies in late spring with a view to receiving the results in the autumn
We expect the findings of these studies to form a basis for ongoing
stakeholder engagement prior to HAL issuing its business plan in 2017
These issues will be considered in more detail through one of the seminars.
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Next steps
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Next steps
The slides and a record of the discussion from both sessions will be made available on our website in due course.
The deadline for responding to the consultation is 29 April 2016. We will be hosting more detailed seminars on the key topics over
the next few months. Our ‘policy update’ document will be published in early autumn
2016.