UK: OFT Proposes To Refer BAA Airports For A Market Investigation

Last Updated: 21 December 2006
Article by Alan Davis

The Office of Fair Trading (OFT) has announced that it is proposing to refer the market for the supply of airport services by BAA in the UK to the Competition Commission (CC) for a detailed market investigation. It will consult the industry and interested parties over the next eight weeks (until 8 February) and will then make a decision as to whether to refer the sector to the CC.

The OFT may make a market investigation reference to the CC where it has reasonable grounds for suspecting that features of the market in question prevent, restrict or distort competition. Following its own preliminary market study, the OFT has stated that the industry's ‘current market structure does not deliver best value for air travellers in the UK and that greater competition within the industry could bring significant benefits for passengers’.

In particular, notwithstanding the fact that Heathrow and Gatwick Airports are price-regulated, the OFT has referred to ‘evidence of poor quality and high charges’ in relation to BAA's airports generally and stated that its ‘investment plans have raised…significant concerns among its customers". It concluded that "these are signs of a market not working well for consumers and we believe that a full inquiry into BAA's structure is required’.

A CC investigation is a lengthy process (potentially lasting up to two years) and imposes significant information burdens on those involved in the industry. If the CC were to conclude that there is an adverse effect on competition, it has the power (and, in most cases, the duty) to accept undertakings from, or impose by order obligations on, those involved in the sector in order to address the competition detriment. It generally has a wide discretion as to what remedies should be included in undertakings or an order, including potentially structural remedies (for example, in the present case, that might include a requirement to divest an airport or part of an airport such as a terminal) and/or behavioural remedies (for example, the imposition of a price cap although, in the present case, some of the larger UK airports are already price regulated) or recommendations regarding the current regulatory system.

A referral to the CC will have significant potential implications for BAA, the Ferrovial-owned operator of seven airports in the UK including Heathrow, Gatwick, Stansted, Southampton, Edinburgh, Glasgow and Aberdeen and which are used by 60% of all air passengers in the UK. In the South-East of England, BAA's airports carry 90% of all air passengers.

Alan Davis, Competition Partner at Pinsent Masons commented: ‘There is a clear prospect that the BAA airports could be broken up by the Competition Commission following this investigation. This is significant as it would be the first time that the Competition Commission would have exercised its relatively new powers under the Enterprise Act 2002 in this way to require the break up of a major industry player. However, there is plenty of precedent for the Competition Commission to impose quite far reaching structural remedies under the previous similar scale and complex monopolies regime, for example, in the brewery and gas sectors.’

The key issues relate to airport charges, quality of service and investment:

  • On charges and quality, the OFT considers that the airports in the South-East could compete with each other if they were separately owned and want the CC to consider whether this would deliver improved quality, service and more competitive charges which would be better for airlines and ultimately air passengers.
  • In relation to investment, BAA argues that a more fragmented market would undermine future investment, especially in the South-East, whereas the OFT believes that ‘without competition, investment could be inefficient, costly for air passengers, and for the UK

Alan Davis commented further: ‘Arguably, breaking up the ownership of the BAA London airports should remove the need for price regulation but whether this would really diminish the individual local market power of Heathrow and Gatwick over airlines that are based there remains to be seen. I believe there will continue to be calls for stricter price regulation.’

Only two of BAA's airports are price-regulated - Heathrow and Gatwick. The OFT has proposed that price regulation should cease to apply to Manchester Airport in light of what it considers to be an effective competitive constraint on Manchester's prices from independently-owned Liverpool Airport. However, this comes at a time when the European Commission is proposing to introduce pan-European price regulation of all airports over a certain size, a move that is opposed by the UK which argues that such price regulation is only necessary if an airport can be shown to have market power (which may well be the case in relation to Heathrow and Gatwick even if they were in separate ownership).

Pinsent Masons' EU & Competition Group is one of the largest specialist competition teams in the UK, with considerable experience and expertise of advising clients on competition law issues in the aviation sector. It also has considerable experience of advising on OFT market studies and Competition Commission market investigations, including having advised on the recent Store Cards, Home Credit and ongoing Groceries market investigations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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