BA in Heathrow dogfight with BAA

BAA, the owner of Heathrow airport, was at loggerheads with its biggest customer, British Airways, yesterday after calling for increases in landing charges to double to pay for new terminal facilities.

The company, owned by the Spanish toll-roads operator Ferrovial, claimed proposals by the Civil Aviation Authority to cut its allowed rate of return could jeopardise BAA's ability to have the improvements at Heathrow ready in time for the 2012 Olympics. But BA urged the regulator to go even further and freeze landing charges in real terms between 2008 and 2013.

In December, the CAA proposed a reduction in BAA's allowed return on Heathrow from its present level of 7.75 per cent to between 5.9 and 6.2 per cent over the five-year period. Even at that level, landing fees would have to rise by between 4 and 8 per cent, increasing the charge per passenger by £4.50 to about £14.

In its response, BAA said the regulator's proposals would create "risk and uncertainty", potentially putting in jeopardy a £1.5bn project to redevelop Heathrow's central terminal area. BAA also accused the CAA of using "untested and flawed methodology" which failed to take into account the threats to aviation from terrorism, pandemics and industrial action.

The airport operator has proposed instead it should be allowed to increase charges at Heathrow by 12.5 per cent a year in real terms compared with the 6.5 per cent annual increase allowed for the 2003-08 period.

It said that the regulator's initial proposals assumed that the aviation industry was less risky than electricity transmission and argued that they have failed to take into account the construction risks inherent in redeveloping Heathrow.

When the new Terminal Five opens in 2008, BAA's plan is to raze to the ground Terminal 2 and the adjacent Queens Building and build a new terminal called Heath-row East, which will house airlines belonging to the Star Alliance. As an interim measure, they would relocate to Terminal One which would also close once Heathrow East was complete. BAA is also proposing to make improvements to Terminals Three and Four.

BAA said the challenge of demolishing and rebuilding a terminal in the middle of Heathrow whilehandling over 70 million passengers a year had not been properly factored into the CAA's thinking. "We are therefore challenging the CAA to formulate a cost of capital that reflects both the scale of this ambition and the associated risks," said BAA's chief executive Stephen Nelson.

But BA said it was up to the CAA to make sure BAA ran the airport more efficiently so charges could be reduced for the benefit of passengers. The CAA's proposals will go to the Competition Commission in March. It will publish final price controls in November to take effect in April next year.