British Airways to call for freeze on landing charges at Heathrow

British Airways is to call on the UK's airport regulator to freeze, or even reduce, landing charges at Heathrow, Gatwick and Stansted in a move which poses a direct threat to the new owner of BAA, the Spanish construction giant Ferrovial.

BA, which under its new chief executive Willie Walsh is by far BAA's biggest customer, will make the demand in a submission to the Civil Aviation Authority this week, urging the regulator to prevent Ferrovial from putting up its charges when new price controls on the three London airports are set next year.

This would have severe financial consequences for Ferrovial, which paid £10.3bn for BAA last month and is eager to increase prices at the company's flagship airports to pay down its heavy borrowings. Ferrovial borrowed more than £6bn to fund the bid but, together with BAA's own borrowings, is likely to have debts of at least £12bn when the new five-year price control takes effect in April, 2008.

BA will tell the regulator that, by then, landing charges at the three airports will be more than adequate to cover BAA's running costs and fund investment in new facilities provided BAA makes efficiency improvements. At Heathrow alone, charges are rising by £250m between 2003 and 2008 - an increase of 50 per cent.

BA, which accounts for nearly 40 per cent of traffic at Heathrow, calculates that BAA could cut its manning costs by up to 20 per cent across its three London airports and improve the efficiency of its capital investment programme by 15 to 20 per cent.

BA will also argue that BAA should be allowed a much lower rate of return on its regulated airports because of the fall in long-term interest rates and the reduced investment risk attached to airport hubs such as Heathrow. Under the present price control, BAA is allowed a cost of capital of 7.75 per cent. BA will argue in its submission that this should be reduced to 5.5 per cent.

BA will argue that the hefty premium Ferrovial ended up paying for BAA proves that it was given far too generous a settlement in 2003 when the regulator allowed it to raise prices at Heathrow by 6.5 per cent a year in real terms.

The views of airline customers are likely to be much more influential in the forthcoming price control, because the CAA has urged them to enter into a "constructive dialogue" to help determine the level of charges.

The second biggest operator at Heathrow, bmi - and Virgin Atlantic, another big customer of BAA - are also known to be unhappy with the present pricing regime and are likely to echo BA's demands for tight curbs on what BAA can charge from 2008 onwards.

BAA is already facing a tough fight with the low-cost airlines that operate from Stansted. The budget carriers, led by Ryanair and easyJet, have rejected the airport operator's plan to spend nearly £3bn on a new runway at Stansted, arguing that it could be built for a third of the cost.

In addition to opposing any increase in landing charges, BA will demand that BAA is prevented from chipping away at the so-called "single till" arrangement at the three airports, whereby commercial revenues are taken into account when landing charges are set.

BAA wants the £250m a year it earns from car parks, advertising and bureaux de change to be excluded from the formula.