BAA, which has a monopoly on operating Britain's largest airports, has been criticised strongly by the Competition Commission today for overcharging airlines and failing to deliver acceptable levels of passenger service at Heathrow and Gatwick.

The regulator said that BAA, which was bought this year by Grupo Ferrovial, the Spanish construction group, in a debt-ladened £16 billion deal, charged passengers more than its levels of service justified.

It said that the airports had "acted against the public interest" by failing to manage security queues to avoid "unacceptable delays to passengers".

The authority said that it had seen no improvement in performance in the past five years.

BAA is already under pressure to be broken up.

In a separate inquiry the Competition Commission is investigating whether BAA should be allowed to continue as the monopoly operator of the largest British airports.

In its report today, the watchdog stated: "In our 2002 report we found that [Heathrow and Gatwick] had pursued a course of conduct contrary to the public interest by failing to make prices paid sufficiently reflect the level of service provided.

"We have seen no reason to believe that there is any case for a relaxation of the current SQR [service quality rebate] condition and we consider that it should continue in force and that some standards should be raised.

"We consider that [Heathrow and Gatwick] have displayed the same failings in the last five years.

"In particular they have failed to manage security queueing and queue times to avoid unacceptable delays to passengers and flights and consequently have not furthered the reasonable interests of the users of Heathrow and Gatwick."

The regulator recommended that the amount that BAA charges airlines per passenger be capped at £10.96 for Heathrow and at £5.48 for Gatwick in 2008-09, rising from £9.26 for Heathrow and £4.91 for Gatwick in 2007-08.

An increase in the landing fee that BAA charges airlines for using its airports will feed through to higher ticket prices.

The fee is charged for every flight, and is based on a complex formula involving carbon emissions, the type of aircraft and the number of passengers on board.

The commission proposed that charges at Gatwick should fall in real terms over the next five years.

Charges will increase by no more than 7.5 per cent above inflation for each of the next five years at Heathrow, while at Gatwick prices must rise by 0.5 per cent below the rate of inflation.

The report has brought the Competition Commission into conflict with the Civil Aviation Authority (CAA), the primary economic regulator for airports.

The CAA apparently is unhappy that it has to go to the commission for a second opinion on changes to its price-capping regime.

The CAA said that it intended to consider the commission's report in the coming weeks, before issuing for consultation its own firm price-control proposals for Heathrow and Gatwick by Nov 20.

All parties would then be able to submit further written evidence to the CAA during a two-month consultation period. The report follows a six-month inquiry by the Competition Commission.

BAA criticised the commission's proposals. Stephen Nelson, the chief executive officer of BAA, said: "We see little in the [Competition Commission's] report which delivers the incentives to transform the airports. Nor do we believe that the CC recognises the scale and nature of the challenges we face in seeking to deliver a step change in the passenger experience.

"At a time of increased complexity and risk in the UK airports sector, the CC is proposing at Heathrow — a dramatic reduction in returns."

Airlines are also displeased, because they say the price cap is too high. British Airways pushed for increases in line with inflation.

Tim Bye, deputy chief executive of bmi, Heathrow's second largest airline, said: “We warned the CC that sanctioning inflation-busting price rises at Heathrow could have a devastating effect on vital regional services into Heathrow."

In March the CAA recommended a cap for Heathrow of £10.29 in 2008-09, with annual increases of 5.8 per cent above inflation, and maximum Gatwick charges of £5.19 in 2008-09, followed by increases of 1 per cent above inflation.

The CAA said that differences between its proposed caps and the commission's price-cap projections were as a result of the "larger capital investment programmes now in prospect at each airport and the costs of delivering more stringent security processing".

Ferrovial, the owner of BAA, said that the report would jeopardise its attempt to reduce the airport operator's debt.

It said: "These proposals introduce a high degree of risk that the refinancing plans in the form developed over the last year might not be able to be implemented as currently envisaged."

Ferrovial plans to refinance about £9 billion of BAA’s debt, as well as debt taken on buying the airport operator last year.

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