AT the end of July, a group of Ryanair executives trooped into the Competition Commission in central London. The watchdog wanted to know what the Irish airline thought about BAA, the UK’s largest airport company.

Jim Callaghan, Ryanair’s head of regulatory affairs, let rip. BAA ignored the needs of its customers, refused to devote enough staff to security screening and inflated its charges, he said.

He gave an example. A week earlier, queues at security at Stansted airport caused passengers to miss their planes. “The BAA duty manager was handing out a photocopied handwritten note to passengers who had missed their flights, saying: ‘BAA is not responsible for compensating passengers for missing flights. Please refer to your airline’.”

A series of similar meetings with airlines, including British Airways, Virgin, BMI and American Airlines, revealed a litany of similar complaints – lack of consultation and issues like security, baggage-handling machinery and refuelling equipment.

Little wonder that last week the commission gave BAA a sharp kick in the shins. It backed a decision by the Civil Aviation Authority not to give the company the price increases it wanted over the next five years. It said charges at Heathrow, for example, should rise, depending on inflation, from about £10 per passenger next year to about £14.20 by 2012. BAA wanted them to go up to just over £20.

BAA, owned by a consortium of investors led by Spain’s Ferro-vial, attacked the decision. Stephen Nelson, the chief executive, hinted that it could jeopardise investment plans aimed at improving Heathrow in time for the London Olympics in 2012.

He said: “We see little in the report which delivers the incentives to transform the airports.

“We have proposed exciting plans to deliver £4 billion of investment and transform these national assets, and we are still looking to the CAA to provide the appropriate framework to deliver this.”

The row over prices, and a separate Competition Commission inquiry into whether BAA’s ownership of seven of the UK’s largest airports, including the London trio of Heathrow, Gatwick and Stansted, is against the public interest, will have big ramifications for the future of British airports – and the UK economy.

Airline-industry experts say the regulatory battle will influence not only how quickly airport facilities improve, but also where, and when, new runways are provided in the congested southeast of England.

BAA has only a short time to overturn the CAA and Competition Commission’s views. Next month the CAA will publish its draft conclusions on pricing, with the final decision to follow in March. A senior BAA executive said the company had not given up hope of changing the regulator’s mind. “If this was a football game, there would still be a quarter to play,” he said.

What BAA really wants to change is the regulators’ view of its cost of capital – how much the regulator thinks BAA has to pay for the capital it needs to run, and invest in, the business.

The airports argued that its cost of capital over the next five years should remain unchanged, at 7.75%. The regulators say it should go down, to only 6.2%.

BAA executives complain this does not take into account the risks involved in running airports, and that the CAA is guilty of causing “regulatory shock” – a sudden and unjustified drop in the cost of capital that will disrupt the company. But the CAA is unlikely to relent. Aviation industry sources familiar with the authority’s thinking say that while it will consider the recent credit crunch before releasing its final verdict, it is unlikely to make big changes.

“BAA’s shareholders can hardly say they weren’t warned. The CAA put out a statement during Ferrovial’s bid for BAA saying that it should not assume the cost of capital will stay the same,” one source said.

The big stick that BAA may wield – although it is reluctant to do so in public – is its commitment to rebuild Heathrow’s oldest and grottiest terminals. It plans to spend more than £3 billion rebuilding Terminals One and Two, replacing them with buildings at least as good as the new Terminal Five, which opens in March. The threat that Heathrow, in particular, will remain sub-standard, is a powerful one.

Once the pricing spat is resolved, BAA and its shareholders then have to contend with the threat of a break-up of the company. The Competition Commission is looking into airport ownership, a probe that many believe will lead to it having to divest one or more of the three big London airports. Analysts say BAA would be most likely to sell Gatwick, but would want it freed from price regulation first to maximise the sale price.

Changes in ownership could affect government plans for new runways in the southeast. The first is intended for Stansted, but aviation executives say that a break-up could lead to a reassessment of priorities, with plans for a new runway at Heathrow accelerated.

The airlines’ full evidence to the Competition Commission can be read at competition-commission.org.uk/inquiries/ref2007/ airports/index.htm

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