ONE of Britain’s largest airlines, Easyjet, will mount a legal challenge over the stiff price increases imposed at Heathrow and Gatwick.

A judicial review of the Civil Aviation Authority (CAA) decision could threaten the planned refinancing of BAA, the company that owns and operates the London hubs.

Easyjet has retained London law firm Lane & Partners as its adviser and informed the CAA and BAA nine days ago of its intention to seek a judicial review.

It is expected to formalise a claim to the High Court within a month. If the court accepts it has a case, arguments could take another six months, with a decision possible by the end of the year, legal sources said.

Ryanair said yesterday that it would join the action, and BMI British Midland is also expected to participate. Sir Richard Branson’s Virgin Atlantic is as yet undecided. British Airways is unlikely to take part.

Easyjet’s legal move is the culmination of a bitter row between airlines, the CAA and BAA. Airlines accused the CAA of failing to police BAA and of approving overgenerous price increases.

The CAA ruled this month that airline charges at Heathrow would increase 23.5% to £12.80 per passenger a year from April. Charges in the four subsequent years could rise 7.5% above annual inflation. Its decision led to outrage among airlines. The CAA defended the rise by saying that the large capital investment required at Heathrow and Gatwick had to be paid for. If the judicial review goes ahead, it will be the first time the CAA has been challenged since it began regulating airports 20 years ago.

A lengthy legal battle could have serious ramifications for BAA, which was bought last year for £10.3 billion by a consortium of investors led by Spain’s Ferrovial. The group has since struggled to refinance the loans taken on to buy the company.

When the new prices were announced, BAA said that they would “enable [BAA] to proceed to finalise the details of the refinancing for the first time”. Analysts said banks and bond investors were unlikely to take part if there was any prospect the courts could overturn the ruling.

The CAA said yesterday it had no record of being notified of Easyjet’s intentions, but would “vigorously defend” its position.

Easyjet said: “We do not believe the CAA has acted correctly in its review of BAA’s pricing. It has not followed the necessary process and has shown a systematic bias in favour of BAA.”

Meanwhile, BAA’s annual report, published on its website on the same day the new prices were set out, shows the company is at the limit of the covenants on some of its existing borrowing. “Restrictions . . . reach the maximum allow [sic] level at 31 December, 2007,” the report said.

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