(Reuters) – London’s Heathrow warned it could struggle to grow its business after accusing the industry regulator of imposing a “draconian” cap on the prices Britain’s biggest airport can charge airlines.

Britain’s Civil Aviation Authority (CAA) said on Friday it would insist that Heathrow set its prices at 1.5 percent below inflation from April 2014 after finding that the airport – Europe’s busiest – had too much market power.

Heathrow said it might appeal the cap, which was much lower than expected for the next five years, but airlines said the move did not go far enough as the hub still had some of the most expensive charges in the world.

The cap is well below an interim suggestion made by the regulator for prices in line with inflation. It is also well below Heathrow’s original request for a rise in tariffs of 4.6 percent above inflation, as measured by the retail prices index (RPI).

The previous five-year tariff was RPI plus 7.5 percent.

“We want to continue to improve Heathrow for passengers,” Chief Executive Colin Matthews said. “We will review our investment plan to see whether it is still financeable in light of the CAA’s settlement.”

The airport, to the west of London which has expanded in recent years with Terminal 5 and the redevelopment of Terminal 2, said the new price limit would result in a fall in the cost charged per passenger from 20.71 pounds in 2013/14 to 19.10 pounds in 2018/19 in real terms.

It said this would result in a rate of return on capital investment of an “unsustainable” level of 5.35 percent compared with the 6.7 percent it was seeking.

The CAA said it was confident its proposals would still allow Heathrow to invest sufficiently while reducing prices for consumers. It said it had toughened the regulation after seeing passenger traffic forecasts strengthen and the cost of capital revised at the airport.

But Heathrow questioned the CAA’s forecasts for the next five years in terms of passengers and costs, and said it would have to cut operational expenditure by more than 600 million pounds and increase commercial revenue targets by more than 100 million pounds by increasing retail and car park charges.

MARKET POWER

Heathrow, whose owners include Spain’s Ferrovial (FER.MC) and the sovereign wealth funds of Qatar, China and Singapore, is the third busiest airport in the world, with almost 200,000 passengers arriving and departing each day.

Analysts at Mirabaud said the news was very bad for Ferrovial. But they noted that it could be balanced by the increasing chance that Heathrow will be allowed to expand from two runways to three by 2030 as part of a government review to address a capacity crunch that could slow economic growth.

Ferrovial, which has been steadily reducing its stake in Heathrow and now holds 25 percent, declined to comment.

The regulator had been reviewing the market power of the big airports – and whether this needed to be curbed by price caps – following complaints from the airlines.

British Airways (ICAG.L), the dominant airline at Heathrow, said the price curbs were a step in the right direction to address the excessive charges, while Virgin Atlantic noted that prices at the airport were triple the level they were 10 years ago. Virgin is the second largest airline at Heathrow.

“Coupled with ever increasing Air Passenger Duty, customers flying to and from the UK are facing some of the highest travelling charges in the world,” said Craig Kreeger, Virgin Chief Executive.

For rival airports Gatwick and Stansted, the CAA said it would accept and monitor Gatwick’s proposal to agree fair terms with individual airlines and not regulate Stansted at all.

Ryanair (RYA.I), Europe’s largest airline by passenger numbers, condemned the CAA decision not to regulate Stansted, one of the low-cost airline’s biggest bases.

“Today’s decision is an example of the CAA’s regulatory failure which will again harm consumers as Stansted will be able to further increase airport charges whenever it wishes, without any reference to competitive price levels,” Ryanair’s Director of Legal & Regulatory Affairs, Juliusz Komorek said.

(Additional reporting by Jose Elias Rodriguez in Madrid,; editing by Sophie Walker)