BRITAIN'S airport regulator has announced new five year price proposals for airline charges at London's three major airports, which operator BAA immediately branded challenging but workable.

The Civil Aviation Authority proposed that the charges at Heathrow and Gatwick be changed by the official Retail Price Index (RPI) measure of in flat ion minus three percentage points a year and at the much smaller Stansted airport by RPI plus one percentage point.

The current five year formula, which governs landing and passenger handling charges at London Heathrow, Gatwick and Stansted, expires next April.

The CAA also proposed that BAA be allowed to increase these regulated charges by 15 per cent over two years to compensate for loss of retail revenue if and when the European Union abolishes duty free sales for international travellers within the Union.

The CAA said that, in making the proposals it was accepting recommendations made by the Monopolies and Mergers Commission (MMC), which undertook a six month investigation.

BAA welcomed the fact that the MMC report was generally complimentary, but said the proposed price changes were challenging although preferable to two other options.

"Taken together with other conditions imposed, the formula for airport landing charges is clearly very challenging," the chief executive, Sir John Egan, said.

"It is less than what we asked for and could have implications not just for BAA but for our customers, both airlines and passengers, and also our suppliers, not least because of the difficulties it poses for our construction programme.

The regulated part of BAA's business makes up, the bulk, of the £434 million sterling it gained in 1995/96 from airport and other traffic charges, which, in turn, accounted for 35 per cent of total group revenues. In the year just ended, BAA's pre tax profit rose 14.2 per cent to £418 million on turnover up 8.1 per cent at £1.253 billion.