The Spanish company that owns Heathrow yesterday threatened to abandon a £1.5 billion plan to upgrade the airport in time for the 2012 London Olympics.

Ferrovial said that the Civil Aviation Authority, which sets the landing charges at Britain’s biggest airports, was giving it too little incentive to invest in replacing Terminals 1 and 2.

Rafael del Pino, Ferrovial’s chairman, admitted that conditions for passengers at Heathrow were already unacceptable, with long queues at security and outdated facilities.

He said: “We are aware that there are many deficiencies. The infrastructure is old and dirty. Some of the assets do not work. We have planning permission to transform Heathrow but the CAA has got to give us the incentive to do that.”

Mr del Pino said Britain needed to decide whether it was willing to pay for a world-class airport. “There is a big question over whether you want a good airport or a cheap airport. At the moment the regulatory regime has been very good at making airports cheap but has not been very successful at getting world-class airports. Heathrow is losing traffic to other hubs that charge more than Heathrow is charging.”

He said most passengers, if asked when queuing at security, would be willing to pay an extra £3 to get through to the departure lounge in only three minutes.

Ferrovial bought BAA, the airport company that owns Heathrow, Gatwick, Stansted, Southampton, Glasgow, Edinburgh and Aberdeen airports, last August for £10 billion. Mr del Pino said Ferrovial was being unfairly blamed for 20 years of “chronic under investment”.

Mr del Pino, whose family owns more than 55 per cent of Ferrovial, said plans to replace Terminals 1 and 2 with a modern terminal would only proceed if the CAA allowed the company a greater return on its investment.

The first stage of the development is due to be completed by March 2012, just in time for the Olympics. But Mr del Pino said that deadline could be achieved only if the CAA gave a more generous settlement by the end of this year.

Asked if the chaotic scenes at Heathrow last summer would be repeated this year, he said: “I hope not but there is always potential.”

Terminal 5 is due to open at Heathrow in next March but that will only cater for 40 per cent of the airport’s passengers.

The Competition Commission is currently considering the CAA’s proposed charging regime for BAA and is due to report in September.

Mr del Pino said Heathrow was already handling almost twice as many passengers as it was designed for. “It was designed for about 45 million passengers and now we have almost 70 million.”

He said Heathrow was losing passengers to other European hubs because of Britain’s unique security rule that passengers can take only one piece of hand luggage on to aircraft.

The Department for Transport is allowing Heathrow to carry out a trial from next month in which passengers changing flights at the airport will be allowed two pieces of hand luggage.

Since the extra security controls were imposed last August BAA has recruited 1,400 more security guards for its seven British airports, including 500 at Heathrow.

Stephen Nelson, BAA chief executive, said it would carry on recruiting until it achieved its target of getting 95 per cent of passengers through in less than five minutes. He admitted that BAA would have to pay penalties for failing to achieve its queuing time targets.

Mr Nelson said: “We will continue to recruit until we have the right complement of people for the peak.”

Times Recommends

• Housing gloom deepens as prices plunge 12.7%
• Nestle outsider to head Unilever
• BP's Dudley exits in Russian shake-up