CAB 01
Written evidence from the Department for Transport (CAB 01)
This is to let you know that I am publishing my draft Civil Aviation Bill today. We spoke about this when we met on 1 November, and our officials have since met to discuss how the Transport Committee can best contribute to the Bill's development given that the timetable has been accelerated. I am grateful to your officials for the work they have put in alongside my officials to deliver Pre‐Legislative Scrutiny.
The proposals are designed to modernise key elements of the regulatory framework for civil aviation in the UK, to enable the sector to make a full contribution to economic growth without compromising high standards.
This draft Bill offers a package of reforms to make both regulation and the sanctions which support it flexible, proportionate, targeted and effective. It proposes removing unnecessary regulation and unnecessary intervention by central government. It devolves more responsibility to the independent specialist regulator, the Civil Aviation Authority (CAA), while ensuring that the CAA is accountable and weighs the costs and benefits of its decisions. The draft Bill proposes that certain costs of regulating aviation should be moved from general taxation to the aviation industry.
Above all the draft Bill puts the consumer first. In the economic regulation of airports with substantial market power the CAA's primary duty will be to consumers; that is passengers and owners of cargo now and in the future. In addition the Bill gives the CAA a role in promoting better public information about airline and airport performance and about the environmental effects of aviation and measures taken to mitigate adverse effects.
The Government wants to see a successful and competitive aviation industry, We are taking forward the work of the South East Airports Taskforce to improve our major airports within the constraints of existing runways. In the longer term, we have committed to producing a sustainable framework for UK aviation by 2013 which supports economic growth and addresses aviation's environmental impacts.
The draft Bill complements these policies. It is in three parts:
• reforming the framework for airport economic regulation, following my predecessor's statements to the House on 3 March 2011 and 21 July 2010. • modernising the framework and functions of the aviation regulator, the CAA. Some of these measures stem from the independent strategic review of the CM by Sir Joseph Pilling in 2008 and a consultation launched by the previous Government in 2009. • transferring certain operational aviation security functions to the CAA as part of wider work to improve aviation security regulation and deliver savings to general taxation. This proposal, mentioned in the July 2011 consultation document "Better Regulation for Aviation Security", would create a single regulator for aviation safety and security, funded by the industry. The Secretary of State would remain responsible for aviation security policy and issuing aviation security Directions to the industry.
CAB 01
As you know, the Government had previously announced that legislation to implement airport economic regulation reforms would be introduced early in the next Parliamentary session. An opportunity has now arisen to introduce a Civil Aviation Bill into Parliament near the beginning of 2012. This would help ensure that the CM does not have to set airport price controls for the 5‐year period 2014‐2019 under the existing system. I therefore intend to take up this opportunity.
It is possible that the scope of the Bill may be extended before it is introduced. One area which could be included is the reform of the Air Travel Organisers' Licence (ATOL), following the recently finished consultation on measures to protect consumers better in the 21st century holiday market and help create a more level regulatory playing field for businesses.
I know that the Committee will wish to take a close interest in the draft Bill and my Department stands ready to assist in that process.
November 2011 CAB 02
Written evidence from the Trade Union Side (CAB 02)
1. I am writing to you on behalf of the unions that have members working in DfT aviation security.
Summary Of Our Views
2. We limit our comments to those parts of the bill that propose a transfer of aviation security functions to the CAA whilst the Secretary of State remains responsible for aviation security policy.
3. We believe that this proposed transfer is misguided.
4. In reality the government is proposing that the industry pay for security regulations and compliance. The transfer of functions to the CAA is just a consequence of that decision to “tax” the industry.
5. We think that the precautionary principle should apply and that unless a compelling case can be made for the proposed changes then aviation security functions should remain with DfT.
6. We think that the proposed division of labour between the CAA and DfT is a recipe for confusion and added complexity. It also runs the risk that matters will fall between the CAA and DfT stools.
The Real Reason For The Proposed Changes
7. The principal driver for the proposed transfer is the supposed cost savings that could be made. In the policy paper accompanying the draft bill, at 2.54, it claims:
The transfer of aviation security regulation functions is expected to deliver general taxation savings estimated at £24.6m in present value terms over ten years. This cost, if transferred to the passenger, would equate to approximately £0.02 per passenger movement per year, based on the 211 million passengers who moved through UK airports in 2010.
8. Whilst the impact appears to be minimal, it is still not clear how the charging regime will be fairly spread across all aviation entities to properly reflect the level of compliance activity undertaken. At present, the compliance monitoring is not restricted to airports and airlines, there is also a significant regime to look at regulated air cargo agents and suppliers of in‐flight catering.
9. In the Impact Assessment associated with the draft bill, it states on page 1:
“Reduce the costs to the taxpayer in line with SR commitments by introducing the user pays principle”.
And on page 2 of the assessment:
“The benefits relate to savings to the taxpayer from no longer funding the aviation security regulation and compliance functions, which are currently provided free to airports and airlines”.
10. In other words there are no efficiencies which “could be gained through having a single regulator for all UK civil aviation specific responsibilities (2.53 of the policy paper)”. The savings claimed are because costs for security regulations and compliance are to be put onto the industry.
CAB 02
11. As the CAA already levy charges on the industry, the “security tax” can just be added on. It is for that accountancy reason that security functions are being transferred to the CAA.
12. Therefore we think that the real discussion is whether the industry should in essence be “taxed” for being security checked.
13. Now we don’t believe that the “user pays principle” is applicable to security compliance any more than it would be for law enforcement.
14. That said, if the Committee did believe this principle applied we do not understand why its application necessitates a transfer of security functions to the CAA. If the industry has to be “taxed” then DfT could levy charges just as readily as CAA.
If It Ain't Broke, Don't Fix It.
15. Since Lockerbie, the current aviation security arrangements have prevented further outrages. Consequently to consider moving away from a tried and tested system that works, to an untested one, there has be compelling evidence/reasons to show that the proposed new arrangements would be as safe, if not safer, than the existing ones.
16. Unfortunately no such evidence/reasons have been given. No safety case has been made for the changes: that of course is because the real reason for the changes relates to money, as we mention above.
17. Security is too important to be so casually treated.
Added Complexity
18. This is a variant of the “If It Ain't Broke, Don't Fix It” argument made above. The current system works and is well understood by the industry.
19. Now it is proposed that the CAA will be the single regulator for all UK civil aviation specific responsibilities. In reality this will not be true as the Secretary of State remains responsible for aviation security policy. The Secretary of State cannot hope to believe that hiving off compliance to the CAA will some how insulate DfT from getting involved in compliance matters. Experience has shown (e.g. UKBA compliance with entry checks and Teresa May) that in the real world the division between policy and compliance is not a clean divide; the one impacts on the other.
20. We think that the proposed division of labour between the CAA and DfT is a recipe for confusion and added complexity. There is a real danger that the added complexity that will be introduced by separating the regulation and compliance teams from the policy makers in DfT will lead to a reduced level of compliance within industry and could result in aviation being put under increased risk from a terrorist attack. It also runs the risk that matters will fall between the CAA and DfT stools. Furthermore, the policy makers would be further removed from the industry that they are regulating and there is an increased risk of policy being created without a proper understanding of the effect for the aviation industry and passengers.
Oral Evidence CAB 02
21. Whilst we accept the bulk of the draft bill is concerned with non aviation security matters we do think that the transfer of security functions to the CAA is a major issue. Consequently we would be grateful if you would consider calling us to give oral evidence before the committee.
November 2011 CAB 03
Written evidence from the Royal Aeronautical Society (CAB 03)
1. The Royal Aeronautical Society (RAeS) is the world’s only professional body dedicated to the entire aerospace community. Established in 1866, the society has 16,000 members in over 100 countries (including 3,500 classified as young members), and is a leader and provider of foresight within the aerospace community. It has a wide range of specialist groups, including an air transport group and the Greener‐by‐Design group, comprising senior academics, industrialists and consultants dedicated to providing objective information and advice towards the promotion of environmentally sustainable aviation.
2. The Society welcomes the requirement placed on the CAA under Section 81 of the Bill to publish, or arrange the publication of information and advice it considers appropriate relating to the environmental effects of Civil Aviation in the UK, as well as the impact on human health and to consider measures designed to reduce such impacts. Environmental effects are perhaps the single most important external factor influencing civil aviation and patterns of air transport growth over the next 30 years.
3. It is vital, however, clearly to distinguish between those factors over which the UK, and by implication, the CAA has a direct power to influence. These are almost entirely related to the local effects associated with airport operation – noise and aggregated pollution (including road traffic). All other issues are largely global effects, and even regional measures such as the European Emissions Trading Scheme, have limited and potentially contentious application to a global air transport industry.
4. The Society is concerned that the quality of data gathered by the CAA or its agents should be peer reviewed and should not reflect the interests of any interest, commercial, governmental or non‐governmental organisation. In preparing any environmental measure designed to affect civil aviation operations, the CAA should publish source material and key assumptions for external accountability.
5. The CAA is to be required to give advice to the general public based on this data. The Society is concerned that this might lead to an over simplification of what can be very complex and uncertain science. The CAA should again be constrained to seek external opinions on the quality of such advice.
November 2011 CAB 04
Written evidence from the Chartered Institute of Logicistics and Transport in the UK (CAB 04)
1 The Chartered Institute of Logistics and Transport in the UK ‐ CILT(UK) ‐ is the professional body for individuals and organisations involved in all aspects of transport and logistics. It has over 19,000 members in numerous disciplines, including the aviation industry and transport planning. As it is not a lobbying organisation it is able to provide a considered and objective response on matters of transport policy. Through its structure of forums and regional groups it provides a network for professionals in the transport industries to debate issues and disseminate good practice. This response has been prepared by the CILT(UK)’s Aviation Forum, the Chairman of which has previously appeared to give evidence to the Select Committee.
2 The Select Committee will undoubtedly appreciate that the very short time available precludes any detailed consideration of the draft Civil Aviation Bill in this submission. If appropriate, CILT(UK) would be willing to provide further views. Nevertheless, CILT(UK) would like to make a few fundamental points which the Select Committee might like to consider during their investigation, as set out in the following paragraphs.
3 As the ownership of UK airports becomes ever more diverse, what impact will regulation have compared to what can be achieved through the operation of the market? With Heathrow and Gatwick now separately owned, there is clear competition between them, with airlines and passengers having choices of price and service. Gatwick, Stansted and Luton are also separately owned and competition here is even more intense because there is spare capacity. There is also normal market competition within and between the regions and nations outside of the South East of England.
4 What impact will regulation have on ability to make up for the significant shortfall of airport capacity in the South East of England? It is this shortfall of capacity, more than any other factor, which leads to poor passenger experience in terms of delay, congestion and lack of resilience.
5 The CAA is recognised by the aviation industry as being very competent and knowledgeable and the move to transfer powers from Government and other agencies is welcomed.
6 The setting of a principle airport economic regulatory duty of the CAA to improve passengers' experience is supported, provided that it does not interfere with the general view of the whole of the aviation industry that safety must remain paramount.
November 2011
CAB 05
Joint written evidence from Hacan Clearskies, Gatwick Area Conservation Campaign, Stop Stansted Expansion and AirportWatch1 (CAB 05)
Issues 1. The Draft Civil Aviation Bill2 published on 23 November 2011 fails to give the economic regulator (the CAA) any meaningful environmental responsibilities. • This is contrary to earlier Government promises and gives rise to serious concerns amongst those who live close to the UK’s major airports that the CAA will in future be powerless to prevent airport operators from cutting back on measures which reduce or mitigate the effects of their operations upon local communities and the environment. 2. Moreover, since the CAA will in future have a clear primary duty focused on the end users of airport services (i.e. passengers and users of freight services), airlines would be able to legally challenge any CAA decision which allowed airports to recover, in their airport charges, any environmental expenditure other than the minimum necessary to comply with the law. • The CAA needs to be given a statutory environmental duty so as to allow it to take a balanced view without fear of a legal challenge from airlines. 3. The DfT press release of 23 November 2011 on the publication of the Draft Bill mistakenly states that it includes a duty upon the CAA ‘to have regard to the effect on the environment and on local communities of activities connected with the provision of airport services’. • This is exactly the obligation that the Draft Bill should include and the fact that the DfT press release is inconsistent with the Draft Bill suggests that a decision to remove the environmental obligation was taken very late in the day. If, when setting price caps, the CAA has no obligation to consider the environmental effects of a regulated airport’s operations there is a significant risk that London’s three main airports, under separate ownership and in competition with one another, would engage in a race to the bottom in relation to environmental standards, setting an example which other UK airports may follow. Annex A provides examples to illustrate the reasons for current concerns.
Amendments sought The Draft Bill should be amended in two places as follows:
Section 1(3): Matters which the CAA must have regard to: Replace existing (d) with: “the effect on the environment and on local communities of activities connected with the provision of airport operation services at the airport to which the licence relates” Existing (d), (e) and (f) to become (e), (f) and (g), respectively.
Section 3(3): Matters which the Secretary of State must have regard to: Replace existing (d) with: “the effect on the environment and on local communities of activities connected with the provision of airport operation services at the airport to which the licence relates” Existing (d) to become (e). Background
1 AirportWatch is an umbrella body comprising national environmental organisations and airport community groups across the UK. 2 http://assets.dft.gov.uk/publications/civil-aviation-bill/civil-aviation-bill-vol2-draftbill-explanatorynotes.pdf. CAB 05
The current regulatory regime for UK airports was established 25 years ago by the Airports Act 1986 and there is general agreement that it needs to be updated. The previous Government started the process of updating the regulatory regime in 2007, commissioning Sir Joseph Pilling to carry out a strategic review of the CAA, and, in 2008, appointing Professor Martin Cave to lead an advisory panel to review the economic regulation of airports in the UK. One of Sir Joseph Pilling’s main recommendations was that the CAA should have a general statutory duty in relation to the environment. The main recommendations of Professor Cave’s advisory panel were that, when carrying out its economic regulatory role, the CAA’s primary duty should be towards passengers and that the current regulatory arrangements should be replaced by a licensing regime to allow the CAA greater regulatory flexibility. In March 2009, the then Secretary of State for Transport (Geoff Hoon) brought together the Pilling and Cave recommendations in a Parliamentary Statement announcing the start of a formal consultation entitled: ‘Reforming the framework for the economic regulation of UK airports’. He described the key features of the proposed new regime as follows: • “I want economic regulation to be targeted, flexible and efficient. I am therefore proposing the introduction of a licence‐based scheme of regulation, similar to that which exists already in other regulated sectors. Only the very largest airports – those with over 5 million passengers per annum or with significant market power – would require a licence”3 • “It is also essential that airports take fully into account the environmental consequences of their operations. I intend to give the CAA an environmental duty with respect to its economic regulatory functions. This will ensure that, when operating as an economic regulator, the CAA will consider the environmental consequences of its decisions.”3 • “Those proposals are designed to put the interests of passengers at the heart of a new regulatory regime, ensuring that airports make the best use of existing capacity while also having regard for the environmental impact of their operations.”4 The March 2009 consultation proposed that in addition to the CAA’s primary duty to promote the interests of passengers it should have a number of supplementary duties, the first of which was: • “To have regard to the effect on the environment and on local communities of activities connected with the provision of airport services.” Another consultation on the subject was launched in December 2009 and this reaffirmed the commitment to require the CAA to have regard to environmental considerations: • “By giving the CAA a specific environment objective we aim to make environmental considerations a ‘mainstream issue’ for the organisation and a strategic priority for its Board.”5 The Draft Bill, however, does not require either the CAA or the Secretary of State to have any regard to the environment or local community effects of airports. In fact there is no mention of the word ‘environment’ in the sections which define the duties of the CAA and the Secretary of State. Counter arguments
1. Requiring the CAA to have regard to environmental and local community effects would distort competition because the CAA, as economic regulator, can only directly influence airports which have dominant market positions (currently Heathrow, Gatwick and Stansted). • The proposed amendments merely seek to protect the CAA’s flexibility to make a balanced judgement;
3 Hansard, 9 Mar 2009, Col 5WS. Note: 10 UK airports exceeded 5 million passengers throughput in 2010. 4 Hansard, 10 Mar 2009, Col 149. 5 ‘Consultation on Proposals to Update the Regulatory Framework for Aviation’, DfT Dec 2009, para 1.24. CAB 05
• The market is currently distorted in favour of Heathrow, Gatwick and Stansted because they are insulated from the risk of their local planning authorities setting restrictive night flying regimes;6 • Heathrow, Gatwick and Stansted account for over 55% of UK air passengers and 76% of all freight. And the CAA could choose to apply an environmental licence condition to all UK airports above the 5 million passengers per annum threshold and thereby cover 84% of the UK market for air travel.7 2. Requiring the CAA to have regard to environmental and local community effects would risk confusing the CAA’s role as economic regulator and create the risk of the CAA developing environmental policies of its own, resulting in additional obligations upon airport operators. • The proposed amendments merely seek to protect the CAA’s flexibility to make a balanced judgement. The CAA has been making such judgements for many years and has considerable experience in attaching appropriate weight to relevant issues; • Moreover, the CAA will in future have a clear primary duty focused on the end users of airport services (i.e. passengers and users of freight services) whereas the duty to have regard to environmental and local community effects would be one of several supplementary duties which, as the Government’s policy paper states: “...cannot, individually or collectively, override the primary duty. Rather they aim to set out factors that the CAA should consider in giving effect to its primary duty.”8
Other regulators’ statutory duties ORR – “to have regard to the effect on the environment of activities connected with the provision of railway services” and “to contribute to the achievement of sustainable development.” 9
Ofgem – “[to] have regard to the effect on the environment of activities connected with the generation, transmission, distribution or supply of electricity”, “to have regard to any [social and environmental guidance] issued [by the Secretary of State]” and “to contribute to the achievement of sustainable development.”10
Ofgas – “[to] have regard ... to the effect on the environment of activities connected with the conveyance of gas through pipes” and “to contribute to the achievement of sustainable development.”11
Ofwat – “to have regard to any [social and environmental guidance] issued [by the Secretary of State and Welsh Assembly]” and “to contribute to the achievement of sustainable development.”12
6 The Department for Transport decides the night flight quotas for Heathrow, Gatwick and Stansted airports and ensures there is sufficient headroom to meet their projected needs. 7 CAA airport statistics, www.caa.co.uk/default.aspx?catid=80&pagetype=88&sglid=3&fld=2010Annual. 8 Draft Civil Aviation Bill, Volume 1: Policy Paper, DfT, Nov 2011, para 2.14. 9 Railways Act 1993, as amended, Sections 4(1)(b) and 4(3)(b). 10 Electricity Act 1989, as amended, Sections (2)(c) and 3A. 11 Gas Act 1988, as amended, Sections 4AA and 4AB. 12 Water Industry Act 1991, as amended, Sections 2(A) and 2(3)(e). CAB 05
Draft Civil Aviation Bill Annex A Briefing Note
Example 1: Homeowners around Heathrow whose properties were threatened by the third runway were offered a ‘Property Market Support Bond’ by BAA, to mitigate the blight. Similar arrangements were introduced by BAA for homeowners around Stansted Airport in 2004 threatened by a second runway. In both cases, the arrangements were supported by the 2003 Air Transport White Paper but they were nevertheless voluntary. Under the present economic regulatory regime airport operators can include the costs of such arrangements in the regulatory asset base (‘RAB’) for each airport, which enables the costs to be recovered from airlines through airport charges. If, however the CAA’s primary statutory duty in economic regulation is towards the passenger and there is no duty upon the CAA to have regard to environmental or community effects, airlines could challenge the legality of any CAA decision which sought to allow such ‘discretionary’ expenditure to be included in the RAB.
Example 2: In submitting development plans for airport expansion, airport operators generally include measures to mitigate environmental and community effects, e.g. improved public transport provision, landscaping and energy efficiency measures. If planning consent is granted, some of these measures will be defined as formal planning conditions, e.g. those which are not considered contentious and/or are seen as an integral part of the proposed development and/or where there is not considered to be any significant risk of the developer not providing the promised mitigation. Under the new arrangements, any mitigation measures not formally defined as planning conditions and not required by law would be deemed to be voluntary and therefore inadmissible for the purposes of setting price caps. And if airport operators could no longer rely upon the CAA to allow environmental/mitigation expenditure in the RAB, this would deter them from doing anything more than the bare minimum required. At present the CAA has flexibility to make a judgement as to the reasonableness of the expenditure when considering its admissibility for the purposes of the RAB and operating costs – the key determinants of the price cap. This flexibility would be lost: the CAA would only be permitted to allow cost recovery where there was an absolute requirement for the expenditure arising from environmental or planning law.
Example 3: As well as planning conditions, approval of a development is invariably accompanied by a Section 106 Agreement (TCPA 1990) consisting of additional obligations which the developer voluntarily agrees with the planning authority. For airports, many of these will relate to reducing and minimising the effects on the environment and local communities. S.106 agreements tend not to be written in robust legalistic language and often relate to process not substance, relying upon the airport operator’s good faith to fulfil the spirit and not just the letter of the obligation. Many s.106 obligations can have significant cost implications for the airport operator. Hitherto, the operators of designated airports (i.e. subject to CAA price regulation) have been able to recover the costs associated with honouring the obligations in spirit and not only to the letter. If, however, the CAA’s primary statutory duty in economic regulation is towards the passenger with no statutory duty (or right) to consider environmental or community effects, airlines could challenge the legality of any CAA decision which sought to allow an airport operator to recover costs incurred in relation to s.106 obligations.
November 2011 CAB 06
Written evidence from ABTA, the Travel Association (CAB 06)
Introduction
1 This response is submitted on behalf of ABTA – The Travel Association. ABTA was founded in 1950 – and is the largest travel trade association in the UK, with over 1,300 members and over 5,000 retail outlets and offices. Our Members range from small, specialist tour operators and independent travel agencies through to publicly listed companies and household names, from call centres to internet booking services to high street shops.
2 ABTA Member sales account for 90% of the package holidays sold in the UK annually, accounting for roughly £41.2 million of the Air Travel Trust Fund’s (ATTF) £46.2 million annual income. ABTA estimates suggest that our Members are licensed to sell in excess of 18 million ATOL protected holidays each year (in 2010‐11 this represented £16.5 million in sales); ABTA Members are also responsible for the sale of millions of independent travel arrangements to UK travellers.
3 Currently, 631 ABTA Members are Air Travel Organisers’ Licensing (ATOL) holders. It is estimated a further 629 ABTA Members could be required to enter the ATOL scheme under the proposed reforms currently being considered by the Department for Transport (DfT). The proposed reforms of the ATOL scheme are likely to entail significant systems and process changes for ABTA Members.
4 As such, the evidence contained within this submission is limited to the point that arose in the Written Statement delivered by the Secretary of State for Transport (23 November 2011) that it is possible the scope of the Draft Bill may be extended before it is introduced, potentially to include the reform of the Air Travel Organisers’ Licence (ATOL).
5 ABTA notes that the Transport Select Committee has been a long‐standing supporter of the inclusion of holidays sold by airlines within the ATOL scheme.
6 ABTA welcomes the Transport Select Committee’s call for written evidence on the Draft Civil Aviation Bill, and the announcement of oral evidence sessions. We are grateful for the opportunity to submit our views, and we wish to offer our continuing assistance in the form of our participation in oral evidence sessions if it is sought by the Committee.
Summary of evidence
7 ABTA welcomes the Government’s announcement of the Draft Civil Aviation Bill, and its proposed timing for early 2012. ABTA supports the Government’s commitment that the Draft Bill will put the passenger at the heart of the aviation experience. As an organisation with a strong consumer presence we support measures that add to the passenger experience. Key to the consumer experience is confidence, and financial protection is central to improving consumer confidence in travel products.
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8 ABTA particularly welcomed the mention that the scope of the Draft Civil Aviation Bill may be extended to include the reform of the ATOL scheme of financial protection. This is the clearest indication to date that the Government is aware of the travel industry’s key concerns surrounding ATOL reform, namely that the ATOL reform proposals will only be workable if airline holiday sales are also included within ATOL’s scope. Primary legislation would also be required to close the ‘agent for the consumer’ loophole, and it is clear that the Draft Civil Aviation Bill is an opportunity to create a comprehensive system of consumer financial protection for holiday sales.
9 ABTA supports clear signals from the DfT that it intends to introduce primary legislation to bring both airline holiday sales and ‘agent for the consumer’ sales into the ATOL scheme at some point.
10 ABTA would emphasise that to not include the provision for the inclusion of holidays sold by airlines within ATOL in the Draft Civil Aviation Bill would be a missed opportunity that would lead to continuing consumer confusion. Furthermore, without including holidays sold by airlines at this opportunity, the Government proposals on ATOL reform would lose significant support from the trade for the entirety of the ATOL reform proposals.
11 This submission places a specific emphasis on the importance of including holiday sales by airlines within ATOL. The airline‐led unprotected flight holiday market is substantial and a solution that excludes airline holidays beyond the short term can neither be effective in terms of consumer protection, nor can it be fair competitively. We believe it is essential that all customers buying similar products should be entitled to clear, comprehensive and similar protection – therefore, airlines selling holidays must be included within the ATOL regime.
12 Airlines can, and do, fail financially – comprehensive evidence of this is included within this submission. In light of this clear evidence, ABTA believes that Government should make an unequivocal commitment in its response to the consultation, expected later this year or early next year, that it will use the Draft Civil Aviation Bill to introduce such legislation as is necessary to bring holidays sold by airlines into the ATOL scheme.
The case for the inclusion of airline holiday sales within ATOL
13 ABTA has long argued that the changes which have occurred within the market place require the reform of the current ATOL scheme and an extension of the scheme to cover organisations selling holidays that currently sit outside the scheme, most notably airlines. The current proposals are a first step towards creating a more comprehensive, clear and transparent system of consumer protection, which we support on the understanding that at a minimum, airline holiday sales, and then all flights, will be brought within scope subsequently.
14 ABTA welcomes the Government’s announcement that the timing of the Draft Civil Aviation Bill would be brought forward to early 2012. ABTA supports the Government’s intention that the Draft Bill will put the passenger at the heart of the aviation experience. As an CAB 06
organisation with a strong consumer presence we support measures that add to the passenger experience and build a stronger market.
15 ABTA particularly welcomed the mention that the scope of the Draft Civil Aviation Bill may be extended to include the reform of the ATOL scheme of financial protection. This is the clearest indication to date that the Government is aware of the travel industry’s key concerns surrounding ATOL reform, namely that the ATOL reform proposals will only be workable if airline holiday sales are also included within ATOL’s scope.
16 ABTA believes all holidays – however they are booked – should be financially protected. This is the starting point for our work in calling for an extension of consumer protection. ABTA believes that such a system should be comprehensive and transparent, while ensuring that UK travel businesses can continue to thrive. To this end, ABTA supports the Government’s objectives of this reform to extend consumer protection, to make the system more transparent and clearer for consumers and to put the ATTF on a sustainable financial footing. Without the inclusion of airline holiday sales, ABTA believes that the proposed reforms will not achieve the Government’s stated objectives.
17 In developing the ABTA response to the June 2011 DfT Consultation on the reform of ATOL scheme, ABTA carried out a robust consultation of Members, including the distribution of a comprehensive questionnaire. The results of this questionnaire were overwhelming, with 95% of ABTA Members believing that airlines should be included within the ATOL scheme if the reforms were to achieve the Government’s stated objectives.
18 87% of our Members believe that all airline sales, including seat‐only, should be brought within the scope of the scheme. 93% of Members agree that airline website sales resulting in click‐through arrangements should be included as Flight‐Plus. This supports ABTA’s long‐held view that all holidays should be protected regardless of how they are booked.
19 The airline‐led unprotected flight holiday market is substantial and a solution that excludes airline holidays beyond the short term can neither be effective in terms of consumer protection, nor can it be fair competitively. We believe it is essential that all customers buying similar products should be entitled to clear, comprehensive and similar protection – therefore, airlines selling holidays must be included within the protection regime.
20 Airlines can, and do, fail financially – with UK‐based Astraeus Airlines failing only last week. Comprehensive evidence of recent failures of airlines is included within this submission on page 4. ABTA firmly believes that not only will the Government’s aims remain unachievable if airlines are not included within the scheme, but furthermore, in their current form, the reform proposals would create a system with market distortions. Such distortions are not only unfair in a competitive marketplace, but we believe they also perpetuate consumer confusion about whether their holiday arrangements are protected or not.
21 Consumer confusion coupled with the distorted competitive landscape in favour of airlines could well lead to fewer and not more consumers choosing financially protected travel CAB 06
arrangements. ABTA estimates it costs between £5‐10 per person to financially protect a holiday arrangement and this is usually passed on to consumer via higher prices. This could add up to £40 on the price of a holiday for a family of four adding considerable financial disincentive to purchasing protected arrangements. ABTA believes excluding holidays sold by airlines will also incentivise traders to seek to avoid the scheme, as far as legally possible, in order to remain competitive against those companies trading without the costs of protection.
22 The majority of ATOL failures that have involved significant withdrawals from the ATTF, leading to the current deficit in the fund, have been largely a result of airline failures, usually driven by external crises, which impact on the businesses of airlines and travel companies. Throughout the lifetime of the ATOL scheme systematic collapse, where the failure of an airline has subsequently led other travel businesses to cease trading, has been a common occurrence.
• The first example of this was the failure of Courtline in 1974. The failure of Courtline was driven by the oil crisis of the early 1970s and the failure of the parent shipping line. As a result, the impact on Clarkson Holidays was significant, and a failure resulted – leading to the creation of the ATOL scheme.
• In 1982, Laker Airways collapsed, taking along with it subsidiary operators Aerosmith Holidays and Laker Holidays. The Air Travel Trustees was able to deal with the resulting costs. By 31 March 1990, the fund stood at +£25 million, rising to +£28.3 million in 1991.
• However, on 8 March 1991, in the midst of the uncertainties of the Gulf War, Air Europe failed, taking down the International Leisure Group (Intasun/Global/Lancaster/Club 18‐ 30 etc. – The UK’s second largest operator only to Thomson at the time) with it. By March 1992, the fund was +£19.3 million and by March 1993 had fallen to +£7.6 million – the link between the collapse of ILG and the depletion of ATT funds is clear.
• Best Travel Group (including Ambassador Airlines) ceased trading in 1994, further depleting the fund until by 1997, it was ‐£5.2 million in deficit and it has never been able to climb back into the black from this point.
23 The major jump in the ATTF deficit can be attributed to the economic climate of recent years, when airlines have failed: XL Travel and Leisure; Kiss Flight; Freedom Flights, etc.
24 According to the Air Travel Insolvency Protection Advisory Committee (ATIPAC) reports (2000‐2011), substantial amount of monies have been paid out from the ATTF on failed ATOL holders, whose failures can be directly attributed to airline insolvencies over the last 11 years. This comes to £50,140,000 of a total £108,101,000 in calls, representing 46.38% since the inception of the ATIPAC online reports in 2000. This clearly demonstrates the importance of including airlines within the ATOL Scheme if the Government wishes to achieve its stated objection of eliminating the ATTF deficit.
CAB 06
25 In the last three years, 51.2% of all claims on the ATTF can be attributed to monies paid out following failures of ATOL holders as a direct result of airline insolvencies; we would highlight the failures of Silverjet, XL Leisure, and in particular, their Freedom Flights business, as well as Goldtrail and Flight Options Ltd, who appear collectively to have cost the ATTF somewhere between £80 million and £90 million between 2008 and 2011.
26 The failure of an airline tends to have a very significant impact on the ATTF when they occur. We would like to draw your attention to the failure of flyGlobespan, which as a non‐ATOL holder did not result in a call on the ATTF. However, some 3,500 passengers had booked directly with flyGlobespan and they were adversely affected, along with some 90,000 passengers yet to travel. This caused considerable consumer detriment that we believe could have been mitigated if holidays sold by airlines had been included within the ATOL protection scheme. It also added to consumer confusion about what holiday arrangements are protected.
27 ATIPAC reports from 2009‐2011 also highlight the particular significance of the airline failure in terms of impact on the consumer. 70% of repatriations that were necessitated during the period were due to an airline associated failure (67,424/96,940) and of the licensed passengers affected, the airline associated impact was 63% (1,101,851 / 1,747,605).
28 The CAA was sufficiently concerned about the impact of the EUjet failure in July 2005 to undertake its own report and analysis. When EUjet ceased flying, there were some 12,000 passengers still abroad and 27,000 yet to travel. The failure of Zoom in August 2008 with some 40,000 passengers affected also illustrates the necessity for airlines to be included.
29 In light of this clear evidence, ABTA believes that the Government should make an unequivocal commitment in its response to the consultation, expected later this year or early next year, that it will introduce such legislation as is necessary to bring airlines into the ATOL scheme. While the announcement on 23 November 2011 is the clearest indication yet that the Government is seriously considering the inclusion of airlines, we now need a clear commitment from the DfT that appropriate measures will be taken by Government to bring holidays sold by airlines into the scheme of ATOL financial protection.
30 ABTA is aware of the work of the European Commission to introduce airline insolvency measures. The Commission undertook an impact assessment this year which showed that although the number of passengers affected by airline failures was relatively small, in comparison to the total number of flights across the EU, the impact on those passengers affected was significant1. We do not believe that activity in Brussels should preclude activity in the UK and, moreover, believe that without UK action the ATOL scheme is not workable in the medium‐term. However, the practical difficulty of applying any national solution to airlines based outside the UK must be recognised. We would recommend the DfT liaises with colleagues in the Commission on this matter. ABTA believes that efforts to address airline
1 European Commission, Impact Assessment of Passenger Protection in the Event of Airline Failure, conducted by Steer Davies Gleave, March 2011 CAB 06
insolvency in the UK should be cognisant of but not tied to efforts in Brussels. We favour a regulatory route to address airline insolvency in Westminster and in Brussels.
Including ‘agent for the consumer’ sales within the Draft Civil Aviation Bill
31 An ‘agent for the consumer’ scenario is a reversal of the traditional agent‐principal relationship, whereby the principal will be the consumer, the agent will be the travel company and the third party will be a travel services provider; furthermore, the agent does not hold any funds of the consumer, ultimately destined for the travel service provider. An example of ‘agent for the consumer’ might be where an agent purchases a flight directly from the flight‐provider using the consumer’s credit card details. Under the current Government proposals on ATOL, ‘agent for the consumer’ sales would sit outside of ATOL financial protection.
32 In order to include ‘agent for the consumer’ sales within the reform of ATOL, primary legislation would be required. ABTA supports clear signals from the DfT that it intends to introduce primary legislation to bring ‘agent for the consumer’ sales into the ATOL scheme at some point. However, in order to dispel consumer confusion in the ATOL scheme, and to create a level playing field for industry, the DfT’s priority must be the provision for the inclusion of holidays sold by airlines within ATOL in the Draft Civil Aviation Bill.
33 ABTA believes that the current agent for the consumer loophole should be closed as soon as reasonably practicable. If there are failures before the loophole is closed, the current regime of financial protection for air travellers will be brought into further disrepute.
34 25% of ABTA’s Members agree that the agent for the consumer exemption should exist, 52% think it should not, and 23% are unsure. 59% of ABTA Members are not currently acting as agent for the consumer, as defined in the proposals, 25% are, and 16% are unsure. The majority (52%), are not considering changing their business model in light of these proposals, however 48% have not ruled it out (13% are considering it, 26% are unsure, and 9% are not considering a change yet).
November 2011
CAB 07
Written evidence from easyJet (CAB 07) easyJet is pleased to make this submission to the Transport Select Committee to help its pre‐legislative scrutiny of the draft Civil Aviation Bill.
Summary We are very pleased the draft Civil Aviation Bill gives airlines the right of appeal on price cap decisions. We hope that this right will be broad and deep, in the areas it covers and the access it gives us to the process. We welcome the extra flexibility that licences give to the CAA’s regulatory approach but caution that strong price caps need to be maintained at the London airports. easyJet We believe that we are ideally placed to provide information to the Transport Select Committee about the Civil Aviation Bill. easyJet is the UK’s largest airline operating from 18 of the UK’s airports. We carry over 55 million passengers each year. (More than BA, Virgin Atlantic and BMI combined). We began in 1995 at London Luton airport, floated on the London Stock Exchange in 2000. So successful, we now have 204 planes, operating over 580 routes to 130 airports across 30 countries. We fly to 44 of the 50 primary airports in Europe, which tend to have their airport charges set through a regulatory framework. Therefore, we are familiar with aviation law across a range of European jurisdictions, including what works well and what does not.
Background easyJet has been closely involved with the Civil Aviation Bill, from the review by the Department of Transport (DfT) in 2008 of the current legislation to the DfT drawing up its proposals last year. This year, we have been closely working with the DfT on its impact assessment of the various options with other airlines, coordinated through the British Air Transport Association (BATA). We have focused on the importance of airlines having a right of appeal.
Right of appeal We believe it is vital that airlines can appeal decisions made by the CAA about setting price caps on airport charges. An airline having this right of appeal, as well as an airport, is only fair or symmetric because these decisions have a material impact on both types of businesses. If this right is not given to airlines, there is a greater risk of regulatory capture of the CAA by the airport. Regulatory capture is a well known and established concept. This capture might only reflect that greater influence that airports will have over the regulatory process through having a right of appeal that compels the CAA to listen to them more closely to them than other parties. And even with the best will in the world, everyone makes mistakes. For example, the Competition Commission (CC) reviews the CAA’s price cap decisions automatically under the current regulatory framework and has been concerned in the past that the CAA has not paid enough attention to service quality at the London airports. Giving airlines the right of appeal means that another organisation with expert knowledge, resources and direct contact with passengers can challenge the CAA’s decisions if they fall too much in favour of the airport. Therefore, we are very pleased that the DfT has drafted the Civil Aviation Bill to give airlines this right and we hope that the Transport Select Committee will strongly support it.
We hope that airlines will count as ‘materially affected persons’ for appealing decisions made about whether price caps should apply to London airports. This decision is a fundamental basis for the price caps, which affect us and our passengers. In the same way that airlines have been granted a right of appeal for price cap decisions, we should be allowed to appeal whether one applies at all. In the same way, we would welcome the role of intervener. Airlines can play a key, constructive and effective role through participating in an appeal process, not just initiating one.
CAB 07
Primary duty to passengers The success of our business depends on our ability to understand and meet our passengers’ needs. Therefore, we welcome the CAA’s duties becoming similarly aligned with ours, focussing on passengers.
Additional powers to the CAA We support the additional powers that will be given to the CAA from the CC and DfT. We believe that this is appropriate given the expertise, independence and industry knowledge of the CAA.
Enforcement powers We agree with the extra civil enforcement powers that will be given to the CAA, including penalties of up to 10% of revenue. We believe that this ought to ensure more proportionate and therefore effective discipline upon airport behaviour, in relation to service quality and delivery of investment, which will benefit our passengers.
Licences We welcome the extra flexibility that licences will give the CAA in setting price caps. For example, it will make it possible for the CAA to set price caps over a longer period, if that suits the airport operator and the airline community. However, we caution that this should not be used to move away from RAB‐based price controls at the London airports. We believe that all the airports that currently have a price cap have significant market power and while RAB‐based price caps are imperfect, they are the only effective discipline for this problem. In particular, RAB‐based price caps provide certainty and some control on costs (especially when combined with a RPI‐X approach). In contrast, other methods are theoretical and impractical, such as trying to estimate the long run incremental average cost. Therefore, we encourage the CAA to focus on how to make the current system better instead of deciding it is broken. For example, the CAA could participate more actively in the current constructive engagement process and focus more on outcomes as a measure of whether investment has been successful or not.
We would be happy to clarify and expand on our written views here in your oral evidence sessions next month.
November 2011
CAB 08
Written evidence from Manchester Airports Group plc (MAG) (CAB 08)
1. INTRODUCTION & GENERAL COMMENTS
1.1 This is the submission of the Manchester Airports Group plc (MAG) to the Call for Written Evidence issued on 23 November by the House of Commons Transport Committee in connection with its inquiry into the draft Civil Aviation Bill. MAG welcomes the opportunity to respond to the contents of the draft Bill.
1.2 MAG is the UK's second largest airport operator and comprises the airports of Manchester, East Midlands, Humberside and Bournemouth. MAG handled over 24 million passengers in 2010/11, with Manchester alone accounting for over 19 million passengers.
1.3 MAG is publicly owned by the ten local authorities of Greater Manchester. These shareholders require us to grow the business profitably, to enhance the value of the business; and to maximise the economic and social contribution to the regions it serves.
1.4 The main points of this submission are as follows:
MAG supports the generality of this Bill in many respects, addressing as it does many of the criticisms that MAG has made over the years of the existing airport regulatory system. In particular, we welcome its greater flexibility and clarity, its introduction of a new primary duty of the regulatory system, and the fact that it seeks to target regulation only where it is absolutely required.
However, we do have a small number of concerns:
• There is no definition of the term 'user of air transport services'; • Regarding inter‐terminal competition and its associated terminal development tendering; • Regarding the appeal process against licence conditions and modifications; and • Regarding the omission in the draft Bill of any measures to rectify the inability of the CAA to properly target its charges towards those elements of the aviation supply chain where its various regulatory activities take place.
2 DETAILED COMMENTS
2.1 Definition of 'airport user'
The bill contains no definition of the term 'user of air transport services'. This has been the subject of considerable debate and dispute within the regulatory system to date, with airlines claiming that they should be the prime beneficiaries of airport regulation, and not passengers or freight shippers. As the CAA have stated on many occasions, although in many instances the interests of airlines and passengers do align, in some cases they do not, particularly as regards future passengers, and as such airlines cannot be regarded as a satisfactory proxy for representing the interests of passengers (and freight shippers).
CAB 08
It needs to be established beyond any reasonable doubt within Chapter 3 of the Bill that such users are passengers and the users of freight services provided by airlines.
The interests of passengers and freight users as the prime beneficiaries of regulation are made quite clear in the explanatory material that accompanies the Bill, including the Ministerial Statement; this certainty needs also to be reflected in the Bill itself, to avoid any future doubt on the matter.
2.2 Inter terminal competition
Clauses 4, 5, and 10 – 13 concern the regulation of airports where there is more than one 'operator' at a given airport site. This is envisaged where competition has been introduced within an airport site, such as with 'inter‐terminal competition'.
Much has been made of the merits of allowing inter terminal competition to take place in the UK and it has been looked at during both the 2006 OFT market study of airports and the more recent market investigation into BAA by the Competition Commission. MAG made representations to both those enquiries to the effect that the suggested gains from inter‐terminal competition (and its cousin 'terminal development tendering') were illusory and theoretical and involved importing many difficulties and complexities into airport operations for no proven benefit. It is not a regulatory solution that has been advocated at any time by the Civil Aviation Authority and even the Competition Commission was neutral about it.
MAG is pleased that inter‐terminal competition is not being forced upon airports within this Bill. However the above‐mentioned clauses do make provision for the regulation of airport sites when more than one operator is active, as would be the case under inter‐ terminal competition. This might occur on either a voluntary basis if an airport operator decided to lease out an individual terminal to a competitor, or it could be imposed as part of a regulatory solution by the Competition Commission following a market investigation at some time in the future.
The Bill does not make it clear that where inter terminal competition is adopted as a regulatory solution, then it should only apply to the proposed 'Tier 1' airports; this clarification could be usefully added to the Bill, to make it clear that non Tier 1 airports, such as Manchester (which has three terminals), are not affected by these requirements.
2.3 Rights of appeal against licence conditions and modifications
One of the criticisms of the current regulatory system for airports is that it involves an expensive and time‐consuming two‐stage process, with a mandatory referral to the Competition Commission. The proposals contained in the Bill provide for the more 'standard' regulatory model to be adopted, with the initial licence conditions and modifications being undertaken by the sector regulator, and the Competition Commission having an appellate role only.
MAG's main fear with the proposed system arises from the fact that the main players in the regulatory process to date have tended to be the airlines, who are well able and qualified to pursue their own regulatory interests. There will remain a possibility that airlines will continue to pursue appeals for what are patently commercial reasons, with CAB 08
the result that the process will remain a two‐stage process, merely swapping over the timing of the respective CAA and Competition Commission stages.
Some protection is afforded against this within Clause 25 (5). Additionally the Competition Commission is now bound, for the first time, to have regard to the new primary regulatory duty of putting the interest of the passenger and/or freight user first when undertaking their duties in this regard. These safeguards should be improved further and strengthened by extending Clause 25 (5) as follows:
(c) that the appeal does not demonstrably show that it is in the interests of either the passenger or freight user.
2.4 Enabling the CAA to better target its regulatory charges
The Bill seeks to give the CAA additional responsibilities in various areas, including enforcement, information disclosure and security regulation. Additionally, there has recently been a strengthening of the CAA's role in respect of its environmental responsibilities and in its consumer protection role, incorporating the work of the former Airport Users Council (AUC). The costs of many of these areas have previously been met from other sources, including general taxation, but are now expected to be met by industry as a 'cost of regulation', thereby lightening the burden on general taxation as a result.
There are several problems that arise from this:
• Although relatively small in per passenger terms (up to 4 pence per passenger for non‐designated airports), collectively these sums can be quite considerable (around £360,000 for Manchester when the costs of security regulation are added). The considerable increases involved, both recent and proposed, represent new costs for airports, many of which are now having to bear considerable increases in cost arising from the recent changes to airport policing costs, previously partly met from local taxation, and from the recent introduction of spectrum pricing for aviation purposes. • The magnitude collectively of these changes to the CAA's charging regime and the reasons behind them represent an effective 'structural' change of charges, the type of which ‐ if made by airports on their customers – would rightly attract regulator attention ‐ and which could only be brought in with adequate notice (more than a year) and then only on a gradual and phased basis. These ‘structural’ changes are being imposed on the industry virtually immediately. • Although at Tier 1 ('market dominant' or monopolistic airports), such costs can be passed through to airlines, and ultimately passengers, as an 'opex cost' within the regulatory settlements, this is not possible at the vast majority of other UK airports which are subject to effective competition for airline and passenger business. This has already proven to be the case with the recently introduced PRM charges. • A large proportion of the recent increases in cost arises from the CAA's extended role in consumer protection, including the work of the former AUC, which to date has mainly not concerned airports, but has concerned with other sectors of the aviation supply chain, namely airlines, tour operators and their various agencies and contractors, most notably relating CAB 08
to complaints against lost baggage, flight delays and cancellations and booking disputes. Although in future the proportion of airport‐related work is expected to increase slightly with the introduction of the proposed Aviation Consumer Advisory Panels, this proportion will remain small. The majority of the CAA's consumer protection work will remain concerned with other sectors of the aviation supply chain. • The CAA recognises this, but is unable to charge airlines directly because it only has power to levy charges on UK registered airlines and aircraft. As such a charge would cause a competitive disbenefit to UK airlines – and much of the CAA's work in this area concerns foreign based airlines (such as Ryanair), the CAA has to resort to charging airports, because it only has the power to do so. • The end result for airports represents a fundamental injustice in that they are required to pay for regulation in areas of the aviation supply chain which are not their concern and over which they have no control. Airports will finish up paying for the CAA’s regulation of airlines.
To rectify this matter, MAG strongly urges that the CAA be given a statutory power, within this legislation, to levy charges for its regulatory activities directly on all airlines that use UK airports. This would then enable the CAA to correctly apportion its charges between airports and airlines, dependent on its regulatory workload. Direct charges on such airlines are already levied directly by Government in the form of Air Passenger Duty (APD).
Such a clause could usefully be added to Clause 95, as follows:
(8) As part of its scheme of charges, the CAA may, where appropriate, levy charges directly upon airlines that utilise UK airports.
The Policy Paper that accompanies the Bill states the possibility of extending the scope of the Bill before it is introduced; MAG considers that the change suggested above falls within this statement.
3. CONCLUSION
MAG broadly welcomes this Bill. We urge that the proposed legislation clarifies the definition of the term ‘users of air transport services’, clarifies the position on inter‐ terminal competition and appeals against licence conditions and modifications, and modifies the Bill so that the CAA can properly target its charges against those sectors of the aviation supply chain it is regulating.
November 2011
CAB 09
Written evidence from the British Air Transport Association (BATA) (CAB 09)
1. The British Air Transport Association (BATA) is the trade body for UK registered airlines. Our ten members cover all sectors of the airline industry – including freight, charter, no‐frills, regional and full service operations. In 2010, BATA members employed over 71,000 people, operated four‐fifths of the UK commercial aircraft fleet and were responsible for some 96% of UK airline output, carrying 119 million passengers and 1 million tonnes of cargo.
2. We welcome the opportunity to make this short submission to the Transport Committee to assist in its consideration of the Draft Civil Aviation Bill. Because of the very short period allowed for submissions, it has not been possible to consult fully with our members, nor to produce a paper covering all the issues included in the Bill. We hope to be given an opportunity to expand on our written comments at the Committee's oral hearing.
3. BATA was the focal point for discussions between the airlines on the one hand and the Department for Transport and the Civil Aviation Authority on the other, stretching over several months, as the Draft Civil Aviation Bill was developed. Numerous meetings were held and oral and written submissions presented. Most of the meetings were with officials, but we also met with the Minister of State for Transport. At an early stage, as a result of comments from the DfT, we decided to invite Ryanair to join BATA members in preparing arguments for submission to, and in meeting with, DfT officials. This proved to be a useful and constructive initiative. External consultants, experts in regulatory law, were also employed to assist in the process.
4. The primary focus of attention in discussions with the DfT became who should have the right of appeal against CAA airport pricing decisions. For the past decade or so the quality of CAA decisions on airport charges and service quality provisions at the three principal London airports has attracted considerable criticism, for example from the Competition Commission as well as from the airports' main customers, the airlines. Unfortunately, without a satisfactory appeal mechanism, the proposed reforms would result, in BATA's view, in a regulatory regime potentially biased against the customer. There was never any question that the airports themselves should have the right of appeal against CAA decisions. The issue was whether, and if so which, representatives of the customers of airports should also be granted such a right. These are complex arguments, but we are pleased that Ministers eventually accepted that in this context airlines are in the best position to ensure that the interests of the ultimate consumer, their passengers, are protected.
5. BATA supports the reform of airport regulation in the UK, and we are broadly pleased with the Draft Civil Aviation Bill. As you would expect, there are points of detail with which we might disagree or where clarification would be welcome, and further work is underway by our members to identify and agree them. Our major remaining concern relates to the new Primary Duty being given to the CAA. We believe there should be more recognition of the role of airlines as the principal customers of airports, realistically the only organisations other than the airports themselves able to engage in detail in the technically complex, time‐consuming and expensive regulatory process. We did propose a small amendment to the draft Primary Duty to provide more confidence that airline (and by extension, air passenger and freight shipper) interests were taken fully into account by the CAA in reaching its regulatory decisions. However, this time unfortunately the DfT decided not to accept our arguments.
6. As already mentioned, the shortage of time has not enabled us to produce as detailed a submission as we would have liked. Nor have we been able to consult our members sufficiently, although some of them may be providing their own submissions. BATA has been closely involved in discussions with the DfT and CAA on the contents of the draft Bill. We are broadly supportive of it, CAB 09
while acknowledging that not all of our suggestions have been accepted. We are particularly pleased that our views have been listened to on the key issue of right of appeal. We would welcome the opportunity to expand on any aspects of the draft Bill not sufficiently covered in this short submission, either in writing or at an oral hearing before the Transport Committee.
November 2011
CAB 10
Written evidence from BAA Airports ltd (CAB 10)
General comments and introduction 1. BAA welcomes the opportunity to submit comments on the draft Civil Aviation Bill to the Transport Select Committee. In the short time since the draft Bill was published we have had a comparatively limited opportunity to scrutinise the Bill in detail. For this reason our comments are inevitably high‐level at this stage. 2. BAA, as the UK’s leading airport operator, will be well‐known to members of the Committee. BAA's two London airports, Heathrow and Stansted, have helped to make London one of the world's best connected cities and Heathrow is the UK’s only hub airport. The hub is vital to the UK's economic success, through the growth of high‐value trade in manufacturing and services which also stimulates jobs. 3. In Scotland we have transformed connections to all the major cities, Edinburgh, Aberdeen and Glasgow. And in Southampton we have developed a very successful regional airport. 4. Our UK airports have been the catalyst for the growth of Europe's most dynamic low‐cost aviation industry, which has opened the social and cultural benefits of aviation to everyone. 5. BAA is, and must continue to be, a responsible custodian and developer of public assets, a good employer, a co‐operative partner with government, an equitable partner to airlines, and a good neighbour in the communities where our airports are located, as well as an excellent business. 6. In general, BAA is in favour of reform of the regime for the economic regulation of airports. The current regime is ripe for modernisation. It should be developed to reflect best practice and ensure economic regulation is both proportionate and effective. While BAA broadly welcomes the proposals, there are nevertheless some areas where we consider the proposals could be improved. 7. It is vital to consider the proposed statutory regime in context. The UK's airports are an important national resource. They are of significant economic value to the UK as a whole. Airports are highly capital‐intensive businesses. Typical major projects can run to billions of pounds and have investment horizons over many years, if not decades. For example, over the current price control period BAA is forecast to invest approximately £5bn in the continuing development of Heathrow. This represents the largest single privately funded infrastructure investment in Europe of its kind today. 8. This kind of investment is, of course, essential for the UK as a whole. In order to raise finance for this scale of investment, BAA needs to operate in a regulatory framework which provides certainty. An environment of regulatory certainty will also benefit passengers, for example, by supporting improved facilities and better service. 9. In short, there is an important balancing exercise as between regulatory flexibility (on the one hand) and regulatory uncertainty on the other. Regulatory risk should be minimised such that BAA can continue to raise finance for long‐term investments, in the interests of passengers, airlines and the wider economy. It is not yet clear whether the proposed regime gets that balance right. CAB 10
10. In relation to the specifics of the Draft Bill: a. the overall direction of reform is to be welcomed; b. we particularly welcome the focus on the interests of the passenger as the primary duty of the CAA; c. there are some areas where we think improvements can be made or where more detail is required to give a better understanding; d. we look forward to working with the Department for Transport and the CAA in developing the Bill in advance of the first reading. 11. The CAA has also published a draft indicative licence (which will form an important part of the regulatory framework under the new Bill). We do have some reservations about the specifics of the draft indicative licence (see below, under paragraph 27ff, for example). However, the proposed approach to licencing is broadly to be welcomed. In many areas the draft provides a framework document rather than an intended policy direction. This is useful in itself. The draft licence flags some very significant areas for policy development and, as a prospective licensee, we expect to work closely with the CAA on the development of these policies. 12. In the rest of this note we deal with some specific policy areas (primarily in relation to the Draft Bill) which we consider merit further attention.
New duties for the CAA 13. We strongly support the proposal that the CAA's prime responsibility should be to promote the interests of passengers. We also broadly support the subsidiary duties contained in clause 3(3) and the regulatory principles in clause 3(4). These will help to give balance and direction to the primary duty. 14. We welcome the proposed duty not to impose or maintain unnecessary regulatory burdens. This is an important part of a modern regulatory framework. 15. In relation to the proposed duty on financial resilience: as with any responsible company, we remain absolutely committed to building a secure and soundly‐financed future; we are therefore happy to support regulatory policies which will underpin this. We do however have some concerns about the possibility for intrusive regulatory intervention in internal financing arrangements, and also some concerns about how it might be interpreted when applied. This is one of those crucial areas where the wrong regime could increase regulatory risk and damage investment. 16. Finally, the CAA will have a difficult task in balancing its various duties under the Draft Bill. We would like the Bill to require the CAA to publish and consult on any exercise requiring its different duties to be balanced and weighed against each other.
Appeals CAB 10
17. The new regime proposes that appeals will be sent to the Competition Commission or, in some circumstances, the Competition Appeal Tribunal. The automatic reference of price control matters, which exist in the current regime, will be abolished. 18. This is a logical approach that represents regulatory best practice, it will enhance administrative efficiency and help facilitate improved regulatory processes. The CAA will have very extensive powers under the new regime and it is right that there should be appropriate checks and balances. 19. The challenge with a regulatory appeals regime is to ensure that the regulator’s decisions are subjected to the right level of account and scrutiny while ensuring that the smooth functioning of the regime is not damaged. A properly‐constructed appeals regime should, of course, correct any errors in the appealed decision. It should also result in better decision making across the board with no loss of regulatory efficiency. On the other hand, a regime which allows too few or too many appeals will undermine the regulator and can result in gridlock of the whole regulatory process. 20. There is a very fine balance to be drawn here and the details need to be examined very carefully. We look forward to working on the detail of this but an example may be useful. The Draft Bill provides a two‐stage approach to appeals. The first stage is simply intended to weed out attempted appeals which have absolutely no merit at all. In general terms, we would support this; in fact, we consider it would be valuable to add another test for that preliminary stage – that to get through this hurdle, the company bringing the appeal must have the locus standi to do so – i.e. it must either be the airport affected by the measure being appealed, or it must be a "materially affected" airline. 21. While this approach is sensible, BAA does not currently consider that this first stage hurdle ought to apply to companies who are themselves the subject of the regulatory decision, i.e, the Licensee. It should be self‐evident that they have sufficient standing to bring an appeal and that they will have no interest in bringing vexatious actions.
Scrutiny and Transitional issues 22. The government’s Code of Practice on consultations1 recommends that they should normally be for a minimum of 12 weeks. In this process we have had only a few days to review an entire Draft Bill. The CAA's draft licence also requires responses unusually quickly (for 14 December). The new regime will not come into effect until April 2014. Given this, allowing only a few days to comment on a Draft Bill is sub‐optimal because stakeholders will not have had time to give the Draft Bill the very careful and detailed attention it deserves. 23. This is particularly important because the process of changing an entire regulatory regime is very complicated. The Draft Bill brings in a new regime in which "dominant" airport operators are required to have licenses. At the moment, it is silent on the precise process by which this regime will be brought into force; the regime for dovetailing the current rules with the new
1 This guidance was originally prepared by the Better Regulation Executive; the Department of Business Innovation and Skills is now responsible for this area: http://www.bis.gov.uk/files/file47158.pdf CAB 10
d welcome more clarity on the face of the bill and will be making detailed proposals to achieve this. 24. We genuinely welcome the consultation and the opportunity to contribute to the TSC’s and other stakeholder’s thinking on the Bill. However, the constricted timescales highlight the need for genuine and thorough Parliamentary and stakeholder scrutiny throughout the process. Stakeholders need a sufficient timeframe to provide considered and productive responses for such a major regulatory change.
Transfer of security functions 25. We note the Bill proposes the transfer of security functions from the DfT to the CAA. We welcome this as broadly consistent with other aspects of the CAA's current remit – for example, their role in relation to airfield safety and security compliance. We would observe that the publication of the Draft Bill represents an opportunity to review how these functions are currently administered and how they will fit with the CAA's existing work. There may be opportunities for efficiencies and, if these can be achieved in a manner consistent with security requirements, this would be welcomed.
Operational resilience 26. The new licence proposes some "operational resilience" rules which will apply to dominant airports. In principle we think that it is important for airports to take appropriate steps to help ensure operational resilience. Airports are in the business of providing services for the benefit of passengers and it is clearly not in BAA’s interests to “close” in circumstances of bad weather, or other extreme circumstances. 27. There is a careful balance to be drawn here between risk and resilience considerations. We would recommend the following principles for operational resilience conditions: a. they must be clear and specific; b. they must be non‐duplicative and coherent (i.e. they ought to build upon (rather than cutting across) other regulatory instruments such as the Aerodrome licence which deals with operating procedures in some detail ); and c. they must only bind the licensee to the extent that matters are within its control. 28. The draft licence as it stands is extremely vague, obliging the licensee to operate an "efficient and reliable airport". While unobjectionable as an idea, it is not useful as a legal obligation because it is unclear what, specifically, it means and so is open to wide interpretation and thus uncertainty. Here, again, is an area where there is a danger of excessive regulatory risk. 29. That said, as we understand it the draft licence is primarily there to give an idea of the structure for the document going forward, rather than to be a detailed policy proposal; we look forward to working further with the CAA on the detail.
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Symmetric regulation 30. We welcome the provisions of section 80 of the Draft Bill which commits the CAA to publishing consumer and passenger related information about aviation services. We are very happy to do our part to help with this; but there is only so much information within the control of BAA. A lot of what is required by passengers is within the control of the airlines and so we support the extension of this power to allow the CAA to require airlines to collate and publish such information. 31. By way of an example: when there is bad weather, this can affect flights. This is not a situation that benefits anyone and we will always do our utmost to get the airport fully operational as quickly as we possibly can. It is also very important that passengers have the best and most up‐to‐date information. In that area, passengers are also reliant on airlines. In this context, the provisions of the draft Bill which allow the CAA to put more of an onus on airlines are very welcome.
Economic and market power analysis 32. Questions about market power and competition policy lie at the very heart of the Civil Aviation Bill. The CAA will in future be responsible for identifying airports with market power. 33. At the moment, we think the Bill is too prescriptive in this respect, in particular in relation to provisions which look to promote certain forms of competition. In broad terms, this seems to us inconsistent with best practice across other regulated sectors which treat detailed thinking about how to promote competition as a matter for detailed consideration by the regulator rather than for Parliament. 34. Other possible improvements to the Bill – to align its provisions with best practice across the economy – would include a requirement that market power and dominance analysis should be consistent with the broader principles of competition law. 35. That said, other aspects of the Bill in these difficult areas appear positive. We particularly welcome the possibility of regulation being removed from airports and in parts of airports where it is no longer necessary.
Sanctions 36. The Draft Bill proposes a sanction regime in which licence breaches can generate fines of up to 10% of an airport’s turnover or a daily fine of 0.1% of that turnover. 37. The principle of a regime which provides good incentives towards compliance is accepted. Nevertheless, BAA has some concerns about the proposals, namely: a. A question of certainty: at this stage we have no real, specific insight into what obligations will be contained in licences issued under the Draft Bill. The specimen licence issued by the CAA, while useful on its own terms, is very much intended as an outline for discussion. b. The possibility of double jeopardy: the CAA already has sanctioning powers under other legislation or regulation. For example, the Service Quality Rebate scheme CAB 10
provides for rebates to airlines and/or fines of up to 7% of regulated revenues if proscribed service quality targets are not met. We would welcome clarity as to the proposed penalties under this legislation, not least whether the intention is for the proposals to supersede existing provisions. c. Are the incentives directed at the right person? As we have highlighted above, passenger experience is often dependent on multiple service providers getting things right. In adverse weather conditions this would include airports but would also include airlines, UK Borders Agency, public transport providers, and authorities responsible for roads and so on. How will the government ensure that all these different providers such as within the transport sector are suitably incentivised? 38. For these reasons, we believe that the sanctions regime needs careful scrutiny and we recommend the following principles: a. the regime should provide an appropriate incentive on all players who activity touch the passenger. This would be consistent with the new principal duty in the Draft Bill which puts the passenger first; b. there should be an appropriate set of checks and balances within the Draft Bill to ensure that penalties are not only imposed where it is proportionate but also where the underlying obligations are sufficiently clear; and c. there should be no double jeopardy.
Conclusions 39. BAA welcomes the opportunity to make submissions to the Transport Select Committee on the Draft Civil Aviation Bill. It is vitally important that the Draft Bill and the rest of Government's policy in this area are subjected to such continued rigorous scrutiny. 40. In general, BAA supports the proposed policy in directional terms. We welcome the proposal to put the passenger at the heart of the regime. We also welcome moves towards modernisation of regulation in our sector. 41. Inevitably in such a major reform, some areas for improvement remain and we look forward to working with Government and the CAA over the coming months.
November 2011
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Written evidence from the Civil Aviation Authority (CAB 11)
Below is the CAA’s response to the Transport Committee’s call for written evidence on the Government’s draft Civil Aviation Bill, published on 23 November.
The CAA exists to protect the interests of the public in aviation matters. We do this based on a number of statutory duties covering the range of our regulatory activity (paragraphs 2.1 – 2.3).
The draft Bill will ensure passengers are at the heart of the CAA’s economic regulation of airports. At present we are restricted by a regulatory regime that is over 25 years old. The proposed legislation will give us a modern and flexible tool kit that will enhance our ability to improve the passenger experience, as well as including reforms which will improve the CAA’s governance.
We look forward to giving oral evidence to the Committee in December.
Executive Summary
1.1 The CAA welcomes the publication of the Draft Civil Aviation Bill which is designed to modernise the CAA’s regulatory framework, including moving to a licence based regime with a primary duty to the users of air transport services in our economic regulation of airports.
1.2 The current legislation dates back to the 1980s and provides a fixed five year ‘one‐size fits all’ price control. The draft Bill offers a package of reforms to ensure regulation is flexible, proportionate and targeted, in accordance with better regulation principles.
1.3 The draft Bill will enhance our powers as an independent regulator, while ensuring we weigh up the costs and benefits of decisions. The draft Bill will also improve our governance, transfer certain security functions to us and give the CAA a role in promoting better public information about airline and airport performance and about the environmental impact of aviation.
The Civil Aviation Authority’s Current legal framework
2.1 As a body that has been created by statute the CAA is only able to do that which primary or secondary legislation expressly or impliedly permits. Historically, primary legislation relating to civil aviation has been infrequent; the CAA’s extensive range of functions is set out in:
• the Civil Aviation Act 1982 – which covers the establishment of the Civil Aviation Authority and how it must carry out its general functions; • the Airports Act 1986 – which sets out the scheme for the economic regulation of airports and our duties in this area (Part 4 will be replaced by the draft Bill once enacted) ; and • the Transport Act 2000 – which provided for the part privatisation of NATS, established the scheme for the economic regulation of air traffic services and placed new air navigation responsibilities on the Civil Aviation Authority.
2.2 The 1982 and 1986 Acts have been amended regularly by means of secondary legislation and all three Acts are supplemented by a wealth of secondary legislation that confers functions on the CAA and governs its activities. CAB 11
2.3 Part 8 of the Enterprise Act 2002 also gives CAA powers to enforce a range of consumer protection legislation. It can take action to ensure compliance with such legislation where it has evidence of conduct which amounts to a breach or breaches of relevant legislation and which harms the collective interests of consumers. This power allows CAA to tackle very serious or systemic breaches of consumer protection legislation in the aviation sector. Key pieces of legislation that can be enforced via this framework are:
• EC Regulation 261 on Denied Boarding • Package Travel, Package Holiday and Package Tours Regulations • Unfair Terms in Consumer Contracts Regulations. • Consumer Protection from Unfair Trading Regulations.
The Economic Regulation of Airports
3.1 In our economic regulation of airports, the draft Bill proposes to replace our four current duties with a single primary duty to promote the interests of users (current and future passengers and owners of cargo), where appropriate by promoting competition.
3.2 The proposed changes to the statutory duties should provide improved clarity over the CAA’s remit and will mean that every time the CAA makes a regulatory decision it will need to be satisfied that doing so would be in the interests of users of airport operation services.
3.3 In the current regime, referral of the price control to the Competition Commission is automatic and that incurs a significant time penalty in terms of the process. To facilitate a smooth transition to the new regime, the previous Secretary of State stated that he would be minded to exercise his power under the Airports Act 1986 that there should be no reference to the Competition Commission for the next price review. The CAA welcomes the Government’s confirmation that this remains its position, as this will provide greater certainty over the process that will govern the next price reviews. It will also help minimise the risks that could arise if stakeholders had to switch to a different regulatory framework part way through the price control review.
Financial Resilience
4.1 One of the proposed subordinate duties of the CAA will be a ‘Financing duty’ to have regard to “the need to secure that each licence holder is able to finance its provision of airport operation services in the area for which the licence is granted”.
4.2 The Department for Transport may issue statutory guidance to the CAA outlining its opinion on the inclusion, in the first licence, of a financial ring fence with derogations for those elements which cut across airports’ current financial arrangements.
4.3 The CAA supports the broad principle that ring fence licence conditions, which do not cut across existing financial arrangements, could bring benefits to users. However, this is subject to a consultation with stakeholders.
Ring fence licence conditions could bring benefits to users by; CAB 11
• Complementing the existing contractual arrangements; • Encouraging the airport to be financially sound; and • Providing the CAA with options if the current financial arrangements are changed.
Deciding which operators should be subject to economic regulation
5.1 One of the criticisms of the current regime is that the Secretary of State currently decides which airports should be designated for price cap regulation. The CAA supports the proposal, under the draft Bill that this decision should be taken by the CAA as it will provide greater regulatory certainty, remove political involvement and reduce costs.
5.2 The criteria for the CAA to take such a decision (the “market power” test) will be based on the existing criteria used by the Secretary of State for deciding which airports are designated for price control. These criteria will provide a robust filter aimed at identifying those airports whose market power is such that it should be subject to appropriate constraints via a licence rather than through the Competition Act ‐ once anti‐competitive conduct has already taken place.
The Licensing Regime
6.1 The proposed licence regime would bring the CAA into line with other economic regulators in the United Kingdom and would benefit users by facilitating outcomes (for example price and service quality) that better reflect what would be expected in a competitive market.
6.2 Airports vary in size and market power. A licensing regime will give the CAA the flexibility to tailor licence conditions to the specific circumstances facing individual airports with substantial market power and should minimise the distortions associated with regulatory intervention.
6.3 The CAA welcomes the proposal to improve its accountability through the introduction of a system of appeals for key regulatory decisions and endorses the proposal that appeals against licence conditions should include some constraints to ensure the system remains workable. The CAA notes the Government is considering whether the appeals regime should make formal provision for 'interveners' and the CAA would welcome the certainty that this would provide.
6.4 In response to a request for advice from the Secretary of State, the CAA published a draft indicative licence at the same time as the Government published the draft Bill. The CAA would emphasise that the draft indicative licence is intended as a supporting document to assist Parliament in its scrutiny of the draft Bill.
Enforcement
7.1 Enforcement powers are an important part of a regulatory systems as they influence behaviour and encourage ongoing compliance with licence conditions. The proposed powers for enforcing breaches of licence conditions mirror those of other UK economic regulators by introducing; CAB 11
• the ability to impose a fine even if the contravention has been rectified; and • penalties of up to 10% of turnover at the relevant airport. • A process of escalation with increasing consequences for the operator for non‐compliance. 7.2 The CAA will also have the ability to obtain information, to support the carrying out of its economic regulation functions, from a person (i.e. not just licence holders) backed by penalties and civil sanctions.
7.3 The circumstances in which the licence may be revoked must be set out in the licence.
Concurrent Competition Powers
8.1 The draft Bill will provide the CAA with powers to investigate and remedy anti‐competitive behaviour in the provision of airport operation services, by any person at all UK airports.
8.2 This could mean investigating and fining operators who abuse their dominant position or collude to fix prices. It would also allow the CAA to investigate a particular market where there is no illegal conduct as such but competition does not seem to be working effectively. The CAA can draw on the case law, guidance and expertise built up by OFT as the principal UK competition authority. The value in giving the CAA the same powers as OFT lies in affording CAA the ability to have a choice of tools. As markets move more fully towards liberalisation, it ensures that where it is desirable to protect effective competition by tackling anti‐competitive conduct after the event rather than through embedded constraints in a licensing regime, the regulator who has all the in depth knowledge can oversee that transition. This gives more confidence to businesses that they will be treated with insight and fairness.
Transfer of Security Functions to the CAA
9.1 The Bill will transfer certain operational aviation security functions to us as part of the Government’s work to improve aviation security regulation. The Secretary of State will remain accountable for policy and directions on security matters, with the CAA assuming responsibility for the provision of advice to the Secretary of State and industry.
9.2 While the detail of how this transfer will work in practice is yet to be determined, the CAA supports the principle of a move to a security regime that is based on outcomes rather than compliance with fixed standards. We believe our experience of implementing Safety Management Systems will be relevant and facilitate such a move.
Governance Reforms
10.1 The changes to the legislation will usefully align the CAA’s governance arrangements with those of other regulators.
10.2 The reforms will ensure the CAA Board is accountable for the appointment of Executive Directors, without the involvement of the Secretary of State, except in the case of the Chief Executive. This will provide greater flexibility to attract, retain and manage first CAB 11
class Executive Directors. The reforms also make a provision to ensure that the Non‐ Executives, who are appointed by the Secretary of State, form the majority on the CAA Board.
Civil Sanctions
11.1 The draft Bill will provide the Secretary of State the power to give the CAA access to civil sanctions to enforce existing offences.
11.2 In future CAA will have access to a more flexible enforcement toolkit which would provide a more proportionate response where an individual has failed to comply with a process in circumstances where the current avenue is via criminal prosecutions.
Publication Powers
12.1 The Bill will give the CAA a role in promoting better public information about airline and airport performance and about the environmental impact of aviation, which will improve consumer’s ability to make an informed choice and may help drive standards of service delivery.
12.2 Access to information powers would better enable the CAA to operate within the Government’s ‘Better Choice Better Value’ agenda. This promotes the publication of information so that consumers have better choices about the services that are important to them.
12.3 The best protection for consumers in terms of choice and value lies in the operation of a competitive market. Consumers need clear information on price and service quality in order to make informed choices and to ensure that markets deliver consumer benefits in practice.
12.4 Information provided currently is piecemeal and subjective. For example the Association of European Airlines used to publish its ‘Consumer Report’, which included statistics on the number of missing bags for each European airline, but this has been withdrawn.
12.5 Passengers value consumer information. The CAA’s own research shows that two thirds of passengers are unsatisfied with the ability to compare the service quality of airlines when purchasing a ticket. Air Transport Users Council research found that 84% of respondents tended to agree or strongly agree that performance league tables should be made generally available.
12.6 The CAA has adopted an environmental objective this year to improve industry’s environmental performance. Although parts of industry provide environmental information it is not standardised. Publication Powers will allow us to gather and publish information in a more proportionate way.
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12.7 Our own research found that almost two fifths (38%) of consumers thought that having access to information about the environmental impact of the flight they were booking is very or quite important. Environmental information to consumers may result in better informed passengers choosing better performing airlines and airports.
12.8 Consumer information has led to improvements in environmental performance in other sectors including;
• the automotive industry ‐ manufacturers have to publish information about fuel consumption and environmental efficiency; • labelling on white goods has driven performance in the electrical manufacturing sector; • energy performance certificates have led to improvements in the energy efficiency of buildings.
Air Travel Organisers' Licensing (ATOL) ‐ Requirements in Primary Legislation
13.1 We welcome the Government’s commitment to introduce reforms to ATOL via secondary legislation. The draft Bill, when introduced into Parliament, has the potential to strengthen these reforms with possible measures to bring airline holidays into the ATOL scheme, in line with all other air inclusive holidays, and to close the loophole that allows agents to avoid the ATOL Regulations by acting as an ‘agent for the consumer’.
13.2 These measures will further improve clarity for consumers who will know that all holidays which include a flight should be ATOL protected, and will mean that all companies that arrange and sell air holidays from the UK are governed by the same Regulatory regime.
November 2011 CAB 12a
Written evidence from Virgin Atlantic Airways (CAB 12a)
Introduction
1. Virgin Atlantic Airways welcomes the Committee’s inquiry into the draft Civil Aviation Bill and is pleased to submit comments for consideration.
2. Virgin Atlantic was established in 1984 to provide a competitive customer service oriented alternative for business and leisure passengers on long‐haul routes between the UK and major destinations. We have grown to become the UK’s second largest global airline, serving 32 destinations, operating from 4 UK airports, and flying 37 wide‐ bodied aircraft. We connect Britain to the world’s leading established and emerging economies and top tourist destinations, serving business and leisure travellers and uniting families and friends.
3. Virgin Atlantic is the UK’s 12th largest private company. We employ around 9,000 people in the UK and in overseas locations. Our total revenue was £2.7 billion in 2010‐11, with over one third of our ticket sales made overseas, generating £1 billion in exports for the UK economy. We carried 5.3 million passengers in 2010, and carried 210,000 tonnes of high value cargo in the holds of our passenger aircraft.
Reforming the framework for airport economic regulation
Background
4. Airlines operate in a highly competitive environment where to survive and prosper they need to meet their passenger’s demands. However, airports are, for the most part, natural monopolies with market power. In many cases airports face limited competition from other airports for airline customers and routes. Without effective economic regulation it is this market power which can allow an airport to arbitrarily raise its prices, resulting in unjustified pricing and insufficient delivery of services. Therefore, the economic regulation of airports with market power is deemed necessary in order to constrain any dominant use of this power.
5. Virgin Atlantic broadly welcomes the proposed reforms in the draft Civil Aviation Bill. In recent years recommendations from the House of Commons Transport Committee’s 2006 report ‘The work of the Civil Aviation Authority’ and the panel of independent experts in response to the DfT consultation on the reform of economic regulation of airports, have all concluded that reform is now essential, and it is welcome that this is now taking place.
6. The current regulatory system is inefficient, burdensome, outdated and in clear need of improvement. Airport charges have been allowed to increase way above the rate of inflation over the last regulatory period1, impacting the cost for passengers at a time when airlines and other businesses are trying to cut costs for consumers. Additionally, the snow disruption during winter 2010 showed that the performance of airports has not improved at the same rate as the charges imposed by the airport operators.
1 Virgin Atlantic figures for passenger and aircraft fees from 2008 – 2011 have shown an estimated increase of 50% at both London Heathrow Airport and London Gatwick Airport.
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7. As an airline that places passengers at the heart of everything that we do, we particularly welcome regulation that produces better outcomes for our passengers and we hope that this Bill will deliver actual improvements in practice. This submission highlights our general comments on the draft Civil Aviation Bill, however, given the shortage of time to evaluate the draft Bill, we have been unable to produce as detailed a submission as we would have liked to.
CAA’s general duty
8. We welcome the provision of a clear primary duty for the CAA, and the movement away from the four equal duties which it currently holds. However, although recognition has been made to “further the interests of passengers and owners of cargo”, we believe that there should also be recognition of the role that airlines play as the principal customer of airports.
9. During our engagement with the DfT during the drafting of the Bill, we outlined our concern that the current wording of the primary duty will not secure the alignment of airport services with passenger needs, primarily because we remained unconvinced that the duties will compel the CAA to take into account the views of airlines as the best placed representative of passengers.
10. The wording of the primary duty should be unquestionably clear that it relates to the functions of the economic regulator to further the interest of both users and providers of airport services. Therefore, we would recommend an amendment of the primary duty with a formulation along the lines of “The CAA must carry out its functions under this Chapter in a manner which it considers will further the interests of users and providers of air transport services regarding the range, availability, continuity, cost and quality of airport operation services.”
Dominant areas and dominant airports
11. Virgin Atlantic supports the removal of Central Government from the process of deciding which airport should be designated for price cap regulation. This should allow an more objective and established methodology to be applied by the CAA.
12. The draft Bill’s provisions regarding “airport areas” is also welcome as it takes into consideration potential variations in the way in which airport areas and ownership may change in the future.
Licensing regime
13. We agree that the current regulatory regime is not as flexible as other regulated sectors, and this has hampered the effectiveness of airport regulation. We have consistently supported the introduction of a licence‐based regime. A licence‐based regime will bring airport regulation and therefore the role of the regulator more closely in line with other regulated sectors. In particular, we believe the introduction of a licensing regime will encourage ongoing oversight by the regulator, both at the time of and between regulatory reviews.
14. The combination of the licensing system alongside the statutory duties will give the CAA significant additional powers. In allowing the regulator greater power and scope on the
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designation of airports; the content of licence conditions; and bespoke regulatory interventions, it is essential that this is accompanied by appropriate checks and balances to ensure the effectiveness of the new regime.
15. We welcome the process for changing licence conditions as this should ensure that the licence‐based system of regulation remains flexible and efficient. We also agree that in proposing any licence modification, there should be a legal requirement for the regulator to hold public consultation, with the process for consultation explicitly laid out.
16. We agree that the CAA should have the sole power to initiate proposals for licence modifications and that this does not preclude other parties asking the CAA to consider certain licence modifications. However, we believe that there should be a formalised and transparent process on how proposals from interested parties for licence modifications are brought before the regulator.
Appealing key regulatory decisions
17. Virgin Atlantic has consistently supported the proposals for the Competition Commission to become an appellate body for CAA decisions, subject to the caveat that all parties with a material interest are granted the right to appeal. Therefore we welcome the draft Bill’s inclusion that an appeal may be brought under this section by “a provider of air transport services whose interests are materially affected by the decision”.
18. Enhancing regulatory accountability is absolutely critical to ensuring the success of this review and the ongoing effectiveness of airport regulation in the future. A symmetrical right of appeal, for both the licensee and parties with a material interest, is intrinsically important in ensuring enhanced regulatory accountability and it is for this reason why we welcome its inclusion in the draft Bill.
19. We welcome the recognition that airlines operate in a competitive environment and therefore the commercial interests of airlines will often align with our passengers’ interests. Virgin Atlantic recognises the need for a responsible appeals mechanism which mitigates the risk of frivolous or vexatious appeals and therefore welcome the mechanism in the appeals regime which deters and where appropriate dismisses any appeal which is not in the passengers’ interest.
Powers for the CAA to enforce competition law
20. Virgin Atlantic welcomes the proposals to give the CAA concurrent powers to enforce competition law and make market investigation references to the Competition Commission in the airports sector.
Disclosing Information
21. Virgin Atlantic recognises that the draft Bill enables the CAA to obtain information from a party where this is reasonably required for the purpose of carrying out its regulatory functions. However, under Clause 48 enforcement of information notice, subsection (4) and (5) it is detailed that “A fixed amount must not exceed £2,000,000” and “A daily amount must not exceed £100,000”. We would question the rationale behind each of these figures and how this compares to penalties in other regulated sectors.
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Modernising the CAA’s governance and operations
Balancing new consultation rights with reduced notice periods for the CAA’s charging schemes
22. Virgin Atlantic supports the removal of the sixty days’ delay period. However, whilst welcoming the introduction of a consultation procedure, we are not convinced that this in itself is sufficient to allay all stakeholder concerns, especially given the lack of detail on the consultation process. There may still be occasions when, stakeholders would require the opportunity to present their arguments directly to the Secretary of State. We would also question the rationale behind a new charging scheme coming into force 14 days after publication and whether this is sufficient for this purpose.
Enabling the Secretary of State to give the CAA civil sanctions powers to enforce existing offences
23. Virgin Atlantic agrees that the CAA should have access to a broad range of civil sanctions. Under the reform of economic regulation the range of powers needs to be carefully considered and their application proportionate to the issue at hand. Additionally, any guidelines, requirements and timescales need to be clear.
24. The draft Bill enables the CAA to make use of civil sanctions as an alternative alongside existing criminal penalties to allow for a more appropriate and proportionate enforcement regime, we hope that this will result in a more effective regulatory outcomes in the future.
Giving the CAA an explicit power to carry out criminal proceedings as part of its enforcement work
25. We welcome that the draft Bill will provide the CAA enforcement powers, including prosecution and will be part of its own remit under section 20 of the 1982 Act. As it is intended that a charging structure will transfer the costs of this enforcement work from general taxation via the industry to the users of the aviation sector it is hope that these costs will be passed on in a transparent, proportionate and fair manner and in a way that is not a significant additional burden to the industry.
Giving the CAA a role in promoting better public information on customer service and environmental effects
26. We consider that greater transparency for the customer is beneficial and welcome the CAA’s role in promoting better public information on customer service and environmental effects. Under this remit the CAA “must” publish or arrange for the publication of information considered appropriate for the purpose of assisting users of air transport services to compare relevant aviation services and facilities. Virgin Atlantic would request that any airline information that was to be published in this regard would be under fair, transparent and comparable consideration and done in consultation with the relevant parties in question.
27. It should be recognised that the breadth and quantity of the information which the CAA could consider requesting from airlines and other stakeholders is considerable and potentially disproportionate. As such the proposal could be considered overly
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burdensome. Further specification of the conditions under which new information gathering powers could apply may be necessary.
28. Virgin Atlantic would suggest that guidelines should be produced, following stakeholder consultation, to determine what information should be collected and published. Among the factors that should be taken into account are: • A cost/benefit analysis, to demonstrate the net value of collection and publication, should be undertaken on each occasion; • It is important that the commercial implications of such requests, in terms of their cost and potential competitive impact, are taken fully into account. In particular, UK companies should not be put at a competitive disadvantage relative to their foreign competitors; • The extent to which a competitive marketplace circumvents the need for additional consumer information should be considered; • The need to avoid using collected data to determine “industry standards” especially where competition exists should be considered; • The need to avoid duplicating what is already collected and published, even if in a different form; • The need to protect commercial confidentiality; • The need to set crude data within its market environment and avoid misleading and overly simplistic conclusions; and • The feasibility of an appeals mechanism with regard to information published.
29. We agree that failure to satisfy a reasonable CAA request for data and information, subject to the possibility of an appeal to another body, should be subject to civil sanctions. There is no justification for criminal sanctions. However, the sanctions should be proportionate and follow published guidelines.
30. Furthermore, under Clause 83 sub section (4) and (5) it is detailed that “A fixed amount must not exceed £50,000” and “A daily amount must not exceed £5,000” we would question the rationale behind these figures and how they compare to other regulated sectors.
Transferring certain aviation security functions from the Secretary of State to the CAA.
31. Virgin Atlantic is supportive of the decision to transfer certain aviation security functions as described in the draft Bill from the Secretary of State to the CAA. We understand that this will mean a change to the current charging regime with the aviation community expected to pay for security regulation. Whilst we are generally not in favour of further increasing the charges which fall on the aviation sector and therefore our customers, to put this change into context as part of the Better Regulation for Security proposal we are hopeful that there will be opportunity in the long‐term for costs to reduce or at the very least be an investment by industry which actually adds value for the travelling public
32. As the threat to security is an unpredictable and unknown element, the aviation sector will require the threat assessment to be as comprehensive and transparent as possible, given the sensitive subject matter, since we are to be expected to pay for something on trust.
ATOL Reform Regulation
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33. Virgin Atlantic would just like to highlight our concern with the current reform of ATOL and its inclusion in draft Civil Aviation Bill. As detailed in our submission to the Department for Transport’s consultation to reform the Air Travel Organisers’ Licensing (ATOL) scheme, UK airlines should not be competitively disadvantaged though an extension of the scheme. Consumers should continue to be allowed choice and freedom without additional cost.
34. Prior to any inclusion of such regulation in the draft Bill we would want to see the regulation thoroughly defined with a clear, transparent and proportionate remit. As the DfT and CAA’s proposals do become clearer we will of course feed additional and more detailed comments to the Committee.
Conclusion
35. In conclusion Virgin Atlantic is broadly supportive of the draft Civil Aviation Bill. In particular we very much welcome the CAA’s decision to impose and modify licence conditions should be appealable by the licence holder and materially affected airlines to the Competition Commission. As detailed in this submission, in order to ensure enhanced regulatory accountability a symmetrical right of appeal for airlines is key.
36. Furthermore, we welcome the opportunity for the earlier introduction of a Civil Aviation Bill into Parliament. However, we note that this has resulted in a shortened period of pre‐legislative scrutiny, and therefore allows for only a limited period to analyse the contents of the draft Bill. It is hoped that a more detailed time for scrutiny will take place while the Bill passes through the Parliamentary process.
37. Finally, we would be happy to provide further evidence for the Committee if deemed relevant.
December 2011
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Written evidence from British Airways (CAB 13)
Summary
British Airways supports the main ideas behind the reform of airport regulation as set out in this Bill. We support particularly the focus on our passengers; the flexible licence‐based approach; and the increased accountability of the CAA. In the limited time available, we have identified the following key concerns, questions and comments as areas for the Committee to review in its inquiry.
• We propose that fines for licence breaches are paid as compensation to the airport’s customers where the breach causes them damage (S31‐45 & Schedule 3);
• We propose that the CAA should have a secondary duty to take account of the views of airline customers of airports, reflecting what happens in competitive market and providing a safeguard against regulatory error and/or bureaucracy.
• We believe that the special provisions for removing financial derogations in the initial licence are unnecessarily complex and redundant. There are a number of safeguards in place to ensure good regulatory outcomes, including the right of appeal against licence changes.
• We support the proposals for appeals, but believe that 6 weeks is too short a deadline for bringing an appeal. We also support intervention rights for third parties.
• While supporting informed consumer choice, we believe that the CAA’s powers to obtain and publish information are too wide in relation to airlines, where no market failure has been found. Use of these powers runs the risk of interference in the air transport market, harming competition and potentially misleading consumers. We therefore propose safeguards to limit the use of these powers.
• In transferring security regulation functions from Government, it is essential that a new approach is adopted and that the skills needed are reviewed before transferring existing resources and responsibilities. Aviation security is a central part of the passenger experience at an airport and also imposes significant costs on airports, airlines and their passengers. We think that the CAA should have duties to act proportionately and to consult industry. Finally, we are unsure of the benefits of giving the Secretary of States very wide‐ ranging powers to direct the CAA and to change the CAA’s functions.
• If the CAA is to be empowered to decide the pay of its executives and to impose new charges for security regulation, we propose that they are given duties to operate efficiently and to ensure that any charge should recover only the CAA’s costs allocated to the relevant activity. These changes will ensure that the CAA does not impose undue burdens.
• Finally we question the need for the CAA to be given new civil enforcement powers and identify the risk that this will lead to regulatory creep.
British Airways looks forward to participating in the Committee’s hearings on this subject. CAB 13
Introduction
British Airways is one of the world’s largest airlines, carrying approximately 32 million passengers worldwide annually on around 750 daily flights. We employ around 39,000 people, the vast majority at sites throughout the UK, and have an annual turnover of around £8.5 billion. The airline’s two main operating bases are London’s Heathrow and Gatwick airports. British Airways flies 237 aircraft to 152 destinations in 75 countries. We also transport more than 750,000 tonnes of cargo around the globe each year, mostly in the bellyhold of passenger aircraft. We pay more in airport charges at the regulated airports than any other airline and carry more passengers and freight. Therefore the changes in the Bill will have a significant impact on our passengers and on BA.
As the draft legislation was published less than a week before this submission is made, we have not had an opportunity to review the detail and consider the implications of specific provisions. Instead we draw the Committee’s attention to some of the key areas that might need to be considered further and to make some initial suggestions where we can.
British Airways is keen to assist the Committee with this pre‐legislative scrutiny and look forward to participating in the hearings due to be held in December.
The rest of this response addresses first the airport economic regulation reforms; then the aviation security changes; and finally the other provisions.
Economic regulation of airports
In general, BA supports the reform of airport economic regulation, which is intended to put as much priority on our passengers as we do, subject to the comments below.
The CAA’s new statutory duties (Section 1 with definitions in S64‐71 & schedule 7)
We support the proposed primary duty and the secondary duties in so far as they go. However we believe the CAA should also have a formal secondary duty to take account of the views of airlines as direct customers of the airport. In a competitive market, airports must win the business of airlines in order to attract passengers to their airport. This makes them seek out airline views and focus on matters that are important to airlines as a means of securing more passengers for the airport.
A secondary duty to take account of airline views would not conflict with the primary duty to passengers, but would simply ensure that airline views were properly considered as a means of establishing passenger interests. The CAA will benefit from the detailed knowledge of airlines about the needs of their passengers and about airport operation services. We also think this measure will reduce the bureaucracy and cost that the CAA might otherwise incur when trying to establish passenger interests through surveys and would also help avoid the risk of regulatory capture.
Licensing (B15‐22;31‐45& Schedules 3& 4)
At the heart of the reforms is a new licence‐based approach, which we support strongly. This will enable the CAA to set out clearly what an airport must do, as well the power to enforce provisions. This is an essential reform allowing the CAA to target regulation and to protect airport consumers. CAB 13
Given the new flexibility afforded to the CAA and its wide‐ranging powers, we also consider that improved regulatory accountability will be vitally important. We address this in our comment on the CAA’s new duties and in our comments on appeals below.
We have a concern about the proposed fines (up to 10% of turnover). While we agree that the CAA needs a power to fine airports for non‐compliance, it would be unhelpful for the proceeds of fines to be given to the Treasury when damage is caused to passengers and airlines. Under EU Regulation 261 (Denied Boarding), airlines are responsible for compensating passengers for long delays, cancelled flights and lost baggage. When these problems are caused by airports, payouts are smaller, but airlines cannot currently recover any costs or lost revenues from airports. In effect, airlines must compensate passengers for airport failures as well as being unable to recover their own losses. The limited scheme of service quality rebates is not intended to compensate airlines; merely to provide an incentive for the airport to plan to meet the CAA’s standards. Ultimately this harms passenger interests because air ticket prices need to be sufficient to cover airline costs. Therefore, where an airport failure affects consumers, we propose that fines should take the form of compensation payments to the airport’s direct customers.
Removing financial derogations from the licence (S23 & Schedule 2(4))
We believe that the special provisions for removing financial derogations in the initial licence are unnecessarily complex and redundant. There are a number of safeguards already in place to ensure good regulatory outcomes, including the right of appeal against inappropriate licence changes.
Appeal rights (Sections 24‐30 and Schedule 2 especially)
The CAA is to be given stronger powers and greater flexibility and the CC’s current advisory role is to be removed. It is therefore imperative that strong and effective measures exist to guarantee regulatory accountability. Appeals are perhaps the strongest mechanism to deliver regulatory accountability. This is the area that has been subject to greatest discussion with DfT. BA supports strongly the proposed symmetrical right of appeal granted both to airlines and to airports for all types of appeal. We did not support alternatives of granting appeal rights either to a quango or to the Secretary of State. Both alternatives would have been far less effective in protecting passenger interests, more costly and would have generated risks of uncommercial market interference. In general, we consider that the new provisions, including the constraints proposed and the CC’s ability to allocate costs, will reduce the risk of unmeritorious appeals being brought. We have yet to study the details, including for example the meaning of the term “the wrong exercise of a discretion”. As in other parts of the Bill, the precise wording is important.
Our only real concern at this stage is that 6 weeks does not seem a long enough period in which to submit an appeal, particularly given the complexity of a price control. This is half the time allowed to bring a judicial review. Mounting a review would be a major undertaking and we think it would be better to allow proper consideration to avoid unnecessary or poorly prepared appeals to be launched. We would ask the Committee to consider what time period would be appropriate.
We understand that the Government is considering whether to allow intervention rights by third parties. We would support this, as it would make it less likely that pre‐emptive or insurance appeals CAB 13
are launched as the only other means of ensuring the right to intervene if a late appeal were brought by another party.
Information powers (S48‐57 & Schedules 5 & 6 as well as Section 80‐89)
We understand and support the need for the CAA to obtain information from airports for its market power assessments. However, there are very wide powers in the Bill to demand commercially sensitive information from airlines as well as airports.
In the case of market power assessments, our concerns are that any data should be properly protected from disclosure and that the information is not used for other purposes. Currently there are no guarantees of confidentiality, the information could be used for many other purposes and fines up to £2m could be imposed. It seems likely that this provision has merely been carried over from the 1986 Airports Act. But since that Act was passed, air transport markets have been opened up to competition, so circumstances are entirely different. In our view, established competition authorities understand that a very open approach to publishing information is likely to compromise commercial interests and to lead to less cooperation between industry and regulator.
In the case of information powers relating to service performance and environmental information, we believe these powers are wholly disproportionate in the absence of any identifiable market failure in the air transport market. It is a fundamental principle of good regulatory practice that regulatory intervention takes place only when there is clear evidence of a problem and that any action is both targeted and proportionate. As well as being unnecessary, the publication of such information on airlines to consumers creates two major risks:
a) that consumers will be misled by invalid comparisons between airlines (eg reflecting their type of operation rather than their performance under similar conditions); and
b) that the CAA will stifle innovation and differentiation, creating homogeneity and reducing passenger choice.
The CAA can rely on the competition between airlines to incentivise one airline to inform passengers where a competitor airline is not providing good service. The Impact Assessment takes no account of this, or of the fact that many passengers have very detailed knowledge about the choices available, perhaps more so than in many other competitive markets. This document also identies a number of tenuous assumptions and risks to the delivery of any benefits.
We do understand that the CAA may need information from airlines for the purposes of regulating airports (or assessing the need for regulation), but in that case, safeguards are needed. The most important are to provide stronger safeguards against publication of commercially sensitive data and to limit the use of the data obtained to the CAA’s functions to the area of work for which it was obtained (eg by removing the list in Schedule 6(4) and by adding a clause to Schedule 6 clause 2.
Aviation security (sections 77‐79 & Schedule 8)
We understand that the prime motivation of this change is to transfer the costs of aviation security regulation from Government to the aviation sector. However, aviation security is a costly area that has never previously been subjected to a review of efficiency. Fundamentally, this is a crucial area CAB 13
both for airport efficiency and for passenger satisfaction, as well as national security. Queues at airport security (just one aspect of security) are amongst the top concerns of passengers and also the largest area of airport operational costs. If this area is to be transferred from Government to the CAA, changes are needed urgently to make sure regulatory performance is improved for passengers, airlines and airports. We would invite the Committee to consider the following points:
• the EU is now the main regulator of aviation security, creating a common approach across Europe. Any UK measures imposed on top of the EU rules stem from differences between the UK and other countries, which relate to the UK’s foreign and other policies. Thus UK measures are an external cost of wider UK Government policies; they are not externalities of aviation. In any case, even under the application of the “User Pays” principle, there is no justification for imposing inefficient costs on industry, which would be the result of current proposals.
• The resources currently deployed in DfT are not necessarily the right ones for an efficient, outcome based approach to security (as foreseen under the Government’s latest proposals). The focus of effort is currently on box‐ticking compliance by airlines and airports with complex rules and policies that do not appear to be fully understood even by inspectors. A new approach to regulation and compliance can deliver high levels of aviation security at much lower cost. Industry needs to be given responsibility for establishing Security Management Systems, as we do currently for safety. Inspectors would then provide guidance, establish best practice, asess the adequacy of the SeMSs and the outcomes or problems that result from them. This is likely to require very different skills than those employed by rules‐based auditors. A transfer of all existing resources should therefore not be included in primary legislation.
• No measures to encourage efficiency are included in the Bill and there has been no consultation on this. As a minimum, the CAA should be given the same “better regulation” duties as in section 1 of the Bill (the airport regulation section), ie to regulate only where necessary and to act in a proportionate, targeted way. This would also be consistent with the EU aviation security regulation that requires EU rules to be “relevant, objective and proportional to the risk being addressed.” We think the CAA should be given a duty to consider the efficiency of airport processes when imposing obligations and a requirement to consult affected parties.
• We are not clear why the SoS should have such wide powers to change the CAA’s security functions through secondary legislation. This suggests a lack of confidence in current proposals. In addition the SoS can issue guidance to the CAA on security matters. These provisions also raise concerns about blurred boundaries of responsibility between Government and CAA. We are not clear how a distinction will be maintained between responsibilities for policies, rules and compliance. If both Government and CAA believe they can impose rules, this could lead to an inconsistent overlapping approach between the two bodies. Our experience of other authorities that have such powers is that fines are used to impose requirements too readily, impairing the collaborative approach needed to address this complex area. CAB 13
Other changes
Pay and other financial freedoms (Section 91‐95)
We understand that the Government wishes to allow the CAA to appoint executive board members and to determine their remuneration. The CAA will also use its existing powers under Section 11 of the Civil Aviation Act to establish new charging schemes for security that will impose significant new burdens on industry.
Currently, the CAA has no duty to operate efficiently and current charging arrangements (set out in Section 11 of the Civil Aviation Act) provide no safeguards for payers of the CAA charging schemes. The only additional safeguard proposed is a 14 day consultation, which is far too short.
More needs to be done to safeguard industry from excessive charges. We consider the CAA has scope to make significant improvements in efficiency, primarily through introducing electronic licences and approvals. We would also observe that the long term liabilities of its financial salary pension scheme do not appear to have been capped and we are unclear how any funding shortfall would be addressed. No information is published about whether the package of benefits provided to employees is fair and reasonable compared with Government and industry. The CAA has also operated very large cross subsidies in its charging schemes for over twenty years resulting in large overpayments by British Airways and other airlines. We therefore think it is essential, before giving the CAA new powers to determine their own pay and to set up new charging schemes for security regulation, to introduce measures that will improve the financial efficiency of the CAA and to provide safeguards against excessive charges. We suggest for consideration:
• A duty to operate efficiently; and
• A requirement that any charge should recover only the CAA’s costs allocated to the relevant activity.
These provisions could be included in Section 8 of the Civil Aviation Act. We also propose that the consultation period is 6 weeks rather than 14 days.
We note that the Impact Assessment for the “other changes” is negative and an assumption is made that “the CAA’s costs are scrutinised by industry who are well placed to ensure that the benefits must outweigh the costs.” This will be true only if the safeguards we suggest are added.
Fines and Civil Penalties (Section 96)
We are concerned that this proposal will create an unnecessary cost burden on industry. We are unclear what problem is being addressed. There is a risk that the CAA will become too quick to threaten fines when minor disagreements exist. It could also lead to “regulatory creep” where industry over‐implements requirements to avoid potential exposure to fines.
November 2011 CAB 14
Written evidence from Gatwick Airport (CAB 14)
Gatwick Airport is the UK’s second largest airport and the busiest single‐runway airport in the world, serving 200 destinations in 90 countries for around 32 million passengers a year on short‐ and long‐haul point‐to‐point services. We are also a major economic driver for the South‐East region, generating around 23,000 on‐airport jobs and a further 13,000 jobs through related activities. Gatwick Airport is owned by a group of international investment funds, of which Global Infrastructure Partners is the largest shareholder.
Summary Gatwick welcomes the introduction of The Draft Civil Aviation Bill, which outlines a move towards a modern, flexible regulatory regime for airports that puts passengers at the heart of the work of the regulator. We support the overwhelming majority of its provisions, but would suggest that the bill be amended in the following ways in order to ensure the needs of passengers are best met.
• The Duties of the CAA (Clause 1): The bill should make clear that furthering competition is a pre‐requisite of promoting the passenger interest. Subsections 1(1) & 1(2) should be amalgamated to reflect this.
• Dominant Areas (Clause 6): The bill provides for the possibility of separate regulation for different parts of an airport. This clause, as well as those associated with it, are overly complex, and could lead to unintended consequences. It could allow, for example, the separate ownership and regulation of terminals. As well causing real practical difficulties for operations, this kind of scenario might distort, rather than promote, competition through one terminal being subject to heavier regulation than another.
• Advance Determinations (Clause 13): It would be very difficult for a regulator to regulate on the basis of how a business may, or may not, perform in future. Given the uncertainties, any determination should only guide, rather than finalise, a regulator’s future assessments. The bill should also empower the regulator to determine that an airport may not enjoy ‘market power’ in future, and therefore does not need to be regulated.
• Appeals against determinations (Clause 14/Schedule One): If an airport operator appeals a decision around market power (which determines whether it is regulated or not), the Competition Appeal Tribunal (CAT) should be able to hear that, as per the current drafting, but should also hear any appeal on what licence conditions might be required to remedy any market power if present. This would make the appeals process less cumbersome and time consuming.
• Appeals to Competition Commission (Clauses 24& 25): Ideally, airlines should not be able to appeal an airport’s licence conditions ‐ especially price controls. This could lead to regulatory deadlock, especially as the right given by the bill is very broad. Decisions on prices, and therefore investment in airports, could be delayed by persistent appeals. This would not help passengers. The CAA should be able to refuse to hear an appeal if it felt it was not in the interests of consumers or consistent with its primary duties. Airlines should still have the right to judicially review any decision by the Competition Commission.
CAB 14
• Determination of Appeal/Decision appealed against (Clause 27): In our view, the CAA (the expert regulator) is best placed to take the final decision on the contents of a licence, rather than the Competition Commission (CC). The CC should only be able to substitute the decision of the CAA if it does not think the relevant licence conditions proposed by the CAA, following the decision being remitted to it, will remedy any competition problems.
• Penalty for contravention of order (Clauses 39‐45): Whilst there should be penalties for contravention of licence conditions, those penalties should not apply to issues where airports already pay compensation to airlines if they fail to meet agreed performance levels under SQR regimes or contractual obligations.
• Information for passengers and on the environment (Clauses 80 & 81): Passengers should have access to clear and explicit information on all elements of their journey, including the aspects that UKBA, airlines and baggage handlers are responsible for. At the same time, requiring the CAA to publish information and replicate engagement on the environment that operators already undertake seems inefficient.
Preamble
1. The Airports Act (1986) established a regulatory regime that was appropriate for the newly‐privatised airports and airline industry as it was 25 years ago. Since then, aviation and the requirements placed on airports have changed immeasurably. That necessarily means that regulatory oversight of airports and airlines must evolve as well.
2. Gatwick has consistently advocated that any reform of our regulatory regime should follow a range of key principles, namely:
• Simplicity and clarity: Any reform of the rights and responsibly of the regulator should be clearly laid out in the bill. • A core focus on the consumer: The bill must place the interests of the consumer first in all respects, and avoid unintended consequences where their interests are not best served. • Incorporation of regulatory best practice: Any new model for regulating airports should mirror that used in other sectors, and should avoid provisions that have, in effect, acted against the interests of consumers when implemented in other sectors. • Consistent assessment of competition: The CAA must assess competition, and market power (the key determinant around whether an airport is regulated or not), in a clear, evidence‐based fashion that is consistent with competition assessments in other sectors.
3. We believe that, if enacted, the Draft Civil Aviation Bill would largely meet these objectives. We welcome and support the Secretary of State’s overarching vision of “putting the consumer first” in terms of the how airports are regulated. A significant majority of the bill’s provisions would help to achieve just that, and also help to drive investment in better, rather than bigger airports, which is a stated objective of Ministers.
4. At the same time, we note a range of areas in which the Government’s overarching aims are not translated into the draft legislation being considered. In addition, it is possible that, if enacted, some provisions would operate against an improved passenger CAB 14
experience ‐ and therefore be contrary to those aims. These issues must be addressed in the course of the Committee’s scrutiny of the bill.
5. Our written evidence highlights the areas in which there is a need for Ministers to reflect further. It should be assumed that Gatwick is in broad support of all clauses and schedules that are not explicitly mentioned in this submission.
Part One, Chapter One: Regulation of Operation of Dominant Airports
6. Clause 1: We welcome the revision of the CAA’s duties, with a clear primary duty focussed on the interests of the consumer (or the passenger). This structure of duties has been shown to work well in other regulated sectors, particularly in communications. At the same time, we are concerned that the drafting of these duties creates some uncertainties.
7. The promotion of the ‘interests of passengers’ and the ‘promotion of competition’ are clearly linked. Competition stimulates the innovation that leads to passenger needs being better met. It is an essential element in achieving this objective. The bill should clearly reflect this. By outlining the CAA’s primary duty in two separate subsections, it is implied that the interests of passengers can be achieved independently of promoting competition. In our view, this not the case in the context of airports. The primary duty should be expressed simply, by amalgamating Subsection 1) & 2).
8. Clause 6: We note the recommendation of the Competition Commission (CC), as part of its investigation into BAA1, that ‘terminal competition’ be introduced. It is our understanding that this clause, and associated clauses, are intended to provide the basis for economic regulation for terminal competition. Under terminal competition, the CC envisaged that terminal services could be separated from airfield services (such as runways, taxi‐ways) and run by different entities.
9. The improved quality of Gatwick’s terminals has occurred in the context of single‐ ownership of its facilities. In the last eighteen months, Gatwick has introduced a transformative new check‐in system, that is helping to eliminate queues for the airlines that choose to use it. In South Terminal, we have completed and launched a £45 million security area that has lead to our passengers clearing security in under five minutes 97% of the time, and we are building a new pier and baggage system in a £174 million project that will revolutionise baggage handling at the airport, along with the convenience that they enjoy.
10. Gatwick is undertaking this investment, which is already bearing tangible results, within the context of being a single owner of all airport facilities. Consumer needs are being met. Our performance metrics, outlined in our Service Quality Regime (see paragraph 37) are all being met. Overall, since Gatwick’s change of ownership the number of passenger compliments made by passengers has risen substantially. In 2010, the rise was 81% year‐on‐year. In 2011, we have already seen a further 11% year on year rise.
11. Whilst, in theory it may be attractive to facilitate multiple entities operating multiple elements of an airport, there are clear practical difficulties that call the idea into
1 Competition Commission, BAA airports market investigation: A report on supply of airport services by BAA in the UK (March 2009) CAB 14
question. Balancing the capacity of terminals and runways would be made very difficult. Gatwick is the busiest single runway airport in the world. We must be able to operate all parts of the airport to their maximum efficiency, especially at peak times. Operations are very difficult otherwise. Likewise, coordination of staffing of different parts of an airport would be far more cumbersome with staff employed by different entities. Finally, the success of this model is dependent on good relations between commercial interests that own various parts of the airport being maintained. Without them, the airport would be very complex to operate.
12. We can also see potential for the legal structure of the various parts of the airport (for example, leases, and ownerships of various assets) to become so complex that it would be difficult to flexibly plan for the future of the airport as a whole in the long term. In parallel, multiple ownership and operation of terminals could lead to a situation that would deter investment from airports, rather than attract it, which would actively harm the interests of the passenger. Investors in any kind of infrastructure, especially airports where the required amounts can run into the billions, assess the risks of their investment partly on the basis of the regulatory structure of that investment. A multiple ownership structure carries more risk than a single one. Private sector investment in airports could be actively deterred.
13. As well as the practical considerations, we believe these kind of provisions could actually distort, rather than promote competition. In this kind of scenario, it would be possible, for example, for one terminal at an airport to be subject to a given regulatory regime and another subject to a different one. This would make genuine competition between the two terminals very difficult. The ‘playing field’ would not be level.
14. As drafted, the Bill could also mean that other “non‐core” parts of the airport in separate ownership are deemed to be dominant provided the core part is. This raises the question of how liabilities imputed to the airport operator as a result of the actions of another operator of a dominant area would be dealt with. The Bill should rely on ex‐ post Competition law2 to remedy any abuse of dominance by operators of “non‐core” facilities.
15. Gatwick’s experience shows that competition between airports is delivering many of the benefits that the CC, in making this recommendation behind these clauses, thought that competition within airports could, with none of the above disadvantages. It follows that the Draft Bill should only facilitate competition within an airport if the CAA has first fully assessed whether the airport itself is actually competing with other airports or not through its powers to assess competition under the Enterprise Act (2002), and found that that there is an adverse effect on competition arising from there being a single operator of multiple parts of an airport.
16. Clause 7: We note that the CAA can only subject an airport to economic regulation if it meets the requirements of the tests contained within this clause. A primary test that must be met is that the airport has ‘substantial market power’ (SMP) ‐ namely that the airport can act independently of competitors, customers (i.e. airlines) and consumers (passengers).
2 For example, the Competition Act (1998) and the Enterprise Act (2002) CAB 14
17. The sale of Gatwick in December 2009 and the upcoming sale of Stansted by BAA have transformed the manner in which the London airports system delivers for passengers and airlines. As we note in paragraphs 10‐11, this new shape of the London airports market is already meeting many of the objectives that economic regulation was designed to achieve in terms of ensuring that the benefits of competition where effectively brought to bear in a single‐ownership environment.
18. The Competition Commission’s decision to require these sales represents one of the most intrusive structural remedies imposed by a competition authority in the UK. The conclusion of the Commission, as set out in its decision, is that it is clear that under separate ownership there would be a substantial degree of competition between the divested airports formerly owned by BAA. This conclusion has been shown to be correct. Gatwick is winning routes from other regulated airports because we are able to offer a better service proposition to airlines.
19. For example, over the past six months we have established the first ever route from the UK to Vietnam, and new routes to Malaysia, Hong Kong, China and Korea. These kinds of long haul routes have historically been seen as for Heathrow to operate, in common with the range of routes that commonly use the airport. We believe that successful competition is driving them to Gatwick. The notably improved passenger experience, improved facilities and service orientated focus of our staff are in large part due to the competitive culture that the change of ownership has fostered.
20. Given the fact that competition is clearly present, and is driving greater price efficiency for passengers at Gatwick, the tests under which it can be found that it is not should be far more explicit. We are not confident the bill currently achieves this. There should be a clear presumption against economic regulation of a company if competition can be shown to be present.
21. We believe this could be better achieved if Test ‘A’, which seeks to determine whether substantial market power (see paragraph 16) exists, were amended to ensure that reference is made to the legal concept of ‘dominance’ ‐ a concept well established and understood in both EU and domestic Competition law. It is also applied in the regulation of other utilities, for instance by the EU in context of its reform of regulation of the communications sector3 , and endorsed by both the Office for Fair Trading, and the Civil Aviation Authority (CAA) as being appropriate to determine whether sufficient competition exists in a market or not.
22. Test ‘B’ is already clearly linked to this concept. We believe that Test ‘A’ should be as well. It makes no sense to require a regulator to test for “substantial market power”, if the outcome of the test is no different from a test of whether a particular airport or part of it is “dominant”. Amending Test ‘A’ would resolve this issue.
23. Clause 13: This clause essentially grants the CAA to power to determine whether an operator might have market power in the future, and regulate for circumstances that have not yet arisen. There are inherent difficulties in predicting, with any degree of
3 European Commission, Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services ((2002/C 165/03) Section 5. CAB 14
accuracy how any business, or its ability to shape prices, might evolve in future. Let alone regulate on the basis of the prediction. If there is a need to grant power to a regulator to regulate on the basis of a future event, that power should extend to the CAA being able to predict that, in future, an airport will no longer have ‘market power’ and take a decision not to regulate it on that basis.
24. Clause 14/Schedule One: There is a need for a consistent assessment of any appeal that an operator might make against a decision that it has market power, and against the proportionality of any remedy introduced (i.e. the price cap or other licence condiition). Currently the bill would allow the former appeal to be heard by the CAT and the latter to be heard by the CC (under Clause 24, Schedule 2) This process is cumbersome and disjointed, and would lengthen the appeal process. As we outline below, lengthy appeal processes actively operate against the passenger interest. The bill should ensure that the CAT determines whether to uphold an appeal around market power and whether the remedy, in the form of the initial licence conditions, is proportionate.
25. Clause 23: This clause removes a key element of regulatory risk for an airport operator which has existing finance in place that is secured against its assets. It ensures the regulator cannot remove an allowed exception from an airport adhering to a licence condition (known as a “derogation”) for existing financing arrangements except under certain conditions. Removal of such derogation may have potentially life threatening consequences for an operator in current economic conditions. It is essential that the derogation remain in place pending any appeal of the CAA’s decision. The bill should provide for this.
26. Clause 24 & 25: There is a real need to reassess the scope of the right of appeal against an airports licence conditions‐ namely which parties are permitted to appeal. As the bill is drafted, a right of appeal is granted to airports and airlines. Very little protection from appeals prompted by seasoned airline litigants is offered. An airline needs only show that its interests are “materially affected” by the relevant decision. The bill does not say what this means. Virtually all airlines operating (or potentially operating) at a particular airport will arguably have a material interest in the airports licence conditions, particularly those which related to price controls.
27. Allowing such a wide right of appeal to regulatory decisions could cause real problems that would harm consumers interests. The CC admits as much in the relevant recommendation, when it outlines that such provisions could promote “the risk of numerous appeals, the risk that unmeritorious appeals are pursued, [an increased] burden on the regulated company, and the risk that the CC becomes effectively the regulator of the system”4.
28. Practical experience from other regulated sectors demonstrates this to be the case. The Communications Act (2003) gives network operators the right to appeal to the Competition Commission around decisions made on price controls relating to their services, and to the Competition Appeal Tribunal around the release of radio spectrum and the operation of networks and services. Spectrum is the essential resource required for new mobile communications services to be initiated. It is demonstrably in the public interest for regulatory decisions that release spectrum to the market to be expedited.
4 Competition Commission, BAA airports market investigation: A report on supply of airport services by BAA in the UK (March 2009) CAB 14
29. However, operators have routinely appealed Ofcom’s decisions on these issues. This has resulted in "regulatory gridlock". Ofcom's decisions are continually mired in lengthy and detailed appeals, their resources are diverted away from its core statutory functions and their ability to take timely and effective decisions is impeded. At the same time, the needs of consumers for better networks and consumers are not met, as the services that licence holders are empowered to deliver, and the investment they need to undertake to deliver them, are delayed.
30. There is some evidence that Ofcom is spending increasing amounts of time on addressing appeals. Ofcom tracks the hours devoted to addressing litigation on an ongoing basis. In the financial year 2009/10, 11,578 hours were allocated to addressing relevant litigation. In the financial year 2010/11, by January 2011, 8,707 hours had already been allocated to this work5.
31. The increasingly litigious nature of the communications sector has substantially delayed the introduction of new communications services that end‐users, and the economy, would benefit from, to the extent that the Government is now reforming the appeals system in use to minimise potential for delayed regulatory decisions as a result of continued appeals6.
32. We can see potential for the same issue to arise in an airports sector where a broad right of appeal around an airport operator licence is afforded to airlines. Airlines operate to a wide range of business models ‐ domestic, short‐haul, long‐haul, budget to name a few. Regulatory or price control decisions around a licence that might be interest of one airline, but may not be in the interests of another, are a real possibility.
33. Long, drawn out, and multiple appeals of the amounts that an airport can charge passengers are simply not in those passengers interests. World‐class airports require certainty of investment over a defined time‐frame. Regulatory deadlock would mean delays to the facilities that passengers need, and would degrade their experience. In our view, the best way to minimise this risk would be through affording a right of appeal solely to the airport operator with others being restricted to judicial review of the decision. At the very least, the CAA should also be able to refuse leave to appeal if it thought that an appeal was not in the interests of consumers or the CAAs statutory duties generally.
34. Clause 27: This clause essentially empowers the CC to overrule the CAA’s decision on the price an airport can charge its passenger. In our view, the expert regulator, rather than CC, is best placed to consider what these prices should be. By allowing it to “substitute” the decision of the CAA, the CC is essentially being given overall authority on what overall level of investment an airport requires in future.
35. Put simply the CAA has more expertise on the needs of airports and their users than the CC does. As drafted, this clause ignores that simple fact. The CC should not have the power to simply ‘substitute’ the CAA’s decisions on pricing for its own. Its expertise lies in the general principle of ‘competition’ ‐ not aviation. The CC should only be able
5 Department for Culture, Media & Sport “Implementing the revised EU Electronic Communications Framework - Appeals HMG proposals on reform of the Telecommunications Appeals Framework” 6 Ibid. CAB 14
to substitute its decision if the CC disagrees the licence conditions (imposed by the CAA following the decision being remitted to it by the CC) will remedy the adverse effects. This is consistent with the appeal process of the CAT on market power and with other sectors
36. Clauses 39‐45: We note a range of provisions in the bill relating to substantial financial penalties for contravention of a licence to operate granted by the CAA. We agree that there should be some form of financial penalty for contravention of a licence condition, however the CAA should not be able to impose a financial penalty in cases where an agreement has already been reached with an on‐airport partners that financial penalties are payable if a given performance metric is not achieved.
37. Gatwick provides a good example. We are currently subject to a Service Quality Rebate (SQR) regime, which was introduced by the CAA after reference to the Competition Commission in 2003. It requires us to pay a rebate to our airlines if we do not meet a given performance metric around some aspect of the airports operation. This can be around anything from the cleanliness of the terminals to the quality of the signage.
38. Our performance in periods of severe weather is likely to become part of this regime. If we do not perform to an agreed metric, we are subject to substantial financial penalties, and our airlines are the direct beneficiaries. Given this, we believe it is appropriate for the bill to exempt operators from financial penalties around licence conditions which are also reflected in our SQR regime.
Part Two: Other Aviation Matters
39. Clause 80: We believe that the provisions for information being released to allow consumers to compare services, and make an informed choice, will be of real benefit. Gatwick has, in many ways, lead the way around the publication of transparent information relating to the performance of on‐airport partners‐ including handling agents. We would welcome this kind of approach being formalised in legislation. In particular, the bill should explicitly empower the CAA to publish details on the performance of airlines, handling agents and the UK Borders Agency in exercising their various functions.
40. Clause 81: There is a clear need for information to be published around an airports environmental performance. To a certain extent this is already happening. Gatwick recently published a draft airport master plan, in which we openly detailed information around our current and future projected contribution to climate change, carbon, air quality, air noise, ground noise, waste management, energy, water, landscaping and biodiversity.
41. We have also conducted a comprehensive public awareness and consultation programme that has involved eleven days of public exhibitions in six separate locations, ten stakeholder workshops, and a bespoke on‐line engagement tool and direct communications with over 5000 local people. Our environmental impacts have been a key feature of all of these In our view, we done a great deal to raise awareness of the environmental impacts of our operations, and the measures we are taking to manage them. CAB 14
42. We question whether there is need to compel the CAA to perform a function that we are already undertaking ourselves, and indeed whether it is appropriate for the CAA, rather than an airport to determine, how best to publish information around what our environmental impacts are. In many cases, we use existing CAA data to do just that. There is a danger that the CAA could replicate the existing activities of airports in this area. The bill should ensure that this does not happen.
November 2011 CAB 15
Written evidence from the Airport Operators Association (CAB 15)
1. The Airport Operators Association (AOA) is the trade association, representing the interests of UK airports. It is the principal body the Government and regulatory authorities consult on airport matters.
2. The AOA welcomes the broad thrust of the draft Civil Aviation Bill, which it believes contains many good proposals to modernise the powers and regulatory activities of the CAA. However, the AOA does have some areas of concern, which are set out below. It will be making representations on suggestions for improvement to the Government and Parliamentarians.
3. The AOA specifically welcomes the fact that the content of the draft Bill relates largely to licensing and economic regulation. The AOA did not support the concept of giving CAA a substantive environmental regulatory role, or asking it to engage in detailed regulation of service quality standards. While regulation in these areas is important, the AOA believes that environmental regulation should be designed in as straightforward a way as possible. Also, wherever possible, it should be framed on a global or EU‐wide basis. While the AOA recognises the valuable role the CAA plays in analysing and providing information about the airport sector, it questions whether the CAA can add value in the area of publishing environmental information (as proposed in clause 81). There is already a large amount of environmental information published by Government departments (such as DECC) and other official bodies such as the Committee on Climate Change (CCC). The AOA would like to understand why primary legislation is required (the Bill’s wording is that the CAA “must publish”), when the decision on which information to publish seems likely to be a matter for CAA judgement. AOA stresses that it supports a straightforward debate on the environment, based on accurate and transparent information. However, the CAA’s activity is funded through charges levied on airports and others and therefore the AOA thinks it right to question whether such new activity adds value in the round, duplicates activity already carried out by others; or, worse, further might add to the confusion that already exists in this area.
4. The AOA notes that although the broad thrust of the draft Bill is to better focus regulatory activity on the consumer, leading to a better experience for passengers, there is no definition, in the wording, of what constitutes a passenger. This is not a trivial matter. The Bill lays down a piece of primary legislation, which, if it is to place passengers at the heart of
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aviation regulation, must stand up to legal scrutiny. The AOA believes this is an omission, and urges the Government to include such a definition.
5. The AOA further welcomes the fact that the content of the legislation is largely as anticipated and that there has been no late introduction of additional parts to the Bill, on which there has been no consultation. Aviation security compliance function
6. There is a part of the Bill which is described in the accompanying policy document as “Transferring certain aviation security functions from the Secretary of State to the Civil Aviation Authority”. This was not part of the originally planned body of legislation. The AOA has been aware of the content of this part of the Bill for some time, which relates to the Government’s plans to implement an Outcomes Focussed Risk Based (OFRB) security regime. While the implementation of this regime is not the business of the Bill, the AOA’s views on OFRB security, a concept it supports, are annexed (for information).
7. The business of the Bill with regard to OFRB security is to make it possible to transfer the Government’s aviation security compliance function, currently within the airports directorate of the DfT (and formerly part of Transec) to the CAA. The Government believes that this would allow synergies to be realised under a new OFRB regime, the auditing of which might be modelled on the way that the CAA currently audits aerodrome safety. Moreover, the transfer of staff will result in a substantial saving for the Government, arising from the fact that the CAA is funded by the aviation industry directly, whereas the DfT, as a central Government department, is not.
8. The AOA is prepared to accept the idea of such a transfer, on the basis that it is a price worth paying to see a more dynamic and better aviation security regime. However, it wants to ensure that the Government makes sufficient progress to design and implement a meaningful OFRB aviation security regime. The AOA would be very disappointed if the transfer of staff, and the associated re‐charge of employee costs to the sector, went ahead, but momentum towards a better aviation security regime were lost. While the result of such an outcome would be a saving for the Government, it would not deliver any benefit to passengers.
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9. The AOA is working actively with the Government to progress the OFRB security concept, and has recently submitted a detailed version of the annexed AOA paper, on OFRB security, to the DfT. The AOA continues to stress the importance of making progress in this concept at European level (where much of aviation security is now framed) and the large degree of effort and resource that it believes will be required to turn the OFRB concept into reality. Competition law and appeals
10. The AOA recognises that the move away from a mandatory referral to the Competition Commission (CC) brings the regulatory framework in line with that of other sectors, and supported this proposal at consultation stage. However, the AOA wants to ensure that the new framework to allow an appeal to the CC does not result in a de facto continuation of the previous framework. It is not clear what the motivation would be not to appeal, and it is not difficult to foresee a situation where appeals become habitual, because they represent a risk‐free opportunity to secure a better commercial outcome for appellants. The AOA believes that the Government should remedy this situation by introducing clear criteria against which an appeal could be allowed. These should not prevent a legitimate appeal taking place and could be focussed on whether such an appeal would be truly in the interests of passengers. Airport licences
11. An important number of the provisions of the Bill relate to the proposals for new airport licences. The AOA supported the concept of licensing in its response to earlier consultations on the subject, but understands that the real work in this area will come from the CAA team that is working on the form of the new licences. The CAA was asked by the Government, at the same time as the Bill was published, to develop an example licence to accompany the Bill. It’s initial work can be seen at http://www.caa.co.uk/docs/5/IndLicenceSlides.pdf. Airport resilience
12. The AOA notes that there is a continued emphasis on airport financial resilience, and an intended supplementary statutory duty on the CAA in respect of the ability for airport operators to finance their operations and activities. Debate on both of these issues loomed large in the consultation stages, and was influenced by press reports about some airport operators’ financial gearing. The AOA does not take a view on airports’ particular circumstances, and acknowledges that it is important that airports are able to finance their operations. However, where financial resilience is concerned, the AOA does not welcome the idea of CAA regulatory interventions which might aim to control the financial structures
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of private airport operators. It believes that this is essentially a matter for the area of corporate governance and its associated regulation.
13. There is a new emphasis on “operational problems”, which is translated into an early licence heading in the CAA’s initial work (see page 13, at http://www.caa.co.uk/docs/5/IndLicenceSlides.pdf). This also is an area of concern for the AOA, in that it has the potential to set precedents and norms for what kind of Government and regulatory interventions are legitimate and acceptable in airports’ operations. It believes that there is a possibility that “operational resilience” may feature strongly in the new airport licences; and moreover that recent concerns about snow disruption could lead to some specific regulation in this area. Coupled with a new “10% penalty” clause, this raises the possibility of large penalties being applied to events, which may often be beyond airports’ control. Aviation, being a global business, which is heavily dependent on weather conditions and factors outside UK jurisdiction, is especially prone to factors are beyond the control of the companies that operate in the sector. While the AOA acknowledges that a 10% penalty is established as precedent in other regulated industries, it would like to understand more about how licences may be developed with regard to establishing criteria on operational resilience. Competition within airports
14. There is a continued possibility (see page 12 of the DfT policy paper at: http://assets.dft.gov.uk/publications/civil‐aviation‐bill/civil‐aviation‐bill‐vol1‐policy‐ paper.pdf) that competition within airports could be favoured in some circumstances. The AOA does not welcome this. It is not a good fit with the UK’s model of airport operations and, were it to be established as a result of regulation, there might be implications for other non‐regulated airport operators. The AOA believes that under such a model, which would be focused principally on price‐competition, there would be high potential for consumers to pay a heavy price in terms of a worse passenger experience. Re‐charging of CAA costs to airports
15. The overall purpose of the Bill is to modernise and clarify the CAA’s powers. While the AOA supports the general thrust of the legislation, the re‐structuring it will bring will place an additional cost burden on the aviation sector, through an increase in the number and types of charges the CAA collects to fund its own regulatory activity. The Bill will result in new CAA activity on enforcement, information disclosure and security regulation; and this is compounded with recent changes to the CAA’s role and regulatory activity with regard to
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the environment and consumer protection. Together, these changes could amount to a re‐ charge of up to four pence per departing passenger, a significant sum, when taken in the round with other costs that airports have to bear. At a mid‐sized airport carrying ten million passengers a year (where the charge would be levied on approximately half the passengers), this would result an increase of £200,000 to the cost base: a material amount of money.
16. While designated airports may be able, through the regulatory structure, to pass these charges through to airlines, non‐designated airports, who operate in a market where airlines generally hold the market power, will not have this opportunity. This ultimately leads to pressure to make savings in other areas of the operation, or further pressure on profitability, against a backdrop where many airports are already loss‐making.
17. The AOA will be urging the CAA to consider carefully the cumulative burden of costs on airports, especially those arising from unforeseen changes (such as new charges to fund the CAA) and the associated effects on airports’ viability, against a backdrop of reduced traffic and straitened consumer spending. In particular, the CAA should be open to looking for ways to ease this situation, because the changes represent new and non‐phased‐in‐charges (of the type the CAA itself might carefully scrutinise, were they to be introduced unilaterally by an airport). Moreover, the CAA’s spending in areas like consumer protection activity (which drives a large proportion of its increased charges) often relates to activities not carried out by airports. Much the associated regulatory cost relates to activity ultimately under the control of airlines, which is to be expected, because they are the parties who contract directly with passengers.
18. The challenge faced by the CAA with regard to re‐charging costs to airlines, is that it only has the vires to require UK based carriers to comply with such a levy. Were it to disproportionately burden UK carriers only, this would result in a competitive distortion. For this reason, airports can be seen as a convenient way to re‐coup costs. This phenomenon has been observed in other areas, such as the re‐charging of airport policing costs. The AOA strongly resists moves of this type because it leads to a continual erosion of non‐designated airports’ business viability.
19. The AOA strongly believes that the draft Bill could be used as an opportunity to deal with this problem. It urges the Government to consider an amendment to the Bill which would
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give the necessary powers to the CAA to levy charges, in proportion to where it incurs costs, either on airports or airlines as appropriate. The AOA believes that such a power could easily be introduced to the draft Bill and that its insertion would require only minor modifications. ANNEX: SUMMARY OF AOA PAPER (TOWARDS AN OUTCOMES FOCUSED RISK BASED SECURITY (OFRB) REGIME) ON PROPOSALS TO IMPROVE AVIATION SECURITY REGULATION I. The Airport Operators Association (AOA) is the trade association representing the interests of UK airports. It is the principal body the UK Government and regulators consult on airport matters.
II. As the strategies employed by terrorists against aviation have evolved in recent years, a range of new measures have been introduced to the sector’s security regime. While these are reasonable attempts at risk mitigation, they have resulted in a more complex system of checks and searches; something which has inevitably had implications for the passenger experience. The challenge faced by all involved in designing and operating the aviation security regime is to devise an overarching philosophy which allows aviation to escape from this “incremental” approach to security.
III. For some time, the aviation industry and the UK Government have been in dialogue about such a more sophisticated approach. This is now being pursued by the Government as “Outcomes Focused Risk Based (OFRB)” Security. The essence of an OFRB regime is for the Government to move away from a prescriptive approach to security regulation, towards one that sets security “outcomes” to be achieved by the aviation industry. This in turn would give industry greater flexibility and responsibility in determining which security measures are used to mitigate the threat.
IV. A key point when considering how this could be done is the reality that a great deal of aviation security regulation is developed and framed in Europe. In addition, the Government has in place a significant number of UK more stringent measures (MSMs). A large proportion of both EU and UK MSM regulation is framed in such a way that it tells the security regime operator exactly what checks to carry out, and how to do them. It is hard to envisage a UK‐OFRB regime without significant modification to EU rules. However, modifying EU regulation can be an uncertain and lengthy process.
V. One option is to start by addressing UK MSMs only. AOA’s members have carried out detailed analysis on this question and believe the scope and benefits would be limited.
VI. Moreover, to progress towards such a regime, and to properly identify the potential benefits from it, the OFRB concept needs to be turned into a tangible set of options. While the Government’s recent Request for Information gives more detail on the OFRB concept and begins the work by providing an example of an “outcome”, more work is needed to articulate how OFRB would work; especially for the key measures in the UK’s National Aviation Security Programme.
VII. A related point is the importance of grounding and developing OFBR “outcomes”, before moving on to focus on developing a security management system (SeMS). It is important to realise that
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such a system is a tool to manage and audit how well an OFRB regime is being operated, rather than a key, in itself, to defining the regime and its associated outcomes.
VIII. A possible way to make progress on developing an OFRB regime would be for the UK Government and the aviation industry to combine their respective efforts on the OFBR and “Better Security” concepts. The latter has been developed in the UK, led by BAA and British Airways (BA); and is now being discussed among EU airport and airline trade bodies and EU policy‐making institutions.
IX. The essence of “Better Security” is that information currently held by Government agencies on passengers, who present a higher risk than normal, could be linked to airport and airline systems, which are already used to process information required to permit passengers to fly. For example, at Heathrow’s Terminal 5, when a passenger presents a boarding card, the IT system checks whether he or she has the right travel documents to land at the destination country.
X. If information on higher risk passengers were linked to such a system, for example, passengers on an existing watch‐list, then the system could be programmed to show to the operative a simple risk flag (red or green, for example). When a higher risk passenger arrives, they could then be directed to a special security comb, equipped for advanced screening. Consideration could then be given to relaxing some of the current checks carried out on the vast bulk of (non‐ higher‐risk) passengers.
XI. The scope to jointly develop the “Better Security” and OFRB concepts is considerable. Better Security could be used to drive flexibility and unlock the benefits required for the Government to move an OFRB regime forward. The benefits such a joint approach would offer are as follows:
• Better mitigation of risks presented by higher risk passengers would allow ordinary passengers to travel more securely (because resources would be focused in the right place);
• A more flexible regime could be adopted for ordinary passengers;
• It could provide the flexibility needed for the Government to progress and develop an OFBR regime. Allowing the Government and industry to move from concept to more detailed design.
XII. AOA recommends that a joint Government/industry working group be formed, under the auspices of the National Aviation Security Committee (NASC), to consider further the feasibility and benefits of joint developing the OFRB and Better Security regimes.
November 2011
Written evidence from the British Air Line Pilots' Association (CAB 16)
The context of our concern is that in BALPA’s Safety Plan, that was endorsed at the Annual Delegate Conference on 5 the November, we cite “Inadequate Regulation” as being the most important root contributor to our higher level safety risks; “apparent” pilot error; “actual” pilot error and commercial pressure. Our exposition of the case for Inadequate Regulation centres around the process used by regulators such as the CAA to determine rules in areas such as flight time limitations and pilot training. With the move towards risk‐based regulation there has been a tendency to reflect the interest of operators rather than those of the public and air crew.
In the area of security recently the Confidential Human Factors Incident Reporting Programme reported that pilots had stopped filing reports in relation to the hazard of ineffective security measures because they felt that nothing would be done
Our concerns have direct bearing on those elements of the Bill that relate the impartiality, governance and probity of the CAA and also those elements that relate to the new security function.
December 2011