1

Revised transcript of evidence taken before

The Select Committee on the European Union

Internal Market, Energy and Transport (Sub-Committee B)

Inquiry on

AIRPORT SLOT ALLOCATION

Evidence Session No. 1. Heard in Public. Questions 1 - 61

MONDAY 19 MARCH 2012

Members present

Baroness O’Cathain (Chairman) Lord Bradshaw Lord Brooke of Alverthorpe Lord Clinton-Davis Lord Fearn Lord Haskel Lord James of Blackheath Lord Ryder of Wensum Baroness Valentine Lord Walpole ______

Examination of Witnesses

Witnesses: James Cole, Airport Coordination Limited; Daniel Edwards, Head of Economic Policy and International Aviation, Civil Aviation Authority; Emma Gilthorpe, Economics and Regulation Director, BAA; and Rob Siddall, Policy Director, Airport Operators Association.

Q1 The Chairman: Good afternoon, ladies and gentlemen. Thank you very much for coming to give us the benefit of your great knowledge on this study that we are undertaking. First of all, I remind Members to declare any relevant interest the first time that they speak. The session is on the record and is being webcast live, and will be subsequently accessible via the Parliamentary website. The witnesses will receive a transcript of the session to check and correct, and this will be put on the public record in printed form and on the parliamentary website. Before I ask you to put your names on the record, I warn you that 2 we are almost certainly going to be disrupted by a Division on the Health and Social Care Bill. At that stage, we will have to adjourn for about 10 minutes to enable us to get down to the Chamber, cast our vote and come back. I am sorry about that, but it is one of the hazards of coming here. I ask the witnesses to say who they represent for the record, and whether they have a brief opening statement. Rob Siddall: I am Robert Siddall. I am the policy director for the Airport Operators Association. We are the national trade body for UK airports. Our main business is representational work, so we are following the proposed Regulation on slots as part of the overall Airports Package proposed by the Commission. Daniel Edwards: Good afternoon. My name is Dan Edwards. I am head of economic policy and international aviation at the Civil Aviation Authority. We in the CAA have no formal role in the allocation of slots in the UK, but we have a keen interest in this area of policy because of the impacts that it can have on consumers and those using aviation services in this country. James Cole: My name is James Cole from Airport Coordination Limited. We are the slot co-ordinators appointed by the Secretary of State for the five co-ordinated airports in the UK. We also provide services at a further 18 airports in the UK, and we are co-ordinators of airports in Ireland and Poland within Europe, as well as Dubai and Canada. We are practitioners in the allocation of slots. The Chairman: Are you actually a sort of semi-state body, then? James Cole: We are a not-for-profit company limited by guarantee as an independent agency specifically set up to allocate slots. Emma Gilthorpe: My name is Emma Gilthorpe. I am the regulatory director at BAA, which owns and runs, among other airports, Heathrow and Stansted. As an airport operator, we do not have any formal role in the allocation of slots, but we have a very direct impact on the efficient allocation of slots in terms of runway, terminal and stand capacity.

Q2 Lord Fearn: Could you please explain the role and responsibilities of your organisation in relation to the allocation of slots? Emma Gilthorpe: The way that it works is that ACL, from which you will hear shortly, co- ordinates slot allocations. As an airport operator, as I mentioned in my opening comments, it is absolutely essential that those slots get allocated in a way that recognises capacity limitations. This will be particularly pertinent at Heathrow, although less so at some of the other airports that are less capacity constrained. Not only do you need the airspace and the landing slot, you also need sufficient capacity to get from the air to the terminal, to park the aircraft once you get to the terminal, and sufficient resources and facilities within each of the terminals at the airport to make sure that passengers can go through the terminal safely, securely and efficiently. That is therefore a critical role in the process of making sure that those slots are allocated purely on the basis of the slot being available, but also that the whole value chain can line up behind that in order to make sure that the passenger has a positive experience going through the airport.

Q3 Lord Fearn: So who actually gives the slot? Emma Gilthorpe: The slots are allocated by ACL, from which you will hear very shortly. ACL is governed by a board, and the airlines sit on that board. Interestingly, the airport does 3 not sit on that board, but the board makes the decision based on things it will go through as to how those slots get allocated.

Q4 Lord Walpole: Are you the person who decides how many slots you have a day, or in an hour, or whatever? Emma Gilthorpe: We will definitely set the schedule for the winter or summer period. Lord Walpole: You set that? Emma Gilthorpe: Yes. We declare the schedule. The Chairman: By “scheduling”, you mean the number of aircraft flying, rather than their destinations? We think of “scheduled” flights going to destinations. Emma Gilthorpe: The capacity declaration is made by us. It is agnostic to route or carrier. James Cole: ACL is the independent slot co-ordinator appointed, as I said, for five airports in the UK. We are the ones responsible for the allocation of slots. Under the EU Regulation1, the co-ordinator has sole responsibility for the allocation of slots. We do that in accordance with the existing EU slot Regulation as well as worldwide guidelines set by IATA2 and any local rules—we have a number of local rules at each of the co-ordinated airports. We work within that framework. As you have just heard, the airport’s role is primarily in the declaration of capacity, but that is done after consultation with the airport’s co-ordination committee. The co-ordination committee, which consists of the airport operator, ATC, the airlines using the airport and representatives of general and business aviation, provides overall supervision of the slot process. ACL sits as an observer on that committee, and the member state—the CAA or the Department of Transport—can also attend as an observer. That is another key part of the process, in terms of its governance.

Q5 Lord Haskel: Thank you for describing how your committee is overseen. There seems to be rather a lot of people who are overseeing. In practice, who oversees you and who appoints you? James Cole: We are appointed by the airport managing body, and that appointment is approved by the Secretary of State for Transport. That is the appointment process. The Chairman: The airport management body—what is that? James Cole: It would be BAA in the case of Heathrow. The Chairman: It is by airport? James Cole: It is by each individual airport, but that appointment must be approved by the Secretary of State for Transport after consultation. In practice, at an operational level, the staff within ACL act in accordance with the regulation as individuals. We have an individual manager appointed to be the co-ordinator for Heathrow. Lord Haskel: So one person is the co-ordinator for each airport. James Cole: Pretty much, yes. Through this co-ordination committee there is oversight of the process, but the actual day-to-day decision making is done essentially by an individual co- ordinator who has an overview of the airline schedules and the capacity situation. But,

1 Slots were initially coordinated by Council Regulation (EEC 95/93) in 1993, later revised in April 2004 by an amending Regulation (EC 793/2004). 2 International Air Transport Association 4 technically, ACL as a company is appointed as the co-ordinator and then, obviously, we employ suitably qualified members of staff to do the job on a daily basis. Lord Haskel: You said that you also do Dubai and Canada. James Cole: Yes, Toronto City Airport in Canada.

Q6 The Chairman: So you are really right at the top, and then you have your personnel going into the various airports. James Cole: The basic process is that the airlines submit their schedules to us. We know the capacities from the declarations made by the airport. Our job is to match the two. It is that sort of exercise. The Chairman: It is a pretty powerful position. James Cole: It can be, but it is power used with a very light touch. Daniel Edwards: As I said in my opening remarks, we in the CAA have no formal role in terms of the day-to-day tactical application of the slots regulation, but we are extremely interested in slots policy for a number of reasons. As you can imagine, it reads across to, for example, the competitive structure within airports, how the airport functions in terms of resilience and the number of services it can offer. It links to bilateral air service agreements, for example, and our ability to offer access to airports in the UK even when they are congested. All of those issues and more are affected by slots regulation and by the way in which we interpret that regulation in the UK, so it is an extremely interesting and important part of aviation policy. Rob Siddall: I should say that we also have no formal role in the allocation of slots. We are a representational body, but we are interested on behalf of all the airports in the UK in all policy areas that affect airports, and slots are one of those. We are particularly interested in promoting the case for airports and aviation in general as a motor for the economy, so any policy that is going to encourage that and free up capacity and get more flights and routes is of particular interest to us.

Q7 Lord James of Blackheath: Declaring an interest, I was the chairman of Dan-Air when it was sold to British Airways for £1, in addition to Lord King agreeing to pay off my entire creditors of £168 million, in return for receiving the unencumbered ownership of the six slots I had at Heathrow, which put a value of £25 million on each of them. I am fascinated, therefore, as to how you approach the problem that any allowance of slots effectively bestows great wealth on the balance sheet of an airline. How conscious are you of that, and is it a factor in your considerations? Emma Gilthorpe: We are very conscious of that at an airport like Heathrow, which is capacity constrained. Obviously, those constraints on capacity mean that the price is the highest that it will be at any airport in Europe. But that in no way affects the way in which we deliver service. They are all our customers. All of those airlines deliver an invaluable service to passengers, so the airport’s job is to concentrate on making sure that the capacity is available for them to be able to do the job that they need to do for their passengers. It is relevant to the extent that it raises some interesting intellectual questions about the allocation of scarce capacity but, in terms of the absolute quantum, it has no impact on the decision-making processes. 5

Q8 Lord James of Blackheath: In the context of the question as it was originally written, before I tampered with it, do you consider that the existing arrangement is a ‘grey area’? Will the new proposals make it more or less grey? Emma Gilthorpe: That is an interesting use of the word “grey”. It is fair to say that the current processes for slot ownership allocation and trading are not as transparent as they could be. From an operational perspective, there is room for improvement. The more understanding that we have of slot ownership, the better we can all participate in that value chain and deliver a positive passenger experience. I will give you an example. It may be the case that a slot is owned by airline A, but airline A may lease that slot to airline B, which may operate fundamentally different routes—which goes to your point, Lord Chairman—and potentially a different size of aircraft. All of that will impact on the airport’s ability to deliver a positive experience. More transparency about ownership and the operational impact that that will have can only be a positive thing. James Cole: On the “grey” market question and the impact of the proposed changes, slot trading has occurred very openly in the UK for many years. Particularly since the European Commission published a communication in April 2008, which effectively endorsed the UK model of slot trading, it has been done in a very open way. A couple of years ago we launched a slot-trading website to help facilitate the process. The proposals that the Commission has put forward are about promulgating the UK model of slot trading across Europe, where slot trading does occur but in a very opaque way. So, personally, I do not think that the regulatory changes that the Commission proposes will have a significant effect in the UK, where slot trading already occurs in a very open way, but it will promote slot trading along the lines of the UK model in other parts of Europe—in Frankfurt, Paris and Milan. The Chairman: So we are actually leaders, are we? James Cole: Yes.

Q9 Lord Haskel: What is the difference between our system of slot trading and the other slot trading you mentioned on the continent? James Cole: The difference is that we are open about the fact that it occurs, and we publish for transparency purposes the fact that 14 slots a week have transferred from one airline to another. We are very open about the fact that that has occurred. Lord Haskel: So it is kept secret elsewhere? James Cole: “Kept secret” is slightly strong. The Chairman: It is not as transparent. James Cole: It is not particularly transparent. Lord Clinton-Davis: Is that true of every country? James Cole: No. In our experience, slot trading occurs only when an airport is very congested, such as at Heathrow or Gatwick. Therefore, presumably, airports like Frankfurt, Milan and a few others may fall into that category. There are many airports where slot trading does not occur. For example, we have never had a slot trade at Stansted simply because slots are still available through the normal process. That would be true of somewhere like Copenhagen, for example. Some member states have local laws: there is a royal decree in Spain that prohibits slot trading, so it does not happen there currently. There is a mixture. That is one of the reasons that the Commission is putting forward these 6 proposals. It would like a consistent application across Europe, whereas at the moment we have a mixture of applications.

Q10 The Chairman: Is it essential that there should be the same system across Europe? If it has worked all right until now, why do we need the same system? James Cole: Is it not for me to comment. It seems to be a theme for the Commission, to have consistency. Emma Gilthorpe: In the interests of keeping barriers to entry low, it is important to have that level of transparency, allowing free movement of airlines around different airports and knowing where opportunities arise. To push business models in particular countries, you need that sort of transparency. Otherwise, the tendency is that most of those airports will have national flag carriers and it becomes very difficult to penetrate those markets if you are an airline.

Q11 Lord Clinton-Davis: But the essential issue is whether an airport is full, or nearly full, to capacity, is it not? Emma Gilthorpe: That is what will drive the need for trading. The simple argument goes that, if there is capacity already, obviously you do not need to trade as you can just go and acquire a slot. It is worth emphasising that airports may have capacity, but they may not have capacity in peak hours. So Stansted has not yet traded but, if you look at its peak-hour capacity, it is actually full at certain times of the day. That becomes a very important area to understand. Daniel Edwards: I want to echo what was said by the others on the panel about the importance of looking at some degree of flexibility on the continent in this area. In terms of our duty to UK passengers, we are obviously very interested in what happens to the UK, but we are equally interested in UK passengers’ ability to get where they want to go elsewhere in Europe. We see barriers to entry elsewhere in Europe because of the way that the slots regulation has been interpreted elsewhere, so it is of genuine interest to us, as UK regulators and legislators, to get that right. Rob Siddall: I think our members would agree with that. Transparency is important. All members are telling us that. They see the way that ACL operates as a good model of operation. It is about getting those principles put in across Europe rather than, necessarily, exactly identical nuts and bolts. The other thing to bear in mind for our members is that each flight has two ends to it, so they have a strong interest in how other European airports and the wider world are operating.

Q12 Lord Walpole: I have just one question that I hoped someone would have answered by now. Is a slot anything to do with the size of an aircraft? James Cole: The slot is defined as the full range of airport infrastructure required to operate a service. The slot is not just the runway, landing and take-off time but includes the right to use some terminal capacity and to park the aircraft of a particular size. So if an airline wants to change a flight operated by a smaller aircraft to a larger aircraft, it has to request that change, and it is subject to us checking that the request fits within the other capacity constraints. Lord Walpole: That is helpful, thank you. 7

Q13 Lord James of Blackheath: Can I just twist that question for a moment? If, surely, you had a slot for 8.30am, that would almost imply that it was a long-haul aircraft and therefore a big carrier. You would therefore have a slot dictated by a long-haul airline’s purchase interest. James Cole: What are called the airline’s historic rights, or grandfather rights, are defined by how they used it. If the slot was currently operated by a 150-seater aircraft and the airline wanted to change it to a 300-seater aircraft, that would be subject to the availability of all the other components of capacity that would be needed at 8.30am.

Q14 Lord Bradshaw: I have a quick question on slot allocation. Does the physical size of the aircraft, and the turbulence behind it, limit the number of take-offs and landings you can run? The Chairman: That is the same point. James Cole: It is a slightly different point, actually. In declaring the capacity of the airport, an assessment is done that includes the mix of traffic at the airport. For technical and safety reasons, the distance at which one aircraft can follow another depends on a combination of their sizes. So a change in the mix of aircraft can have an affect on the capacity of the airport, but it is not a parameter in the allocation of slots. Within a season, the slot is not dependent on the aircraft size in the sense of wake/vortex separation. But from one season to the next, as the capacity is reviewed, it could have an effect. For example, at Heathrow, as we get more and more A380s, that could eventually have an effect on the capacity of the airport. That happens through the airport, with the advice of NATS, reviewing the capacity of the airport each season. Emma Gilthorpe: The other thing that is worth mentioning is that, obviously, if slots are used for a particular purpose now, for a smaller aircraft, over time the airport can accommodate a larger aircraft because you can build new facilities. We have obviously had to build new stand capability in order to take the A380s, which operate a two-pier—or sometimes three-pier—service, whereas most aircraft now have a one-pier service. Those things can evolve over time.

Q15 Lord Clinton-Davis: The allocation of slots is governed by European legislation at present. Do you think that there is a case for leaving well alone, or is it susceptible to some change? The Chairman: “If it ain’t broke, don’t fix it”. Daniel Edwards: As the discussions have already indicated, the proposals that have come forward from the European Commission are very similar to the system that already exists in the UK. On that basis, you would argue that no reform is necessary. Equally, however, we do see problems elsewhere in Europe, particularly with the idea of the legality of things like secondary trading. Clarifying that through legislation would be extremely helpful, for the reasons that we have articulated earlier. For that reason, the argument that, “If it ain’t broke, don’t fix it” does not quite hold water. However, we are aware of the risks associated with taking legislation through European institutions—namely, you do not know what is going to come out of the other end. What goes in is not necessarily what comes out, and that is obviously of concern to us.

Q16 Lord Clinton-Davis: What discussions do you have with the other regulatory authorities? 8

Daniel Edwards: Well, we obviously talk. The slot co-ordinators have a very close relationship with other European colleagues. We are very aware of the ideas and positions of certain member states across Europe, particularly those that do not see eye to eye with the UK in terms of the current application of the regulation. It is clear that there is not unanimity across Europe in terms of how to take this forward. There will be some difficult discussions in Council if this does go through for negotiation. It is clear that the Commission is very wary of this. That is why it has thought long and hard before bringing forward this package of measures.

Q17 The Chairman: That is very interesting. Are you as a group assured that the UK Government are aware of the strength of your arguments? Are you, in effect, singing from the same hymn sheet? Daniel Edwards: From our perspective, we believe that we are. We have worked very closely with the Government. We have an advisory role, as the CAA, advising the Government on policy issues across the board, and this is obviously an important policy issue, as I set out. The UK position has been very consistent for a number of years. That is part of the reason that we are in such a strong position with regard to the proposal that has come forward from the Commission. It has been heavily influenced by the UK position. Lord Clinton-Davis: So there is no change as far as governments are concerned. Daniel Edwards: No, I think that there is cross-party consensus on the way forward. There may be subtleties in that position but, by and large, it is pretty consistent. The Chairman: That is rather comforting to hear.

Q18 Lord Brooke of Alverthorpe: Where is the opposition coming from in Europe, and what is it based on, primarily? Daniel Edwards: It is difficult to generalise about that. There are a number of issues. Lord Brooke of Alverthorpe: Forgive me, but you did mention one earlier. The Chairman: You did mention Spain. Daniel Edwards: Absolutely. The UK comes from a philosophical starting point in terms of a laissez-faire, deregulatory approach, which looks to the allocation of resources according to value. That is very much the approach that is being promulgated within this proposed regulation. As you know, that is not an approach which is shared by our partners in Europe. That is why we have some tensions with, for example, countries like France and Germany possibly taking a different line on the degree of intervention that they would expect to see in the market. One example would be the degree to which they value a free and open secondary market for slots, given that they are promoting the interests of particular carriers. As I said, it would be unkind to generalise, but there are quite clear differences. The Chairman: I think you said a lot there, actually. Lord Bradshaw: And I think that you have more or less answered my question. I do not have anything to add, thank you.

Q19 The Chairman: Thank you. I am going to ask the next question. The proposal would put in place measures to ensure that slots are not misused and that new entrants are able to enter the marketplace. Are these the key issues that need to be tackled? Does the proposal do enough to tackle them? I think I probably know the answer to the second part of that question. 9

James Cole: From a co-ordinator’s point of view, and perhaps more generally, there are some useful proposals, which appear not to be terribly controversial, around the misuse of slots and some slight improvements in tightening airlines’ responsibilities to use slots correctly and as allocated—there are some extra powers of enforcement—as well as trying to make sure that these things are applied across Europe. Some member states have not taken action in some areas under the 2004 amended regulation. So there are some useful improvements on the misuse side. It would be wrong to characterise the process as something that is riddled with misuse; it is very much the exception. None the less, it is important to a smooth-running airport and good service to passengers that a small number of badly behaved operators do not cause disruption for those who work within the process. As far as the new entrant proposals are concerned, in general the Commission is seeking to broaden the range of operators who would qualify as new entrants, and to allow slightly larger competitors to qualify as new entrants and therefore, perhaps, be more effective competitors. Under the existing regulation, only really rather small airlines qualify as new entrants and, therefore, they are arguably not terribly good competition for the dominant carriers. From a co-ordinator’s point of view, we generally think that that is positive. It would give a broader range of airlines the ability to become new entrants, and therefore give a co-ordinator a broader choice of applicant carriers in making slot allocations. However, fundamentally, particularly at an airport like Heathrow, the lack of slots is such that even having new-entrant priority does not really help because there are essentially no slots in the pool. Just addressing the slot allocation priority does not solve the problem if the capacity constraints are too severe. Now, Heathrow is a rather extreme case. There are a lot of co- ordinated airports that are not so completely full, but that is one of the issues. The Chairman: I have committed a sin. I have not told you my interests. I should have declared that I was on the board of British Airways for almost 12 years and on the British Airways safety board, so I had a lot of dealings with people from the CAA and all the rest of it. But that is the past, and really is not relevant to this. Rob Siddall: To answer the question, for our members in the round many of the proposals in this regulation are welcome. It is not a revolutionary approach; it is building on what has been done before. I think that they would see them as sides of the same coin. There are good proposals here. There is support for increasing the slot utilisation rule to 85:15. There is support for increasing the time series and so on. Where we have got members with a runway that is approaching capacity, they would see that through the lens of, “Can I get the max out of my runway?”. These sorts of signals, they would say, would help that. That has obviously got to be balanced with the needs of airlines as their clients, and the rules that they have to operate within. We support moving towards proposals that will free up capacity where it is needed.

Q20 Lord Haskel: This question deals with misuse of slots. For our education, can you give us an example of how the slots are misused? Emma Gilthorpe: I could attempt to do that, as well as making a related point. There are a couple of primary ways that slots can be misused. The first is that an airline can express their interest in a slot. They then have to go through a number of processes to determine whether or not it suits them and whether the capacity is available. A scenario arises called “late hand-back”: they have done this evaluation and then, at the last minute, it is possible that they could want to hand them back. That has then potentially precluded somebody else from entering and having not had the time because they are getting towards the beginning of the season. I must emphasise that that does not happen very often, but when it does happen, 10 it has a material impact on the market and the level of competition that can occur within the marketplace. It is one of those things that, while rare, it is very important that we guard against. The regulation would allow us to introduce quite an innovative concept, a reservation fee, that means that, if you do not hand back your slot on time, you then incur the cost at the beginning of the season when you would otherwise have used it. This is additive to what exists already. There are already slot sanctions. They tend to relate more to the use once you have a slot, such as poor planning associated with that slot meaning that aircraft do not land or depart on time. So it is a positive step forward that this would be supported under the regulations. It is certainly something that BAA would welcome, albeit, as I say, that it happens on a very small number of occasions. On new entrants, this is not a big deal for Heathrow at one level because there is no capacity, as has been described. However, I note that there are two aspects to the new- entrant rule, one of which is that the new proposal retains the existing five-slots-per-day rule and expands it to nine slots per day for airlines requesting slots. So if an airline has more than nine slots per day, it cannot qualify as a new entrant. But that is less of a concern. More of a concern is the very high threshold, whereby an airline holding more than 10% of slots would not qualify as a new entrant. It is worth looking at that in the context of Heathrow, which has 480,000 movements a year. So you would need more than 48,000 movements not to qualify as a new entrant. That is quite a high threshold. As I say, it is not an immediate and material concern to Heathrow because there is no capacity, but should— heaven forefend—there be new capacity at Heathrow at any time in the next decade, then that would mean that opportunities for new entrants could be quite limited because you would have to have quite a lot of capacity in order to breach that threshold.

Q21 The Chairman: Piggybacking on that, could I ask one question? Say a new airline was started and it applied for slots and found that there was a dip in the economy so it was not going to be able to operate the flights because it had cut back. What penalty would you have for that, or would you be very forgiving and say, “Well, if you want to sell the slots back, or sell them to somebody else, you can do so”? It is rather like investing in part of the ocean where you think that there is oil, and then it just does not come out. What happens? Emma Gilthorpe: Heathrow is generally a very popular destination or base for airlines because it generally generates quite high airline yields. Even in recessionary periods it is a very positive airport for airlines to be part of. But there is a “use it or lose it” rule, so you have to hand your slot back if you do not use it. There are set parameters, which I will not go into the detail of here, but if you breach those parameters, then you hand the slot back to the board. Of course, they have an inherent value, so you would trade that slot.

Q22 The Chairman: So there would be compensation if the airline handed back the slot and some of the original financial investment would come back, or would it lose the whole thing? Emma Gilthorpe: If the airline could find somebody to acquire the slot, if there was matching, then yes. If it could not, then the slot would go back into the pool. James Cole: Can I just clarify a point? The slots that are allocated from the pool by ACL are given away for free—there is no charge—so there is no “cost” of the slot that an airline needs to recoup in that situation. On a related point, one of the issues that the regulation is seeking to address is this phenomenon which we call “overbidding” and “late hand-back”. Heathrow is rather an exceptional case, but if you take Gatwick, which is a very constrained and busy airport, at 11 the time of initial slot requests, about six months in advance of the season, we might have growth of, say, 15% on the previous season. Once the schedule has settled down, the actual growth may be, depending on the economy, 2%, 3% or 4%. So there is a huge hump of artificial demand that then falls away. That can lead to inefficient allocation of slots. It can lead to an airline that actually really wants to fly to Gatwick not getting the opportunity because the slot was allocated to, in hindsight, the wrong airline. Addressing that would improve the efficient use of slots. The Commission’s proposals are seeking to do that. It is a very difficult problem to solve. They probably do not do everything that would solve it, but these ideas of penalties for late hand-backs or slot reservation fees are seeking to address that problem. It is quite a difficult problem, because it is difficult to distinguish between an airline that genuinely has plans to grow that do not come to fruition for whatever reason and another airline that is perhaps being slightly overambitious in its plans in the first place.

Q23 Lord Brooke of Alverthorpe: Is there more that the Commission could have suggested should happen in this area that does not appear in the proposals before us? James Cole: It is very difficult. The European Union Airport Coordinators Association, of which we are a member, made suggestions to the Commission in the early days. Largely, it has incorporated those suggestions into these proposals. We did not have any better ideas ourselves, so I cannot really lay the blame at the Commission’s door. Lord Brooke of Alverthorpe: Do the regulators have any additional views? Daniel Edwards: No. There is a general comment, which is that the work that went into generating these Commission proposals was done by a consultancy hired by the Commission, as you would normally expect. The work that the consultants did was very sound, and we are pleased with the way they went about their business. They did quite an exhaustive check of the kind of options that were available to regulators in taking this forward, and they came up with some very good ideas based on best practice from around Europe. The slot reservation fee idea is one that operated in Düsseldorf— James Cole: For a short time. Daniel Edwards: —for a short time. They came up with some very positive results. By and large, the process by which they have arrived at the current proposal has been a good one.

Q24 Lord Brooke of Alverthorpe: Continuing on that question, and then back to my real question that I am supposed to be asking you, you have just described the process that they went through. Are the operators who have been unhappy with the present arrangements still unhappy? Daniel Edwards: Yes. Again, I am generalising, but the way that the regulation works is that those who value slots the most, particularly in the secondary market, have the ability to access them through paying money. Those with some shallower pockets probably have less opportunity. You would think of certain sectors of the industry, such as general aviation or certain regional services, which may well be less able to spend the money that some of the other competitors for those slots can afford. It is very difficult to see how you square that. This is an ongoing issue, and intervention in that area would have a cost. We talked earlier about the cost for a slot being £20 million. Those are the kinds of figures that we are messing with if we intervene in the market. We have to consider it very seriously before we do that.

Q25 Lord Brooke of Alverthorpe: Like the Lord Chairman, I have some past form. I was formerly a partnership director in NATS for five or six years, so I know a little bit about 12 listening to the announcement that, “Due to NATS, there is a delay”, when in fact the airport operator had not got us out on to the plane at all. The Chairman: That is very cynical, Lord Brooke. Lord Brooke of Alverthorpe: We used to fume over it. The Commission claims that its proposal would allow the system to handle 24 million additional passengers, add €5 billion to the European economy and create up to 62,000 jobs between 2012 and 2025. This is not an easy one to answer, I know, but do you think that this is a realistic assessment? Bringing it nearer to home, could you say whether you think that there will be additional jobs and so on created here as a consequence of the change? Emma Gilthorpe: It is at the very optimistic end of what might be achieved. Either the quantum or the timelines are aggressive. If you looked at 30 years, maybe you could achieve something of this nature. But the regulation—and as a regulatory director, I am frequently saying this—in and of itself will not stimulate this number of jobs. It requires heavy collaboration among all of the airport operators, airlines, ACL, NATS and their equivalents across Europe in order to optimise the capacity that is there. Those jobs and that GDP benefit will only be forthcoming if you can get more people travelling into and out of your country. If the underlying infrastructure does not sustain that, then you are not going to get these step changes that we desperately need in the UK, certainly. Rob Siddall: I would agree with that. In places where it is able to free up capacity, I suppose that it stands to reason that that will have a positive effect. More flights mean more business, more jobs and all those kinds of things. I take the point that that all hinges on there being more flights, so it is not by setting a new set of rules that you will necessarily achieve that end. In answer to the previous question about whether the Commission is going about this the right way, we were disappointed that it did not choose to make more use of local rules. It is good to have a broad set of principles applied across Europe, but there is also scope for local rules. Each airport, certainly in the UK and, I guess, abroad, is different. There is scope there to work. The Chairman: So an element of subsidiarity? Rob Siddall: Yes, definitely.

Q26 Lord Ryder of Wensum: I pose this question to you all, and perhaps to Ms Gilthorpe in the first instance. To mix my metaphors, have we not all of us this afternoon been rather tentatively dancing around the elephant in the room, which is really all about capacity at Heathrow? Thanks to this Government’s unwise and short-sighted decision not to build an extra runway at Heathrow, the problem that you and we are dealing with now, with slots, is so much greater than it would be in other circumstances. We all know that most other countries in Europe are developing their airports at the expense of, widely, British commerce and the City of London, which will simply take their business elsewhere. Also, you would not have such a market, with too many aeroplanes chasing too few runways. That is very bad economics by any standard if you believe in liberal market economics, as the Commission and the Government claim to do. Can you please address, with even greater clarity than you have done up until now, the real problem, which is lack of capacity and particularly lack of capacity at Heathrow? Emma Gilthorpe: In the first instance, there is no doubt—and there has been much publicity in recent months leading up to the Government’s sustainable aviation policy review—about the extent to which we, as the UK, will be held back if we do not invest in 13 sufficient hub capacity to be able to capitalise on the key emerging market trade routes that we need in order to be able to do business with China, Brazil and those other places in future. It will be a significant lost opportunity if we do not make progress on that front. Aviation policy and runway capacity are matters for the Government and at the moment their policy is that there will be no new capacity in the south-east, but they are consulting on that and within a matter of weeks they will be issuing their next statement on that topic. I hope that it will put all options on the table. It is important, whether you are talking about the Thames estuary or more capacity at Gatwick, Heathrow, Stansted or anywhere else, that you look at those things in alignment. I would argue that, from an economics point of view, it would be cheaper and quicker to look at that at Heathrow than in the context of some of the other airports, but there are costs and benefits to this as we know. We know that there are concerns within local communities around Heathrow about the extent to which we can do more to mitigate the impacts of having one of the world’s busiest hub airports. But, as I say, that hub airport brings with it the significant economic opportunity of many billions of pounds a year. It is the elephant in the room. It is not an easy thing to tackle. There is no simple solution to it.

Q27 The Chairman: Can I just bring us back to what we are supposed to be doing? I know that it is the elephant in the room, and you are absolutely right, but I hope that we will have another opportunity to look at the whole thing about the expansion of the British airports. It is not only Heathrow; you have got Gatwick as well—I do not know why they are not looking at a second runway at Gatwick. To have a great discussion about this is a luxury that we are affording ourselves, and we have a time pressure. Capacity must be increased in order to tackle congestion problems; obviously, we would say that that is right. Do you think that this measure from the European Commission will actually help it or not? Emma Gilthorpe: It is a small but important step. The Chairman: It is essential, you believe. Emma Gilthorpe: Yes. The Chairman: And how small, would you say, in the great realm of things? Emma Gilthorpe: It is small to the extent that it will help airports operate more efficiently—and, importantly, help slot regulation operate more transparently—than is the case at the moment. With transparency, you get a more efficient market.

Q28 Lord Ryder of Wensum: But with respect, Lord Chairman, the question has already been asked by my colleague Lord Brooke about the claims that the Commission is making. It makes some very bold claims: that the proposal would allow the system to handle 24 million additional passengers, add €5 billion to the European economy and create up to 62,000 jobs. How many jobs will be added at Heathrow? Are there going to be additional passengers at Heathrow? Do you think that this particular measure will add anything to the British economy? Those are the Commission’s words, not mine. James Cole: I will make one brief comment based on the consultants’ report. Most of the economic benefit was attributed to secondary trading. As we said earlier, we have had secondary trading for many years in the UK. I do not think that the changes to the regulation will affect that market very much in the UK. I cannot comment on whether the quantum is correct, but most of those benefits would be seen in the parts of Europe that have not had an open secondary trading market as we have in the UK. The other area where the UK has led is in the governance and capacity assessment side of things. If you look at the number of movements per hour we achieve at Gatwick, which is the busiest single-runway in the world, 14 and at Heathrow, which is the busiest two-runway airport in the world, we already achieve much more with our facilities than our counterparts in Europe. So they have some significant headroom, if they were to just match UK best practice. Perhaps the benefit is correct, but it is probably not going to be seen so much in the UK as elsewhere in Europe where they have more headroom to improve. The Chairman: You can see that I am hopping on eggs at the moment. The reason is that we are going to be interrupted very shortly because the mover of the Motion in the Chamber is on his feet and has been for some time. Because of the problems and the way I have allowed myself to wander down into areas, which have been very productive in terms of eliciting information, I also suggest that if you think that you can clarify this point more along the lines of the question of Lord Ryder and Lord Brooke, it would be useful if you could send us some information. That is, if you think that there is anything; if you just say “No”, well, it is no. I do not want to leave valuable information uncovered, but I also realise that we have a real time pressure on this. It might be that the mover of the Motion will speak on for another 20 minutes and then withdraw his amendment, but I doubt it. I am sorry to do this to you, Lord Ryder. Lord Ryder of Wensum: No, of course. The Chairman: Thank you very much indeed.

15

Examination of Witnesses

Witnesses: Simon McNamara, Deputy Director General, European Regions Airline Association; Richard Matthews, Head of Scheduling, easyJet; and David Smith, Schedule Planning Manager, British Airways.

Q29 The Chairman: My Lords, I think that we have kept our witnesses waiting long enough. Thank you very much indeed for coming. I do not know whether you were here for the previous panel, but it was very interesting. We are now looking at the organisation and allocation of slots. Would you like to introduce yourselves, and say who you are and what you do, for the record? Richard Matthews: Good afternoon. My name is Richard Matthews and I head up slots and scheduling for easyJet, which is now the fourth-largest airline in Europe and the biggest in the UK in terms of passengers carried. We have an interest in most of the airports around Europe, particularly those that are slot constrained, because it is part of our brand to try to fly to those congested airports—the primary airports—where passengers want to go. David Smith: Good afternoon. My name is David Smith and I am Schedule Planning Manager for British Airways. We are here because slots are obviously of great interest to British Airways—they are pretty much what we need to run our business and to carry our customers. We operate extensively throughout Europe and beyond, across the world, into many of the airports where congestion and slot allocation are real issues. Simon McNamara: Good afternoon. My name is Simon McNamara and I am the Deputy Director-General of a trade association called the European Regions Airline Association. We represent around 60 airlines that fly services across Europe, but we operate in particular for small and medium-sized regional-type carriers, which provide services both within the regions and to major hub airports across Europe.

Q30 Lord Fearn: Regarding European legislation on the allocation of slots, could you please explain the interest that your organisations have in that process? Simon McNamara: Our airlines operate services to slot-constrained airports—in other words, airports where capacity exceeds demand and therefore the right to operate at those airports is controlled by the slot allocation regulation. That is the interest of the airlines that I represent. David Smith: For British Airways, as I said in my opening remarks, slot allocation is pretty fundamental to our business, as the slots are the means by which we can operate our flights. We are the largest carrier at Heathrow and one of the larger carriers at Gatwick, and we operate to most of the congested airports around Europe and beyond.

Q31 Lord Walpole: Can I just ask a silly question? Does each flight that goes away have a slot at the other end? David Smith: Not all airports are co-ordinated in the same way that the London airports are co-ordinated. As such, there is no requirement to clear a slot at every airport that we fly to, but at every airport where we are required to file for a slot to operate a flight we do so.

Q32 Lord Walpole: What sort of percentage of your flights is that? Is it 50% or 90%? 16

David Smith: I do not know exactly. Obviously, the majority of our flights operate to congested airports within Europe and the UK. I could not tell you exactly what proportion of those are to co-ordinated airports. Richard Matthews: For easyJet, we have around 1,300 flights a day in summer season, involving a take-off at one airport and an arrival at the other end, so that is 2,600 slots a day. I would say that upwards of 80% to 90% of those flights need an appropriate slot at either end. For example, if we are flying between Paris Charles de Gaulle and Milan Malpensa, we will need a slot for both ends of that route. If we are flying from London Southend—which we will start doing from next month—to Belfast, we would not need a slot at either end. Perhaps in Belfast we would need an advisory permission, which is a lower priority classification for airports so, formally, it is not fully co-ordinated. The Chairman: But you still need to make sure that the airport knows your schedules. Richard Matthews: Absolutely. We put in an application, so everywhere that we fly to knows that we are coming.

Q33 Lord Clinton-Davis: I will ask the same question that I asked earlier. We know that there is European legislation on the allocation of slots. Is the European Commission’s proposed revision of this legislation necessary? Simon McNamara: My strong view, on behalf of the association that I represent, is that the amendment is not necessary and will not solve the underlying problem, which was touched on at the end of the discussion with the previous panel. The Chairman: It does not deal with the elephant in the room. Simon McNamara: Exactly. That is fundamentally the problem that the Commission initially set out to address. The Commission has built up sufficient regulatory momentum that it had to do something, and this is what we are left with. However, I do not believe that this amendment—yes, it tinkers around the edges and makes improvement in certain areas—will address the underlying problem, which is the shortage of slots across Europe.

Q34 Lord Clinton-Davis: I think that it is completely unwise to suggest that the European Commission is simply doing this for the sake of it. There must be some pressure on the Commission to do this, although you may not agree with the proposal. Is that your view? Simon McNamara: The Commission undertook an exhaustive process, whereby it hired consultants to undertake a review, and, yes, there are two sides to the argument. There was some support from the airport industry for amendments to the regulation, but I think—I do not want to speak for my colleagues here—that the majority of the airlines represented across Europe and internationally did not want to see an amendment to the regulation. The regulation is not perfect, but it works. The Chairman: Can I just interject? Lord Clinton-Davis was Commissioner for Transport—actually, he should have stated that—in the European Union some time ago so, although he tries to hide it, he is sometimes slightly biased in defence of the Commission. Lord Clinton-Davis: In the nicest possible way.

Q35 The Chairman: However, I would like to pursue this matter. The original policy was in effect to look at capacity throughout Europe and to try to unblock any blockages. You would think that the way to do that is to allocate slots. Is that what you are suggesting? 17

Simon McNamara: The amendment was proposed by the Commission as an “Airports Package” to deal with the constraints at airports. The proposal comprises three elements: slots, groundhandling and noise. One of the key aims was to address the problems and bottlenecks at airports across Europe.

Q36 Lord Brooke of Alverthorpe: Lord Chairman, I am just a little bit surprised at what has been said, in the light of the evidence from the previous panel, among whom there seemed to be a general feeling that, following the 2008 changes, we could perhaps have continued without any further changes. Are you saying that we do not need these changes at all? Simon McNamara: That is my belief. These changes will not take us a large step forward in improving the system.

Q37 The Chairman: Will the other two measures included in the airport package, on groundhandling and noise, not improve things? Simon McNamara: The proposal on groundhandling is completely separate because it talks about the liberalisation of the ground-handling market, and the noise proposals addresses aircraft noise. Those are not related to capacity, if you like.

Q38 Lord Haskel: Is there a safety element here? Obviously, trying to squeeze in as many slots as possible has implications for safety. Are you satisfied that squeezing in the extra slots—which, obviously, people would like to see—is compatible with passenger safety? David Smith: Yes. It is difficult for me to speak on behalf of the European Commission, but its proposals would not increase capacity at airports beyond that which is already available. Rather, the proposals seek to increase the utilisation of that capacity so that, instead of having four or five days where utilisation is at 97% of the maximum, you would have six or seven days—or 152 days. In any given timeframe, the capacity does not increase. The Chairman: But the utilisation of the capacity changes through the allocation of the slots. David Smith: I believe that the intention of the European Commission’s proposed revisions is to increase the utilisation. As an operator at Heathrow where utilisation is already in the high 90s in terms of percentage points, our view is that the proposed revisions are not needed. They are not helpful and, in many ways, may be unhelpful, particularly when viewed in a global context. Lord Clinton-Davis: No reputable airline would do anything to prejudice safety. David Smith: Of course not. Richard Matthews: On Lord Clinton-Davis’s question on whether the airlines are in favour of the proposals, I think that easyJet perhaps takes a slightly different view in that we are prepared to see a revision to the regulation so that certain aspects might be improved. When the consultation came out, our main focus was to argue for consistent application of the rules. For us, we are really talking about a pan-European operation, and we do not see a consistent application of the rules in the UK and at other airports in other European countries. If you are flying between London and Paris or between Milan and Athens, you really need to see that these things are applied evenly. It would be silly if an operator achieved the criteria to retain a slot at one airport but not at the other, even though it flew on the same day. We take the view that there are aspects that can be improved. To home in specifically, we are in favour of increasing the threshold for new-entrant status for carriers. 18

Under the current regulation, you often have one dominant carrier at an airport and the number two carrier might have way below 10% of the slots. The current rules do not really encourage slot co-ordinators to allow a strong second competitor. That is why we support the increase of the threshold from, say, 5% to 10% for new-entrant carriers.

Q39 The Chairman: Can I just track back to something that BA said. You said that the revisions may in fact be unhelpful. What do you mean by that? David Smith: For us particularly, we operate in a worldwide context, so it is very much in our interests for common rules to apply throughout the world because, as has been touched on by several people, we need a slot at both ends. The sort of changes that the European Commission is proposing would move us away from that common-rules principle around the world and would lead us to have an imbalance between what the rules are in Europe and what the rules are at the other end. There is a real risk of retaliation from other airlines and other countries if the rules are changed here. Over the past few years, a lot of progress has been made on harmonising the worldwide system based around the rules in the current regulation. We feel that it would be a backward step to make changes to those. The Chairman: Because of the global problem? David Smith: Yes.

Q40 The Chairman: Could you perhaps give us a note on that? What function do the likes of IATA have in trying to make the rules apply everywhere? David Smith: We would be happy to provide you with a note on that. The Chairman: If you could. I do not want to go off on a different track now. Lord Brooke of Alverthorpe: Are you drawing a distinction between the experience in Europe—we have had a reasonably understanding response to the proposals from easyJet, which flies primarily within Europe rather than being a long-haul flier like BA—and elsewhere, outside of Europe? It is generally understood that there are problems in other parts of Europe that needed addressing. David Smith: Within Europe, as has been commented on several times already, we certainly see inconsistent application of the current regulation. We very much favour the consistent application of those rules across Europe. Beyond Europe, some parts have not adopted those principles in the first place. To answer your question, Lord Chairman, IATA is keen to drive that agenda across the world to try to get harmonisation and standardisation so that everyone is on the same page. This is almost a two-speed answer: the regulation that is in place in Europe needs consistent application; and the existing regulation needs promulgating throughout the world.

Q41 The Chairman: On a point of clarification, you also mentioned the word “retaliation”. What sort of retaliation would that be? David Smith: It might be the case that our rights to fly to whichever country in the world you might choose—Nigeria or China or India—are withdrawn or encumbered in retaliation for changes made in the European Union. The Chairman: That is interesting. Mr McNamara, did you want to say something else? Simon McNamara: On the point about the common application of the rules, the Commission is proposing a slot reservation fee to incentivise airlines not to abuse their 19 slots, but the Regulation already provides clear means to impose sanctions on airlines that abuse their slots. It is a question of allowing states to enforce those. I do not think that any reputable airline would support misuse of slots. When capacity is scarce, it needs to be used. The rules already allow for the sanctioning of airlines, and we need to make better use of those. A slot reservation fee would simply put money into someone else’s pockets for a short period of time and would not actually solve the problems. The Chairman: Yes, I can see the validity of that point. If there are no more comments on this issue, we will move on to Lord James’s question.

Q42 Lord James of Blackheath: Let me give my previous criminal record in this respect: I was chairman of Dan-Air, which was sold to British Airways for £1; principally because we had six Heathrow slots, British Airways agreed to write off £156 million-worth of debt for £1. What is your view of the Commission’s proposals and the impact that they have will have on European airlines? How is the impact likely to differ among airlines? I suppose that I should add: how far will the answer to that question be dictated by the policies that you apply? To what extent will you be selective in favouring one airline against another and what criteria would apply? Richard Matthews: I think that the simple answer is that airlines that fly more frequently are likely to benefit compared to airlines that do not fly as frequently. At easyJet, our business model is based on high utilisation of our aircraft and crew assets by flying several times a day and using slots on a daily basis—every day of every week and every week of the year—whereas some airlines have a more seasonal nature to their business and may struggle to fit in with the criteria if those meant that they were encouraged, or forced, to fly for longer than they really wanted to do so.

Q43 Lord James of Blackheath: The second part of my question perhaps points to the issue rather more directly. Do the proposals do enough to allow the dominance of large carriers to be challenged? By its very wording, that question implies that there would be a positive use of the allocations in order to curtail size and capacity. Richard Matthews: I guess that the new rules will perhaps encourage more churn of existing capacity, which is perhaps one of their aims, rather than having the same carriers holding slots indefinitely year after year because of the way that the existing grandfather rights work. The proposals will make it harder for some carriers to retain those slots. Where such carriers lose those slots, that will create bigger slot pools. However, that may not be possible at some airports—Heathrow is a good example—where there is very little capacity to change.

Q44 Lord James of Blackheath: In answer to a question earlier, Ms Gilthorpe said that there would be no attempt to dictate routes, but I have a strong impression that the old Civil Aviation Authority definitely tried to get a viable level of activity on any given route, such as the route to Paris, by insisting on a bigger allocation of slots to one destination. Is anything like that happening now? David Smith: I do not believe so. I believe that there is a very transparent allocation process. Airport constraints were touched on in the earlier discussion, where James Cole or Emma Gilthorpe—I am not sure which—spoke about the limits on aircraft size at certain times of the day, but there is no dictating of routes on slot allocation. 20

Richard Matthews: On some routes where there is a reservation for public service obligations, an amount of capacity is set aside in order to provide essential services, such as to remote islands— The Chairman: Such as the Highlands and Islands. Richard Matthews: Or the equivalent in Corsica or wherever it might be.

Q45 Lord Walpole: What one major change would you like to see introduced into the current draft proposals? David Smith: There are some elements of the proposal that we are supportive of, and there are some elements that we do not support. The parts that we believe to be most damaging are the proposal to change the minimum utilisation rule from 80:20 to 85:15 and the proposal to increase the series length definition from five weeks to either 10 or 15 weeks. If we were able to remove any element, we would take those elements out. Again, that is not because they would particularly disadvantage us in the way that we operate normally, because generally we operate a very regular service—in the high 90s in terms of percentage points, as we talked about—but more because of the global context. The length of the series at five weeks and the 80:20 rule are fundamental planks in the global system. I do not want to go over the ground that we covered five minutes ago, but we would be very keen that we stuck with what is considered to be the norm currently.

Q46 The Chairman: Have you made that clear to the Government? David Smith: Yes, we engaged in a whole range of lobbying activity, both directly and through trade bodies, where we have made those points.

Q47 Lord Walpole: Does easyJet want to answer as well? Richard Matthews: For easyJet, we are less concerned by some of the measures that have been proposed, but I take the point about the raising of the slot utilisation threshold from 80% to 85%. It might as well be 90% in that, if you have a 10-week slot series, under the existing rules you have to fly eight out of 10 of those slots; if the threshold is at 85%, you cannot fly half a slot—you cannot fly 8.5 out of 10—so it would need to be nine anyway. I think that there was an element of trying to tone down a proposal that probably really means 90%. That is perhaps why BA is concerned, because it really means 90%. We would like to see consistent application in the secondary market. We think that that would be helpful. As James Cole from ACL was saying earlier, there is an active and very open transparent system in the UK, but in airports where we operate in Spain, for example, we would not have the opportunity under the existing legislation to purchase slots if we wanted to do so. We also have similar problems in France. Paris Orly is a good case in point, because the capacity there is effectively limited by an environmental annual limit of movements and you cannot get a slot there by purchasing your way in.

Q48 The Chairman: Do you have to fly from Le Bourget instead? Richard Matthews: We have an operating base in both Paris airports. We started the one in Paris Orly first, but because we could not grow Orly as quickly as we wanted to grow our Paris market, we needed to start a base in Paris CDG. That might sound perverse, as Charles de Gaulle is the busier airport, but it is actually slightly easier to get slots there. 21

Q49 The Chairman: I am conscious of the fact that Mr McNamara was left out when we asked the earlier question about what impact the Commission’s proposal will have on European airlines and how that impact is likely to differ among airlines. I am sorry about that. Simon McNamara: That is okay. My association also represents airlines that operate smaller aircraft types, and we believe that there is potentially a bigger impact on those types of carriers from some of these proposals. Those types of carriers are already being squeezed out of major hub airports as average aircraft size goes up and will be particularly squeezed if you then start attaching economic mechanisms such as fees and any other costs associated with slots. You can recover only so much money from the consumer. If instead of operating a 70-seat aircraft you are operating a 200-seat aircraft, your ability to pay is far higher. We would see a risk to regional services especially being accelerated by some of the proposals put forward in this change.

Q50 The Chairman: Have you also made representations on that? Simon McNamara: Yes. Most of our lobbying is to governments across Europe but we also lobby the European Parliament and Council. Obviously, the UK is very influential in that process. Yes, we have made representations on that.

Q51 Baroness Valentine: I should first declare that British Airways is a member of London First, and I am chief executive of London First. One of the key elements of the proposal is the idea of increasing the “use it or lose it” threshold to make sure that slots that are allocated are used. Are slots misused? Will this proposal guard against that? Also, would you mind clarifying for me the environmental trade-off? Presumably, if there is an incentive to use a slot, that risks you running empty planes just to keep a slot open. Does there have to be a set number of people in a plane to count as it using the slot? David Smith: As I said, we do not support the increase in the “use it or lose it” measure. We already operate at a very high utilisation rate in London. At Heathrow particularly, that utilisation is in the high 90s in terms of percentage points. Regularity is important to us, so we plan to fly and we do fly. We do not cancel due to lack of customers; we put those flights into the marketplace and we operate them. The 80:20 rule is there not as a tool for making decisions about the commercial viability of any individual service, but rather to get us out of trouble when weather, problems in the airspace or operational issues arise. That is solely what we use it for. Simon McNamara: One of the other misunderstandings is because the threshold applies to 80% usage of a series of slots, not of all your slots. On the face of it, 20% unused sounds like something that is not being utilised well. In fact, as one of my colleagues mentioned, if you have a series of 10 slots—so, every Monday at 7.20 am, you have that slot and you have a series of 10—you only need to cancel two and you are down to your 80% already. That is two flights over a 10-week period, so it is not a great deal. Airlines do not want to underutilise aircraft, because aircraft moving equals making the best use of that asset. The environmental point is well made: if you try to incentivise operators too much, there is the risk that they will operate aircraft unnecessarily. That has an environmental impact, so you need to balance the two. You are never going to get 100% utilisation out of any resource, however hard you try. It is about finding the balance, and 80:20 works quite well. The other point is that 80:20 is used elsewhere in the world. As soon as you start to get a global mismatch, you have a problem at both ends of the route—so you need 85% in Europe but perhaps 80% somewhere else. We need a common global standard and, generally, 80:20 is well understood and well known. 22

Q52 The Chairman: But slots are misused. Do we need some different measures to tackle the problem—different from those in the Commission’s proposal? Richard Matthews: There are two aspects to the changes in the slot percentages. It is not just about the increase from 80% to 85% or whatever it could be, but also the increase in the definition of a series slot length. We just talked about the example of a 10-week slot length. The maximum that a slot length could be is 31 weeks in a summer season. The bigger the slot series, the less impact one slot makes as a percentage. We note that the Commission is suggesting an increase from five to either 10 or 15. An increase of some sort would help to increase the churn of slots available for new carriers to come into airports. If a definition of misuse is that too many carriers are sitting on slots and not using them as much as they could, then that is perhaps some of the misuse that is taking place. We at easyJet support an increase to some degree, in that if we want to launch a service on a year- round basis we are often frustrated because a slot that we are trying to access is being held for a few peak weeks. In the UK, that might be in July and August, when we have more demand; in another European airport, it might be in June or September. For us to be able to fly that service year round, we cannot do it because someone is effectively blocking it for a small length of time. We agree that an increase in the slot series would have some benefits. Addressing your environmental concern, we at easyJet find that, particularly in the current economic climate, demand is not even across all months of the year. If the levels of utilisation or slot series were increased too much in a winter season, we would probably be forced to fly one or two more services than we would like in order to cross the threshold, rather than not operating a flight on a wet Tuesday in January. That is the kind of scenario that I am trying to paint here.

Q53 The Chairman: I can understand that. Does the customer—the regular customer— ever come into your thoughts? You mentioned the 80% and the 10 flights. I know people who commute weekly from various places such as Johannesburg because of their jobs in London. It would be an absolute disaster if that person could not come for two weeks out of 10. It is a huge period of instability and uncertainty. Richard Matthews: As airlines, we try to build some pre-planning into this so that we are not putting services on sale and then cancelling them and disrupting people who have active bookings. It is more a question of perhaps not offering those services on those cold days on January, so that the flights are never there for somebody to book. The Chairman: Is that why they have stopped printed timetables? Richard Matthews: There is certainly an increase in the level of fragmentation of services. There is quite often some interruption of service in terms of a daily or weekly repetition. The Chairman: It was only a matter of clarifying whether you are really concerned about the customer. I am not saying that you are not. David Smith: From our point of view, our regularity—a measure of how many of our planned services we actually operate—is in the high 90 percentage points. We do not use 80:20 as a means of taking out flights that we do not wish to operate for economic reasons. Our customers are very much in our thoughts. We plan ahead, and 80:20 is there for us to deal with unexpected events that mean that capacity is cut: we lose a runway, or it snows or whatever. It is relevant to that discussion because, again, from a customer point of view, the flight that you might like to cancel in that scenario might be the same one three or four times in a row, but you do that because you have an alternative for that customer that is much more acceptable. If the threshold is higher, you are forced to cancel flights where the 23 alternative for the customer on those flights is less palatable. So the next flight might be six hours away, rather than an hour and a half away. That is one of the reasons why we are very keen to leave 80:20 where it is. The Chairman: I did pick up on what you said, particularly that fact. You mentioned the market, and not many people mention the market. It is a difficult one when there is ever- increasing demand for air travel. Do you want to mention anything on that, Mr McNamara? Simon McNamara: No, not specifically. I am fully in line with what my colleagues have said.

Q54 Lord Brooke of Alverthorpe: As you probably know, I was partnership director on NATS when it was first part-privatised. We covered this subject about whether or not there is a grey market in slot trading operating in the UK, and there were allegations of a lack of clarity and transparency surrounding secondary slot trading. What are your comments on that? Secondly, do you accept that, while there have been changes here, there is a case for application of some of those changes in other parts of Europe that would be of benefit to both the industry and, ultimately, the consumer? David Smith: I will start, as this is particularly an issue for British Airways. To answer your second question first, we would very much support the formalising of the position on slot trading in the UK across Europe. If that amendment were proposed in isolation from some of the other revisions being proposed, we would very much support it. Earlier on, Mr Cole made the point that secondary trading has delivered most of the benefits in allocating scarce capacity—and economic use of scarce capacity—to date, and delivers most of the benefit claimed by the European Commission as well. On your first question, we do not believe that the market in slot trading in the UK is grey. We are clear that we trade slots in the UK one way: we acquire slots, and we have yet to dispose of slots voluntarily at Heathrow. As Mr Cole mentioned, the slot co-ordinator at Heathrow has a very transparent website where those parties interested in doing those sorts of deals post their details. Those transactions are in the public domain from that point of view. I guess that the only bit of it that is not transparent is the prices paid, which is one of the proposals in the Commission’s proposal.

Q55 Lord Brooke of Alverthorpe: And what do you think of that? David Smith: I am no expert on worldwide industries, but it is not always the norm. We would rather not disclose what we paid for those slots, just in case it mires our future negotiating position and makes it more difficult for us. We do not disclose how much we pay our cabin crew, and we do not disclose how much we pay for our aircraft. I am not sure why we would voluntarily disclose how much we pay for some slots. Lord Brooke of Alverthorpe: I thought you disclosed what you pay your cabin crew—to them anyway. “Not enough”, they would say. David Smith: But it is not a matter of public record. The Chairman: The point is that it is not the total take-home package, but it is commercially confidential. I can see that; otherwise you could be held to ransom.

Q56 Lord Brooke of Alverthorpe: But there have been accusations of over-bidding and late hand-backs. Would you argue that that has now diminished, to a degree? David Smith: That is a different part of the process. I think that that refers to the normal co-ordination process; again, Mr Cole referred to it earlier. That is one of the slot abuses 24 that the sanctions that were already in the Regulation would seek to address if they were applied properly. Again, the European Commission is proposing a revision to that to increase the weight of those sanctions. I think that Mr Cole answered the question on how much abuse he saw earlier on. ACL would see that more than us.

Q57 Lord Brooke of Alverthorpe: Do you think that people should be saying that the Commission should be making sure that, if the Regulations are adopted, they are actually applied and put into practice? Is there a need for a stronger push in that direction? David Smith: Sorry to dominate the discussion, but we feel that the first port of call should be to make sure that the current Regulation is put in place fully and equitably across the whole of Europe. If there are subsequent amendments to that Regulation, again, we would look to see its consistent application across Europe.

Q58 Lord Clinton-Davis: Have you made representations to that effect? David Smith: We are very active. We work through trade bodies such as IATA, and we work with IATA on the global scale. We talked earlier about the global nature of this and how keen we are to see common rules established and enforced throughout the world—we are very active on that—as it is a big hindrance to our business when they are not. Richard Matthews: To go back to your question, absolutely we agree that there is not a grey market in the UK. It works well. The website that James Cole mentioned is designed to flush out a level of interest in slots for those airlines that have slots but may not want to continue flying them. It is useful and probably helps to stabilise the prices that may be bid and paid in the trading market. We think that there is greyness in other parts of Europe, where slots are traded in the secondary market but you do not hear too much about it. Then there are places like Spain, where a royal decree prevents slots from being traded at all. It would be useful to have consistent application in all areas of Europe where you have congested slot access. You could have slot trading as one of the tools in your box. That is particularly important for a growing airline like easyJet, which is trying to grow its presence and be the number one or number two carrier at many of the congested airports in Europe. The Chairman: There was for a long time suspicion that, when there were takeovers of airlines, they were nothing to do with anything other than the slots—rather like the point that Lord James was making about Dan-Air and Heathrow. He sold Dan-Air for the slots. Lord James of Blackheath: You might be interested to know that I only managed to get that out of Lord King because I persuaded Lord Branson to announce that he was going to pay £30 million per slot. The Chairman: You have elevated Mr Branson to the Peerage. As I far as I was concerned, he was a “Sir”. Lord James of Blackheath: As far as I was concerned, he was God.

Q59 Lord Bradshaw: You have poured a lot of cold water on the existing legislation. We know from the answers to Lord Ryder—he was here for the earlier session—that many people think that the only way to go ahead is to increase the capacity of Heathrow. Have you any other solutions to the problems of the airline industry, or have I summed it up completely? Richard Matthews: I will jump in quickly, because Heathrow is not an airport that easyJet flies to at the moment. We are looking at this across all airports. Frankfurt is the other large airport in Europe that we do not fly to. Bar that, we fly to all of the others. There are four 25 or five other London airports, so addressing Heathrow is perhaps not the only answer, but it is the recognised leading airport in London so I understand the point that you are making. The scorn that is being poured is more about the consistent application of the legislation rather than the legislation itself. Some aspects of the amendments, as I said, are of interest to easyJet—not all of them, but some. Simon McNamara: In the UK, Heathrow and Gatwick are the benchmarks in terms of getting the best out of your airport on utilisation of runway capacity. There is a lot for other European airports to do to increase the utilisation of their runways without necessarily building new runways—simple changes in traffic management and the way that traffic is moved on the ground. Routes out of the UK to other European destinations could be improved by freeing up capacity at those airports, by making them work to best-in-class standards. It is generally accepted across Europe that Heathrow and Gatwick are best in class for the utilisation of the facilities that they have. There is a lot that could be done across Europe to increase movement rates. The Chairman: That is a very interesting point. We need more things to say that we are doing well at and where we are best in class. Simon McNamara: There are some very interesting stats put out by NATS on the utilisation of European airports. I would be happy to supply some charts on that, which show Heathrow and Gatwick’s utilisation benchmarked against that of other European airports. The Chairman: That would be very useful. David Smith: We believe—obviously, and publicly—that there is a need for more capacity in the south-east of England, in the London area. Even if you believe that the long-term answer is to build a new airport with multiple runways somewhere further from where the population lives, which is laudable in lots of ways, the need is now. The reason we are having a discussion about the Regulation is because it is there to allocate scarce capacity. Secondary trading is there because capacity is scarce. There is demonstrably a need for more capacity. We have said publically that that would be best done immediately at Heathrow because any discussion about a new airport for London is many years away. The Chairman: How come other countries can do airports, from idea to completion, in five years—like Hong Kong?

Q60 Baroness Valentine: Can you distinguish between mixed mode and variants thereof, and a third runway? You were talking about immediate solutions, which I assume is more about the possibility of operational freedoms. David Smith: As you know, proposals to change the way in which the runways at Heathrow are used would allow more movements through Heathrow. We have consistently supported that as an immediate solution, before moving into a sort of medium-term—which even then is a long way away—which is a new runway and, potentially beyond that, a new airport.

Q61 The Chairman: It has been a very valuable session, Thank you very much indeed. My final question is whether there is any glaring question that we, or I, should have asked but did not. Richard Matthews: Lord Chairman, I would never say glaring, but we at easyJet would say that the detail of the slot series length is quite an important aspect of the revision. While we have said that we are in favour of increasing the target measures that will allow more access to congested airports, we do not wish to see an extension to the series length that would make it difficult for us to operate on a year-round basis. This is particularly important when 26 you consider that, particularly where we are increasing our proportion of business routes, those routes do not operate to the same level for all 12 months of the year. There are holidays within those routes. We want to make sure that any revision to the Regulation takes account of where, among today’s carriers, carriers will naturally want to optimise their services to fly business routes within business months and leisure routes within leisure months. We would like to ensure that that point is well made. The Chairman: Mr Smith? David Smith: No, I think that you have done a good job in covering the main ground covered by the revisions to this Regulation. Simon McNamara: It has been a very interesting session. One element that it would be worth looking at is that there is quite a substantial shift in control from the member states to the Commission, particularly on the administration and running of the slots system. That would be worth investigating. There are several delegating acts and implementing acts intervening at state level and overriding the Regulations. There is a lot of additional complexity and bureaucracy that it would be worth examining when you come to formulate your view. The Chairman: Thank you very much. That is most useful. To each one of you, I say thank you very much indeed for giving up your time and for your preparation. Certainly, I have learnt a lot, and I am sure that every other Member of the Committee has. We are indebted to you. You will receive a transcript, as you probably heard.