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Motion made, and Question put forthwith, pursuant to Standing Order No. 118(6) (Standing Committees on Delegated Legislation),

Northern Ireland

Question agreed to.


Stakeholder Pension Scheme Regulations 2000

3 Jul 2000 : Column 131

Airport Regulation

Motion made, and Question proposed, That this House do now adjourn.--[Mr. Touhig.]

10.26 pm

Dr. Vincent Cable (Twickenham): I have great pleasure in introducing an Adjournment debate on the subject of airport regulation. I sought the debate because I am one of those Members with a constituency near to Heathrow. Those of us in that position have many constituents who work at the airport, who use it for business and, most importantly, are affected by environmental costs and aircraft noise.

Several neighbouring Members have introduced Adjournment debates about Heathrow and particularly about aircraft noise, but I approach the subject in a slightly different manner. I am not so much concerned by what I regard as the symptoms of the problem, but with the underlying causes, such as the way in which airports are regulated. That is the spirit in which I gave evidence to the terminal 5 inquiry a couple of years ago.

I shall summarise my conclusions and then develop my arguments in a little more detail. The first of the two central points that I want to make is that the system of regulating airports, and Heathrow in particular, is drastically in need of overhaul. The Government have overhauled the system of regulation for other infrastructure industries--notably the railways--but airport regulation is calling out for reform in much the same way. It was introduced in the mid-1980s, at a time when the previous Government wanted to privatise the industry as a monopoly. They did that in a way that made it attractive to potential buyers of shares in the privatised industry without affecting the interests of the recently privatised British Airways. The wider public and social interest was not a dominant concern, but it have should been. That oversight now needs to be corrected in a reform of the regulatory system.

My second concern flows from the first. The cost of landing at Heathrow airport is very cheap. I would argue that it is ludicrously cheap, because it fails to take into account the economic costs of congestion, environmental costs and, probably, it does not even cover the basic running costs of the operation. That is damaging from a variety of standpoints. It leads to the airport being overused; it leads to the relative neglect of provincial airports, such as Stansted, where there is probably a much greater willingness to see expansion; and, most important, it leads to a substantial shortfall in revenue that the Government could derive from airports for public expenditure, but that they currently do not.

I shall develop those points in a little more detail. The first element in the system of regulating the airports that needs overhaul is what is called the single till system--the principle whereby two thirds of the profits of BAA derive from parking, property and shop rentals and the other third derives from landing charges. Those revenue streams are pooled. Under the regulatory system, the landing charges are directly regulated under a retail prices index minus X formula, which is referred from time to time to what is now the Competition Commission, whereas the other two thirds of the business are not regulated, although BAA has a substantial monopoly in them.

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That results in a massively grossly distorted system of airport charging. It means that Heathrow has become one of the cheapest airports in the world in which to land, despite the enormous congestion and pent-up demand associated with it. BAA quite openly acknowledges that. It recently commented:

The regulators acknowledge that the landing charges are very damaging, although they cannot do anything about them. The Monopolies and Mergers Commission, as it then was, said when asked to review charges:

It was highly critical of the system that it was required to operate.

Moreover, BAA operates one of the biggest retail monopolies in the world through its control of the shopping system at the airport. That aspect is not regulated. Arguably, it results in considerable pressure to over-expand that part of its business at the expense of normal airport passengers. The pressures for T5 primarily come from that source.

So that is the problem--what could and should the Minister do about it? I understand that the Government are reviewing the system of regulation from which the following elements need to emerge. There should be a proper system of independent regulation that takes into account the wider public interest and not simply the interests of aircraft users. There needs to be a proper system of economic charging, which would almost certainly be substantially greater than the present one.

The Department of the Environment, Transport and the Regions has conducted its own studies into the matter, and I shall quote just one of them:

A system of charges based on economic principles could and should be introduced. Under the present structure, such a system would result in BAA making enormous profits. There is no reason why that should be allowed. The Government could deal with that by taxing away the windfall profits, as they did in 1997.

The objection is sometimes made that such an attempt to change the charging structure would fall foul of international rules. The 1948 Chicago convention imposes constraints on Government charging. However, to the extent that I understand matters--the Minister can correct this--it should be possible to do a great deal. After all, Heathrow's charges are about half those of major European airports such as Paris and Amsterdam, as well as of those of Manchester and some of the provincial airports. Given that Heathrow's charges are substantially lower than comparable airports, there is considerable scope for increasing them.

Mr. David Taylor (North-West Leicestershire): As East Midlands airport is in my constituency, I have a keen interest in the debate. Is the hon. Gentleman aware of the estimate that it would be necessary for airport charges to treble to ensure that the market-clearing mechanism removed the excess demand for slots at Heathrow and

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Gatwick, and that charges at the moment bring in £450 million a year, or thereabouts, and the excess charge would bring in about £900 million a year. Is not that an issue?

Dr. Cable: Yes, that is an issue. The hon. Gentleman's arithmetic and conclusions are entirely right. Charging is a substantial revenue source, which currently accrues primarily to the airlines--many of them foreign-owned--that benefit from the cheap charges. That revenue should ultimately go to the British public. There are mechanisms by which that could happen.

My second basic source of criticism is related, and concerns the slots. The right to land at Heathrow is effectively given away: under the grandfather principle, slots are allocated on the basis of historic use of routes, which is convenient for airlines that have traditionally had them, and less convenient for new airlines such as Virgin and British Midland, which are trying to get into the business. That is increasingly accepted as a damaging and inefficient way to run a system. An extremely valuable commodity is handed out free, competition is suffocated, and new airlines are prevented from entering the business.

It has become clear that there are alternative ways of allocating slots, notably by auctioning. American Airlines now auctions slots for domestic flights and earns substantial revenue by doing so. The Government have demonstrated through the third generation mobile phone licences that it is possible for auctions to be extremely effective, well conducted and lucrative. There is no reason why the same principle should not be adopted in an airport context.

I recognise that there are practical problems, particularly the problem of bilateral treaties and the fact that a plane that takes off must land somewhere. However, consultant studies have been done for the Civil Aviation Authority which show that, within limits, auctioning could be applied at Heathrow. At the very least, it could be employed for take-off and landing at British airports or within Europe, or to allow for competition between British airlines on transatlantic routes, for example. If the Government wanted to be bold and show that they believed in open skies, they could simply employ an open approach unilaterally. Clearly, there is scope for introducing auctions. That would raise the cost of landing to a more appropriate level and would be an alternative or additional way of dealing with the problem, beyond the reform of the single till system.

The third element of regulation that needs reform is the lack of independent regulation and the constraints imposed on the two regulators, the CAA and the Competition Commission. It is worth quoting from the commission, which described the difficulties under which it labours. It stated that the CAA said that it

On the contrary,

That is part of the evidence to the terminal 5 inquiry. Under the present system, then, the regulators are unable to take into account the public interest or the national interest, widely defined. That needs attention.

The last aspect of regulation that requires attention is the overall context of taxation of airlines. The airlines enjoy enormous taxation privileges. They do not pay fuel

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duty in the way that motorists do. There are international treaty reasons why that is difficult to enforce, and even if we tried to enforce it, there is the practical problem of planes landing with full tanks in order to avoid taxation. Any change would have to take place on an international level or, at the very least, on a European level.

Estimates suggest that as a result of the airlines' ability to escape from fuel duty and also from value added tax, revenue of the order of £5 billion a year probably goes begging. I appreciate that there are obvious practical difficulties in recouping that, but it underlines the extent to which the airports operate with the benefit of considerable regulatory privileges. Whether that is dealt with through the tax route, the charges route or the slot route--there are various options for pursuing the same objective--it is clear that something should be done.

One of the consequences would be that the demand for the use of Heathrow would significantly contract. The models used at present to predict the demand for Heathrow and, to some extent, Gatwick assume a virtual doubling of demand within the next generation. That is clearly conditional on the price. I believe that the model exercise has been done by the Department of the Environment, Transport and the Regions. It suggests that if charges were doubled, which is roughly what the hon. Member for North-West Leicestershire (Mr. Taylor) suggested, the demand would be reduced by 15 per cent. below what it otherwise would be. If the full slug of taxes were imposed, and the cost was increased by 50 per cent.--

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