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Mr. Taylor: I thank the hon. Gentleman for giving way again. Does he agree, at least on the principle of the polluter pays, that there is an argument for taxing aviation fuel? The amount of pollution generated per passenger mile exceeds that of road vehicles. Is not the system inequitable?

Dr. Cable: It is inequitable, environmentally nonsensical and extreme. We are not considering a minor disparity; motor fuel is taxed at more than 300 per cent., but tax on aviation fuel is zero. That enormous distortion in the market clearly needs correction.

I shall make a couple of points in conclusion. Charges need to increase to deal with the severe distortions that the current system of regulation creates. There are several methods of doing that and I have suggested some of them. Introducing such measures would be environmentally friendly and economically sensible; it would lead to better use of the airports, for example, by discouraging small airlines from using the airport. That would mean better capacity utilisation. The measures would encourage a better balance between Heathrow, Gatwick and the regional and smaller airports.

The introduction of such a programme would be contentious and the Government would face severe criticism from some of the affected interests. Recently, Mr. Ayling responded to the suggestion of removing slots from his airline by describing it as

I note that Mr. Richard Branson describes the current system in almost exactly the same language. The established interest and the potential new order fiercely contest rights.

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It would be argued that any system of economic charging would drive business away from Heathrow. The rate of growth could not--and perhaps should not--be sustained. I live in west London, and it could be argued that development around the airport is excessive, not insufficient. One of the main reasons for the enormous problems that local hospitals suffer in recruiting nurses is the competing salaries in the airport-based industries. Unlimited growth around the airport is therefore not an unmixed blessing. Perhaps some restraint on growth through better regulation would be economically beneficial.

Critics would argue that measures such as those that I advocated would lead to increased fares. They might do that, although fares are largely set in an international market. Any measure that reduced some of the silly fares, which mean that it costs far less to travel to Madrid and Rome than to get to Edinburgh by train, would be welcome. Some of the irrational pricing in the airline market would almost certainly be eliminated by some of the measures that I described.

I am grateful for the opportunity of introducing the Adjournment debate, and I look forward to the Minister's reply.

10.43 pm

The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Mr. Keith Hill): I congratulate the hon. Member for Twickenham (Dr. Cable) on obtaining a debate on an important subject, which is acquiring increasing public prominence. I also express my thanks to the hon. Gentleman for his courtesy in giving me advance notice of the key issues that he wished to raise. I shall attempt to address many of them in my response.

It is especially timely that the hon. Gentleman should raise the subject of airport regulation now. As he knows, my right hon. Friend the Deputy Prime Minister has been leading a review of airport competition, aimed at ensuring that the regulatory and other arrangements in the sector best further the long-term interests of the travelling public. The Government will make a statement on the outcome in due course.

Let me set out the wider context. In our 1998 White Paper, "A New Deal for Transport", the Government undertook to produce a new airports White Paper, taking a 30 year forward look at the way in which the sector might and should develop, and fully considering the economic, environmental and social implications. Subsequently, the scope was widened to address the whole of air transport policy and thus cover both airports and civil aviation.

Work is in progress to lay the foundations for that White Paper and we shall consult widely while doing so. At this stage, the Government are ruling nothing in and nothing out, but we have made it clear that that is not an exercise in predict and provide: the scenarios that we are considering include those in which capacity might be lower than the forecast level of demand. In such cases, the management and control of existing infrastructure would assume even greater prominence. Whatever emerges from that work, we have a situation at least in the short term in

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which demand to use the airports of the south-east is moving towards the point at which capacity will be exhausted.

The increasing imbalance between supply and demand potentially places airport operators in a strong bargaining position when it comes to negotiating user charges with airlines and other airport users. It is to counter that potential that airports are subject to economic regulation. That requires airports to maintain transparent accounts and to notify their scale of charges to the Civil Aviation Authority each year. The CAA has powers to investigate complaints of abuse of position and to issue conditions to prevent or to provide redress for abuse.

At four UK airports--Heathrow, Gatwick, Stansted and Manchester--economic regulation takes the form of a cap on user charges. That is set for a five-year period by the CAA, following an investigation by the Competition Commission. That provides downward pressure on charges, while giving the airport an incentive to greater efficiency.

The hon. Gentleman argues that charges at Heathrow are too low and should be set at, or at least nearer to, market clearing levels. I admit that it is on the face of it odd that user charges should be falling in real terms at airports where demand considerably exceeds supply, but we must bear in mind that aviation is an international business and that the UK is party to a number of international agreements, as well as subject, in some areas, to European law.

Guidelines for the setting of airport user charges are produced by the International Civil Aviation Organisation, to which the UK is a contracting state. Those guidelines currently start from the principle that charges should be cost related. They state that the calculation of cost should reflect the full cost of providing the airport and its essential ancillary services. They also state that revenue from non-aeronautical airport operations, such as retail and commercial activity, should be taken into account when setting airport charges. That is, as the hon. Gentleman reminded us, the so-called "single till" principle.

ICAO guidelines provide a basis for the operation of airports and aviation throughout the world. Any decision to depart from them opens the possibility of reciprocal action in other countries. In the case of the UK, the guidelines are given greater weight by the fact that they were used in the preparation of the current bilateral air services agreement between the UK and the United States. We are committed to airport charges that are cost related; at present, we also apply the single till.

Both the Competition Commission and the CAA will no doubt want to consider the impact of the single till and the ICAO guidelines during the investigation that will precede the setting of a new cap for Heathrow charges. Their preparatory work will start shortly and their freedom of action may be increased by recent developments at ICAO.

I bring the hon. Gentleman news hot off the press. An ICAO conference in Montreal last week agreed to recommend to the ICAO ruling council that the current guidelines be amended to allow economic principles other than pure cost recovery to be taken into account when setting airport user charges. That may make it easier for charges to be modulated to demand patterns--which in

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plain English means higher charges at peak times than at others--or to rise to reflect overall demand for use of the airport.

Mr. David Taylor: Does that new departure allow for the incorporation into the charging regime of a contribution towards the environmental costs that are incurred by people who live in and around airports?

Mr. Hill: I hope to come to that point in due course. It is important. The hon. Member for Twickenham has already raised it. It is a point very well taken.

The conference considered the future of the single till. There was widespread agreement that full cross-subsidy of airport user charges from other sources of income may, at some airports, be inappropriate, having regard to local circumstances. The ICAO secretariat is to undertake a study of the implications of injecting more flexibility into the organisation's guidance on the subject. The results are due to be presented to the ICAO council in November. We await that report with interest.

As the hon. Member for Twickenham said, in addition to airport charges, the allocation of take-off and landing slots is another key component that affects the efficient operation of airports. He will be well aware, I suspect, that that process is governed by European regulation EC 95/93. Where a slot co-ordinator is appointed, the Government approve the appointment, but have no other role in the process. The co-ordinator is charged with acting in an independent, neutral, transparent and non-discriminatory manner when allocating slots to airlines.

Under the regulation, an airline that holds a slot in one operating season has first claim on it in the next equivalent season and indefinitely thereafter. Slots may be removed from their holder only when the airline fails to use them for at least 80 per cent. of the season. There is no other power of confiscation. At Heathrow, the overwhelming majority of slots are claimed under those grandfather rights. The remainder, together with any newly created ones, are placed in a pool for allocation.

Although the regulation's purpose was to encourage competition and promote new entry to the market, a CAA study suggests that it has not been successful in that objective and because of the scarcity of slots--particularly peak hour ones at Heathrow--it has proved virtually impossible for a new entrant airline to obtain sufficient slots at suitable times to establish commercially viable services. It has also been difficult for an incumbent to get new slots to start a service--for example, to compete on a route already served by a rival. To develop new services or to increase frequency on an existing one, airlines have had to shuffle the portfolio of slots that they already hold, or reduce or even end other services.

If the current system is not working well, what are the options for change? Obviously, the most suitable solution for airport users would be enhanced capacity so that there would be no difficulty in getting slots at the time that they want. While the White Paper work is in progress, I have to leave that option to one side. However, assuming

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continued slot constraints, there are two possible routes: a different regulatory regime--which would, by its nature, have to be more interventionist--or use of the price mechanism. We await European Commission proposals for changes to the regulation. Those are expected later this year, and I cannot pre-empt the Government's response. Much will depend on the overall package proposed by the Commission, but I can consider the options in general terms.

The basic problem is one of turnover. Incumbents have an indefinite hold over the slots that they have been allocated. The European Commission floated the idea that they should be required to hand back a percentage of slots each operating season so that those could be put in the slot pool and allocated from there, but it was not well received by member states and not pursued, although it remains a possibility. I would rule out direct Government intervention in the allocation process. The important principle of an independent co-ordinator has recently been affirmed by the ICAO at its conference. The Government are not attracted to the concept of ring-fencing slots for particular types of service. That would inhibit airlines' ability to respond to market demand without offering a solution to the real problem.

If changed regulation has its limits, what of the price mechanism? The possibility of airlines trading slots among themselves has often been mooted. Some operate at Heathrow for reasons of prestige, although they could be accommodated elsewhere in the London airport system, but there is no incentive in the current system for them to surrender their slots. If such airlines could sell their slots in an open market, that would encourage them to think more carefully about the scale and location of their UK operations and enable use of the slots by a carrier that valued them more highly.

It is common knowledge that airlines already use their ability under the European regulation to swap slots with each other as means of buying and selling on a grey market. That is, of course, imperfect. There is no transparency in the process and it is unlikely to be a mechanism for bringing new entrants into the market. For that reason, it has been argued that trading should be legitimised, with the availability of slots for sale made public and all parties open to bid. It has also been suggested that the traded slots should carry only time limited rights. There are arguments against slot trading that must be taken seriously. It would appear to favour the airlines with the deepest pockets, which would compound the dominance of the big airlines and alliances at a particular airport. However, that trend is already inherent in the airline industry.

It is sometimes suggested that all slots should be surrendered and sold. That is not possible under the current European regulation, as there is no power of confiscation. Pressure will no doubt be put on the Government to argue for a change to enable that to happen when the European Commission publishes its proposals. One option for moving in that direction might be to auction the pool slots. Most of the existing slots in the pool would carry no significant value, but if newly created ones were subject to auction, that might be a start, particularly if such slots carried only a time-limited right of possession.

The Government wish to see existing airport infrastructure used in a way that maximises benefit to the travelling public and to the British economy, within the

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framework of sustainable development and environmental protection. Airport pricing policy and slot allocation are two key areas. We shall take careful account of the points that the hon. Member for Twickenham has made as we respond to the Commission and prepare our consultation document on air transport policy.

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Following the issue of that consultation document, there will be an opportunity for much more debate. I expect that the hon. Gentleman will wish to contribute. We shall welcome and look forward to that.

Question put and agreed to.

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