House of Commons - Transport

Select Committee on Transport Second Report

6 FURTHER MATTERS OF CONCERN

48. Immediately prior to our hearing on 2 November, we were alarmed to receive in writing an allegation from Virgin Atlantic, a major airline which supports the CAA proposal,[93] that the Department had threatened to "name and shame" it in front of this committee if it did not agree to voluntary measures "to minimise the adverse impact on passengers of airline failures."[94]

49. We questioned the Minister about this on 2 November and accept her assertion that she knew nothing about the matter.[95] Subsequently, we received a letter from her explaining that in a discussion between the company and an official "the impression was given that the Department would highlight - as oppose to omit - the names of airlines which had not signed up."[96]

50. While this incident may have reflected a misunderstanding, it indicates a very disappointing level of trust and communication between the Department and some parts of the industry. The Department needs to ensure that its working relationship with the industry is uniformly sound. Improvement here is clearly called for. This episode also exposes the problems of seeking a voluntary agreement for the protection of air passengers where there is no industry-wide agreement.

Delay

51. The normal convention is that the Government replies to the reports of select committees within two months. The Government has taken over seven times longer to respond to our predecessor committee's report.

52. In this case, we accept that there were sufficient grounds for some delay in order to complete an economic and regulatory impact analysis of the CAA draft proposals. Sir Roy McNulty, Chairman of the CAA, estimated in June 2004 however that this work might take a "minimum [of] two months, maximum three", and that the "advice would stress the urgency of this problem as something that needs to be addressed very quickly in our opinion."[97] The then Minister, Tony McNulty MP, wrote to the committee on 2 September 2004 to explain this delay.[98]

53. His successor, Charlotte Atkins MP, told us later in September that the Government expected to be in a position to reply to the Committee in December.[99] The Department then wrote to us in October seeking a further delay on the basis that alternative options were being considered to address air protection and indicating that the Government would write to the committee early in 2005.[100]

54. In the absence of the expected response our predecessors wrote to the Department in March 2005.[101] In reply, the Minister said that the CAA's advice was expected by the Department in the second week of April.[102] Thereafter we heard nothing. In August, in considerable exasperation, we announced a public hearing to examine the Minister, Karen Buck MP.[103]

55. The Government has explained subsequently that the CAA's "draft advice" was delivered to the Department on 12 April 2005. The intervention of the General Election prevented speedy Ministerial consideration, but interdepartmental consideration of the draft did continue at official level.[104] Newspaper reports in the summer indicated that while the Department for Transport supported a levy to protect air travellers, the Treasury was opposed.[105]

56. Our predecessor committee sought a speedy response from the Government precisely because the problem of financial protection was perceived to be an urgent one. That was borne out by the demise of EUjet in July which disrupted thousands of passengers. We deplore what turned out to be a wildly over-optimistic estimate from the CAA in 2004 that the extra analytical work would take a "maximum" of three months. Estimates for work made to this committee must be accurate.

57. But what is of greater concern is the evidence of Departmental drift. Had the Government moved swiftly when our predecessor's report, 'Aviation', was produced in 2003, or a year later on publication of the first report on air protection, then the plight of the EUjet passengers might have been eased. We accept that General Elections cause extra pressure on Ministers for a concentrated period, but that cannot explain the entire delay. Ministers should have ensured that the interdepartmental discussions, which appear to have lasted from April to September, possibly as a result of a dispute between the Department and the Treasury, proceeded more quickly. [106]

Evidence based policy

58. As noted, in arriving at its decision about the future of financial protection the Government has set aside the advice of the industry regulator, the CAA. This advice took account of the Government's regulation policy. It was expensive and time consuming to produce. The Department was directly involved in its production. The Minister herself described it to us as "an excellent piece of work".[107]

59. For the Government to reject what it describes as "excellent" CAA work is bad enough. But what is more alarming is that the grounds of that rejection remain unclear. As we say, the Government's rejection of the regulator's advice is based on assertion not analysis. The Government now needs to present the detailed evidence on which its decision was based. The powerful arguments for a modest "all flights" levy to protect passengers presented in the evidence we have received need to be addressed by the Government in detail.

60. The Government appears to believe that the form of blanket protection to passengers offered by ATOL has had its day because:

"ATOL stems from the early 1970s when a family holiday abroad tended to be organised as a package and travel abroad was infrequent. It involved putting at risk a significant proportion of family income in advance of the holiday being taken. These days overseas travel is a lot more routine."

The Department presented no evidence to support the strong implication in its evidence that because travel is "a lot more routine" it no longer involves a "significant proportion" of family income. We challenge the Government to argue this case with those families of four who, according to the CAA's research, had to pay out an average of £400 to return to the UK when EUjet collapsed. We would be interested to know if those people consider £400 to be a "significant" sum. Travel remains expensive.[108]

61. A member of the Liaison Committee challenged the Prime Minister on 22 November that: "The Government makes much of the fact that it operates on the basis of what it calls evidence-based policy and yet often policies seem to descend from the blue skies…and we wonder where the evidence is."[109] The Department's approach to the policy of financial protection for air travellers is a blatant example of the Government's departure from evidence based policy making. It is essential and, we think, self-evident that the process of Government policy making should be based on clear and convincing analysis. We see precious little evidence that this approach was adopted in the present case.

Forewarning?

62. It is clear from the evidence we received that there were concerns over the viability of EUjet before its collapse. When asked if there were indications that the company was going to collapse the Chairman of the CAA said "No, we did not."[110] This may have been strictly true but was not the whole story. Sir Roy also told us that "There had been rumours but no hard information."[111]

63. The company was not regulated by the CAA however but by the Irish Commission for Aviation Regulation as it was registered in the Republic of Ireland.[112] The CAA told us that EC Licensing Regulation 2407/92 states that the principal place of business of a licence holder is required to be in the Member State responsible for issuing the company's Operating Licence.[113] That Regulation gave no legal role normally to the CAA in regulating EUjet. [114] This was a cause of concern to the CAA however as the majority of EUjet's scheduled business was based in the UK.[115]

EUjet background

64. The CAA conducted a study of EUjet's background after this committee's hearing on 2 November.[116] EUjet's parent company, PlaneStation, had traded under a number of names: "In March 2001, as the Wiggins Group plc, it received censure from the Financial Reporting Review Panel and the Financial Services Authority for overestimating its results between 1995-2000, which on their restatement resulted in significant losses."[117] Subsequently, a "number of directors left the Group".[118] In July 2003 the Group's shares were briefly suspended at its own request "while it was in discussions on a possible takeover." [119] These events took place before the Group, which changed its name to PlaneStation in January 2004, invested in EUjet in May 2004.[120]

65. Kent County Council which took a small shareholding (1.5%) in PlaneStation "in order to assist in the regeneration and development of east Kent" nevertheless assessed that investment as "high risk".[121] There were problems with the financing of EUjet. This prevented it beginning scheduled operations in the summer of 2004 and additional funds were raised then, and again in December 2004. Passenger numbers were lower than expected, and when a land sale designed to prop the company up broke down in the summer of 2005 PlaneStation announced its suspension on 25 July.[122]

66. How much information about the chequered history of EUjet's parent company the CAA knew prior to the company's collapse earlier this year is unclear. But given the CAA Chairman's comment to us on 2 November that "If we hear information that leads us to believe that something ought to be looked at we have, on occasion, contacted the regulatory authority in the country concerned",[123] and his suspicion that the company may not have been viable,[124] it might have been reasonable to expect that the CAA would have pressed its concerns urgently to the Irish Commission for Aviation Regulation, EUjet's regulatory body, even on the basis of "rumours". Had such action been taken, it is possible that the problems experienced by thousands of UK travellers could have been avoided earlier in the year. We accept that EUjet was not regulated by the CAA. We hope however that the CAA will intervene more courageously in future if presented with similar circumstances.

67. It is surprising that the CAA did not pursue the case as it had been sufficiently concerned about the general issues arising from EUjet's Irish registration to contact the Irish Commission. The CAA explained in detail the severe constraints on the action it can take over a non-UK air carrier about which it has concerns.[125] For example:

It cannot require financial information from a non-UK carrier

It has no legal powers to take action against such carriers

Public exposure of concerns about a non UK carrier could open it to "censure" from the European Commission and possible reciprocal action against UK carriers.

68. In January 2005 "87% of Eujet's then 81 flights per week were departing from the UK."[126] Quite properly, the CAA was concerned and approached the Irish Commission for Aviation Regulation in January proposing that EUjet should be regulated in the UK, but this was rejected. We understand the CAA is "looking at this problem with the Department for Transport".[127] The problem must be addressed as a priority. It is absurd that the present rules prevent the CAA regulating a company's aviation activity where the majority of its flights depart from this country. We hope that a common sense solution is being pursued vigorously by the CAA and the Government with the European Commission.

Air Travel Trust Fund

69. The Air Travel Trust Fund (ATTF), as explained in paragraph 16, is used to provide financial support when required for the ATOL bonding scheme. One of the recommendations of our predecessor committee was that the funding for ATTF should be reformed:

"There is no power to raise a new levy to replenish the Fund, despite the fact that its Trustees have called for one for over 12 years. Successive Governments have promised the necessary primary legislation, but it has not been brought before Parliament. The Fund was exhausted in 1996 and is now [£9.6m]in deficit. It now meets its liabilities through commercial borrowing against a Government guarantee. The interest costs ATOL-bonded operators £500,000 every year."[

128

70. We are pleased that the Government has taken the opportunity of reform offered by the Civil Aviation Bill currently passing through Parliament to ensure that the present approach is rationalised: "The provision on replenishing the Air Travel Trust Fund (ATTF) in the Civil Aviation Bill gives scope for a single fund collected from tour operators instead of a two-part approach of bonds plus the ATTF."[129] While this is welcome however it is no more than overdue housekeeping and has no direct bearing on the wider issue of air protection policy.

93 Ev 47 Back

94 Ev 47 Back

95 Q 52 Back

96 Ev 18 Back

97 Financial Protection for Air Travellers, Oral Evidence, Q 289 Back

98 Letter, Tony McNulty to Gwyneth Dunwoody, 2 September 2004 Back

99 Letter, Charlotte Atkins to Gwyneth Dunwoody, 15 September 2004 Back

100 Letter, Charlotte Atkins to Gwyneth Dunwoody, 27 October 2004 Back

101 Letter, Gwyneth Dunwoody to Charlotte Atkins, 21 March 2005 Back

102 Letter, Charlotte Atkins to Gwyneth Dunwoody, 5 April 2005 Back

103 Letter, Gwyneth Dunwoody to Karen Buck, 9 August 2005; Transport Select Committee, Press Notice 03, 9 August 2005 Back

104 Ev1 Back