Examination of Witnesses (Questions 20-39)|
11 JANUARY 2006
Q20 Mrs Ellman: Is the 6% rate of
Sir Roy McNulty: I think it is.
It reflects the fact that there are capital assets in the business.
Capital assets do not come for free. Although people refer to
this as a 6% profit, it is really recognising the costs of those
assets in the business. I do not think that is unreasonable.
Q21 Mr Scott: You expect employment
costs to rise in real terms from £55.8 million in 2004-05
to £65.7 million in 2009-10 despite a reduction in your staff
numbers. Are you planning higher than inflation wage increases?
Sir Roy McNulty: No.
Q22 Chairman: What is the difference?
Mr Scott is a man of great faith; he believes every word you say.
I do but I want to think about it.
Sir Roy McNulty: We plan for an
inflation level increase. There is some movement within the grades
by people acquiring seniority in their job they can progress a
bit through the grades, so there is some increase from that. Other
than that, there is no hidden big handout or anything of that
nature. We can provide you with an analysis of the causes of that
variation in the figures if you wish.
Q23 Mr Scott: Thank you. What contingency
plans do you have in place should your assumptions upon which
you base your financial planning be wrong?
Sir Roy McNulty: The whole system
works on an annual basis. Although what we show there is our current
forecast of costs for five years, we levy our charges annually.
So if there was, as there was 15 years ago, a sudden kick up in
inflation, then sadly the charges go up accordingly. We make a
budget, we assess through our budgeting system what charges we
need through the different charging schemes, and we calculate
the resultant charge to the regulatees.
Q24 Chairman: Regulatees, Sir Roy?
Sir Roy McNulty: It is a word
we invented. I am sorry about it. It is shorthand for all those
people who enjoy being regulated by us!
Chairman: It is not my definition of
shorthand. You might like to give a re-think to that.
Q25 Graham Stringer: As the Chairman
and Mrs Ellman have said, there are a number of unique features
about the structure of the CAA. One of those unique features is
that when you have decided on what prices airports can charge
for landing and when you have gone through the economic regulation
process that is subject to an appeal to the Competition Commission.
Do any other regulators have that extra appeal and, if so, is
it a good idea?
Sir Roy McNulty: No other regulators
as a matter of routine to my knowledge.
Dr Bush: It is very different
from other regulators. It is not an appeal, it goes automatically
to the Competition Commission, whereas in other cases it is an
appeal mechanism once the regulator has determined the charges.
As to whether it is a good idea, I think it causes us some issues
around the length of time for the process; it probably extends
it by six to 12 months. There is obviously the possibility of
duplication of effort, although we try, by working with the Competition
Commission staff, to reduce that. There is possibly the thought
that people who are subject to our process will store up some
of the issues and not vent them with us until it goes to the Competition
Commission. There is always the problem that you get a little
bit of grit in the regulatory decision-making oyster. We can make
it work. It has worked. We would prefer a different system. We
would prefer something that was nearer what other regulators have,
but it has worked for a number of years, a number of regulatory
periods and reviews and we are stuck with it at this time.
Q26 Graham Stringer: What extra costs
does it mean to the four regulated airports?
Dr Bush: The last time the Competition
Commission charged around £1.5 million each to BA and Manchester.
Some of that would be work that we would otherwise have had to
undertake. The net figure will be less than £1.5 million
it might even be substantially less than £1.5 million, it
rather depends. This time, for instance, we will be doing a lot
more of the work in terms of invigilating the airports' costs
than was done by the CAA last time so I would expect our costs
to be higher and theirs to be commensurately lower.
Q27 Graham Stringer: You said you
would like to get rid of the automatic referral to the Competition
Commission. Can you expand on what you would like to see in its
Dr Bush: I think we would like
to see what I might call the normal UK regulatory system which
applies in the NATS case, where we reach a view and then it is
for the regulated company to decide whether or not it effectively
wishes to appeal that. The difficulty this appears to create for
the airlines is that they would not have a right of appeal under
that system, and so they may feel that they get at least a second
bite of the cherry under this system relative to what they would
have under what I would prefer.
Q28 Graham Stringer: Prices to passengers
have been falling quite dramatically over the last five or 10
years. This Committee has received evidence that there is competition
between the United Kingdom and European airports. Why are you
necessary if prices to the ultimate consumer are falling due to
other economic factors? Why do we need economic regulation of
Dr Bush: Across the vast bulk
of the industry we are not needed and we are not there. Most airports
are not regulated and that is welcome and good.
Q29 Graham Stringer: In volume of
passenger terms you regulate the majority of passengers, do you
Dr Bush: Yes, because of the scale
of the London airports and Manchester we regulate airports used
by the majority of passengers but we do not get involved in the
details of the other airports. Heathrow is a natural monopoly
because of its network characteristics. Gatwick is pretty much
full up and therefore has a certain degree of pricing power potentially.
There may be growing question marks in some ways around Stansted
and Manchester and certainly these are issues that we have said
we would consider if people wished to raise them, but ultimately
it is a matter for the Government.
Q30 Graham Stringer: You advise the
Government on a lot of the aviation affairs.
Dr Bush: We do indeed.
Q31 Graham Stringer: I am raising
the matter and I am asking you to answer that question now. Do
you think, given the decline in fares to passengers, that Manchester,
Stansted and indeed Gatwick and Heathrow, if they were regulated
separately or in separate companies, should be regulated economically?
Dr Bush: I am not sure that the
decline in fares paid by passengers is necessarily relevant. The
question is whether the airports would be able, in the absence
of economic regulation, to raise their charges to the airlines,
particularly where the airlines do not necessarily have a choice.
In the Heathrow case that is probably true and it may be true
for certain elements of Gatwick, but it might be less true for
some elements of Stansted and Manchester. Certainly for two of
the airports I suspect there is still quite a strong case.
Q32 Graham Stringer: It is an interesting
point. Who is the ultimate customer, is it the passenger or is
it the airlines? Whose interest are you serving?
Dr Bush: Our statutory duty is
to look after the interests of both. Users incorporate both passengers
and the airlines. Clearly to the extent that we are protecting
the airlines from charges going up at airports above where they
might otherwise be then actually that ought to be of benefit to
passengers as well.
Q33 Graham Stringer: I am not clear
what process you will follow if you believe there is evidence
that Manchester and Stansted do not need regulating.
Dr Bush: As part of the current
review, as we set out in the document we published just before
Christmas, we are doing some market analysis which will look at
the market for each of the airports. As a result of that, if we
came up with a view that said there is sufficient competition,
for example, around Manchester, I think we would at that point
have discussions with the Government about whether it would be
appropriate at some point for the Government to think about de-designation.
But I think we need to assemble that evidence and look at it and
see what the prospects are. It rather depends on how much competition
there is and how fast it has been growing around Manchester. There
has been quite a big increase, but Manchester in size terms is
still fairly dominant in that area.
Q34 Mr Leech: Sir Roy, you said that
you felt the current funding arrangements were the best option.
Do you not feel that the current funding arrangements lead to
people being under the impression that you are beholden to the
wills of the airlines and the airports?
Sir Roy McNulty: That has occasionally
been said, I have occasionally read it, but no evidence has been
put forward that supports such a statement. I can honestly say
from my four years in the CAA that I have seen no case where the
judgment being made in any of the regulatory arms was influenced
by the fact that the people whom we regulate pay their charges
Q35 Mr Leech: The Campaign for Rural
England suggested that environmental concerns had been perhaps
sidelined because of the need to keep the airlines and the airport
Sir Roy McNulty: I cannot understand
the basis for such a statement. The CAA has limited responsibilities
in relation to the environment. Probably the principal area relates
to the environmental guidance which the Secretary of State gives
us for application in dealing with airspace changes. We also have
a technical advisory role in noise measurement and we have a few
relatively minor duties in relation to the noise characteristics
of engines. In none of that is there any flavour of being nice
to the airlines or being nice to aviation or doing other than
what the Secretary of State has asked us to do.
Q36 Mr Leech: Do you think there
could be a conflict if your role within the environmental concerns
Sir Roy McNulty: I think it would
all depend on the basis on which it expanded and the remit that
we were given. At the moment we strive conscientiously to follow
the remit we are given, particularly in relation to the environmental
guidance on airspace changes. As regulators, we try to do what
we have been asked to do either in terms of statutory objectives
or guidance from the government.
Q37 Clive Efford: Sir Roy, I want
to take you back to your answer on the figures relating to employment.
I understand that you are going to cut the number of staff over
the next five years. The figures that were quoted to you were
£55.8 million in 2004-05 rising to £65.7 million in
2009-10 for employment costs. I did not really understand the
answer. Perhaps it is me being dim. Why is there the above inflation
increase at a time when you are reducing staff numbers?
Sir Roy McNulty: We will provide
a detailed break down of the movement in those figures. Secondly,
the existing plan as of last spring does not fully reflect the
reductions that we know we are going to have to make mainly because
the plans that EASA has have not been clear enough. We are a bit
clearer nine months later what they are trying to do and how fast
they are trying to do it, and I think the plan that we produce
in March/April coming will show a further reduction in staff and
a further reduction in those wages costs.
Q38 Clive Efford: Does it mean any
changes in operation for the CAA? We have had some evidence that
suggests that it is a bit of a nine to five service and that a
24/7 service would assist the industry more. Are there costs involved
in that? Are you intending to address that complaint?
Sir Roy McNulty: The plan will
reflect such plans and strategies as we have for improving our
service. If there is a need in some parts of the industry for
a 24/7 service, I have no doubt that we would provide that, that
is not an issue.
Q39 Clive Efford: Can you explain
the fluctuations in the profits and loss of different groups?
For instance, the European Regulation Group had improvements that
were significantly higher in 2005 than 2004 and yet the Consumer
Protection Group made a loss in 2005 compared with a profit in
2004. Why the two situations?
Sir Roy McNulty: It goes back
to the charges setting mechanism that I described earlier. We
set our charges about six months before a year starts and obviously
it is a forecast, it is an estimate and life does not always turn
out as we forecast, something comes along that needs done. Maybe
something needs a 24/7 service that we did not expect and we put
it in place and that is an additional cost or maybe the industry
volumes do better than we had expected so we have a gain. It almost
never turns out exactly the way we expected, but usually the swings
and roundabouts balance out, and we have never got into serious