Select Committee on Transport Minutes of Evidence

Examination of Witnesses (Questions 20-39)


11 JANUARY 2006

  Q20  Mrs Ellman: Is the 6% rate of return fair?

  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 place?

  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 the airports?

  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 not?

  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 to us.

  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 groups onside.

  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 was expanded?

  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 difficulties.

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