Select Committee on Transport Minutes of Evidence

Memorandum submitted by BAA plc

  BAA plc owns and operates seven airports in the UK, all of which are subject to regulation by the CAA to a greater or lesser extent. BAA also has interests in airports in Australia, Italy and the United States, and the following comments are informed by our experience of regulation in those jurisdictions.

  The CAA is a well-established organisation, with a huge amount of experience, and a well-justified international reputation for its knowledge, professionalism and objectivity. Its activities bear on airports in the following main areas:

    —  It regulates safety at airports, through the provisions of the Civil Aviation Act 1982, the Air Navigation Order and Civil Aviation Authority Regulations. These are implemented through the airport operating licences, and through an extensive process of standard setting, inspection and contact with airport management. This function is exercised through the CAA's Safety Regulation Group (SRG).

    —  Under the provisions of the Civil Aviation Act 1982, it advises the Government on airport and airline policy, as a consultee in major policy development processes (such as for SERAS, prior to the Future of Air Transport White Paper); as an advisor on critical specific issues, such as open skies, slot allocation and ground handling; and as a source of expertise on miscellaneous issues, such as the designation or dedesignation of airports for price control. In this role the CAA can have major indirect impacts on airport operations.

    —  It regulates the economic activities of airports directly through the provision of part IV of the Airports Act 1986. Specifically, it sets the maximum levels of charges which may be set at airports designated for price control by the Secretary of State (currently Heathrow, Gatwick and Stansted, owned by BAA plc and Manchester, owned by The Manchester Airport Group plc). This function is exercised through the Economic Regulation Group (ERG).

  While BAA believes that there are relevant live issues concerning the CAA, four general points should be made at the outset.

  Firstly, the CAA'S remit, and the limitations to its power, are set out in the statutes under which it exercises power. These provide an important safeguard to those bodies which the CAA regulates, since they allow redress through the courts when the CAA disregards or exceeds its duties.

  The statutory remit of the CAA is appropriate overall to its skills and structure. For instance the CAA has no duty to consider environmental issues, which are better dealt with through other regulators, such as the Planning Inspectorate and the Environmental Agency. (It does however have to take account of the costs incurred by airports for environmental work in its price determinations).

  Secondly, the CAA's enabling statutes render it independent of Government intervention in its decision making. This insulation of individual decisions is another important safeguard. However, it is also right that the CAA, as a creation of Government, is subject to democratic oversight, and the power of Government to remove the directors, or legislate to alter the CAA's duties, is an important protection against systematic abuse of authority by the CAA itself.

  Thirdly, over the last few years the proactive approach to safety regulation that CAA SRG has taken is one that we welcome. The increasing involvement of airports in the development of standards and the willingness to look at the requirements from a different perspective has led to the development of more realistic solutions in a number of areas. This approach combined with an increasing involvement of airports at the earliest stage in the development of regulation is essential to the continuing success of the aviation business.

  Of equal importance is the continuing involvement of SRG in the European and global development of standards. The CAA currently has considerable involvement in both of these arenas and is well respected for the work that it does. Given the global nature of standards in this area it is essential that this level of proactive involvement continues. A good example of where positive results have been achieved has been in the development of requirements for the integration of the A380 into airports. The development of a European approach to aerodrome regulation will bring a number of challenges during the next few years and maintaining a strong UK voice during this debate will be essential.

  Finally, the CAA's record is possibly the best measure of its remit and performance. The Committee may be re-assured by the fact that the CAA regulates an industry which has:

    —  a safety culture and record which is internationally respected; and

    —  a record of accommodating innovation in air travel, and consumer choice, which leads Europe (the growth of domestic competition, and the emergence of low-cost airline operations in Europe have both been led by the regulatory and policy climate in the UK).

  Specifically in relation to airports, the CAA's regulatory decisions at Heathrow have provided the framework for the construction of Terminal Five, Europe's largest building project, on budget and programme to date.

  Within this generally-supportive climate, we believe there are four areas where the Committee may wish to reflect on the scope for more clarity in the CAA's remit, and improved performance in the economic regulation of airports.


  The CAA's statutory duties do not include the formulation of Government aviation policy; this has been reserved by the Secretary of State for Transport and the DfT. Indeed the CM has made it clear that it is not its duty to implement the 2003 Future of Air Transport White Paper to the timescale defined by the Government, and that it may take an independent view. This has created a situation in which the CAA's policies, and its interpretation of its duties can conflict with Government policy.

  BAA can live with either the Government's or the CAA's policies, but we cannot comply with both, if they imply different development programmes. While the CAA's independence is important and a degree of tension with Government is probably healthy, the organisation needs to incorporate in its activities mechanisms for resolving its differences with Government. Failure to do would create a degree of policy confusion which simply makes it more difficult for airports and airlines to make timely investment decisions, to the detriment ultimately of airport capacity, airline competition and passenger choice.


  One opportunity for this tension to be minimised is in the role the CAA takes in contributing to the formulation and implementation of Government airports and aviation policy. The CAA is uniquely placed to help to frame Government policy through its technical knowledge and independence. The tension between Government and CAA on airport policy is, in part, a reflection of the fact that in the SERAS studies, leading up to the White Paper, the CAA stood back from full engagement in the analytical work. The problem could be minimised if the CAA engaged in building the analytical foundations of Government policy. In particular, the CAA should participate fully in the forecasting of demand for air travel, so that the Government's forecasts incorporate the CAA's authoritative and independent perspective.


  The CAA's decisions must ultimately further the interests of consumers, in this case air passengers. The regulation of relationships between airlines and airports without regard to passengers would simply be an exercise in the allocation of profits between companies. Indeed the CAA's remit, in terms of its duties set out in Section 39 of the Airports Act 1986, specifically includes furthering the reasonable interests of airport users, defined to include passengers as well as airlines.

  In practice, it is not clear that this duty towards passengers is fully incorporated in the CAA's work in a structured way. The proposition, sometimes advanced, that the interests of airlines will tend to coincide with the interests of passengers may not always be clear to regular air travellers. However, the CAA has established no process for the proper evaluation of how passenger interests are best met in airport development. No guidance is given as to whether the CAA places greater weight on passenger or airline interests, and the tests for whether passenger interests are met are not set out.

  To assist in understanding the passengers interests, the CAA sponsors the Air Transport Users Council (AUC), but it is not clear that this body is resourced adequately, or indeed drawn into regulatory determinations sufficiently, to give full coverage to the needs of passengers.


  One of the benefits of the CAA's approach to airports regulation has been the low level of bureaucracy, or regulatory costs which it imposes on the industry. This is to be welcomed, since over-regulation can distract the management of a regulated company from its prime purpose of delivering the products its customers want at the right price.

  However, since the privatisation of BAA's airports, the regulatory burden has progressively increased, with no obvious benefit. The first five yearly price review of the South-East airports in 1991 took 12 months; the second in 1996 took 21 months; the third in 2002 took 32 months. (In the last review BAA submitted more than 800 information, policy and position papers.) The next review, already underway is not scheduled to finish until February 2008.

  Although the process has been characterised as light touch" regulation, the CAA is now in constant, daily interaction with airports, airlines and others, seeking information, influencing the parties and managing the process on a continuous basis. This gives rise to the danger that the CAA will find itself participating in decisions and discussions which would be better left to airlines and airports themselves.

  Regulated companies have to accept that regulation imposes a burden on them, but it is at least open to debate that the CAA's process is disproportionate, given that it has effectively extended the price review to four sequential reviews: the first with airlines, the second with the CAA, the third with the Competition Commission and the last with the CAA again. The CAA might also consider how consistent this is with the risk assessed approach to regulation advocated by the Hampton Report.

11 November 2005

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