Memorandum submitted by British Airways
INTRODUCTION
1. British Airways acknowledges the need
for effective controls in the public interest in areas such as
safety and airspace design and in market regulation where there
is no competition. However, the regulatory framework set up for
the CAA is a very old one that predates many significant structural
changes, including:
— privatisation of British Airways,
BAA, BAe Systems, Rolls Royce;
— establishment of the single EU air
transport market;
— progressive long-term liberalisation
of intercontinental markets;
— the shift in regulatory practice
away from formal rules and processes and towards managing risks
and securing outcomes;
— rise of EU policies and EU regulatory
structures taking precedence over national structures, notably
in competition policy, aviation safety and air navigation; and
— new Better Regulation" standards
for improved regulatory effectiveness.
2. The CAA has played its part in promoting
these developments, which also have significant implications for
the role of the CAA. Overall, change to the CAA has been piecemeal
and reactive. Changes were made in the Transport Act 2000 to separate
NATS from the CAA and to give the CAA regulatory powers over NATS.
We are not aware that there has been an overall strategic review
of the CAA's remit since the Edwards Review was set up in 1967,
almost forty years ago. The Edwards Review resulted in the Civil
Aviation Act of 1971 and the establishment of the CAA in 1972. At
33, the CAA is one of the UK's oldest regulators—and one
that attracts little public scrutiny.
3. A key question to consider is whether
the CAA is evolving adequately in response to the emergence of
EU regulators and to the Government's Better Regulation agenda,
or whether its old constitution and organisation impedes progress
towards a modern, efficient, risk-oriented regulator. The CAA
was set up to be independent and accountable to Parliament. The
Select Committee's review is therefore timely.
4. Parliament has so far taken a hands off"
approach to their role as ultimate overseer of the CAA. The House
of Lords Constitution Committee's review into the Accountability
of Regulators provided the last opportunity to consider the CAA's
role.
5. British Airways's relationship with the
CAA is based on mutual respect and we recognise their professional
expertise. We agree with the CAA on most policy issues, though
there are occasional disagreements on important issues. Despite
market deregulation, our own commercial interests still depend
to a significant extent on the CAA who:
— have discretionary powers over our
safety (AOC) and commercial licenses (ATL);
— regulate prices and service quality
standards at BAA's main airports and at NATS;
— recover their own costs (c £100
million pa) as well as a profit from UK industry;
— negotiate the cost of the Met Office
contract which is recovered from commercial airlines flying in
UK airspace (some £25 million pa);
— continue to regulate air fares in
some long haul markets;
— allocate scarce capacity among UK
airlines in restricted longhaul markets (new Indian rights were
divided by the CAA between three UK airlines);
— negotiate technical/operational standards
at ICAO; and
— ensure delivery of air transport
infrastructure.
6. It is therefore important to us that
the CAA constantly reviews its effectiveness and efficiency and
adapts to keep pace with the needs of the industry.
7. In this document, British Airways makes
the case for a number of changes to remove outdated regulatory
burdens and to sharpen accountability arrangements. Inevitably
we focus on areas where change is needed rather than on areas
that work well. We have raised most of these issues with the CAA
through their various consultation arrangements.
8. We would like to stress that these remarks
are intended as constructive contributions to the Select Committee's
inquiry and hope that the CAA will read them in that spirit. British
Airways has always supported the need for an independent CAA and
we continue to do so. In most policy areas we agree with the CAA
and cooperate closely with them. We are also prepared to pay our
own share of the costs of efficient and proportionate regulation.
REMIT, STRUCTURE,
AND POWERS
OF THE
CAA
9. The CAA acts independently within frameworks
laid down by the Civil Aviation Act 1982, the Airports Act 1986
and the Transport Act 2000 as well as the Air Navigation Order
and other secondary legislation. The CAA's statutory objectives
and responsibilities are therefore scattered and difficult to
summarise. Most regulators have one core area of competence, but
the CAA has remits for: economic regulation (ERG); consumer protection
(CPG); safety regulation (SRG); and airspace policy (DAP). The
CAA also has environmental and health expertise, acting as an
adviser to Government in these areas.
10. The four main groups (SRG, ERG, DAP
and CPG) operate as separate regulators, each with their own distinct
policies, agendas, workforce, industry consultation arrangements
and income streams. They come together primarily at the group
level. This makes the CAA an unusually complex regulator and one
that has four distinct identities.
11. As a public corporation, the CAA also
has a unique constitution for a regulator. It is not part of Government,
[1]but
pays corporation tax and is required by the Treasury to make a
6% return on assets. The CAA receives almost no Government funding.
In 1982, the CAA was given powers to levy cost-related prices
for its formal statutory functions so that it could become self-financing.
Despite this, for VAT purposes it is not considered to be providing
an economic service. Therefore £3 million of VAT incurred
on bought-in products and services cannot be passed through and
reclaimed by industry. This seems to be an anomaly.
12. In a few limited areas, notably airspace
regulation and economic regulation, the CAA exercises a policy
role independent from Government. In other areas, notably safety,
policy remains legally the responsibility of the Secretary of
State and the CAA's role is one of overseer, enforcer and adviser
to Government.
13. The CAA also provides some services"
that could, in principle, be provided by a competent third party
on a competitive basis. For example:
— Tour-operator bonding arrangements
in some EU countries (eg Germany) are provided by non-Governmental
organisations on a commercial basis;
— meterological information could be
opened up to competitive supply; and
— consultancy and training services
provided by the CAA can be provided on a commercial basis (as
some is already).
14. The CAA is accountable to the Secretary
of State and the relationship is managed through DfT. The CAA
is also accountable to its own Board. Presumably the Board is
accountable to the Government, as owner of the CAA. Most Boards
ensure that their company responds to pressures either from competitors
or a regulator. The CAA has no competitors and no regulator and
is legally entitled to recover its costs from industry. The issue
of who regulates the regulator, be it Government or Parliament,
is an important one.
15. On policy matters, the CAA consults
industry before making decisions or recommendations. In some areas,
industry has either a right of appeal, or the decision is taken
by the Secretary of State. However, there are areas where there
is no appeal and therefore no real accountability apart from a
judicial review. Examples of areas without appeal include:
— the setting of ATC charges and service
quality standards, where NATS has the right of appeal to the Competition
Commission, but airlines do not; and
— The right of appeal to the SoS over
allocation of route rights under the scarce capacity process is
to be withdrawn without an adequate alternative being put in place.
16. The closest equivalent structure to
the CAA's is the FSA. This is a Government-owned company, funded
by industry. However, the FSA does not appear to have to make
a profit. They are subjected by the Treasury to independent value
for money reviews every five years or so. There are statutory
consumer and Practitioner panels that scrutinise the effectiveness
of the FSA against its statutory objectives and provide feedback
at a strategic level. And there is a statutory duty to operate
efficiently.
17. Apart from the FSA and the CAA, all
other regulators are subject to audits by the NAO.
18. Although some areas have been modernised,
many of the CAA's powers, including its corporate structure and
statutory accountability arrangements are decades old. We believe
there are structural deficits that result from this old constitution.
PERFORMANCE OF
THE CAA IN
RELATION TO
ITS STATUTORY
OBJECTIVES AND
FUNCTIONS
19. Commercial air transport in the UK is
safe, growing and innovative, providing an efficient service to
the general public and a wide choice of destinations, airports,
prices and levels of service. The CAA has helped to facilitate
this.
20. On the other hand, regulatory costs
in the UK (fees and compliance costs) are often higher than elsewhere
and the infrastructure is congested. Airport charges are rising
and NATS remains one of the most expensive air navigation service
providers, despite economic regulation. The UK's airlines have
struggled to remain competitive and most have not made adequate
returns on their investments.
21. The CAA's Annual Report describes their
work by organisational group, not by statutory functions (although
these coincide to some extent). The report includes some simple
high level performance indicators" for safety and delays,
but these are measures of UK industry performance, so it is not
easy to draw conclusions from these about regulatory performance.
Business plans also focus mainly on projects and priorities, rather
than statutory functions.
22. There has never been an independent
overall review of the CAA's performance against its statutory
objectives and functions, so far as we are aware. However, technical
performance reviews are conducted:
— ICAO audits the CAA's safety regulation
group to check its technical competence against international
standards and the CAA responds to their recommendations.
— on their own initiative, DAP conducted
a stakeholder survey in 2004 to examine perceptions of their own
effectiveness—and seeking suggestions for improvements.
— ERG commissioned a review of their
last airport quinquennial review, following widespread criticism,
and this has led to a new approach to the forthcoming review.
23. British Airways would like to draw attention
to the following areas where the CAA's performance against its
statutory functions could be improved.
24. The last economic review of BAA airport
charges did not go well, as the CAA accept. Under the previous
directorship, ERG based their approach on economic theories that
were not accepted, while neglecting core regulatory duties, such
as reviewing the scope for cost efficiencies. We have engaged
with the CAA to ensure a more positive approach in the next review,
which will be based on a strategic dialogue between BAA and its
customers. We support this approach, although ERG need to be realistic
about the scope for agreement. They will still need to get involved
in key areas to ensure that the regulatory regime delivers value
and does not legitimise monopoly prices.
25. The second economic review of NATS,
which is almost complete, will result in the continuation of a
high level of ATM charges compared to the European average. We
are prepared to pay for the investments necessary to increase
capacity, but we do not believe that the service quality and capital
investment incentives are strong enough. We believe that safety
is enhanced by the service quality incentive" because by
encouraging better capacity planning, it should reduce conflicts
between safety and operational performance.
26. Safety is of paramount importance to
airlines and the CAA rightly places a high priority on this area.
However, we believe, as do other sectors of industry, that there
is significant scope for removing outdated regulatory burdens,
introducing more efficient oversight arrangements and reducing
paperwork costs—without undermining the effectiveness of
the CAA's important work. The new EASA framework for certification
has required SRG to review the continuing need for some national
restrictions in a spring cleaning" exercise, and this has
had positive results. The same approach will also need to be applied
in other areas to prepare for EASA taking competence for operations,
licensing, airports and air traffic management. It is often assumed
that tighter regulatory standards lead to higher safety standards,
but this is not necessarily the case. We are pleased that SRG
has started to move towards a risk-based approach to safety. This
has the scope to improve or maintain safety levels, while reducing
regulatory burdens.
27. The delivery of two new runways in South
East England will require unprecedented changes in airspace design
and use. This creates significant challenges for DAP, whose procedures
have so far been used only for relatively small airspace changes.
Therefore, without wishing to criticise past performance, we believe
that change is needed to ensure that DAP can prevent airspace
change becoming a constraining factor in the delivery of new airport
infrastructure.
28. The CAA passes through large costs from
the Met Office and Eurocontrol, to airlines. We understand that
the CAA did reduce Met Office costs, but there is clearly scope
to reduce these burdens much further.
EFFECTIVENESS AND
EFFICIENCY OF
THE CAA'S
REGULATORY FRAMEWORK
29. The regulatory framework is complex
and fragmented, making it difficult for people to know exactly
what powers the CAA does or does not have when it deals with certain
matters.
30. The CAA commonly acts beyond its formal
remit, as an adviser to Government. It is not clear that this
advice is always sought by the Government. The CAA is legally
entitled to recover the costs of such advice from the Secretary
of State, but in practice we understand that this rarely happens.
The boundaries of the CAA's remit have therefore become rather
blurred. One example is research, which is the SoS's responsibility
(Civil Aviation Act (S1(d)). The CAA has a significant research
programme, the costs of which are recovered from airlines. We
believe the CAA should be obliged to secure consent before undertaking
such extra-statutory work from whoever will pay for the work.
Consultation is not sufficient. This does not need a change to
the regulatory framework, but it does require that the CAA distinguishes
clearly between statutory and non-statutory functions and charges
accordingly.
31. There is currently no legal obligation
on the CAA to be transparent or efficient. The CAA has recently
started to be more transparent in its finances. However, we cannot
think of any other UK organisation—public or private—that
can levy charges with such impunity.
32. In our view, the CAA's funding arrangements
work badly, though they appear to serve the purposes of the CAA,
the Treasury and DfT. It has been too easy for the organisation
to finance the activities it wishes to pursue and there is little
incentive to ensure that longstanding activities remain necessary,
proportionate and efficient.
33. The CAA has a large property portfolio,
consisting of a freehold building at Gatwick, two London offices
on long (onerous) leases and a significant number of regional
offices. There has been some consolidation in recent years, there
seems to be scope for further reductions, especially with the
introduction of technology and the smaller role of the CAA.
34. In areas where industry believes there
is insufficient accountability on the part of the CAA, public
criticism is the only practicable way to address issues that cannot
be resolved directly with the CAA. This situation creates tensions
in the otherwise constructive relationship between industry and
the CAA.
35. An appeal mechanism is needed for scarce
capacity hearings to the Competition Tribunal.
36. The VAT status of the CAA should be
reviewed.
37. The requirement for the CAA to make
a profit of 6% on assets is not, in our view, justified. Even
if a profit is required, 6% is excessive given that the risk free
rate is around 2%.
EFFECTIVENESS AND
EFFICIENCY OF
THE CAA IN
THE GENERAL
DISCHARGE OF
ITS DUTIES
38. We are pleased that the CAA has signed
up to the Better Regulation agenda, including the use of Regulatory
Impact Assessments, adoption of the Enforcement Concordat and
effective consultation. This applies to new requirements. There
remains a great deal of scope to reduce old regulatory burdens
without undermining effectiveness. We are pleased that SRG is
to stop routine flight tests and we look forward to a new approach
to annual safety audits. These developments recognise the effectiveness
of safety management systems and reward well managed airlines
by targeting inspections on areas of real risk.
39. Regulatory burdens are, however, inevitable
for monopolies, such as NATS and BAA, where there is no scope
to introduce competition as an alternative to regulation.
40. We believe the CAA is insufficiently
accountable for its £100 million annual budget which, together
with a return on assets, is recovered from industry. Cost allocation
arrangements have created invisible cross-subsidies that result
in excessive charges to large airlines such as British Airways
and also reduce pressures to reduce regulatory burdens and to
be efficient. The CAA has started to remove the cross-subsidies,
but progress is slow.
41. The CAA has started to control its costs,
but greater transparency of cost information is needed. We believe
there is scope to reduce CAA costs by:
— closing/amalgamating regional offices;
— reducing training costs, which are
currently very high;
— automating high volume paper based
transactions—such as the issuing of licenses;
— stopping work when competence passes
to the EU;
— charging for non-statutory advice,
rather than recovering costs from statutory charge schemes (this
would probably lead to a reduction of effort); and
— outsourcing work where this improves
efficiency.
42. DfT explained in their response to the
House of Lords report into the Accountability of Regulators that
they set efficiency targets, on which CAA directors' bonuses depend.
However, it is industry that pays for the CAA and industry is
not consulted about these arrangements. DfT also exercise control
over staff remuneration, but again industry is not consulted.
It is therefore impossible to assess whether these arrangements
are appropriate.
43. We are concerned about the CAA's ability
to downsize where necessary, in response to European developments.
We have been told by the CAA that staff contractual terms are
an inhibiting factor to organisational change. If it is the case
that CAA staff benefit from public sector terms and conditions
of employment (including generous final salary pensions and long
holidays) while also benefiting from rates of pay that are competitive
with the private sector, this may inhibit staff mobility. However,
we have no information on this.
44. Despite the CAA's reduced responsibilities
and the scope to improve efficiency, the CAA's current business
plan up to 2010 shows staff numbers reducing only by 5% from current
numbers. Costs are planned to increase by 18% over the period
(by £18 million) despite the staff reduction and a pension
fund surplus. The Safety Regulation Group, where industry is expecting
to see significant reductions, is planning to increase annual
income from £69 million to £75 million, an 8% rise.
This plan, which has not been discussed with industry, does not
appear to reflect the agreed charging principle that The CAA
shall continuously seek to minimize the cost of regulation by
improving its efficiency and effectiveness and by limiting its
regulation to that which is necessary, proportionate to risk and
within the scope of the legislative framework."
45. We believe there is a good case for
the CAA to be subject to audit by the NAO.
Effect of growing international and EU cooperation
on the work of the CAA
46. National approaches are inevitably giving
way to international ones. Within the EU, competence has been
passed to Europe in recent years for, inter alia:
— The single air transport market,
with its liberalisation of markets, prohibitions on State Aid
and common commercial licensing requirements to protect consumer
interests;
— Denied boarding compensation;
— Airport measures including slot allocation
at congested airports and ground handling;
— Safety of aircraft, with operations,
licensing, airport and ATC safety to follow;
— Air traffic services integration
(the ongoing Single European Sky programme);
— Aircraft noise measurement, operating
restrictions and the phase-out of old aircraft;
— Emissions trading to manage climate
change; and
— Working time limits under the social
chapter.
47. Nationality itself is becoming a meaningless
concept within the EU single market. As the EU's remit expands
into all significant aviation policy areas, so the policy-making
role of Europe's national aviation regulators, including that
of the Government and CAA, is fast disappearing. EU rules generally
prohibit national variations except where objectively justified.
This is important to avoid distorting competition.
48. Regulatory methods are also changing.
It is now accepted on the Continent as in the UK that an approach
based on compliance with prescriptive rules is far less effective
and efficient than an approach based on incentives, voluntary
approaches, formalised responsibilities and risk management. As
in the UK, it will take time for commitment to these principles
to result in tangible change.
49. EASA, as an organisation, has run into
significant problems with its charging arrangements. Its systems
are bureaucratic and its charges have not been properly calibrated.
This must be changed if the organisation is to work effectively.
This is a serious problem, but it does not undermine the rationale
for EASA to take competence for all areas of aviation safety.
The Management Board must take responsibility for solving the
problems with charges.
50. Policy in most areas is now decided
in Brussels. Only national infrastructure and its regulation remains
at national level, as the Government has retained national competence
in these areas. This means that the CAA will progressively require
fewer people.
51. The main challenges facing the CAA are
the need to work within the new common EU rules, while also updating
its own regulatory practices and adapting to the changing needs
of industry. A single European air transport market requires a
consistent set of rules, and this is driving regulatory harmonisation
in almost all policy areas. It is an unstoppable trend and one
that should deliver great benefits.
52. The transition is creating challenges
for the CAA and industry. We share a common interest in trying
to manage the transition and to make the new European structures
as efficient and effective as possible.
18 November 2005
1 CAA employees are not civil servants. CAA assets
do not belong to the crown. CAA does not act on behalf of the
crown or benefit from crown immunity. Back
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