Select Committee on Transport Minutes of Evidence

Memorandum submitted by British Airways


  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 NATS ppp;

    —  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.


  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.


  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.


  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%.


  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;

    —  Airport security;

    —  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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