Select Committee on Transport Minutes of Evidence

Memorandum submitted by Virgin Atlantic

  Virgin Atlantic has split its evidence to the House of Commons Transport Committee's inquiry into three main sections, covering three important aspects of the CAA's responsibility: Safety Regulation; Economic Regulation; and the Consumer Protection Group.

  It is worth remembering that the UK's Civil Aviation Authority (CAA) is relatively unusual, in that it is paid for entirely by industry. This means that UK air transport faces additional costs that its competitors, based in other countries, do not have to meet. This makes it even more important that the efficiency of the CAA is regularly reviewed, with detailed data made available to industry and effective consultation with all stakeholders. We have found that, on the whole, this happens.


  With the part privatisation of National Air Traffic Services, the Safety Regulation Group is now the largest division of the CAA in terms of manpower and turnover. Virgin Atlantic does not in any way question the need for ongoing safety regulation of the air transport industry and acknowledges the CAA's deserved reputation for high quality safety regulation. The CAA has contributed substantially to the UK's high level of air safety. Virgin Atlantic works closely with the Safety Regulation Group to ensure that high standards are maintained and has an excellent relationship with the relevant CAA staff.

  Safety standards are paramount and should not be unduly influenced by costs. Nevertheless, it is not unreasonable to expect that high safety standards should be regulated as cost-effectively and efficiently as possible. This is a challenge to the CAA, which inevitably is a monopolist and, quite rightly, therefore not subject to competitive cost pressures. In the past the industry has been critical of the efficiency and cost levels of the Safety Regulation Group and its reluctance to respond to industry proposals. Consultative procedures have not been as effective as they should have been. In addition, the CAA has earned a reputation for gold plating" regulations and going beyond the standards that other countries find sufficient, with no discernable improvement in safety levels.

  Fortunately, there has recently been a significant improvement in the CAA's approach to industry consultation. Following pressure from a number of airlines, the CAA agreed to a joint exercise with the industry to examine cost allocation and related matters within the Safety Regulation Group. Of particular concern to airlines such as Virgin Atlantic was the long-standing substantial cross-subsidy from the larger UK airlines to other parts of the aviation industry and the uncertainty about the role of the European Aviation Safety Agency in Europe. It is evident that as it becomes established, EASA will increasingly take over responsibility for many of the tasks currently preformed by the CAA. Virgin Atlantic welcomes this move. In theory it should result in common safety standards throughout Europe and reduced regulatory costs for individual airlines. However, it is important not only that the UK's current high levels of safety are not reduced as a result, but also that UK airlines do not find themselves paying for the new EASA regulation while still being subject to the same CAA charges.

  The outcome of the joint CAA/industry exercise was excellent. The CAA should be congratulated on its willingness to consider difficult issues and work with the industry to find solutions. The recommendations arising from the exercise are now being implemented. It is hoped that the same cooperative approach can be carried forward in the regular CAA/industry consultation fora. The Safety Regulation Group faces a difficult period ahead as it adjusts to the creation of EASA. Its future role and size is still uncertain. It is important that the CAA works as closely as possible with the industry to facilitate the extent to which regulatory responsibility and implementation are eventually transferred to EASA. Of particular concern to Virgin Atlantic is the possibility that the CAA will incur substantial additional costs, for example if staff redundancies become necessary. The creation of EASA was a political decision. It seems only reasonable, therefore, that any additional costs incurred by the CAA as a result should fall to the Government rather than the industry.

Aviation Health Unit

  Falling under the remit of Safety Regulation, the Aviation Health Unit was established in 2003, at the request of the Secretary of State for Transport, in reaction to political pressure following press stories about the dangers of deep vein thrombosis and with little consultation with industry. The Aviation Health Unit exists to provide advice on aviation-related health issues to the Secretary of State and is funded by the CAA's regulatees, the airlines. This is made clear in Clause 7 (Subsection 4) of the Civil Aviation Bill, which states that the Secretary of State can require the CAA to provide advice and assistance in connection with his civil aviation functions on a continuing basis, and precludes the CAA from recovering from the Secretary of State the costs of providing that advice.

  Virgin Atlantic, as do other carriers, makes the health and safety of our passengers our top priority. We employ in-house medical experts who offer advice to our passengers and crew and organise any necessary assistance. We also distribute further health advice to passengers through a variety of media. This advice and assistance is paid for by us; we do not expect subsidies from the Government. It would appear reasonable, therefore, that if the Secretary of State requires advice on health issues, he too should pay for it.

  Given the ongoing establishment of the new aviation safety regulatory body, EASA, it would also seem sensible that the responsibility for aviation health advice be transferred from the CAA to this Europe-wide body. All European airlines could then contribute to its financing, just as they will all benefit, along with governments and the travelling public, from its output.


  One of the primary responsibilities of the Consumer Protection Group is to manage Air Travel Organisers' Licensing (ATOL), the mechanism which protects package-holidaymakers in the event that their airline or tour operator fails, and provides for refund and repatriation assistance for those passengers. The ATOL system costs the CAA an average of £0.16 per protected passenger,[2] in addition to the estimated £100 million it costs the industry to maintain their bonds. The CAA has recognised that, as the travel industry has changed and people are becoming increasingly likely to create their own quasi packages" on the internet, the number of passengers covered by the ATOL mechanism is falling dramatically.

  In 2003 the CAA launched a consultation and undertook, under the aegis of the Department for Transport, detailed analysis of the current system with a view to finding alternative more targeted, equitable and perhaps cheaper"[3] solutions. In October 2004 the Secretary of State for Transport asked the CAA to carry out an economic assessment (the major part of which was provided by an independent consultancy) of a range of regulatory options, at a cost of £400,000.

  When the CAA presented its findings to the Government and the air travel industry in autumn 2005, the advice was dismissed by the Department for Transport, despite significant support from consumer groups and a large proportion of industry. This has meant that the ATOL system, which covers fewer people each year and sets bonded tour operators at a competitive disadvantage vis-a-vis flight only" carriers, remains in place whilst the CAA carries out yet further analysis. Virgin Atlantic has supported the CAA's proposals and is disappointed with the Government's reaction. In the circumstances, it seems only fair that the Government, rather than the industry (and therefore ultimately the travelling public) should meet the costs of the CAA's work. We would urge the CAA to move forwards, as soon as possible, with the Government's commitment (set out in the Aviation Minister's statement to the Commons of October 2005) to re-examine the ATOL bonding scheme with a view to making it fairer and less costly for tour operators to maintain.

  The Consumer Protection Group also has responsibility for enforcing certain other consumer protection legislation. When the EU Denied Boarding and Delay Compensation Regulation (EC No 261/2004) entered into force in February 2005, the AUC (and ultimately the CAA's CPG) became responsible for ensuring that airlines complied with its provisions. The CAA has taken a very even-handed and realistic stance on this poorly drafted Regulation. They recognise that many UK carriers, not least Virgin Atlantic, already had in place high levels of customer service and long-standing procedures for assisting passengers facing delays or cancellations. They also understood that, in some cases, this Regulation has led to a decrease in the levels of assistance provided to passengers. The CAA has sensibly concentrated its efforts on repeat offenders" who habitually contravene the Regulation, an approach that is welcomed by Virgin Atlantic.


Scarce Capacity

  The Civil Aviation Bill, currently in the House of Lords, includes a clause (6) on removing airline's right of appeal to the Secretary of State for Transport against a decision made by the CAA in an aviation route licence case. Instead, the only appeal mechanism available to airlines would be a Judicial Review via the courts. Virgin Atlantic welcomes the proposed reform for a variety of reasons, not least that as the independent regulator of the UK aviation industry, the CAA should be allowed to perform its role without political intervention. We believe that the CAA's current administrative procedures for the conduct of hearings provide applicants with a fair opportunity to put their case and to have it examined rigorously and that these procedures, coupled with the possibility of seeking Judicial Review of the CAA's decisions, render an alternative point of appeal unnecessary. In addition, the number of appeals would certainly be reduced, saving airlines money. At present there is really little reason why an airline that did not get everything it wanted from the CAA would not appeal as a matter of course and irrespective of the strength or otherwise of its case. There would also be more certainty for airlines in that unless an airline could persuade a judge to suspend a CAA decision pending final judgment, which seems unlikely, the decision would come into effect shortly after publication. Airlines would not be waiting for weeks for the Secretary of State to reach his own decision, as has been the case in recent instances.

Regulation of ATC and Airport Services

  Virgin Atlantic strongly supports the regulatory framework attached to the provision of air traffic control (ATC) and airport services in the UK. As in the case of water, electricity and gas, the provision of ATC and airport services are two areas where usual market forces are limited and often fail to produce outcomes which are in consumers' and the UK economy's interests. Because the provision of such services has particular cost characteristics which mean that they will tend to be provided by only one firm, providers of ATC and airport services will have the ability to ignore the wishes of airlines and passengers with impunity. They will not lose business from so doing: airlines and passengers are not able to vote with their feet" as no alternative service providers exist. Providers of ATC and airport services therefore need to be incentivised to behave as if they faced effective competition, in order to produce low prices and high service quality.

  Virgin Atlantic is one of the members of The Airline Group and has a seat on the NATS Board. We have taken such a hands-on" approach to NATS in order to assist in its transition to a commercial, customer-responsive organisation, while always remembering that safety is paramount, in a difficult trading environment. We were pleased that the CAA took a challenging but pragmatic approach to the setting of the price control on NATS's en-route and Oceanic businesses, particularly in light of the severe financial difficulties faced by NATS in the aftermath of the tragic events of 11 September 2001.

  In the case of BAA's London airports (Heathrow, Gatwick and Stansted) we support the two-stage approach being taken towards the Regulatory Review by the CAA this time around. The first-stage, commonly known as Constructive Engagement", is the new part. It requires BAA to ask its airline customers what they want and then show how it is going to deliver these requirements cost-effectively. While at first pass this may seem to be micro-management" by the CAA, the fact that the CAA has felt the need to impose this (with the support of airlines) on BAA shows that such consultation has not been as effective as it might have been in the past. So far Constructive Engagement seems to be working well: for the first time, airlines are being consulted seriously on BAA's short-, medium- and long-term plans for Heathrow and Gatwick. However, the strains this has put on airlines, particularly smaller airlines, in terms of resourcing should not be under-estimated: there are at least eight Workstreams taking place at both Heathrow and Gatwick until next June. It is therefore important that the CAA continues to play a central role in this initiative. It is relevant that one of the Competition Commission's recommendations at the time of the last Airports Review was that the CAA should examine whether it has more scope to be involved in relationships between airports and users aside from its formal role under Section 41 of The Airports Act 1986.

  Virgin Atlantic supports the retention of the Competition Commission's role within the two regulatory processes. The experience of these two processes last time around showed the importance of the regulator also being performance-reviewed, particularly when difficult economic issues are the bones of contention. We were concerned by the lack of transparency inherent in the Competition Commission's deliberations during the last Airports Review: we found it very difficult to find out anything about what BAA was saying, and hence to respond to those statements. We are pleased to hear that the Competition Commission is taking steps to make its deliberations more transparent.

  We are disappointed that over three years on from the Competition Commission's recommendation that the CAA examine whether current procedures under Section 41 of The Airports Act 1986 can be made more effective in resolving disputes between airports and users, this has not yet occurred. While we recognise that the EU Modernization Regulation has created considerable uncertainty as to the CAA's status, this has effectively taken away one of the few sticks" airlines have at their disposal in their negotiations with BAA. While we would always prefer not to have to make recourse to such provisions, their existence makes it more likely that satisfactory agreements will be reached in the first place.

16 November 2005

2   CAA Annual Report and Accounts, 2005. Back

3   Joint CAA and DfT statement, 27 October 2004. Back

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