Examination of Witnesses (Questions 300-319)|
18 JANUARY 2006
Q300 Chairman: Gentlemen, if an organisation
was set up from scratch to regulate civil airlines, how similar
would it look to today's CAA?
Mr O'Leary: Speaking for Ryanair,
I think it would look radically different from what the CAA looks
like today. From an economic regulatory point of view the CAA
is an abject failure in regulating either the airports or NATS.
The purpose of a regulator is to replicate, as best it is possible,
the effects of competition where competition does not exist. If
you take the UK airline industry at the moment, thanks to the
efforts of the low fares airlines, we now have one of the most
competitive airline industries in Europe if not the world. We
have one of the least competitive and least efficient industries
in terms of the regulated airports and NATS. Evidence abounds
in NATS, which is regulated by the CAA, where we have the highest
rate of air traffic control service charges of the 32 Eurocontrol
members. The British NATS is the most expensive in Europe. Regulation
is clearly failing.
Q301 Chairman: You do not think some
of the others are highly subsidised by various means? You have
not heard of it.
Mr O'Leary: I am not here to answer
for the others, we are simply here to say, speaking on behalf
of users, who are both airlines and passengers, one has to ask
the question why, after years of regulation by the CAA, are British
passengers/British consumers paying the highest Eurocontrol charges
of any of the 32 countries in Europe.
Q302 Chairman: You feel that this
is due to incompetence? Is there a specific area in which you
notice something that they do not do or do do that other air regulators
Mr O'Leary: I think there have
been many examples in recent years of incompetence on the part
of the CAA in terms of regulating the industry.
Q303 Chairman: Such as?
Mr O'Leary: The one that comes
to mind more recently in the case of NATS was the financial crisis
that arose in NATS as a result of the failed refinancing when
NATS was taken over by the airline group. The response of the
CAA as regulator was not to require the airlines' group to bail
NATS out of its problems or to make up the financial shortfall,
it was to award a further price increase to NATS requiring airlines
and consumers to pay yet higher charges to this regulated monopoly
because they had made a mess of their refinancing. As in all cases
where section 39 of the legislation says the objective of the
CAA is to have regard or to advance the interests of users, in
the case of the refinancing of NATS it was to tax the users, to
bail out the failed refinancing of NATS.
Q304 Chairman: You do not feel some
of our major airports are lowering the charges that they place
on the users?
Mr O'Leary: Certainly the policy
of the BAA airports in London in particular is to charge the highest
possible charges, to waste the greatest amount of capital it is
possible to waste and then pass it back to customers over the
next 40 or 50 years in the form of higher charges.
Q305 Chairman: Is not charging the
highest price the market will bear called capitalism, Mr O'Leary?
Mr O'Leary: No, capitalism is
underpinned by competition.
Q306 Chairman: I see.
Mr O'Leary: Where competition
delivers lower costs and better service for consumers, which is
why competition between the airlines in the UK has delivered such
benefits for the consumers and why the absence of competition
between the regulated London airports and the continuing incapacity,
unwillingness, as you will describe it incompetence of the CAA
in regulating the major London airports has resulted in higher
Chairman: It is nice to know that you
are so clear about not wanting any more cross-subsidisation.
Q307 Mr Donaldson: We have received
evidence that there is poor integration and co-ordination between
the Department for Transport and the CAA in some areas of policy
development. Is this something you recognise and, if so, can you
Mr O'Leary: I think, with respect,
you are not looking at the core issue here again from the point
of view of users, whether those users are airlines or passengers.
The relationship fundamentally between the CAA and the Department
for Transport is largely immaterial to us, it is the relationship
between the CAA and the regulated monopoly, in this case the BAA,
which is of primary concern. The CAA was long ago captured by
Q308 Mr Donaldson: Mr Cahn?
Mr Cahn: Two points. If I may
return to your earlier question about what changes might be needed
for the CAA. I do think it is worth considering the impact of
the gradual shift in regulatory responsibilities to the European
Union. That is an on-going process which clearly is happening
quite widely. It is half-way there, it is not yet complete, but
as that process unfolds clearly the nature of the CAA and the
resources devoted need to change to respond. That is the great
driver for looking, again, at the responsibilities of the CAA
and the way it is structured. To address Mr Donaldson's question,
there is an issue about the relationship between the CAA and Government,
and that is that the CAA is asked by Government to offer policy
advice quite frequently. We are very happy that should be the
case, they are a source of expertise and I have confidence in
their expertise. The problem I have is that it is we, the industry,
who pay for that policy advice with no opportunity to give a view
on whether we would wish to pay for that advice. Therefore, it
is quite right that the Government should be able to seek policy
advice from the CAA but they should pay for it when they do it,
and it should not be burdened on the industry because, of course,
that burden immediately goes through in the end to the passenger.
Mr Humphreys: It is important
to remember the Civil Aviation Authority is an independent regulator.
The Department for Transport is a Government department. There
are bound to be differences of approach and view, therefore, and
overwhelmingly those differences are managed satisfactorily. Sometimes
they are not, we had the case very recently on ATOL licensing
where the CAA took a very different position than the Government
did. From Virgin's point of view, we were certainly on the side
of the CAA on that. There have been other cases as well but, on
the whole, these differences are fairly minor and are managed
very well, I would suggest.
Q309 Chairman: You would say when
we are told that EASA is not fit-for-purpose, rather than start
worrying about the transfer of duties from CAA to EASA we should
be very careful to maintain the levels of safety and care that
the British need in terms of their consumers and passengers?
Mr Humphreys: Certainly I think
we should be very careful to maintain safety standards. Whether
the creation of EASA will lead to a reduction of safety standards
is another matter though. I think we are concerned about the way
EASA is operating at the moment. We support EASA as a principle.
We think more effort needs to be put into making it efficient
and well-run but it is early days, and hopefully these things
Q310 Mr Donaldson: Gentlemen, do
you think the Department takes sufficient heed of advice from
the CAA when advice is given?
Mr Cahn: I do not see how we can
know the answer to that question because we do not know the advice
that is given and we do not know the conclusions that the civil
servants draw or that ministers draw from them. It is simply a
question we cannot answer but that makes my point, again, we are
paying for advice which we do not see, which we cannot comment
upon and which we have not commissioned.
Q311 Mr Donaldson: In the case of
financial protection for air travel, the CAA was asked to undertake
a full study of the issues, only to find that the recommendation
of the one pound levy was abandoned. Do you have a view on that?
Mr O'Leary: I could not agree
more with the Department for Transport in objecting to the proposal
for the one pound levy. The one pound levy would be a tax on UK
consumers which would create a £100 million a year fund for
the CAA, fundamentally, to fund the failure of the CAA to properly
oversee the economic licensing and regulatory function. It also
dates back to an era, I do not know whether it is the 1960s or
1970s and package holidays, when people used to get stranded abroad
with no means of getting home. We have had other examples in recent
years. When EU Jet collapsed last year the low-fares airlines
immediately stepped into the breach and offered EU Jet passengers
£25 repatriation to the UK. There is not a requirement anymore,
thanks to the widespread availability and choice of airline services
and the incredibly low fares that are available to and from the
UK, for a £100 million per annum fund for the CAA, it was
a crazy idea and the Department for Transport is absolutely right
to reject it.
Mr Cahn: If I may, I would like
to agree with Mr O'Leary on that. I thought it was quite an extraordinary
proposal from the CAA to create in effect a slush fund of £500
million, which was the original proposal, where there was no market
failure and there was no need. There are insurance products available
on the market for any passenger who feels the need to have protection.
There is no evidence of a widespread incidence of people being
stranded overseas. This would simply have added a financial burden
to a large number of passengers and, in particular, to the financially
secure airlines. We thought that it was a bureaucratic intervention
in the market and wholly unnecessary. I thought it was a good
decision by ministers.
Q312 Chairman: So it is not true
that British Airways was returning with empty seats, leaving people
behind and was offering deals which disadvantaged passengers quite
Mr Cahn: In the past there have
been airline failures, for example when Sabena failed or Swissair
failed, and we have always transported passengers freely.
Q313 Chairman: I am talking about
this instance. This is the one that has been raised. You have
raised it before the Committee. We have been told that planes
were returning with empty seats and passengers were not allowed
to use them and British Airways took only a small percentage.
In terms of the low-cost airlines, Mr O'Leary, we were told that
some were quite helpful and some were not. I think I am getting
a nod at the end of the table. Mr Humphreys, can you imagine that
some airlines would be helpful and some would not?
Mr Humphreys: This might come
as a surprise to you, but I very much disagree with what British
Airways has said here. As you know, we were very supportive of
the CAA's proposals. I do not think Mr O'Leary has done justice
to those proposals. As to his example of EU Jet, the CAA did a
very detailed study of what actually happened and the evidence
suggested strongly that many passengers were left stranded and
those that were helped ended up paying a lot more than they would
otherwise have done.
Chairman: I think that is clear from
Q314 Mr Scott: Mr O'Leary, going
back to what you said about the collapse of EU Jet, if you had
not had the capacity on Ryanair to return those customers, would
you have put on extra flights at £25 to return those customers?
Mr O'Leary: Yes, and we have done
so in the past. I think, with respect, the question you asked
misses the point. The point that I was trying to make was that
before this Committee we are trying to look at the performance
of the CAA. I have now given two examples. One was the bailout
of NATS, where the CAA's solution was to tax passengers. Secondly,
in order to refund the CAA's own ATOL fund the CAA's proposal
was to tax passengers. In the case of certainly the Stansted G2,
which I know we will come to eventually, the CAA's proposals will
be to tax passengers. Yet in section 39 of the Airports Act one
of the guiding instructions or imperatives for the CAA is to forward
or advance the interests of users and what you see the CAA repeatedly
do is tax users, not advance their interests.
Q315 Chairman: That is not necessarily
a tax on passengers when what you are offering them is a defence
against being abandoned, but I will not labour the point.
Mr O'Leary: With respect, the
solution to passengers being abandoned is for passengers to book
with financially strong airlines.
Q316 Chairman: I would be interested
to see which ones those are.
Mr O'Leary: Certainly Ryanair,
Flybe, British Airways and Easyjet are among the most financially
sound airlines, with strong balance sheets. If passengers want
to go with the fly-by-night airlines who come and go, they will
have to decide if they want to avail themselves of the travel
insurance or not. However, what the CAA was proposing is the equivalent
of taking 15 points off Chelsea at the end of every season and
transferring them to Sunderland. It is a crazy idea.
Mr Scott: That sounds fair enough!
Q317 Mrs Ellman: Mr Cahn, you have
argued that the CAA should be audited by the National Audit Office.
Why should that be when it is funded by industry and not by the
Mr Cahn: May I just come back
and have one last go on financial protection for passengers? My
Chairman is speaking in New York today and, amongst other things,
he is arguing that our industry should be treated as a normal
industry and not as a special case. I think this is a very good
example where moral hazard is being engaged by proposing that
our customers should subsidize other airline's customers. In the
automobile industry if you buy a car, if you buy double-glazing,
if you buy clothes or you buy a house, nobody suggests there should
be a government-levied tax. What we would like in British Airways,
which is indeed a financially secure airline, is to see our industry
treated as a normal industry.
Q318 Mr Martlew: It would be much
easier not to impose this tax, as Mr O'Leary says, if there was
an official agreement amongst the major airlines that they would
bring people back. Why have we not got such an agreement?
Mr Cahn: We have an unofficial
practice amongst scheduled airlines that where a scheduled airline
fails we will bring passengers back, and all the experience over
the years is that we have done that. We did that when Sabena failed,
we did that when Swissair failed and you can be confident that
we will do it in the future if a scheduled airline fails. I think
that there are divisions within the industry and I do not see
that we necessarily have an obligation for all airlines, but we
will do it where a fellow IATA airline is in trouble.
Mr O'Leary: I think the simple
answer to your question is there is no problem with them. We have
no difficulty in reaching an agreement whereby passengers on a
failed airline will be repatriated free-of-charge. Ryanair would
sign up to that tomorrow.
Chairman: It is nice to be in such an
Q319 Mrs Ellman: Can I return to
the National Audit Office?
Mr Cahn: Nobody is regulating
the regulator. The CAA is one of only two regulators in this country
which is not audited by some external body, the other being the
FSA and this does not seem to us to be right. I am not saying
the NAO is necessarily the right body to do it, but it is the
one which came to us and that is why we suggested it. What we
are clear about is that it would be beneficial if there was some
external audit if only to challenge the CAA, as any organisation
needs to be challenged with an external perspective.