Select Committee on Transport Minutes of Evidence

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 do not?

  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 charges.

  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 give examples?

  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 the BAA.

  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 will evolve.

  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 severely?

  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 the evidence.

  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 government?

  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 open-spirited industry.

  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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 8 November 2006