Select Committee on Transport Minutes of Evidence


Supplementary memorandum submitted by Ryanair

EXAMPLES OF THE CAA'S REGULATORY FAILURES

1.  INTRODUCTION

  The CAA has repeatedly failed to regulate either of the UK' s two large air transport monopolies (NATS and the BAA). In so doing, the CAA has consistently failed to meet its statutory obligation to further the reasonable interests of airport users within the UK, and has repeatedly allowed both NATS and the BAA to abuse their dominant position.

2.  OTHER CAA REGULATORY FAILURES

  2.1  The absence of competition, or any degree of effective regulation has resulted in a situation today where UK NATS is now the most expensive ATS provider in Europe, as well as being one of the least efficient. It is further mirrored in the case of the BAA airport monopoly, which is now the most profitable airport operator in the world.

  2.2  The CAA's failure to regulate the BAA airport monopoly is consistent with the CAA's long list of regulatory failures in other areas such as NATS and the ATOL system.

  2.3  The previous decision by the CAA to allow NATS to further increase Air Traffic Control charges in the UK, inflated UK ATC charges from the third most expensive of the 32 countries covered by Eurocontrol, to the most expensive. This special price increase was awarded as a bail out to NATS and its private sector shareholders following the failure of its refinancing plans-in the aftermath of 9/11. Instead of requiring the private shareholders of NATS to refinance the operation, the CAA approved these cost increases without any obligation on NATS to improve its efficiency or lower its costs. In addition the CAA has allowed NATS to shift the majority of the risk for traffic shortfalls in future onto users. This risk shifting was characterised by the CAA back in 2003 as a one off" exceptional measure to relieve NATS from a financing crisis following the events of 9/11, however the CAA has since maintained this one off" measure in the current price review and has indicated that it is now a permanent fixture.

  2.4  Instead of meeting the reasonable interests of users (which in Ryanair's case was to suggest the award of a price increase to NATS upon production of agreed efficiency and cost reduction targets) the CAA not alone ignored the users, but penalised those users with increased charges and increased risk in order to bail out the inefficient and expensive NATS monopoly.

  2.5  A more recent example of the CAA' s own ineptitude, was its failed proposals to include scheduled airlines in the ATOL system, which would have involved the levying of a £1 tax on every passenger departure from the UK to cover some notional risk that UK consumers might get stranded abroad. This kind of tax the consumer" nonsense is typical of the regulatory approach of the CAA towards the reasonable needs of users". This repatriation fund wouldn't be necessary if the CAA's own licensing section did not award operating licences to airlines or tour operators who are clearly not financially fit to operate to/from the UK. The proposed solution of the CAA in this case was not to meet the needs of users" but rather to tax the users to meet the needs of the CAA".

3.  THE FAILURE TO REGULATE BAA STANSTED AND G2

  3.1  The continuing management of the project for a second runway and second terminal at Stansted (G2") highlights the failure of the CAA to regulate the BAA monopoly in compliance with the Airports Act. It also demonstrates the CAA's capture by the BAA monopoly, wherein the CAA rubberstamps spending plans put forward by the BAA, and disregards the BAA's failure to consult with users or users objections to the BAA's plans. This results in capital plans and spending which are contrary to the reasonable interests of users, and conflict with the CAA's own proposals for how the regulatory process at Stansted would be handled.

  3.2  As the Committee will be aware, Section 39 of the Airports Act imposes four objectives upon the CAA which include:

    (a)  To further the reasonable interests of users of airports within the United Kingdom.

    (b)  To promote the efficient economic and profitable operation of such airports.

    (c)  To encourage investment in new facilities at airports in time to satisfy anticipated demands by the users of such airports.

    (d)  To impose the minimum restrictions that are consistent with the performance by the CAA of its functions under those sections.

  3.3  In relation to BAA Stansted in particular, the CAA has repeatedly and consistently ignored the reasonable interests of users. It has at all times subrogated users' interests in favour of promoting the BAA's profits and its profligate spending plans. This view has been expressed with unanimity by the airline users at Stansted, but the CAA has ignored us. More interestingly it is also shared by the BAA plc, which continues to guide the investor analyst community and through them its shareholders that it operates in a benign regulatory environment" where it continues to successfully secure a higher return on its assets than its true cost of capital".

4.  RYANAIR'S REASONABLE INTERESTS

  4.1  The failure of the CAA to require the BAA monopoly to meet the reasonable interests of users in Stansted can be demonstrated by practical examples of what has happened at Stansted in recent years and in particular in relation to the G2 project, which Ryanair and other Stansted users support in principle. Ryanair's stated reasonable interests at Stansted included:

    (a)  That we would be consulted upon all spending plans at Stansted and that our input and that of other airline users would be factored into capital and expenditure plans at Stansted so that waste could be avoided and efficient facilities developed to meet the needs of low fare airlines. We have not been consulted.

    (b)  We supported in principle that there should be no cross subsidisation between the three BAA airports in London and that user airlines at Stansted should pay for facilities at Stansted, and equally that the BAA should only provide those facilities which the airlines users actually wanted and were willing to pay for. BAA continue to advocate cross subsidisation.

    (c)  In order to verify the true cost of operation of the three London airports, the BAA should be obliged to produce separate verifiable accounts for costs, revenues and profitability at each of the three London airports and that these accounts would be verifiable and transparent. The BAA's accounts at Stansted are unintelligible.

    (d)  That any proposals for the development of a second runway and second terminal at Stansted should in the first instance be put out to competition and tender. The BAA would of course be allowed to tender, and the best designed and most efficient proposals would be awarded the contract to develop, build and operate the second runway and ternunal. This open conipetiti6n would at least ensure that the winning proposals (even if they came from BAA Stansted) would be competitive. The CAA have done nothing to advance or promote competition.

    (e)  That any preliminary costs or capital costs associated with the development of a second runway and terminal at Stansted should only be levied on the users of those facilities as and when those facilities became available for use. No prefunding of these capital facilities should be allowed. The CAA has previously approved the inclusion of these costs in the RAB.

    (f)  Ryanair believes in common with other airline users at Stansted (including BA and Easyjet) that these facilities should cost no more than £l billion, which would be similar to the 2006 equivalent costs of the second runway and second terminal developed at Manchester (in the mid 1990's at a cost of some £450 million). These costs would also be consistent with the €900 million budget for the proposed second runway and second terminal at Dublin Airport as well. We have been ignored by both the BAA and the CAA.

    (g)  Ryanair and other airline users at Stansted sought the CAA's attendance at airline user meetings with BAA Stansted so that the CAA could monitor the extent to which the BAA was encouraging and promoting consultation and constructive engagement with its users at Stansted. The CAA have attended as observers" only and stand idly by while the BAA ignores users' requests.

5.  CAA'S RESPONSE TO USERS' REASONABLE INTERESTS

  5.1  We regret to advise the Committee that the CAA has totally failed to further the reasonable interests of users at Stansted Airport. Instead, the CAA has cooperated with the BAA to ensure that these reasonable interests are ignored or rejected. As a result, the airlines at Stansted find themselves in the remarkable position of supporting a second runway and second terminal development, but being pilloried by both the BAA monopoly and the CAA regulator as being irrational, unreasonable and opposed to any spending plans at Stansted Airport, when this is patently untrue.

  5.2  Consultation with airport users at Stansted is a sham. BAA Stansted presents capital expenditure plans to the airline users on an annual basis in the form of a 100 plus page CIP document. Users are asked to revert with their views, and if the BAA hear nothing further from users, they take this silence as acceptance" of their capex plans. When in May 2005 Ryanair submitted an extensive list of observations and criticisms of these capital expenditure proposals, BAA Stansted responded by saying they had received no complaints from any other airline and that since Ryanair was in the minority, the capex plans would now proceed. This is typical of what passes for users' consultation at Stansted. The reason why there is no consultation, is because there is no sanction placed upon the BAA for any failure to consult with users. The CAA, which attends the monthly airline user meetings at Stansted, claims to do so only in an observer" capacity. When the airlines complain, the CAA responds that there is no requirement for BAA Stansted to reach agreement with airline users on its capex plans. Why should BAA Stansted consult with users, when its plans will simply be rubberstamped by the CAA in the absence of agreement on those plans with airline users? How can the reasonable interests of users" be furthered if BAA Stansted, with the full knowledge and support of the CAA, can continue to ignore and disregard the stated reasonable interests of those users as expressed at user meetings?

  5.3  BAA Stansted has for 15 months refused to provide its airline users with a business plan or traffic forecasts to justify its plans to spend £550 million on increasing current capacity from 25 MPPA to 35 MPPA. This refusal is contrary to Appendix 4 of the CAA's February 2003 price review decision. It is also contrary to the CAA' s own proposed approach to the regulatory treatment of initial expenditure on new runway capacity at Stansted. This specified that the CAA's regulation of the second runway project would be subject to safeguards designed to prevent BAA having an artificially exaggerated incentive to invest or to overstate the extent of its preliminary expenditure". These safeguards included:

    —  As far as practicable, BAA should consult users on the level of preliminary expenditure before it is incurred.

    —  No expenditure would be rolled in the RAB unless BAA has followed a best practice management and operates proactively the enhanced information disclosure and consultation agreement consulting effectively with well informed users, to ensure that BAA should be able to demonstrate that the initial costs have been incurred efficiently.

  5.4  Despite repeated requests by the users in Stansted, there was no consultation on the preliminary expenditure at Stansted. The CAA initially approved £100 million of preliminary expenditure, and then subsequently withdrew that approval in the face of threats of legal action by Stansted users. In the meantime, the BAA has now spent more than £50 million of preliminary expenditure without consultation or agreement with users and without the approval of the CAA. The CAA's revised position is that there is now no need for consultation or agreement with users before preliminary expenditure is incurred, a position which completely contradicts its own approach as set out in its 2004 consultation paper.

  5.5  The airlines at Stansted have for almost 15 months now been seeking information from the BAA on traffic forecasts, a business plan and proposals for G2 at Stansted. BAA Stansted has consistently refused to provide any such information. In response to user complaints, the CAA has repeatedly urged Stansted users to await the publication of the BAA's proposals for G2, which were published in December 2005 after 18 months of formulation. Rather than the publication of these proposals becoming the starting point for a period of constructive engagement with users, the CAA announced—just prior to the publication of these G2 proposals—that no constructive engagement will take place at Stansted. This decision by the CAA to rule out constructive engagement with airline users at Stansted—even before the BAA had published its proposals for G2—demonstrates the total regnlatory capture of the CAA by the BAA, and reinforces the ability of the BAA to force through any project it wishes at Stansted whilst ignoring the reasonable interests of users. The BAA can spend what they like with no input from users, simply by getting the CAA to rule that constructive engagement cannot take place.

  5.6  Despite the unanimous view of Stansted airline users that there should be no cross subsidisation between the three BAA airports at London, the BAA has recently begun to advocate cross subsidisation from passengers using Heathrow and Gatwick airports to support its profligate expenditure plans at Stansted. It justifies this on the basis that Stansted cannot afford the cost of the expenditure plans at Stansted. The obvious solution to this difficulty is to reduce the expenditure plans at Stansted rather than to seek a cross subsidy from passengers at Gatwick and Heathrow, who will gain no benefit from additional facilities at Stansted. Despite repeated written requests by Ryanair to the CAA, the CAA has refused to rule out the prospect of a cross subsidy during the next regulatory review. Any such cross subsidy would conflict with Section 39 of the Airports Act. The failure of the CAA to rule out any such cross subsidy at Stansted is disturbing, but further evidence of the CAA's regulatory capture by the BAA.

  5.7  The continuing failure of BAA to produce separate verifiable accounts for costs, revenues and profitability of each of the three London airports means there continues to be no cost transparency or accountability at Stansted. BAA continues to produce two sets of accounts on an annual basis. One is a regulatory set of books given to the CAA, which is designed to inflate the cost of assets at Stansted and demonstrate that the BAA is failing to recover its maximum regulated charge per passenger. The other is a statutory set of accounts, which confirms that the BAA continues to make extortionate profits at Stansted with a profit margin of some 30% of revenues. Neither set of accounts is transparent. Both sets of accounts produce an entirely arbitrary profit figure for Stansted, which depends upon the allocation of BAA's central costs. This lack of transparency prohibits any verification or regulation of the BAA monopoly operations at Stansted.

  5.8  The CAA has continually ignored or rejected Ryanair's contention that the costs associated with a second runway (whether preliminary costs or otherwise) should only be charged to the users of that second runway when or after those facilities come into use. Customers of regulated utilities should not be asked to pay in advance for capital facilities which they may never use. For most businesses operating in a competitive (as opposed to a regulated) environment, the cost of capital assets can only be recovered from the users of those assets. The policy of the CAA of increasing the regulated asset base to pay for preliminary expenditure, or initial G2 expenditure, many years before G2 will be made available to users, does not meet the reasonable interests of airline users. This policy encourages the BAA's profligate expenditure, and gold-plating.

6.  THE G2 PROPOSALS

  6.1  The G2 proposal which was published in December by BAA provides further proof the regulatory failure and indeed capture of the CAA by the BAA monopoly:

    —  Including railway access, the total cost of these proposals equates to some £4 billion to provide a second runway and second terminal at Stansted. These costs are profligate and are more than four times the 2005 inflation-adjusted cost of the second runway and second terminal built by Manchester Airport in the mid 1990s. They are also more than four times the cost of a proposed second runway and second terminal at Dublin Airport.

    —  These proposals for G2 have been produced by, assessed by, verified by and confirmed as reasonable by the BAA monopoly without any independent verification or scrutiny. Users have been given no input into either the location, design, or costing of these facilities.

    —  These proposals include expenditure over £1 billion on roads and railways, which should be separately financed by the users of those roads and railways and not by airline users at Stansted.

    —  These proposals will give rise to a doubling of airport charges at Stansted, despite the BAA's own confirmation that Stansted is and will for many years be dependent upon the low fares airlines.

    —  The proposals have been gold plated to the maximum possible extent by virtue of designing runways capable of accommodating the A380, which will have no commercial use at Stansted, and by insisting on excessive runway separation which is neither necessary nor used at either Heathrow or Manchester airports.

7.  LACK OF ACCOUNTABILITY

  7.1  There is no effective mechanism for complaining about the BAA. A complaint made to the CAA under Section 41 of the Airports Act is a totally fruitless exercise because of the CAA's capture by the BAA. The CAA's response to Ryanair at all times during the present quinquennium is that there is no point in complaining about individual costs or waste at Stansted, because the BAA is under recovering against its regulatory cap. The CAA therefore ignores issues such as the abusive operation of the fuel levy at Stansted, where BAA Stansted has already recovered more than three times the total capital cost of the fuel farm by overcharging airline users.

  7.2  Any complaint to the CAA under Section 41 is of extremely limited scope and effect (even in the very unlikely event that the complaint is successful, given the CAA' s failure to regulate the BAA), therefore forcing any complainant airline to initiate High Court proceedings in order to prevent abuse by the BAA; a course of action which was taken by Ryanair in the case of the fuel levy at Stansted, and which has resulted in the fuel levy being cut in half, not just for Ryanair, but for all other airlines at Stansted.

  7.3  The CAA itself is not accountable. There is no right of appeal against the CAA's decision on economic regulation. There is no regulation of the CAA, nor is there any complaints procedure in relation to the CAA. The CAA knows that it faces no real threat of legal sanction in relation to its actions. This is why it has become complacent, and totally ineffective in regulating the CAA. Ryanair believes that this is why the CAA continues to prioritise the profitability of the BAA airport monopoly over the reasonable interests of the airline users.

8.  BAA'S VIEW OF THE CAA'S REGULATION REGIME

  8.1  A review of investment analyst research on the BAA plc provides consistent feedback to the financial markets and to BAA shareholders, that the BAA operates in a benign regulatory environment in the UK. These research reports whilst independent are heavily drawn from company briefings, and are usually either seen or vetted in advance by the subject company to ensure that there are no errors or misstatements of fact. The consistency of the references to a benign regulatory environment" which runs through these analyst reports is clear evidence that this is the BAA's own interpretation of the CAA's regulatory regime. Recent comments in analyst reports on the BAA plc highlight the attractiveness of the BAA as an investment, because it has a virtual monopoly on airport capacity in the London area". There is a guaranteed return on asset base over a five year period affording tremendous long-term visibility on profits". The current benign regulatory period is set to continue beyond 2008". The long-term investment case relies on the company securing a return on its assets higher than its true cost of capital and growing its assets in real terms" BAA did its shareholders a great service by securing such a high return on the RAB in this regulatory period". Guaranteeing a return on investments is encouraging gold-plating which hurts passengers and airlines in the pocket in the longer term."

9.  CONCLUSION

  9.1  The CAA has consistently and utterly failed to regulate what is a highly damaging, abusive airport monopoly. The BAA has consistently ignored the reasonable interests of users and expends excessive amounts of capital because it receives an inflated and unjustified return on that capital from a weak and ineffective regulator.

  9.2  The CAA's complete failure to force the BAA to consult with users on their requirements for either preliminary expenditure, or on the actual expenditure for G2 in Stansted demonstrates the abject failure of the CAA to properly regulate the BAA to meet the reasonable requirements of users. The BAA's proposals to spend over £4 billion on a second runway and second terminal at Stansted are more than four times the comparable cost of providing these facilities at Manchester Airport (indexed up to current prices) or the proposed cost of providing these facilities at Dublin Airport over the same period. This profligacy again demonstrates the total failure of the CAA to regulate BAA Stansted either to meet the reasonable interests of users, or to develop efficient airport facilities.

  9.3  Ryanair believes that the regulation of a private monopoly is no substitute for open competition. Ryanair has long advocated that the BAA airport monopoly should be broken up. It is contrary to the interests of the development of efficient air transport services to the South East of England to have one privately owned monopoly to control airport access to London and the South East. The break up of the BAA would allow Stansted, Gatwick and Heathrow to compete against each other to attract new airlines and new services to London and this competition would result in lower costs, and more efficient facilities, because competition would drive down costs, would improve efficiency and would enhance the delivery of services for users.

  9.4  Failing this, the UK Government and the CAA should require/compel any proposals for the development of a second runway and second terminal at Stansted to be put out to competitive tender. The award of the ownership and development of the second runway and second terminal at Stansted should go to that operator which in open competition provides the best package of facilities, consistent with providing efficiency, safety, environmental compliance, and lowest cost to airport users. The failure of the CAA over the past decade to encourage or promote competition, or to replicate the effects of competition at any of the three BAA airports, is just the latest in a long line of regulatory failures by the CAA.

  Finally, Ryanair wishes to sincerely thank the Transport Committee for the opportunity to air these grievances, and respectfully requests the Committee to call for the break-up of the BAA monopoly, or for the introduction of real and lasting competition for the provision of airport services in London and the South East. Alternatively, the Committee must insist on real and meaningful changes in the way the CAA regulates the BAA airport monopoly and the way in which users' concerns, complaints and grievances may be addressed by an independent body or forum which will regulate the performance of the CAA itself.

18 January 2006




 
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