Select Committee on Transport Minutes of Evidence


Examination of Witnesses (Questions 440-459)

MR KEITH MANS, PROFESSOR CALLUM THOMAS, MR DAVID STARKIE AND DR GRAHAM BRAITHWAITE

25 JANUARY 2006

  Q440  Clive Efford: In terms of the employees of the CAA, we have had witnesses who have been concerned about the scope and the abilities of those employees, and you yourself have just made reference to one example where they were not able to inspect a new piece of technology. Do you think there are sufficient skills and knowledge within the staff of the CAA?

  Dr Braithwaite: It is an answer in two parts. First of all, the CAA does some things extremely well, and around the world the CAA is renowned for its quality of regulation and its commitment to safety and it has done some spectacularly good things, but we cannot be complacent on that. There are other areas where people are deciding that the future is not with the CAA in Gatwick and the future is not in Cologne or in aviation. They are leaving and we are losing some of the expertise that the CAA has.

  Q441  Clive Efford: More specifically, do you feel that there are skills shortages in the Safety Regulation Group?

  Dr Braithwaite: I could not give you a specific example, no.

  Q442  Clive Efford: Right, do you think that there is anything the CAA could do to improve the attractiveness of being employed by the CAA, people's career paths, et cetera?

  Dr Braithwaite: I think the CAA and perhaps at even higher levels than that needs to have a clearer view of its future and just how quickly things are going to disappear across to EASA, yes.

  Q443  Clive Efford: Are you aware of any areas of safety research that have been cut back by the CAA?

  Dr Braithwaite: I am certainly aware that their research budget is shrinking fast and meanwhile the EASA research budget has not been announced. It has been talked about as a wish-list but we are certainly scaling back quite rapidly in this country.

  Q444  Clive Efford: Sorry, just to be clear, the impact on EASA of cutting back here?

  Dr Braithwaite: EASA has not, as far as I know, published a research budget or a research strategy at the moment although there is talk of a wish-list that it would like to publish. Meanwhile the UK's capability and funding for research is shrinking at the same time.

  Q445  Clive Efford: Right. Do you think that the CAA has sufficient powers in order to inspect aircraft that are registered abroad?

  Dr Braithwaite: To the best of my knowledge, yes.

  Q446  Clive Efford: And you think it fulfils that role in full?

  Dr Braithwaite: I think that is getting beyond my knowledge.

  Q447  Clive Efford: Just one last one, Sir Roy suggested to us that Europe should move towards the American system of reviewing the regulatory regimes in all countries that have aircraft flying into the United States. Do you think this would be the best way to ensure safety on incoming foreign-registered aircraft?

  Dr Braithwaite: I think it is fraught with all sorts of political issues if we start to become a little bit too suspicious of our neighbours across Europe and across the world. It is not an easy task to do.

  Chairman: Heaven forefend that we should be suspicious of our neighbours, Dr Braithwaite! Mr Stringer?

  Q448  Graham Stringer: Mr Starkie, do we need economic regulation of the airports that are economically regulated at all?

  Mr Starkie: No, I do not think so. We have had economic regulation now for nearly 20 years. During that period of time the aviation market has got very much more competitive, including in the airport industry itself, and I think as a consequence the time has certainly come to review whether we need to subject Manchester and Stansted, in particular, to this. They have designated airports under the Act, which means they are subject to a price cap, and I think the time has come really to review that situation, particularly in relation to those two airports.

  Q449  Graham Stringer: Against what criteria? I agree with you that there is more competition from Schiphol and Liverpool and Birmingham and Manchester and Stansted competing with other airports, so one could say that generally, but how would you quantify that? What criteria would you use to say that now we have reached a point where competition is really there and it is a good control on prices?

  Mr Starkie: Well, the CAA at the moment are carrying out a competition review, you might say. They are looking at market areas for different airports and seeing to what extent these overlap. I think there is evidence in the pricing strategies of different airports that they are now much more competitive. As you mentioned, Liverpool is quite a ferocious competitor of Manchester these days, and I found it interesting at the last price cap review that Manchester set itself a very challenging target of reducing its operating costs by, I think the figure was, 7and a half % per annum, but it seemed willing to do this and to go along with the regulator in this regard, and I think it was willing to do that because of competition from Liverpool and Leeds and so on and it knew that, in the absence of economic regulation, it really needed to get its cost base down, so these various bits of evidence I think lead me suggest that we do not really need it. Manchester is also a different animal from the other three, the other three being Stansted, Gatwick and Heathrow, because of course it is owned by local governments, and it is arguable in those circumstances whether we should be subjecting Manchester in this case to price control. In many other instances we would expect the local governments with trading organisations to still act in the public interest and I would be expecting that of Manchester.

  Q450  Graham Stringer: You mention Stansted which of course is in the private sector and owned by BAA. Do you support the idea of independent regulation for the three London airports—Stansted, Heathrow and Gatwick—or, asking a tougher question, do you believe that BAA should be broken up completely into different commercial units?

  Mr Starkie: I am not so sure that is a tough question actually, but to take the first—

  Q451  Graham Stringer: It is for BAA, maybe not for you Mr Starkie!

  Mr Starkie: Just for BAA. To take your point, I think the answer is, yes, there should be some—well, if I could go back one step, the CAA have decided now to subject the London airports to what it calls stand alone" regulation. Previously they were regulated as a combined system which in effect allowed Heathrow to cross-subsidise Stansted. It was not in a direct sense but indirectly the systems approach allowed for that. The CAA have set the systems approach aside and are now approaching it on a stand-alone basis. I totally agree with that because I think the systems approach led to a lot of problems for other airports, particularly Luton, which suffered as a consequence from the competitive effects of Stansted being cross-subsidised, particularly in the past. I think stand-alone regulation is very important indeed. In terms of breaking up BAA, I have long been an advocate of that. I was 20 years ago when the whole system was set up and I have seen nothing to change my views on it. At the time that BAA was privatised in its entirety, the Secretary of State, Nicholas Ridley at that time, said it was a very fine decision as to whether they should have been separated, and I think now the time has come to review that issue again.

  Q452  Graham Stringer: The airlines complain quite a lot that regulation is not tough enough, particularly around Stansted, but generally. Do you think their criticism is unfair? Who do you see as the customer of the airports; is it the airlines or is it the passenger because you get a different outcome with the regulation in terms of price impact on airlines than you do on passengers?

  Mr Starkie: Are you referring to the Stansted airlines?

  Q453  Graham Stringer: Well, I mention Stansted because there has been quite a lot of criticism, but Stansted and more generally?

  Mr Starkie: I think certainly there have been problems at Stansted in terms of the BAA reaching a view with the airlines there on a forward investment programme. I think to a very large extent that is a consequence of two very different cultures. Of course, the BAA really came out of the nationalised industry, and my view is that it still has a great deal of that culture about it, whilst the low-cost airlines using Stansted are driven by a totally different commercial culture, and therefore I would have anticipated that it would be very difficult for the Stansted airlines to agree with the BAA on a forward investment programme. I think that is less true of the airlines using Heathrow and less true of British Airways which is the principal airline at Heathrow. The problem at Heathrow is the issue of trying to expand runway capacity.

  Q454  Graham Stringer: Do you believe that the constructive engagement process, which is now the precursor to decisions on economic regulation, is a good thing or are you critical of it?

  Mr Starkie: On the whole I think it is a good thing. I anticipated that there would be difficulties with it because the airlines are not necessarily skilled in airport matters. They do not necessarily have the resources that they would need to fully engage with the BAA. Again, I would have expected that to be less the case with large companies like British Airways. On the other hand, the low-cost airlines will have problems, and I anticipated those problems, but nevertheless I think it is a desirable direction to move in and it is the sort of approach adopted in other competitive industries.

  Q455  Graham Stringer: You think that is an improvement but you would prefer the regulation to disappear?

  Mr Starkie: The regulation not to disappear entirely but to stand more in the background and be more of, if you like, a threat to the airports that if they did abuse their dominance (if they do have dominance) then a stiffer form of economic regulation will come back into the picture, so I think there are opportunities for withdrawing.

  Q456  Graham Stringer: I do not think you answered my point, unless I missed it, about who is the real customer, is it the airlines or is it the passengers?

  Mr Starkie: My own view is that the real customer for the airport is in some ways the airlines.

  Q457  Chairman: Not the passenger; the airlines?

  Mr Starkie: Not the passenger directly. My reasoning on that would be that the airline market is very competitive in many sectors (although not totally because there are some flights to some parts of the world which are not competitive) and as a consequence the airlines will tend themselves to reflect what the passenger wants and will convey that on to the airport, but I see the airlines being the principal customer of the airport.

  Q458  Graham Stringer: One final question if I may. Uniquely amongst regulators there is a referral to the Competition Commission after the CAA have looked at economic regulation. Is that a useful device or is it double regulation and expensive and bureaucratic? Is it necessary?

  Mr Starkie: I do not think it is done in the right way. The airport industry in terms of its economic regulation differs from the other regulated utilities because the Competition Commission only comes into the picture with the other regulated utilities in terms of an appeal. That is to say, if the regulated industries cannot agree with their regulator, at the end of the day they can go to the Commission on appeal. With the airports the approach is very different because the Competition Commission is drawn into the picture almost from the very start. There is a mandatory reference to the Competition Commission and to my mind this does lead to duplication. It can lead and did lead last time round to a lot of conflict between, if you like, the two regulators, and that has quite a high cost to the industry, I believe. Regulatory uncertainty is very undesirable; it pushes up the cost of capital. Although the decision rests at the end of the day with the CAA and there is no appeal to the Competition Commission after that final decision, nevertheless the CAA acts very cautiously in circumstances where it is in conflict with the Competition Commission, and generally I find it leads to a muddying of the waters. It would be very desirable if they reverted to the standard model.

  Q459  Chairman: I want to release you quite soon, gentlemen, but I am just going to ask one thing of Dr Braithwaite really. You have given us a lot of detailed evidence. Do you think it is true that the CAA's approach to flight training means that there has been a huge transfer to overseas providers?

  Dr Braithwaite: No, I do not think that is solely the result of the CAA. There are some that will go overseas because of costs and so on but there are other more practical reasons such as the strength of the pound and the weakness of the dollar and where you can fly in rather better weather so it is not a simple picture of regulation.


 
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