Select Committee on Transport Minutes of Evidence

Supplementary memorandum submitted by the Department for Transport

  When I appeared in front of the Committee on 1 February, I promised you notes on a number of issues. Please find these below.


  1.  This note describes various actions the Department for Transport (DfT) has taken over the last twelve months, working closely with the Civil Aviation Authority (CAA), to seek to improve the performance of the European Aviation Safety Agency (EASA). They should be seen against the backdrop of several representations and statements made by the Secretary of State for Transport about his concerns over EASA, and his reluctance to agree to extend the scope of the Agency's activities until it is discharging its existing functions satisfactorily. The note concludes with an account of the meeting on 9 February 2006 between the Chairman of the CAA, the Director of Aviation in DfT, and the Director of Aviation in the Transport and Energy Directorate of the European Commission.

Manpower planning

  2.  In February 2005, prompted by an earlier paper from the UK, the EASA Management Board asked the UK Member (who is Deputy Chair of the Board) to convene a small group of high-level technical experts to review the manpower planning strategy of the Agency. The Group was co-chaired by the UK member and the Certification Director of the Agency.

  3.  The Management Board had identified two major concerns:

    (a)  was there a danger that the implementation of the Agency's staffing concerns could result in the system as a whole running short of skilled resource? and

    (b)  were the Agency's plans to locate all its certification staff in Cologne practicable and efficient?

  4.  After a series of meetings the UK Member reported his personal conclusions and recommendations to the Management Board in June 2005. His main conclusions were as follows:

    (a)  there was no reason to question the fundamentals of the Agency's manpower strategy, or its policy objective of internalising responsibility for certification tasks; but

    (b)  the Agency needed to create and maintain a comprehensive risk register relating to manpower issues, and make regular reports to the Board; and

    (c)  the Agency should seriously consider locating some of its staff away from Cologne, to carry out a range of so-called proximity services" which could be more efficiently and effectively provided at a local level. This could have the additional benefit of retaining some experts in the system who would otherwise be lost for reluctance to move to Cologne.

  5.  These recommendations were accepted in full by the Management Board, which requested the Agency to conduct bilateral discussions with all the major aviation Member States about the optimal range of proximity activities in that country.

  6.  Since then the Group has continued to meet, to monitor the risk register and to make regular reports to the Board. The budgetary problems of the Agency have created a range of new risks which can only be managed effectively if the budgetary issues are resolved. But apart from that, the Group has been satisfied that the Agency's manpower strategy is on course, and that there is no reason to believe that there will not be a sufficient number of practitioners in the system. It is harder to make an objective judgement on whether the overall quality of the certification workforce is being maintained.

  7.  Progress on identifying proximity activities has been slower than we would have wished. There seems to be some reluctance on the part of the Agency to move this initiative forward speedily, and we are continuing to try to inject more momentum into the programme of bilateral discussions agreed by the Board.

Effectiveness of the Management Board

  8.  The Management Board consists of 26 Members, one from each EU Member State, and one from the Commission. They are joined on an associated basis by representatives from non-EU EEA countries. With many countries also fielding alternates and/or technical advisors the numbers at meetings can approach 50. This is too large a group for detailed debate and strategic decision-making. Furthermore, the frequency of meetings (quarterly) makes it difficult for most Board Members to maintain any sense of continuity in their interaction with the Agency, and results in agendas consisting largely of lengthy, process-driven documents for decision. There has been limited scope for more strategic policy-based discussion.

  9.  The Chair and Deputy Chair (from Germany and the UK respectively) proposed in September 2005 that the Board should establish a small Steering Committee to oversee the strategic development of the Agency. They suggested the Committee would interpret the Agency's strategic objectives; ensure consistency between objectives, planning assumptions, work programme, budget and staffing policy; advise on priorities; evaluate the Agency's relations with stakeholders; and monitor the performance of the Agency's senior management. It would also prepare advice for the main Board, which—it was emphasised—would retain ultimate authority.

  10.  The Board agreed the diagnosis of the problem, but there was significant resistance to the idea of creating a smaller, inner group, for fear that countries not directly represented would find their interests overridden by those that were (this was of particular concern to many smaller States). Consequently the recommendations in the paper were rejected, although it was agreed to take steps to minimise the shortcomings identified, mainly through better, more timely preparation of agendas and meeting documents. The only Board meeting to take place since that discussion was a more productive event than previous occasions.

  11.  The proposal to create a Steering Committee chimes with one element of the Commission's proposal to extend the scope of EASA, in which the Commission proposes the establishment of an executive sub-Committee of the main Board. Whilst adoption of this proposal is not imminent, it suggests that there may be scope for achieving further progress in the meantime, if only piecemeal. This issue is likely to be addressed in the external review of the Agency, due to be commissioned by the Board before September 2006 as required under the founding Regulation.

Management and Financial Procedures in Certification Activities

  12.  The budgetary difficulties EASA found itself in at the end of 2005, with early revenues from the Fees and Charges system introduced in June 2005 running well short of estimates, prompted a lengthy and purposeful debate at the Management Board in December. The Board decided, again on an initial proposal from the UK, to commission consultants to make an urgent study of the Agency's management and financial procedures, and to report back at the March 2006 meeting.

  13.  After a rapid competitive tendering process the work was commissioned from Deloitte, and is now well under way. The UK Member is one of three Management Board representatives on the Steering Committee. Deloitte are focusing on four main areas of study:

    (a)  creating a model by which the Agency can predict the volume of certification demand;

    (b)  identifying possible simplifications to the overly-bureaucratic procedures for commissioning, executing and charging for certification activities;

    (c)  advising how the Agency's various IT systems can be made more coherent and thereby provide better management information; and

    (d)  recommending changes to the Fees and Charges Regulation and its accompanying tariffs.

  14.  Deloitte have made a purposeful start to their work, and we look forward to seeing their conclusions in March. This is an essential stage in the process of establishing a meaningful Agency budget for the remainder of 2006 and beyond.

Methods of Regulation: Airworthiness Directives

  15.  The UK Member of the Board has consistently pressed the Agency to put in place a comprehensive system for the distribution to the industry of airworthiness directives". These are notices which regulatory authorities issue to operators and owners or aircraft concerning urgent actions to take in the event of a serious aircraft safety defect being discovered in an aircraft type.

  16.  The subject was first discussed at a Board meeting in September 2004. The Board asked the Agency to put in place a system which goes beyond a narrow interpretation of the Agency's legal responsibilities and meets the expectations of Member States, in relation to fulfilment of their legal obligations, and the needs of industry. The UK Board Member sought progress reports at all subsequent Board meetings. In the light of unsatisfactory progress, he wrote to the Certification Director of the Agency in August 2005, enclosing a CAA paper setting out in detail the system which needed to be put in place.

  17.  By December 2005 the Agency had put in place procedures which go some way to meeting requirements but much remains to be done. The UK Member will take this up again at the next Board meeting in March.

Meeting on 9 February 2006

  18.  On 9 February the Chairman of the CAA, the Director of Aviation in DfT, and the UK Member of the Management Board met Daniel Calleja, Director of Aviation in the Transport and Energy Directorate of the European Commission, to discuss their concerns about EASA. The Commission's Member of the Management Board Zoltan Kazatsay, Deputy Director of the Directorate, joined the meeting later.

  19.  The UK delegation emphasised its support for the concept of EASA, and the key importance to the UK (and other EU Member States) of how well the Agency performs its functions. The staff of the Agency had faced a daunting task and much has been achieved, but significant challenges remain. The UK side then went through in detail a number of areas in which it considers improvements are needed. The Commission confirmed that it took the Agency's difficulties very seriously, and recognised how urgent it was for all parties concerned to address them.

  20.  There was agreement between the UK and the Commission that the key to improvement lies in strengthening the partnership between EASA and the National Aviation Authorities, enabling the Agency to draw on as wide a range of specialist assistance and support as possible. For a number of reasons relationships between the Agency and National Authorities have not always run smoothly, but it was now time for them to work more closely together.

  21.  The Management Board next meets on 16 March, when it will receive the Deloitte report (see above). This will be an opportunity to have a first discussion of the way ahead, but it will probably be necessary for the Board to re-convene in the near future to continue that debate. The UK side presented some initial ideas on how to strengthen EASA/NAA co-operation and partnership on the ground, which the Commission welcomed and undertook to study further.


  The objective of CAA's investment in safety research is to increase the effectiveness of SRG's regulations and regulatory processes in delivering safety improvements, including the provision of best practice" advice to UK industry. The Government considers that this is a matter which SRG should decide in consultation with its stakeholders.

  Funding is through SRG charges schemes. CAA has long standing mechanisms in place to discuss with industry how best to focus its research budget so as to be cost-effective: that will depend to a large extent on whether the outputs can be translated into changes in SRG's regulations and regulatory processes. As regulatory competence has passed to the Community in a number of areas the CAA has agreed with industry to reduce its investment in those areas where it would not be able to deliver the outcome of the research. The CAA has passed to the European Aviation Safety Agency (the Agency") selected information for consideration by the Agency.

  Regulation (EC) No 1592/2002 provides that the Agency may develop and finance research in so far as it strictly relates to the improvement of activities in its field of competence, without prejudice to Community law" and it shall coordinate its research and development activities with those of the Commission and the Member States so as to ensure that policies and actions are mutually consistent". Its remit is thus, like the CAA's, related to improving the effectiveness of its regulatory activities in delivering safety improvements.

  The Agency has recently begun to develop a European Safety Strategy Initiative which will, in due course, lead to the funding and coordination of research projects. The Agency will need to consider its own input where it can add most value to the totality of research effort in Europe and internationally. Through its representative on the EASA Management Board the Government will monitor closely the development of the Agency's research activities.

  Whilst it is regrettable that the Agency has not yet been able to develop a research programme it is not surprising that during its build-up phase it has focused its resources—both financial and human—on its front-line certification activities. This is where safety is most directly assured.

(iii)   NOTE ON 6% RETURN ON CAPITAL EMPLOYED (ROCE): EXPLANATION OF RATE, POSITION ON ASSET TRANSFERS, AND WHEN DFT LAST REVIEWED THE RATEThe CAA does not have monies voted to it by Parliament but must recover its operating costs, plus a rate of return set by the Government, through charges on the aviation industry for its regulatory services and on users of UK airspace through the EUROCONTROL en route charges system. The CAA will continue to be funded by those whom it regulates.

  The CAA's regulatory sector, comprising Safety Regulation, Economic Regulation and Consumer Protection, is normally required to achieve the higher of either an average annual 6% rate of return on the average current cost of capital employed, or break-even after charging interest and tax. In a normal year, the monetary value of the rate of return is in the order of £1.8 million, compared to CAA turnover of approximately £81 million.

  The Government believes 6% is a reasonable rate of return for the risks the CAA faces. Although there have been no asset transfers to the Authority, the CAA has been required to borrow funds over that period, most notably to build Aviation House Gatwick, which houses the Safety Regulation Group. The net assets of the CAA as at 31 March 2005 were £28,979k as valued on a current cost basis. The CAA continues to face a pension liability, property commitments for its London lease and the potential for professional indemnity and third party liabilities. The ROCE is not a 6% profit; it is more truly recognition of the costs of those capital assets invested in the business. The rate was formally reviewed in 1997-98, the result being a move from setting an 8% rate of return on a three year rolling average; to the current position of 6% rate of return taking each year on a stand alone basis.

  The 6% return on capital employed is used to pay National Loans Fund (NLF) interest, NLF loan repayments, and for the funding of minor capital expenditure and taxation. The return is also used to fund the cost of transition from the UK basis of regulation to the EASA model during EASA's transition period to full operation from 2005-06 until 2008-09. HM Treasury have agreed this additional temporary use of the ROCE funds.

  It is true that the aviation industry would prefer the rate of return to be reduced, possibly closer to 3.5% on the basis that this would be consistent with other Government bodies/agencies. The Department, in conjunction with HMT, will consider carefully the views of the aviation industry in this respect.

  Once the final Rule emerges we expect that the Transport Council will be invited to make a final assessment of whether a Stage One deal should be agreed.


  The Secretary of State's letter of 30 November to Gwyneth Dunwoody reported that considerable progress had been made at the resumed EU-US aviation negotiations in October and November and that there was accordingly a prospect that an acceptable Stage One deal could be struck during 2006.

  Provisional agreement was reached on a wide range of hitherto difficult issues including application of competition law, state aid, security, safety, the environment, wet-leasing and handling of code-share applications. However, the Transport Council in December concluded that an assessment of the acceptability of the overall deal should be postponed pending the outcome of the US Government's proposals for amending the rules on foreign control of US airlines.

  Reform of US rules on airline ownership and control has taken centre stage as an alternative route to gaining access to the US domestic market, since it is clear that Congressional action to grant cabotage rights for EU carriers is not a realistic possibility in the near future. Indeed, changing airline control rules could have advantages compared to seeking cabotage rights, since significant relaxation of these rules in the trans-Atlantic market would be likely to have far-reaching consequences, increasing the pressure to dismantle anachronistic restrictions on airline ownership and control worldwide, thereby helping to bring the global airline industry into line with other sectors.

  As the Committee will be aware, the US Administration has concluded that there is no early prospect of persuading Congress to change the law on ownership and control and has accordingly initiated a rule-making process to change the criteria it uses to judge where control of an airline resides.

  On the face of it, the proposed new approach appears to be an attempt to make progress within existing legal constraints. A consensus has emerged on the European side, however, that the proposal would need strengthening to express the rights of foreign investors more positively and to define more clearly and narrow the scope of the areas to remain under US control: safety, security, participation in the Civil Reserve Air Fleet programme, and corporate organisational documentation.

  We have been scrutinising the original proposal with the assistance of US lawyers, and the Commission and a number of industry interests are doing likewise. However we will not be able to conclude our evaluation until the US publishes its final Rule. Despite receiving a very large number of responses to its proposals, the US Department for Transportation appears to envisage late March or early April as a realistic timetable for publication of the final rule.

15 February 2006

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