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.
(i) EASA: ACTIONS
ON 9 FEBRUARY
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.
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
(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, whichit was emphasisedwould retain ultimate
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
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
(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.
(ii) NOTE ON
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
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 resourcesboth
financial and humanon its front-line certification activities.
This is where safety is most directly assured.
(iii) NOTE ON
6% RETURN ON
(ROCE): EXPLANATION OF
WHEN DFT LAST
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
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
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.
(iv) NOTE ON
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