Select Committee on Transport Written Evidence


Memorandum submitted by the Airlines Consultative Committee at Stansted Airport (The Stansted ACC")


  This Memorandum is submitted by the Stansted ACC. Its purpose is specifically to address issues concerning economic regulation by the CAA. In addition to the functions set out in the Note for Editors" in the Transport Committee Press Notice, the Stansted ACC notes that Section 3(d) of the Civil Aviation Act 1982 provides that the functions of the CAA also include any other functions conferred on it by any other enactment. This includes the functions and objectives conferred by the Airports Act 1986 (the Airports Act"). Accordingly, this Memorandum includes reference to the functions and objectives contained in the Airports Act, and in particular to Part 3 of the Airports Act concerning the economic regulation of airports.


  2.1  Stansted ACC is concerned about the CAA's remit concerning economic regulation, and in particular the economic regulation of the BAA group of companies. The BAA group of companies enjoy a position of dominance that is, or is approaching, a monopoly, not only in relation to the ownership and operation of the major London airports, but also in relation to various infrastructure and facilities within those airports. Indeed, the Report of the Monopolies and Mergers Commission dated July 1991 stated at paragraph 2.11:

    The BAA Airports are clearly in a dominant position, particularly in the London area, where alternatives to BAA are limited."

  2.2  In addition, the House of Commons Transport Committee sixth Report of Session 2002-03 stated in its findings and recommendations at paragraph 117:

    We believe that the dominant position of BAA means the ownership structure of United Kingdoms airports is deeply flawed".

  2.3  The CAA has failed to address concerns of users of Stansted Airport as to BAA's monopoly position and abuses of that position by BAA. This failure has been caused in part by the inadequacies of the statutory regime, and in part by the CAA's unwillingness to regulate BAA properly.

  2.4  Competition at London's airports and effective regulation of the BAA is hampered by the current statutory regime. For example, under the Airports Act, the CAA is the body which ordinarily first considers complaints relating to abuse of a dominant position (either through the procedure in Section 41 of the Airports Act or in the context of the quinquennial Airports Review Process). In practical terms, it is only in circumstances where the CAA is considering imposing conditions in relation to alleged abuses that the matter will be referred to the Competition Commission. There is no procedure or mechanism by which complaints can be considered and determined on an expedited basis. Unless they commence proceedings in the High Court, airport users are left in the position where issues arising out of BAA's monopoly position are not adequately considered or resolved on a timely basis, if at all. For example, a Stansted airline was forced to initiate High Court Proceedings in order to force BAA to reduce an excessive fuel levy that applied to users of Stansted Airport, and which constituted an abuse of BAA's dominant position.

  2.5  Further, a major obstacle to the effective regulation of BAA so as to prevent abuses of its dominance is a lack of willingness on the part of the CAA to deal with such abuses. The historical relationship between BAA and the CAA leads to the CAA having a bias in favour of BAA to the detriment of industry users including airlines and passengers. This is evidenced by the apparent commitment" given by the CAA to BAA in relation to preliminary expenditure incurred by BAA for the Stansted G2 Project (G2") (see paragraph 5.2 below).

  2.6  The CAA is not proactive in relation to, or on top of recent commercial developments in the aviation industry (and in particular, the low fares market). It does not understand the economic model which has brought about such significant growth at Stansted Airport.

  2.7  In light of the fact that there are inadequate structures in place to curb BAA's dominant position, and given that the CAA is unwilling or unable to regulate BAA to ensure that abuses do not occur, the Government needs to legislate to ensure that effective competition is introduced into the London Airports market and to ensure that the CAA is required to regulate BAA more effectively.

  2.8  In the circumstances, the Transport Committee should make recommendations: (1) to curb the dominant position of BAA by breaking up the BAA monopoly, thereby opening up competition in the London market; or (2) to require the CAA to take a more proactive approach to regulating the BAA.


  3.1  The regulatory framework is not effective in ensuring that the BAA Airports are effectively regulated. The process to date has failed to: (1) open up competition; and (2) ensure that BAA's dominant position is not abused.

  3.2  The annual five-year review process is dominated by BAA. BAA throws substantial personnel and resources into the review processes. Other interested parties in the review process, for example airport users including airlines and passengers, simply do not have the resources to counter each and every submission and argument put forward at enormous expense by BAA in its effort to ensure a favourable regulatory outcome. This, together with the issues referred to above arising out of the historical relationship between BAA and the CAA, results in a situation where the CAA is effectively in a state of regulatory capture.

  3.3  The time taken in relation to each regulatory review is far too great and resource-intensive. This is driven by, and tends to favour, BAA (for the reasons above).

  3.4  The CAA is too narrowly focused on economic theory (and indeed outdated theories), rather than on understanding the industry and the realities of operating an airline business in a competitive market place. Indeed, there is an apparent lack of expertise and experience of the modern aviation business within the CAA. As an example, the CAA in the prior review stated on several occasions that it was not concerned with Stansted as BAA had not been charging up to the permitted cap. However, this only demonstrated how out of touch the CAA's regulatory regime in Stansted was with commercial reality. The huge growth at Stansted only occurred as a consequence of the low airport charges, which were substantially below the regulatory cap. BAA's recent public statements that it will begin pricing up to the cap is a further indication of their dominance in the London market now that Stansted Airport has essentially reached capacity at peak times. The CAA has failed to regulate Stansted in the past, allowing it to recklessly increase its regulated asset base, to the detriment of users.

  3.5  There needs to be more effective monitoring by the CAA between airport reviews to ensure that there is compliance with the regulatory settlement and to enable users' concerns to be properly addressed. Projects that may not have been envisaged at the time of a previous airport review may well be under way, resulting in potentially large investment (hence a possible increase in the regulated asset base) prior to the next airport review. This results in the inconsistent treatment of such expenditure. Moreover, interim decisions are being made which are subsequently unlikely to be reviewed or changed, regardless of their merits.

  3.6  The regulatory framework does not encourage competition. Moreover, the Competition Commission is unlikely to become involved in specific issues of abuse, save in respect of issues raised in the review process once every five years.

  3.7  The regulatory process, as set out in the CAA's proposals for constructive engagement", is meant to be underpinned by a process of consultation between BAA and airport users. However, the CAA has expressly stated that the consultation process does not necessitate agreement between BAA and airport users. Moreover, BAA has consistently refused to provide sufficient information to enable adequate and informed consultation with users to take place. Indeed, in its 2003 decision on BAA price controls, the CAA stated: The CAA agrees that BAA's disclosure of information to, and consultation with, users should be improved." There has been no improvement. Despite this, the CAA refuses to intervene, and chooses instead to act only as an observer".

  3.8  The CAA's proposals concerning constructive engagement" are bound to fail in circumstances where BAA is under no threat of competition being introduced and is free from any form of regulation designed to ensure that it does not abuse its dominant position, and where BAA is able to incur substantial expenditure without the agreement of users, but for which users will become liable. Annex 4 to the CAA's 2003 decision on BAA price controls stated that there should be enhanced disclosure around a central business plan". However, BAA has consistently failed to provide any form of business plan or justification for the G1 (expansion to 35 million passengers per annum at Stansted) or G2 projects and has stonewalled the constructive engagement process. The CAA has failed to intervene stating that it is for the airport and the airlines" to reach agreement or not. However, if it were possible for the airport and the airlines to reach agreement (ie, if they had equivalent bargaining power or BAA was subject to competition), then there would be no need for a regulator.


  4.1  There are aspects of the CAA's performance in relation to its statutory objectives (with regard to economic regulation) which the Stansted ACC considers to be highly inadequate.

  4.2  Primarily due to the advent of the low fares carriers, the users of air transportation in the United Kingdom now enjoy low fares, punctuality and safe service from a range of competing airlines. However, the success of low fares carriers and the remarkable growth at Stansted Airport have been achieved despite, rather than as a result of CAA regulation. This growth is under serious threat because of the CAA's failure to regulate BAA. Although BAA has stated that it only has 50% confidence" in its traffic forecast for Stansted and that Stansted traffic was high risk" compared to Heathrow and Gatwick traffic, it is nevertheless proposing to spend £4 billion at Stansted, which will approximately quadruple existing costs to users. This increase will destroy any prospect for growth of low fares airlines at Stansted.

  4.3  It is clear that the CAA has fundamentally misunderstood and misconstrued its duties and responsibilities under Section 39 of the Airports Act. In particular, the CAA has given too much weight to its responsibilities to promote the profitable operation of airports and to encourage investment, to the detriment of its duties and responsibilities to further the reasonable interests of users. Moreover, the CAA has failed to ensure that investment at airports is reasonable, effective and efficient. As a result of this failure by the CAA, the regulated asset base at Stansted Airport is spiralling upwards, unchecked and uncontrolled. The result will be unnecessary increases to airport charges. Such increased charges will result in higher fares for passengers, thereby undermining, and indeed jeopardising, the forecasted growth upon which investment was predicated in the first place.

  4.4  The Stansted ACC's concerns regarding the CAA's failure to comply with its statutory obligations and its failure to comply with the principles of the Better Regulation Task Force (transparency, consistency, accountability and proportionality) are illustrated by the CAA's current consultation in relation to preliminary expenditure on G2. Specific reference is made to this project below at Section 5. In addition, a copy of the Stansted ACC's Response (without the Appendices referred to therein) to the CAA's Consultation Paper dated July 2005, is enclosed.


  5.1  The CAA's current consultation on preliminary expenditure in relation to G2 serves as a microcosm of the failings of the CAA in relation to economic regulation. Particular reference is therefore made to that consultation process, and to the Stansted ACC's Response to the CAA's Consultation Paper dated July 2005.

  5.2  In summary, the CAA is failing to discharge its duties and is breaching its statutory obligations under Section 39 of the Airports Act in relation to the G2 project at Stansted Airport by encouraging BAA to incur preliminary expenditure which is forecast to exceed £100 million, in circumstances where:

    (i)    There is no commercial risk to BAA, since users will have to pay for the preliminary expenditure through increased airport charges.

    (ii)    Users will pay the preliminary expenditure without receiving any benefit for years, if at all.

    (iii)    There is no agreement from users to the preliminary expenditure.

    (iv)    No, or no adequate, consultation has taken place between BAA and users regarding the need or extent of this expenditure, and the CAA refuses to become involved.

    (v)    There are no proper controls on the level of expenditure being incurred by BAA.

    (vi)    The case for additional capacity and the cost thereof has not been made out by BAA and BAA has refused to provide users with even basic information to enable them to evaluate the project.

    (vii)    No proper analysis has been carried out as to the effect of increased airport charges on traffic growth.

    (viii)    The CAA has apparently given a commitment" to BAA in relation to preliminary expenditure, which highlights the nature of the relationship between BAA and the CAA.

    (ix)    No steps have been taken to encourage competition: the CAA's Consultation Paper is based on the premise that BAA will build and operate a second runway and terminal in the absence of any competition. This serves to further BAA's dominant position and facilitates abuses of that position.

    (x)    Allowing expenditure now, contrary to Section 40(3) of The Airports Act, will unlawfully fetter the CAA's discretion in setting the regulated asset base at Stansted Airport at the next price review in 2007.


  6.1  The Stansted ACC is grateful for the opportunity to submit its comments on the Transport Committee's review of the CAA. However, Stansted users urgently call on the UK Parliament to introduce competition into the London market, either by breaking up the BAA monopoly or by allowing competing airport operators to tender for the construction and operation of G2. The recent announcement by Luton Airport of plans to build an additional runway and terminal facilities for roughly one third of the costs of what BAA is proposing to spend is indicative of BAA's regulatory gaming at the expense of Stansted airlines, consumers and the competitiveness of the UK economy in general.

  6.2  Economic regulation is a poor substitute for competition and the CAA's failure to regulate BAA has allowed them to abuse their dominance by providing over-specified and overly expensive facilities through uncompetitive procurement processes and slack financial controls that do not meet the requirements of users and have led to inflated airport costs and airfares. The Stansted ACC is sceptical that any reform of the CAA would address these problems. However, at the very least, the CAA should be required to focus on the stated requirements of users and to force the airport monopoly to effectively consult with users so that facilities and services reflect those needs. If BAA fails to consult with users and meet their requirements, then the CAA should refuse to allow BAA to recover these costs from users.

  6.3  The Stansted ACC is available to provide any further information that the Committee may require in its review of the CAA.

15 November 2005

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