APPENDIX 28
Memorandum submitted by the Airlines Consultative
Committee at Stansted Airport (The Stansted ACC")
1. INTRODUCTION
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. THE REMIT,
STRUCTURE AND
POWERS OF
THE CAA
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. THE EFFECTIVENESS
AND EFFICIENCY
OF THE
CAA'S REGULATORY
FRAMEWORK
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. PERFORMANCE
OF THE
CAA IN RELATION
TO ITS
STATUTORY OBJECTIVES
AND FUNCTIONS
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. THE EFFECTIVENESS
AND EFFICIENCY
OF THE
CAA IN THE
GENERAL DISCHARGE
OF ITS
DUTIES
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. CONCLUSIONS
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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