Sir Joseph Pilling is aware of this recommendation
by the Committee. He will no doubt consider coverage of this issue
in his report in the light of this recommendation, as well as
the Competition Commission's own review and the Government's recently
announced specific review of airport economic regulation.
2. We agree with the CAA that economic regulation
should only apply where there is a need for it, and therefore
welcome the Department's decision to de-designate Manchester airport.
Although Stansted will remain a designated airport for the immediate
future, we are confident that the circumstances of BAA's common
ownership will change in the foreseeable future, either through
the actions of the Competition Commission or BAA. (Paragraph 29)
3. The real problem in the airports sector is
that there is a need for economic regulation at all. The fact
that regulatory asset base regulation brings problems of its own
is another issue entirely. Piecemeal ownership of terminals by
companies other than BAA is not radical enough a solution to the
problem of BAA's monopoly. (Paragraph 35)
4. It was, and remains, our view that BAA should
be doing a lot of things covered by the incentives anyway. We
have no issue with the principle of performance-related pay as
applied through service quality rebates. We do, however, regret
the apparent need for such targets. If there were no position
of market power in the UK airports sectorif there was real
competition for trafficairport owners would not need incentives
from an external regulator. (Paragraph 45)
5. We believe that the percentage of revenue subject
to rebates should be higher, as suggested by the Competition Commission.
The comparison of the regulation of BAA to an anti-trust regime
lends further weight to our view that BAA's market position is
fundamentally anti-competitive. (Paragraph 47)
As stated in our evidence to the Competition Commission
our view is that competition is preferable to regulation which
may distort market decisions and stifle innovation. Even where
competition acts as a weak discipline on behaviour, regulation
should only be preferred if can be expected to deliver a clear
The Government is therefore committed to the principles
of the Better Regulation agenda and believes that economic regulation
needs to be appropriate and proportionate.
On 22nd April 2008, the Secretary of State for Transport
announced a review of the economic regulation of the UK airport
The Secretary of State noted that it has been over
20 years since the Airports Act 1986 put in place the current
regime of economic regulation and as such it is one of the oldest
economic regulatory systems in the country. Much has changed since
then, and there is an urgent need to consider how the framework
needs to be updated to reflect today's realities. In particular,
the review will look at how best to provide incentives to:
- improve the passenger experience;
- encourage appropriate and timely investment in
additional capacity to help deliver economic growth in line with
wider Government policy;
- address the wider environmental impacts of aviation
on airport development.
In addition, the Secretary of State is keen to identify
and learn from best practice from the regulatory frameworks in
other industries and the Government's better regulation strategy.
The review will be taken forward to complement the
independent inquiry of the Competition Commission on its market
review of BAA and the independent strategic review of the CAA
being undertaken by Sir Joseph Pilling. It will allow the Department
to provide well-informed evidence to the Competition Commission
for their inquiry, and to respond to any relevant recommendations.
The Department for Transport will be advised by a panel of independent
experts led by Professor Martin Cave.
This review will therefore take into account the
issues raised by the Transport Select Committee.
6. We believe a competitive airports sector would
be better than the current state of affairs, where in our opinion
competition is stifled by common ownership of several major airports.
Airports under separate ownership would have to compete for traffic.
This would also have positive consequences for passengers. BAA's
common ownership is holding back the natural development of the
market, where discrete passenger markets are less well-defined.
7. Heathrow is losing its popularity as a transit
hub to other European airports. It is vital that Heathrow reverses
this trend and retakes its place as the European hub of choice
for international carriers. It is clear that a chronic shortage
of capacity is hindering Heathrow's ability to provide the sort
of service to which it should aspire. We therefore support the
Government's proposal to add capacity at Heathrow. (Paragraph
We note the Committee's support for the Government's
proposal to add capacity at Heathrow. The consultation, Adding
Capacity at Heathrow Airport, closed on 27 February. We are
now analysing all consultation responses, and the Secretary of
State expects to make a policy decision later in 2008.
As part of the consultation process leading up to
the Future of Air Transport White Paper, Government sought views
of consultees about the value to the UK of having one or more
major hub airports in the South East. This is an important prior
consideration for any decision about the long-term provision of
As the White Paper explained, large airports are
able to support a wider range of destinations and greater frequency
of services than could be supported by local demand alone. Major
airports attract passengers connecting from one flight to another
and, because of this concentration, airlines can operate routes
and frequencies that would not otherwise be viable. This is well
illustrated at Heathrow, which has the highest number of international
transfer passengers of any airport in the world.
The White Paper also noted that a South East hub
could deliver substantial benefits to the whole of the UK, and
most believe that Heathrow is the only candidate for that role.
The Government therefore agrees with the Committee in this regard
and recognises the immense value to the UK of Heathrow's status
as an international hub airport and wants to see that continue.
8. There is limited competition between UK airports.
With the demarcation between different types of airports becoming
ever less clear, the theoretical restrictions on competition decrease
and the old argument against divestmentwhich denied the
possibility of competition altogetherloses force. We feel
that there is room for more competition (especially between BAA's
London airports) and that ending the current situation of common
ownership would go a long way to realising this. (Paragraph 57)
9. We have already called for the AUC's funding
to be increased. It should become a proactive consumer body, going
out and engaging with passengers. Its role to 'further the reasonable
interests' of passengers should be interpreted as meaning more
than just waiting for disgruntled passengers to make a complaint.
However, if the AUC's terms of reference do need amending to allow
it to become a genuinely proactive body, then the CAA and AUC
should do so quickly. (Paragraph 61)
The Government is committed to effective consumer
representation. We note the Committee's recommendation which we
shall consider following the Strategic Review of the CAA, and
the work which the CAA has in hand to review consumer issues and
its approach to consumer policy in the aviation sector.
10. BAA may feel as though it is taking a lot
of the flak for things that are not part of its day to day responsibility,
but this does not detract from the serious questions raised over
mismanagement of resources and failure to plan adequately for
contingencies which were far from unexpected, let alone inconceivable.
With the ever-present possibility of extraordinary circumstances
such as strikes or terrorist incidents, queues at airports are
almost inevitable from time to time. Our criticism of BAA is that
it should have predicted the predictable, and planned accordingly.
11. The main benefits arising from T5 will be
for passengers and British Airways. The increase in capacity that
a fifth terminal provides has given BAA the opportunity to move
airlines around and improve the condition of the other terminals.
This will benefit all other airlines and their passengers. It
is however regrettable that BAA ever allowed the position to get
as bad as it did. (Paragraph 64)
The Government notes the Committee's criticism of
BAA for failing to predict and prepare for contingencies such
as strikes or terrorist incidents. Both to fulfil its regulatory
obligations and to ensure that passengers are not unnecessarily
inconvenienced, the Government agrees that BAA needs to ensure
that it has sufficient staff resources available to effectively
undertake the security requirements placed on it, and to have
plans in place to ensure an effective response when circumstances
necessitate the implementation of enhanced or additional security
In terms of planning for contingencies, as the Adding
Capacity at Heathrow Airport consultation stated, introducing
mixed mode operations at Heathrow even without lifting the current
air transport movement (ATM) cap, could provide greater operational
resilience. This could provide greater flexibility for the airport
to cater for peak demand and to recover from delays caused by,
for example, adverse weather conditions.
In November 2007, the Department for Transport published
Improving the Passenger Experience: An analysis of end-to-end
journeys with a focus on Heathrow. Heathrow, as the UK's largest
and busiest airport, was chosen as a starting point.
Government is committed to ensuring that improvements
are delivered - the 2008 Budget set out government's aim to reduce
delays for travellers at Heathrow through "... measures with
airport operators to improve average and maximum waiting times
at immigration. This will be accompanied by greater use of automated
biometric technology and fast-track routes through immigration."
UK Border Agency, DfT and airport operators are working together
on operational improvement plans at the 10 UK airports which account
for the vast majority of inbound air travellers (as set out in
the DfT Nov 2007 document.)
As part of the regulatory regime at Heathrow and
Gatwick airports, with a view to improving the performance of
these airports in terms of service quality, the CAA introduced
a Service Quality Rebate regime. This requires the airport owner
to pay rebates to airlines when service levels fall below certain
defined standards. Performance areas subject to such standards
include security queues, arrivals baggage carousel availability;
flight information; cleanliness etc. As announced in the recent
price cap review by the CAA, rebates will be up to 7% of airport
The review of airport regulation announced by the
Secretary of State on 22nd April will include looking at how best
to provide incentives to improve the passenger experience.
12. Competition between terminals at Heathrow
could have been a radical solution to the problem of competition
at Heathrow. If neither the Government nor BAA believe that inter-terminal
competition is an option at Heathrow, then it makes the prospect
of divestment even more likely. (Paragraph 78)
13. There are more limitations on supply than
there are on demand in the aviation sector, and there are no signs
that this will change. To assume that spare capacity is necessary
for competition is to deny the possibility of competition altogether.
We have heard evidence from the CAA that there is indeed competition,
particularly in the point-to-point and low-cost sectors. If competition
is taking place without spare capacityas the CAA say that
it isthen it must be possible. (Paragraph 81)
14. BAA's monopoly position in the UK airports
sector is unnecessary. Indeed, it is bad for passengers and bad
for the aviation industry. We do not agree that the status quo
is a necessary condition of sustained investment and development.
We are firmly of the view that increased competition is possible
and could have huge benefits for both airlines and passengers.
We look forward to the Competition Commission's analysis of all
the issues, and hope that it undertakes detailed cost-benefit
analyses of all the possible outcomes. (Paragraph 85)
As explained above, it would be inappropriate for
the Government to comment on these issues until the Competition
Commission has completed its market inquiry into the supply of
airport services provided by BAA. The deadline for the completion
of this inquiry is 29 March 2009.
1 http://www.dft.gov.uk/press/speechesstatements/statements/stateeconomicregairport Back