Select Committee on Transport Third Special Report



Government response

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 sector—if there was real competition for traffic—airport 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)

Government response

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 net benefit.

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 system .[1]

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.

Challenges

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. (Paragraph 48)

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 54)

Government response

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 airport capacity.

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 divestment—which denied the possibility of competition altogether—loses 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)

Government response

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. (Paragraph 62)

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)

Government response

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 measures.

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 charge revenues.

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.

Options

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 capacity—as the CAA say that it is—then 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)

Government response

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.



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