Transport Committee - Minutes of EvidenceHC 1694

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Oral Evidence

Taken before the Transport Committee

on Tuesday 13 December 2011

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Jim Dobbin

Julie Hilling

Kwasi Kwarteng

Paul Maynard

Iain Stewart

Graham Stringer

Julian Sturdy

________________

Examination of Witnesses

Witnesses: Dame Deirdre Hutton, Chair, Civil Aviation Authority, Andrew Haines, Chief Executive, Civil Aviation Authority, and Iain Osborne, Group Director Regulatory Policy, Civil Aviation Authority, gave evidence.

Q85 Chair: Good morning. Welcome to the Transport Select Committee. Could you give your name and organisation, please, for our records?

Andrew Haines: My name is Andrew Haines. I am the Chief Executive of the Civil Aviation Authority.

Dame Deirdre Hutton: I am Deirdre Hutton. I chair the Civil Aviation Authority.

Iain Osborne: I am Iain Osborne. I am the Group Director of Regulatory Policy for the Civil Aviation Authority.

Q86 Chair: Thank you very much. What is the case for the continued regulation of airports?

Dame Deirdre Hutton: The main case is that some airports will have significant market power. Our basic premise-and the reason why we are so glad to see this Bill-is that we believe competitive markets serve consumers very well but our regulatory framework for ensuring those competitive markets is out of date. In order to bring it up to date, to ensure we can regulate airports with significant power in a way that is proportionate and practical, we need a new Bill. Perhaps I might pass that to my colleague Mr Haines.

Andrew Haines: Successive Governments, and indeed most regulators in the UK, have said that competitive markets genuinely deliver the best and most efficient outcomes for consumers. However, in certain markets it is likely that individual operators might have significant market power, which means they are not subject to the same competitive pressures. That is why I believe there is a case for regulation. This Bill gives us a flexible range of tools so that we can regulate according to the level of how that market power manifests itself to protect consumers but without doing that where it is not necessary.

Q87 Chair: Which airports do you expect to be regulated, Mr Osborne?

Iain Osborne: The Bill gives us a flexible set of powers that will enable us, at the appropriate time, to determine which airports need to be regulated. We are currently carrying out an assessment of the three big London airports-Heathrow, Gatwick and Stansted-and we will take the decision on whether they need to be licensed in the light of that assessment. But things will change over time.

Q88 Chair: What will you be looking at? Gatwick tell us they do not think they should be regulated now.

Iain Osborne: The core issues we are looking at are the standard issues looked at in competition assessment, not just by the CAA but by the Office of Fair Trading and other competition regulators. Essentially, we are looking at whether the airport can act independently of competitors or its customers. If it increases its charges, do the airlines have the ability to vote with their feet? If the quality is poor, do customers actually have the ability to use another airport? Historically, the airports which have been regulated have been the ones where those conditions are not in place. Effectively, the airport is in a position that it could have overcharged or failed to provide the quality required. What we are looking for is airports which deliver sustainable high quality and good-value services, as you would get in a wellfunctioning competitive market.

Q89 Chair: Do you expect the Bill to change the nature of regulation of airports? How will it be different from how things happen now?

Dame Deirdre Hutton: In a general sense, it will enable us to do the job that we are supposed to do better. Indeed, the changed Bill originally derives from a report by the Select Committee. There has been a consensus with that report, Joseph Pilling’s report, and then Martin Cave’s report, that our legislation needed to be updated. The main thing for us is that it will give us a central focus or a key objective on the interests of consumers and cargo users. It clarifies the purpose of the regulator and then gives us the modern regulatory regime in order to put that in place. In terms of, "Does it make a very practical difference?", I am sure we could give you some examples. The main thing, from my perspective, is that it gives us the regime we need to do this job properly.

Andrew Haines: The current regime requires us to set a price control every five years. We cannot set it every four or six years; we cannot choose not to set a price control but to oversee; we have no powers to require a service quality regime; and there is no licence to protect consumers. There are a number of things this Bill delivers to consumers. It gives us broad publication powers to require all parts of aviation to provide information that consumers might find useful; it gives us a licence, which means we can determine the best type of economic regulation for airports according to their particular circumstances; it allows us to ensure that capital investment is focused on the needs of consumers; it allows us to apply a flexible approach; and it allows us to require service quality standards. For example, at the moment, only the Competition Commission can do that. There are a whole range of reasons why the passenger benefits from this Bill.

Q90 Iain Stewart: I want to pick up on one point you mentioned there, which is the information airlines would be required to publish. In our evidence session last week, two of the airlines said that the information it would be required to publish would be-I think one said-grossly disproportionate. How would you respond to that?

Andrew Haines: I would respond in two ways. First of all, there is a great deal of market research that says consumers would like more information to enable them to choose between competitive airlines. Airlines have a real incentive to compete. That competition can sometimes be most effective by concealing the true quality of what you are buying. Therefore, there is a real consumer need. Secondly, the Bill puts very real safeguards for airlines and other parts of aviation so that we cannot act in a disproportionate way. We have to consult, and we have to demonstrate that the benefit of the use of the powers outweighs the costs of doing so. The third point would be that the Government’s principle is that, if you inform consumers, you can have less regulation. We genuinely believe that a more informed consumer can stimulate a more effective marketplace.

Q91 Iain Stewart: The airlines argued that they already publish all relevant information in a number of forms. Could you give me an example of the type of information that you think is not currently available but would be required under this Bill?

Dame Deirdre Hutton: Can I make one point first? The important thing for consumers, it seems to me, is that they are given information which is comparable and transparent across the piece. The problem, perhaps, with each airline publishing their own information is that the consumers then find, without realising, that they are comparing apples and oranges. The role of the regulator here is to make that information transparent and comparable across the piece. Andrew, I am sorry, I interrupted.

Andrew Haines: There are two issues. First, many airlines simply do not provide that information. If you try to find out the average time it takes for an airline to deliver your baggage, you would find very few airlines, if any, produce that information. It is the same with typical checkin times, for example, or if you try and get an easily accessible comparison of prices across the piece, given the level of addon charges. They are required to publish it on their own website, but formats can vary. It is about both access to information and then being able to read across. A good example would be environmental footprint. Airlines tend to use the measures that make their footprint look most attractive. It is very difficult for a consumer to judge, overall, the objective piece of evidence. I would strongly contend that a lot of this information should be available to the public in a way that helps them make an informed decision.

Q92 Chair: How would the public know if it was the airport or the airline? Passengers do not know who is responsible for services like baggage collection, do they?

Andrew Haines: That is a very good point. However, by making the information publicly accessible, that issue almost becomes less relevant. Many people think that baggage is the airport’s responsibility. You will find in an airport-Gatwick airport, for example-that the range of baggage return times by operators can vary enormously, according to their arrangements and the priorities they place on that.

Dame Deirdre Hutton: You are absolutely right that the journey for the consumer is a whole mixture of different companies. The way you are going to create a good journey through an airport for a consumer is if all those companies cooperate. One of the things we can do, by taking an overarching view of what the consumer journey should be, is to encourage the airports, the airlines and the ground handlers to cooperate for the benefit of the customer.

Iain Osborne: May I add one point in response to Mr Stewart’s question? In some ways, the industry has gone backwards. They used to publish how likely they were to lose your bag and, for whatever reason, decided to stop publishing that. We think there are consumers who would like to know that when they make booking decisions.

Q93 Graham Stringer: What is the difference between having a flexible approach and arbitrary interference in the running of an airport?

Iain Osborne: Part of the difference is due process. As Andrew has commented, effectively, with all of the powers that the Bill would give us, we are required to consult and, in many cases, to apply cost benefit analyses. We are always required to apply the principles of better regulation.

Regulation is about accountability. We are not accountable for the details of how an airport is run. The airport operator is accountable. We are there to hold them accountable. Our role is very much to make clear what is expected of the airport in a situation where the market is not going to provide that discipline. Quality and resilience is a very good area. We discovered, last winter, that there was widespread confusion about who was supposed to do what. The result was that people did not do what was needful. Regulation can provide a useful discipline in making clear what the responsibilities of the different parties are and, indeed, of providing sanctions where people fail to deliver those responsibilities. There is a great deal of activity going on, both on a voluntary and a commercial basis. We have very much sponsored that work and hope to see this network of relationships becoming clarified and energised. If we see that in a satisfactory way, any regulation can be very light touch indeed. Having the powers will enable us to intervene where we do not see that voluntary approach coming into play.

Q94 Graham Stringer: Historically, regulation has been, in essence, to keep the quality of capital investment down, has it not? The airlines have been concerned that too much money might have been spent by airports and that they would have to pay for it. You seem to be looking at it through the opposite end of the telescope. It is a very different approach to regulation, is it not, pushing up standards rather than keeping capital expenditure down?

Iain Osborne: I do not think the airlines would agree with that characterisation. They feel that expenditure has been inefficient. What the airlines want to see is-

Q95 Graham Stringer: No. That is not what Ryanair say, is it? They are not on their own. They say there is too much of it. "We want lower quality terminals." That is and has been the argument for the regulatory regime over the years. This is looking at it completely the other way round, is it not?

Iain Osborne: Different airlines have different needs from the system, just as different passengers do, and particularly a big, complex airport like Heathrow or Gatwick. They are serving everyone, as one of the executives put it to me recently, "from the sheikh to the backpacker". They are complex systems. In a competitive context, what we would see is the airport making investments where it is confident there is demand to support those investments and being disciplined by the market to make those investments efficiently. That is the key role of regulation. It is not to say more investment or less investment, but what are the needs of the passenger base-as mediated, very often, through what the airlines are looking for-and the right investments? Then it is to make sure they are being carried out efficiently, not wastefully.

Q96 Graham Stringer: If I can go back to the Chair’s original question about which airports are going to be regulated, it is a very different kind of regulation. The trend has been that Manchester is no longer regulated, Gatwick does not want to be regulated, and there is a good case for Stansted not being regulated. I would be very interested in the answer to the following question. Do you envisage the regulation applying only to Heathrow or are you going to extend the regulation to more airports than it now applies to?

Andrew Haines: We have a very clear process required of us in the proposed Bill with criteria we have to assess. First of all, it has to be established whether or not an airport has significant market power, then why the normal Competition Act regime does not deal with it-

Q97 Graham Stringer: I am sorry to interrupt you, but the CAA has said very clearly, about Manchester, that it is now in a competitive situation. Are you going to go back and reexamine that, are you going to carry on with the general drift that competition between airports is increasing or are you going to reverse it?

Andrew Haines: We are going to look at each case on its merits. I would think, for example, that Manchester is very unlikely-

Q98 Graham Stringer: But the information is there, is it not? The information about whether those airports are in a competitive market is known to the CAA. It is not a question of going back. That is information you have used to dedesignate Manchester. We do not need new information. I would like an answer as to how the information will apply at the moment.

Andrew Haines: I will defer to Iain, but one thing I should say is this. The reason we need more information is because markets change. The reason that Manchester was regulated and then not regulated was because of the growth of Liverpool and a different competitive environment. I am simply making the point that, in 10 years’ time, it might change again. We are certainly not applying a different philosophical approach that would mean Manchester would be regulated simply because we look at it differently. The same test would still apply.

Q99 Chair: Mr Stringer is asking whether you will be revisiting these decisions and on what basis that would be done.

Iain Osborne: Perhaps I can answer that. The Airport Charges Directive creates a regime where anybody can ask us to review the competitiveness of a particular airport. We will revisit them if airlines, for example, come and ask us to. But we have no policy agenda to regulate competitive airports which, at the moment, are not regulated-absolutely not. We look forward to having a regime which is more flexible: more flexible in that the licensing power can be switched on and off, but also more flexible in that we have a wider range of tools. The last time the Competition Commission looked at Aberdeen, it said that the airport may well have market power but the costs and benefits of regulating it do not make it worth the candle. The Bill will give us competition law powers so that if we were to see an airport-and it could be Aberdeen or others-that had market power, but it was fairly marginal, we would have a wider toolkit to intervene, again, proportionately and flexibly.

Dame Deirdre Hutton: Could I make one point? I think you said-and I may have picked you up wrongly-that Gatwick airport said they did not think they should be regulated any more. Going back to that business about airports being a complex set of partners, the airlines at Gatwick would probably take a different view. We will have to make a judgment against the very clear criteria that we have.

Q100 Paul Maynard: If, as you say, you have no policy agenda, I am interested to know why you are so keen to have this added flexibility which would allow you to regulate more airports. It would imply that you seek the flexibility in order to expand the number of regulated airports.

Dame Deirdre Hutton: We have given the wrong impression if we have said that. It is not to regulate more airports. It is to better regulate the airports we are regulating.

Andrew Haines: Taking the example of Gatwick, it may well be that, if we determine Gatwick still has significant market power, this Bill does not require us to set a price control in the traditional way. We could say there is significant market power but there is a direction of travel, so we will apply a different form of regulation-less regulation but not "no regulation," for instance.

Q101 Paul Maynard: One feasible end point, if I have listened carefully to what you are saying, is that the only remaining regulated airport could conceivably be Heathrow. What interests me, in particular, is why there are provisions in the Bill for competition between terminals at an airport. Obviously there are relatively few airports with more than one terminal, Heathrow being the obvious example. Why did that appear in the Bill? Who was seeking that power and for what reason?

Iain Osborne: The last time we set a price control for Stansted, Ryanair-the major user at Stansted-were seriously interested in the possibility of building their own terminal. At the moment that is not so much a focus of interest for the airlines. As volumes have reduced, the issues are a little different. We are looking at a context in the southeast where it is not clear that more capacity will be built for a period into the future. If the industry goes back to growing at a reasonable pace and we do not see more capacity, we could well get into a situation where airports that, today, do not have market power, or are on the cusp, go back to very clearly being regulated. At that time it may well be the airline business models make it sensible to run the terminals in a way that does not happen at the moment. Again, it is about creating a regime which is capable. The current regime has lasted 25 years. If the new regime which is being created has sufficient flexibility, then it can be robust and survive.

Q102 Paul Maynard: Theoretically, this provision for interterminal competition could apply to Heathrow. There would be no reason for it not to.

Iain Osborne: There is no reason in principle. There are a number of quite significant practical problems about making inter-terminal competition work which would need to be worked through. We would also need to be confident we were not serving the interests of the current set of airlines while preventing new entry. In a context of where there is not enough resource to go round-which is true of Heathrow terminals, by and large-creating barriers to new entry would be a serious issue. In principle, I would not rule it out, no.

Q103 Paul Maynard: I have one final question, if I may. Do any of you regard an airline as a customer of an airport in the same way that a passenger is? How do you differentiate the relationship between a passenger and the airport and an airline and the airport?

Iain Osborne: Ultimately, the industry exists to take people places. That is what creates the value for society. That has a status-an importance-which must not be disregarded. For a lot of issues, the interests of airlines in the business, who employ a lot of people doing a lot of analysis, line up with those of passengers and the airlines are useful people to work with. But you have to keep a sharp eye on the possible situations where airlines might not represent the interests of the passenger. It is a kind of half and half, and you can see it as a glass half full or half empty, depending on which side of the discussion you are on. As a practical matter, for example, on how we can get the currently regulated airports more efficient, we are very happy to work with the airlines. They have their people in there all the time spotting problems. However, when it comes to a future-focused issue, like terminal competition, you would have to be very alert to the danger of allowing the current bunch to prevent competition, which would be bad for future passengers.

Q104 Chair: You spoke about the transport of people but you did not mention cargo-freight. Are they not supposed to be an area covered by the Bill as well?

Iain Osborne: The Bill is absolutely clear that "users" means both. That was a slip.

Q105 Jim Dobbin: We have seen a deal achieved in Durban on environmental issues, which I think is going to be enacted in 2020. Do you think this Bill, in its present form, gives the CAA the regulatory powers to include environmental issues as part of its duty?

Andrew Haines: I have two things to say. The first is that this Bill is only a subset of what the Civil Aviation Authority does. We already have some considerable environmental responsibilities in areas such as airspace management, which can make a significant contribution to CO2 reduction and in terms of advising the Environment Agency on ETS. What it specifically includes is a strong information provision that will give us a duty to publish information and also an ability to publish guidance to industry on measures that they might take to improve environmental footprint. Once seen as part of what we already do, we have a pretty considerable package of environmental responsibilities, yes.

Q106 Jim Dobbin: Do you think there is any need to strengthen this power within the Bill?

Andrew Haines: Overall, the package is very workable for us. We would not object to an environmental duty per se, but what we have gives us a very comprehensive set of tools.

Dame Deirdre Hutton: It is worth adding that, as Chair, I have a letter from the Secretary of State which sets out the objectives he would like me to ensure the CAA fulfils. An environmental obligation is contained in that letter, so we do have environmental duties and powers coming at us from a range of different directions. I am afraid I do not have that letter to hand with me. It is available on the website, but I could let you have a copy if you would like it.1

Q107 Steve Baker: You have talked about the regulation of price, quality and service in competition. Would you accept that some airlines provide a spartan and inexpensive service because that is exactly what customers want?

Andrew Haines: Absolutely, yes.

Q108 Steve Baker: If I were to summarise what I have heard you talking about as to economic regulation, you have said that the whole industry is a complex system, people have different needs and markets change. Inherent in that, there seems this recognition, quite properly, that markets are a dynamic process of adjustment to what people want. Would you not then be constantly chasing the market trying to figure out what you ought to be regulating rather than letting the market get on with fulfilling people’s needs? How would you ever get ahead of this dynamic process of adjustment? Is it not working? Should you not simply leave it alone?

Iain Osborne: When the system is working well, we have created a context within which an airport operator with market power works so that they act like a competitive airport. They are the ones chasing the market, seeking the business and trying to delight their airline and human customers and cargo shippers. That is the definition of success. The existing regime focuses people too much on the quinquennial reviews and the price controls. Too much management effort goes into that. What we want is a regime which creates steady, continuous pressure for the airport to improve in quality and efficiency sustainably, so it is a sustainable business whereby we have a value chain that can deliver for the passengers.

Q109 Steve Baker: If we were to be concrete about this, the problem is that Heathrow is incontestable, is it not?

Iain Osborne: We are in the middle of a process that is governed by public law, looking at market power, and we are not ready to say who has market power or not. I do not think there are many people in the industry who are expecting us to come out and deregulate Heathrow. Much of the discussion is around Gatwick and Stansted. For legal reasons, it is not a good time for us to say who we are going to regulate and who we are not.

Andrew Haines: It might be worth making the observation that the biggest proponents of regulation of the London airports are the airlines. It is not as if we are trying to impose regulation. In fact, the CAA has often found itself in a position of saying that regulation may not be necessary, whereas the airlines are arguing it is. This idea that somehow we are trying to disrupt the natural commercial relationships between airlines and airports is something we very much want to avoid at all costs. It is airlines, very often, who are arguing that Stansted still ought to be regulated, for instance, and, likewise, Gatwick currently.

Q110 Steve Baker: Is it not a natural phenomenon for people to want their suppliers to be regulated?

Andrew Haines: It is, absolutely. But it is not a characteristic of a regulator trying to intervene unnecessarily in a well-operating market. The balance is not quite as you might characterise.

Dame Deirdre Hutton: In a general sense, we would agree completely with the point you are making, that regulation is always second best to a competitive market.

Andrew Haines: We completely accept that, absolutely.

Dame Deirdre Hutton: But, as with energy, water or a whole range of other markets where competitive markets do not exist in a way that is wholly satisfactory, you have regulation. Is it second best? Yes. But that does not mean to say, in certain markets, you should not have some of it.

Q111 Julian Sturdy: I want to touch on airport security functions, if I can. What is the rationale for transferring security responsibilities to the CAA? I obviously understand the savings to the taxpayer, which is one of the major issues, but would you outline some of the other benefits that you see involved in this?

Dame Deirdre Hutton: There were two particular reasons for thinking it would be sensible to put this in the Bill, from the DfT’s perspective. First, there was the desire to make security regulation outcomes-focused and risk-based rather than have it on a more standard enforcement basis. The perception was that the CAA is already doing outcomesfocused, riskbased regulation around safety. There is a wealth of experience there as to how you do that form of regulation and a set of skills that could reasonably be transferred across to security.

The second issue was the belief that it would be helpful for airlines and airports if they had one regulator to face rather than two: if it was all within the CAA, it would be easier for them to interface with us. Having said that, the draft Bill proposes that the Secretary of State will remain the main authority for aviation security and will set policy and directions. There is still, I think, some question about where the cutoff might be between the responsibility of the DfT and the Secretary of State and the responsibility of the CAA.

Q112 Julian Sturdy: On that point, because you are putting an extra layer in the system, do you think it will cause any problems with delay in timings if an urgent security issue arises?

Dame Deirdre Hutton: What lies behind that is we will need-and, as Chairman, I would feel very obliged to ensure, from the CAA’s perspective, that we have it-absolute clarity about our role as opposed to the Secretary of State’s role. The handoffs are then about getting the mechanisms and the processes right. The danger you describe would be there if we fail to get clarity, so it is essential for us to do that.

Q113 Julian Sturdy: You feel that clarity is not quite there yet.

Andrew Haines: The Bill will make explicit that the Secretary of State will retain emergency powers. That will be absolutely clear. What we need to work on clarity is, if you like, the "not emergency," the bit in between the daytoday and the absolute emergency. That is something we will work through very comprehensively with the Department for Transport in the run-up to the transfer of powers. But, as to the emergency, it is very clear. The Secretary of State will retain that right.

Q114 Chair: This Bill is likely to come to Parliament sooner than was anticipated. We have been told that the work on the outcomesbased approach has not really kept up with it. Is that something that concerns you?

Andrew Haines: The Department for Transport undertook a consultation for much of 2011 on the principles. They had the responses to that back in November and are working through those. The level of response from industry has been very supportive of the principle, so the devil is now in the detail of making it work. But there has been very little resistance from all parts of the industry. They are saying this is a useful thing that can enhance security of aviation and be a cost-effective measure as well.

Q115 Chair: But the industry themselves told us they are concerned there has not been enough work done on the outcomesbased approach and they were expecting more time to do that before this Bill came to Parliament. That is the issue.

Andrew Haines: But the industry have said they support the principle and what they now want to see is the detail. I think there is an industry nervousness that they may get the transfer to the CAA without the benefit of that regime. That is something we want to work with industry and the Department for Transport to nail. It is certainly outstanding work.

Dame Deirdre Hutton: I assure you we are working very closely with the Department on this. It is absolutely in the interests of the CAA that we get this right as well. It will not be introduced in practice, if the Bill goes through, until 2014, so there is quite a long period for us to get this right. I am as keen as I am sure the Committee are for us to get this absolutely nailed down.

Andrew Haines: The other thing, if I might say, is that all parts of industry recognise this will be a journey. The transfer to us will not be a radical change on day one. To develop an ethos of a security management system will take a number of years. To work cooperatively with Europe will take some time as well. We see this, if you like, as the start of a journey and not a radical change in transfer of responsibility.

Q116 Graham Stringer: If the Bill goes through unamended, do you envisage that the CAA will have more employees or fewer employees?

Dame Deirdre Hutton: That is a very interesting question. What I would say-

Chair: What is the answer?

Q117 Graham Stringer: It is a question of who regulates the regulators, is it not? Are you going to be so big that you will be a great cost on aviation?

Dame Deirdre Hutton: There are two answers. One is the efficiency, which we are trying to deal with at the moment, and the second is the security.

Andrew Haines: We will have maybe 40 to 50 additional security people who will be transferring, initially.2 We will probably have a handful more people in Iain’s department because of the licensing regime and dealing with appeals and so forth. But we have a very comprehensive efficiency programme, alongside that, looking to reduce our costs and burden to industry and modernise our systems.

Q118 Graham Stringer: As a percentage, how much bigger do you expect to be?

Andrew Haines: Net, we expect to be smaller because we intend to make more than that level of efficiencies. If we did not do that, then it would be less than a 5% increase anyway.3

Q119 Graham Stringer: The National Audit Office have pointed out that you are the only public body they do not have access to. Do you think they should?

Dame Deirdre Hutton: It is worth pointing out that we are entirely funded by industry. There are no particular public funds at stake, therefore, that the National Audit Office should oversee. I know the National Audit Office have spoken several times to the DfT, who have made this point to them. The National Audit Office have not approached me.

Q120 Graham Stringer: That is a no.

Dame Deirdre Hutton: We have a very proper process of having an auditor, with a retender process. We are properly audited by, I think, PwC at the moment. I have no doubts about the competence of the auditing of the Civil Aviation Authority. The particular reason for the NAO to be involved would be if we were spending public money, and we are not.

Andrew Haines: It is also worth saying that, in a decade which saw public expenditure increase very significantly, the CAA reduced its costs in real terms by 20%. That is a trend we intend to continue.

Q121 Chair: You do not see any need for change. That is what you are saying.

Dame Deirdre Hutton: We have recently retendered for our auditor and PwC won, so we do not see any need for change. Under the Combined Code we would retender every three years or so.

Q122 Julie Hilling: I want to go back to the security issue. When you are talking about an outcomesbased security regime, how are you going to measure those outcomes? Clearly, we do not want the major one of an aeroplane falling out of the sky. If you are not looking at input, how do you measure the outcomes?

Dame Deirdre Hutton: Can I make one point? I have learned, finally, that I have to talk about "outcomes-focused" rather than "outcomes-based" because the system will not be wholly outcomes-based. There is a level of auditing and checking that will continue. That is very important. We are not planning to throw the whole baby out with the bath water and move to a completely different system, but a greater outcomes focus.

Andrew Haines: There will still be a very strong element of compliance in this, with very detailed requirements to meet the letter of secondary legislation. There are examples given in the DfT’s consultation where specific pieces of technology are currently prescribed. An operator is not able to procure the best technology. They are obliged to procure a specific type because the rules are so prescriptive. Outcomes-focused would give the operator an opportunity to say, "I can meet that outcome more efficiently. I can get a better result. I can demonstrate to an independent regulator and inspectors I can do that and that I am doing that." That is a better outcome for the airport and for security. It is that level of flexibility, but it will need to be developed as people get a good understanding of threat, and different technological solutions might develop.

Q123 Julie Hilling: You will still be describing inputs that people need to do-

Andrew Haines: Very much so. There are European regulations which will significantly constrain people’s flexibility. Even if the Government wanted to say-and I do not believe they do-"Let’s leave it entirely up to the industry", European regulations are pretty prescriptive themselves. At the moment there is a national overlay and the opportunity is to apply an outcomes focus to that national overlay.

Q124 Julie Hilling: Could you help me with describing some of those things that the inputs would be?

Andrew Haines: The example the DfT give in their consultation is of a particular piece of equipment to test whether or not there is any explosive contamination on shoes. At the moment that might be prescriptive to a piece of technology.

Q125 Julie Hilling: But you would still be saying that shoes have to be checked.

Andrew Haines: We would say, "Shoes have to be checked. How are you going to demonstrate that you do that efficiently and effectively?" That would be an example. We would not prescribe, "You have to buy x piece of kit from x manufacturer."

Q126 Iain Stewart: I would like to return briefly to the representation of consumer interests and, specifically, the new Aviation Consumer Advocate Panel. I understand you are still reviewing what its remit and representation will be. How close are you to finalising that?

Dame Deirdre Hutton: Could I step back a pace? We felt there were two consumer issues. One was how we deal with and derive information from complaints to help us understand where there was a need to do something. The second one is the more strategic consumer input which looks ahead and gives us broad views about how consumers feel. The complaints we have taken inhouse, under Iain’s department, to deal with them in an efficient way. The consumer panel being set up is Iain’s baby.

Iain Osborne: It will be a couple of working weeks before we make a publication which, because of Christmas, probably means into January. But we are very close.

Q127 Iain Stewart: We will have that detail before the Bill goes before Parliament.

Iain Osborne: Yes. That is definitely our intention.

Q128 Chair: How are you going to decide who is on that consumer panel?

Iain Osborne: We will advertise under a Nolan process. To give you some indication of our thinking, we want a panel which is small enough to be cohesive and able to form and carry forward an agenda. We will not be looking for a representative of airlines, a representative of passengers with disability, a representative of Scotland, and so on. We are looking for something that is more tightly focused than that. It will be expertise; it will be consumer expertise; it will be a track record of being able to assimilate evidence, form an agenda and work through the kind of public law processes that underpin regulation to produce real world outcome changes.

Q129 Chair: Does that mean you are looking for professional representatives rather than a voice of people who use airports?

Iain Osborne: No. We are very much looking for a voice of people who use airports, but we want people to be able to demonstrate to us that they have the skills to make a real difference rather than just the fact that they fly a lot.

Q130 Chair: As to powers, let me put something to you. There is a situation at the moment in relation to Ryanair. No press notice has been given, but, for Christmas and other peak travel periods, the hold luggage charge will go up to £25 per 15 kg bag; from January, the penalty for forgetting to print out your boarding pass will go up to £60 and, in a ticketless travel regime, the fee for a family of four forgetting the paperwork would be £240. This seems to be a gross abuse. What powers would you have under this Bill to deal with that?

Iain Osborne: We already have the powers that would be relevant if we did decide that that was abuse.

Q131 Chair: What are you going to do about this?

Iain Osborne: Our key focus-

Q132 Chair: What are you actually going to do about this one?

Iain Osborne: Our key focus is ensuring that people have proper information to make choices as buyers. I have flown quite a lot on Ryanair over the years because it is a cheap way to do business travel. If you know about the deal-frankly, if the ticket is cheaper because of the way they organise other things-then that is not necessarily a problem. But it is extremely important that people are given effective information. In your question, you highlighted that you are not satisfied that people are being properly informed. That will be our primary approach.

The legal powers that we have, if we decided that there were real problems, are in two areas. One is that we have powers under the Unfair Terms in Consumer Contracts Regulations and the other is that we have powers over transparency, making sure that people’s websites give the full deal up front. We will look at the question under those two powers about whether enforcement action is justified. It will be against the proposition that the market includes airlines that are cheap and cheerful and that are very clear with their passengers about what they expect.

Q133 Chair: Are you saying you have the power at the moment to deal with the situation I have described, where one of the issues is that these increases have not been made public-they are just happening?

Iain Osborne: Yes, we do have powers at present to address that transparency issue.

Q134 Chair: Are you likely to use them?

Iain Osborne: As I say, we will look at the question, but I am not in a position to give you an answer about what we intend to do. We can very much commit to write to the Committee to confirm the position we will take on that.

Q135 Chair: What new powers would this Bill give you in relation to situations like this?

Andrew Haines: The Bill is not related to this area.

Iain Osborne: There are two areas that are relevant. The Bill gives new enforcement powers but they are more adding civil sanctions to the powers we already have on safety, for example.

Andrew Haines: They do not apply here.

Iain Osborne: So they are not particularly relevant to that issue. Then there is the publication area. We already have powers to require individual airlines to publish certain things on their website. The publication power, stepping back from that, gives us a power to publish information to consumers in general to make sure they have an overview.

Q136 Chair: What about looking at the needs of shippers of cargo? Are they going to be represented on the consumer panel, or is that going to be dealt with in a different way?

Iain Osborne: The interests of cargo shippers are extremely important. We have been working on a study on cargo shipping and it is a very important part of the sector. The needs are clearly different from those of passengers. Cargo shipping is quite concentrated at a few airports, and they are not the big ones. East Midlands airport, for example, is a key cargo hub. As I say, the consumer panel is not intended to have a representative from every lobby. That would produce a very large and diffuse group. However, we will certainly be including in the terms of reference that the panel shall be representing the consumers in the same sense that we have duties to consumers, which, as I say, clearly does include cargo shippers.

Q137 Chair: How is the Bill going to promote economic growth?

Andrew Haines: We are an independent regulator. In that sense, we have no statutory responsibility, nor is it appropriate for us to particularly stimulate a Government policy. We fundamentally believe that competition is the best way to promote consumer growth in this country and the flexible form of regulation will be trying to avoid interruption in competition. But we have no locus to stimulate economic growth per se, which is a matter of Government policy.

Q138 Chair: Should there be a secondary duty to airlines?

Andrew Haines: We think it is not necessary because of all the other provisions in the Bill. We have to consult with users, we have to demonstrate that we have taken representations into consideration, and then airlines have a right of appeal. There is also a danger that, if we give a secondary duty to one party, we might skew the balance with other parties-such as airports and investors-that we do not have a secondary duty to. We think it is unnecessary and would be unhelpful.

Q139 Chair: Can you guarantee that severe weather will not shut down airports under the provisions of the Bill?

Dame Deirdre Hutton: I wish we could.

Q140 Chair: What can we do to mitigate the problem?

Dame Deirdre Hutton: We have, since last winter, been working very hard with the major airports in the southeast to try and get to a position where severe weather will be considerably less damaging than it was last year. Andrew, do you want to take that forward?

Andrew Haines: We obviously cannot guarantee weather, but we can ensure the licence has provisions in it that place an obligation on regulated airports to be prepared for events. Those are not there at present. We can either be very prescriptive in our approach to that or we can do what many other regulators do, which is to put a general provision in and then establish guidelines. We believe that can send some very strong signals to the airport to make sure they are adequately prepared. Ultimately, it gives the basis for sanction if they fail, in practice, to deliver against those requirements.

Q141 Chair: Would you be in a stronger position under the provisions of the Bill?

Andrew Haines: Very much stronger-transformed.

Q142 Chair: Are there any further powers you would want?

Iain Osborne: I wanted to add that Andrew’s answer is very much about the powers the Bill gives us, which is focused at the airport level. A great deal of what went wrong last winter was with airlines failing to look after passengers who were caught up in problems. We have been doing a great deal of work with the airlines to try and raise their game on that. Last week, or the week before, when there was an expectation of disruption because of the general strike-we now have a trained team-we had people in the airport able to give real-time support to passengers, making sure they were getting their rights and collecting information we can potentially use for enforcement purposes, if that is relevant. This Bill is not about the airline side, but we have powers on that side as well as on the airport side.

Dame Deirdre Hutton: I think the answer to your question about whether we need more powers is no. We are happy with what is in the Bill. Maybe, in 20 years’ time, my successor will be sitting here saying that we should have been given more. For the moment, we are content with what is in the Bill.

Q143 Chair: How are you going to prevent frivolous appeals, either by airports or airlines?

Iain Osborne: I do not think it is for us to prevent them. It is for the appeal body to prevent them. Different kinds of appeals will either go to the Competition Commission or to the Competition Appeal Tribunal. Both bodies will be accepting appeals only from parties with a material interest, which is a concept very well established in law. The courts use it all the time. If they accept an appeal and the party that has made the appeal loses, it will be carrying the costs, which could be quite significant. I think we will be looking to the appeal bodies to prevent vexatious or frivolous appeals. We have a very strong interest that they do that and will be arguing for it. But we are happy that the provisions in the Bill will have that effect.

Chair: Thank you very much for coming and answering our questions.

Examination of Witnesses

Witnesses: Rt Hon Theresa Villiers, Minster of State, Department for Transport, Jonathan Moor, Director of Aviation, Department for Transport, and Robert Catherall, Airport Economic Regulation Policy Manager, Department for Transport, gave evidence.

Q144 Chair: Good morning, Minister, and welcome to the Transport Committee.

Mrs Villiers: Good morning, Chairman.

Q145 Chair: Would your officials like to identify themselves for our records?

Mrs Villiers: Absolutely. Jonathan, would you like to introduce yourself?

Jonathan Moor: Good morning. I am Jonathan Moor. I am the Director of Aviation.

Robert Catherall: Good morning. I am Rob Catherall. I am the Airport Economic Regulation Policy Manager.

Q146 Chair: Thank you very much. Minister, I understand you want to make a statement.

Mrs Villiers: I would love to have a minute or so for opening remarks. First, I offer my sincere thanks to the Committee for engaging in this expedited process to give prelegislative scrutiny to the Bill, which will be a very positive part of the overall legislative process. I very much welcome the patience you have shown and the adaptation you have made to your procedures to ensure this can be done in time with the slot that has become available in the new year to present this legislation to Parliament.

As I hope you will be aware, the Bill contains a package of reforms to modernise the regulatory framework for designated airports, to make that framework more targeted, flexible, proportionate and effective, and to enable the regulator to address the things that passengers care most about. The aviation industry is vital, dynamic and highly successful. It has changed considerably since the current regulatory framework was introduced in the 1980s and that means we need to update that framework to comply with regulatory best practices. We believe that, with this reform, we can deliver a much more costeffective way to deliver airport regulation, which is needed to protect the interests of passengers.

The Bill focuses on reform in three areas. The first is the economic regulation of airports, which takes up the bulk of the Bill. Economic regulation remains vital if we are to protect the interests of consumers. We have had compelling evidence that the current regulatory regime distorts competition between airlines and needs reforming and modernising to comply with best practice. This Bill introduces a new system which puts consumers’ interests first. At the heart of that is the duty to put end users’ interests first in clause 1 of the Bill and it enables the CAA to intervene in real time. The current system has worked effectively in some ways, but it is very focused on a onceeveryfiveyears’ price review. The proposals you are considering at the moment, and Parliament will consider in the new year, focus on enabling the CAA to intervene between those fiveyearly price reviews in a much more flexible way on issues relating to the quality of service that passengers are receiving at airports.

The second area of the Bill covers the regulatory framework for the CAA, with a new role for the regulator in promoting and collecting better information about airline and airport performance and the environmental impacts of aviation to improve consumer choice on service quality issues and, indeed, environmental ones. The CAA will also gain broader powers to enforce competition law at all airports, going beyond its role in economic regulation of designated airports. For the first time, the CAA will be able to use civil enforcement powers as opposed to being confined to the criminal sanctions it has at the moment, which can be disproportionate and difficult to use.

The third area relates to the transfer of responsibility for regulating aviation security from the Department for Transport to the CAA. The Bill transfers certain operational aviation security functions to the CAA, with the Government retaining control of aviation security regulation policy. The Government will remain accountable for security policy, but the CAA, as regulator, will oversee its implementation on the ground. We believe that considerable benefits will be generated for the industry because it will, henceforth, be dealing with a single regulator covering security, safety and economic regulation.

Finally, there is the potential to add to the Bill some further reforms to the Air Travel Organisers’ Licensing fund-the ATOL scheme-which we will be considering in the weeks prior to introducing the Bill to Parliament.

Q147 Chair: Thank you. Who would you say the main beneficiaries of the Bill would be? How would it improve aviation? Who would benefit?

Mrs Villiers: The main beneficiaries would be passengers. Indirectly, airlines will also benefit-as well as airports-because they will be subject to a more efficient and less costly regime.

Passengers will benefit, for example, from the proposed licence condition that the CAA has put forward to require high-quality planning for winter resilience. Recent events have shown that the regulatory system was not very adept at dealing with the issues that arose in relation to the severe weather episode. That kind of inclusion of winter resilience preparation in the licence gives the CAA much more effective powers to intervene where the airport is not providing the quality of service that passengers want.

Q148 Chair: What is the case for continued regulation of airports?

Mrs Villiers: There is a clear case for doing that where airports have substantial market power. Particularly in relation to Heathrow, but in relation to the other designated airports, it would be difficult to properly protect consumers’ interests without a regulatory system. But, of course, the framework we are putting into place gives the CAA the power to decide which airports are regulated. One of the advantages of the Bill is that it takes the politics out of this decision and ensures these decisions on which airports it is appropriate to regulate are made independently by the regulator complying with best practice on regulation.

Q149 Chair: What changes would you expect to see in relation to regulated airports?

Mrs Villiers: I would expect to see changes on issues like winter resilience-a stronger focus on the issues that matter to passengers. One of the aims of the Bill is to get airports focusing on the type of investment that matters to passengers, for example, on improved baggage handling. There is a range of ways in which we hope that the performance of airports will improve and they will focus more closely on their customers’ needs, both in the investment decisions they make and in the way they run their airport.

Q150 Chair: In relation to regulation, would you anticipate different airports would be regulated? Would there be any changes?

Mrs Villiers: That is something the Bill would leave to the CAA. I would not think it appropriate to prejudge their opinion as to whether they wanted to add airports to the system of economic regulation or, indeed, take out one or more of the three airports that are currently subject to economic regulation.

Q151 Chair: If there was more airport capacity in the southeast, do you think that would remove the need for regulation?

Mrs Villiers: I think there would still be a case for regulation, even with changes in capacity.

Q152 Chair: How will the Bill promote economic growth?

Mrs Villiers: It will reduce cost for airports and airlines and ensure that the economic resources are more efficiently targeted. I think the current system is distorting competition in the way airlines operate. I believe that a more modern regulatory framework which is better-simulating what a competitive market would deliver-will lead to a more efficient allocation of resources. Complementary to the changes in the Bill on security is a reform we are taking through, via consultation at the moment, to focus aviation security on a riskbased, outcomesfocused approach, which gives airports more discretion on how to deliver the exacting and demanding security outcomes we will set for them. We believe that would enable them, potentially, to save considerable amounts of money but still deliver the same high standards of security they currently do and, arguably, even improve and make our air travel more secure. But, as I said, we are taking forward that reform to enable them to do that in a more efficient and, hopefully, lower-cost way.

Q153 Chair: Could there be higher costs for regional airports who are already feeling squeezed?

Mrs Villiers: An aspect of the Bill does cover collection of information about airports and air travel which applies beyond those three airports subject to economic regulation. That could potentially impose a cost, but the CAA is, of course, bound by better regulation principles to ensure that it focuses on regulation where the benefits for passengers outweigh the costs.

Q154 Chair: How sure are you that that will in fact be achieved?

Mrs Villiers: I am confident in the ability of the CAA to operate this new framework in a proportionate and sensible way.

Q155 Chair: You mentioned security. One of the concerns we have heard is that, because this Bill is going to Parliament sooner than anticipated, the necessary work on looking at the outcomesbased approach has not proceeded at the same pace. Can you deal with that?

Mrs Villiers: We are certainly keen to press ahead with the broader reform to security but we do not see there is a problem in delivering the overall change to the responsibility of the operation of regulation on the ground. That is a positive move for the airports and airline industry, regardless of the broader approach on aviation security and the approach we take on riskbased regulation. Obviously we will seek to coordinate as well as possible between the two strands of the reform we are taking forward.

Q156 Chair: But it is the detail that matters, is it not? The industry have told us they are generally supportive of that move but are concerned the detailed work on the outcomesbased approach has not been done.

Mrs Villiers: I can certainly understand your point of view and the Committee’s point of view and I am very anxious to ensure we make good progress on the move to an outcomesfocused, riskbased regime. We have to make sure we consider all the appropriate factors and get this issue right, given the sensitivity of it. I will certainly take that message on board. As I say, it is entirely in accord with what I and my ministerial colleagues would like to do, which is to press ahead with what will be a very useful reform.

Q157 Graham Stringer: Can I take you back to the questions Louise was asking you about designation and regulation of airports? You said you wanted to take the politics out of that. Why?

Mrs Villiers: There is a strong case for decisions like this being taken in a very transparent way by independent regulators. Another advantage is that we would have a very broad appeal process for those decisions, whereas, at the moment, it is subject to a decision by the Secretary of State which is only appealable via judicial review. That is very constrained, as you will appreciate. This process is more transparent, and the appeal from it is a lot more powerful and open to interested parties.

Q158 Graham Stringer: I understand that and it is an interesting answer. But the Government is committed to deregulation and generally thinks it is good for the economy. Why not simply bite the bullet and deregulate all the airports economically, apart from Heathrow, and see what happens?

Mrs Villiers: I do not believe that would be in passengers’ interests. The sensible approach is for the regulators to take a decision about whether airports have substantial market power and whether the existing straightforward, acrosstheboard competition principles are not sufficient to protect passengers’ interests.

Q159 Graham Stringer: The direction of travel-I hate that phrase-over the last few years has been to dedesignate airports as the industry has become more competitive and the structure of it has changed with lowcost airlines. Is there not a possibility, in passing this power over to the CAA, that you will have more regulation of airports where it has proved to be unnecessary?

Mrs Villiers: I do not think that that is an inevitable conclusion at all.

Q160 Graham Stringer: Not inevitable, but possible.

Mrs Villiers: In the Bill it is clear that the CAA has a responsibility in terms of efficiency and the appropriate economic outcomes. As I say, I am confident they will exercise their powers in a proportionate manner. They are required by the new statutory framework to have regard to the costs of regulation and to take action where they can be confident that regulation will deliver greater benefits than it costs.

Q161 Graham Stringer: I do not completely understand the details of Government policy, but I understand that every time a new regulation is passed you have to get rid of one. How many regulations have you got rid of in proposing this Bill?

Mrs Villiers: This Bill does not add new regulations. It will involve considerable reduction-

Q162 Graham Stringer: Potentially it does, does it not?

Mrs Villiers: -in costs because it is a more efficient system. The regulatory impact demonstrates that this new regulatory system will cost considerably less for airports to operate. I do not know if Rob wants to come in on that.

Robert Catherall: Yes. This Bill recasts the system of economic regulation, so we are repealing Part IV of the Airports Act 1986 and introducing a much more flexible system of economic regulation which should lower the costs on industry because it is able to be deployed much more flexibly. Therefore, the economic regulation is a deregulatory measure.

Q163 Graham Stringer: It is only deregulatory if the flexibility is applied less than it was before and not in an arbitrary way, is it not? It could be more regulatory.

Mrs Villiers: The assessment we have done is that this will cost airports and airlines less to operate than the current system, which is why it has had a broad welcome from many stakeholders across the airports and aviation industry.

Q164 Jim Dobbin: Minister, you mentioned the environment in your opening statement. Of course it is high up the agenda now with the signing of the climate change agreement in Durban. Obviously, with the Governments who have signed that deal, you are going to have to take that into consideration. I am curious because a Department press release stated that the draft Bill had included a duty to have regard to the environment and local communities and that seems to have disappeared from the content of the Bill.

Mrs Villiers: The inclusion of that duty in the press release was an error. There is no explicit inclusion of a duty to take on board environmental factors. That would not stop the CAA from taking a balanced approach, in relation to decisions on investment, which has an environmental purpose. As I said in my opening statement, the Bill would require the CAA to take its decisions on the basis of what is in the interest of passengers. It is certainly in the interests of passengers for airports to be good corporate citizens and to take account of the environmental impact of the decisions they make. The current framework does not give the CAA an explicit right to take on board environmental factors when making decisions on economic regulation, but that has not stopped airports from making appropriate investments, for example, in schemes to mitigate the environmental impact of flying.

Q165 Jim Dobbin: But would you not think that, since this deal has been signed, the Department should look at the content of that deal and see whether it is a possible security issue for the Department?

Mrs Villiers: When you say "that deal has been signed," I possibly misheard that. I did not understand your question. There is a specific deal-

Q166 Jim Dobbin: I am talking about the climate change deal in Durban.

Mrs Villiers: Right. Obviously, I very much welcome the progress that has been made in Durban and I hope it is a precursor for further progress on carbon emissions. This Bill is about economic regulation. It is not the right vehicle for delivering a sustainable framework, overall, for aviation. To take action effectively on aviation, one needs to look at the whole industry, and, preferably, operate on an international basis. Certainly, a specific focus on environmental requirements in relation to airports that happen to pass the substantial market power test and require economic regulation would potentially distort the picture.

My point of view is that, for measures which are appropriate to address the impact of flying, they need to be addressed to all airports rather than only to those that happen to need economic regulation. Indeed, the CAA does carry out various environmental functions pursuant to different statutory duties which it has. While this Bill focuses on their role in relation to economic regulation and, potentially, for regulating security in the future, there are other functions the CAA have, not least of which is giving advice to Government that includes some very valuable input in relation to noise and also advice on the Emissions Trading Scheme, which is central.

Q167 Jim Dobbin: My own view is that there will be an economic cost in relation to reducing carbon emissions. Therefore, it is associated with the economics of all of this and might well be something in the future that we have to look at.

Mrs Villiers: There is a potential cost associated with measures needed to deal with climate change, but there is absolutely no doubt that costs which an airport incurs as a result of laws and regulations requiring them to take action on environmental impacts are recoverable-can be included-as part of their regulatory asset base. It is very clear that they could spend money and use the regulatory asset base to deliver the improvements they need to make to comply with legal obligations on reducing both carbon emissions and addressing local environmental impacts.

Q168 Chair: You said, Minister, that the inclusion of the environmental duty in the press release was an error.

Mrs Villiers: It was, I am afraid.

Q169 Chair: What kind of error was it? Did the Government change its mind?

Mrs Villiers: The Government had decided on the content of the Bill and decided that a specific environmental duty was not necessary or appropriate. Unfortunately, a mistake was made when the press release went out in that the Government’s view on this was not reflected in the press release and an environmental duty was included. It was some time ago when the decision was made that a specific reference to environmental considerations was not appropriate in the context.

Q170 Chair: Was there an earlier draft which said there should be an environmental duty?

Mrs Villiers: The previous Government had proposed, in its consultation, to include such a duty. The current Government, for the reasons I have said-because we do not think economic regulation is the appropriate vehicle for this-decided that a specific environmental duty was not appropriate.

Q171 Iain Stewart: I have a couple of separate but related questions on the interests of passengers. The Bill defines air transport users as present or future passengers or cargo owners. We have heard some concern that the interests of current passengers and future passengers are different and that, to meet the needs of future passengers, significant investment and disruption to airports currently will have to be made. That obviously does not help the current passengers. Are you comfortable that the Bill is sufficiently clear in its definitions of balancing those two different needs?

Mrs Villiers: It should be possible to do that balancing exercise without too much difficulty. It is important that the interests of both those groups of passengers are properly considered. It would be a mistake only to focus on what is convenient for today for the short term. We do need to take into account the longterm needs of passengers and that is in the longterm interests of a healthy airline industry as well.

Q172 Iain Stewart: Linked into that is another area of dispute between the airlines and the CAA on the publication of performance information. The airlines feel that would be disproportionate and they already publish the information. The CAA says that is not happening. First, I would be interested in your view on who is right on that debate. Also, if we are balancing the needs of current and future passengers, are you comfortable that the requirement to publish information currently will take account of any disruption that goes on in investment in airports to meet future passenger needs?

Mrs Villiers: Clearly, a range of information is already published about performance, but I think passengers’ interests would be well served by having a wider range of information published. Under the Bill, it would be up to the CAA to decide what it is appropriate to ask airlines and airports to publish. As I have said before, it is entirely possible for them to do that in a proportionate manner and it would be very important for them to take on board the costs of doing that, and only to take forward requests where the benefits outweigh those costs. In almost all areas of provision of public services, giving consumers more information on the performance is a very effective driver of performance improvement. When it comes to suppliers of any kind of service which have a substantial market power and may require regulation, a very important tool is for consumers to know how the relevant operator is performing in practice. Shining the light of transparency on performance is going to be a real plus for passengers in this context as it is in many other areas of service provision or public service provision.

I am not quite sure I understand the point you are concerned about. You think if information is published about present services that will distort the picture in relation to future services. Perhaps you could give me a bit more information about the concern you have.

Q173 Iain Stewart: To give you an example, let us say the information is on the efficiency of processing baggage handling at the airport and the airlines are required to publish their performance in that. But certain airports, to meet the needs of future passengers, were investing in new systems for processing baggage, which, in the short term, leads to a drop in performance-

Mrs Villiers: I see what you are getting at.

Q174 Iain Stewart: Will the information that is required to be published be value added in that way, that passengers can make an objective decision and say, "Okay, this airport or airline was diminished but that is only a shortterm phenomenon"?

Mrs Villiers: There is always the risk, with any kind of transparency, that it will be read in such a simplistic way it does not give a true picture. We all have experience of that in the way the press reports all sorts of figures. It would certainly be very important for the CAA to qualify and explain the figures ultimately published, and they are eminently capable of doing that sort of thing. It is never possible to be proofed against distortion and partial coverage of statistics, but it is an important issue. Yes, in terms of the way the CAA deal with the information it is ultimately going to publish, it would be very important for them to comply with the best practice, say, that the Statistics Commission would circulate, making sure we do all we can to ensure people understand the information-and do not get a mistaken impression from the figures-so they can then make a judgment that the figures have gone down but, in terms of longterm improvement, that is justifiable and desirable. It has nothing to do with competence. It is a product of disruption caused by investment to deliver improvements in the long term.

Q175 Paul Maynard: Mr Stewart beat me to it on current and future passengers, but you very clearly laid out why you thought this was a deregulation measure. Do you have any concerns, with smaller regional airports operating at the margins, that this represents a cumulative additional burden which may threaten their continued existence? Many are operating at the margins already and this will be adding one more burden on top of many. The Airport Operators Association is very concerned about this.

Mrs Villiers: I appreciate that some regional airports have struggled over recent times with the overall impact on air travel of the economic situation over the last few years. I can only repeat that I feel it is very important that a proportional approach is taken by the CAA to information collection. They are subject to clear duties which require them to look very carefully at the requests they make of airports to ensure the benefits of providing the information outweigh the cost to airports. I believe they can get that right. I also believe, in line with a major thrust of coalition policies, that transparency drives improvement, and giving people more information about the services they buy or receive through the public sector is very beneficial for them. There really are pluses for passengers of airports because it will enable them to make informed choices about where they want to fly from, whether it is a regulated airport or one of the smaller airports which is not part of economic regulation.

Q176 Julie Hilling: Minister, I apologise, but can I take you back to the environmental and local communities’ duty? I hear what you are saying, that you did not see it was appropriate to put it in here, but where, then, will it go into any future legislation?

Mrs Villiers: There are various functions the CAA has under other legislation, particularly in relation to giving advice to Government where it looks at a number of environmental issues. That will continue unaffected. As I have said, in making decisions on economic regulation, it is clear that passengers’ interests are served by ensuring airports are responsible players in the market. For example, I believe that Birmingham airport has spent money on environmental mitigation measures and it has done so in circumstances where they are not a regulated airport and are in competition with other airports. So the market is already delivering a situation where airports which are not regulated are making investments in environmental mitigation. That is one of the reasons why the CAA would think it entirely reasonable for airports which are regulated to invest in environmental mitigation measures. As I have said, that already happens and it has never been changed by airlines.

I am confident that the CAA would be able to continue to permit investment by airports, on the basis of the RAB, which is focused on the environment. Without those kinds of environmentally responsible measures by airports, the likelihood might be greater that the Government would come along with a tougher regime in the future. One of the reasons why airports invest in environmental mitigation measures is to take forward their commercial interests. It is to ensure, for example, that they could get their planning applications through. It is in the airport’s interests to make that environmental investment and, ultimately, in the passengers’ interest. Hence, I do not see there is going to be a problem with the CAA continuing to do what it does under the current system, which is to allow airports to invest in measures which are specifically directed at mitigating the environmental impact of flying.

Q177 Julie Hilling: What about that comfort for people who live near airports who were hoping for greater controls on noise pollution and other effects of the airport? They were hoping for stronger regulation in there. What comfort can you give to them?

Mrs Villiers: I still think economic regulation is not the right vehicle to deliver it. The way in which we deliver comfort to local communities is by sticking to the promise we made not to build a third runway at Heathrow. The way we take on board the concerns of communities is by a very careful assessment of all the issues around night flights, which the Government will be making in determining the successor to the current regime. There are much better ways to protect local communities than via economic regulation. The Government is determined to protect the quality of life of local communities. That is one of the reasons why we opposed a third runway at Heathrow and why, as I have said, we will be looking with great care at what the replacement for the current night flights regime will look like.

Q178 Graham Stringer: I am worried about the transfer of security functions from the Department to the CAA. Is there any rationale, apart from transferring the costs from the taxpayer to the passenger, for this transfer?

Mrs Villiers: The rationale is that it makes sense. There are real benefits to having security regulations sitting in the same place as safety and economic regulation. In particular, I think there are real synergies between safety regulation and security regulation. The CAA has a record which is as good as any in the world on the success of its safety regulation, as does the airline industry. A lot of that is focused around safety management systems. Empowering the airlines and the airports to come up with systems that are safe-which they devise-is very much in line with the thrust of the reforms that we are taking through in the wider reform of security regulation. Having the same regulator overseeing the two streams of regulation on the ground will be a more efficient way to do it. I think, ultimately, it will reduce costs. It is not only a question of transferring cost from the taxpayer to industry, though I appreciate that is what the Bill does. It will also make for a better, more costeffective and effective way to regulate security.

Q179 Graham Stringer: The trade unions say, "If it ain’t broke, why try to fix it?" The security system at the moment, since Lockerbie, has stopped any outrages, and there have clearly been some attempts to blow aeroplanes up. Even in your risk assessment you say that the CAA lacks sufficient security expertise, although DfT and the CAA are working to mitigate this. Is there not a real risk involved in that transfer?

Mrs Villiers: First, on the concept of "If it ain’t broke, don’t fix it," you are right that very high levels of security are being delivered, which is, thankfully, one of the reasons why we have not had recent terrorist outrages that have succeeded. But there has been, for a long time, feedback from the industry which has said that the current way of regulating security is too process-based, too tickbox-based and too inflexible. For example, take the measures that Gatwick introduced to have familyfriendly lanes in search zones. That kind of innovation has sometimes been hard to get through the current processes. There really is a case for looking at a process which, as I say, entrusts and empowers the people delivering security on the ground to work out the best and most effective way to deliver that. Genuinely, that will make it more passenger-friendly. There are real benefits here. Ultimately, the outcome is going to be the same in that we will maintain high, and arguably better, levels of security. The way of delivering it will be not only more cost-effective but it will be more passenger-friendly.

In terms of the risks of transferring this to the CAA, obviously an assessment of any legislative proposal has to take account of all possible risks. We are certainly proposing to transfer staff with the transfer of responsibilities. We are hoping that experienced staff, currently working in this area, will be part of that transfer to the CAA and that that will help mitigate risk. We believe these risks are manageable and it would be appropriate for us to press ahead with this reform because it will result in a better outcome for passengers.

Q180 Graham Stringer: There are two differences that occur to me. One is, Minister, if something goes wrong-and we all hope it does not go wrong- you will not be responsible, will you? The lines of accountability will be broken for your responsibility because other people will be making detailed decisions. I want a Minister of whatever Government to be responsible for security.

The second issue is not nearly as important as that, but it is a detailed practical issue. When people tried to get on aeroplanes with peroxide-liquids to blow them up-new regulations were brought in. Those regulations were implemented very badly by officials, although the policy was fine. Direct representations had to be made to the Secretary of State-who was Andrew Adonis at the time-to intervene to make the implementation of the policy work more effectively. I can imagine a letter from you or your successor saying, "This is not to do with me. This is to do with the CAA." Again, I want the Minister to be responsible not only for the overall security but for the detailed implementation. Do you not think that is a problem?

Mrs Villiers: I do not believe it will cause problems. For example, operational decisions in the police are taken by the police themselves, not directly by the Home Secretary. The Secretary of State for Transport will continue to be accountable for aviation security policy-the regulation of security. The policy will be the responsibility of the Secretary of State and she will remain accountable to Parliament for that. The daytoday decision making, in all sorts of other regulatory contexts, is taken by regulators with the airports obviously delivering the security on the ground. That split of accountability where politicians set the framework, set the policy, works in a whole range of contexts every bit as sensitive as aviation security without problems.

Q181 Graham Stringer: I do not think I agree with that but I accept your answer. I have a final point. You mentioned that the Civil Aviation Authority deals very well with safety and has an excellent safety record, which is true. Something this Committee’s predecessors have worried themselves about in the past is that you would not normally-or in a lot of cases you would not ideally-sit a safety regulator in the same organisation as an economic regulator. There might be conflicts of interest. Do you not think you are increasing the number of potential conflicts by putting security in there as well as safety?

Mrs Villiers: I do not think so because, whatever the function is, any regulator has to take a sensible and proportionate approach to risk. That is one of the key things a regulator has to do. Those principles apply in safety, security and in economic regulation. Other regulators, such as the ORR, have very successfully combined a responsibility for economic regulation with safety regulation. The CAA has, for many years, successfully combined regulation of safety and economic regulation. As I have said, the CAA’s success in keeping people safe on our airlines has been absolutely tremendous. It is second to none. The example we have had from the CAA over the previous decades demonstrates that you can be the most successful safety regulator in the world, arguably, and still be competent and successful in regulating other areas as well.

Q182 Kwasi Kwarteng: I was wondering what your thoughts were about competition between different airports and how this Bill would foster that. There are some issues about inter-terminal competition and things of that nature. I wanted to know what you had to say about that.

Mrs Villiers: Extending the CAA’s remit to give it a parallel responsibility with OFT for general competition rules will be positive and lead to a more effective operation of competition rules in relation to airports generally. As to the decisions, as you will be aware, the Competition Commission recently-a few years ago-proposed divestments of some of the airports owned by BAA, but that is a matter for the Competition Commission to determine in relation to potential divestments.

Q183 Kwasi Kwarteng: Going forward-and you probably will not want to be drawn into this-as aviation evolves in this country, do you think that the regulatory environment would be changed significantly if we were, for instance, to build a big airport at the estuary? Would you be prepared to comment on how the regulatory environment might evolve in that instance?

Mrs Villiers: The design of these reforms is to provide the CAA with the tools to regulate effectively and proportionately over the years to come. Regardless of what is done about capacity, we want to give the CAA the tools it needs to regulate and to protect consumers’ interests in a way which is as economically efficient as possible.

Q184 Kwasi Kwarteng: So you do not see any change. Given where we are with the CAA and the talk about potential new major developments in this field, do you think the structure of the CAA-what we have-is sufficient to take us forward?

Mrs Villiers: I think the current system of regulation is inflexible. The new system that we propose in this Bill would give the CAA the powers of the modern regulator to intervene effectively and proportionately, in real time, to protect the interests of passengers. That would remain the case, as I say, separately to the issue of capacity. The Bill does not-

Q185 Kwasi Kwarteng: Okay.

Mrs Villiers: It is a separate issue. It would work regardless of the decisions which are taken on capacity in the future.

Q186 Julie Hilling: The staff side expressed some concern to us about the transfer of staff from the Civil Service. One of their major concerns is that an awful lot of people would not want to transfer and expertise would be lost because they would then be seeking other alternative posts within the Civil Service. What is your view on that?

Mrs Villiers: The proposal is to transfer the posts. We are keen to try and provide as much clarity as possible to the staff filling those posts about the exact arrangements. Not everything is finalised at the moment. For example, the pension schemes of both the Civil Service and the CAA are currently under review and subject to negotiation. It is not possible to give complete clarity on all issues at the moment. We are clear that the posts would transfer with the Bill and we very much hope that the relevant staff would want to transfer. Obviously, a potential option for staff is to seek other posts within the Civil Service if they did not want to transfer. We would hope that as many of them as possible would want to transfer. We will be working with them to provide as much visibility and clarity as possible about the circumstances in the terms of the transfer, but we cannot answer all the questions yet.

Q187 Julie Hilling: We can hope for lots of things. There is a real concern that that expertise will be lost. Have you considered other models, for example, staff being managed, for instance, but remaining civil servants, effectively a secondmenttype model? Your employment remains within the civil service but the management is elsewhere.

Mrs Villiers: Of course, as a result of this prelegislative scrutiny process, we will consider all the representations that the Committee might want to make on that and other issues. Our current view is that transfer of the posts to the CAA is going to be the most effective way to deliver the change that we need and support the CAA in the duties it carries out. Obviously, we think it is important to retain as many of the staff currently in those posts as possible to ease the transition.

Q188 Julie Hilling: Can I ask about ATOL? You are saying that potentially it will be in the Bill. Are there going to be reforms of ATOL in the Bill and what are they going to be?

Mrs Villiers: We will be making an announcement on that in the new year when we respond to the consultation we have run on ATOL, which looks primarily at the reforms we were proposing to take forward through secondary legislation, but it also asks questions about reforms which would require primary legislation, in particular to bring airline holiday sales into the framework. As I say, we will be announcing the results of the consultation and our decision on whether to include ATOL provisions in the Bill in the new year. The Committee will get its answer very soon on that. I am sorry it has not proved possible to put it in the Bill now.

Q189 Chair: When we know what is happening with that, we will be putting questions to you about ATOL.

Mrs Villiers: I am grateful for the Committee’s interest in that. I would be very happy to come back and talk about it.

Q190 Chair: I want to go back to the passenger experience because you talk a lot about the Bill making it easier for passengers to be able to compare experience in different airports. Some of the frustrations that passengers face are about queuing at border control. Will you be publishing figures on that?

Mrs Villiers: Do you mean the queuing at borders?

Q191 Chair: Yes, border control.

Mrs Villiers: That is not within the remit of the Bill.

Q192 Chair: But it is a very significant part of the airport experience, is it not?

Mrs Villiers: It is indeed, yes. You will appreciate that that is a competence for the Home Office.

Q193 Chair: I do, but there is no provision in the Bill.

Mrs Villiers: Not in this Bill, I am afraid.

Q194 Chair: One of the provisions is for competition between airport terminals. What are the circumstances where that would be agreed?

Mrs Villiers: The body that would have the power, if it so chose, to require some kind of division or divestment of terminals, would be the Competition Commission. It has that power at the moment. This Bill does not make any change to that. The CAA does not have that power. In this Bill we have future-proofed it so that if, in the future, the Competition Commission decided that competition between terminals was appropriate we would not have to amend legislation to update the regulatory framework to deal with that situation. The current position is that the Competition Commission has expressed interest in this issue, but it has not made a ruling that that is an appropriate way to deal with competition issues, though it has said that it would like the legislative framework to keep open the option of doing that in the future. Of course, there is also the conceivable alternative whereby, without a divestment order by the Competition Commission, an airport itself chose to separate the ownership and operation of parts of its airport. That is why the Bill allows for licensing and designation of part of an airport as well as a whole airport.

Chair: Thank you very much for coming and answering our questions.

Mrs Villiers: Thank you. It is much appreciated by us. It has been a very interesting discussion.


[1] This letter is available on the CAA’s website: http://www.caa.co.uk/docs/286/Feb2011Objectives_signedfinal.pdf

[2] See supplementary evidence from the CAA for clarification on this point

[3] Ibid

Prepared 18th January 2012