Civil Aviation Bill

Memorandum submitted by the

MANCHESTER AIRPORTS GROUP (MAG) (CA 05)

INTRODUCTION & SUMMARY

1.1 This is the submission of the Manchester Airports Group plc (MAG) to the Call for Written Evidence issued on 31 January by the House of Commons Public Bill Committee in connection with its scrutiny of the Civil Aviation Bill. MAG welcomes the opportunity to respond.

1.2 MAG is the UK's second largest airport operator and comprises the airports of Manchester, East Midlands, Humberside and Bournemouth. MAG handled over 24 million passengers in 2010/11, with Manchester alone accounting for over 19 million passengers.

1.3 MAG is publicly owned by the ten local authorities of Greater Manchester. These shareholders require us to grow the business profitably, to enhance the value of the business; and to maximise the economic and social contribution to the regions it serves.

1.4 MAG supports the Bill in many respects, addressing as it does many of the criticisms that MAG has made over the years of the existing airport regulatory system. In particular, we welcome its greater flexibility and clarity, its introduction of a new primary duty of the regulatory system, and the fact that it seeks to target regulation only where it is absolutely required.

1.5 However, we do have some concerns, which will be further explained below:

· Increase in costs for airports, and indirectly for passengers and airlines;

· Presumption in the Bill that savings will arise from the ‘outcomes focused risk based’ security process;

· Limited ability for some airports to recoup new regulatory costs;

· Industry costs being collected only via airports, instead of direct on airlines;

· Inter-terminal competition and its associated terminal development tendering; and

· Appeals process against licence conditions and modifications.

2. DETAILED COMMENTS

Increase in costs for airports

2.1 The Bill seeks to give the CAA additional responsibilities in various areas, including enforcement, information disclosure and security regulation. These will result in increased costs for airports, and, ultimately on passengers and airlines.

2.2 The current regulatory charge for non-designated airports [1] is 0.95p per arriving passenger – approximately £85,500 per year at Manchester Airport. This will increase to 1.26p from April 2012, an increase of one third, to allow the CAA to fund its new responsibilities of consumer protection, as well as a result of structural changes in the way that charges are applied. This amounts to an increase for Manchester Airport on the 2011 baseline of some £27,900.

2.3 On top of these increases, the Civil Aviation Bill proposes loading further regulatory costs onto airports. These arise from a) the enhanced role envisaged for the CAA in terms of enforcement and information disclosure (not quantified and shown below as X), and b) the transfer of security regulation from DfT to CAA (estimated by DfT at 2p per passenger [2] ).

2.4 We estimate that the combined costs could be as high as 4p per passenger:

(Current regulatory charge 0.95p)

Regulatory charge from April 2012 1.26p

Enforcement, information etc costs Xp

Additional charge to cover security 2p

Estimated new charge (1.26p+2p+Xp=4p) 4p

2.5 Whilst this does not sound an onerous amount at a per passenger level, it would increase the regulatory costs at Manchester Airport by £274,500; an increase of 321% on the 2011 baseline. This is illustrated below:

Impact on Manchester Airport

 

Date	Pax (one way) [1]	Regulatory charge	Total annual cost [1]	Increase on 2011 baseline	Percentage increase
2011	9 million	0.95p	£85,500	N/a	N/a
2012	9 million	1.26p	£113,400	£27,900	32.6%
Post bill	9 million	4p approx	£360,000	£274,500	321%

Impact on East Midlands Airport

 

Date	Pax (one-way) [1]	Regulatory charge	Total annual cost [1]	Increase on 2011 baseline	Percentage increase
2011	2 million	0.95p	£19,000	N/a	N/a
2012	2 million	1.26p	£25,200	£6,200	32.6%
Post bill	2 million	4p approx	£80,000	£61,000	321%

(Bournemouth and Humberside are currently under the threshold for economic regulation charges, but may in future incur the 2p per pax passenger charge).

2.6 These new costs represent a significant regulatory burden on UK airports, especially the smaller, regional airports. These airports are already struggling with the cumulative costs of recent additions such as airport policing costs and aviation spectrum pricing.

2.7 If airports sought to introduce a 321% cost increase on their airline customers, the regulator would rightly seek to intervene. We believe that at the very least, the Government / regulator should consider phasing in the costs over time to avoid overburdening in particular the smallest airports. We agree with the Transport Select Committee that, "the Government and the CAA should be sensitive to the costs implications for airports of the various measures proposed in the draft bill." [1]

Outcomes-focused security / presumption of cost savings

2.8 The DfT has argued that, while the industry will in future be paying for the cost of security regulation (currently funded by DfT), there may in fact be savings for industry. The move towards an ‘outcomes focused, risk based’ (OFRB) security process would give the industry more flexibility to innovate, negotiate better deals and ultimately make savings. In other words, future costs should be set against the potential for future savings.

2.9 There is no intrinsic link between OFRB and the Bill. OFRB could be introduced as an approach to aviation security without the need for any legislation. The linkage being made between the two is a false one.

2.10 While OFRB is a laudable aim, and one broadly welcomed by the aviation industry, the extent to which it will result in meaningful savings is debatable. The DfT’s own impact assessment (accompanying the recent consultation on OFRB) states that the saving for industry is likely to be in the region of just 1% of industry costs. We believe even this to be highly optimistic.

2.11 For the UK Government to allow a more flexible approach, it needs to secure agreement from its EU partners. Since aviation security is largely governed at EU level, any flexibility for UK industry will require special dispensation from the EU. If MAG’s experience is anything to go by, acquiring the approval of the EU authorities for security innovations will be extremely challenging.

2.12 Manchester Airport (MA) is currently operating thirteen Rapiscan Secure-1000 single-pose, backscatter scanners under an EU approved trial. We believe that the scanners are safe, that robust safeguards are in place to protect passenger privacy, and our experience shows that passengers overwhelmingly prefer the body scanners to a traditional ‘pat-down’.

2.13 However, despite strong backing from the Department for Transport, the future of Manchester Airport’s body scanner trial is now uncertain. In other words, Manchester Airport sought to innovate, but without the support of the EU, our investment remains in doubt. This gives us little reassurance that the 1% cost saving, promised as part of OFRB, would actually materialise.

2.14 The Government does have some flexibility when it comes to addressing the ‘more stringent measures’, which it unilaterally applies over and above EU legislation. These could potentially be subject to more flexible arrangements under the OFRB approach. However, this is likely to be fairly limited, and unlikely to deliver the expected 1% of savings.

2.15 MAG is concerned that, far from delivering savings, the transfer of aviation security from DfT to CAA will simply result in additional costs. As the Transport Select Committee pointed out, "There is a danger that the aviation industry will incur the additional costs of security regulation but not the savings that may come from the proposed introduction of the outcomes-focused risk-based OFRB security regime…The Department for Transport must do more to reassure the aviation industry that the potential benefits from an OFRB regime will be delivered, to offset the additional costs that it is imposing." [2]

Cost recovery

2.16 Despite the significant increase in the costs of regulation for airports, the Bill makes no reference as to how airports may seek to recoup these costs.

2.17 The larger, regulated airports are able to pass increased regulatory costs through to airlines, and ultimately passengers, as an opex cost within their regulatory settlement. However, the majority of UK airports, which operate in a highly competitive environment, find it much harder to simply pass on costs to airlines. Airlines push back strongly on any cost increases, and to simply expect, for example, Manchester Airport’s airline community to accept an annual increase of £274,500, without any commensurate savings elsewhere, is entirely unrealistic. At worst, it could put some marginal routes out of Manchester at risk.

2.18 At some airports, particularly the smaller ones, low cost carriers have sought lengthy deals spanning several years. These lengthy contracts may have little or no scope to vary charges to take into account new regulatory costs, adding to the complexity and impracticality of cost recovery.

2.19 MAG would like to see some recognition in the Bill that this could be a problem for airports, particularly the smallest airports. Our preferred solution would be for the CAA to be able to collect the regulatory costs that directly relate to airlines from the airlines themselves, rather than via airports.

Regulatory costs collected via airports

2.20 A large proportion of the recent cost increases arise from the CAA’s extended role in consumer protection. To date this has mainly concerned other sectors within the aviation supply chain, including airlines, tour operators and various agencies and contractors. Complaints may include lost baggage, flight delays and cancellations and booking disputes, all of which airports have no direct control over.

2.21 We understand that the cost of such regulation was previously funded partly by CAA overheads and partly via a NATS regulation fee on the airlines. The latter represents the fact that the CAA currently has no power to directly levy non-UK airlines, despite the fact that the majority of consumer complaints are in relation to airline issues, such as those above.

2.22 Changes to Single European Sky rules will mean that the option of imposing an indirect NATS regulation fee will not be available in the future. The CAA is unable to charge airlines directly because it only has the power to levy charges on UK registered airlines and aircraft. Such a charge would cause a competitive disbenefit to UK airlines as well as the fact that much of the CAA’s work in this area concerns mainly foreign registered airlines. In response to this the CAA have loaded regulatory charges onto airports, assuming that they will be able to pass them on to airlines.

2.23 The presumption that airports can pass these costs on to airlines is unfounded. As described above, this is very difficult for the vast majority of UK airports, which operate in a highly competitive market.

2.24 The end result for airports represents a fundamental injustice as they are required to pay for regulation in areas that they have no control over and which other sectors, such as airlines, have responsibility for.

2.25 We believe that it is unfair that airports should be directly charged for an industry-wide issue of consumer protection and airports should not have to shoulder the burden. Additionally, some of the security costs being levied directly on to airports include regulated air cargo agents and suppliers of in flight catering.

2.26 To rectify this, the Bill should give the CAA the statutory power to levy charges on all airlines that use UK airports. This would enable the CAA to apportion consumer protection charges more appropriately between airports and airlines, dependant upon its regulatory workload. Direct charges on such airlines are already levied directly by the UK Government in the form of Air Passenger Duty (APD).

Inter terminal competition

2.27 Clauses 4, 5 and 10 – 13 of the Bill refer to the regulation of airports where there is more than one ‘operator’ at a given airport site. This is envisaged where competition has been introduced within an airport site, such as ‘inter terminal competition’.

2.28 Our understanding is that this is in the Bill simply for future-proofing and to ensure that legislation is flexible in the event that inter terminal competition is ever introduced in the future. The Bill does not specifically promote inter terminal competition or even describe a process under which it may be introduced in the event of a market failure as a potential remedy

2.29 However, we would argue that the Government should be able to justify why the legislation should be introduced at all. We do not believe it is consistent with ‘better regulation’ to insert clauses into a Bill on the off chance that they may be needed or used at a later date in the future.

2.30 Inter-terminal competition is unworkable, undesirable and not in the best interest of the passenger. The reasons for this are:

· Cost: a single terminal operator will have lower operating costs due to economies of scale and the ability to optimise capacity across terminals. This directly benefits airlines and passengers, but would be undermined by inter-terminal competition;

· Capacity: for meaningful competition to exist between terminals there would need to be spare capacity at each terminal to allow airlines to move freely between terminals. Such spare capacity would increase costs and reduce efficiency;

· Differing airline needs: no frills operators have very different needs to those of full service and long haul scheduled carriers. A single operator can more easily and efficiently accommodate these differing needs than multiple operators. In the case of Manchester Airport, the current terminal configuration is such that T3 is unsuitable for the volumes associated with charter traffic; T2 is not designed for domestic traffic etc. To adapt terminals to be able to accommodate all sorts of traffic would be expensive and probably a barrier to any such switching taking place;

· Transaction costs: a model with multiple terminal operators would most likely result in significant transaction costs, given the legal structures (leases, ownerships etc) and the inflexibility of future development of the airport due to fragmentation. JFK (where 9 terminals ‘compete’) is one of the most expensive airports in the world;

· Planning: An operator with a full asset might seek expansion at a time when other terminals have capacity, leading to an inefficient use of assets; and

· Price controls: A licensed airport with multiple operators would create an extremely complex price control system. If the different operators were all subject to price control, this would require the regulatory asset base to be disaggregated and costs allocated between terminals, airside and landside areas. This would almost certainly prove complex and expensive, given the high level of regulatory intervention that would be necessary.

2.31 MAG would like to see the relevant clauses deleted / amended to rule out inter terminal competition. This would be in the best interests of the passenger.

Appeals process

2.32 The current regulatory system for airports involves an expensive and time-consuming two-stage process, with a mandatory referral to the Competition Commission. The proposals contained within the Bill provide for the more 'standard' regulatory model to be adopted, with the initial licence conditions and modifications being undertaken by the sector regulator, and the Competition Commission having an appellate role only. This is welcome.

2.33 MAG notes that the main players in the regulatory process to date have tended to be the airlines, who are well able and qualified to pursue their own regulatory interests. This being the case, there remains a possibility that airlines will continue to pursue appeals for commercial reasons, with the result that the process will remain a two-stage process, merely swapping over the timing of the respective CAA and Competition Commission stages.

2.34 Within Clause 25 (5), there is effort to offer some protection against this as well as with the Competition Commission now bound, for the first time, to have regard to the new primary regulatory duty of putting the interest of the passenger and/or freight user first when undertaking their duties in this regard. However, the Bill should be strengthened in this regard to ensure that the appeal is in the interests of either the passenger or freight user.

3. CONCLUSION

3.1 MAG broadly welcomes this Bill, but remains concerned about the proposed cost implications. We would like to see costs phased in over time.

3.2 MAG notes that there is no direct link between the Bill and OFRB. The potential benefits of OFRB could be realised with or without the Bill.

3.3 We are not convinced that the OFRB process will outweigh the new costs of security regulation. After our experience with bodyscanners, we fear that industry will see extra costs for no additional benefit.

3.4 We are concerned that the Bill presumes airports can pass all their costs on to airline customers. This is not the case. Our preference would be for regulatory costs pertaining to airlines to be charged directly to airlines.

3.5 Finally, we are not persuaded of the need to include clauses that would pave the way for the possibility of inter-terminal competition. We believe that this is not in the best interests of the passenger, and that these clauses should be removed.

February 2012