Civil Aviation Bill

Memorandum submitted by Gatwick Airport Ltd (CA 07)

22 February 2012

About Gatwick

Gatwick Airport is the UK’s second largest airport and the busiest single-runway airport in the

world. It serves more than 200 destinations in 90 countries for around 32 million passengers a

year on short- and long-haul point-to-point services. It is also a major economic driver for the

South-East region, generating around 23,000 on-airport jobs and a further 13,000 jobs

through related activities. The airport is 28 miles south of London with excellent public

transport links, including the award winning Gatwick Express. Gatwick Airport is owned by a group of international investment funds, of which Global Infrastructure Partners (GIP) is the largest shareholder.

Executive Summary

1. Gatwick welcomes the bill and the principles behind it. Its provisions herald much needed reform of the regulatory regime governing the UK’s largest airports, which has not been updated since privatisation in 1986. These changes will directly and indirectly benefit passengers. This must be the guiding principle behind any framework for reform. As such, we support the substantive majority of what is being proposed. Some improvements could however be made.

2. These improvements would ensure that the bill creates a regulatory system that "puts consumers first" through effectively facilitating the investment that the UK’s largest airports need in order improve. Our submission to the committee focuses on three key areas where we believe Ministers should reflect further, or clarify ambiguities. Gatwick broadly supports all the provisions of the bill not specifically referred to in this submission.

3. Market Power Test: The market power test forms the entire basis of whether an airport is regulated or not , and therefore whether many of the provisions in the bill apply to it or not . It is critical that the test used incorporates best practice and established precedent from other sectors , and from across Europe . A s the Transport Select Committee recommend , a ‘light touch’ approach which recognises that competition does exist between London ’s airports should be applied by the regulator . T here is some ambiguity on this issue . Ministers should reflect further on the need to ensur e ‘dominance’ is present prior to the regulation of an airport being required.

4. Appeals of an airports licence : This bill seeks to increase regulatory accountability by allowing airlines to appeal the terms of an airports licence , (which could include its price cap) or a change to it once issued . The scope for repeated , and possibly unmerited, appeals to the Competition Commission is significant. Gatwick has 7 0 airlines. Under the bill, any of them could appeal, creating uncertainty that would d elay investment in the airports that passengers expect and need. The bill does seek to safeguard against this. A s the Transport Select Committee outline, thes e safeguards need to be tightened. Setting a clear threshold around who can, and cannot , appeal a change to an airports licence would provide a clear safeguard .

5. Requirement to publish information: The bill creates an enabling power for the C ivil A viation A uthority ( CAA ) to obtain and publish information on ‘the environment’ and ‘customer service’. We welcome the principle. We have led the industry in terms of transparency in these areas. At the same time, the bill also needs to require that the CAA does not replicate the existing, successful efforts that the sector is undertaking in this area.

Market Power Test ( Clause 6 )

6. The bill outlines a series of tests that must be met in order for an airport to be regulated. These aim to determine whether an airport has ‘substantial market power’ ("SMP") and if so, whether there is a risk of abuse of that position which existing Competition law is not sufficient to control. An airport which meets the market power test requires a licence to operate from the CAA, which may include a price ’cap’ on what it can charge airlines for landing, taking off and parking at the airport. These charges are levied on a ‘per passenger’ basis, and often appear on passenger tickets as ‘airport charges’.

7. Gatwick agrees with the Transport Select Committee finding that: "Given the greater degree of competition that now exists between airports in the south east of England… the CAA should undertake its economic regulatory duties with a relatively light touch. The Government should be open to proposals and suggestions for amendments to the bill to reinforce this principle".

8. Gatwick is currently price regulated because of its previous position as part of BAA, which at that time had 92% of the South East airport market. Gatwick’s sale has therefore removed the rationale for the economic regulation of Gatwick. Gatwick’s current market share – at most 25% of the South East market – is substantially lower than for companies subject to economic regulation in other sectors. For example, utility network companies such as water companies and electricity transmission and distribution companies operate natural monopoly businesses where entry and competition are for all intents and purposes not possible.

9. In October 2011, we made a substantive submission to the CAA outlining that Gatwick should not be economically regulated, as we do not have Substantial Market Power (SMP). At Gatwick there is compelling evidence of innovation and competitive behaviours consistent with the Competition Commission’s and CAA’s expectations when calling for the break-up of BAA’s South East airport monopoly. In our view, there is sufficient competition present for the market to determine the appropriate level of charges that Gatwick levies for using the airport.

10. For example, airlines and passengers have the potential to switch to and from the airport – and this is what happens in practice. Gatwick has gained routes from its competitors in the South East. It has also lost routes. The CAA’s own figures show that a substantial proportion of passengers view two or more of the South East airports as good substitutes for Gatwick [1] . Competition is present. If our prices were too high, airlines and passengers would be free to go elsewhere.

11. Regulation stifles competitive forces. For this reason, the Government must, through this bill, outline a regulatory framework that will give competition more chance to develop. In Gatwick’s case, the commercial relationships we wish to establish with our customers cannot develop freely in the shadow of regulatory decision-making. As in other areas, the full benefits of competition will only arise with the lifting of the distorting impacts of regulation.

12. As such, we believe (as does the Transport Select Committee) that any market power test outlined in the bill should reflect the competitive environment that now exists between airports in the South East. This should involve clearly linking any test used to determine whether to economically regulate an airport with the legal concept of ‘dominance’, which is the test used to determine whether competition is present in other sectors in the UK and across Europe and is a well understood concept in EU and UK Competition law. The European Court defines this position as follows:

"a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers" [2] .

13. It is also applied in the regulation of utilities and infrastructure provision, for instance by the EU in context of its reform of regulation of the communications sector [3] . In this sector, regulatory bodies are required to use the ‘dominance’ test to determine whether a national communications network operator should be economically regulated or not. It is a concept endorsed by both the Office of Fair Trading (OFT) [4] , and indeed the CAA [5] as being appropriate to determine whether sufficient competition exists in a market or not, and therefore whether there is need for regulatory intervention in that market.

14. We see no reason why a decision to economically regulate an airport should be taken on a different basis from that outlined by the European Court, by the OFT and by the CAA in its own competition guidelines. In our view, a test that the CAA conducts for SMP should also clearly be one for ‘dominance’ as defined by the European Court and applied in regulated sectors across the EU.

15. We do note reference in the explanatory notes to the bill that the "CAA will take due account of all applicable guidelines and recommendations relating to the analysis of markets and market power, which have been produced by the UK and European Competition Authorities" [6] . As the committee will be aware, explanatory notes do not have any statutory status [7] . As such it is not incumbent on the CAA to make reference to them in assessing SMP. We believe that it should be.

16. From the summary of CAA’s ‘initial view’ [8] on market power at Heathrow, Gatwick and Stansted, it is not clear that the established process to determine dominance (described in paragraph 12) has been followed. Instead, the CAA introduces the concept of ‘market segments’ and concludes that in some market segments Gatwick’s position is ‘relatively strong’. This does not necessarily translate to a situation where Gatwick can be found to be ‘dominant’ in the South East airports market.

17. Such departures introduce uncertainty and create the risk that intentions of Government, as outlined in the explanatory notes to bill, are not fulfilled. The application of economic regulation should be based on clear, and objectively justifiable principles. In other sectors the finding of dominance, in line with the European Court’s definition of ‘dominance’, needs to be established to warrant regulatory intervention. In our view this should be the standard also required to justify the economic regulation of airports.

18. For the avoidance of any doubt in the future over the way in which the CAA assesses market power (and therefore whether it regulates an airport or not), the face of the bill should clearly stipulate that ‘dominance’ [9] is the test to be applied by the CAA in assessing SMP. This could be achieved by stating that SMP is equivalent to dominance, as is the case in the relevant legislation governing regulation of the communications sector.

19. At the very least, Ministers must confirm to parliament that the basis under which the CAA assesses SMP must be the same as that outlined by the European Court in making judgements around the relevant sections of the EC Treaty. While we welcome the reference in the explanatory notes for the bill, this issue is fundamental to the entire basis of the economic regulatory structure the bill outlines. It is important that the actual legislation makes this clear.

The Scope of r ights of a ppeal of an airport’s licence (Clauses 24-25)

20. The bill introduces a right for airlines and ‘any materially affected’ person to appeal to the Competition Commission the terms of, and modifications to, an airport licence that the regulator publishes, which would include any ‘price cap’ applied. Gatwick agrees with the Transport Select Committee that "airlines might use frivolous or vexatious appeals to delay licence conditions to which they are opposed" and that there should be "far clearer definition of what constitutes ‘materially affected’ if this risk is to be avoided.

21. As the Transport Select Committee outlines, there is a real need to reassess the scope of the right of appeal against an airports licence conditions: the bill does not say what this means. As such, virtually all airlines operating (or potentially operating) at a particular airport could argue that they have a material interest in the airport’s licence conditions, particularly those which related to price controls- which often determine how much, through the ticket price, their passengers have to pay to use the airport.

22. This is compounded at airports like Gatwick, which is home to over 70 airlines, with a full suite of airline business models. We are a major base for what have been defined as ‘low-cost’ short haul airlines, where the cost of a ticket is a key consideration. Increasingly, we are also home to ‘long haul’ airlines, where the level of service provided to customers both on an aircraft and in an airport is seen as at least as significant, if not more so, than that for customers of ‘low-cost’ airlines. To provide a level of service that ‘long haul’ airlines expect, and also to compete to attract other airlines with this business model, we have to charge prices for airport services that are commensurate with the costs of doing so.

23. By contrast, in attempting to provide an increasingly improved services to these passengers, we are indirectly impacting the business model of ‘low-cost’ carriers, whose business model is based on cost to the passengers, with our charges built into that. In this way, Gatwick is caught in the middle of two competing pressures from our airline customers. One to maintain and improve high levels of services in all airport services we provide, and another to keep costs low. The airport will also have a regard to the longer term and interests of future passengers. Allowing all 70 airlines a right of appeal, which may well be based on their own short term self interest, will create delay, uncertainty and additional cost.

24. This could cause real problems that would harm consumers interests. Long, drawn out, and multiple appeals of, for example, the amounts that an airport can charge airlines and passengers are simply not in those passengers interests. World-class airports require certainty of investment over a defined time-frame. Regulatory deadlock would mean delays to the facilities that passengers need, and would degrade their experience

25. The CC admits as much in the relevant recommendation, when it outlines that such provisions could promote "the risk of numerous appeals, the risk that unmeritorious appeals are pursued, [an increased] burden on the regulated company, and the risk that the CC becomes effectively the regulator of the system" [10] .

26. Practical experience from other regulated sectors demonstrates this to be the case. The increasingly litigious nature of the communications sector has substantially delayed the introduction of new communications services that end-users, and the economy, would benefit from. Ofcom's decisions are continually mired in lengthy and detailed appeals, their resources are diverted away from its core statutory functions and their ability to take timely and effective decisions is impeded to the extent that the Government is now reforming the appeals system in the communications sector to minimise potential for delayed regulatory decisions as a result of continued appeals [11] .

27. The Government, in the evidence summary for their impact assessment around the bill, state that "although difficult to predict numbers accurately in advance, wider rights will almost certainly lead to more challenges". They go on to outline a number of ‘safeguards’ that in their view would discourage unfounded appeals to either the terms of an initial licence or a subsequent change to it. These include, if appeal concerns the initial terms of the licence, whether an appeal is ‘trivial or vexatious’, whether it has ‘a reasonable chance of success’, or if appealing a change, a ‘permission stage’, the loser having to bear costs and that the appeal would not suspend the actual modification of the airport licence.

28. We appreciate the extent to which the Government has gone to discourage invalid appeals. However, in the context of Gatwick, we do not believe these are sufficient safeguards provide sufficient protection against them. Because of the diversity of the airline mix at the airport, there is still scope for a huge number of appeals, or attempted appeals to be made. This would risk the whole process of issuing and/or modifying our licence, if it were found we required one, becoming so unwieldy as to discourage the substantial private sector investment we need to attract in order to fund what National Infrastructure Plan names as one of the UK’s top 40 infrastructure projects.

29. We agree that airlines with substantial amounts of passengers should have rights of appeal. But there is a risk inherent in making those rights as broad as the bill does. While we do not object to the principle, there is a need to refine who actually has the right of appeal, or who is "materially affected" by a license once the CAA issues it, or decides to change it once issued. In our view, the best way to do so would be to place a threshold based on the total number of passengers from a given airline that actually use that airport, which defines who is, and is not, materially affected.

Appeal Threshold

30. In our view an appropriate threshold would be for an appeal to be permitted by an airline or group of airlines if that airline, or group of airlines, accounts for more than 40% of passengers using an airport in a given year. This would ensure that the airlines who account for a significant proportion of Gatwick’s business, and whose business is therefore affected most by the way we operate the airport and what we charge, would have scope for right of appeal of the initial licence or a modification of our licence, if we are found to require one. It would also negate the delays and uncertainty around future levels of investment that we need in order to grow caused by the potential of multiple appeals.

31. We appreciate that no airline at Gatwick currently accounts for 40% of passengers passing through the airport in a given year. However, a collective of airlines who genuinely felt that a licence modification ‘materially affects’ them should be able, under the terms of the bill to relatively easily, combine together to jointly appeal. This mechanism provides the benefits of increasing the accountability of the regulator for its decision, but reduces scope for multiple appeals that we have highlighted.

32. Ministers should consider whether this provides the additional safeguards that the Transport Select Committee require. Certainly, this kind of provision would place the imperative on airlines to collectively determine whether the terms of any licence that the CAA issues, or changes once it issues it, do in fact affect more than one business and further narrow the scope for appeals that have little or no merit or are based on narrow self-interest.

CAA Powers to require publication of information (Clauses 83-92)

33. The bill gives the CAA powers to require the publication of information on ‘customer service’ and ‘environmental’ issues, on the basis of whether costs to the industry of publishing information are justified by the perceived benefits that the CAA judge to be gained from doing so.

34. We believe that the provisions for information being released to allow consumers to compare services or ‘customer service’ and make an informed choice, will be of real benefit. Gatwick has, in many ways, led the way around the publication of transparent information relating to the performance of on-airport partners- including handling agents. We would welcome this kind of approach being formalised in legislation .

35. However, as the transport select committee outline, in some areas, "these powers are too widely drawn and risk creating bureaucracy and additional costs to the aviation industry while the benefits are less tangible".

36. We agree with this view. There is a clear need for information to be published around an airports environmental performance. We want to publish information about what our impacts and we want to help people understand what we are doing to manage them. Given this, t he benefits for creating what the Government calls an ‘enabling power’ seem to us, limited and do not seem to take account of what airports are already doing to achieve just that. For example Gatwick recently published a draft airport master plan, in which we openly detailed information around our current and future projected contribution to climate change, carbon, air quality, air noise, ground noise, waste management, energy, water, landscaping and biodiversity.

37. We have also conducted a comprehensive public awareness and consultation programme that has involved eleven days of public exhibitions in six separate locations, ten stakeholder workshops, a bespoke on-line engagement tool and direct communications with over 5000 local people. We will soon publish a further document outlining what information the community and stakeholders believe needs to be published or clarified.

38. We have also published a simple ten point plan for how we will improve our environmental performance over the course of the decade . This programme, which we call Decade of Change, commits us to a range of easily understood objectives- including a 50% reduction in our carbon emissions (compared to 1990 levels), a 20% reduction in energy usage, eliminating use of landfill and recycling 70% of all waste. These are challenging targets.

39. Every year we update stakeholders on progess around them. Managing environmental impacts , as well as being transparent around what they are, have been a key feature of Gatwick’s progress since coming under new ownership. In our view, we have done a great deal to raise awareness of the environmental impacts of our operations, and the measure s we are taking to manage them and we have done so without these legislative provisions being in place.

40. We also operate, in common with all UK airports , a statutory consultative committee (GATCOM) . This meets in full public session four times a year and is open to the public. We provide this committee, and any other member of the public that wants to participate , with a detail ed overview of our current environmental performance around carbon emissions, noise impacts, air quality impacts, energy usage, waste and water management. This complemented by a full annual report, which provides further details on exactly what our levels of performance have been and what mitigation steps we are taking.

41. Given the extensive efforts we make to publish as much information as we can, in as simple and accessible form as we can, we question whether there is need to compel the CAA to perform a function that we are already undertaking ourselves, and indeed whethe r it is appropriate for the CAA ( rather than an airport ) to determine, how best to publish information around what our environmental impacts are.

42. The bill should ensure that this does not happen at the outset . In our view, the bill rather than simpl y making this power an ‘enabling’ one, should require the CAA to actually assess whether in publishing the information concerned they are actually going above and beyond the efforts undertaken by the airport or airline the request relates to.

43. The impact assessment in the bill outlines a range of ‘steps’ that the CAA ‘anticipates’ taking in exercising this power. The only actual obligation they are placed under is that the costs should not outweigh the benefits. There is a clear need to ensure that the CAA are also obliged to consider the nature of information that the industry already publishes in determining whether to exercise its power. Leaving all of the scope for how this power is used to the CAA does not eliminate the risk we outline , and creates the potential for administrative burden that the transport select committee outline needs to be addressed.

February 2012

[1] CAA, Catchment area analysis working paper, ( October 2011)

[2] Case 27/76 United Brands v Commission [1978] ECR 207, [1978]1 CMLR 429. This definition has been

[2] used in other cases.

[3] Article 4, Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (Electronic Communications Framework Directive)

[4] Office of Fair Trading, Abuse of a Dominant Position: Understanding Competition Law (2004)

[5] CAA ‘ Guidance on the Assessment of Airport Market Power’ (April 2011)

[6] Civil Aviation Bill Explanatory Notes- Paragraph 58.

[7] The Cabinet Office Guide to Making Legislation (2010) outlines that “ The Notes are not legislation. They do not form part of the Bill and are not amendable by Parliament nor endorsed by it. They are not designed to resolve ambiguities in the text of the Bill – if ambiguities are identified as the Bill progresses, they should be removed by amendment. The Notes should make clear that they do not purport to be authoritative rulings on the interpretation of the proposed legislation, as only the courts can give these” .

[8] CAA , Heathrow, Gatwick and Stansted – market power assessments (January 2012)

[9] Article 82 of the EC Treaty (Article 82) and section 18(1) of the Act (the Chapter II prohibition)

[10] Competition Commission, BAA airports market investigation: A report on supply of airport services by BAA in the UK (March 2009)

[11] Department for Culture, Media & Sport “Implementing the revised EU Electronic Communications Framework - Appeals HMG proposals on reform of the Telecommunications Appeals Framework”

Prepared 22nd February 2012