Civil Aviation Bill

Memorandum submitted by British Airways (CA 10)

Summary

1. British Airways supports the main ideas behind the reform of airport regulation as set out in this Bill. We support particularly the focus on our passengers; the flexible licence-based approach; and the increased accountability of the CAA. We have contributed fully to the Government’s consultation process and to the Select Committee’s pre-legislative scrutiny process and would now like to submit the following points on the draft legislation for consideration by the Scrutiny Committee.

2. These are mainly technical drafting changes that are designed to ensure the Bill achieves its stated purpose. In many cases, the Transport Select Committee also recognised that these were areas where amendments would be needed. In summary, we request that:

· A secondary duty to air transport providers is included (in Clauses 1(3)&S2(4)) in place of the specific obligations to consult if necessary;

· The specific tests for removing financial derogations from the initial licence (Clause 23) are redundant and should be removed;

· Improvements are needed to several of the Definitions (Clauses 68 & 70)

· Greater clarity is needed in the Security Provisions (Clauses 78-82) and a commitment to the principles of Better Regulation;

· A safeguard is needed over the new Information powers (Clauses 83-92) to reduce the risk of regulatory intervention where there is no market failure;

· The CAA should have an explicit Efficiency duty (Clause 100) and be subject to audit by the NAO, as other regulators are;

· There is a risk that inappropriate use of new Civil enforcement powers (Clause 102) could damage the open flow of information between industry and CAA, that has contributed to the UK’s high safety matters. We recommend that the CAA is required to consult on a formal policy before exercising the new powers;

· The requirement not to impose undue Regulatory burdens (Clause 103) should apply not just to airport economic regulation, but to other areas of CAA regulation, including the new security regulation powers.

3. These points are discussed more fully below.

Introduction

4. British Airways is one of the world’s largest airlines, carrying 32 million passengers worldwide annually on 750 daily flights. We employ around 39,000 people, predominantly in the UK, and have an annual turnover of around £8.5 billion.

5. The airline’s two main operating bases are London’s Heathrow and Gatwick airports, with a smaller base at London City Airport serving New York and European destinations. From these three bases, British Airways flies 237 aircraft to 152 destinations in 75 countries. The airline also transports cargo – more than 750,000 tonnes around the globe each year.

6. In 2010 BA completed its merger with Iberia of Spain to create the International Airlines Group (IAG). Our combined business offers flights to 205 destinations throughout the world on a fleet of 415 aircraft. We have also commenced a joint business agreement with American Airlines (AA), which further extends benefits for our customers. The combined network of BA, Iberia and AA serves 433 destinations in 105 countries with more than 5,180 daily departures.

7. The relationship that British Airways has with the airports it operates from, especially Heathrow and Gatwick, are of crucial importance to the success of the airline. We are committed to making this relationship work for the benefit of our passengers and the freight carried in our aircraft. To this end, we work closely with airports in some areas, such as in delivering high standards of security, and we depend on the system of economic regulation to ensure that airport services are provided efficiently and are well aligned with passenger needs. We have therefore engaged fully in the consultation opportunities provided by Government, CAA and the Transport Select Committee as the Bill has developed.

Secondary duty to air transport providers (Clauses 1(3)& 2(4))

8. British Airways considers that the CAA [1] should have an explicit secondary duty to "further the reasonable interests of air transport service providers" when regulating airports. It is accepted by all parties that airline and passenger interests closely align in the highly competitive UK air transport market (and the CAA has recently adopted this as its "rebuttable position"). This duty has been part of the current framework for airport regulation since 1986 and has never caused any difficulties. [2]

9. British Airways understands and supports the Government’s decision to clarify the CAA’s remit by giving them a new single primary duty to passengers, as the ultimate consumers. However, it is self-evident that airlines, as the airports’ direct customers, manage and pay for the commercial relationship with airports, on behalf of passengers. Passengers expect the airline they buy their ticket from to negotiate with the airport on their behalf on a range of issues including airport capital investment, service quality, airport efficiency and prices. This is what happens at airports that face real competition from other airports. Airports cannot compete for passengers directly, but compete to attract airlines. Airlines therefore know better than anyone else, including the regulator, what different passengers want and are prepared to pay for. Airlines often compete with rivals at other airports, so they have a strong commercial interest in securing an efficient airport experience for passengers as part of their overall journey.

10. We therefore consider that a secondary duty on the CAA to further reasonable airline interests is an important, efficient and pro-competitive mechanism to help the CAA interpret passenger interests, reducing the need for expensive surveys, the risk of regulatory error and the number of appeals. In any case, such a duty can do no harm, since it does not conflict with the primary duty.

11. Both the Competition Commission and the Transport Committee have recommended that there is a secondary duty to airlines. We understand that the Government considers that airline interests would be better protected by obliging the CAA to consult with airlines on a number of specific matters in the Bill, rather than subjecting CAA to a clear secondary duty to airlines. However, we do not consider these references to be an effective substitute and believe that a specific secondary duty would be much clearer. In the interests of clarity and brevity, we would therefore be prepared for many of the specific references to consulting airlines to be replaced with a more general duty to consult, so as not to change the balance and intention of the Bill. In Appendix 1 we list the specific references to consulting airlines that could be changed if a new duty was included.

Removing financial derogations from the initial licence (Clause 23)

12. Clause 23 sets out the procedure that CAA must follow in order to remove an airport operator’s derogations from financial ring fencing conditions of its licence. We accept that initial derogations from a standard ring fencing regime are necessary in the initial licence as a transitional measure, given the financing arrangements that airport operators currently have in place.

13. However, a ring fence and its conditions exist to make sure that the assets passengers pay for are there for their use, even in periods of financial distress. The CAA must be able to protect passengers from financial risks. Therefore we do not believe that initial derogations should be permanent, and question the need for additional specific tests that must be met before they can be removed. It is not clear why the process to change this part of the licence should be any different from other licence changes, given the checks and balances provided in the new Bill [3] . The additional regulatory hurdles imposed by Government appear to add unnecessary complexity and uncertainty. We are concerned that this provision could expose passengers to the risk of paying more for the money that BAA borrows on their behalf. We also have concerns that by imposing additional unnecessary constraints on how the CAA performs its new duties, the Government may, however unintentionally, undermine the independence of the CAA.

Definitions (Clauses 66-70)

14. British Airways understands and supports the Government’s intention to provide clear definitions that allow the CAA to focus on areas of an airport that could be subject to statutory market power. However, many of the important definitions are completely new and it appears that some require amendment to avoid unintentional and potentially damaging effects. We may provide additional comments at a later date, but we set out here our initial views:

15. In Clauses 67(1(c) & 3) the definition of "Airports" includes only car parks directly linked to terminals or with pedestrian access. This would appear to exclude long stay car parks, even though the airport may be able to exercise market power in this area (especially if there are planning policy constraints that restrict car parking to within the airport perimeter). BA believes that this definition should be widened. It is important to note that widening this definition does not oblige the CAA to regulate if they do not believe the airport could exercise its power over long stay car parks. However, it does give them the ability to do so if they consider it necessary following their market power determination.

16. For similar reasons we consider that Clause 67(1)(f) should be extended to include facilities such as shuttles, bus facilities and other structures used for transporting passengers between terminals, satellites and car parks.

17. We consider that Clause 67(4) should be extended to include hotels beyond those inside a terminal. Hotels within the airport perimeter have an essential role in facilitating the operation of the airport. This is particularly true at times of disruption (when airlines may be obliged to accommodate passengers overnight under passenger rights regulations [4] ). It is important that such airport hotels are not excluded from the possibility of regulation if an airport attempts to exploit their market position either at periods of disruption, or at other times.

18. We consider that Clause 67(5) which specifically excludes bus, tram or railway stations from the definition of an airport should be removed, since these are often included within terminals and paid for by passengers (the capital cost may be recovered from airport charges). The requirement to improve local surface transport provision is often a planning requirement associated with airport development and it is important that the CAA is able to control the costs of such significant investments, if they deem it necessary.

19. Currently, the CAA uses the concept of a "single till" to allow them not to regulate non-core airport activities directly, but to ensure that the airport has no long term interest in exploiting any market power they may have. The definitions of an airport need to be drawn widely enough not to prejudice the continuation of the single till, which is widely acknowledged to be an effective and proportionate "light-touch" regulatory approach.

20. In Clause 68 we do not consider that ground handlers should be included in the definition of airport operators, as these bodies operate in a competitive market (as guaranteed under the EU Groundhandling Directive). As some airlines perform their own ground-handling, the effect of this could be to subject airlines to airport regulation. BA does not believe this has ever been the intention of the Bill.

21. In Clause 70 there is a wide definition of joint operators of airport areas. We understand the intention of this provision, which is to include joint venture agreements. However, it is drawn so widely that it could include bodies that have very limited responsibility for the effective management of some aspects of an airport area – such as airlines or ground handlers. We would request that this definition is tightened so that it covers only airport operators.

Security Provisions (Clauses 78-82)

22. BA has a number of concerns about the proposed transfer of security regulation from DfT to CAA, including the lack of clarity about the responsibilities of the two bodies and the cost burdens that could be added to industry. British Airways supports strongly the Government’s intention of moving towards an Outcome Focused Risk Based approach to regulation (OFRB), but currently it remains unclear what this means in practice, how long it will take to deliver and what savings can be expected from regulatory costs. We therefore share many of the concerns expressed by the Transport Select Committee and would request that further consideration is given to this whole section. We have also made a number of other suggestions that could help address the issues identified, including changes to Clauses 100, 102 and 103 (see below).

Information powers (Clauses 83-92)

23. The new information and publication powers in Sections 83 & 84of the Bill, which would permit the CAA to collect and publish a wide range of information on air transport services, are drawn widely and there is a risk of unwarranted use and/or overuse and interference in competitive markets. The Transport Select Committee shared these concerns. We understand that the CAA must first consult on a policy and have regard to the principle that the benefits should outweigh any adverse effects. However, with any regulator, there is a real risk of over-regulation when such wide powers are provided and this could distort competition or add unnecessary cost burdens.

24. We therefore believe CAA should be obliged to have regard to the principle that regulatory action is justified only where there is clear evidence of market failure. We think this would be reasonable addition to the need to ensure that costs are outweighed by adverse effects and it could be included as an amendment to Section 92(3).

Efficiency duty (Clause 100)

25. Most regulators are given a formal duty to be efficient and are subject to oversight by the National Audit Office [5] . It is important that the CAA is properly accountable for its use of resources, as recognised by the Transport Committee. We recommend, therefore, that Clause 100 of the Bill includes an amendment to Section 8 of the 1982 Civil Aviation Act, adding a subparagraph such as:

26. " In performing its duties and functions, the CAA must have regard to the need to use its resources in the most efficient, effective and economic way."

27. BA notes that in the Financial Services Bill currently progressing through Parliament, the Government proposes to subject the Financial Conduct Authority, and the Prudential Regulatory Authority, to clear requirements to discharge their duties with due regard to the need for efficiency, and subjecting them to audit by the National Audit Office. We do not believe there are any compelling reasons that the CAA should not also be subject to such requirements.

Civil enforcement powers (Clause 102)

28. British Airways recommends that these new powers are balanced with the requirement for the CAA to establish an enforcement policy. This could work in a similar way to the Section 92 requirements for use of information publication powers.

29. British Airways is concerned that giving the CAA extensive new powers to fine the civil aviation industry risks changing the generally cooperative and open relationship between industry and regulator. This relationship is especially important in the area of safety, where the industry’s excellent safety record has benefited from an open and honest dialogue about safety issues. Increased use of enforcement measures is likely to make industry less willing to share information if it is likely to be used in civil enforcement proceedings. Our concerns would also apply in the area of security regulation, if the new powers are transferred.

30. We do understand the need for any regulator to have an effective enforcement regime, but we consider that the risks of the proposed approach currently outweigh the benefits.

Regulatory burdens (Clause 103) – application to security regulation and other powers

31. British Airways believes that this provision – a duty not to impose or maintain unnecessary burdens – should be applied to Part 2 of this Bill, and preferably to all the CAA’s regulatory functions. This will be an important means of achieving the Output Focused Risk Based (OFRB) approach to Security that is intended to accompany the transfer of security regulation and will therefore be essential to ensuring that the new cost burdens are accompanied by a more effective regime.

32. In any case, it is not clear why subsection (3) applies to Chapter 1 of Part 1 (economic regulation of airports) when there is already an explicit requirement in Section 2(4) that has very similar effect.

33. Final Note: BA is still considering the competition provisions and other details in the Bill and will provide further comments to the Committee if necessary at the earliest opportunity.

Appendix 1:

Specific references to consulting air transport providers that could be removed if a new secondary duty to airlines is included [6]

Most of these references oblige the CAA to send a copy of the notice/licence etc to a list of bodies including "such bodies representing airport operators or providers of air transport services as the CAA considers appropriate". The specific reference to providers of air transport services could be replaced with a generalised reference to bodies the CAA considers appropriate or perhaps a more up to date requirement to make public its intentions and to invite comments from interested parties.

Clause 8 (publication of market power determination)

Clause 11 (publication of operator determination)

Clause 15 (1a & 3) (publication of proposed and final licence)

Clause 16 (4a & 9) (proposed refusal to grant a licence)

Clause 22 (2a, 5 & 6) (licence modification)

Clause 31 (8) (contravention notice)

Clause 33 (5) (enforcement order)

Clause 34 (4) (modification/revocation of enforcement order)

Clause 35(5), 36(7) & 37(5) (urgent enforcement order)

Clause 41 & 42 (penalty notices)

Clause 48 (11) (licence revocation notice)

Clause 53 & 54 (penalty notice)

February 2012


[1] Any chance to the CAA duties would also be reflected in the Secretary of State’s duties, as these are worded in the same way.

[2] One of the CAA’s four equal duties under S39 of the Airports Act is “to further the reasonable interests of users of airports”, where users are defined as both passengers and airlines.

[3] Sa feguards against inappropriate licence changes include: a) the CAA’s explicit duties to ensure that an airport can finance its activities; to promote efficiency and economy; and to regulate in a way that is proportionate and targeted; b) the CAA has a duty under S103 not to impose or maintain unnecessary burdens; c) the airport can also appeal licence change decisions to the CC.

[4] Regulation (EC) 261/2004

[5] Examples of efficiency duties can be found in many other regulatory frameworks including the Financial Services and Markets Act 2000, the Water Industry Act 2003 and the Charities Act 2011. Equally, most such bodies are subject to NAO audit, including for example those covered by the new Financial Services Bill (such as the Financial Conduct Authority, the Financial Services Compensation Scheme and the Money Advice Service).

[6] The specific references to air transport operators in relation to licence change appeals are not included in this list, because they are necessary to give effect to the right of appeal.

[6]

Prepared 24th February 2012