Civil Aviation Bill

Memorandum submitted by BAA (CA 16)

Introduction

1. BAA welcomes the introduction of the new Bill. It is important that the framework for regulation is modernised to ensure the CAA can regulate in a dynamic market. Although the focus of regulation will be the airport operator it is important to recognise that the industry is complex and a successful passenger journey relies on other organisations such as airlines, ground handlers and UKBA.

2. If the CAA is to regulate effectively against its primary duty to passengers it is vital that they have the power to monitor and publish performance across the entire passenger journey. BAA wants a regulatory regime where it can work collaboratively with other members of the airport community with accurate open information so issues that impact on the passenger can be managed effectively. The airport cannot be held responsible for matters beyond its control.

3. It is also important that the Government recognises that economic regulation and market power need to be considered in the context of a wider aviation market. It would be wrong to focus on the UK market alone when applying a market power test. It is clear that Heathrow faces increasing competition from a number of European Hubs., and that Stansted competes with airports across Europe to attract and retain low-cost airlines. It is important that Government gets the balance of regulation right – otherwise it will place the UK at a significant disadvantage relative to the regulatory regimes governing competitor airports in the EU.

4. The current draft of the Bill is a good start. It largely reflects the policy debate two years ago. BAA supports the policy that sits behind the Bill. Our concerns are around how that policy has been given effect in the drafting process. It must be recognised that the drafting process over the last twelve months has been conducted behind closed doors in Whitehall and we have only had access to a draft since mid-November. In the short time available we have tried to work collaboratively with senior officials at DfT to work through our concerns. It is essential that the Bill Committee address a number of key areas that remain of concern.

5. The Bill is overly complex and doesn’t sit well with commensurate legislation relating to economic regulation and competition law. BAA is also concerned that the balance between regulator discretion and accountability is skewed. BAA is also concerned that recent moves to include airlines within the primary duty appear to disregard the careful consideration that Ministers have given the issue, and we are concerned that such a fundamental change at this late stage will completely undermine the policy intent and needs to be carefully thought through. In addition, BAA is concerned that the Bill doesn’t given sufficient focus to elements of the passenger experience that are beyond the airports control such as the arrivals immigration process.

6. A number of essential and relatively simple amendments will ensure the Bill is clear and workable and give the CAA the necessary tools to implement policy effectively.

Balancing complexity with clarity

7. BAA supports the policy that the Bill should in no way limit the potential for the development of competition in the future (in whatever form that might take). Our concern is how the Bill has been drafted.

8. BAA believes the Bill imports unnecessary complexity that is not seen in comparable legislative frameworks. The foundation of the Bill (Clause 5) is difficult to understand and does not sit well with well-established approaches used in competition law. Complexity has already led to misinterpretation and we believe the burden is on the Government to demonstrate why complexity is required. Complexity increases investor uncertainty.

9. The drafting in clause 5 appears to be more about limiting what the CAA can regulate by introducing a complex set of arrangements relating to airport areas, core areas and the relationship between the two whilst also introducing the concept of dominance. We do not believe clause 5 needs to be complex to limit the ability of the CAA to regulate. It is certainly not required to give effect to the policy intent of allowing for different forms of competition between airports.

10. It needs to be recognised the CAA is bound to its duties and needs to demonstrate the benefits exceed the cost. Within this framework there is almost no risk that the CAA will impose regulation unnecessarily. There is already a well-established model that’s reflects this approach. The Communications Act 2003 sets out the framework within which OFCOM conducts economic regulation. An alternative draft to clause 5 based on the CA03 would read along the following lines:

(5)

(1) Before making a market power determination CAA must -

(a) Identify the market or markets (with reference, in particular, to product and geography) which in their opinion are the ones where it is appropriate to consider whether to make a market power determination; and

(b) Carry out an analysis of the identified markets in relation to the market power test [in section 6]

(c) Publish a notification for consultation containing an account of the matters [at subsection (a) and (b)]

(2) The markets referred to in Section 1(a) and 4 must, in relation to the product market concerned, consist only of Airport Operation Services.

(3) The duty in section 1 must be carried out in a manner which is consistent with competition law.

(4) A market power determination must:

(a) Identify the geographic and product markets in respect of which it is made;

(b) Identify any person or persons which has or have substantial market power in those markets.

(c) identify (by reference, in particular, to airport area and locality) the markets which in their opinion are the ones where it is appropriate to consider whether to make a market power determination; and

(d) carry out an analysis of the identified markets in relation to the market power test in clause 6.

11. In the last ten years there is no evidence that such a form of regulation has allowed OFCOM to regulate beyond the scope of the policy intent. There is no need for this complexity in the draft Civil Aviation Bill when a simple effective precedent in another sector is already in place. We do not believe the DfT or CAA has given sufficient justification for why such complexity is required – and the test for its imposition on industry should be high.

12. Given this is a far simpler approach, unless DfT and the CAA can identify a technical reason why it cannot be implemented, BAA believes the current text should be replaced. Time has been short so it has been impossible to consider the consequential amendments required to other parts of the Bill. However, given the compressed nature of the process it would be wholly inappropriate for amendments not to proceed on the basis that there is insufficient time for the Department to consider consequential amendments. The compressed timeframe for amending this Bill is an issue caused by Government and should not be used as a means for driving through a less than adequate draft now.

Balancing flexibility with accountability

13. The CAA is given broad discretion in the Bill. BAA supports broad discretion for the CAA, both in the way it determines what markets should be regulated, and how these markets should be regulated. In our view this is the regulatory approach that is most likely to lead to the best outcomes in a complex industry environment. Such flexibility needs to be balanced with robust accountability. In addition to an appeals process - the best way to balance that discretion is by placing checks and balances on the regulator that are designed to enhance decision making. There are two ways this has been done in other regulated sectors but appear absent in this Bill.

14. BAA considers that a formal requirement to carry out impact assessments (including cost/benefit analyses) before a licence condition is imposed would be consistent with best practice and help to deliver proportionate regulation. It has considerable advantages over relying on the common-law requirement because it is clear and explicit and requires quantification. In telecoms for example, experience shows that CBAs significantly enhance regulatory rigour and transparency. We therefore propose a number of amendments that will introduce requirement on the CAA to work with the licensee and airport users to fully understand the costs and benefits of each licence condition (and more importantly the relationships between conditions). Improving transparency of the impact on the entire airport system will be a significant step forward and a means of ensuring the maximum benefit for passengers and airlines.

15. BAA believes the CAA should be subject to the National Audit Office Regime. An argument that suggests the CAA does not need to be audited by the NAO because the CAA does not spend the public’s money is questionable and demonstrates how out of step that thinking is with the accountability the public expects. The Office of Rail Regulation (ORR) and OFCOM are funded in a similar way to the CAA (through industry licences and levies) and are subject to NAO scrutiny. Other regulators such as the Office of Fair Trading (OfT) are also subject to these requirements. It is difficult to see why the CAA should be treated differently to its peers. We have prepared a number of amendments that would give effect to NAO oversight.

16. If the CAA is to get to a point where it is considered as a leading economic regulator it should have no concerns in being subject to the kinds of accountabilities imposed in other sectors.

Clarity around CAA duties

17. One of the strengths in the Bill is that it gives the CAA a clear primary duty to focus on passengers. We would be deeply concerned that the Committee is considering adding the airlines to the primary duty. An approach that introduces airline interests into the primary duty would fundamentally alter Government policy. There is abundant evidence that airline and passenger interests do not always align.

18. One just needs to look at:

· CAA / OFT interventions in relation to credit card fees and airline ticket pricing. A number of airlines have been forced to accurately present the final ticket price so consumers understand the full cost – rather than trying to mislead them. This is not the behaviour of an industry that’s interests are completely aligned with their passengers.

· Denied boarding compensation, where specific legislation had to be brought forward to ensure passengers were adequately compensated and supported by airlines as a result of delay or cancellation. Why is this type of legislation required if airline interests align with the majority of their passengers.

· Passengers with reduced mobility are now the responsibility of airports as a result of poor airline assistance in the past.

· The publication of arrivals baggage information has been strongly opposed by airlines yet this appears to be a logical and basic piece of information most passengers would want to be aware of.

· At Terminal 3, one airline has deliberately sacrificed the passenger’s experience. Rather than using pier served stands passengers are bussed to remote stands. We believe this is completely unnecessary – the driver of the behaviour is a reasonable airline attempt to lower operating expenditure in relation to ground handling but this is completely out of alignment with passenger interests.

· There is also evidence that suggests airlines have a much greater focus on premium passengers over and above economy passengers, particularly during times of severe disruption. There is a natural commercial incentive to focus on higher yielding passengers and their needs are typically managed first. It is essential that any duty is crafted in a way that ensures all passengers rights are considered equally.

19. Using Heathrow as an example it is important to demonstrate what a primary duty to airlines would mean in practice as well as the issues the CAA would need to consider.

· There are currently 90 Airlines at Heathrow. While there is at times a common view it is impossible to see how the CAA would be able to balance the interest of all the airlines as well as passengers in any meaningful way.

· Airlines have very different business models. How would the CAA balance the different commercial interests of airlines and also then balance that interest with those of passengers?

· Airport investment is a long term issue. How would the CAA reconcile an airport investment programme that was deemed to benefit passengers in the long term but airlines did not want to pay for?

· Surface Access – what if an airport wanted to make significant investments to integrate the airport with broader Government rail plans. If airlines didn’t want to pay for it how would the CAA reconcile the duty to passengers and airlines?

20. Strictly speaking the CAA needs to focus on the long term interests of passengers. If the Government is serious about improving the passenger experience in the UK the Bill needs to directly reflect that the needs of both current and future users. This should be the focus of the primary duty.

21. BAA does not believe a primary duty to passengers and airlines can work. There will be significant conflict between the two. For example – the very fact there is a conflict might enable individual or groups of airlines to appeal CAA decisions on the basis that "the CAA did not (appropriately) consider its/their specific interest". We believe this is a recipe for disaster and will lead to an ineffective and fraught regulatory regime. Appeals may be viewed as "legitimate", but are simply used to distort the competitive process (seeking to prevent the rest of the airline community "benefiting" from the CAA's decision).

22. If the Committee intends to consider secondary duties to individual players (such as airlines), that should form part of a wider debate about what secondary interests are important – rather than just picking one. For example, the UK’s position as an international hub is of enormous benefit. A duty to promote the UK as a hub destination would be valuable for all players. Further, the CAA would also need to have a number of secondary duties to promote efficient investment in UK airports and to promote sustainability and innovation in UK airports. It is difficult to see how the CAA could regulate in a fair and consistent manner if airports are not given equal weighting in the secondary duties. It would be wrong to merely "cherry pick" and add a duty to airlines – the Committee should consider the issue of secondary duties in the round and ensure the Bill is focussed on promoting a healthy and efficient airports sector.

23. In considering a range of new secondary duties the Committee should also consider amendments that require the CAA to consult on a publish clear guidance on how it would balance and indeed resolve any conflict between them. It is a key component of better regulation that industry can expect transparent, proportionate and consistent decisions when the CAA exercises its judgement. The requirement to consult and provide guidance should therefore sit on the face of the Bill. It is not sufficient to merely have a duty to better regulation principles as we do not believe this would place sufficient pressure on the CAA carry out this task. It is important there is no ambiguity in the CAA’s approach under the new regime.

Certainty for the Licensee

24. There are a number of elements within the Bill that have inadvertently increased investor uncertainty. They relate to areas of drafting that do not reflect the policy the Government consulted on. They can easily be addressed through minor drafting amendments and would realign the Bill with Government policy.

25. The initial Government policy in relation to financial resilience focussed on the introduction of a financial ring fence. The Government policy was that in situations where the ring fence cut across existing financial arrangements the condition would be derogated. This can happen under the new Bill but there are no specific rules in the Bill governing how a derogation is to be introduced or on what terms. This was not an issue at the time the policy was discussed as the SoS was going to introduce the first licence – and the licence was not appealable.

26. The reason it is an issue is because there is nothing to force the CAA to derogate in situations where a licence condition cuts across existing arrangements. No doubt the CAA will act responsibly but the Bill proposed extensive appeal rights for third parties, who may end up being entitled to bring forward an appeal to the Competition Commission in relation to financial conditions. BAA does not believe it is fair or reasonable that airlines have a right of appeal in relation to airport operator finances. Drafting should be introduced that limits airlines right of appeal in this area.

27. In addition, once the licence framework has been established it is important that the licensee has certainty around whether efficiently incurred costs that sit outside the definitions in the Bill can be recovered. Simple amendments will ensure that the licensee can charge users for costs that sit outside defined services (subject to CAA tests).

Publication of Information

28. We agree that the CAA (through DfT) should be able to collect and publish information in relation to all aspects of the passenger journey. It is not uncommon for economic regulators, focussed on consumers to involve itself with the efficient delivery of a service that spans a range of organisations.

29. OFCOM regulates a broad spectrum of industry ranging from wholesale markets to the specific content that is broadcast. In order to understand how an integrated telecommunications sector works – OFCOM needs to work closely with a range of government departments such as the Home Office, Dept. Culture Media and Sport and BIS

30. The ORR does not regulate the franchises for Train Operating Companies (TOCs), nor does it regulate rail fares. In both cases, DfT is responsible. Despite this, the ORR provides an online National Rail Trends portal which includes information on rail fares and TOC performance. ORR’s data portal application provides a user friendly online interface to rail statistics and rail trends, enabling readers to compare quarterly data year on year.

31. If CAA is to become a truly passenger focussed regulator, as intended in this Bill, then it should follow the ORR’s example and transparently provide data on all aspects of passenger experience at airports, to fully empower passengers.

32. As the TSC rightly identified – it would be an incomplete response if the CAA could only focus on part of the passengers experience at an airport. Passengers face an end to end journey and expect a joined up approach from Government to ensure it is delivered and regulated effectively. We therefore support a view that the CAA should be given a clear remit to make all elements of the passenger journey transparent – including UKBA.

Appeal Rights

33. BAA believes appeals to the CC ought to deal with price control matters only – as is consistent with other sectors; they should  be decided explicitly "on the merits" (as with those to the Competition Appeals Tribunal (CAT) under (for example) Schedule 1, para 3(1)) of the current draft and should be limited to only considering issues related to price control. Again, this would more clearly mirror the approach adopted in other sectors such as OFCOM and OFGEM. Appeals in relation to other licence conditions should be heard by the CAT, with more freedom accorded to the Tribunal to determine the correct appeal standard on a case-by-case basis.

February 2012

Prepared 2nd March 2012