Examination of Witnesses

Civil Aviation Bill – in a Public Bill Committee at 10:36 am on 21st February 2012.

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Emma Gilthorpe, Kyran Hanks, Andrew Harrison and Robert Siddall gave evidence.

Q 1

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

Good morning, lady and gentlemen. Thank you for joining us. I welcome you and remind you that this evidence session has to end on a guillotine at 11.30, when we will move to the next set of witnesses. From your left to right, I ask you to be kind enough to identify yourselves, please.

Emma Gilthorpe: Good morning, Mr Chairman. I am Emma Gilthorpe, and I am here representing BAA.

Kyran Hanks: I am Kyran Hanks, strategy and regulation director for Gatwick Airport Ltd.

Andrew Harrison: I am Andrew Harrison, managing director of Manchester Airports Group.

Robert Siddall: I am Robert Siddall, policy director at the Airport Operators Association. We are the trade body for UK airports.

Q 2

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

Thank you very much indeed. We have received written evidence from you, but do any of you wish to make a brief opening statement before I open it up to my colleagues for questions?

All Witnesses: No.

Q 3

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport

I would be keen to hear about your experience of dealing with the Civil Aviation Authority as a safety regulator. What are your views on the combination of safety and security regulatory functions in the same body? What potential advantages and drawbacks might that involve?

Emma Gilthorpe: The CAA has an international reputation for safety regulation. It is certainly one of the best aviation safety regulators in the world. Theoretically, the concept of moving security into the CAA looks positive, but I think the devil is in the detail. I would like to raise two aspects.

First, moving the function will not change the environment in which we operate, and the area where we can drive security efficiencies is by moving to an outcomes-based regime, rather than the one we have at the moment, which is much more a rules-based regime. Simply moving the function will not improve the capability of UK aviation security.

Secondly, the cost burden of moving something out of the Government purse, if you like, into charges—which airports will inevitably have to pass on to their customers and, through them, passengers—is quite uncertain. It is uncertain whether the market will be able to bear that cost and whether there will be any particular issues. For airports such as Heathrow or Stansted, which are currently regulated, the cost will be passed through in the regulatory  charge, but I am sure my colleague, Mr Siddall, will have comments on the ability of the much smaller airports to bear that charge in a highly competitive marketplace.

Robert Siddall: We would say that the CAA has a good reputation for safety regulation, and we would agree that there is potential for it to take on what has previously been the compliance function in security, which is a good thing. There are synergies to be had there. Over the years, the CAA has been moving away from a prescriptive approach and towards an outcomes-focused approach to the way it regulates safety, so there will be a natural fit there if you wanted to implement and ensure compliance in a regime that is outcomes-focused. It is right to say, however, that putting the assurance part of that operation into the CAA does not deliver the outcomes-focused regime in itself. That is the key point, but it is only one part of the story.

There is a cost element, and it is certainly true that there will be a further cost burden on the non-regulated airports. Our view has been that if that goes hand in hand with an outcomes regime that is better for passengers, that is a good thing overall and would be worth it. However, the two need to be looked at in the round and delivered together. Another thing to say on cost is that that is only one element of cost. The regional airports, many of which are having a very tough time, are facing costs from all other kinds of policy areas, so you really have to look at the cumulative effect and the totality.

Andrew Harrison: I would echo what my colleagues have said. We would in principle say that we do not have a problem with moving security matters across to the CAA. That would be a positive move. Indeed, the outcome-focused, risk-based approach to security is also something we would support, although our concern is around our experience with innovation. We at Manchester have put into place a risk-based approach to security, including body scanners; but—despite appearing to provide higher levels of consistency in security detection, better levels of customer service and, indeed, cost savings—the EU regulation could potentially ban such technology. Therefore, even if we do put into place an outcome-focused, risk-based approach, the risk is that we will still be meeting minimum standards set by Europe, so all the things that this is designed to do could be put in jeopardy. That would be our concern, but I echo the points made by my colleagues.

Kyran Hanks: I am happy to agree with the comments and to support the move to bring security and safety together. The CAA has been a good sector regulator. We would have some concern about the costs and how they would be imposed on us. The CAA’s costs to us as an airport have risen significantly in the past two years, and this also has to be scrutinised properly. Other than that, however, we agree with the comments of the others on the panel.

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport

The panel has covered my follow-up question adequately.

Q 4

Photo of Jim Fitzpatrick Jim Fitzpatrick Shadow Minister (Transport)

Chairman, I am sure that our guests will have seen that during the debate on Second Reading, quite a few comments were made about environmental duties and whether the CAA should provide for those. Could they  comment on that and on the transfer of security costs to airports? I know that we have received submissions, for which we are very grateful, but some oral clarification of, or elaboration on, their different positions might be useful.

Robert Siddall: On the environment question, we were glad that the remit for the CAA to carry out economic regulation has not been mixed up with a remit for environmental regulation. That is a good thing. There is provision for the CAA to increase its role in matters of the environment, and our view on that was that it is okay, but aviation and the environment has been a vexed debate, as I am sure people know. One question is where it is right to put in the necessary constraints and regulations. We are looking for a global deal on aviation emissions at the moment. We have supported the European emissions trading scheme, but that has to be a first step towards a global deal. It is actually a global issue, which, for example, would not be within the CAA’s remit. One question therefore is where environmental issues are dealt with—is it national, European, or international? It is important to think about that.

The other point is that the market for information on environmental matters is very crowded. There are many bodies providing all kinds of information, and the CAA could have a role to play there. It has a good reputation for statistics and analysis, and if it were to bring some clarity to that debate, which has been dogged by misinformation and people selectively using statistics, that would be a good thing. We think its remit should extend only as far as the areas where it is able to add value. The key point is added value. It should not duplicate other areas on the environment that are already being dealt with. Shall I comment on the security costs?

Robert Siddall: Just to reiterate—there will be an extra cost in the transfer of those people to the CAA. If that goes hand in hand with a better security regime, I think we would support that. We have consistently supported the Government’s move to an outcomes-focused regime, but at this point we are waiting to see whether the Government will bring forward concrete proposals on what an outcomes regime actually looks like. The bit that will happen in the CAA is, in effect, the tool in the bag to manage an outcomes-based regime. The question is, what does the outcomes-based regime look like in the first place? There will be an associated cost. If it is done in the round, that would be worth it, but those costs are hard to bear because many new regulatory costs are coming into play for airports, many of which operate on very tight margins. That will be difficult to bear.

Kyran Hanks: We do not support the CAA, as part of its economic regulation duties, having a further environmental duty; we think that will confuse the role of the CAA. In terms of publishing environmental data, we already publish quite a lot. To the extent that the CAA can add to that, we would support that, and to the extent that the CAA wants to ask us to publish other data on airport performance, we would support  that as well. We have already made some comments on the costs of security, so I will not add to those. Thank you.

Andrew Harrison: Just in terms of the environment, we echo the point that it is important that we understand the environmental impact of our operations. We would welcome what is proposed in the Bill in support of that, given, as my colleague has said, that we already publish quite a lot of information. The only point I would raise is that in our view that should not be at the expense of watering down anything that focuses on the customer. Therefore, ensuring that the customer is at the heart of the Bill is important. The environmental content is welcome, but it should not be at the expense of the passenger.

To elaborate slightly on security, the issue with security costs for airports is the extent to which they can pass on those costs to airline customers. As we have talked about, in a regulated environment that is possibly less problematic than in an environment with smaller airports, which are perhaps less financially stable; many of them have entered into long-term agreements with low-cost airlines, without which they would not be viable at all. Some of the contracts that some smaller airports have entered into do not have provision to absorb costs such as these when they come along. A lot of the airlines will look at the airport and say, “That’s an additional tax on us and we would expect you, as the airport, to absorb that.” I think that the extent to which any of the smaller airports around the UK could absorb some of these costs is really questionable.

Emma Gilthorpe: On the environmental question, the CAA has a useful role to perform in being an independent, specialist source of data and knowledge on what is, as Mr Siddall said, quite a vexed topic. I support the clause that allows the CAA to perform information-gathering activities as long as they are additive, as Mr Hanks said, and not duplicative of what exists in the market already. I do not think the Bill should support an additional duty on the CAA with respect to the environment. That is a matter for Government. Lots of trade-offs are required beyond the economic capabilities of our sector regulator and it is therefore right that those matters are reserved for Government.

Q 5

Photo of Priti Patel Priti Patel Conservative, Witham

We have already heard the word “cost” and about the economic implications for the cost of airports. Do you think the Bill places enough emphasis on the CAA to act as quite an efficient body? That brings into the mix duplication and not reinventing the wheel. Secondly, do you think that can be done within the scope of the Bill while keeping down costs and charges to airports?

Emma Gilthorpe: There are two points that I should like to raise. First, the CAA has a very strong reputation when it comes to safety regulation but it is moving up the ranks in terms of its economic regulation credentials. When you benchmark it against other regulators there is still room for improvement, but equally it is not as well resourced as some of the economic regulators at the moment. Never let it be said that the BAA is not supportive of having efficient costs but it is important that it has the tools it needs to do the job we are asking it to do. With these new duties, and certainly, as we have discussed, the potential transfer of security responsibilities, costs will be incurred. What is crucial is that the CAA is  accountable for how it spends the money it is given. Very unusually, relative to all the other sector regulators, the CAA is not subject to scrutiny by the National Audit Office and so I think it would be valuable, in giving the CAA this extra discretion and these new responsibilities, if those were balanced against the need for public scrutiny of its functions and how it expends the money it is given.

Kyran Hanks: Gatwick airport has seen a 100% increase in the CAA’s charges over the last two years. It consults properly in the way that charges are imposed, so it is fairly transparent how the charges are levied upon us, but nevertheless it is still a significant increase. I think that any oversight that can be brought to bear, such as by the NAO, or any challenges that can be made by this Committee or other bodies as to the CAA’s costs can only be welcome going forward, given the extra duties it will pick up.

Robert Siddall: I would have to echo those comments. It is right that the CAA has the resources to do the job but we have seen its charges on the economic side rise over the last few years and we will see further increases, which we have set out in our written submissions, in security and possibly the environment area and so on. Those will all bring additional costs which, particularly for the smaller airports, are hard to bear. Some of them are not making profits and some are struggling to remain viable; their margins often are very thin and all these costs are material for them. I talk to airport MDs who say, “I’ve spent ages trying to make £50,000 or £100,000-worth of savings,” because the number of people employed at an airport by the airport can often be quite small, although there are many people working on the site. Anecdotally they will say, “I have worked really hard to do that and suddenly I see another £100,000, £200,000 or £300,000 of regulatory costs just fly in.” That wipes out all those efficiency savings. That is the level it turns at if you are a small regional airport.

Q 6

Photo of Nicholas Dakin Nicholas Dakin Opposition Whip (Commons)

You seem, from your answers, to be broadly positive about the direction of the Bill. Your concern seems to be about the application or delivery of it rather than the policy direction. Have you any concerns about the policy direction that you want to highlight?

Emma Gilthorpe: I think that is accurate. Broadly, the BAA welcomes the Bill. The current piece of legislation we have is very outdated in a very dynamic market. One policy area where I do have concerns relates specifically to the construction of clause 5. I do not want to go into huge amounts of detail with the Committee as I am sure that is not what you want. Clause 5 is the area where the legislation attempts to define the market and following which, if you were found to have market power under clause 6, you will then be licensed or not. It is highly likely that Heathrow, for instance, would be found to have market power. My concern is that the way clause 5 is constructed is incredibly complicated and quite difficult to interpret. I urge you to look at it in some detail to see if you can help me interpret it because it is not easy. It is quite impenetrable.

There are lots of benchmarks out there—competition law and examples of how you go about defining markets—and I genuinely believe it could be constructed in a far simpler way that would lead to a lot more certainty for the BAA and other airports that would be regulated.  We need certainty in order to invest with any level of sustainable returns. One such example arising out of the complexity is that it is unclear to me whether, for instance, some of the rail assets, particularly Heathrow Express—a service that is very much prized by passengers using Heathrow as an integrated hub—would be in or outside of the regulatory construct. If it was not in, no business case would support private investment in Heathrow Express. It is very important that we get these parameters clear and predictable, so that future investments are not impaired. I think a relatively simple construction could deliver that.

Kyran Hanks: In general, we support the direction of the Bill and think it is a timely change from the Airports Act 1986, but there are two points that I want to bring up. First, Gatwick is now in separate ownership and it is not clear from the Bill that the separate ownership of Gatwick airport, and the competitive dynamic that has now been introduced in the south-east, is being adequately supported by the drafting. The second aspect I would ask you to consider is the Government’s policy on airports—I have to get this right—being better, not bigger. It is not clear whether some of the surface access provisions at Gatwick airport, particularly the provision of the Gatwick Express, will be protected by the passage of the Bill. We have seen the Gatwick Express degrade over the past two to three years and we hope that the Bill will reverse that trend. I ask you to consider those two aspects.

Andrew Harrison: We also broadly support the Bill and in particular, as I mentioned, the fact that it puts the customer at the heart of the travelling experience, which is important. From our point of view, inter-terminal competition is a concern. Being the only non-designated airport in the UK with more than one terminal, it is something, obviously, we are concerned about. We cannot see any need for it at this stage and we do not understand why it is included in the Bill. It feels like a “just in case” measure, as opposed to something that is a potential reality and therefore, in our view, should be addressed on the basis of there being a real need to look at this.

From our perspective, having inter-terminal competition would bring additional costs into operation. It would bring about the inefficient use of assets, with competing bodies trying to ensure that they have spare capacity in each of their assets. That just drives up the cost. JFK airport is probably the best example in the world of an airport with such a situation in place, and it is one of the world’s most expensive. We do not understand at this stage why it has been included but otherwise, we are very supportive.

Q 7

Photo of Mike Freer Mike Freer Conservative, Finchley and Golders Green

May I ask you about transparency of information? You welcome the Bill, as it puts the customer at the heart of the airport experience, but I would like to hear your views on an element of customer service where the Bill is silent. You whizz the customer through the airports, treating them very well, until they get to immigration. No transparency is proposed on UKBA customer service and I am interested to hear whether you think the Bill should be extended to include transparency on the customer service standards of UKBA at our airports.

Kyran Hanks: We have been actively discussing with UKBA the publication of its performance and we now have on our website the performance of UKBA in both  our terminals. We also publish data on arrivals bags, so you can now see who is responsible for delivering bags in our arrivals halls, and we are discussing with the airlines whether to publish check-in queue data, but we are having some resistance in that area. In general, we would support the Bill being extended to all aspects of airport performance, including UKBA, in terms of transparency. As I say, we are already some way down that road with UKBA.

Q 8

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

I just wanted to press you, Ms Gilthorpe, and anyone else who wants to come in, on what you mean in relation to how a simpler market power test could effectively work, given that this is undoubtedly a complex area that is difficult to negotiate. As a supplementary, could any of you expand on the views that you set out in written evidence on potentially including a secondary duty on the CAA to take account of the interests of airlines, given their special position?

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

Emma Gilthorpe. You may touch on the previous issue if you wish.

Emma Gilthorpe: That is fine. Sorry, what was the first question?

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

You say that it could quite easily be made simpler in market power, but how?

Emma Gilthorpe: What happens in other sectors is that the sector regulator is given, under normal competition law policy-making powers, the discretion to determine the appropriate product or geographic market. That happens at UK national level and at EU level in those sectors.

So you would basically have a construction that states that the CAA is required to define a market, but you would not have on the face of the Bill exactly what it would have to do to pick those markets. At the moment, there is talk of airports, airport areas and core areas, all of which seem to intermingle. It is unclear what each of those separate things is and how they relate—hence my earlier point on the potential problems with Heathrow Express.

I would set out something in a couple of sentences that gives the CAA the discretion to determine the markets on which an airport does or does not have market power. The CAA would have to go through effective public consultation to do that. It would be scrutinised, and that decision would be appealable. I believe that would be adequate, but I would balance it with my earlier comments about the need for the CAA to be subject to standard better-regulatory principles and National Audit Office scrutiny, and to produce impact assessments. All those things.

On the discretion side of the equation, you must have accountability, too, but I think that would be a far more efficient construction than the very complicated one that we have at the moment.

Q 9

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

So the issue is complex, but you would not put it on the face of the Bill?

Emma Gilthorpe: Yes. Sorry, what was the second question?

Q 10

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

What is the secondary duty for airlines?

Emma Gilthorpe: My airline colleagues are strong proponents of the secondary duty, which is one of the few areas of the Bill on which we do not necessarily agree. From BAA’s perspective, we feel that the primacy of the passenger duty needs to stay. I would also argue that, if you put the passenger at the heart of the regulator’s duties, the duty on the airline is implicit. I think I speak for all my airport colleagues when I say that we spend 110% of our time serving our airlines, as well as serving passengers, in order that the overall passenger experience is positive. Therefore, having passenger centricity delivers that outcome.

One area on which I would possibly disagree with my airline colleagues is that airlines have customers and airports have passengers. I think that is never more manifest than when you look at the bits of the airport in which more or less is invested. The area of the airport that I always feel is the least well invested in is the arrivals area. The passenger or customer gets off an airline plane, walks into the terminal and is no longer a customer of the airline but is absolutely a passenger.

In order to ensure that we address the end-to-end passenger journey, 98% of which would also be as a customer of the airline, it is better to have the primacy of the passenger at the heart of the Bill, which leaves precision for the regulator in making its economic regulatory decisions.

Q 11

Andrew Harrison: We are all working to ensure that airlines choose our airport, rather than anybody else’s. Therefore, that is where our focus is. To provide some context, at peak some 21,000 people are employed on site at Manchester airport from 200 or 300 different organisations; the airport itself employs only 2,300. From that point of view, giving great service to customers is a team effort.

When we start to look at ensuring that we protect customer service, which is what we are looking to do here, it would be helpful if the CAA was able to levy charges directly not only on our own airlines, but on airlines from overseas. That way, the airlines and other service partners would be much more on the hook, as it were, for delivering the elements of service for which they are responsible, rather than passing a cost through an airport that would attempt to pass it on to the airline, which, as we have said before, is going to be problematic.

The areas I am thinking about are things such as lost baggage, flight delays, cancellations and booking disputes, all of which are outside the realms of what the airport can do something about. I would probably add the UKBA element to that as well. We would welcome the ability to split the customer journey up, as it were, and to apply the right amount of scrutiny and standards to the people who deliver the service.

Q 12

Photo of John Woodcock John Woodcock Shadow Minister (Transport)

Both of you so far have suggested, “It is just a given that we will serve the airlines, because it is in our interests to do so.” Could you not make the same case about the primacy of customers: “We do not accept that that stands for the primacy of customers, so why should we for airlines as a secondary duty underneath the primacy of customers?”

Emma Gilthorpe: I am not sure I fully understand the question, but we are regulated because we have some potential to be dominant. Although instinctively BAA is very focused on its customers, you could argue from an economic regulatory point of view that we are not systematically putting passengers at the heart of what we do. That is why you need economic regulation; it is why you need a regulator; and it is why that regulator needs some clarity over its duties. The airline is an intermediary in the process.

If you look at, for instance, communications regulation, Ofcom does not have a duty to regulate or to put wholesale providers of telecommunications as one of its duties. It has a duty to the consumer, not to an intermediary provider between, let us say, BT and the end customer. The idea of focusing on the passenger or customer is that they are at the end of that value chain, and if you focus on them, the other things should line up to deliver that.

It should also be highlighted that the airlines are not without a voice in the Bill. It gives the airlines appeal rights, so if they feel strongly that their concerns are not being taken into account, they always have that mechanism for introducing them. The airlines can also do so, of course, through the public consultation process that will go on through any regulatory policy making process.

Andrew Harrison: To answer that point, we would argue that in the vast majority of UK airports the balance of power, in terms of the relationship, sits with the airlines. They have assets that are easily redeployable. You have only to look at Ryanair’s move into the Hungarian market with the collapse of Malev, the national carrier, which showed that these assets are very easily and rapidly deployable.

When airlines are working on very fine margins, as some of the charter operators are currently doing, they are making decisions all the time about the level of service and the price that they get from each of the airports. It is probably fair to say that the smaller the airport, the more the balance of power favours the airline. From that point of view, simply in order to stay viable and to continue to grow profitably, airports are constantly trying to build positive win-win relationships with airlines.

Sometimes what has got lost in all that is what it means to the customer, the passenger—all this terminology we have about the people who come through the airports and get on the planes. If the Bill focuses on those people’s rights, it brings both parties—the airlines and the airports—together with all the other operators that make up this journey to focus on their rights. That is our point of view on that.

Q 13

Photo of Fiona Bruce Fiona Bruce Conservative, Congleton

That leads neatly to my question. Could you comment on the implications of the extension of the ATOL scheme, as proposed in the Bill, from your perspective?

Andrew Harrison: I have got two lines on that, if I am honest. We are happy to see ATOL reform included in the Bill to help protect passengers, but it is something that airlines rather than airports are involved in. The situations that we see in the press, where an airline or a tour operator goes bust and people are stranded overseas, do not do anybody any good—they are bad not only for airports, but for the whole industry. Although we are not directly involved in ATOL reform, we would applaud it.

Emma Gilthorpe: I think the extension of the ATOL scheme is a positive thing, but it is only one element in the changes that we are starting to see but we would like to see more of. That should not happen through the legislative process, though. It is a matter where the regulator can perform a useful function. But also it is the responsibility of airports and airlines to get this right between them and, to echo Mr Hanks’s point, collaboration is critical to how the airport functions.

There are multidisciplinary activities that happen and, to refer back to the earlier point about UKBA transparency, we can resolve this issue today if we want to. We do not need legislation to get the transparency we need so that customers, passengers, airlines and airports understand the different elements of the passenger journey and know who is performing well and who is performing not so well on a day-to-day basis. That could happen pretty swiftly if we wanted it to.

So the ATOL move is positive, but there is a lot more we can do outwith the legislation with the right mindset and positive approach towards collaboration to deliver an even better service for passengers.

Q 14

Photo of Jim Shannon Jim Shannon Shadow DUP Spokesperson (Health), Shadow DUP Spokesperson (Transport)

As you can probably tell from my accent, I represent an area—Northern Ireland—where we have two regional airports and other smaller ones as well. I am keen to get your thoughts on how this legislative change will affect the regional airports, particularly Belfast International and Belfast City.

Robert Siddall: We have already talked about cost implications from the various new provisions of the Bill which will affect all airports, including our members in Northern Ireland. I think those airports, like many of the other airports in the country, are working very hard to get and retain their routes and to remain viable and profitable in business. Obviously, there is an implication there. I think there are other potential implications.

The Bill sets out how the regulated airports will be regulated over the coming years. We have said that we welcome the modernisation aspects of the Bill and so on. But that sets up ways of doing things which in themselves may have implications for all the airports across the country. That is something to look at as well. The major effect will be on costs for the airports in Northern Ireland.

Q 15

Photo of Kwasi Kwarteng Kwasi Kwarteng Conservative, Spelthorne

During the Second Reading debate, I was particularly interested in the provision for oversight of the CAA. What are your thoughts about that—particularly the fact that the CAA will not be subject to the National Audit Office?

Emma Gilthorpe: As I think I referred to earlier, it is unusual within the UK-regulated sector for an economic regulator not to be subject to National Audit Office scrutiny. It is a matter of good regulatory practice, but also good administrative practice, that these agencies are subject to that process.

It is important from an airport’s point of view because we all contribute a significant amount of money towards the functions that the CAA performs. We do that on the basis of the size of our airports. So Heathrow, for instance, will contribute a significant amount, followed by Gatwick. So it is a matter of being clear about what the priorities of the CAA are, setting out simple things like its annual plan, which it does at the moment, but  then, if you like, a post-investment review process which the NAO can undertake to ask, “What did you do? How did you do it? Did you do it efficiently? Did you pass or fail?”

I would quite like to see some key performance indicators introduced on the CAA as well in terms of its levels of efficiency. If it is looking at a complaint or an investigation, has it some milestones by which it should revert to the customer or the complainant? Those sorts of things are part of modern regulatory practice and I think they would be very positive. But it needs something like the NAO to be scrutinising those things in order to make sure that those milestones and the investment that airports, airlines and passengers make in the regulatory sector deliver a positive outcome overall.

Kyran Hanks: As we know, the CAA is a world-class regulator across its various functions. It did get a mixed report in terms of economic regulation from the Competition Commission in respect of what it has delivered to the regulated airports over the past 25 years —hence the reason for this Bill—but given that it is mainly a good regulator, we would see no reason why it should not be exposed to the NAO, as every other economic regulator has to be. If it is as good as everyone says it is, there should be no risk in the NAO scrutinising it, so we would support that provision being applied.

Q 16

Photo of Seema Malhotra Seema Malhotra Labour, Feltham and Heston

Do you have any particular concerns about the licence framework and the processes outlined for applying for or modifying licence conditions?

Kyran Hanks: We support the overall concept of a licence. As Emma said, it is the detail that will be important. When companies apply for and get a licence, that licence can be changed, subject to due process, and that does create risk that we do not currently have.

We understand why the licence framework is being introduced for regulated airports. There is some nervousness on our side as to what the licence might contain and about the fact that there is quite a lot of discretion given to the CAA as to what the initial licensing conditions might look like. We do not yet know what they might look like, how they might be applied, how they might be appealed and who can appeal. We understand why the framework has been put in place, but given the lack of detail we currently have, we are nervous at this stage. However, we are working with the CAA on that.

Emma Gilthorpe: I just want to add that we naturally do not know what we do not know at this stage, but the principle is positive. We currently operate under a piece of legislation, as we have discussed, that dates back to the ’80s, and it is really hard to change it, so having a licence that is more agile and flexible to the circumstances has to be the right solution. We need to work more closely with the CAA over the coming months in order to understand better what is going to be included in that, but one of my particular concerns relates to the scope of the appeals.

If you take an airport such as Heathrow, we currently go through a price control process once every five years. A very, very small change in that price control has multi-million pound implications for the airlines. Therefore, there is potentially a very low threshold that would have to be breached in order for the airlines to appeal every time a pricing decision happened.

Although it is very important that there are balanced rights, trying to set these thresholds so that you do not end up with repeated costly and potentially vexatious appeals processes is absolutely critical to a well-functioning regulatory structure. Otherwise, we will have a regulator spending 95% of its time dealing with appeals and 5% of its time focusing on what the passenger needs to have delivered by airports. As far as the legislation goes, the setting up of the framework looks good, but the devil is in the detail, and we need to get the appeals structure right, so that we do not end up in a continuous spiral of appeals.

Q 17

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

A lot of the Bill is about licensing the airports with market dominance. Can the panel just give me their views on how many airports need to have that licence going forward? Now that BAA has lost Gatwick and may be losing Stansted, would it only be Heathrow that would ever be subject to this? Is that what you would like to see?

Emma Gilthorpe: That is an interesting question. At the beginning of this session, I said that I thought it was likely that Heathrow would end up being dominant. It is the nation’s hub airport. It is a different beast to the other airports.

A significant proportion of transfer passengers goes through that airport compared with somewhere like Stansted. I do not think that I would be giving anything away in saying that I expect that that is likely to be the outcome, but it is incredibly important that we go through those steps, because Heathrow competes aggressively with Charles de Gaulle, Schiphol and Frankfurt, and our position is slipping. If we do not get the market definitions right, we will not know the right point at which, in the future, to evolve that regulatory framework.

On the other side, I would argue passionately for the fact that Stansted should not be regulated. I do not believe that it is appropriate. There is significant buyer power in the airlines that use Stansted airport. You know the outcome of the Competition Commission investigation. I happen to think that Stansted and Heathrow perform fundamentally different functions, but I did not win the day on that one.

Kyran Hanks: In November, we made our submission to the CAA that Gatwick does not need to have a licence. We think competition is already taking effect in the south-east and delivering an improvement to Gatwick that 25 years of regulation did not bring, so we do not think it should be licensed under the Bill, although clearly that is a matter for the CAA, subject to appeal.

In the same light, given that the CAA thought that Stansted did not have market power in 2007, and Stansted’s performance has only gone backwards, we do not think that that airport should be regulated either. A perverse outcome for us would be if Stansted were deregulated, and we were kept regulated, which would then frustrate the competitive dynamic in the south-east. It will only be improved once Stansted is sold, whenever BAA give up appealing.

Robert Siddall: We take a view on matters that are important to all airports, so I will not comment on any particular airports. It is true to say, however, that many airports in the UK would see themselves as being under increasing competitive pressure. They are fighting hard to win and retain routes, and often they are looking at other airports across Europe and further across the world.

This is not just about a local place serving a local catchment; it is about winning routes and services in competition with all kinds of other airports right across the globe. That competitive pressure is bearing very hard, so I think the overall trend will be that the market does the job of ensuring that passengers get a good service, and that flying is affordable. That will be the continuing trend.

Q 18

Photo of Fiona O'Donnell Fiona O'Donnell Shadow Minister (Environment, Food and Rural Affairs)

There is concern in Scotland about fewer airlines flying, especially domestic flights, and about there being less choice and competition for passengers. Do you think that the proposal for the CAA to have concurrent powers with the Competition Commission will in any way improve choice and competition for passengers?

Kyran Hanks: No, I do not think the concurrency with the Office of Fair Trading, although we support it, will affect the connectivity of Scotland to the south-east. That is more a matter for the policy review that is going on in parallel with the Bill, about whether there should be more capacity in the south-east at some point in future. That will be the main area by which connectivity is delivered to or maintained in the south-east. I do not think the Bill, in that aspect, will have a particular impact on that issue.

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

In winding up this session and leading in to the next, the Minister would like to put a couple of environmental questions to you.

Q 19

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport

This question is addressed to Ms Gilthorpe and Mr Hanks, as representatives of airports that are currently regulated. Would you agree that under the Bill, as drafted, you continue to be able to invest in measures that are focused on improving the environmental performance of the airport, even in the absence of a specific supplementary duty on environmental matters?

Emma Gilthorpe: Yes, absolutely; there is nothing in the Bill that would impair our ability to continue. That investment is something that BAA takes very seriously. There are as many opinions on the topic as it is possible to have, so there is nothing in the Bill that would impair us. It is something that we are naturally motivated to do. I do not think the Bill particularly prescribes any additional activity in that area. As we discussed earlier, what is needed is to balance, if you like, the costs and benefits of the environmental with the economic impacts of investing in an airport such as Heathrow.

Kyran Hanks: We have a programme called the “Decade of Change” at Gatwick airport, which has 10 environmental targets that we are seeking to achieve by 2020, and the costs associated with that are included in our existing regulatory settlement. We are currently negotiating with our airlines costs such as a new energy centre at the airport, to reduce our CO2 emissions. Having an environmental duty on the CAA does not add to or detract from our desire to be better environmentally.

Q 20

Photo of Theresa Villiers Theresa Villiers The Minister of State, Department for Transport

I have a second question on supplementary duties. I think that you have all indicated that you do not see a need for a supplementary duty on the CAA to look specifically at the concerns of airlines, so could you give examples of where the interests of airlines and passengers might conflict in a way that would reinforce the need to concentrate the CAA’s focus on passengers as its primary duty?

Emma Gilthorpe: Very briefly, I think that an example that often gets media attention is an “event of mass disruption”, as we call it, where we end up with a lot of passengers in terminals and planes not going to the places that they should be going to. I think that the service that passengers get under those circumstances is significantly improving and has improved a lot in the past couple of years, but we still get circumstances where passengers are not getting the service that they want and desire.

If you had an airline duty for the CAA, the airlines’ needs may be served, but I would argue that the passenger left stranded at the airport is not consistently necessarily having their needs served. Just to be clear, that is a matter for the airport and the airline, so I am not suggesting for a minute that we are not part of that picture, but I would argue that that is quite a good example of where the passenger needs to be at the heart of this process to ensure that their needs are properly served.

Andrew Harrison: A more mundane example to build on that one is collecting baggage. The airline contracts with a ground handler to remove the bags from the plane and deliver them to the carousel. Obviously, for airlines operating at tight margins, that becomes a financial game for many of them in terms of the tightest margins, and therefore service delivery is not necessarily top of the list.

For that example, baggage reclaim times are often about a relationship between the amount that an airline is prepared to pay the ground handler versus the service that it gets in return. When you look at the whole end-to-end journey in an airport, we manage only three of the, I think, 13 touch points we have with the customer, and two of those are in car parks and one is in security—the rest is a third party. That is one example of where perhaps passenger objectives and airline objectives would not necessarily be aligned.

Q 21

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

Mr Siddall and Mr Hanks, do you have any final observations?

Kyran Hanks: I have a couple of real examples from our airports today. We have the potential for a big investment in our arrivals halls. We are finding it an uphill struggle to get some of our airlines to support that because of the issues that have been raised in terms of the degree to which passengers are handed over to the airports.

We are still pressing forward and trying to improve both the immigration and arrivals performance. The railway station at Gatwick is somewhat short of ideal compared with Heathrow. We think that we might struggle to get all our airlines to support a big investment programme in the station. Those are two examples of investment that passengers want which not all our airlines are currently supporting.

Photo of Roger Gale Roger Gale Parliamentary Assembly of the Council of Europe (Full Member)

Thank you very much indeed. In closing this session, Ms Gilthorpe, Mr Hanks, Mr Harrison and Mr Siddall, I thank you for your attendance and for the benefit of your opinions and information. The Committee is indebted to you.