The Future of Aviation

The Future of Aviation The Civil Aviation Authority’s response to the Government’s consultation document on air transport policy April 2001 Civil Aviation Authority: London Civil Aviation Authority 45-59 Kingsway London WC2B 6TE Internet service http://www.caa.co.uk  Civil Aviation Authority CONTENTS 1. 2. 3. 4. INTRODUCTION THE ROLE OF THE ‘NEW CAA’ IN AVIATION GENERAL COMMENTS CAA’S RESPONSE TO THE CONSULTATION DOCUMENT QUESTIONS Main questions Consumer issues Economic effects Environmental effects Airport capacity Airport competition and ownership Airport planning Integrated transport Airspace Airlines Air freight General aviation 1 1 3 8 8 12 19 21 25 28 29 31 35 38 41 43 44 GLOSSARY CAA RESPONSE TO CONSULTATION QUESTIONS 1. 1.1 INTRODUCTION This CAA Response to the Government’s Consultation Document on Air Transport Policy is in four chapters. Following this introduction, the next chapter sets out the remit of the CAA in UK aviation, which inter alia explains the orientation of some of the responses. Chapter 3 makes a number of general comments on the Consultation Document, mainly focusing on broader economic aspects (which are dealt with in some technical detail). Chapter 4 then gives the CAA’s response to each of the individual questions posed by the DETR. The Consultation Document is very wide ranging and comprehensive in the topics that it addresses, in what is a complex arena. Inevitably, with such a wide subject, people’s aspirations in one area will be incompatible with others’ aspirations elsewhere. This is obviously so for the aspirations of reducing the environmental impact of aviation with the aspirations for market growth. The responses here try to set out reasoned arguments that could lead to practical decisions. However, it is difficult to address each question fully in a short note without cross-references. The detailed responses in Chapter 4 therefore need to be read as a whole rather than in isolation. THE ROLE OF THE ‘NEW CAA’ IN AVIATION This chapter sets out the remit of the CAA in UK aviation, which inter alia explains the orientation of some of the following responses. The ‘New CAA’, following the separation from NATS, is the UK’s independent integrated aviation regulator. It consolidates aviation regulatory functions within a single specialist body. The CAA provides a strong and stable regulatory environment for all aviation regulation. A key feature is the recent addition of new responsibilities and the integration of new functions. It is important that the Directorate of Airspace Policy is now fully integrated within the CAA; this preserves the long-standing and successful civil/military partnership. The CAA’s responsibility for the NATS licensing arrangements post PPP should ensure that UK ATM is on a firm commercial footing. The CAA’s Vision is: ‘To be the most competent and respected aviation regulator through an open and fair regulatory regime, and to champion the sustainable interests of air travellers and airspace users.’ It is worth noting that the phrase ‘sustainable interests’ is in accord with many of the proposed policies discussed in the Consultation Document. The CAA’s remit is of course determined by Government, with its regulatory responsibilities and other tasks being set out in a legal framework. The 1 1.2 2. 2.1 2.2 Vision encapsulates the essence of the CAA’s purpose within this framework: it has been endorsed by the DETR. 2.3 The CAA’s responsibilities, the great bulk of which are defined in legislation, include: • SRG: Safety regulation – airworthiness of aircraft and operational aspects, including flight crew, aircraft engineers, air traffic controllers and aerodromes; certification of UK airlines and aircraft; and maintenance of air traffic services standards. • ERG: Economic regulation – the regulation of NATS, the regulation of designated airport charges, route licensing, and the regulation of air fares for journeys outside the European Union. • DAP: Airspace policy and regulation – planning, developing, approving, promulgating, monitoring and enforcing airspace policies and arrangements for the UK. • CPG: Consumer protection – the regulation of the air travel industry and management of ATOL; airline licensing and airline consumer issues. In addition, the CAA advises the Government on aviation issues, conducts economic and scientific research, produces statistical data, and provides consultancy and training world-wide. 2.4 The above shows that the CAA has technical competence in most of the topics covered by the Consultation Document. In particular, the CAA has a particular knowledge of the practical application of air transport policies. The aim in producing the following responses has been to produce reasoned arguments that should lead to practical decisions. For aspects where the CAA has no particular special knowledge or interest, no comment is made. The Consultation Document discusses a number of aviation safety issues, but does not ask specific questions on the subject. The CAA’s views on this topic were set out in its response to the DETR Consultation Document on Transport Safety (March 1999), and remain the same today. For its response, the CAA tested the views of a very wide cross section of the aviation industry, including major commercial operators, the professional bodies, and a wide range of other representative organisations. There was a remarkable consistency of view across the whole industry. There was little support for changing the present arrangements for aviation – which are seen to be working well – or, alternatively, for the creation of a single UK transport safety regulation body. 2.5 2 2.6 The CAA’s recommendation on aviation safety was: “The CAA and the other transport regulators should be members of a new ‘UK Council of Transport Safety Regulators’, to enable good practice to be shared, lessons learned from the experience of others and strategic safety issues jointly examined.” 3. 3.1 GENERAL COMMENTS The CAA supports the development of a new long-term integrated air transport policy that addresses appropriate market development and takes account of environmental, airspace and surface access issues. It is important that aviation policy is consistent with the Government’s integrated transport policy and its general economic development strategy. The objective of the air transport policy should be to promote a level of aviation infrastructure that maximises the net economic benefit of air transport both to every region of the UK and the UK as a whole. The net economic benefit means that all costs, including environmental costs, have been taken into account. In short, the CAA endorses the objective laid out in the White Paper on Integrated Transport Policy that aviation should face its full costs, not just private costs. In principle, the aviation market should be allowed to expand – or forced to contract – to the point where the incremental benefits to the UK are expected to match the incremental costs – but no more or less than this. Given this criterion, UK aggregate living standards would be compromised were the aviation market to be artificially constrained to a level below the social optimum. Equally, they would be adversely affected if environmental quality were to be reduced in order to “subsidise” excessive development of the aviation market. What would be the likely implications of a full ‘internalisation’ policy objective for the development of the aviation market? Recent DETR work on the valuation of external effects suggests that for airport-related noise the existing special levies on air travel are currently roughly in line with the range of environmental costs. However, taxes such as APD are not well targeted to the environmental problem. Moreover, evolving household “distaste” for noise could rise markedly faster or slower than improvements in technology. Major changes – such as runway developments – could allow more aircraft movements, and hence additional environmental costs that would exceed the current levies noted above. The situation on global warming is much more problematic particularly given the newer forecasts of temperature increases. It is, for example, hard to forecast the level of carbon charge – or, if permits are used as the economic instrument the corresponding increase in the price of fossil fuels – that will be agreed in the international negotiation process. It may or may not be 3 3.2 3.3 3.4 significantly higher than current charges. In any event, the CAA’s current judgement is that the resulting output adjustments in the UK & European aviation market would be relatively small in comparison to other markets. This is because other markets are likely to have feasible adjustment options with markedly lower costs than aviation’s. 3.5 The CAA welcomes the commitment to intra-modal neutrality that underlies the integrated transport White Paper. This will eliminate distortions to the development of modes caused by problems elsewhere. For example, the demand for air and rail services could be distorted by the lack of effective and efficient road pricing. However, the air transport market can be considered as an international network. This is both in relation to the wider context of network economics and consumer preferences in the market. It is also accepted that there need to be global policy responses to human-induced climate change problems. Aviation’s environmental costs must therefore be handled at a global level. This is vital if the Government is to ensure that global environmental policy goals are achieved without wasteful loss to the UK. There is no reason to impose special constraints on aviation, or to attempt to solve in isolation problems that are substantially global in nature. To bring about the objectives described above, the CAA favours the use, as far as possible, of market mechanisms and competition. Thus, on the airline side, the CAA has long advocated that the long term interests of air travellers would be best served by a full liberalisation of international aviation markets. This would involve the removal of all bilateral restrictions and the engagement of normal competition law, so that the airline industry can compete and develop on the same footing as other industries. The CAA welcomes the Government’s continuing support for airline liberalisation. On the infrastructure side, given the development of Manchester and regional airports generally, the main UK current problem is capacity in the South-East in the context of excess and growing demand. This has linkages to: 3.6 3.7 3.8 • the difficulty in assessing and ‘internalising’ the incremental environmental costs of providing additional capacity, via; • a planning system which is expensive, slow and uncertain for large-scale developments such as Heathrow Terminal 5; and • the lack of complete mechanisms to compensate environmental losers, mainly from noise, arising from airport developments. In addressing the development problems, the CAA believes that the emphasis should be placed on the individual developers of commercial infrastructure, who should be able to work within a clear statement of Government policy. 4 3.9 The CAA therefore believes that Government policy should introduce a lesscentralised planning system that focuses on addressing adverse environmental effects and other externalities. The planning system needs to focus on identifying the local and regional environmental costs of developments, rather than on scrutinising the commercial need for such developments. Developers are better placed than are planning inquiries to assess commercial benefits and costs. The fundamental problem being addressed arises from effects external to the developer, which suggests that institutions to address and decide on appropriate ‘internalisation’ of the externalities need boundaries incorporating the great bulk of those effects and those affected. For major developments, this could suggest boundaries beyond current planning authorities – but probably with regional rather than national boundaries. In contrast, issues such as global warming need to be addressed through national policies and instruments, to implement international agreements. Development projects should only proceed if they can be expected to cover their full costs. Government policy should be to ensure that developers and operators do face environmental costs and other negative externalities. Thus, projects would only proceed if the developer still considers them commercially profitable after the adverse environmental costs are properly taken into account. This maximises the prospect of the development producing net benefits to the UK. Two major problems have to be addressed if this approach is followed. First, it is a fact that internalisation measures – such as charges linked to emissions – are and will be less than perfect. Second, there will be ‘losers’ as the result of otherwise beneficial development. Judgement will therefore be required by publicly accountable decision-makers, following open, transparent public processes in which those adversely affected are participants and can voice their concerns. The political challenge is to design institutions that will deliver and sustain general support for economically beneficial developments. If this is not achieved, then the risk is that existing processes would be used to delay or halt worthwhile projects. To address the problem of uncompensated losers, Government policy should encourage developers to compensate those adversely affected. It is recognised that there might need to be limits to the scope of such compensation mechanisms where large numbers of people could potentially be involved. Political decisions will continue to be necessary in this regard. The CAA recognises that the time profile of investment in airports is ‘lumpy’ and that the present planning system can deter developers – which may together cause sequencing problems. The Government may feel it necessary to adopt a more active role than might be the case in other markets. In doing so, it must bear in mind that air transport is an industry carried out, in the UK at least, by mainly private companies without public 5 3.10 3.11 3.12 3.13 subsidy. Moreover, it will be difficult for the Government to have the sort of information and analytical processes that would allow a robust view about development paths over a thirty-year period. Therefore, the CAA believes that developers – who are closer to customers and better able to respond to new information and manage risk – should be allowed to play as large a role as possible. 3.14 It is important that whatever decisions the Government reaches are clear ones, minimising the government-related costs of uncertainty for the industry. However, the CAA believes the Government should not go beyond ‘necessary intervention’, ie should not attempt to lay down detailed ‘point in time’ blueprints for air transport. This is a crucial point, given the dynamics of the market, changing consumer preferences and evolving service provision options, all of which are difficult or impossible to forecast. This points to the importance of clear policy objectives, with a framework that allows the key decisions to be made by decision-makers with best information, incentives and accountabilities. On a practical level, the Government’s decision to retain the structure of BAA clearly limits the scope for competition. It eliminates potential rivalry between Heathrow, Gatwick and Stansted. It could also increase the barriers to entry faced by new developers in the South-East. The decision underscores the need for economic regulation to incentivise BAA to the maximum extent possible. The effect of the present form of airport regulation on development incentives is uncertain. On the one hand, it is well known to regulators that price caps can remove some of the risks of investment, and so might encourage overinvestment. On the other hand, more risky investments might require a higher prospective return than that allowed, resulting in under-investment. The CAA will be reviewing the effects of its regulation on the provision of infrastructure, through its work on the designated airport price caps. The CAA welcomes the Government’s policy of bringing together the different transport modes in the UK which offers benefits to air passengers. However, the CAA believes that airports should be treated on exactly the same basis as other developments as regards surface access. While airports should be able to invest in these projects on a commercial basis, it would be undesirable for airport charges to be increased to fund unprofitable projects or projects that would normally be funded elsewhere. It is accepted that expenditure on surface access may be a condition of new airport projects being allowed to proceed. If the developer wishes to proceed given these conditions, then that is usually regarded as one of the costs of the development. Before extra capacity comes on stream, there is a need to ensure the best use of the existing – and increasingly scarce – capacity at the London airports. Transparent secondary slot trading is needed to ensure that scarce 6 3.15 3.16 3.17 3.18 capacity is used by those who value it the highest. There are options for dealing with resultant windfalls. Consideration should also be given to allowing airports to sell newly created slots, thereby increasing their incentive to develop capacity, and to permit local interests to purchase slots to ensure access to congested airports. More market-orientated mechanisms do offer the opportunity for airlines to abuse dominant positions. However, the CAA sees no reason to suppose that competition law is inadequate to deal with such problems, nor does the CAA see any obvious case for ex ante administrative formulae limiting absolute or incremental market shares. 3.19 There is a need to ensure that UK airlines are not put at a disadvantage by the Government’s decisions. The airline industry is becoming increasingly global. The UK has proved itself capable of generating world-class companies across the range of air transport, in airline, airport and – potentially – air traffic control operations, which is to the benefit of both UK passengers and the UK economy. UK-based companies will generally have superior information about their UK customers’ preferences and, even in an age of airline alliances, be more prepared than foreign-based carriers to offer wide networks from the UK. Information is equally important to UK passengers and to the competitive process generally. The CAA has provided statistical information since its inception and for a decade has provided punctuality information. However, data collection and dissemination imposes a cost on both the CAA and the industry, for which the passenger ultimately pays. There are various suggestions for additional data being produced. In general, the CAA supports such proposals for increasing the data sources available to passengers. This is provided that such sources give valuable information to customers and the industry – eg on market choices and airline comparisons – sufficient to justify the costs involved. How this information would best be disseminated will depend to some extent on the outcome of the Commission’s consultation on Service Quality Indicators. At the national level, one option might be incorporation within the Government’s planned Transport Direct database. 3.20 3.21 7 4. CAA’S RESPONSE TO THE CONSULTATION DOCUMENT QUESTIONS MAIN QUESTIONS a) Should the Government choose policies that respond to the demands of consumers and allow current growth patterns to continue, while mitigating the negative effects as far as possible? Or are the costs of this approach too high and should we therefore choose policies to limit these negative effects? The policy objective should be that aviation and other industries should be allowed to expand (or contract) to the point where the incremental benefits to the UK just cover the incremental costs including environmental costs. From a public policy standpoint, industries should face their full costs, including environmental costs. The two problems in this approach are to estimate environmental costs and to devise efficient charging mechanisms. These mechanisms need to provide incentives for the introduction of mitigating measures that are cost-effective to society. If these problems can be overcome, then this ‘internalisation’ of costs would represent the optimal approach. Developers should be permitted, and indeed encouraged, to seek the agreement of adversely affected parties to developments. This is likely to include compensation payments of various types. It seems possible that the costs of local pollutants emitted by aviation, including noise, can be estimated with some confidence, and that compensation schemes might then allow some reduction in the currently large transaction costs associated with planning inquiries. It may be more difficult to achieve consensus on the costs of global pollutants and the means to address them. The CAA supports continuing work in this area. Currently, aviation makes a small contribution to pollution, but it is a growth industry. The optimisation of the output levels of all industries within environmental ceilings (or setting the tax equivalent) implies the balancing as far as possible of the associated marginal social benefits and costs. In the context of climate change, growth in aviation output could therefore be accommodated as long as aviation’s marginal output yields greater net social benefits than other industries. b) How should the Government ensure that aviation meets the external environmental costs for which it is responsible? Should greater emphasis be placed on regulation (at global, national or local level), economic instruments or voluntary agreements? If we should use a mix of approaches, what are the principles that should underlie the choice of approach for each issue? Much depends on the degree of success of the various studies in progress to estimate the costs of the various forms of pollution that aviation causes, and the design of the regulatory institutions charged with enforcing the resulting policies. Without the results of these studies and detailed knowledge of the comparative costs of mitigation measures, it is difficult to give other than very general preliminary views. Clearly, there will be wide variations in the adverse effects of 8 noise and air pollution around different airports, dependent on different aircraft types and their operation, geographical location, population density and distribution, and climatic conditions. This suggests that, wherever possible, local solutions should be found for local problems. More generally, mechanisms that are targeted at the externality itself and the decision-maker who is best placed to manage the externality, and which provide incentives for the externality’s reduction, are to be preferred. However, the estimation of environmental costs might eventually prove intractable or politically unacceptable, so that ‘ceilings’ have to be set locally or globally. In such circumstances, mechanisms such as emission permits could provide incentives for those ceilings to be met in the most efficient manner. Where the pollution produced by aviation has similar characteristics to that produced by other industries, these mechanisms should encompass as wide a market as possible and not just be restricted to aviation. c) If aviation covers its environmental costs, should capacity then be provided to meet demand? As indicated in the General Comments chapter, as long as the marginal social benefits of the incremental capacity of a proposed development exceed its marginal social costs, the development should be allowed to proceed. d) Should the UK try to maintain its position as a major hub for international connecting traffic, or focus on enabling travel to, from and within the UK? Is there a role for Government in promoting either objective (given that airlines will pursue the most commercially attractive option)? This question raises complex issues, which cannot be fully dealt with in a short response. Heathrow is by far the UK’s principal airport both for international passengers and for connecting passengers. Indeed, it is the largest international airport in the world but, without more capacity, it is at some stage likely to lose this status. How important this would be to the UK economy is an open question, because Heathrow and the other UK airports would still have sizeable networks. If capacity is constrained, then the CAA believes that airlines are generally in a better position than Government to judge how scarce capacity is best used. UK airports, principally Heathrow, compete for connecting traffic with hubs such as Amsterdam, Paris and – in some markets – Chicago and Atlanta. Connecting traffic can be drawn to a hub for a variety of reasons. Factors include the range and frequency of services, a convenient geographical position, the ease of making connections, and the attractiveness and aggressiveness of the hub airline. The competition for connecting traffic is becoming more intense as airlines such as Air France reshape and expand their networks to make more, and quicker, connections available. It is therefore difficult to see how Heathrow without 9 significantly more runway capacity can maintain its present share of international connecting passengers. Connecting passengers compete for scarce airport and airline capacity with passengers who are starting or ending their journey in the UK, so fewer connecting passengers would mean that more UK passengers are able to use Heathrow and Gatwick. However, the loss of connecting passengers can also bring disbenefits. They can bolster frequency to less popular destinations. Indeed, they may be crucial to the viability of a thin route. Moreover, since connecting traffic is mainly carried by the hub operator, there can be benefits to the UK economy from the extra output produced by UK-based network operators. It could also be argued that the more UK passengers can use Heathrow and Gatwick, the fewer will be the direct services developed from UK regional airports, with possible net disbenefits to regional passengers. Heathrow’s international pre-eminence is arguably more based on the strength of London as a business, financial and tourist centre, and as a highly populated and prosperous catchment area. Clearly, there is a synergy between the airport and the city, and Heathrow’s network of services must act as an additional attraction. It would seem reasonable to assume that a substantial deterioration in that network in absolute terms could affect the economy of London and the UK. An absolute deterioration seems unlikely. The open question is the extent of the incremental economic benefit that the UK derives purely from the fact that Heathrow has more international passengers than any other airport in the world. Ultimately, Heathrow’s precise ranking amongst world airports will depend on its available capacity. Within that total capacity, there are complex trade-offs between connecting and local traffic, which airlines – rather than governments – are in the best position to make. In particular, the quality and especially the business content of the traffic that an airport offers can be more important to airlines than the total volume. A constrained Heathrow is likely to become an increasingly businessorientated airport. e) Within the existing capacity constraints, how can the interests of UK consumers be best advanced? The CAA believes that market-based solutions backed by competition law can provide the best achievable outcome for all consumers. It recognises that airline valuations of ‘best interests’ can differ from passenger valuations, for a number of reasons, but believes that there would be even greater disadvantages to government-imposed administrative solutions. However, for a market-based solution to be fully effective, there are still some economic and regulatory distortions that need to be tackled. One obvious example of these distortions is that government-imposed bilateral restrictions remain on many routes. Even where these restrictions are removed, their legacy remains, especially at congested airports. The present airline shares of slots at Heathrow have largely been determined under bilateral regimes. As the 10 industry matures, the USA’s experience suggests that airline networks will change and the growing trend towards alliances may reinforce this change. Hubbing carriers focus on the spokes into their hub, not on routes that feed competing networks. Thus, one might expect Air France to concentrate on routes between the UK airports and Paris rather than on routes between the French regions and London. Although it has concentrated its own Heathrow services on Paris CDG (see table below), Air France has retained its slots and leased them to British European on a franchise basis. Air France’s Daily Departures from Heathrow 1995 Paris (CDG) Paris (Orly) Lyon Nice Strasbourg Toulouse Other Total 7.9 3.7 2.4 1.6 1.7 1.6 0.5 19.3 2000a 12.7 0 2.6b 0 0 2.8b 0 18.1 Source: CAA Airport Statistics Notes: (a) Year ending September 2000 (b) Operated by British European under Air France’s code One reason for this could be the lack of an effective slot market combined with the suppression of demand resulting from bilateral restrictions, principally Bermuda II. Without these constraints, Air France might perhaps sell the slots it does not need for its Paris service. Some could be suitable for long-haul operations and attractive to other airlines – such as Delta if it could switch from Gatwick or BM if it could operate to the USA from Heathrow. Other slots might be better timed for short-haul operations and, if more such slots were available to UK-based carriers, there might be less pressure on UK domestic services. However, overall, Heathrow would tend to become more of a long-haul airport, with many of its short-haul spoke routes becoming monopolies. 11 Just as at hubs in the USA, it may be difficult for this loss of short-haul competition to be replaced at Heathrow. However, airports are substitutes for each other. The present problem is that the frequency and prices offered at Heathrow are so attractive that the degree of substitutability is very low. It would be unrealistic to suppose that substantial long-haul networks could develop at most UK regional airports, but there is scope for more short-haul routes. However, the prices at Heathrow and Gatwick need to reflect more closely the scarcity values of their capacity to make these regional services viable. Ensuring that scarce resources are used by those that value them most highly may therefore have both direct and indirect benefits. Thus, the conclusion is that a market-based solution leading to greater airport substitutability and more local services would provide the greatest benefit to UK consumers. CONSUMER ISSUES a) In protecting consumer interests, where should we strike the balance between regulation and voluntary action by the industry? The balance should be struck where voluntary action is unable to meet the consumer protection objectives, or where regulation is inappropriate or cumbersome. The CAA believes that currently a good balance is being achieved, with market solutions being implemented wherever feasible. However, the balance should be kept under review on a case-by-case basis. The CAA’s starting presumption is that statutory intervention is an option to be used when a competitive market demonstrably fails to deliver particular consumer benefits or achieve satisfactory standards. However, it can be an inappropriate or cumbersome way of enforcing the more judgmental and qualitative dimensions of airlines’ products – which ideally a competitive market would secure. Where market competition is less than perfect, it may be better to have such aspects reflected in voluntary codes rather than introduce detailed and prescriptive legislation. Voluntary codes may of course be more easily implemented if there is the sanction of possible regulatory action, and may well need to be monitored for compliance. One key prerequisite for regulatory effectiveness is that the regulated element is capable of precise and clear definition. Another is that across-the-board compliance is required for the consumer benefit to be delivered, perhaps in circumstances where there are potential deficiencies in consumer knowledge. For example, the insolvency protection provided by the ATOL system could not be left to voluntary compliance. Were this to be attempted, then in practice it would never extend across the entire industry, as it would be left to individual firms to decide on compliance. In theory, voluntary bodies could offer insolvency protection, but in practice voluntary bodies cannot and will not underwrite the system to give full protection. 12 A further example is airline insurance standards. Airlines may declare that they have unlimited liability, but customers are unlikely to have the knowledge, understanding or time resources to make choices based on the degree to which airlines are insured for their liability. This would be true even if there were a requirement to disclose information on this aspect. b) What changes, if any, should we make to airline conditions of carriage to bring them up to levels which meet present day consumer expectations? The CAA has endorsed and supported both the work that the AUC has done on pressing for changes in airlines’ conditions of carriage, and the OFT’s recent initiative. The CAA has not been involved in any detail in airlines’ conditions of carriage, apart from enforcing requirements to disclose passenger liability. It would expect to be involved in the enforcement of any new statutory requirement. In broad terms, the CAA regards transparency and legibility as being the most important aspects, and views these as currently unsatisfactory. The CAA is aware that certain aspects – for example, the requirement that the sector coupons for a multi-sector journey can be used only in the particular order stated – are perceived as unfair. c) Should further comparative airline information be made available in the UK including perhaps environmental information? If so, by whom? The CAA endorses the principle that customers should be able to make informed choices, based on readily available and intelligible information. For example, the CAA has published detailed punctuality statistics on routes to and from the major UK airports for the last decade. The CAA sees no reason why environmental information should not be considered on a par with information relating to airline standards, but it also believes that both cases have to be approached with care. Data collection and dissemination are only justified if the benefits outweigh the costs. There is a need to ensure that the data presented to passengers is intelligible, relevant to their decision-making, robust (in the sense that the past is a good guide to the future), and likely to improve their decisions. The CAA also endorses the principle that comparative data on airline performance can help in raising industry standards; and notes that here the problem of converting data into information may be less severe – although the industry already has strong incentives and processes to do just this, eg IATA benchmarking. The Commission envisages that data of this kind should be collected on a Europewide basis through a single central body. Whether such an approach will be adopted is unclear, and it is very possible at some stage that Member States will be required to play a role. The CAA has since its inception collected and published detailed operational data from both UK airports and airlines. Depending on the further information that may be collected, there are potential economies of scale and scope in an expansion of its role. The ‘acid test’ is if the data – which will be 13 paid for in one way or another by consumers – would be giving them reliable information about airline standards, thus enabling them to make better choices. The CAA does not believe that comparative airline information should include safety data, mainly because of the large statistical fluctuations involved with small numbers of incidents. d) Does the current fare regulation protect consumers and airlines adequately? If not, how should we revise it? The CAA has long believed that the interests of passengers will be best protected by liberalisation and an actively competitive market, rather than by regulation. Where government-imposed restrictions remain and competition is muted, the CAA believes that its approach – of monitoring and, if necessary, regulating only the lowest fully flexible fare – remains appropriate. The advent of effective competition on routes within the EEA has brought clear benefits to consumers. The development of low-cost airlines, which are able to charge the fares they wish without the intervention of the governments at each end of the route, has been a particularly notable success of European liberalisation, and has stimulated demand. Other benefits have included the introduction of new fare types by existing airlines, such as those offered by BM and, more recently, BA’s new Economy fare. The CAA sees the BA fare as partly meeting the requirements of those passengers wanting fully flexible travel but unwilling to pay for the premium service offered in Business class. However, it can be purchased only on a round trip basis, so therefore does not qualify as a ‘basic’ fare under the EU fares Regulation. The CAA would hope to see increasing competition in the liberalised European aviation market accompanied by more innovation and a further widening of choice to consumers. This will follow as airlines under competitive pressure seek to match their products more closely to passenger needs across the spectrum of demand. Imposing a requirement on airlines, whether conventional or low-cost, to offer particular types of fares with specified levels of availability may be neither effective nor efficient. The point is that airlines operate sophisticated capacity management systems. Thus, even if it were possible to impose a requirement on airlines to offer a particular type of fare, it would be difficult to judge whether that fare was being made available to passengers. This might only be possible with potentially costly intervention into airline capacity systems. However, although it is important that airlines are able to operate flexibly, they are subject to the normal advertising standards, and the availability of their fares should be as transparent as possible. 14 On routes to destinations outside the EEA, the CAA sees the lifting of governmentimposed restrictions as the best way of serving passenger interests. Meanwhile, the CAA believes that its approach – of monitoring and, if necessary, regulating only the lowest fully flexible fare – remains appropriate. It must be borne in mind that an objective should be to impose the least restraint on airlines. It is worth noting that, in principle, this approach has been incorporated in the EU fares Regulation and the Commission’s guidelines for intra-EEA fares. On routes to points outside the EEA, competition has again brought innovation. These include products such as Virgin’s Premium Economy and new fare types such as BA's recent introduction of a choice of up to four different fare types in its premium classes. e) Are consumers’ interests adequately protected by the application of competition law to code-sharing, franchising and other commercial arrangements between airlines? If not, what further steps should we take? As noted above, the CAA believes that competition in the aviation industry offers the best available means of ensuring that the long term interests of consumers are met. Normal competition law should therefore be properly applied to co-operative arrangements between airlines, such as code-sharing, franchising and other commercial agreements. The effect on competition of co-operative arrangements between airlines will depend on the circumstances of the case. In some cases, code-sharing can serve to increase competition, particularly where the viability of a smaller airline’s services is strengthened by the increased feed traffic generated by carrying the code of another carrier offering connecting services. In contrast, where two airlines operating alongside each other on the same route agree to code-share, each carrying the other airline’s code on that route, the effect on competition may be less beneficial. The CAA believes that the effects on competition of co-operative arrangements between airlines need review on a case-by-case basis. In addition to the application of competition law, airlines are subject to various requirements on the information provided to consumers. In particular, the EU Regulation governing the use of computer reservation systems requires that consumers be informed of the identity of the carrier operating each sector of a code-shared flight. Route and Air Transport Licences granted by the CAA also require that, before entering into a contract for carriage, passengers be informed of the name of the holder of the licence. f) Do we need further action to ensure consumers are adequately protected when buying airline tickets directly from airlines? It is widely perceived as an anomaly that customers buying packages, charter flights and scheduled tickets from travel organisers are well protected by the ATOL system, whereas those buying tickets directly from airlines have no insolvency protection. In the past, the CAA has prepared reports on this subject for the Government. The CAA’s recommendation in 1991 was that the minimum scope of 15 a scheme should be all UK departures. However, it now seems legally difficult – as well as unsatisfactory from a consumer viewpoint – to set up a scheme that would affect UK airlines only. The CAA therefore believes that any scheme would have to extend to at least all European airlines. Despite the fact that the structure of protection is anomalous, the practical effects of recent failures have not been great. Scheduled airline passengers are in less need of protection than customers buying package tours: many passengers do not pay for their own tickets and corporate bad debts are less politically sensitive than are losses to individuals. Many tickets bought using personal money are protected by an ATOL holder, who must accept responsibility if the airline fails. The sums are often very much less – perhaps £100-200 for a flight on a low cost airline, compared with £2,000 or more for a family holiday – and the booking lead times during which money is at risk are on average much shorter. Repatriation is not normally an issue on scheduled routes, as travellers can arrange their own transport home – in contrast with many charter destinations with no alternatives. Other scheduled airlines are normally very willing to offer extra capacity and reduced fares to affected passengers. Following the two failures in 1999, it was apparent that there were other sources of refunds, including travel agents and credit card companies. The CAA’s view therefore remains that any scheme would need to cover all UK departures and be set up in a European context, but that the need is not a high priority. g) Do we need further action to combat disruptive behaviour on board aircraft, and if so, what? For example, should passengers be prohibited from drinking alcohol other than that supplied by the carrier? The CAA believes that progress is already being made. The CAA helped draft the necessary changes to the Air Navigation Order, and SRG participated widely in publicising the new approach to dealing with disruptive passengers. Since then, SRG has acted as agent for DETR in the gathering and collation of data on such incidents within the UK fleet, and continues to provide advice to DETR on the issue. The CAA holds the view that the consumption of alcohol by aircraft passengers remains a matter for the airlines. While recognising the potential impact of alcoholinduced disruption, disruptive behaviour is not a primary threat to aircraft safety. There is also the possibility of disruptive behaviour that is not alcohol-related (such as the recent exceptional instance on a BA flight from Gatwick to Kenya where a mentally disturbed passenger gained access to the cockpit). While there are clear and serious safety implications from such events, the issues of in-flight operational security and passenger control can rest only with the airlines. It is not obvious how some direct responsibility could be placed on the CAA regarding disruptive behaviour among passengers. It is not clear what form of regulation might be put in place to help combat such disruption. The present legal 16 powers do provide a measure of deterrence, but only the airlines are in a position to shape the behaviour and movement of their passengers when onboard. h) How should any health risks associated with flying be tackled? Issues of passenger health have become highly relevant in the context of both media and public interest, and, most important, the House of Lords (HoL) report on Air Travel and Health published in late 2000. The HoL report highlights a lack of clarity about responsibilities for health issues associated with flying and the cabin environment. It also raises the issue about how passengers might be better informed on such matters. The CAA welcomes these endeavours, but would not see it as appropriate for it to become directly engaged in the establishment of regulations serving passenger health. The exception would be those areas where technical specifications are important, eg cabin support systems. Although SRG has no direct responsibilities in respect of passenger health, it will give full support to DETR’s inter-departmental – DETR, DOH, HSE and CAA – Aviation Health Working Group (AHWG), which is addressing a range of issues raised within the HoL Report. The AHWG will seek to develop formal actions in response to the recommendations, and to develop and agree with the airlines ‘best practice’ in those areas where regulation is judged either inappropriate or unenforceable. The AHWG deliberations will be assisted by the results of a Government study into aircraft cabin environment and health. This study is being supported financially by CAA, and its results should be available during the coming year. The SRG’s Research Department recently funded a JAA-sponsored study of anthropometric ( = measurements of the human body) data to support a review of the UK’s minimum aircraft seating standards, and hence the possible establishment of a JAA requirement. This work included a review of the health aspects of long term sitting in aircraft seats and the scope for addressing these through seat spacing or design. This specifically included a review of the most recent scientific knowledge on the causes and incidence of flight-related thromboembolic ( = blood clotting) disease. The draft report will be issued shortly: it is expected to recommend practical egress trials and tests following prolonged periods of seating in representative seating configurations. These tests should be used to validate any changes in the seating dimensions detailed in Airworthiness Notice No 64, which were suggested from purely static analyses of anthropometric data. CAA is contributing to the DETR search for appropriate responses to the HoL recommendations. The CAA’s current view is that the best outcome could well be shared – but explicit – responsibility among DOH, HSE and CAA. This might be buttressed with a supporting ‘code of conduct’ or best practice agreement between DETR and the airlines that demonstrates more clearly their commitments on passenger health matters. 17 Of course, any arrangements to include aspects of passenger health matters in CAA’s remit would need to be formally agreed with DETR, with appropriate resources in place. i) Should we set up a statutory consumer body for air transport, as in some other industries? If so, how should it be organised and financed, and what should be its duties? The CAA believes that the present arrangements work well, but is open-minded about the formation of a statutory body. Questions such as this would usually arise from demands originating from major problems or arising from strong public demand for such a statutory body. The assessment of how to proceed would then need to be made in the context of considerations of regulatory impact and the pressure on parliamentary time. However, the CAA is not aware of any particular such demands, either currently or historically. This is in contrast with the long standing and persistent requests by the travel industry for a single travel regulatory body. The existence of consumer councils covering other industries – chiefly monopoly suppliers and utilities – is not wholly relevant to the airline industry, which, despite some constraints, is in comparison highly competitive. Airports are less so, but the CAA’s view is that direct consumer representation is less important in maintaining service standards than the input from airlines. Indeed, airlines invest heavily in monitoring airport performance and setting service levels. Aviation consumers already have several options open to them when seeking redress. The AUC handles complaints and – where a travel intermediary is involved – so do CPG and ABTA. In policy issues affecting consumers, the CAA has a strong consumer orientation, and both it and the AUC publicise their views on important consumer concerns. The CAA also has various direct executive responsibilities covering consumer responsibilities. This includes most of the tasks managed by CPG and the publication by ERG of punctuality statistics. The CAA’s wider regulatory activities are of course ultimately aimed at consumer benefit. Any move to set up a statutory consumer body would raise questions about the boundaries of the CAA’s own activities. The AUC is, as the Consultation Document indicates, a CAA-funded consumer-focused body that is specifically designed to complement the CAA’s executive role. The reference, for example, to consumer information based on service quality statistics could imply a substantial executive role in areas where the CAA already delivers an expert and cost-efficient consumer product. Presumably, airline passengers would fund any statutory body. Given the need to recoup costs through foreign as well as UK airlines, the most equitable route would probably be through collection of a specific additional tax, on similar lines to the APD. 18 The CAA is open-minded about future arrangements. To make a decision, some specific questions about a statutory body do need to have definitive answers. What are the additional benefits to airline passengers that would support extra costs on the industry? What are the specific gains for a wider-ranging consumer body serving air travel users? From what sources would appropriate funding be secured? How would any possibility of duplication with the CAA’s own duties be eliminated? ECONOMIC EFFECTS a) Is there any evidence of negative economic effects associated with the development and operation of airports? Perhaps the main potential problem with the development of airports is the lumpiness of the investment. Leaving environmental effects and the negative effects of under-supply aside, the principal potential danger with the development of airports is that of over-expansion, or an expansion that is far too early. Not only does this represent a waste of resources, which for a time at least could be put to better use, but over-expansion at an airport could threaten the viability of its neighbours. For this reason, the CAA believes that the onus should be, as far as possible, on companies to propose, develop and take the risk on new capacity. Their investment decisions would be more likely to be economically efficient, as developers would have to compete with other investment projects for funds, with risks being borne by the developer. By contrast, public sector investment can bring about projects too early – should the government’s budget permit – as a government agency or a subsidised private firm may be less exposed to the commercial consequences of actual traffic falling short of forecasts. It would still be possible under the less-centralised approach discussed in the General Comments chapter for the Government to retain the right to modify or veto projects through the planning process. This would allow it to ensure that developments were in accord with its environmental or regional development objectives. However, the planning process does affect the timeliness of projects. At present, the process exacerbates the normal commercial risk of forecasting demand. This could lead to developers favouring a ‘little-too-late’ as against a ‘just-in-time’ approach to investment. b) Do you agree that good air transport links to and from regional airports encourage regional economic growth? What might be done to promote them? The CAA examined the relationship between air services and regional economies in its 1994 study: “The Economic Impact of New Air Services”. Although the study was principally concerned with the effect of a new long-haul route into a regional airport, it reviewed previous research, which was more concerned with the economic impact of airports as a whole. This research indicated the important 19 place of an airport in a regional economy. It showed also that the presence of an airport plays a role, albeit together with a large number of other factors, in the decisions of companies about where to locate. Only 16% of the UK total of international scheduled passengers fly from regional airports, as compared with 63% of international charter passengers. However, as the following table shows, the fastest growing component of traffic at UK regional airports in recent years has been international scheduled services. In many cases, this has been due to the introduction or rapid expansion of routes into the main European hubs. Passengers (M) at UK Regional Airports 1990 Domestic International Scheduled International Charter Total Source: CAA Airport Statistics 1999 22.2 14.9 23.0 60.0 Growth % 40 140 84 74 15.9 6.2 12.5 34.5 In part, these changes reflect the restructuring of airline networks which has accompanied liberalisation in Europe – a development that the CAA has sought to encourage by offering to liberalise so-called sixth-freedom pricing wherever possible. It may also reflect a more aggressive approach by regional airports towards attracting new carriers, both network airlines and low-cost operators. The CAA supports the privatisation of regional airports as a means of securing necessary investment. Although links to European hubs bring passenger benefits, the link to London – and especially to Heathrow – remain important both for domestic and transfer passengers. The CAA believes that sustaining these ‘at risk’ links might best be accomplished by establishing a slot market and allowing the participation in that market of regional bodies and business consortia. As noted in the General Comments chapter, an open market may in any case help relieve some of the pressure placed on BA’s and BM’s domestic routes at Heathrow. c) Should we encourage maintenance operations to shift to regional airports? Heavy maintenance is a global industry, with airlines willing to fly long distances to the most competitive bases. Attempts to discourage the use of London’s airports might therefore simply drive business away from the UK. Large maintenance bases already exist at Aberdeen, Birmingham, Bristol (Filton), Cambridge, Cardiff, Coventry, East Midlands, Exeter, Glasgow, Lasham (Alton), Luton, Manchester, Newcastle, Norwich and Southend. The reason for listing these bases is merely to demonstrate that there is a geographically wide spread of regional airports with maintenance bases capable of servicing large public transport jets. 20 A more pressing problem, as the Consultation Document notes, is the shortage of skilled maintenance personnel in the UK, which means that some of these regional bases are presently unable to use their full capacity. The solution to this problem must rest principally with industry, which so far has not demonstrated a wholehearted willingness to support initiatives that fully address the issue. Regarding the role that Government could play in education and training, the CAA strongly supports the findings of the Inter-Departmental Working Group on the Training of Aircraft Maintenance Engineers. It endorses the Working Group’s recommendations on financial support to aid recruitment and training, where there is evidence of market failure. However, the Government has not yet announced plans on the promotion and funding of the training of engineers in order to encourage careers in aviation maintenance. ENVIRONMENTAL EFFECTS a) To what extent should the Government rely on regulation to influence noise, emissions and other environmental effects of aviation, and to what extent are economic instruments or voluntary agreements more appropriate? On balance, the CAA favours economic instruments over voluntary agreements for the management of noise, emissions and other environmental effects of aviation. Although significant gains have been made by them, the achievement of voluntary agreements can take time and effort to secure even the most basic consensus. Furthermore, there would be no assurance that the solution agreed is an optimal use of resources (including environmental resources). Carefully designed economic instruments have the potential advantage of providing dynamic incentives to enable the aviation industry to minimise its effects on the environment. In contrast, voluntary agreements tend to produce static targets or limits on some specific aspect of environmental performance. There can be much to commend the use of consultative committees as a starting point. This brings together all the parties who benefit or suffer cost arising from aviation activities, which then in principle could produce an outcome to which all can subscribe. However, such an approach, even if in practice successful, can be so prolonged as to generate substantial costs of its own, and would in any event need to be supported by incentives for compliance, such as taxes. In principle, regulation with the objective of economic efficiency should produce a similar outcome, but only if government has perfect knowledge of the marginal social costs and benefits of aviation. In practice, regulation may produce limits on aviation output that have the advantage of simplicity, but such limits can be a very blunt instrument. Regulation may not reflect clearly the way in which pollution arises and the costs of its avoidance; may be inefficient in responding to changed circumstances; and may provide no incentives for reducing environmental impacts below the specified threshold. 21 Economic instruments would therefore seem to be more likely to produce an outcome closest to the optimal, but they would need to be targeted. As the Consultation Document indicates, better fuel efficiency of aircraft engines could produce more, rather than less, NOx – thus a simple fuel tax might be counterproductive in reducing NOx emissions. There is the important proviso that aviation’s external costs can be measured to an acceptable degree of accuracy. This may not be possible for some of these costs. Nevertheless, it would seem important to explore this issue of measurability as thoroughly as possible, rather than to use purely judgemental values either in economic instruments or to underpin regulatory structures. Even if the eventual decision is to set regulatory limits, then it may be possible to set those limits so that the incentives provided by economic instruments can be used to achieve them in the most economically efficient fashion. An example would be trading permits within a regulatory ceiling. As noted in Chapter 3, for global pollutants any trading system should be as wide as possible. b) To what extent should there be a national framework for the assessment and mitigation of noise and local environmental effects at airports and to what extent should the details be decided locally? For example, should limits for aircraft noise and/or emissions be set around airports (where they do not already exist)? The CAA considers that it is inappropriate to set national limits for noise and emissions around airports. Such limits would either be set too low – so that it unnecessarily constrains growth, or too high – so that there is little incentive to reduce noise and emissions. Such limits need to be established locally to ensure that local factors are adequately addressed and local preferences taken into account. There is, however, a need for firm DETR guidance on ‘current best practice’ tools, metrics and methodology for the assessment of noise disturbance, whilst devolving the application of mitigation measures to local discretion. The Consultation Document notes the work done about 20 years ago that led to the introduction of Leq as the UK noise exposure index. There is now a pressing need to recalibrate and update the index, in particular to review the possible inclusion of evening/weekend weightings and to cover the whole 24 hours. There is one major caveat. Where national interests do not align with local interests, or where local interests are in conflict, there may be a need for intervention by the Secretary for State. It was in part for this reason that the three London airports – Heathrow, Gatwick and Stansted – were designated under Section 78 of the Civil Aviation Act 1982. 22 c) If economic instruments were used to reflect the polluter pays principle, should such instruments be varied in relation to the sensitivity of location or operating time (for example for night flights)? In designing economic instruments, relevant factors such as time and location should be taken into account where this is both practicable and robust. The object of economic instruments is to bring aviation output to the point at which its marginal social benefits equal its marginal social costs, including environmental costs. Measurement problems aside, this implies that, where marginal environmental costs differ, the economic instrument should reflect these differences. As noted above, in principle the economic instruments should focus – to the greatest possible extent – on the externality itself. The variation in economic instruments is therefore more likely to arise with respect to local external costs and perhaps noise in particular. An efficient local noise levy would need to reflect not only source noise but also the time and the size of the population at risk around the airport in question. d) Is a balance between mitigation and compensation the best approach for local impacts? Are there further steps the Government could take to mitigate the environmental effects of aviation? The key policy objective is ensuring that polluters are faced with the costs of the adverse environmental impact they cause and are incentivised to minimise the impact and compensate the remaining losers. Compensation measures mainly cover noise insulation schemes and the distribution of the proceeds of noise limit charges to help the local community. (There are some other forms of direct compensation, for example the Vortex Protection Scheme, which compensates residents for roof damage by aircraft wake vortices.) Noise insulation schemes are limited to a relatively small proportion of the population residing in the worst affected areas. Ideally, the aviation industry could compensate individual citizens for environmental damage caused, but there may be practical difficulties to overcome given the number of households potentially affected. It also has to be recognised that people are not always ‘economic animals’. Thus, it may well be that they would ideally prefer not to be paid for enduring noise, but rather for it to ‘go away’, and for some earlier quieter environment to somehow be restored. If one takes this view, mitigation would go some way to achieving what people may ‘really want’. If aviation can be made to face its external costs directly, then incentives should be provided to encourage the mitigation of these externalities. There are already many significant and different initiatives to mitigate the environmental impacts of aviation. Aircraft manufacturers, airport operators, airlines and air traffic service providers are all involved. The CAA believes that the gains from mitigation are potentially widespread and substantial, and hence could benefit large numbers of people. 23 However, mitigation can be costly, so there it is essential to have confidence that the delivered benefits do justify the costs involved. Unfortunately, the benefits of mitigation measures tend to be cumulative rather than single ‘major breakthroughs’. Moreover, the average citizen is not always in a position to assess these cumulative environmental gains. The highly successful work over the last two decades to reduce aircraft noise generation seems to have received very little publicity. It is recommended that Government provides continuing support to development work on mitigating measures, and that greater emphasis is given to education which will increase public awareness of its benefits and the continuing efforts being made. e) In the long term, where should the UK concentrate its efforts in international negotiations on environmental impacts? The CAA strongly recommends that the UK should focus its international efforts in this area through ICAO in terms of global warming. The UK should also endeavour to achieve better coordination within European fora, in order to present a more effective line on regional concerns to ICAO. Aviation is a global business and the pursuit of local interests may damage international cooperation offering long-term benefits – as would seem to be the case in the dispute over hush kits. Such disputes can tend to damage the image of aviation with the public, and obscure the progress by manufacturers to improve the environmental impact of aviation. f) What more could be done to encourage further development of future technologies in this field? The Government needs to work in cooperation with other States. Jointly, Governments can fund directly or create incentives to develop technologies to mitigate the environmental effects of aviation. The incentives could be either economic instruments or the creation of appropriate regulatory regimes. Regulation could be very direct, such as setting emissions or noise standards, or indirect, such as fostering competition in an environmental context. An example of the latter might be engine manufacturers competing on noise and emissions for airline customers – who are becoming progressively more sensitive to airport environmental regulation. The Consultation Document cites aerodynamics, engine efficiency, combustor technologies, and design developments as important directions for technology developments. These are areas where there are already significant development efforts, but which still need appropriate support over the long term. It is also appropriate to note here the potential for ATM technologies and procedures to mitigate environmental effects. In particular, CNS/ATM developments have the potential to reduce fuel consumption significantly, on the assumption that these combined technologies help deliver fuel-optimum routes. To achieve these levels of benefit, work on these improvements needs to be taken 24 forward at a European level through the work arising out of the ‘High Level Group’ recommendations. Governments can also directly fund research and development of new technologies. The Government should ensure that complementary analytical and concept studies are also undertaken. The need is to identify where technology development is most beneficial in reducing environmental impact. It is also important to estimate the key environmental impacts – which emissions, noise etc – and trade-offs between environmental benefits, such as between different combinations of noise and emissions. Thus, the CAA supports the use of all the tools available: regulation, economic instruments, customer pressure, and government sponsored support for research. AIRPORT CAPACITY a) Would it be desirable to implement new policies in order to make best use of airport capacity? If so, what policies should be implemented? The CAA believes that the current policies have not been fully effective in promoting the best use of airport capacity when demand for airport slots exceeds supply. Under current procedures, allocation of the overwhelming majority of slots rests on historical precedence. This does not appear to maximise the net economic benefit of air transport to the UK, even approximately. It does not ensure that the value to users of consuming scarce resources is greater than the marginal social cost, including any external costs and the value foregone by excluding use by other users. It therefore leads to outcomes that are inefficient from an economic perspective. The existence of a ‘grey market’ in slots may mitigate these effects somewhat, by allowing marginal users to compare the benefits of continued use with the opportunity cost represented by the sale price of the slot. However, the extent to which this happens is severely limited both by the uncertain property rights and the lack of transparency in any transactions taking place. One of the stated aims of the current European Regulation is to allocate slots in ways that support liberalisation, and that facilitate entry and competition. Such objectives might have a positive effect on the net benefit of aviation, if they were to lead to significant improvements in efficiency and innovation because of new entrants. However, in practice, at heavily congested airports such as Heathrow and Gatwick this aspect of the regulation is limited to the allocation of a small number of slots. These are either no longer required by the users who had historical precedence or are newly created by marginal increases to runway capacity. The very limited availability of such slots has made it difficult for potential new entrants to acquire sufficient packages of slots to offer commercially attractive schedules for new services – particularly on short haul services. 25 The CAA therefore believes that full liberalisation will inter alia allow the true demand for airport capacity to be revealed. Further, it believes that secondary slot trading – as a minimum – would allow this demand to be best accommodated within scarce airport capacity. The application of normal competition law and policy has to accompany these developments. This would disentangle the debate from the political machinations that has all too often surrounded international air services negotiations. Price regulation of the type that has been applied at the congested London airports also exacerbates the problem of excess demand. It encourages the continued use of scarce resources at the margin by airlines that attach relatively low values to their use. The CAA’s current Quinquennial Review of airport charges at the designated airports is directly addressing these issues. b) Should the slot allocation regime be adjusted to take environmental considerations into account? As explained above, the CAA believes that aviation should face its full – including environmental – costs. However, this should be achieved using policy instruments that are specifically aimed at securing this objective, such as targeted economic instruments. The aim of such instruments should be to ensure that the output of the industry is brought to the point at which its marginal social benefits equal its marginal social costs, including environmental costs. The aim of the slot allocation regime, on the other hand, should be to ensure that scarce airport capacity is put to its highest value use. This is best achieved by introducing slot trading, so that airlines face the full opportunity costs associated with the use of slots at congested airports. If aviation then faces its full social costs, environmental costs will already be taken into account in this process. There have been suggestions that the slot allocation regime should take separate account of environmental considerations, for example by giving lower priority to noisier aircraft or to services on routes where surface transport provides an effective substitute. However, in the CAA’s view such approaches are a poor ‘second best’ to ensuring that aviation in general meets its full environmental costs. Indeed, true economic efficiency requires that all transport modes (and all other industries) should face their full costs. Failure to do so, together with the employment of arbitrary restrictions on aviation, would be likely to result in both distortions in the allocation of resources across the economy and a sub-optimal outcome in environmental terms. c) What are the arguments for and against raising the cost of using airports where demand exceeds capacity? It is clearly inefficient for services to use airport capacity unless they provide a net benefit after allowing for the additional costs incurred (to the user, the airport and third parties). Where demand exceeds supply and potential users are excluded from using the airport, the net benefit derived by the use of each user should be 26 higher than the net value that would be derived by the most valuable alternative use which has been excluded (the ‘opportunity cost’). The opportunity cost of a slot will vary significantly between season and time of day. The relative value of different uses will also change over time in response to new market conditions or opportunities. If there were in place a secondary market in slots, the opportunity cost of a slot with particular characteristics would be reflected by its market price. In the absence of a properly working secondary market, airport charges could be allowed to reflect the opportunity cost of the use of the slot. In practice, this is likely to be a much cruder approach than market-based slot trading. This is because neither the available information nor the flexibility in the tariff are ever likely to be sufficient to set charges that perfectly bring supply and demand into alignment at all times. Moreover, making a monopoly airport the full beneficiary of scarcity rents could on occasion provide a disincentive to deliver additional capacity, since this might erode those scarcity rents. However, in the absence of market instruments, such an approach to airport charges would at least allow capacity to be used by those who value it most and to exclude those who value it least. d) How can future technologies to reduce capacity constraints at existing airports best be used? How can the Government and the aviation industry encourage the development of such technologies? It is primarily the responsibility of airport operators and their ATC providers to develop and introduce new technologies into airport operations. The CAA has an interest in the early introduction of technologies that improve safety, lead to a more effective use of airport/airspace capacity, or which offer environmental benefits to residents near airports. As a general principle, it is very important for substantial concept and evaluation work to be carried out at the ATM system level before implementation is contemplated. Without these assessments, it would be difficult for customers and regulatory authorities to determine the ‘business case’ for technological changes. Some general comments can be made on the technologies mentioned in the Consultation Document: • Effective vortex wake advisory systems could provide major safety benefits by detecting the presence of hazardous aerodynamic conditions in front of arriving aircraft. In normal atmospheric conditions, such systems could potentially offer huge increases in peak hour runway capacity. • Airport surface management systems could also offer significant benefits. They could enable runway incursions – potentially serious safety hazards – to be identified. They could permit capacity in poor weather conditions to approach that in good weather. The latter is of great importance given the heavy traffic scheduling that now takes place in winter. • In recent years, NATS has carried out R&D on arrival and departure management systems very successfully. This has demonstrated real safety 27 benefits in terms of controller workload, as well as offering significant capacity and fuel saving benefits. The outputs of this R&D now need to be implemented. • Satellite-based systems need close conceptual examination at the ATC system level. The main aim must be to ensure that the promised net benefits to customers are deliverable. The political and industrial dimensions of satellite systems – ‘Europe’s Galileo versus the USA’s GPS’ – must not be allowed to blur the operational business case. • Heathrow is the only major UK example of a potential ‘closely spaced parallel runway airport’. Several research studies have been carried out into the possible capacity gains from this mode of operation. These gains could be very worthwhile in terms of delaying the need for airport capacity elsewhere to be brought on stream. However, the environmental implications – loss of runway alternation and higher numbers of movements – are potentially very significant. This aspect was not examined in the Heathrow Terminal 5 Inquiry – the potential environmental impact would need to be examined before any further technical studies are embarked upon, otherwise the latter could be nugatory. Investments in airport technology are for the airport operator to determine, based on operational costs and benefits. However, the Government should consider ‘pump priming’ financial support to development work that could offer major security improvements or environmental benefits. AIRPORT COMPETITION AND OWNERSHIP a) Does the current economic regulatory regime for airports properly safeguard against abuse of position? Does it provide the right signals to the airport about timely investment? How might it be improved? The current economic regulatory regime appears to have provided some safeguards against abuse of a dominant position. The combination of the public interest aspect of the reference to the Quinquennial Review and the CAA’s powers (under section 41 of the Airports Act) to impose discretionary conditions appears to have created an atmosphere of improving consultation with users. These include critical issues such as quality of service and the investment programme – but these are areas where further improvement is desirable. However, the current regime does not of itself provide sound signals to investment. As the RPI-X framework has been geared to providing a level of returns that remunerate the cost of capital for all investment, the airports have no incentive to distinguish the capital programme that provides the greatest economic value. All investments are equally rewarded, and the risk of each project depends on the actions of the regulator in continuing to consider the assets as part of the regulatory asset base and the cost of capital that is allowed, rather than the inherent commercial risks of the business. If the regulator allows a cost of capital higher than the true cost of capital, this can lead the airport to make an excessive level of investment. Conversely, if the regulator allows a cost of capital that is too low it is 28 likely to induce a level of investment that is less than optimal. The five years cycle of reviews may also lead to poor investment incentives by distorting the plans at review time and by inhibiting the addition of worthwhile projects between reviews. The CAA is considering improvements to the current framework as part of its current review. One approach under consideration is linking the charges formula more closely to the value of outputs to users. Another is the possibility of a default price cap, which would regulate a basic level of service but then allow airlines to make long term contracts for additional capacity and quality. These issues are currently subject to a consultation with the industry. AIRPORT PLANNING a) Do you consider that the guidance in PPG24 on noise sensitive development near airports is easy to understand and interpret? Has the guidance achieved its objectives? The guidance in PPG 24 was the product of technical compromises by the various parties involved in its detailed drafting. The CAA finds it very difficult to judge whether it has achieved its ‘top down’ objectives. It is therefore suggested that a study be undertaken to ascertain how much development has taken place inside the Noise Exposure Categories (NECs) since the guidance was introduced. b) Could the concept of environmental capacity limits be applied successfully to UK airports? How would limits be set? Would these be alongside or instead of limits on passenger throughput? The introduction of environmental capacity limits might appear to provide a method of meeting community anxieties about airport expansion, but the setting of the ‘right’ limits raises many issues. On one hand, local communities will tend to argue that limits are set too low and do not achieve any environmental gains. On the other hand, the aviation industry will tend to argue that environmental limits are set too high and are unfairly restraining their commercial activities and economic growth generally. Compromises tend to satisfy neither party. Furthermore, there is no incentive to use the environmental capacity efficiently within any declared limit. It is recommended that the concept of ‘environmental efficiency’ be explored, along with mechanisms for its optimisation. Environmental efficiency could be measured in several different – and indeed complementary – ways. Useful indicators (‘metrics’) might, for example, be the noise generated per revenue passenger kilometre or the amount of carbon dioxide produced per passenger. A group of such metrics would together represent the full complexity of environmental efficiency. Further research and analysis work is required to develop a robust concept of environmental efficiency, the metrics to be employed, and how best to combine them. 29 c) Would it be useful to update and reissue the guidance on the operation of airport consultative committees? Would it be desirable to include representation of regional interests on committees at larger airports? The CAA’s experience is that the existing Consultative Committee arrangements, under Section 35 of the Civil Aviation Act 1982, have worked well for many years. However, there is some growing evidence that, with the increasing and opposing pressures on the industry generally, particularly in terms of environmental demands, those arrangements may no longer be adequate. There is some evidence that, while Local Planning Authorities (LPAs) are represented on Consultative Committees, the impact of airports in today’s society is now being noticed further afield, in Planning Districts which may not be currently represented on Consultative Committees. The impact of airports is also being noticed at a more local level, in that smaller pressure groups – at a level well below LPA level – are continuing to gain more influence on the Airport Planning process. The CAA has been told that some LPAs represented on Consultative Committees are not discharging their responsibilities adequately. Examples are nonattendance at meetings, non-participation in the consultation process, and not filtering the consultation down to the local level. This may indicate that elements of Consultative Committees do not have the experience or competence within their own organisations to form fully balanced judgements. This is perhaps not that surprising, given the variety of local, national and international issues that confront the operation and development of today’s aviation infrastructure. The consequence can be that small pressure groups are increasingly able to exert undue influence on the local consultation and national processes, and hence turn issues into ‘long running disputes’. Thus, the CAA believes that the guidance on the operation of Airport Consultative Committees should be updated and reissued to reflect today’s environment, and that their composition should be reviewed to include regional interests. d) Should the Government encourage a system of voluntary environmental agreements between airports, airport users and local interests, which could provide an agreed framework for development and complement the statutory role of the planning system? Voluntary local agreements between airport operators, airport and airspace users and those affected by the airport and airspace use have a valuable part to play in mitigating the environmental impact of aviation as a whole. However, it is important to emphasize that all such agreements, whether statutory or voluntary, must fully recognise the safety requirements for aviation. In particular, there must be correctly designed instrument flight procedures and appropriate tolerances in the operation of aircraft. There are examples where existing custom and practices do need to brought up to ‘best practice’. Agreements must take into account the evolutionary nature of aviation, which is likely to result in changes in the future that are not always easy to foresee. 30 e) How should people best be compensated for the environmental impact of airports on their local area? Should the Government encourage greater use of voluntary arrangements to compensate for, or mitigate the effects of, significant airport development? The Government could examine schemes whereby compensation is dispensed through local tax relief. The examination would need to consider how the scheme might operate across the various Council Tax bands (given that some of the more vulnerable members of society do not pay local tax). The immediate benefits of any such a compensation scheme would of course accrue to the actual payers of council tax. Mitigation of the environmental effects is likely to have a more widespread and, arguably, more equitable impact on the community. This could either be on a voluntary basis, as a result of regulation, or because aviation has to face its external costs directly. INTEGRATED TRANSPORT a) Is there anything further that the Government or the aviation industry can do to encourage increased public transport use to access airports, and to encourage greater use of airports as inter-modal hubs connecting different forms of transport? Despite the improvements that have been made to public transport access to the three main UK airports over the last decade, there has been little change in the market share of private car and taxi. However, the average figures conceal considerable differences both between passenger categories – eg foreign passengers are far more likely to use public transport – and across the catchment areas, varying with the quality of public transport. Percentages of Air Passenger Modal Share at UK Airports in 1987 & 1999 Gatwick 1987 Private/Hire Cara Taxi/Minicab Bus/Coach/Rail Other Total Terminating passengers (M) 55 7 38 0 100 17.6 1999 52 15 33 0 100 22.9 Heathrow 1987 44 20 35 1 100 26.8 1999 39 26 35 0 100 42.1 Manchester 1987 72 16 11 1 100 8.6 1999 63 27 10 0 100 16.6 Source: CAA Origin and Destination Surveys, 1999 Note : (a) Includes passengers using car park courtesy buses 31 Transport policy is moving towards better reflecting the real costs of use in the price paid by the user at the point of consumption. This is for example through local road pricing and workplace car parking levies. Economic measures such as these will alter the modal shares, as will the further initiatives being taken by BAA and other parties to improve public transport links – initiatives which the CAA supports. However, people about to make an air journey may place a particularly high value on the use of a car/taxi to get to the airport. There can be a variety of reasons. They could be travelling as a family, have heavy luggage, perceive the car as a more reliable method of getting to the airport on time, or be returning late in the evening. Note that in the evening public transport – not necessarily on the links to the airport itself – is less reliable. BAA set a target of 40% public transport use at Heathrow in 2000. However, it may be necessary to levy heavier charges on, say, car parking or car access to the airport to achieve much higher levels of diversion to public transport. Car access to airports is only a small part of total UK car use. There may be other categories of car user that can more easily be moved to public transport. For example, even at airports, passenger access is only part of the picture – journeys to and from work at the airport can contribute a similar volume of road traffic. As noted earlier, there have already been public transport improvements for airport workers, and these may offer a more cost-effective means of alleviating congestion. Airports are major transport interchanges, and their surface links could provide alternative means for people to complete their journeys by non-car modes or by making shorter length car trips. Examples of this are the use of the Gatwick Express by commuters to travel into Central London, and increasing the frequency of the Stansted Skytrain and scheduling intermediate stops to serve (predominantly) commuters. But there is a trade-off, in that the services may become less attractive to airport users. In the longer term, there is the prospect of high-speed rail links into UK airports that could complement or substitute for short-haul flights. Indeed, regulatory mechanisms such as Traffic Distribution Rules could be used to direct or prohibit air traffic of different types to certain airports in order to increase substitution in favour of rail. But this approach involves the State second-guessing the market, and seems likely to produce a highly distorted outcome. For example, it might lead to the passenger deciding to make the whole journey by road, or to travel by road to fly from a more remote airport. However, the concept of an inter-modal hub suggests a wide-ranging system of surface spokes, which enables not only access by air passengers but also allows other travellers to make connections between surface modes. If such a hub could build up an attractive level of frequency, passengers travelling from the South of England to the Midlands and the North could have an alternative to travelling through the centre of London. Hubs do require a substantial volume of demand, so whether such a system is a viable commercial proposition, even based on an airport such as Heathrow, is an open question. 32 b) Should surface access connections to airports be regarded as essential components of airport development and approval for any new capacity be made conditional on appropriate connections being provided? The CAA believes that airports should not be treated any differently to the developers of other projects of equivalent scale for the purposes of surface access. Not all airport developments have surface access implications that are so great that they require additional surface access connections. The CAA believes that, regarding road access, the existing planning policy guidance (PPG13) comes close to striking the right balance in requiring planning conditions and contributions from developers where the development substantially brings forward the need for additional road infrastructure. The CAA believes that it remains reasonable that the developer should not be required to pay for improvements to deal with existing deficiencies in the road system which would not be made worse by the development. Nor should the developer have to pay for improvements already programmed by the highway authority within the same timescale as that of the proposed development. As regards public transport, the CAA believes that airports and third parties should be encouraged to invest in projects on a commercial basis. To the extent that there are externalities associated with such developments that would not be internalised by a commercial appraisal, the CAA is unable to give a specific recipe on how these should be treated. This would depend very much on the specifics of the case. Normal public procedures for planning and financing public transport presumably would apply. One approach to funding public transport at airports has been for the airport to increase the charges for car use better to reflect the external costs that this imposes, and to use the surpluses created to fund public transport. Such an approach has been applied at Heathrow and Gatwick, where real increases in car parking charges have funded local bus services. c) What are the best mechanisms for bringing together the various interested agencies in order to establish the best surface access connections? The CAA has no special competence in this subject. d) What are the likely costs and benefits of substitution between short haul air travel and rail, for example between London and major regional centres? If the benefits outweighed the costs what could the Government do to encourage substitution? CAA staff are participants in the CfIT study mentioned in the Consultation Document. The CAA believes that all modes of transport should bear their respective external costs in full. If these external costs are internalised, then the resulting market 33 allocation of resources should minimise the impact of transport on the environment. Government should work to ensure that these externalities are included in transport decision making and that markets work efficiently. It is recommended that intervention by Government is strictly limited to explicit social measures, or where it judges that public service obligations must be met. The costs of such support should be made explicit and transparent. 34 AIRSPACE a) How might Eurocontrol, the EU, the CAA and NATS ensure that, if necessary, additional (i) airspace capacity; and (ii) air traffic service capacity, is created? How could the costs of this, both economic and environmental, be minimised? As noted in Chapter 2, the CAA is the specialist aviation advisor to the DETR, and fully supports the Government’s initiatives on Eurocontrol and the EU. In particular, the CAA believes that the work and recommendations of the HLG offer the potential for more customer-responsive European ATM arrangements both to deliver the best airspace environment and to generate the necessary increases in ATS capacity. The CAA believes that it is very important for the regulatory and service provision elements of Eurocontrol to be separated. The regulatory part should inter alia include airspace policy work – to facilitate a Single European Sky and to ensure that the needs of all airspace users are taken into account. This would join onto the Performance Review and Safety Regulatory Commissions. The service provision part should include increased management input from States’ service providers. The providers’ goal should be to develop a more commercial and customerfocused Eurocontrol ‘ATS business’ whilst satisfying the essential requirements of non-commercial airspace users. The EU and Eurocontrol need to work closely together on regulatory issues. The EU’s legal powers should help to ‘fast-track’ innovation by its States and ATS providers. Qualified majority voting in both the EU and Eurocontrol (through its revised convention) should help to make decision making more effective. However, a mechanism to safeguard essential national security interests needs further development. Costs will be minimised by the increased operation of market forces and by much more attention being paid to cost and benefit analysis of major development and investment decisions. There is a need for more business transparency by Eurocontrol and service providers, so that their customers, particularly the airlines, can assess the merits of proposed business plans and investments. Environment externalities need to be fully costed in such decision making. b) How might Europe’s air traffic services be liberalised? The objective of liberalisation – as occurred in the airline industry in the 1990s – is to enable commercially motivated companies to compete with each other free of governmentally imposed restrictions. In these circumstances, normal competitive processes would foster innovation and create strong downward pressure on costs. However, the provision of en route ATS differs from most other industries. With current technology and methods of operation, a substantial degree of statutory 35 monopoly will be necessary for some considerable time ahead in order to ensure that aircraft are handled both safely and effectively. The situation may change over the longer term. Air traffic controllers are being provided with more advanced computer-aided tools and aircraft are progressively being fitted with sophisticated on-board avionics. It is therefore possible that there will need to be a re-evaluation of existing assumptions about the scope for direct competition. However, for the immediate future any competition between ATS providers in en route airspace is likely – at best – to be ‘for’ the market rather than ‘in’ it. The development of this type of competition should be encouraged by the government. Even in this context, it is already technically feasible that ATS providers could compete for franchises to provide ATC services geographically distant from their base of operations. The translation of such technical possibility into practical reality, once governments are prepared to permit non-nationals to provide such services in their sovereign airspace, would introduce a new source of competitive pressure. This would still not entail direct competition within a given volume of airspace. On current trends, such cross border ATS provision might occur first within Europe, for much the same underlying political and commercial reasons that produced the completion of the single internal European market for airline services. However, the precise way in which it may happen will depend on a number of factors. One obvious economic factor affecting the optimal size of a franchised block of international airspace would be the presence and strength of any economies of scale and scope. Another would be the level of transaction costs involved in coordination between different providers. Safety considerations would of course have to underpin any changes – controllers need to be ‘rated and validated’ to handle traffic in each block of airspace. c) Are we striking the right balance in the allocation of airspace between different classes of user? What changes, if any, might help in the future? For many years, DAP has been required, through the Directions to the CAA, to take into account the interests of all airspace users on a fair and equitable basis when regulating UK airspace. The UK premise has always been that airspace should be of the lowest classification possible, commensurate with safety and complexity. Airspace therefore remains with this lowest classification (Class G), except where a convincing case has been made for it to be otherwise. The aim is to ensure maximum access with minimum regulation. Seeking consensus across the aviation community for airspace changes is a principle and process that still holds good. A process that would take account of economic factors in the allocation of airspace deserves careful consideration. The aspirations of non-commercial users will still remain valid. In the short term, consensus will be difficult to achieve. 36 For the future, the ECAC airspace strategy, if adopted in full, will have a significant impact on the allocation of airspace and airspace structure. Harmonisation of vertical divisions of airspace with the rest of Europe, together with transponder carriage policy and other technological innovations (eg Mode S) will be important components to make the new regime work. The anticipated growth in regional airports together with increasing environmental constraints will increase the pressure for the balance to move further towards controlled airspace, with additional constraints on general aviation and defence VFR operations. Finally, while airport and airspace capacity for increasing commercial operations must be taken into account, the efficient use of airspace has to be considered in the context of gate-to-gate operations. This points towards the need for integrated European wide ATM planning, with the appropriate contribution being provided by the allocation of airspace. d) How should research and development efforts into new technology in air traffic management be stimulated and funded? Should the Government help to secure implementation of such technologies? It is primarily the responsibility of airport operators, airlines, and their ATC providers to develop and introduce new technologies into air traffic management. These should be normal commercial decisions, with funding being by the companies involved. The key issue is most often the actual adoption of new technologies, rather than research and development work – where the UK through NATS in particular has an impressive track record in all the areas mentioned. NATS, following PPP, should maintain its research and development programme, and continue to be in the lead for the adoption of commercially advantageous ATM technology, taking a strategic perspective. One way in which the latter process can be helped is through progressive improvements in equipment standardisation and certification processes. ATM is an international business, so that it is essential to bring new technology on stream on – at least – a European level, and preferably with the USA’s support. Improved joint European arrangements for equipment and ATC regulation, through EU and Eurocontrol bodies, must therefore be given full support. To reiterate, a key problem is the adoption of new technologies, rather than their technical development. It is widely recognised that international standardisation can procedurally be a very lengthy process. The histories of Mode S, MLS, TCAS, and three (sic) different standards for VHF digital communications serve to illustrate the lengthiness of the processes. This is true even for equipment that offers significant safety improvements, such as TCAS. The question for regulators is therefore whether the standardisation processes and arrangements for exceptions (eg such as may be necessary for State aircraft) can be ‘fast-tracked’ or simplified whilst still ensuring high standards of safety and performance. 37 The Consultation Document specifically notes satellite navigation as a possible new technology for ATC. The CAA recommends that more work should be done to establish the future costs and benefits to aviation users. Results of these analyses should be published and discussed with ATM users – in particular those financially affected by decisions to introduce the technology. There is not yet a consensus among UK ATC’s customers that satellite navigation does offer major net benefits to the aviation community. It is important that the industrial dimension does not cloud these commercial decisions, nor should there be a possibility that aviation users could subsidise users of other transport modes. Data link and ADS-B technical research – where NATS has again made major contributions – need to be complemented by studies into the costs and benefits of commercial introduction. More generally, strategic studies to aid effective planning are required. The top priority must be safety, with capacity the next most important. Optimal routeings are important, but must not of course introduce delays by leading to reductions in overall system capacity. Industry must reach consensus about the ‘right’ technical paths to follow, based on meeting forecast airspace demand and delivering customer benefits. Commercially focused ATS providers should drive this process. The DETR and CAA should try to help ensure that this consensus is achieved. In particular, planning at a European level must take a higher priority. The current work under EU auspices, which confronts the next steps and practicalities of its HLG recommendations, should help to stimulate effective planning. AIRLINES a) In the light of increasing globalisation of the aviation industry, how should the UK’s approach to alliances, code-sharing and franchising meet the objectives of sustainable development? The objectives of sustainable development and promotion of competition are entirely separate from each other. Each objective requires the use of distinct policy instruments. The best means of meeting sustainable development objectives is to ensure that the aviation industry meets its full external costs, as described above. The UK’s approach to alliances, code-sharing and franchising should be to ensure that users interests’ are protected by the appropriate application of competition law. The CAA sees no sense in which competition policy could be effective in the pursuit of sustainable development objectives. 38 b) Are there particular features of the analysis of competition in the airline industry which might differentiate it from other industries? The CAA believes that there is nothing about the airline industry, per se, which demands that competition law be applied differently from the way in which it is applied to other industries. Many industries have particular characteristics of their own. For example, it can be argued that the airline industry is a network business, in which the demand for air services on a particular airport-pair, city-pair, or even country-pair is derived from a multitude of separate origin/destination markets. Consequently, market definition in airline competition cases can sometimes be quite complex. As another example, the ‘indivisibility’ of capacity can result in extremely low short-run marginal costs, with consequent difficulties in applying competition law to cases involving allegations of predatory pricing. But none of these characteristics is unique to the airline industry. Competition law is fully capable of addressing the different issues raised in the airline industry. c) Should the UK press within the EU for a change in Community policy on ownership and control of airlines? [This response also covers question (e) below.] These questions raise an important strategic issue. The CAA believes that the greatest economic benefits in the long term can be secured only by means of a full and genuine liberalisation of the global aviation market. This would mean scrapping all existing constraints on the routes which may be served, the number of airlines and frequency of flights, the fares which airlines may offer, and any other remaining government-imposed restrictions. But, unlike the USA’s ‘Open Skies’ model, it would also mean eliminating the special nationality-based restrictions on airlines’ ownership and control, which have been the foundation of the whole bilateral system. The result would be unrestricted access to domestic as well as to international air markets. But the application of normal competition law would be essential if reform of the system were to deliver the full potential benefits to air travellers. Such full liberalisation would yield a number of important benefits for the UK: • The complete removal of the existing restrictive nationality-based rules on the ownership and control of airlines would permit UK airlines to build global networks through mergers, acquisitions or alliances as they saw fit, subject only to normal competition policy. In other industries, mergers and takeovers have often proved important stimuli to product innovation and efficiency. • A fully liberalised market would provide a more secure base for UK airlines to exploit their strengths in the longer term. Ultimately, it is likely that control of foreign airlines, and the greater scope for in-depth integration of activities and effective management control which that would allow, would be much better than potentially unstable alliances. 39 • Global liberalisation would give UK airlines wider access to capital markets, and should therefore result in their being able to obtain capital more cheaply. • Aviation investment, activity, and thus employment, in the UK are much more likely to increase than decrease as a result of genuine liberalisation. As indicated above, the main alternative form of liberalisation – USA Open Skies – fails to address the need to remove restrictions on airlines’ ownership and control. It thus falls substantially short of full liberalisation, and is designed permanently to benefit the USA’s own industry over that of the UK and other major aviation nations. By its nature, it cannot deliver the first three benefits above, and – by design – would jeopardise the fourth. Moreover, while it would bring some short-term benefits to air travellers, the long-term benefits would be markedly less than with full liberalisation. The Consultation Document sets out the view that the UK should consider on a case by case basis if it should seek to negotiate to liberalise its aviation agreements with non-EU countries bilaterally, or instead support a mandate for the European Commission to do so at EU level. The CAA sees a fundamental difficulty with the former approach. A UK objective of full liberalisation of the North Atlantic or other non-EU markets is unlikely to be secured through bilateral negotiations. The EU regulation on the licensing of air carriers requires that EU licensed carriers be majority owned and effectively controlled by EU nationals or governments. Ultimately, therefore, the UK is not free to negotiate through bilateral arrangements any changes to the rules governing ownership and control of airlines established in the UK. It seems inconceivable that, without reciprocal rights, the Government of the USA would introduce the legal changes that would be required to allow UK airlines to own and control airlines established in the USA. Thus, the only practicable means of achieving a full liberalisation of the North Atlantic aviation market is through EU and USA negotiations. It follows that the CAA believes that current EU law restricting the ability of non-EU nationals to own more than 49%, or secure effective control of, EU carriers should be removed. However, this should only be done as part of EU agreements with the USA, or other countries or groups of countries, which liberalise fully their aviation relationships. So far as GATS is concerned, as a global free-trade regime it offers a framework within which a full and comprehensive liberalisation of the air transport industry could ultimately be achieved. However, because of the way in which they operate, applying normal multilateral trade rules – in particular the ‘most favoured nation’ (MFN) principle – to international air transport would have major consequences. It would be likely to result in liberal countries such as the UK being obliged to open their aviation markets to all other WTO Members equally, without securing reciprocal access to all foreign markets. This would risk severely reducing any leverage that economically liberal countries might be able to exert over restrictive countries, and so damage the prospects of achieving a full global liberalisation of air transport in the future. 40 There are nevertheless alternative approaches to be explored within the GATS framework, which might provide a means of making progress with like-minded countries while retaining a degree of negotiating leverage against other countries. One solution might lie in the concept of ‘conditional MFN’, which would require the UK to open its international aviation markets to another individual Member only to the extent that it in turn opened its market to another Member. The GATS should be a complement rather than a substitute for other means of securing international air transport liberalisation. The UK should pursue this avenue in parallel with its search for bilateral and EU solutions. d) Is there a case for further liberalisation of cargo services? If so, what form should it take and what are the main considerations? The CAA believes that a policy of full liberalisation of the type advocated above for passenger services is just as appropriate for cargo services. e) In what circumstances should we consider negotiations between major aviation blocs (such as EC/USA) or full inclusion of aviation in GATS? See response to (c) above. AIR FREIGHT a) Should the Government encourage the development of dedicated freight airports? At present, freighter operations into Heathrow and Gatwick are limited by Traffic Distribution Rules. This is irrespective of the economic benefits of such operations compared with those of marginal passenger flights. If a slot market were introduced, there seems no good reason to restrict freighter services, subject to their obtaining the necessary slots. Nevertheless, the projected growth in freighter aircraft movements and the growing congestion at major airports, particularly those in the South-East, could together make the establishment of a dedicated freight airport a commercially viable project. Freight transport, even more than passenger transport, is a network industry. There would therefore need to be good links to existing airports for transshipments, as well as to UK-based shippers and importers. Thus, there are practical obstacles to viability – position, access, and the development of sufficient ‘critical mass’. Moreover, any such development would inevitably compete with other cargo specific airports already established in continental Europe, and would necessarily suffer some disadvantages because of the geographical position of the UK. In the early years at least, the success of such an airport might depend on the longterm commitment of a freight carrier willing to develop a network of services, and prepared to make a substantial investment in the facilities. These facilities might include (see below) rail links to other airports, particularly Heathrow. The number 41 of freight carriers with the required financial strength appears limited, which suggests that full liberalisation of freight services would be needed to widen the pool of potential entrants. b) What action might be taken to reduce the specific environmental costs attached to the structure and operation of the air cargo industry? What role could rail play in the movement of freight to, from, or between airports? How could the Government promote the transfer of goods to airports by rail? The CAA supports the concept of the internalisation by aviation of its external costs. It also supports the Government’s policy of inter-modal neutrality, ie that competing transport modes should also be required to internalise their external costs. Indeed, in order for true ‘life cycle’ costs to be met, it is important that all the industries involved in the supply chain for each mode of transport should meet their full costs. Thus, they should take account of the pollution directly emitted by rail and road vehicles during their operation, and the other pollutants arising from rail and road supply chain products. Bearing those caveats in mind, and other things being equal, improved rail infrastructure might help reduce environmental costs by transporting some of the cargo that is currently carried by air. However, many air freight consignments are time-sensitive, and this may prove an overriding factor in choosing an air/road combination. Air freight often consists of consignments that are not only time-sensitive but are also high-value and low-weight. The UK Air Freight Study estimates that, apart from the South-East, the level of air freight imported to or exported from any single UK region is less than 100 tonnes a day. It is not therefore clear if a UK dedicated rail freight service of a reasonable frequency, such as the operation being developed between Frankfurt and Northern Germany, would be viable. However, the volume of air freight imports and exports is much greater in the SouthEast. This may create more of a potential for rail services between South-East airports and shipping centres or between South-East airports, particularly if a dedicated freighter airport were to be developed. c) Is there more the Government could do to make the UK air freight industry more competitive, efficient and responsive to the needs of its customers? As with the airline industry generally, a full and genuine liberalisation of the global air freight market, accompanied by the proper application of normal competition law, is the best means of securing the long term interests of its customers. The most significant obstacle to a fully competitive air freight industry is the bilateral system. At its heart are nationality-based restrictions on the ownership and control of airlines. These restrictions prevent the UK air freight industry from benefiting by the establishment of global networks through mergers, acquisitions or other cooperative arrangements. Such moves should be subject only to normal competition policy. The Government should seek to remove these artificial 42 restrictions so that the industry can be placed on the same footing as other industries, as described above. GENERAL AVIATION a) Should Government policy on general aviation build upon PPG13, perhaps with stronger guidelines about what should constitute suitable facilities for general aviation? The CAA’s general view, set out above, is that Government policy should focus the planning system on identifying the local environmental costs of developments rather than addressing commercial considerations. This should be the role of developers. Consistent with this approach, the CAA does not believe that Government policy on general aviation should seek to provide guidance that extends beyond the existing statements in PPG13. It should be a matter primarily for developers in consultation with actual and potential users of aerodromes to reach a view on what facilities are commercially justified. b) Will it be possible to allow business aviation access to major airports where there is a pressing need to make the most efficient use of limited capacity? The key question is whether the current administrative mechanisms for allocating airport capacity will be replaced by more market based mechanisms, such as transparent secondary slot trading or market-clearing charges. If so, then the CAA believes that this would provide an efficient basis to allocate access, and thus further restriction on access to business aviation would not be necessary. Whether a significant proportion of business aviation would be willing to pay the market price for access to the major airports is doubtful. However, there would be a market-driven incentive to put forward proposals for (say) executive jet developments at neighbouring airports. 43 GLOSSARY ABTA ADS-B AHWG APD ATC ATM ATOL ATS AUC CAA CfIT CNS CPG DAP DETR DOH ECAC EEA ERG E U GATS GPS HLG HoL HSE IATA ICAO JAA Leq LPA MFN MLS NATS NEC NOx OFT Paris CDG PPG PPP R&D RPI SRG TCAS VFR VHF WTO Association of British Travel Agents Automatic Dependent Surveillance - Broadcast Aviation Health Working Group Air Passenger Duty Air Traffic Control Air Traffic Management Air Travel Organiser’s Licensing Air Traffic Services Air Transport Users Council Civil Aviation Authority Commission for Integrated Transport Communications, Navigation and Surveillance Consumer Protection Group Directorate of Airspace Policy Department of the Environment, Transport and the Regions Department of Health European Civil Aviation Conference European Economic Area Economic Regulation Group European Union (or Community) General Agreement on Trade in Services Global Positioning System High Level Group House of Lords Health & Safety Executive International Air Transport Association International Civil Aviation Organisation Joint Aviation Authorities Equivalent continuous noise Level Local Planning Authority Most Favoured Nation Microwave Landing System National Air Traffic Services Ltd Noise Exposure Category Nitrogen Oxides Office of Fair Trading Paris Charles de Gaulle - Roissy Planning Policy Guidance Public Private Partnership Research & Development Retail Price Index Safety Regulation Group Traffic alert and Collision Avoidance System Visual Flight Rules Very High Frequency World Trade Organisation 44