AUC

							  Airport Regulation : Price Control Review – CAA price control proposals for
                               Stansted Airport

               Response of the Air Transport Users Council (AUC)



The Air Transport Users Council (AUC)’s purpose, as set out in its Terms of
Reference, is to “complement and assist the Civil Aviation Authority (CAA) in its
duties to further the reasonable interests of users of air transport services”. In matters
relating to airport regulation, the AUC recognises that the CAA’s duties require it to
take account both of passenger interests and of those of air transport service providers.
The AUC’s interest in the CAA’s price cap proposals for Stansted Airport is therefore
to consider whether, on the basis of the Competition Commission (CC) and CAA
analyses, the proposals represent a reasonable balance of the interests of the
respective parties.

The AUC considers the principal passenger interest in airport regulation to lie in the
outcomes of:

   •   timely investment in infrastructure in line with growth in demand, and

   •   provision of agreed minimum standards in passenger facing services.

It notes that the CC has made three public interest findings in its recommendations to
the CAA, one of which was that Stansted Airport has failed in its provision of airport
services of adequate quality. This is therefore one of the main areas of comment by
the AUC. Those comments are set out below, together with the AUC’s views on other
issues arising from the CAA’s proposals where the AUC has identified a specific
passenger interest.


Service quality

The AUC welcomed the introduction of Service Quality Regimes (SQRs) at
Heathrow and Gatwick as part of the Q4 price cap. And it accepted – at the time – the
CAA’s reasoning for not introducing a similar scheme at Stansted. It is disappointing
now to note in the CC’s public interest finding for Stansted of inadequate service
quality.
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The CAA comments that Stansted Airport Limited (STAL) has been improving
service standards in the most recent years of Q4 and muses as to whether an SQR
would be necessary, not least because of competition from other airports. But it
concludes that it favours introduction of an SQR for Q5, citing the benefits of the
discipline that an SQR would impose operationally as a deciding factor in its
considerations. The AUC believes that this is the right decision for passengers, even
if only as a precautionary measure.

The AUC also supports the CAA’s proposals for the public accountability of
performance at Stansted. It agrees that independent audit of BAA’s records of quality
of service and rebates should be integral to the scheme. Publication on the BAA
website and in the terminal at Stansted would be equally important because of the
discipline that comes from public scrutiny.

In terms of the details of a suitable SQR scheme for Stansted, the AUC is not in a
position of offer independent evidence of the impact of the scheme at Gatwick (which
the CAA proposes to use as a model for the Stansted SQR). But it makes sense for
the Gatwick scheme to be used as a point of reference for Stansted. The AUC accepts
that it may not be sensible to use identical measures for the two airports, and notes
that the CAA is proposing a lower standard at Stansted for departure lounge seating
availability.

BAA’s latest Customer Service Trends Report (October – December 2008) shows
departure lounge crowding (albeit not seating availability) to be one of two service
quality measures that appear to be on a continuous downward trend (the other is
trolley availability), on the basis of passenger satisfaction surveys. It is interesting to
note that this measure of satisfaction has fallen more steeply at Gatwick over the same
five-year period, and remains below that of Stansted. And passengers’ rating of
Stansted under the more general, recently introduced, “ambience” measure is in the
middle of the range for all BAA airports – and higher than for Gatwick and Heathrow.

There could be grounds for speculation as to whether the passenger satisfaction scores
reflect different expectations for different airports. In any event, it would not make
sense to set the departure lounge seat availability standard unattainably high. But the
standard should, at the same time, be challenging for the airport and aim to achieve a
reasonable measure of satisfaction for passengers. It would therefore make sense to
set the standard by reference to as many existing relevant measures and points of
reference as possible.

Bonuses

The AUC did not support the inclusion in the Heathrow and Gatwick SQR schemes of
bonuses for BAA when performance was above standard. The reasoning was that the
standards should be set to deliver a high level of service in the first place, and that
users (airlines and passengers collectively) should not be expected to pay extra if the
airport achieved a different level of service than that which users had been led to
expect in return for airport charges. For the same reasons, the AUC endorses the
CAA’s proposal not to include bonuses in the Stansted SQR.
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Other points of interest

Flexible approach to setting price caps

The AUC recognises that the current uncertainties surrounding the future rate of
growth in demand for air travel at Stansted has created difficulties for the CAA in
setting a price cap that would be suitable for the next five years. The related impacts
of economic slowdown and changes in the level of competition pressures from other
airports can clearly be expected to influence investment decsions – in terms of both
scope and timing. It therefore must be sensible for the CAA to flag up the possibility
of reivew of the price cap during Q5.

Non- passengers flights

The AUC notes that the CAA has identified the omission of airport charge revenue
from non-passenger flights in the CC’s calculations on setting the price cap and that it
has corrected the price cap recommended by the CC to take these charges into
account. The Council endorses this correction; passengers should not have to
subsidise charges on non-passenger flights through airfares. Standalone approach

The system approach to regulation facilitated the development of Stansted ahead of
the actual needs of passengers. This allowed STAL to offer airlines ample capacity
and low charges to accommodate the low cost carrier phenonomen. Passengers have
undoubtedly benefited hugely from the increased choice of routes and from the low
fares offered by these carriers.

But the same low cost model has increasingly spread to airports throughout the UK.
The Council agrees with the CAA that a system approach for the London BAA
airports during Q5 would have a potentially greater adverse effect on competition than
previously. Major cross-subsidy of Stansted by other airports might well deliver
significant benefits to one group of passengers and usere. But the AUC believes that
the CAA is right to balance Stansted users’ interests with those of users of other
airports. It is therefore in the wider passenger interest for investment decisions at
Stansted to be funded by passengers using the airport.

Single till

The “single till” approach to price regulation is a key benefit to consumers; it is in the
passenger interest for commercial revenues recouped from passenger spending in
shops and terminal facilities to subsidise aeronautical charges, which in turn are also
paid for by passengers through airfares.

Competition between airports

It is in the passenger interest for price caps to be set at levels which encourages
competition between airports. The AUC notes the CAA’s view that the level at which
a price cap is set has a direct impact on competition between airports which share
catchment areas. This is particularly true at Stansted, where the majority of flights are
operated by no-frills point-to-point airlines, which generally compete using a broader
geographical range of airports than airlines operating via hub airports. No-frills
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airlines are also likely to be more responsive to changes in the competitive
environment because of the cost sensitive nature of the market. The Council therefore
supports the CAA’s undertaking to periodically assess the level of competition
between Stansted and other airports during Q5 to ensure that the continuing suitability
of the price cap.




Air Transport Users Council (AUC)
3 February 2009