Memorandum by Virgin Atlantic Airways
Executive summary
1. Virgin Atlantic is pleased to submit evidence to the Lords Select Committee
on Regulators’ inquiry into UK Economic Regulators.
As the UK’s second
largest airline, Virgin Atlantic employs over 8000 people and has an annual
turnover of £1.4 billion. The airline serves a wide range of routes, including
destinations in the United States, South Africa, India, China, the Caribbean and
Australia.
2. Our submission reflects the focus which the Select Committee on Regulators
is placing on the working methods and effectiveness of UK Economic
Regulators,
considering
their
relationship
with
one
another,
with
the
public/consumer interests, the impact on competition within domestic industries
and the UK economy’s international competitiveness, as well as the regulators’
use of Regulatory Impact Assessments.
3. In this context, Virgin Atlantic’s principal experience of UK Economic
Regulators comes through our dealings with the Civil Aviation Authority (CAA)
Economic Regulation Group (ERG) and it is on this group that our evidence
focuses.
However, we do have occasional exposure to the OFT and the
Competition Commission, so will comment on these organisations where we
have had appropriate experience.
4. Virgin Atlantic believes that in the highly regulated and international business
of aviation, the CAA ERG is a very professional and very well-respected aviation
regulator, with whom we have a good working relationship on the whole. They
perform their role well and have taken steps to ensure fairness in service
provision for the industry and end product for the consumer.
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Working Methods and Effectiveness
5. The UK’s CAA is relatively unusual as a regulator, given that it is fully
financed through charges on those whom it regulates, the aviation industry.
The regulatory obligations of the CAA cover all civil aviation functions in the
UK, which include airspace policy, safety regulation and consumer protection, in
addition to economic regulation.
6. The ERG of the CAA has responsibility for promoting economic efficiency
through the removal of Government-imposed restrictions to entry to the airline
market and facilitating the optimal supply and regulation of aviation
infrastructure. In addition, the ERG acts as expert adviser to the government
and collects, analyses and publishes statistical information on airlines and
airports.
Specific responsibilities include economic regulation of airports,
economic regulation of National Air Traffic Services (NATS), economic policy
advice to government, statistics and surveys.
Independence
7. The unusual funding arrangements for the CAA allows it be a regulator that
is independent from government.
As a result of this independence, there is
bound to be a difference of approach and view with the Department for
Transport, though this is largely managed satisfactorily. Occasions when it has
not been include the recent case of ATOL licensing, on which the CAA took a
different position from the government.
8. The Civil Aviation Act 2006 provides the CAA with further independence by
removing an airline’s right of appeal to the Secretary of State for Transport
against a decision made by the CAA in an aviation route licence case. Virgin
Atlantic was supportive of this clause at all stages as the reform allows the CAA,
as an independent regulator of the UK aviation industry, to perform its role
without political intervention.
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9. We believe that the CAA’s administrative procedures for the conduct of
hearings provide licence applicants with a fair opportunity to put their case and
to have it examined rigorously. In our opinion, these procedures, coupled with
the possibility of seeking Judicial Review of the CAA’s decision if desired, make
the right of appeal to the Secretary of State unnecessary.
The change also
provides greater certainty for UK airlines, for unless an airline could persuade a
judge to suspend a CAA decision pending final judgement, the decision would
come into effect shortly after publication. The time-delay imposed on airlines
in waiting for a decision by the Secretary of State has also been eradicated.
This change, to make the CAA more independent from government, is
welcome.
10. There is a further issue concerning the relationship between the CAA and
the DfT generally. The CAA is quite frequently asked by government to offer
policy advice; indeed, we are happy that should be the case, as the CAA is a
source of expertise in which we have confidence. There is a problem, however,
over the funding of the policy advice. It is currently paid for by the industry,
with no opportunity to give a view on whether we would wish to pay for that
advice. We believe it is quite right that the government should be able to seek
policy advice from the CAA, but that they should pay for it.
Whilst we
understand that this may raise issues around independence, we believe that this
is an area which should be considered.
Capacity
11. Virgin Atlantic strongly supports the regulatory framework as it applies to
the provision of air traffic control (ATC) and airport services in the UK. As in
the case of water, electricity and gas, the provision of ATC and airport services
are two areas where usual market forces are limited and often fail to produce
outcomes which are in consumers’ and the UK economy’s interests. This is due
to the fact that the provision of such services has particular cost characteristics,
meaning that they will tend to be provided by only one firm.
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12. These dominant suppliers have the ability to ignore the wishes of airlines
and passengers with impunity, for they will not lose business from so doing as
airlines and passengers are not able to “vote with their feet”, due to the lack of
alternatives.
Providers of ATC and airport services therefore need to be
incentivised to behave as if they faced effective competition, in order to
produce low prices and high service quality.
Regulation of Airport Services
13. In the case of BAA’s London airports (Heathrow, Gatwick and Stansted) we
support the two-stage approach taken by CAA towards the Regulatory Review.
The first-stage, commonly known as “Constructive Engagement”, requires BAA
to ask its airline customers what they want and then show how it is going to
deliver
these
requirements
cost-effectively.
We
have
however,
been
disappointed with some of its results in practice (as set out in more detail in
Virgin Atlantic’s February 2007 response to the CAA’s initial proposals for
airport regulation). Virgin Atlantic believes that it is essential for the CAA to
play a central role in the Constructive Engagement process as the airlines do
not possess the expertise or resources to replace the regulatory function the
CAA performs.
14. To date, this process of constructive engagement seems to be working well,
with airlines being consulted seriously on BAA’s short-, medium- and long-term
plans for Heathrow and Gatwick.
However, the strain which this has put on
airlines, particularly smaller ones, in terms of resourcing should not be underestimated. It is therefore important that the CAA continues to play a central
role in this initiative.
15. Virgin Atlantic supports the retention of the Competition Commission’s role
within the two regulatory processes. Past experience of these two processes
shows the importance of the regulator also being performance-reviewed,
particularly when difficult economic issues are the bone of contention.
We
were concerned by the lack of transparency inherent in the Competition
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Commission’s deliberations during the last Airports Review, in particular, we
found it very difficult to find out anything about what BAA was saying, and
hence to respond to those statements.
We are pleased to hear that the
Competition Commission is taking steps to make its deliberations more
transparent.
Regulation of Air Traffic Control Services
16. Virgin Atlantic is one of the members of The Airline Group and has a seat
on the NATS Board. We have a “hands-on” approach to NATS in order to try
to ensure that it remains a commercial, customer-responsive organisation, while
always
remembering
that
safety
is
paramount,
in
a
difficult
trading
environment.
Funding and Operations
17. Given the unusual way in which the CAA is funded, it is particularly
important that the efficiency of the CAA is regularly reviewed, with detailed
data made available to industry and effective consultation with all stakeholders.
We have found that, on the whole, this happens.
Within the ERG there has
always been relatively good transparency and consultation procedures.
We
believe the ERG is a group that overall provides value for money.
18. We believe that the right principle is proportionate regulation. Therefore, in
many areas of economic regulation of monopolies and safety regulation for
example, there will always need to be substantial regulation. In some areas of
economic regulation, however, there should be a lighter touch. The CAA has
made progress in this direction.
19. One area where there is some concern for the aviation industry is that the
CAA is not audited by an external body.
Given that the CAA is in effect a
monopoly a case can be made that another party should be monitoring their
work.
However, there is a question over who would be the appropriate
organisation. The National Audit Office’s remit would not allow it to monitor
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the CAA under the current financing arrangements, and the Competition
Commission is not really the ideal organisation to look at it either, given its
focus on competition.
Virgin Atlantic suggests this is an area that might be
considered in more detail and addressed.
Economic regulators and the public interest
20. The work of the CAA is very important in protecting the public interest. The
fact that the CAA is funded by the aviation industry does not unduly influence
decisions made by the CAA in favour of the industry.
In the context of
economic regulation, it is not unusual for economic regulators to charge those
whom it regulates, with a uniqueness relating to aviation in Europe. The CAA
ERG often makes economic regulation judgements which the industry does not
agree with and is not influenced either way by its funding structure.
21. The CAA, through its research and analysis role, often focuses on the
consumer experience and makes recommendations accordingly.
A recent
example was research carried out into how best to repatriate UK citizens
stranded abroad following the collapse of a UK carrier. The DfT and many in
the aviation industry did not agree with the recommendations resulting from
the research, although Virgin Atlantic did and believes this is an excellent
example of the type of useful research that the CAA conducts.
Competition within domestic industries and the UK economy’s international
competitiveness
22. Unlike many other regulators in the UK and aviation regulators in other
countries, there is no direct government funding of the CAA’s work.
As a
result, the UK air transport industry faces additional costs that are not expected
of its competitors based in other countries.
Conclusion
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23. The CAA ERG is a group which is independent from government but which
maintains constructive dialogue with the Department for Transport, providing
research and policy advice where necessary.
Whilst CAA’s financial independence from government has advantages, this
means that the UK aviation industry is solely burdened with funding the work
of the organisation, including the ERG. Funding aside, the relationship of the
industry with the ERG works quite well, with changes made by the ERG in a
number of areas that have led to more constructive and productive
engagement that ensures fairness for the industry.
The unique funding arrangement of the CAA has not prevented the ERG from
also standing up for the consumer in presenting recommendations in this area
to the Department for Transport and taking bold steps where necessary to keep
the airline industry in check.
9 February 2007
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