Regulation Change

Justine Greening, who was replaced by Patrick McLoughlin as Secretary of State for Transport. (DfT)

Bruce Hales-Dutton reports on how the British Government is working to change the way UK airports are regulated.
Better and more effective regulation of Britain’s airports to sharpen competition, improve passenger service and raise performance standards is promised by the government.
The Civil Aviation Bill, currently before Parliament, provides for a range of sanctions that could be used against underperforming airports.  They could be fined up to 10% of their turnover for transgressions such as failing to plan adequately for heavy falls of snow.
Transport Secretary Justine Greening told MPs: “The current regulatory regime proved itself a blunt and ineffective tool when it came to dealing with the issues that arose last winter.  We need to put that right.”
The Bill, which is expected to pass into law by the summer, gives the industry’s regulator, the Civil Aviation Authority (CAA), greater power as well as the ability to apply more flexible and better targeted economic regulation of airports than is currently possible.

Transport Secretary Justine Greening. (DfT)

Ms Greening said: “The bill brings together the government’s commitment to having a successful and sustainable aviation sector with our agenda on regulation.  It will allow the CAA to modernise the way it regulates, bring a stronger consumer focus to its activities and improve transparency and accountability.  It will also create a stable environment for investment in airports and will allow the UK aviation sector to continue to thrive and develop.”
The bill also transfers some of the government’s responsibility for aviation security to the CAA.  The Department for Transport will, however, continue to have overall responsibility for aviation security and for issuing directions under the Aviation Security Act.
Some staff will transfer to the CAA, although it isn’t yet known how many people will move.  The change will also mean that meeting the cost of the operation, put at £24.6 million (US$40m) over ten years, will move from the general taxpayer to the industry.
 
Economics
Much of the bill is concerned with updating the economic regulation of Britain’s major airports, introduced in the Airports Act 1986, in anticipation of the privatisation of the state-owned British Airports Authority.  The government points out that since then there have been massive changes to the industry and the way it operates.  Air traffic has more than doubled and the market has been liberalised, with the subsequent rise of low-cost airlines.  Regional airports have grown faster than expected and there are now around 70 with an annual turnover of over £1 million (US$1.58m).
Ms Greening told the Commons: “Few people would claim that the current regime, which, after all, was designed 25 years ago, is giving passengers the quality of service that they deserve.  The industry and the regulator have urged change as well, and three years ago the Competition Commission concluded that the legislative framework distorted competition between airlines by adversely affecting the level, specification and timing of investment at airports and the service that passengers receive.”
If enacted, the Civil Aviation Bill would repeal Part IV of the Airports Act, which contains the blueprint for the present economic regulation of the airports currently designated for price control: Heathrow, Gatwick and Stansted.
At its heart lies a long and complex process involving extensive consultation with the parties.  Every five years the CAA is required to refer the airports to the Competition Commission for a review of their conduct and advice on setting charges.  When the Commission has reported, the CAA has to implement any public interest findings about the airports’ conduct and, after considering its advice and listening again to the airports and their airline customers, the CAA decides on the price formula which it publishes in draft to enable the parties to comment.
The formula, which essentially provides a charging ceiling, operates over a five-year period during which changes can occur which can only be taken account of at the end of the specified timespan.  Both the industry and regulator therefore regard the process as inflexible and also as unnecessarily cumbersome and costly for the parties.
 
Procedure
The procedure differs considerably from that required of other utility regulators, which in most cases were put in place after 1986.  For example, this meant that, unlike airports, most utility companies are required to hold a licence; contravention of which can be grounds for regulatory intervention.  Another key difference is that airport regulation is aimed at the charges paid by the airlines rather than the service received by their passengers.
Part 1 of the Civil Aviation Bill would replace these arrangements with what the Government describes as a “flexible, modern regime designed to put consumers first.”  The current system of economic regulation was described by Ms Greening as ‘one size fits all’.  The proposed flexible licensing regime would, she said, be directed at areas where regulation adds real value.
The bill would remove the Secretary of State’s role in deciding which airports are regulated and give that responsibility to the CAA to make decisions based solely on the need to regulate and to protect the interests of consumers.  Until now it has been required to consider only the airlines’ interests.
 
Levy Licence
Another key change contained in the Bill requires major airports to hold a licence to levy charges to users in the same way that air traffic service provider NATS, also regulated by the CAA, has done since it became partially privatised in 2001.
Each licence would contain a set of conditions that could be tailored to a particular airport’s regulatory circumstances, its place in the market and its competitive position.  This would allow the CAA to move away from setting price controls to monitoring prices while regulating certain aspects of service quality instead.  Longer regulatory periods would be applied if the CAA thought it would encourage investment decisions.
A general licence condition would require acceptance of a code of practice on ‘operational resilience’ which could include resilience against severe weather if the CAA considered it appropriate.  Civil enforcement powers would enable the regulator to fine airport operators a sum equivalent to up to 10% of annual turnover.  The government believes this would enable the CAA to tackle poor performance more speedily and effectively.  It also hopes it will bring a more effective and transparent regime able to achieve continuous compliance from licensees.
A major criticism of the current regime is its poor accountability over key regulatory decisions.  Judicial review is the only way to challenge them, but the Bill introduces a new system of appeals.  There would be no automatic references to the Competition Commission and a consumer advocate panel would be established.
The CAA’s regulation of aviation security would be similar to its risk-based approach to safety oversight, in which airlines, airports and others subject to regulation submit safety management systems for approval and periodic audit.
Ms Greening said this system: “has empowered our airlines and airports to develop safety management systems that keep safety at the heart of their operations, striving for ever safer and more efficient systems.”  She added: “That is why I believe there would be real benefits to bringing the CAA’s impressive specialist expertise to the regulation of aviation security.
Security regulation has been criticised for being too process-driven and reliant on a tick-box approach.  “Although those arrangements have kept people safe,” Ms Greening said, “too often their inflexibility has caused frustration on the ground at airports.  There would be attractive benefits for passengers if we could empower the experts to find the best and most efficient way of maintaining the highest levels of security for air travel.  That means more involvement from the experts in aviation operations, which can bring real benefits.”
Under the proposed regime, the government would retain responsibility for aviation security policy and for giving security directions, although the regulator would have a role in maintaining and improving security.  Consequently, the Bill includes provisions for the CAA to keep under security directions made by the Secretary of State under review and to provide advice and assistance to the industry and the government.
Ms Greening told the Commons that this would “not happen overnight”.  She said: “They will take place over the next two or three years so that we get the right staff transferred with the right expertise.”  She denied that new interfaces would be created that might cause delay in the implementation of policy.  “It will mean a far more ongoing and rigorous approach to security that will manage to combine the highest standards of security and safety at airports while delivering a more streamlined approach for passengers on the ground.”
New powers would be given to the CAA to publish information about the way air transport is affecting the environment.  This would include the production of data on carbon emissions, noise, vibration and even visual intrusion.  Such information, the government believes, would enable travellers to make comparisons between airlines covering not only the price of their flights, but also the environmental impacts involved.
The regulator would also have power to issue advice and guidance to the industry so that it can improve standards of service and operate in a more sustainable way.
The Bill is also intended to clarify the level of financial protection available to holiday makers under the CAA-administered Air Travel Organisers’ Licensing system.