Memorandum by Virgin Atlantic Airways Executive summary

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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.
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.

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.
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.

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.

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 under-estimated. 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 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 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.
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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