Uncorrected Evidence 119

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Oral Evidence

Taken before the Transport Committee

on Wednesday 28 November 2007

Members present

Mrs Gwyneth Dunwoody, in the Chair

Clive Efford

Mrs Louise Ellman

Mr Philip Hollobone

Mr John Leech

Mr Eric Martlew

Mr Lee Scott

David Simpson

Graham Stringer

Mr David Wilshire

________________

Memoranda submitted by British Airways plc, easyJet Airline Company Limited

and American Airlines Inc.

Examination of Witnesses

Witnesses: Dr Paul Ellis, General Manager, Infrastructure Policy and Economic Regulation, British Airways plc, Mr Toby Nicol, Communications Director, easyJet Airline Company Limited, and Mr Don Langford, Managing Director, Services - Europe & India, American Airlines Inc., gave evidence.

Chairman: Members having an interest to declare.

Mr Martlew: A member of Unite and GMB.

Graham Stringer: A member of Unite.

Clive Efford: A member of Unite.

Chairman: A member of ASLEF.

Mrs Ellman: A member of Unite.

Mr Wilshire: Chairman, I have never settled whether or not I do have a declarable interest because parts of Heathrow are in my constituency and significant numbers of employees of more than one witness today are my constituents, so I declare it.

Q146 Chairman: Mr Wilshire, employer of the whole of BAA! Gentlemen, I am going to ask you, if I may, firstly to identify yourselves for the record. Some house rules for those of you who have not been here before. The microphone in front of you actually records your voice but does not project your voice, so I am afraid you are going to have to speak up, and if you want to catch my eye I would be very grateful if you did not repeat something that somebody has already said. Sir, would you like to begin the identifications?

Dr Ellis: Thank you, Chairman. I am Paul Ellis and I am General Manager of Infrastructure Policy and Economic Regulation with British Airways. We are the largest single customer of BAA and so we have a deep interest in the proceedings.

Mr Nicol: Toby Nicol, Director of Corporate Affairs and Communications at easyJet.

Mr Langford: My name is Don Langford. I am the Managing Director of Customer Service for American Airlines for Europe.

Q147 Chairman: Gentlemen, I am afraid I have an unpleasant duty to perform. The Evening Standard today has come out with an article which frankly causes us very great concern. People who give the evidence they intend to give to a Select Committee to another party, and particularly to anyone in the Press, before they arrive are actually committing a contempt of the House of Commons. The reason why you are asked to come here and give evidence and the reason why we decide what we will do with that evidence is that it is a duty of those who appear here to understand that we are a Select Committee and the House of Commons examines that evidence. I must say to those who are quoted, in this case Mr Nicol, it says: "Speaking ahead of his appearance before the Committee today, easyJet Director said there is a case for urgent reform," and then there is a long quote from you. This is, frankly, not acceptable. In the worst possible cases we then have to decide whether or not we intend to take evidence from you. We have, however, discussed this. We are extraordinarily unhappy. Have you any comment you wish to make?

Mr Nicol: No. Thank you very much for pointing that out and thank you if you continue to take evidence from me, and apologies.

Q148 Chairman: Did I hear a particular word?

Mr Nicol: Apologies.

Q149 Chairman: Good. Thank you very much. Now, then, gentlemen, do any of you have anything you wish to say before we begin? No? Then you all are customers of BAA. All of you in your written evidence have made various comments about poor service. Can you give us some examples of the kind of poor service you experience from BAA?

Dr Ellis: Yes, Chairman, we can give some examples of the poor service that we experience from BAA. I think it would not be a surprise to the Committee to hear that we have had poor service in respect of the management of security at the BAA airports in the most recent year or so. This applies both to passengers leaving from the main departure halls, but also those transferring, and indeed other elements of the service. We also have poor service in terms of the number of passengers who can get on and off the aircraft without travelling on a bus. We are seeking to remedy that. Clearly, we have poor service in terms of punctuality and we are looking to an expansion of the runway capacity, particularly at Heathrow, to be able to remedy that.

Mr Nicol: I think our main concerns would fall in the area of security. Clearly, in the run up to and after 10 August last year the issue of security, how long it takes to get through the security checks at airports, has been a major, major focus and we have been very disappointed in the way in which BAA has responded to that. Whenever we go out and speak to our customers one of the major things which people say is putting them off air travel at the moment is simply the airport experience. It is not the airlines or anything to do with us, it is the service which they are getting from BAA, specifically going through security, so most of our concerns fall into that area.

Mr Langford: I would also echo those problems. We have issues with security through control points and not through just the passenger points of the airport. We have had very significant operational problems with the difficulty of moving flight crew, goods and cargo through the control posts, which is not as obvious a problem but is still very significant for us operating at the airport.

Q150 Chairman: Can we have a little detail on that? Difficulty in moving crew through the airport. What does that mean?

Mr Langford: There is a number of control posts which bring people airside at the airport. Our flight crews come in on a bus and they have to stop at the control post to be screened before they are able to then come to the aircraft. There have been very significant delays at a number of these posts. Our flight crews have waited in excess of an hour on many occasions to clear these posts. Therefore, they report to the aircraft late for duty, which has caused us hundreds of security delays over the past year in dispatching our aircraft on time. We also have delays in air cargo going onto the airfield and these delays are quite significant, although they are not quite as photogenic as the customer delays that we have all spoken of.

Q151 Chairman: All of you must know that the security rules are laid down by TRANSEC, which is a bit of the Department for Transport. What is British Airports itself doing wrong? Where is the gap between what BAA is doing and what TRANSEC tells them to do?

Dr Ellis: The gap is in terms of the contingency planning for security disruption and having sufficient fallback potential to be able to deal with that disruption.

Q152 Chairman: In what sense, numbers of staff, the training of staff, how precisely? I must have, I think, some clear indication of what the problems are.

Dr Ellis: The numbers of staff, particularly staff who can be called upon at short notice to beef up the arrangements. In British Airways, for example, we have staff who are prepared to come into the front line when there is disruption and I think there is a need for those types of provisions to be made within BAA. Clearly, we need a more flexible arrangement in terms of the infrastructure within the terminals to be able to expand the provision of lanes and bring additional equipment into use should the need arise.

Q153 Chairman: Mr Langford, with your delays on your staff, are they delays because the security staff are not available or because there is a queue of other crews at the clearance points, or because there is some delay? What is the reason?

Mr Langford: I think fundamentally it is mismanagement of the resource. For example, when we speak about the control posts, there is obviously a great deal of construction and we are mixing many different kinds of goods through the airport. We would like to find a way to be more efficient, to have crews perhaps to be processed outside the airport, to have lanes dedicated to crews. So you might have a crew bus and a truck delivering a bunch of magazines or something, and some things are not time-critical. Crew leaving on a noon flight is time-critical; the delivery of magazines or the delivery of construction supplies might not be time-critical and I believe these are not managed effectively, which is what is causing very specific operational problems for us.

Q154 Mr Hollobone: To American Airlines: you stated that BAA ignores Terminal 3, allowing it to decay to the detriment of BAA's customers. What evidence do you have that the condition of Terminal 3 is adversely affecting your business?

Mr Langford: We do a number of customer surveys, we speak to our customers and we have had a number of focus groups and a number of written surveys, and our customers tell us very consistently of their dissatisfaction with the facilities they see at Terminal 3 in terms of the physical environment, in terms of the walking distances, in terms of the wait times, and just a walk through Terminal 3 could show you peeling paint, missing light bulbs, Duck tape on the floor, all manner of very, very poor housekeeping in our terminal.

Q155 Mr Hollobone: In your written evidence and again before the Committee just now you have spoken of BAA's "mismanagement" of Terminal 3. When you say "mismanagement" do you really mean not treating it as a priority?

Mr Langford: I accept that the resource is finite and I accept that there are only so many things that can be done at a given time, but I believe we are not focusing on the things that are important to the passengers, for example just simply the provision of lighting, the provision of heating and air conditioning, the condition of toilets and carpets and finishes. I believe these things are not being managed properly and focused on appropriately, to the detriment of the customer experience at our terminal.

Q156 Mr Hollobone: You claim that cross-subsidisation is unfair to those airlines which pay high airport fees at Heathrow and Gatwick and also unfair to their customers, only to see that money invested elsewhere, but last week the Committee heard from the Air Transport Users Council, who argued that passengers do not really care where their money goes as long as they get to their destination on time and without hassle. Do you have any evidence that your passengers are particularly bothered by cross-subsidisation within the BAA group of airports?

Mr Langford: I think they are bothered by the net result of such cross-subsidisation. I believe if there is money that could have been spent to improve the customer experience at Heathrow which is used to subsidise projects at other airports, then our customers would care that their money is not being used to improve their own experience.

Q157 Mr Hollobone: Does not cross-subsidisation happen throughout the aviation industry, for example by using revenues from more expensive tickets to offer cheaper tickets to other travellers?

Mr Langford: I would say that fact is true, yes, although I do not know if cross-subsidisation would be the phrase I would use for that.

Q158 Chairman: That may just be because you do not like the English, like the rest of us!

Mr Langford: I am quite fond of the English, Chairman.

Chairman: Cross-subsidisation, Mr Hollobone.

Q159 Mr Hollobone: Just some questions to easyJet: easyJet has complained about the level of investment at Stansted. Would you accept that lack of investment at Stansted is a problem faced by all airlines?

Mr Nicol: Our problem at Stansted is the level of future investment which is being proposed, dealing with a move from 25 to 35 million passengers on the one hand or what is called the SG2, the second generation of the Stansted development due to come on-stream in 2014, give or take. The level of investment which is currently there at the moment we are wholly satisfied with. There has been no cross-subsidisation certainly for the last couple of quinquennial reviews into Stansted. It has been seen as a stand-alone airport, and that is absolutely right in our book. Our problem is the future development, particularly being unfit for the kind of airlines that operate through Stansted.

Q160 Mr Hollobone: Do you maintain that Stansted is unfairly subsidised at the expense of Heathrow and Gatwick?

Mr Nicol: No, absolutely not.

Q161 Mr Wilshire: Could I just go back to American Airlines' response to my colleague's question about the impact on your business of T3? What in fact you did, I think, was to rehearse the problems which any of us who use the airport are horribly aware of. Could I press you a bit further? What evidence do you actually have that that has damaged your business, as distinct from simply upset your customers?

Mr Langford: We have seen, with our customer flows to points beyond Europe, that Heathrow is becoming a less popular transit hub and we are finding that customers are making their transfers at other airports within Europe, and we believe this to be a trend which is continuing.

Q162 Mr Wilshire: In what sorts of numbers? Have you any figures?

Mr Langford: I really could not provide any numbers to the Committee at this time.

Q163 Mr Wilshire: Can I ask the same question of our other two witnesses? What evidence do you have of impact on your business as distinct from unhappiness?

Mr Nicol: From easyJet's perspective, I think at certain airports you have to sell tickets more cheaply at certain times in order to fill the aircraft, it is as simple as that. When, as I mentioned earlier, all of our passengers tell us that one of the biggest hindrances to air travel is the airport experience, particularly the length of time it can take to get through security - and I am principally talking here about Stansted and Gatwick because easyJet does not operate from Heathrow - going through those airports, it is difficult. People will say, "I'll fly but I'm going to pay �5 less to do it," and that has an impact on our business.

Q164 Mr Wilshire: I cannot resist the temptation to say that is beneficial to the customer, but I do not think we ought to pursue that thought too far.

Mr Nicol: I do not believe that spending an hour in the security queue is particularly beneficial. I think people would prefer the certainty to know that it is going to be ten minutes and no more than ten minutes.

Q165 Mr Wilshire: I do not disagree. Dr Ellis?

Dr Ellis: I think there are two areas where we have particularly notices the adverse impact. One is in terms of the transfer of passengers, and we have some evidence which we have submitted already to the Competition Commission about that, which I would willingly submit to this Committee as well. Secondly, we have evidence in relation to the effect on business passengers who would normally take short-haul trips who are avoiding Heathrow. We can see that very clearly in the trends that we were seeing in our business up until August of last year and those which happened subsequent to August last year.

Q166 Chairman: Dr Ellis, you are talking about business passengers moving from you to other airlines? Is that what you are talking about?

Dr Ellis: I am talking about British passengers moving away, certainly from us. Some would go perhaps to other airlines, some would choose not to fly and some would go to another airport. It is a mix of factors. We can track what happened to our business as a result of the impact of the security restrictions.

Q167 Chairman: What element of that is reflected in price? You now have competition from other airlines who offer business class facilities for much less than some of the prices you have asked for until recently.

Dr Ellis: Yes, we do. What we do have evidence of is that people were prepared to pay those prices to travel from Heathrow because of the benefits that Heathrow brings, but the additional burden of having to go through long security queues has clearly dented that business. It would also have an impact, of course, on our costs in terms of managing the implications of the long security queues, so it is a two-way thing.

Q168 Mr Martlew: Just on that, has the situation got better with regard to the security queues? I went through Stansted on Saturday morning and there was not a problem, so are things better than obviously they were in the summer?

Dr Ellis: Yes, there have been some improvements, but we have a long way to go, particularly in terms of the transfer of passengers, where they are still facing very long queues and indeed BA are currently seeking to defer the implementation of the recommendations of the Competition Commission in terms of dealing with those transfer security queues and indeed the control post queues which we heard referred to earlier. We are, of course, looking forward to further improvement earlier in the New Year when the "two bags" rule starts to be amended.

Q169 Mr Wilshire: Our witnesses are three amongst probably hundreds of thousands of people who had good reason to moan about things, particularly at Heathrow. Could you tell us something about how you have found engaging with BAA to discuss those problems and what impact you have been able to have on getting things improved?

Dr Ellis: I will take the lead on this one. Under the auspices of the CAA there has been a process called "constructive engagement" between the airlines and BAA, both at Heathrow and at Gatwick. That has led to a richer sharing of information in some areas. In some aspects of the capital programme, for example, we are doing better on those. However, we are now at a point in the regulatory process where we can see that some of the investments we felt had been agreed through the constructive engagement process are now being reviewed and rolled back when it actually comes to the crunch in terms of the triggers which are being put on those investments and the reward that would flow to BAA. So we are part-way through a process. We have yet to see whether it actually produces the goods because with constructive engagement we can only in the end determine its success when we see delivery on the ground.

Mr Langford: May I say, in terms of on the ground operationally, I believe that over the past few years BAA has actually been less responsive to operational issues. I believe we had much more coordination with BAA and with the leadership at the airport terminals to handle operational issues and forecasting problems. I believe the focus has gone away from that and I do believe there needs to be some significant improvement in those areas.

Q170 Mr Wilshire: Before Mr Nicol answers, could I ask you when you noticed that change and why you think it happened?

Mr Langford: On the first part of the question, I would say over the past few years our access to senior leadership and our regular operational coordination has certainly deteriorated. I cannot comment as to why, but a number of people have departed BAA and their successors have not re-established those operational links as we had in the past.

Mr Nicol: We have been involved in the constructive engagement policy at both Gatwick, where it has worked very well, and Stansted, where it has worked appallingly, such that Dr Harry Bush, whom the Committee heard from earlier in its inquiry, effectively is proposing to de-designate Stansted for price control reasons, which we think would be terribly damaging to the customer. One of the reasons why the constructive engagement process broke down was despite many, many calls from the airlines, principally the ACC which looks after the airlines' interests at Stansted, for particularly business plans, financial numbers and passenger numbers upon which its infrastructure investments were going to be based, we could not get that so we were unable to assess whether their passenger forecasts and their capital expenditure plans were appropriate. As a result of that, the constructive engagement process has broken down, much to our great annoyance.

Q171 Mrs Ellman: British Airways in the written evidence say that BAA "has no incentive to promote vigorous intra-group competition, but instead has sought to manage the airports on a 'systems basis'." How exactly could that be changed? Could it be done through changes in the regulatory regime?

Dr Ellis: Yes, I believe it can. It is a big question. If you had asked me that a year ago, I would have probably said that we needed to split the airports up so that each operated independently. There have been some glimmers of hope over the last year. There is a number of factors which have changed, of course. We have had the Ferrovial take-over, we have had the Competition Commission inquiry in progress, we have had the quinquennial review going on, but we have seen from BAA a move towards paying much more attention to its key asset, which is Heathrow, and we have been very pleased with the way in which they have now come on board and are leading the campaign for additional runway capacity at Heathrow. We believe that is a very important step forward. What we are not sure of, of course, is whether that momentum would be maintained when the spotlight moves on, and I think it is an important question to address, which we are certainly taking up with the Competition Commission, to see whether we need to change the regulatory structure if we do not go through, if you like, the end game of going for a full break up. We think there are some important changes which potentially could help through the regulatory structure being amended. If I could give you an example, if we went for a much more conventional arrangement where we had licensing of BAA (which applies to other regulated industries), if we looked very much more closely at the duties of the CAA, which of course are now being investigated following on from a recommendation of this Committee, and if we looked at those duties which we believe the CAA is interpreting far too leniently and flexibly in terms of the conditions it sets for BAA in terms of its price mechanism and in terms of meeting service quality, and if we get that to be tougher, then there may be a way forward. If you look at the last five years, BAA has been operating under a public interest finding in terms of its service quality performance and yet at the end of those five years we are still in deep discussions about why the service quality is so poor and why the international investigations, which compared BAA with other airports, put Heathrow and Gatwick right at the bottom of the list. There are clearly not enough teeth in the regulatory procedure at the moment.

Q172 Mrs Ellman: Do the other witnesses have a view on those proposals?

Mr Nicol: We have some very substantial problems with both the regulation and the manner in which the regulation is applied. We do not believe that now it is appropriate to have the regulated asset base for the scope of BAA. Effectively, we believe at least we have a one-way flow of money in our organisations from the airlines effectively to the airports. easyJet makes, say, a good margin in our industry but it is still low double figures. BAA makes a profit margin which would make King Tutankhamun blush it is so big! We have significant concerns that effectively the 7.75 per cent which BAA has been allowed to earn on anything which it spends in this quinquennial review, the five years, means that it is allowed to spend and spend and spend and we are the ones who have to pick up the bill. We believe the regulated asset base is wrong and we also believe that the CAA could be doing more in order to control BAA's excesses in this area.

Q173 Mrs Ellman: So what do you see as the alternatives for the regulatory asset base?

Mr Nicol: I think there will be a role for regulation, a regulated asset base, a return on assets for, say, vital infrastructure, monopoly infrastructure such as runways, for example, but if you look at Stansted there is no reason why, for example, a new terminal (which I am sure there will be in Stansted in due course) would have to be operated by BAA. This is coming to one of the things which Dr Ellis was saying. You might begin to get a bit of competition between terminals within a particular airport, rather than simply giving more terminal capacity to BAA to spend.

Q174 Chairman: Do not all businesses meet their costs from the revenue from customers?

Mr Nicol: Yes, absolutely. It is a question of whether they are a monopoly or not and in our minds one of the problems which we have had at Stansted, and the reason why the constructive engagement failed, was because the amount which BAA wanted to spend at Stansted, despite coming down from a very high number, was still a very high number and we felt that was too much. The level of gold plating which we felt was going on at Stansted was just too high. It is a relatively small thing, but to give a cast iron example, the suitability of the infrastructure to take the A380. No Stansted operator operates anything like an A380. No airline that I can think of is going to put an A380 into Stansted in the coming decades, so why are we the users, particularly easyJet and Ryanair, going to be expected to pay for that? So all customers, all airlines, all businesses operate where their customers pay for them. It is just a question of how monopolies are regulated.

Q175 Chairman: Do you ever consider shifting? If this is such a wholly inadequate organisation with whom you deal and if they are producing plans which are way beyond anything that you can perceive is in your commercial interests, have you ever considered shifting airports?

Mr Nicol: We have shifted some capacity out of Stansted over the course of the last couple of years and going back to probably 2005. It is not significant, but we have probably reduced our capacity there by about three or four aircraft, so probably 20 per cent of our capacity at Stansted has moved.

Q176 Chairman: Do you intend to continue that?

Mr Nicol: We are okay with things as they are now, but that is because the increase to 38 million passengers, you will have noticed, obviously, has been rejected so we are not too sure where that is going to go. Also, in terms of the next generation, the big Stansted rebuild, we are still waiting to see the numbers on that and only then would we be in a position to make a decision.

Q177 Chairman: Dr Ellis, are you thinking of moving?

Dr Ellis: Certainly not, Chairman. I think the problem in the south-east of England is that there is a great shortage of capacity and it is inconceivable that British Airways would be able to move its hub operation anywhere else in the south-east of England. We actually have about a billion pounds worth of our own investment tied up in the airport as well. There is no capacity to go anywhere else.

Q178 Chairman: Mr Langford, you can go anywhere!

Mr Langford: I have to say Heathrow is so bad we have shifted some capacity to Stansted, so we do have the ability. Heathrow is still the premier international airport, but we have begun services to Stansted.

Q179 Chairman: If you are right about your passengers not particularly liking Heathrow, you could actually shift some of your flights to Frankfurt, or Schiphol?

Mr Langford: We could do so.

Q180 Chairman: Have you done so in the last year?

Mr Langford: Our international growth has been in other points in Europe and Asia.

Q181 Chairman: But that is in addition to those services which you already provide. Have you shifted anything from those airports which you consider to be inferior airports?

Mr Langford: No, we have not.

Q182 Mrs Ellman: Mr Langford, American Airlines has recommended separating, whether by divesture or some other means, the economic interests controlling Heathrow, Gatwick and Stansted. What does that mean?

Mr Langford: Actually, the Chairman of my company said it. He said, "The only thing worse than a public monopoly is a private monopoly!" I believe we need more competition. I believe that we need more competition between airports. I think we need to find a way to find means, whether through regulatory means or through divestiture, for each airport to operate much more efficiently than it does now.

Q183 Mrs Ellman: Mr Nicol, you do not think breaking BAA up is the answer?

Mr Nicol: The break-up of BAA is one of these big Titanic issues in our industry. It is a good easy way to get headlines, to call for the break-up of BAA. Our view, though - and it is to amend the view from American Airlines - is that what would be worse than a single monopoly controlling Heathrow, Gatwick and Stansted would be three individual monopolies. Gatwick will still be a monopoly, Heathrow will still be a monopoly -

Q184 Chairman: I do not think you can have three individual monopolies, that is the minor problem.

Mr Nicol: This would be the discussion on how would any potential break-up work. You hear people advocating that all three airports should be sold off, yet they all control, they all have a monopoly of, their local markets. Stansted, Gatwick and Heathrow do, and in effect what you would do is simply create mini-monopolies rather than a big monopoly. That is our point that regulation needs to be better. It is not about ownership.

Q185 Mr Scott: I have a brief question for all of the witnesses. Security is paramount. The most important thing for any passenger is now their security in travelling on airlines. You have said that there are problems with queues, et cetera, at all of the airports. Can you tell me of any experiences elsewhere in the world where they have got a much more successful way of dealing with this?

Mr Nicol: What we noticed after 10 August last year was that most airports very quickly - this is within the European sphere within which easyJet operates - got back to business. Luton Airport, which is sort of broadly comparable in size to Stansted, was back operating at a similar level to previously very quickly. What we noticed was that it was only the BAA airports which we operate from, Gatwick and Stansted (Stansted in particular) where there appeared to be problems.

Mr Langford: I have to say Manchester Airport responded, again, much more quickly and much more fully, and they were able to get back to business much more easily and there is a great deal more collaboration and information-sharing in Manchester, we found, than we had in the BAA airports.

Q186 Graham Stringer: I am pleased to hear that. I would like to clarify BA's position. Four or five years ago, in giving evidence to this Committee I am right in thinking BA were against breaking up BAA, then you were in favour of it, and now you do not know. Is that your position?

Dr Ellis: We are not sure, yes. We want to see how things play out in terms of the Competition Commission's investigation and the behaviour of BAA over the coming year. A lot of things have changed in the most recent year and if things change then you have to look at them in the new context. You have got a new owner, who does seem to be exhibiting an increased commitment to Heathrow. We have a market inquiry in place, at which we are expecting to explore the alternatives to the full break-up and I have given an indication of our interest in looking at a licensing regime, setting some tougher conditions on BAA, if the right things can be put in place. I should add one final thing, which is making sure the money cannot leak out of the business. We saw in the current quinquennial review three-quarters of a billion pounds which was actually distributed to shareholders which could otherwise have been invested in the business. This time around I suppose the danger could be that the money goes into paying off the debts, and we are looking for some form of ring-fencing of the financial structure. So if those issues can be addressed, we are open to finding an alternative to full-scale break-up. The world has changed.

Q187 Graham Stringer: What commercial decisions have you had with BAA about these issues? I am not talking about the constructive engagement, which is primarily about pricing, is it not? It is very surprising that a major company like BAA has three positions in five years on something which is fundamental to your operations. Have you had commercial discussions with BAA?

Dr Ellis: Not in relation to these matters. There are discussions going on, certainly in relation to what provision should be made in the regulatory settlement - and this is a proposal put forward by the CAA - for ensuring that the development of another runway at Heathrow can proceed during Q5, so that is another useful straw in the wind. We have to react as the circumstances change and if that means that we have changed our position, then that is the case.

Q188 Graham Stringer: Have you had discussions with the Department for Transport about your views on BAA?

Dr Ellis: Not recently.

Q189 Graham Stringer: When?

Dr Ellis: Personally, not for over a year.

Q190 Graham Stringer: Not you personally, your company.

Dr Ellis: I am not aware of those discussions having taken place recently. If there have been some, I can certainly find out and let you know.

Q191 Graham Stringer: I would be interested in that, because whenever I do interviews on the radio some expert comes in and says, "Well, whatever you say about the break-up of BAA, it will all be done behind closed doors between BAA, BA and the Department for Transport." So are you saying that those discussions do not take place?

Dr Ellis: I am not aware of any discussions of that nature taking place, and I think you overestimate the sort of -

Q192 Graham Stringer: I am just reporting what is said to me by the professional press and aviation firms.

Dr Ellis: Absolutely, and one sees that line adopted on a number of occasions. I am not aware of those discussions.

Q193 Graham Stringer: Again over the last five or six years you have moved virtually all your regional operations into Heathrow and many of your Gatwick operations into Heathrow. If it is so bad, why did you consolidate them there?

Dr Ellis: It is the best we have got in terms of being a competitive hub. Our competition is principally coming from Paris, Amsterdam, Frankfurt, and increasingly from the hubs in the Middle East and the Far East. Heathrow is bad, but it is far and away the best opportunity we have got to be able to compete as a global hub and we are working extremely hard to make it better. Terminal 5 opens next March and it will be a big step forward. We hope it is the first step towards a full-scale revival of the fortunes of Heathrow and the Government's consultation document last week certainly again improves that perspective. So we certainly want to work to make Heathrow a much better airport in the future for our passengers.

Q194 Graham Stringer: This is a point which was made previously: if Heathrow is so much better than Gatwick that you have moved a considerable amount of operations out of Gatwick, how can we as a committee be convinced that there would be real competition between Gatwick and Heathrow if BAA is split up?

Dr Ellis: If we could just go back to the premise, what we did was we tried to operate a split hub operation between Heathrow and Gatwick. No other airline had tried that in the world. We failed. We had to then re-balance our services and what has happened since then is that Gatwick dropped down to a lower level, but that has since been maintained and we are not cutting back on our Gatwick operations as things stand at the moment. In terms of the competition aspect, I think there is a number of themes to this. Certainly in terms of hub competition that takes place between Heathrow and its Continental rivals and the other airports which I have mentioned. In terms of points to points services and the passengers using those, of course there is very significant competition between Gatwick and Heathrow, and indeed Stansted comes into that equation as well.

Graham Stringer: Just one last question to BA and then I will put one question to all the airlines, if I may?

Chairman: Very briefly.

Q195 Graham Stringer: Very briefly, how much business do you believe you have lost to the other major European hubs over the last three or four years because of the problems at Heathrow, both capacity and bad service, and what have Charles de Gaulle, Schiphol, Frankfurt, Copenhagen taken off you?

Dr Ellis: It has taken a considerable amount. If you look at the growth in the number of flights, for example, and the growth in the numbers of passengers going through those airports - and I will give you the details - Heathrow has been basically flat for the last three or four years and those other airports have been growing in line with the market, and in the case of Paris above the market, so Paris has been getting on for five per cent and the others in the three to four per cent range. That is actually quite a short historical perspective. If you go back ten years or more, Heathrow was far and away the best hub in Europe and that was good for the UK, and certainly good for us, of course, as an airline for the passengers. We are now fifth in terms of destination from the hubs in Europe and we are about, I think, to drop to sixth when Madrid goes past us after opening two new runways. So we are sliding down fast. What we need to do is to turn that around. I am sorry to return to it, but the consultation on another runway at Heathrow is actually starting to give us the opportunity to reverse that decline.

Q196 Graham Stringer: A final point to all the airlines: is not what lies behind your view of either tougher regulation or breaking up BAA that basically you are paying too much, that you are the only customers of the airports and actually the passengers and other people who go to the airport are not customers and do not have their own relationship with the airport, therefore you should control the prices? Do you think that is fair?

Mr Nicol: We certainly would not argue we should control the prices. We believe absolutely we are the customers of the airlines and our customers are ours, and we need to do everything we can to make the airport experience as good as we can.

Q197 Graham Stringer: Do you not think that passengers who buy tickets with your airline, or American Airlines or BA, are making a double choice? They are choosing the airline for price and whatever other reason, and they are also choosing the airport in many cases because they prefer Manchester to Birmingham, or Gatwick to Heathrow, or whatever?

Mr Nicol: From our experience, people choose an airline based upon the brand and the price and they would choose an airport based on its location to where they start or finish their journey and the schedule operated from that airport. We operate to a number of destinations on the Continent from all three London airports and so people would simply pick and choose which is the right airport, from Luton, Stansted or Gatwick, from which to fly.

Q198 Graham Stringer: But that really concedes the point that the passenger is both the customer of the airport and the airline, in whatever proportions?

Mr Nicol: Yes, but they are not travelling, clearly, with the airport, they have chosen to travel with the airline. It is up to us to get the best possible deal for our passengers, particularly by working the airport.

Mr Langford: I think we have found customers are very price-sensitive. Customers like non-stop service. The value of any hub or any airport goes exponentially by the number of destinations it has, so I think the size of an airport and the number of options we provide to the customer is very important. I think many people fly out of Heathrow, despite their dislike for the airport, because of the value that it provides for the size of the hub or the geographic value to where somebody lives.

Dr Ellis: The passengers cannot negotiate directly with the airport owner. I think we have to represent their interests.

Q199 Graham Stringer: They can choose, though, to go with an airline from Birmingham or Liverpool rather than Manchester, can they not?

Dr Ellis: They certainly can. I have no problem with that point. What I would like to say is that the passenger in a sense cannot influence the nature of the product directly with the airport. They certainly report to us what they consider to be wrong. They do not like the fact that they have long queues at security, they do not like poor punctuality, that is right up at the top of their list. They do not like having to get buses out to the aircraft. Also, they are sensitive to price, so the extent to which we can negotiate on their behalf for good service, quality and to minimise the price that is paid is what the customer is after.

Mr Langford: I think the point is if the customer's aircraft leaves half an hour late because of the control post problem, they blame the airline. The airline bears the cost of late customers and their onward destinations, so obviously we are the ones who have to deal with that relationship with the airline to provide the service that the customer is contracting from us.

Q200 Mr Leech: Mr Langford, you had pointed out that Manchester had dealt with issues surrounding security far better than BAA. What lessons do the three of you believe could be learned from Manchester, or is Manchester just a poor comparison with the BAA airports?

Mr Langford: Strictly from my own point of view, being an operator in Manchester, we found that the reaction time was much quicker in Manchester, that there was much more engagement much more quickly, much more information was shared.

Q201 Mr Leech: What is the reason for that?

Mr Langford: Their management structure, their management point of view. They are used to operating in that manner. My manager in Manchester is very close to the operating people and the senior people at Manchester Airport, which is less true of the London airports. I spoke about security and I spoke about efficiency. The line is open at five o'clock in the morning, for example. People show up very early because they hear about the problems at Heathrow. If there are not enough lines open at 5.00 am queues start to build up. Queues then attract other queues and your whole day has a problem due to a small miscalculation at five o'clock in the morning. The people at Manchester, we found, do not make those mistakes and they are much more constant in having people available at 5.00 am, and the day runs well. At Heathrow you tend to be on the back foot.

Q202 Chairman: Gentlemen, that has been very instructive. Before you go, Mr Nicol, I will accept a written apology from you.

Mr Nicol: Of course.

Q203 Chairman: And we will not forget again, will we?

Mr Nicol: Thank you for pointing it out.

Chairman: Thank you, gentlemen.

Memorandum submitted by BAA Limited

Examination of Witnesses

Witnesses: Mr Stephen Nelson, Chief Executive, Sir Nigel Rudd, Chairman, and Mr Kyran Hanks, Director of Regulation, BAA Limited, gave evidence.

(Interruption)

Q204 Chairman: Good afternoon, gentlemen. I apologise for making you wait. Would you be kind enough to identify yourselves?

Mr Nelson: Certainly. Stephen Nelson, Chief Executive of BAA.

Sir Nigel Rudd: Nigel Rudd, Non-Executive Chairman.

Mr Hanks: Kyran Hanks, Economics and Regulation Director.

Q205 Chairman: Did any of you have anything you wanted to say beforehand?

Mr Nelson: Yes, Chairman. Good afternoon, and good afternoon to the Members of the Committee and thank you for the opportunity to say just a very few words at the start. As the Prime Minister recognised earlier this week, the future of air travel is one of the great strategic challenges facing this country at this time. It will not surprise you that we very much agree with this assessment. The bottom line to this debate is, we believe, very clear. Our airports in the South East are full and in the case of Heathrow have been so for over 17 years. At the same time, the international competition is ahead of the game. Paris will achieve in two years the capacity that we are aiming for through expansion of Heathrow through the third runway in 12 years, and we are already losing out on business and reputation as a result. On top of that, we must face the challenge of security. The abnormal has now become normal. So we confront effectively two fundamental issues. The first: how can we improve our service in the short-term? I think we are making progress, but we have a long way to go. The second: how can we create the right frameworks to deliver long-term improvements, improvements which will give the nation the airports it has a right to expect both in terms of service and facilities, but improvements which must also be delivered alongside our responsibilities to the environment and the wider community? BAA believes we can meet these challenges, but we also recognise that to do so we have to work with the rest of the aviation industry, the Government and the wider political world and that we need a collective answer to some profound questions on how we support big infrastructure projects in this country. That is why Sir Nigel, Mr Hanks and I welcome this opportunity, Chairman, to answer your questions today.

Q206 Chairman: Yes, Mr Nelson. You will realise that there is a number of very important questions we have to ask you, not only about the change of ownership but about the way you operate, the way your facilities provide a service, and you will have heard some of the criticisms of the way you treat your customers. How do you respond to the complaint that you provide a poor service?

Mr Nelson: Let me make my opening remark, that I am acutely sensitive to and regret the degree of frustration that poor service, be it queues at security, check-in or immigration, inflicts on passengers. From a personal perspective, I have been in those queues, from a professional capacity and as well with my family.

Q207 Chairman: Yes, but is it right, Mr Nelson? Do you provide a poor service?

Mr Nelson: I think that we have much to do in terms of improving our service and that we are making improvements, Chairman.

Q208 Chairman: That is a "Yes," is it? In what way is your service a poor service? We have heard that there are problems because you do not have enough people on security. We have been told there are difficulties because you do not respond with sufficient speed to the problems which arise in the airport. Is this true?

Mr Nelson: Security queues at peak times are too long. There are also occasions when lanes are unmanned and we also recognise that the general fabric of our airports has become run-down.

Q209 Chairman: Do you not have enough trained staff?

Mr Nelson: I think what is very important to say is that 10 August last year revealed that prior to 10 August, the security crisis, we had insufficient staff for a steady state operation and we also had under-investment in the basic facilities of our airport terminals. We have gripped both of those problems over the last twelve months. We have now 50 per cent more staff at Heathrow and at Gatwick in the front line. We have 30 per cent more spent on basic maintenance and cleaning and we will have opened by April over 50 per cent more lanes in Heathrow and 60 per cent in Gatwick. It also needs to be recognised that those are what could be described as "input statistics". What is the passenger getting as a result of this? Well, as I say, we are making progress: 95 per cent of the time at ten minutes or under over the last three months, three per cent of security searches at Heathrow, passengers have experienced satisfactory service. It is the times outside of that -

Q210 Chairman: Who says that, Mr Nelson, them or you?

Mr Nelson: Our surveys indicate that on average more people find the experience at Heathrow excellent than they do very poor.

Q211 Chairman: How often do you do your surveys, given that we are talking only about a three month window?

Mr Nelson: We very regularly survey. We do 60,000 surveys a year and we are measured monthly on what we call a quality service monitor, which ultimately will be feeding into penalties, and indeed probably bonuses.

Q212 Clive Efford: How do you respond to the charge that you have not listened to the industry in terms of the facilities you provide at airports and that where you have agreed changes or improvements at airports with the airlines those changes have not been implemented?

Mr Nelson: I think the opening of Terminal 5 on 27 March on time will represent the capability of this business both in its ambition to deliver construction of the highest world-class quality, and I also recognise that we have a difficult job meeting, for example in Heathrow, the competing demands for infrastructure of 94 airlines, but I am pleased to say that going forward for the next five years we have largely come to an agreement on a transformation plan for Heathrow which amounts to some 3.6 billion across those airlines. So my sense is that actually we are meeting the demands as put to us by airlines.

Q213 Clive Efford: You have just said to us, in answer to a question from the Chairman, that the fabric of the buildings, for instance, is in a poor state of repair. That does not require planning permission, that does not require any form of agreement with airlines. Is that not something just about your management of your own assets?

Mr Nelson: I agree that we are playing catch-up here. I am pleased to say that the new owners of BAA, which is the ADI consortium led by Ferrovial, have very quickly seen the issue here of under-investment and, without compensation from the Regulator, have driven the maintenance and cleaning budgets up this year by this year by 30 per cent. It will not be enough because if you go around the terminals, as I do regularly, we still have too much yellow and black tape, we still have areas of the terminal facilities which are not yet at the standard we want, and we still have terminals which are over-pressed in terms of capacity, but what I want to signal is that there is a very firm conviction with this business and with its leadership that we have to address these issues.

Q214 Clive Efford: We have heard that you are in a monopoly position in terms of being able to make charges to airlines, albeit within a regulatory system, so in that sense your budget is guaranteed, you are not in competition with somebody who can take that income away from you. Why, then, has the fabric of these buildings fallen into disrepair? Why have you not in the past been maintaining your assets?

Mr Nelson: I think there is a big picture and a small picture. The big picture is that we have airports which are, on any international comparison, cheap and we will have provided, and we can certainly provide, the statistics which indicate that Heathrow is cheap relative to it being the busiest international airport, and Gatwick is even cheaper.

Q215 Chairman: That is not a new situation, is it, Mr Nelson? To be fair, as long as we have been inquiring into airports the reason why there has always been the difficulties in Heathrow is that it has been a darn sight cheaper than anybody else. It is not exactly new, is it?

Mr Nelson: No. I think, Chairman, therefore we are looking at the consequences of a long-term situation.

Q216 Chairman: Oh, I see. So it has been like that for the last, what, 15 years and now we are looking at the consequences! Well, that shows responsiveness.

Mr Nelson: I think it is important to recognise that pricing at Heathrow to the airlines has remained in constant terms almost flat. It has gone up over 20 years by �1.50 and at Gatwick it has gone flat to down.

Q217 Chairman: Who decided that, Mr Nelson?

Mr Nelson: This is the regulatory framework within which we work.

Q218 Chairman: Have you objected to that in the past and said that this enabled you not to meet your targets?

Mr Nelson: I think we have had serious challenges as part of the regulatory cycle every time it comes around, every five years, but what we are now calling for is a wholesale review of this and I am glad to say the Secretary of State is looking very carefully at this for the forthcoming period.

Q219 Clive Efford: How do you respond to the claim by British Airways that your systems basis approach to airport management stifles competition? BA has said that the joint ownership of BAA of the three largest airports in the South East has resulted in severe restrictions of competition at the level of provision of airport services.

Mr Nelson: I will ask Mr Hanks to answer that.

Q220 Chairman: Mr Hanks, are you a systems-based person?

Mr Hanks: We are not any more.

Q221 Chairman: Since when?

Mr Hanks: Since 2003 the system has not existed in terms of that particular style of regulation framework.

Q222 Chairman: I think there may be a suspicion from your customers that no system exists!

Mr Hanks: To follow on from that point, we do not cross-subsidise Stansted from Heathrow any more. Again, that finished in 2003. So both those points put by British Airways and American Airlines are wrong.

Q223 Clive Efford: Why would that be then? Why would BA be working on this misunderstanding as to how you are operating? Does that not indicate there is a slight breakdown in communication?

Mr Hanks: I think what they are referring to there is the structure of BAA rather than the nature of the regulatory framework, and clearly we do operate as one company across the South East.

Q224 Clive Efford: May I suggest then that you have got no incentive to promote intra-group competition? What would you say to that?

Mr Hanks: When the airports have no capacity there is no scope for competition. It does not matter who owns these airports, they cannot compete when there is no capacity.

Q225 Clive Efford: What about the charge that you have been insulated by the airlines from some of the worst effects of the poor quality of service?

Mr Hanks: The regulation review we have just gone through does not feel like we have been insulated from the worst effects of poor quality of service. We have had a very tough regulatory settlement, in part based on the quality of service which is being delivered in the current regulatory period.

Q226 Chairman: It was tough in what sense? They said you should give your customers a good service? Is that what they said?

Mr Hanks: No, they have doubled our exposure to poor quality in the next five years.

Q227 Chairman: Because they did not think you were doing very well, to use an English understatement.

Mr Hanks: And they have decided to incentivise us to deliver a better service in the next five years.

Q228 Chairman: So even though you have not got the capacity, you are going to be incentivised?

Mr Hanks: That is the nature of the regulatory framework, that you have carrots and sticks.

Q229 Clive Efford: But do the airlines have a point about the poor quality of service? The way you have been able to respond to the increased demand for security measures over the last year and a bit - do you think your response has been adequate? Do you think it has met the needs of the passengers or the airlines?

Mr Nelson: I think, quite clearly, given the amount of passenger dissatisfaction we have to accept that for many passengers it has not been satisfactory. When you are in a queue it is not satisfactory, but what we had one is we have accelerated as fast as we can the recruitment process. You cannot simply just drag people off the street and put them in a security operation. It is very clear that it is a highly trained operation. We have taken over 35,000 applications to get the numbers that we have. It has taken up to 20 weeks with reference checking, criminal records checks and also the ability to test whether people can actually read the X-ray machines. So am I satisfied with the pace at which we have recruited? No, but needs must to work against quite a difficult recruitment process.

Q230 Clive Efford: Do you think that BAA as it is currently structured has responded well to competition from other airport hubs in Europe and other parts of the world?

Mr Nelson: The first point is that I welcome the fact that you recognise that we are in competition with competing hubs. We are losing traffic, and we are losing traffic because the transfer experience through Heathrow, partly as a result of the security regulations and partly as a result of our capacity constraints, is not satisfactory.

Q231 Clive Efford: Is this just a workman just blaming bad tools? We have heard from BAA that traffic has been lost. Do you think your response to that has been adequate, or do you think that BAA in any way is responsible for any of that loss of traffic?

Mr Nelson: What I will say is that we have got every incentive, because we are a commercial organisation as well and when we do not hit our passenger forecasts there are commercial impacts for us. We have got every incentive to recruit as fast as possible and to secure better standards of service so that we do not have people saying, "There's too much hassle at Heathrow. We will go elsewhere, through Paris or through Amsterdam."

Chairman: So as you have got that incentive you do not need any extra, is that right?

Q232 Mr Martlew: Just on that point, you said you had 35,000 applicants. How many people have you taken on?

Mr Nelson: Close to 2,000 as a result of that, so we are operating at a five to six per cent success rate.

Q233 Mr Martlew: What is that 2,000 as a percentage of your total security force?

Mr Nelson: It is about 50 per cent.

Q234 Mr Martlew: So you have increased it?

Mr Nelson: We have increased it by 50 per cent, and we will go on recruiting until we get better standards of queuing. Could I just make the point that, for example, coming up to December, where of course we are looking very carefully at the Christmas period, there are times both in Terminal 2 and Terminal 3 where we will have all lanes fully manned and there will be queues because of the physical capacity constraints.

Q235 Mr Leech: Just on this point, I do not know whether you were here during the previous evidence but American Airlines suggested that it was not just about bodies, it was about management responsiveness. Do you have any comments in relation to that, because certainly Manchester does it a lot better than Heathrow and Gatwick? Why is that?

Mr Nelson: Mr Leech, I will not comment on Manchester's performance. What I think we can do is constantly improve in this area. I am confident that we have management teams who are absolutely clear, working with lots of dedicated people, to improve the standards of our service and build back our reputation.

Q236 Chairman: Yes, but is it true, Mr Nelson? Nobody doubts your goodwill, but you are being asked a different question. Is it true? They say you do not respond. They say, "We're talking to you. It's not as good as it was two years ago." Is it true?

Mr Nelson: As I say, I do not want to make comparisons with Manchester -

Q237 Chairman: We are not talking about Manchester. They are telling us about you. Are you less responsive than your teams were two years ago, and if so, why?

Mr Nelson: No. I can very confidently say that that would not be the case. It is the capacity constraints, the lack of recruitment - as I said, we were playing catch-up - and the very severe security regulations that have put us under pressure. Another way of putting it is the investment in our business has not matched the growth in passengers. We need to turn that back and we need to reinvest in this business. That is what we are doing.

Q238 Chairman: How fast are you doing that? Surely the business of communicating with your customers should not come as a sort of surprise to you, should it?

Mr Nelson: No. I think there is a very great sense of urgency in this business, as you might well imagine given the amount of public criticism we have been under. There is very sustained and great sense of urgency to recruit, to improve our processes and to make sure that management are absolutely focused on what we call putting the passenger first.

Mr Wilshire: Chairman, if you will allow me, before I come to my question, to say, given the local protest we witnessed earlier on, that the overwhelming majority of the neighbours of Heathrow whom I represent would totally disassociate themselves with the views of the self-appointed and self-opinionated!

Chairman: Mr Wilshire, with respect, this is a Parliament which responds to anyone who wishes to approach us. If people are so unsure of their arguments that they need to disrupt the sitting of a Select Committee, that tells us very clearly of the standard of those people, and I do not think we wish to discuss it any further. Did you have any questions for the witnesses?

Q239 Mr Wilshire: I think I have made my point. Yes, I do have some questions, but I think it is important to get the record straight. Could I just start with the situation of Terminal 5 coming on-line. Is there not a tendency for all the shortcomings, irrespective of who is responsible for them, to say, "It will all be alright on the night when Terminal 5 opens"? Is there not a danger of raising expectations that that might be a solution for more things than it will be?

Mr Nelson: I think the right way to consider Terminal 5 is step one. We are as clear as anybody that Heathrow needs to be transformed. Terminal 5 at a stroke will reduce the numbers of passengers going through Terminal 1 by about 50 per cent, the numbers of passengers going through Terminal 4 by about 75 per cent, and that will level out to 50, and the numbers of passengers going from Terminal 2 by about 15 per cent. That will provide from April very considerable relief to passengers in physical terms. It needs also to be understood that Terminal 3 will actually get busier; it will go up in passenger terms by about ten per cent, which I think plays to the point that it is not just Terminal 5, it is the development of the whole campus in physical terms, and that is what our plans are in front of the Regulator. It is the development of the whole campus that needs to be delivered.

Q240 Mr Wilshire: Rather a lot of people are aware of the problems at Heathrow. Which of those problems do you consider are your responsibility and which are the problems you consider are the responsibilities of somebody else?

Mr Nelson: Before I go into this, it is important to say that I see no upside from the blame game and I personally have steered well clear of the media. However, it does need to be articulated that BAA controls, let us call it two of the six major factors in customer satisfaction. We control central security and we control the retail and the catering. We do not control check-in. We provide the desk, but we do not control the manning of the check-in.

Q241 Chairman: However, Mr Nelson, most of the evidence we have got has been about exactly those bits which you control.

Mr Nelson: With respect, Chairman, there is enough evidence also to suggest, both anecdotally and on websites, that check-in queues have been considerable as well.

Q242 Chairman: So we are not in the blame game, we are just saying the others are as bad as us?

Mr Nelson: I accept that point, but immigration is Home Office and baggage reclaim - the time it takes for the bag to be transported from the plan onto the reclaim belt is under the control of the airlines handling agents. We are responsible for the kit. Finally, punctuality, which with an airport as full as Heathrow can be anything from weather-related to schedule-related issues.

Q243 Mr Wilshire: Can I turn to the impact of the takeover which occurred recently? Can you give us any indication of what the impact of that takeover has had on three things, on management, on the levels of maintenance you are able to carry out and the issues of investment or under-investment, or the possibility (if I understand the Press correctly) of not being able to make some of the investments?

Mr Nelson: I will make my comments and then I will ask Sir Nigel to make any comments he wishes. I welcome the opportunity just to restate very quickly that Ferrovial and the other two shareholders said, "We must invest, irrespective of any regulatory compensation, in cleaning, extra security guards and maintenance and in making sure that travelators, lifts and escalators work better." That has been, to date, a �30 million investment which, in commercial terms, comes off the bottom line. That for me is the sign of investors prepared to grapple with these issues rather than to pull money out.

Sir Nigel Rudd: Chairman, I would just like to add that the dealings I have had with Ferrovial - and, as you know, Chairman, I have only been Chairman of the company for two months, but all the dealings I have had with Ferrovial and their partners demonstrate their willingness to get this right, to invest in this airport to make it a world-class airport.

Q244 Chairman: Yes, except, Sir Nigel, you will realise that if anybody takes on any deal with carries with it such an enormous amount of debt inevitably people are going to wonder where the priorities of the company are going to lie. Are they going to lie with the interests of the airports, with the British interest in having a first-class hub, or are they going to lie where they ought to in legal terms, in the narrow sense, with their shareholders in returning the best possible return on their shares? They are not unreasonable questions.

Sir Nigel Rudd: Certainly, Chairman, they are not. The assurance I had when I took over the chairmanship of this company is that there will be adequate financial facilities available to make the investment which is absolutely required in this airport to make it a world-class airport.

Q245 Chairman: Was it explained to you how the burden of debt would affect that investment?

Sir Nigel Rudd: The raising of debt will not be an issue. The issue is the price and the return that will be obtained from that investment, and you have to realise that BAA has been a gross user of cash for the last five years and as far as I can see for the next five years. The difference between EBITDAR, that is profit plus depreciation, against the capital expenditure in the last five years has been �2.8 billion. In our plans going forward there is going to be another �4.5 billion put into the airports to develop Heathrow East and refurbish Terminal 4 and do some work on Terminal 3. So the net cash going out to shareholders is negligible. What they have to do is to borrow money and to make a reasonable return on their equity investment over the long-term.

Q246 Mr Martlew: Very briefly, is Mr Nelson aware of the popular survey which indicates that the majority of people living near the airport support its development rather than oppose it?

Mr Nelson: Yes, I am, Mr Wilshire.

Q247 Mrs Ellman: Mr Nelson, you seem to try to gloss over a lot of the problems. After all, there has been a lot of very bad publicity for BAA and for Heathrow in particular, has there not? Do you not think you are trying to gloss over this?

Mr Nelson: It is certainly not my intention, Mrs Ellman, to gloss over anything. What I am very keen to convey is that regrettably the fixes are not quick, but this is a company gripping the problems transparently and making progress. We are not sitting on our hands. We want to improve service against these high pressures which we face.

Q248 Mrs Ellman: What about the problem of queuing? You do not seem to see that as very important.

Mr Nelson: I am sorry if I have conveyed that queuing is not important. It is extremely important. It is probably our number one priority operationally, as I say, security queues, the ones we control. We have brought down the queues. It is no satisfaction to somebody who is standing in the queue for me to say that 95 per cent of the time at Heathrow it is ten minutes or under, because if you are in the five per cent you are in a long queue. But we have made significant progress and we will continue to make progress.

Q249 Mrs Ellman: You referred to some areas, including queuing, which you say are not your responsibility, but as people who run and own the airport what do you do about ensuring that those with the specific responsibility view it differently?

Mr Nelson: It is a very important point. We must seek - and I think we are putting a lot of effort into this - what we are calling a consensus and leadership from the top, from the COs of the airlines, from myself, from Government, to look to the passengers' interests in the round. I make no apologies for taking this back to regulation, the big picture. Until we get a framework which does not pit the airlines against the airport operator but actually looks as collaboration and cooperation in a better way than we have currently got, then we will not get the best experience for the passenger. In the meantime, we will continue to work with the airlines to improve things.

Q250 Mrs Ellman: American Airlines gave us evidence this afternoon about problems experienced by their staff getting through controls at the airports. Is that a problem you are already aware of?

Mr Nelson: I am aware that on occasion we do have queues going through the staff checkpoint. It is not just airlines, it will be our own staff as well and any other people working air-side. Again, that is not a problem we want to take lightly and we must make sure that is improved.

Q251 Mrs Ellman: What are you actually doing to get improvement secured?

Mr Nelson: For most of the actual staff searches there is only a limited physical capacity, which will be one or two security lanes. So we have maximised the security lanes where possible to ensure that we can get people as quickly as possible through. But if there is, for example, a queue on the motorway and if there are -

Q252 Chairman: Mr Nelson, we were told that crew have been held up as long as an hour. If you hold up an aircraft crew, the aircraft cannot take off on time, it looses its slots and it is in considerable difficulty. Is that true, and are you aware of it? If you are aware of it, how often does it happen?

Mr Nelson: I will check the statistics and get back to you.

Q253 Chairman: Mr Nelson, surely in the talks you have had with the airlines they cannot have been silent on this matter. Are you aware of any of the crews having difficulty getting through security and being delayed with an effect upon their flight time?

Mr Nelson: Chairman, I was certainly aware of the intensity of the problem in and around 10 August and beyond. I have not been made aware of this recently and the issues we tend to talk about in regular strategic dialogue with airlines is around control posts and less around the staff security.

Mr Hanks: If I could add, as part of the next regulatory settlement there has been an agreement made with the airlines at both Heathrow and Gatwick to put a service quality incentive on the airports to minimise the queues at those control posts.

Q254 Chairman: So you admit in fact this is happening, you have accepted it and you believe that now you have got to do better?

Mr Hanks: And it will be resolved in the next regulatory period.

Mr Nelson: At the control posts.

Q255 Mrs Ellman: Will an increase in airport capacity give you an even greater monopoly position or have you got any ideas of introducing competition?

Mr Nelson: I will ask Mr Hanks to take that question.

Mr Hanks: There will not be an increase in airport capacity in the South East until 2015 at the earliest, when we have plans to deliver the second runway at Stansted, and then probably 2020 when there are plans to deliver capacity at Heathrow. The demands for that capacity mean that it will be taken up almost instantly, so it will not increase the position, the market share if you like, of BAA.

Q256 Mr Martlew: The emphasis on stricter border controls and passport controls - as I say, I went through Stansted at the weekend - is that causing problems? Are there delays at the border controls?

Mr Nelson: There are delays at border controls, and again it serves no one, I think, to be casting blame. What we are doing is - and this is welcomed by both the DfT and the Home Office - we are putting automated systems in so that we can measure exactly what those delays are and we will have those implemented in the spring.

Q257 Mr Martlew: Would it not be better just to put more passport operators there?

Mr Nelson: That is a matter for the Home Office and I think it needs to lie with the Home Office in that context.

Graham Stringer: Mr Nelson, I have lost count, you might be the fifth or the sixth senior representative of BAA who have sat at that table before the Select Committee over the last ten years. You are the first one to be in favour of a third runway, rather surprisingly.

Chairman: Openly!

Q258 Graham Stringer: The first one to tell this Committee that you were in favour of a third runway. Why is that?

Mr Nelson: We have been, for the last two or three years, publicly supportive of the White Paper. We think the White Paper, which was issued in 2003 after extensive consultation, is a well-judged document and it is well-judged for the following reason: it says that demand will exceed supply even if you build two runways, first at Stansted and then, providing the limits can be met, at Heathrow. Therefore, we supported it. Second, we are a commercial organisation and growth serves our commercial interests, but I see no conflict between the support for the White Paper and now our public support behind the Government for this policy.

Q259 Graham Stringer: That is rather missing the point, is it not? You are in competition with major hubs in Europe which have four and five runways. Possibly in the next ten years we will get a third runway. You are going to be at a competitive disadvantage. That has been known for the last 15 years, and yet it is only in the last 18 months, two years, that BAA has said it is in favour of a third runway. What has been going on? Why is a commercial organisation not been in favour of this extra piece of vital infrastructure?

Mr Nelson: I think it is very important to go back and to see the process which has had to take place here to get to the consultation which took place earlier. The process has been effectively a policy statement, to which we and others were contributors, and then -

Q260 Graham Stringer: Just let me interrupt you, because I think we are going down the same path. Are you saying that BAA did not understand the need for a third, possibly a fourth runway ten years ago?

Mr Nelson: I think, Mr Stringer, the situation 12 years ago when we publicly said that we were not in favour of a third runway is a very different situation from the one now, with 55 million passengers travelling through Heathrow, and we now have 67/68 million.

Q261 Graham Stringer: The actual current passenger numbers are below the projections you were giving 12 years ago, so you cannot use the fact that now we have more passengers because you were publicly projecting (as was the Government) a great growth in air travel. What I want to know is why a major commercial organisation has not come forward and wanted something that was vital to its business. Had you had, as I said in the previous interview, private conversations with the Department for Transport which told you not to go ahead?

Mr Nelson: I am puzzled by your observation. We have been very firm advocates and supporters of the White Paper, which is very explicit about not only the runways but the sequence of the runways.

Q262 Graham Stringer: It is, but all the way through the T5 inquiry witnesses from BAA who came here before that White Paper said it was not a matter for them. BAA either had no view or was opposed to a third runway. A commitment was given at the T5 inquiry that you would not have that. Why was that?

Mr Nelson: I hope you will understand that, having been in the job for 14 months, it is difficult for me to comment genuinely -

Q263 Graham Stringer: No, I do not understand. This is absolutely vital both to the country and to BAA. I do not understand that your memory only goes back 14 months. No, I will not accept that as an answer. I want to understand why this country is disadvantaged by not having enough runways and why the owners and operators of the major airport has not been pushing for that.

Mr Nelson: I think your point is a very relevant point, which is that we have had to work very hard in support of the process that led to Alistair Darling's White Paper in 2003. Up to then there had been no government policy governing a runway expansion, no runway built in the last 50 years, and to that degree we have become very firm supporters of the policy. Now that we are in formal and open consultation, we have gone public with our support, but I do not see a contradiction there.

Q264 Graham Stringer: Can you tell me of another commercial organisation that waits until the Government tells it what its commercial interests are?

Mr Nelson: I think this is again, if I may, an important point. The development of runway capacity, for the reasons we have been visibly presented with this afternoon and for many other obvious reasons, has to be policy-driven by government.

Q265 Graham Stringer: That is rubbish. I developed the only other runway which has been built in this country over the last 50 years and we did not go and ask Government whether or not they were in favour of it. We told them what the plans were and why that was important to Manchester Airport and Manchester. Is the point that you actually did go to Government and ask them what to do?

Mr Nelson: No, I come back to the point I am making: we have been supporters of the process leading to the White Paper policy and we have been public supporters of the White Paper policy. We recognise that it meets not only in the South East but is also purported to meet the demand constraints in other parts of the country and that right now, as far as I know, we are the only major airport company which is pushing for the development of two runways.

Q266 Graham Stringer: Let me approach this another way. Is not one of the reasons why there is so much anger in west London about this development because you gave a commitment that there would not be a third runway, and when you were considering giving that promise what considerations did you take into account?

Mr Nelson: It is simply not possible for me to speculate on the particular reasons why there is so much anger over and above the obvious fact that when you develop runways there are local impacts.

Q267 Graham Stringer: It is not a speculation if you gave a commitment that you were not going to build a third runway and then you say you are in favour of it. That is not a speculation, it is fairly straightforward; it is a big whopper!

Mr Nelson: There will be some who represent this to me, who say, "Why is it exactly that 12 years ago there was a written commitment and now BAA is supporting development?" but whether that represents the two million people in west London who will be overflown more, I cannot say.

Graham Stringer: Thank you.

Q268 Mr Hollobone: Sir Nigel, you are a very distinguished businessman, you do not take up these jobs lightly, and our inquiry is called "The Future of BAA", so presumably you undertook your own inquiry into the future of BAA before agreeing to be Chairman two months ago. I wonder if you could share with this Committee your SWAT analysis - the strengths, weaknesses, opportunities and threats of BAA - and the process you went through before taking the job?

Sir Nigel Rudd: First of all, I passionately believe in better infrastructure for this country. I am a regular user of the East Midlands line into St Pancras and we can see how that can be transformed by investment and how it can regenerate a whole area, so I passionately believe in that development. That is one of the reasons why I took on the job. I did my research into the consortium to see whether they had adequate finance to meet the commitments, and they have. There are issues, of course, about return on capital, which we can go into. They are very, very serious issues, but they have the ability to run this business and run it well and invest. My reaction when I actually got into the business - as you probably know, I have bought and sold a lot of businesses in my time and it always struck me that when you get into a business it is never as it seems, and I was absolutely staggered to realise, because I assumed as a customer that the retailing went to BAA and of course it does not, it goes into subsidising landing fees. It is what is described as a "one till", so the car parking the retail, everything goes into one till and then the calculation made by the Regulator of the allowable landing charge is made after that. I had always assumed, as probably a lot of us had - maybe not the people who know the industry well -

Chairman: Sir Nigel, you should have read our report. We actually explain this in some detail! We will send you a copy of the previous report. You will find it helpful. Mr Hollobone, did you want to get on?

Mr Hollobone: I am very interested in Sir Nigel's philosophy -

Chairman: We are all interested in Sir Nigel's philosophy, and I am sure he would be delighted to come back and tell us about it on some other occasion. However, we need to know about mixed mode and we need to know about some of the other problems, and we will be into a division in a moment.

Q269 Mr Hollobone: I am in your hands, Chairman. I was particularly interested in Sir Nigel's assessment of the weaknesses and the threats to BAA which might threaten its future.

Sir Nigel Rudd: I see the business as two businesses, as an infrastructure building business and as a running of an airports business. The running of the airports business actually has to be improved. Stephen has explained how we are going to do that, and it is actually very important that we make the changes, and the new infrastructure will help us to do that.

Q270 Chairman: Sir Nigel, suppose BAA was asked to divest itself of one of the London airports. Is that going to create more competition?

Sir Nigel Rudd: The Competition Commission is looking at this. My perception - and, as I say, I am new to the industry - is that it will not, because I do not believe that most people make a choice of an airport by the stand of the airport. They make a choice by which airline is flying from that airport.

Q271 Chairman: Yes, but you have just actually made an interesting division and said that you see the company as having two halves, one of which is property and business and the other is running the airport. Some of us do not quite see that difficulty. For example, supposing BAA was asked to copy the system used at JFK, where terminals are owned and run by airlines. What would be your response to that?

Mr Hanks: That is a situation we are aware of in JFK. JFK is a much bigger airport.

Q272 Chairman: I am sure you are aware of it, Mr Hanks, but what would your response be if you were asked to do it?

Mr Hanks: There is not the space for that kind of competition at any of our London airports.

Q273 Chairman: But you have just been telling me that there is so much investment going in in the next ten years that you will have completely new terminals and in fact you may actually be able to offer this new high-quality, beautifully organised, very efficient terminal to people on precisely that basis.

Mr Hanks: We cannot add more space at the airports. We can improve the quality of the facilities there, but Heathrow will be the same size and it will still be four terminals, as it would be -

Q274 Chairman: The airlines are already grouped, are they not, in different terminals?

Mr Hanks: They are, and there is not the space to move them around.

Q275 Chairman: Has anyone given any attention at all to the question of mixed mode running?

Mr Nelson: Yes, Chairman. We would be supporters of mixed mode for two reasons. One, it reduces the stacking that will occur over London, and thereby has an environmental benefit, but it also gives us an operational benefit because it reduces the possibility of congestion. The second one is that it obviously is a more efficient use of the runways, so that we can actually drive up growth without having to put the third runway down before we have exhausted the capacity of mixed mode.

Q276 Chairman: So is it essential for the efficient running of the new Terminal 5?

Mr Nelson: No, it is not, Chairman. The running of the new Terminal 5 has nothing to do with more air traffic movements or more runway capacity. It is a very welcome addition of 40 per cent more space for passengers in Heathrow.

Q277 Chairman: Sir Nigel, which do you think is most important to your shareholders, the overall transport interests of the United Kingdom or the return on the capital they have invested?

Sir Nigel Rudd: I do not think they are mutually exclusive. I think that most businesses - and I have been in the business of looking after customers and if you look after customers then you will do quite well; if you do not, you will not.

Q278 Chairman: You do not feel there is a little way to go before BAA can be put in that category?

Sir Nigel Rudd: I think there is a long way to go, but we are intent on being there.

Q279 Chairman: It is quite clear to your masters that in fact this is a major transport hub which is fundamental to the economy of the United Kingdom, and if we get it wrong it is going to cost us a very great deal in terms of jobs and investment?

Sir Nigel Rudd: I think that is absolutely crucial and that is why I took on the job.

Q280 Chairman: They have given you undertakings that you will get the support to do that job in a way which is not only supported by your individual shareholders but is of interest and support for the United Kingdom?

Sir Nigel Rudd: I have said, Chairman, the capital is available. What I really worry about is the return on that capital. All commercial organisations have choices of where they put their capital and if there is not an incentive to invest, then it makes it very, very difficult.

Q281 Chairman: Do you think that Ferrovial and the other shareholders just did not do that due diligence before they took over the company, or is this something they have discovered recently?

Sir Nigel Rudd: I think they have been genuinely surprised and shocked by the reduction from 7.75 per cent to 6.2 per cent in the present review. They are shocked.

Q282 Chairman: Why?

Sir Nigel Rudd: Because they believe that the risks that were envisaged five years ago in running an airport have not changed substantially, that there are market risks in the market, as we know today, with banks, et cetera, and they think it is totally unreasonable.

Q283 Chairman: And yet they were unable to make their case successfully, is that what you are telling us?

Mr Nelson: Perhaps I could just add, the reason why it was shocked was that that change, 155 basis points, is three times the average of regulated changes over the last ten years, excluding BT, so it is unprecedented.

Q284 Chairman: But equally, Mr Nelson, you have already been telling us - and if you have not, your customers have been telling us - there have been considerable changes in the way you operate over the last ten years.

Mr Nelson: And we would imagine that actually the risks of operating and building out a runway, and indeed an airport of the kind of Heathrow, are going up rather than down, but what that settlement indicates is that the risks have gone substantially down, and we do not accept that.

Sir Nigel Rudd: Chairman, as I have said, I care passionately about investment in infrastructure and this sends a terrible message to any bidder who is thinking of investing in infrastructure in this country.

Q285 Chairman: For what reason, because the due diligence which was done before did not indicate that this was an area which might be at risk if different decisions were taken by the regulatory bodies? Is that what you are telling us? Why would one buy something which was regulated by an authority which was at great liberty to make precisely the estimates they have made in the interests of the industry?

Sir Nigel Rudd: They did their calculations and clearly they did not expect that reduction.

Q286 Chairman: So really one can only say it is very wise, before taking over a major investment of this kind, to ensure that people giving you advice are at least basing their estimates on the possibility and probability that there will be changes?

Sir Nigel Rudd: Chairman, they had that advice and the advice was clearly wrong, because the rate which has been offered is far lower than that advice, and I have seen that advice.

Chairman: I think, Sir Nigel, you should tell them to ask for their money back from the people who were their consultants. Gentlemen, you have been extremely helpful. Thank you very much indeed.

Memorandum submitted by Department for Transport

Examination of Witnesses

Witnesses: Mr Jim Fitzpatrick MP, Parliamentary Under Secretary of State, and Mr Jonathan Moor, Director of Airports Strategy, Department for Transport, gave evidence.

Q287 Chairman: Minister, I think all we are going to have the time to do really is to say hello to you. I apologise if we have kept you waiting. Normally, we are very loath to keep important persons waiting. Would you be kind enough to identify yourselves for the record?

Jim Fitzpatrick: Chairman, thank you very much. I am Jim Fitzpatrick, Parliamentary Under Secretary at the Department for Transport and Aviation Minister. If I may, Chairman, introduce Mr Jonathan Moor, who is Director of Airports Strategy at the Department, who will be with me this afternoon for any evidence to the Committee, if that is okay. Can I read a very short statement, Chairman?

Q288 Chairman: We would be delighted to hear from you, Minister, but you will not be surprised if we all rise to our feet and run away in the middle of it!

Jim Fitzpatrick: Of course. I thought it might be helpful just to say a few words on where we are in respect of policy, if I may, Chairman. We set out a sustainable long-term strategy for the development of air travel out to 2030 in the Air Transport White Paper in 2003. There we made clear our support for additional capacity at some UK airports, but only where the case is strong after accounting for the environmental implications. We particularly support additional capacity at two of BAA's airports in the South East. The pace of change in the industry has raised the potential for regulatory and structural changes in the near future. We have just completed a public consultation on the designated status of Manchester and Stansted Airports, with the decision due soon. In addition, the Competition Commission is currently carrying out an inquiry into the supply of airport services by BAA, which may have implications for the structure of the industry and the Secretary of State has invited Sir Joseph Pelling to carry out a strategic review of the CAA. These reviews may restrict our ability to respond fully to questions from the Committee, but we will do our best to answer what we can, Chairman.

Q289 Chairman: That is helpful. You do understand that we are aware of all the things that are going on around this subject, but of course we have taken quite a lot of evidence this afternoon and we have quite a lot of written evidence that we would like to question you on. Normally, I do not allow ministers to say to me, "Don't ask me that," but I am sure you will indicate to us if you think we are going too far, and we may even argue with you, who knows? Does BAA's gearing jeopardise its ability to raise the finance required to deliver the necessary additional airport capacity for the South East?

Jim Fitzpatrick: It is our view that given the CAA's recently published proposals and price caps for the next five years beginning from April 2008, the CAA has a duty to provide airport owners with the incentive to invest. Having also taken into account the Competition Commission's own recommendations on price caps, the CAA is confident that its proposals will provide adequate incentive for BAA to invest. The financing obviously is a matter for BAA. The ability to deliver the investment supported in our White Paper may be affected in the medium term by the ability to obtain finance on reasonable terms, and we were concerned about this possibility at the time of acquisition. Ferrovial provided us with assurances of their support for the investment programme, so we are quite confident that the investment we anticipate and the expansion we see is required will be deliverable.

Q290 Chairman: Because, after all, commitment is not quite the same thing as the ability to invest, is it?

Jim Fitzpatrick: No, but given the structuring package which is in place, given the outline investment the company has made, given our discussions with them at that time and their ability, given the fluctuations in the market and everything else, given the CAA's recommendation of where the price regime should be for the next five years, we think within all of that envelope there is real confidence that Ferrovial can deliver and will deliver and we have no reason to think, notwithstanding the financial turbulence in the markets, that that will prevent that from happening.

Chairman: I think we may want to question you a bit on that.

Q291 Mrs Ellman: What exactly is the current consultation on expansion at Heathrow all about? Is it about whether there is expansion, the extent of the expansion, or when it is actually going to happen? Is it the date we are talking about?

Jim Fitzpatrick: The consultation is covering a whole range of issues. The main aspect is that in the 2003 White Paper and in the -

Chairman: I am sorry, Minister, now the Division Bell is ringing. The Committee is suspended.

The Committee suspended from 4.18 pm to 4.27 pm for a division in the House.

Q292 Graham Stringer: We were just with the previous witnesses, Minister, discussing how we had got here, how we had go to a situation where Heathrow, which is one of the world's premier airports, is now in a situation where it is at a competitive disadvantage with at least four, if not five other European hubs which have more runways. Can you shed any light on how we have allowed the country's premier airport to get into that situation?

Jim Fitzpatrick: Chairman, do you want me to finish the answer to Mrs Ellman's question about what we are actually consulting on at Heathrow?

Chairman: Of course, yes.

Q293 Graham Stringer: And you can think about that one!

Jim Fitzpatrick: Yes, well, that is probably true indeed, Mr Stringer. Chairman, what we are consulting on primarily is additional capacity for Heathrow. The media have focused on a third runway and a sixth terminal because that is the easiest thing, I think, to communicate to the public. However, we are also consulting on a range of other things. What we are actually putting into the public domain is that our declared policy support was for a third runway from the Air Transport White Paper in 2003, confirmed in 2006, but we said that we would only go through with that if we were confident that we could meet the strict environmental standards on air quality and noise that we believe are appropriate to be maintained. We have been doing the work on that. We have put into the public domain the scientific evidence and the data upon which we based our decision. That is what we have put into the public domain for scrutiny and that is what is being consulted. We are also looking at other aspects. The original proposal was for a 2,000 metre runway. That is now a 2200 metre runway. We are looking at mixed modes. We are looking at what is called the Cranford Agreement, which goes back to the fifties. We are looking at alternation. So there is a range of additional elements about the capacity building with Heathrow, but the main ones are the third runway, the length of the runway and the air quality and noise, environmental protections that arise and need to be demonstrated for us to be able to say that that is exactly where we want to go and that we have the confidence in going forward.

Q294 Chairman: I will come back to Mrs Ellman, if I may, but I think Mr Stringer has posed you an interesting question. Mr Moor, you are having to pick up the short straw!

Mr Moor: Following the T5, the length of time it took to take the T5 inquiry through, the Government in 2002 consulted on its aviation strategy and in 2003 published the Air Transport White Paper, which set out a clear 30 year strategy for the future development of the aviation industry in the UK. In particular, in there it included the proposals around two new runways, one at Heathrow and one at Stansted. So I think the answer to the question is that the Government recognised this weakness and therefore responded to it in 2003 with the Air Transport White Paper.

Q295 Graham Stringer: When over the last ten years Members of this Committee, including myself, have asked BAA why they were not going for a third runway when Madrid were putting on two or three, I cannot remember all the numbers, Schiphol was putting on an extra two or three and Charles de Gaulle was doubling in size, they said to us, "Not our responsibility, Guv, it's up to the Government." What was the Government saying to BAA during that period? There were clearly discussions going on. It is clearly the most bizarre position for a private commercial company to say that it is up to the Government whether they have a major investment decision on something which is important to their future. Can you enlighten us on that?

Jim Fitzpatrick: I do not think I can shed any light on it directly for you, Mr Stringer. I think Mr Moor has tried to outline -

Q296 Chairman: Come now, Minister. I think you must have read yourself in with great care. Surely somebody gave you just a hint of what other ministers have decided?

Jim Fitzpatrick: Forgive me, Chairman, I was going to say that I thought Mr Moor had given an explanation as to certainly the last five years and that indeed the decision was delayed as a result of the planning -

Q297 Graham Stringer: Minister, I am asking a different question. I accept what the White Paper in 2003 said. It said we wanted a runway. What I am really asking is what the Department for Transport said to BAA so that they did not ask for one before, because they were saying the ball was in the Government's court, however strange that is, and I would like to understand why, because we are in a situation which I find disturbing. Firstly, the country has lost its position in the aviation world. Heathrow is now not as prominent in world aviation and European aviation as it was. Secondly, at the T5 inquiry BAA said they would not have a third runway, which upsets people, quite reasonably, if they believe they are told an untruth. I want to understand why the country is disadvantaged and why those statements were made.

Mr Moor: If I can just clarify the process back in 2001 and 2002, a number of airport operators and other people put in a number of proposals to the Government around new airports and increases in passengers to existing airports. BAA obviously put in a proposal at that stage for a third runway and it was considered as part of the White Paper and was consulted on.

Graham Stringer: Come on, this Committee is an intelligent committee.

Chairman: More or less, yes!

Q298 Graham Stringer: Its Members are intelligent and they know, because we asked the questions of BAA and ministers over that period, that Heathrow was falling behind in its capacity, not just terminal capacity but runway capacity. There are some intelligent people in the Department for Transport who also viewed that as a problem. Why were the Department for Transport not promoting that and what conversations were they having with BAA? You cannot come to this Committee and tell us, "We thought about a third runway at Heathrow in 2001/2002." It is just not credible.

Jim Fitzpatrick: But at that time, as you say, BAA was saying that it did not want -

Q299 Graham Stringer: It was saying it was up to you collectively as the Government. What conversations were you having?

Mr Moor: I cannot comment on what was happening before 2001.

Q300 Graham Stringer: Why not?

Mr Moor: Because I am not aware of what conversations were happening then.

Q301 Graham Stringer: That is even more incredible, that you have not looked at the background. My guess is that the briefing for this, and when you looked it up, went back to the 1985 White Paper. Come on, we have had permanent secretaries here who have taken us through all sorts of histories. It is just not credible that a senior official comes here and says, "I don't know what happened before 2001." Please treat us seriously.

Mr Moor: I think my answer was post - once Terminal 5 got planning permission to be expanded, that is the time when BAA started the conversations around the future development of Heathrow, which ultimately went into the sales consultation in 2002, but it was not until the T5 planning application had been approved that there was consideration around what was for further development at Heathrow after that.

Q302 Graham Stringer: It is not credible, is it? Is it not really that the strategy was, "We get T5 out of the way and then we will go for runway 3," and that is to the disadvantage of the runway and to the disadvantage of the credibility of government generally, not just government of my political colour but government generally? Is that not the case?

Jim Fitzpatrick: That is a conclusion, Mr Stringer, which you may very well wish to draw. What we have been trying to outline is that from our point of view we have a very clear policy, which is to support the third runway. We have been doing the work to demonstrate that that could be done within the environmental protections we said were required when we published the White Paper in 2003 and that is what we are explaining as part of the public consultation at the moment.

Q303 Graham Stringer: What I want to believe about my Government is that they were thinking hard in the mid-1990s and beyond about the capacity of Heathrow Airport, and what I seem to be hearing is that you either do not know about it or nobody was thinking about it. It just is not credible and what I really want to understand is what were the dialogues going on be Government and BAA. Would you reveal those to us if you go back and you look at your very dusty files on these matters?

Jim Fitzpatrick: I would much rather put my hands up and apologise for the fact that I do not know rather than accuse previous ministers and officials of saying they were not discussing it, because I am sure they were, and I am very happy to go back to the Department and to research the documentation which was available at that time and to supply the background information from the 1985 White Paper forwards for the benefit of the Committee, but in terms of being able to cast light on that which was being discussed in the time period you are talking about, I can only apologise, Chairman, because I do not have that information at the moment.

Q304 Graham Stringer: I am grateful for that and I look forward to that information with great interest, because although we should look forward it is important to understand why we have got into a situation where people are annoyed because they are told one thing and the airport is not as good as it otherwise could be. Can you tell us why we do not go for a second runway at Gatwick, as opposed to Stansted?

Mr Moor: I can explain. In the last planning application at Gatwick Airport there was the local planning condition put on Gatwick Airport which said that a second runway could not be built before 2019. At the time of the Air Transport White Paper the Government looked at that condition and concluded that it supported development at Heathrow and Stansted and it would not seek to challenge the planning condition at Gatwick before 2019.

Q305 Graham Stringer: Did you take legal advice as to whether or not that planning decision, the planning agreement I suspect it was, was breakable and changeable?

Mr Moor: I am sure at the time legal advice was taken, but the decision at the time was to not pursue the development at Gatwick. It was considered the sustainable approach was to go for two runways in the South East. Despite the fact that air traffic forecasts showed three runways were required in the South East, only two were approved and they were chosen as Stansted and Heathrow.

Q306 Graham Stringer: Is there any prospect of you looking at Gatwick, because with the length of time these inquiries take - I know we are trying to speed them up - talking about 2019 is not ridiculous with Gatwick, is it?

Mr Moor: What we say in the Air Transport White Paper is that if development at Heathrow is not possible following this consultation, then the Government will look at the options for development at Gatwick.

Graham Stringer: Thank you.

Q307 Clive Efford: We have heard a lot of criticism from the airlines of BAA. Is the Government aware of them, and what assessment has it made of these criticisms?

Jim Fitzpatrick: Are we talking about general terms, Mr Efford, or are we talking about Heathrow in particular?

Q308 Clive Efford: There has been a lot in particular about the response to the heightened security measures, recruitment, the lengthy queues at peak times and the inability to be able to respond to them.

Jim Fitzpatrick: Yes, thanks for that. We certainly are aware of them. The Department only last week published this document, "Improving the Passenger Experience", which was issued for discussion by the Secretary of State specifically to start addressing the concerns and criticisms which were being expressed by individual passengers but also airlines in an attempt to start defining exactly where the problem areas were, where the pressure points were, what could be done to improve the situation. We have been in regular dialogue with the industry, both airports and airlines, over the intensified security as a result of the plots last August, the imposition of the restriction on the "one bag" rule, which created problems, the additional immigration pressures for people returning to the UK, to do what we could to try to make sure that those pressures were relieved as best as possible within the restraints that were put in place, that we shared best practice across the country because some airports seemed to be dealing with it better than others, but also that we looked to see what we could do by way of improving the situation with additional recruitment, with better training, with the procurement of more scanners, for example, for the security cone, and indeed more sophisticated technology in terms of being able to screen and the material, whether it is bags, jackets, shoes, or whatever, asked to be deposited by the passengers. So there is a very comprehensive examination going on of the passenger experience to try and support the airlines. We are conscious, obviously, that Heathrow, with the opening of T5 next March, should see a major stepping stone towards fundamental improvements of the experience at Heathrow. Subsequent to that, Terminals 1 and 2 will be replaced eventually by Heathrow East by 2012 in time for the Olympics and major refurbishments will be going on at the other terminals, so Heathrow will virtually be rebuilt by between 2012 and 2015 next year. So in relation to the major problems which are being expressed, focusing on Heathrow, we believe there will be an immediate pressure relief next March when T5 opens and gradually that situation will improve considerably. But this document which we publish and the discussions which we have on an ongoing basis between ministers, officials, airports and airlines are very much addressing those concerns which we are very conscious of.

Q309 Clive Efford: We have also heard a lot from the perspective of passengers and their experience of passing through airports. In light of the criticisms there, do you think BAA has performed well?

Jim Fitzpatrick: We certainly are of the opinion that it is improving and the additional recruitment, the procurement of the latest technology, the additional machines which are being put in place, the experience post-August 2006 and post the Glasgow Airport attack demonstrates that there is a real willingness on behalf of BAA to acknowledge the shortcomings which exist in the airports and their requirement to deal with the additional pressures which have been caused as a result of the security threat being raised and the actual experience of Glasgow. Monitoring their recruitment procedures and the procurement of equipment, the amounts of money which they are clearly investing in the technology as well as extra staff, does give us confidence that they are aware that the situation has to improve, and indeed they are carrying that out as best they can.

Clive Efford: Given the responses of various airports to heightened security the summer before last, Manchester seemed to have systems in place. We have heard at a previous inquiry which this Committee undertook that Manchester seemed to have systems in place which responded quite well, but BAA did not seem to have similar success. Why do you think that was?

Q310 Chairman: Do you want to make a guess, Mr Moor?

Mr Moor: If I could just explain a couple of things. Obviously, we recognise that BAA has had problems with its passenger experience, as identified in the publication, but I think we also recognise that a lot of those problems are due to capacity constraints at Heathrow in particular and the fact that the airport is already operating at 40 per cent above capacity, so unlike some other airports in the country where they have had the ability to expand their security cone because they have more a flexible use of space, I think BAA has suffered from that. One of the things I would say, though, is that we fully support CAA's proposals around having more transparency of passenger experience information at the airport and for airlines, but also CAA is currently consulting on quite significant rebates if BAA fail to deliver the passenger experience going forward into the next price cap review. So it is now looking at much tougher queuing times, 99 per cent at ten minutes, 95 per cent at five minutes, and there will be quite considerable penalties on BAA if it fails to meet those targets in the next quinquennium.

Q311 Clive Efford: The imposition of those increased penalties would suggest that there is some sort of dissatisfaction with performance, would it not?

Mr Moor: I think certainly the Competition Commission's report did say that it felt that the CAA's penalty system had not been sufficiently robust to improve the customer experience, and I think that is why the CAA is consulting on a tougher system in the next quinquennium.

Q312 Clive Efford: You are not suggesting to the Committee that the constraints of space were the major contributors to poor performance, are you?

Mr Moor: No, not at all. What I am suggesting is that there is a lot of different factors in terms of looking at different airports. Some airports have responded very well, some airports have not responded quite so well, but I think what you do have to do is to look at all the different capacity constraints and other operational constraints and take a view about where the airport is and whether it is improving or not, but I recognise that BAA has had serious problems at certain of its terminals at Heathrow in particular.

Q313 Clive Efford: Do you think that all the procedures which have been put in place now are going to address the problems we have experienced over the last, say, year and a bit, two years?

Mr Moor: Certainly BAA is quite confident that it has got a plan now to address all of those issues. I think the CAA is also scrutinising that through setting target performance standards. I have no reason to doubt BAA's plan. I think it would itself admit that it has not fully implemented that plan yet and it is still recruiting people and still installing machinery.

Q314 Clive Efford: Just one last question: setting aside the major investment in the infrastructure, why are its buildings in such a dilapidated condition?

Mr Moor: I think that is a question for BAA -

Q315 Chairman: Oh, we asked them!

Mr Moor: BAA certainly has put in place an extensive plan of further investment in Heathrow Airport over the next five years including, as the Minister mentioned, Heathrow East, a completely new terminal. By 2012 the vast majority of passengers will be going through new terminal facilities.

Q316 Mr Leech: Security issues are clearly the biggest issues as far as the passenger experience is concerned, but one other area is passenger comfort and one of the problems with a lot of airports is lack of sitting space. This, of course, is brought on by the amount of money BAA has to generate from commercial activity as opposed to from the airlines themselves. Has the Government considered possibly addressing the balance so that more money in the future might come from the airlines rather than focus on commercial activity, and therefore being able to provide better space for people to sit?

Jim Fitzpatrick: The CAA has outlined the price regime for the next five years, which is out at the moment for consultation, and it would certainly take into account the whole package of income which the airports would get both in terms of the retail charges from airlines, et cetera. So there is a complex formula to determine what is appropriate. I think the biggest frustration, and Mr Moor referred to it a moment ago, in terms of Heathrow is the fact that it is running so much at over-capacity that there are constraints on virtually everything, which hopefully will start to be addressed when T5 does open next year and there will be greater space for passenger comfort. The CAA's proposals on the passenger experience and the recommendation or suggestion in its consultation that the rebates system, the fines to be levelled on airports, be increased from the three per cent at the moment to potentially seven per cent recognises that it is clearly concerned that airport performance has to improve and it is prepared to consider levelling much stronger, higher, heftier fines if the performance does not improve.

Q317 Mr Leech: Do you think then that the proposed increases being put forward by the CAA will actually help to redress the balance and provide more comfort for passengers, and do you also believe that T5 will actually provide enough seating spaces for the passengers it is going to attract?

Jim Fitzpatrick: On the last point, Mr Leech, when I visited T5 a couple of months ago seating was one of the statistics which was quoted by BAA, because it was a bit miffed that there was a report in one of the national newspapers which was suggesting that there was going to be very limited seating, and it was saying that there is more than enough adequate seating planned. So it is very confident that those figures will more than match up to scrutiny. I think, as we have been trying to say, there is confidence from BAA and we have no reason to doubt that the performance and the passenger experience will improve as a result initially of T5, but we are talking about a rebuild, a refurbishment programme which will run through to 2012 and therefore it is going to take some time.

Q318 Mrs Ellman: You said that the third terminal at Heathrow's runways would only be built if environmental and noise standards were met. Is it realistic that it would not go ahead because you were not satisfied with it?

Jim Fitzpatrick: We are very confident, given the examination we have made, the scientific data and the research which we have unde