Sub-Committee B considered the Explantory Memorandum on the above proposal on 5 March 2007 and responded that, whilst favouring action in the areas identified by the Commission, it shared the government's concerns that the draft Directive may not target regulation effectively at monopoly power but instead add unncessary regulation where competition already functions well. The Committee agreed that the proposed threshold at which airports should be regulated is arbitrary, and asked us to set out an alternative threshold which might better reflect airports' market position. The Committee also indicated that it would like to receive the results of the Government's consultation. I am writing to update the Committee on the progress of Council negotiations, especially on the scope of the Directive, and to inform it of the outcome of the consultation.

As you may recall from the Explanatory Memorandum, the Government indicated its support for the principles of the draft Directive but intended to consult with industry to further inform its policy considerations. The Department held a 12 week consultation which finished on 18 June 2007 and included a stakeholder seminar. 22 responses were received, including 10 from airports and 5 from airlines. The Civil Aviation Authority also responded. For a complete summary of responses, please refer to the attached document. I also attach a Partial Impact Assessment which takes account of the consultation results.

  The responses to the consultation revealed considerable concerns about the proposed Directive. Over 80% of respondents thought that the Directive was not proportionate or well targeted at airports where there might be a case for regulation. Additionally, almost 80% thought that the threshold determining which airports would be covered by the Directive was unsuitable, with many suggesting alternative options. Airports, particularly those of small and medium size, opposed the proposals due to the likely increased costs involved, and argued that regulation is not appropriate in the competitive markets in which they operate. The CAA strongly opposed the Directive due to the increased regulatory burden it would impose and its inconsistency with existing UK policy. The response from airlines was more positive. One airline supported the Directive as drafted but agreed it would be open to amendments on its scope, whilst another agreed with the need for a Directive but considered the draft proposals too wide in scope and too weak in power, and thus ineffective.

  On the basis of the consultation responses, the Government formulated a negotiating position which it has been pursuing in Council Working Group discussions, the first on 9 July 2007 and the most recent on 29 October. Our approach aims to reduce the burden on airports as far as possible, whilst helping airlines to operate in a competitive, yet fair, environment. As the Committee recognised in its repsonse to our Explanatory Memorandum, there are some problematic issues concerning the Directive, especially regarding the scope of its impact. Although the proposed 1 million passenger per year threshold has now been revised upwards to 5 million, with general agreement, the UK considers the fixed threshold appoach in the draft Directive to be a arbitrary and too broad and would prefer to focus the Directive specifically at airports with market power. This position has been presented during Working Groups and the UK has proposed amendments to better target the provisions of the Directive to avoid adding unnecessary regulation to airports where sufficient competition exists. The UK's preference for a market-share and competition-based test has not gained wide support from other Member States. We are therefore currently pursuing a new approach which we hope would mitigate the effects of the broad threshold in current drafts. This approach aims to recognise the UK's exisitng system which targets regulation where it is needed. We have had some positive results in trying to ensure that the efficacy of our current system is acknowledged and hope that our proposed amemdments will allow the UK to continue to apply its existing arrangments where they achieve the principle aims of the Directive

  Other areas of concern for the UK include the Directives's provisions regarding the power of the Independent Regulatory Authority to intervene in disputes, the required frequency of consultation between airports and airport users and clauses requiring transparency during negotiations on charges. Whilst recognising the principles underpinning such proposals, we want to ensure that such measures are proportionate and do not undermine existing competition. We have therefore been contributing to Working Groups to try to make such provisions as balanced as possible in the interests of maintaining competitive yet constructive relations within the aviation industry. We have support from other Member States for some of these views and some of our proposed amendments have been added to the draft text. It is hoped that ongoing negotiations will allow us to make further progress in improving on the Commission's initial proposal.

  The Portuguese Presidency has inidciated that it hopes it will be possible to reach a general approach on this dossier at Transport Council on 30 Novmeber. Working Group discussions of the proposal continue, with gradual progress, and I will write to you again ahead of the Council to provide you with an update on these negotiations. Some matters, however, may only be resolved during Ministerial discussions at the Council itself.

  The European Parliament has begun its consideration of the draft text, the TRAN Committee is currently scheduled to vote on the Rapporteur's report on 21 November and the document is currrently scheduled to have its plenary first reading in mid December. I will of course keep the Committee informed of the progress of the proposed Directive.

8 November 2007

EUROPEAN DRAFT DIRECTIVE ON AIRPORT CHARGES—SUMMARY OF RESPONSES TO CONSULTATION

Introduction

  This document summarises the responses to the Government's recent consultation on the European Draft Directive on Airport Charges. The consultation began on 26 March 2007 and closed on 18 June 2007. A stakeholder symposium was held on 26 April 2007 at DfT in London.

The Government received 22 responses to its consultation on the draft European Directive on Airport Charges. A list of respondents is included at Annex B.

  The tables below show a breakdown of responses received by organisation and sector:

TABLE 1: ORGANISATION ANALYSIS

Type of Organisation	Number of Respondents	Percentage Respondents
Small to Medium Enterprise (up to 50 employees)	1	4.5
Large Company	14	63.6
Representative Organisation	5	22.7
Trade Union	1	4.5
Interest Group		0.0
Local Government		0.0
Central Government		0.0
Member of the public		0.0
Other (inc Regulator)	1	4.5
Total	22

TABLE 2: AVIATION SECTOR ANALYSIS

Type of Organisation	Number of Respondents	Percentage Respondents
Airline/Airline Representative Organisation	5	29.4
Airport/Airport Representative Organisation	10	58.8
Airport Consultative Committee	2	11.8
Total	17

Consultation Response Analysis

  The following section analyses responses to each question posed in the consultation and gives Government's response.

1.(a)  Do you think that a passenger threshold is an effective way to establish which airports should fall within the scope of the Directive?

   (b)  If so, is the proposed 1 million passenger per annum (mppa) threshold appropriate?

2.  Can you suggest any alternative ways to establish which airports in a Member State should be subject to the measures proposed in the Directive?

  Four of the 20 respondents who responded to this question supported using a passenger threshold to determine the scope of the Directive, while one supported using 1 mppa as the threshold. Most respondents, including both airlines and airports, believed a passenger threshold was not a good way of targeting airports with market power, where they may be a rationale for regulation, and the 1 mppa would mean a disproportionately large number of UK airports would be subject to the Directive. A range of alternatives were suggested, all with the aim of targeting the Directive more effectively at airports where there may be a case for regulation. These included using a test to identify airports with substantial market power, basing a threshold on market share or some combination of these two.

Government Response

  The Government agrees that a 1 mppa threshold is inappropriate to set the scope of the Directive. It supports the use of a 1% EU market share threshold to determine initially which airports should fall within the scope of the Directive. Additionally, the Government supports a market power test or "competition assessment" to be carried out by national regulators to determine which airports have substantial market power and should be brought into regulation, despite not falling within in the 1% threshold, or which airports do not have market power, despite falling within the threshold, and should be excluded from regulation.

3.  Do you agree with the requirement for a mandatory process of consultation between the airport management and airport users at all qualifying airports?

  There was a variety of responses to this question. 35% of respondents, including 4 airlines, agreed that consultation should be mandatory at least when airports proposed to change the level or structure of their charges. Others supported the principle of mandatory consultation at airports with substantial market power. A significant number questioned whether mandatory consultation was necessary or appropriate at airports operating in competitive markets, where consultation between airlines and airports formed part of normal commercial relationships, with little case for making it a legal requirement.

Government Response

  The Government's view is that consultation should be required when there are significant changes to the system or level of charges, but not mandated to take place annually.

4.  Do you think the proposed timescale for agreeing changes to charges would work in practice?

  80% of respondents thought that a requirement to consult at least 4 months before revised charges were introduced and to publish agreed charges 2 months in advance did not allow sufficient time for consultation and for airlines to adapt. A longer period or allowing greater flexibility would be more appropriate. Two respondents thought the proposed timetable would be workable in practice.

Government Response

  The Government's preferred approach is that the Directive should not include a timetable for consultation on airport charges. Where consultation was appropriate, when there were significant changes to charges, the Directive should allow adequate time for consultation and discussion, taking into account airlines' requirements.

5.  Would you be content for the CAA to take on the role of Independent Regulatory Authority (RA) in the UK? If not, do you have any alternative suggestions?

  84% of respondents were content for CAA to be the UK Independent Regulatory Authority as defined in the Directive, 2 were not. One argued for a separate ombudsman to be set up, another thought CAA as regulator should concentrate on ensuring markets operated competitively. Many of those who were content for CAA to take on this function raised concerns about the funding and resource implications given the wider and different role for an RA than that currently carried out by CAA.

Government Response

  The Government agrees CAA would be the best organisation to be the UK Independent Regulatory Authority. Funding and resource implications for CAA will depend on the final scope of the Directive.

6.  Do you think that arbitration by an IRA would be an effective method of resolving disagreements between airports and airlines for all or any of the Directive's provisions?

7.  How do you think this would work in practice if, for example, an airport proposed a charge of x and the airport users preferred x-5? Would the IRA need to follow a process similar to a price cap review?

8.  Are you content that the IRA's decisions in matter of arbitration would have binding effect?

  Opinion was split almost equally on whether arbitration by the regulatory authority would be an effective method of resolving disputes. A number of respondents believed that there should be guidelines or criteria about how arbitration would operate and circumstances where the RA may intervene, including how to safeguard against frivolous or vexatious complaints. Without these, there was a risk of the RA being drawn into disputes at an increasing number of airports, where it would effectively set airport charges. Some respondents thought the regulator would in practice be required to carry out price cap reviews at an increased number of airports. This would have significant cost implications and might risk undermining incentives to invest.

  Respondents also thought that two months was too short for a regulator to reach a decision, particularly for complex issues. One respondent stressed the need for all regulatory decisions to be published to aid transparency.

  14  respondents answered question 8 about whether the RA's decisions should be binding. Of these almost half were content with binding decisions, in some cases provided Judicial Review could be sought to consider points of law.

Government Response

  The Government does not believe the right to seek arbitration from the RA as drafted is appropriate, and supports the views of consultees who argue for a more tightly defined role for a regulator including criteria under which disputes could be assessed. The Government believes that appeals to a regulator should be on the basis of evidence of anti competitive behaviour by airports or airlines, in line with standard competition law.

9.  Will the transparency requirements affect your normal commercial relationships?

10.(a)  Do you believe that these transparency requirements are required at all airports with over 1 million passengers per annum?

     (b)  What costs and benefits would ensue?

  Respondents had a variety of views about these questions.

  Small and medium airports were concerned about the effects the transparency requirement would have on their relationships with airlines. Some argued that mandatory transparency requirements were not needed when airports operated in competitive market. Disclosing cost and revenue information could effect their commercial position. These airports were also concerned about the costs of establishing systems to provide the information required by the Directive—some estimated start up costs to be in the region of £100,000 per airport, with annual costs of tens of thousands. Large airports were in favour of transparency in principle but had concerns about the detail of the Directive, which assumed a close relationship between costs and charges when in reality this wasn't always the case. Airlines were in favour of cost and revenue transparency from airports, although one was concerned about providing potentially confidential information to airport operators.

Government Response

  The Government's is concerned that the transparency requirements could undermine competition. We would suggest aligning them with established accounting standards.

11.  How do the proposals compare with current arrangements at UK and other Member State airports?

  Respondents noted that the UK operates a privatised aviation market driven by market pressure and competition legislation. There was support for the UK system but one airline noted that other Member State legislation was currently inadequate. One airport noted that transposition of the Directive into Member State law would result in differences in how the Directive was implemented across Europe.

Government Response

  The Government notes respondents' comments, particularly regarding transposition. Whilst encouraging a consistent approach across the EU, we also recognise the importance of tailoring any regulation to meet national and local circumstances.

12.(a)  Do you think that compulsory service level agreements are needed to guarantee quality standards effectively?

   (b)  How should any trade-off between higher standards and the cost of quality improvements be taken into account?

  There was little support from respondents (9 out of 17 answered negatively) for mandatory service level agreements (SLAs) at all airports within the Directive's scope, although this was favoured by one airline. A number of respondents argued that this was not appropriate at airports that operated in competitive environments—in these circumstances airports and airlines had incentives to negotiate and agree service quality standards. There was however recognition of the useful role SLAs could play at airports currently subject to price cap regulation in the UK and the benefits of the process of constructive engagement on these issues between airports and airlines. SLAs could be appropriate at airports that had substantial market power or where an airport was acting anti competitively. Other points raised were; airlines would have different views about desired service levels, making airport wide agreements difficult; to be most effective handling agents would also need to be involved; and airline and passenger views on service quality might differ.

Government Response

  The Government considers that airports would be required to consult airlines on service quality although it would not be mandatory to reach formal agreement. We suggest that rather than there being recourse to the RA purely regarding disputes on service quality, the RA would look at service quality when adjudicating on any dispute on price.

13.  Do you have any other ideas on how quality standards could be maintained between airports and airlines?

  Respondents had several alternative ideas for how quality standards could be maintained. Two airports thought that competition was the best way to meet airline needs. Another airport considered that passenger needs should be taken into account since airports provide direct services to passengers as well as to airlines. Two respondents suggested a greater role for the Regulatory Authority—it could be asked to step to protect user interests in the event an SLA could not be agreed or if there was evidence of anti-competitive behaviour. One airport thought that airports should be able to set standards and have the power to vary them in agreement with airlines.

Government Response

  The Government thanks respondents for their suggestions.

14.(a)  Do you agree that airports should be able to differentiate charges based on the quality of service offered?

   (b)  Will the proposals affect any charging policies you currently have?

15.  In your view, will the provisions ensure that airlines get fair access to the terminals they want to use if demand for a particular facility exceeds its capacity?

  95% of respondents agreed that airports should be able to differentiate charges based on service quality. Airports described the proposal as a welcome move and a logical principle. It was noted that differentiation of charges would be difficult to introduce at small single terminal airports and one airport highlighted that it would be important to allow several types of differentiating strategy, such as route incentivisation schemes. Airlines also agreed with the principle although no frills carriers thought the proposals did not go far enough whereas a full service carrier thought that any differentiation should be minimal. One stakeholder considered the non discrimination text not strictly necessary since non discrimination on the basis of nationality is already disallowed under the Treaty of Rome.

  However, only 12% of consultees who answered question 15 believed that the provisions would ensure airlines got fair access to terminals if demand exceeded capacity. Three organisations thought that it was important to set objective and fair criteria for access, and one thought this would be a challenge for airports. It was considered that the proposals must take account of contracts as these should limit airlines' propensity to switch to other services. Two smaller airports thought that the proposals would not result in fair access and would result in preferential treatment for some carriers.

Government Response

  The Government supports the principles of non-discrimination and the ability to differentiate of charges.

16.  We would be grateful to receive from airlines in writing any examples where they consider that they have been treated unfairly at Member State airports with respect to airport charges.

  Several examples of potential unfair treatment of airlines were provided to us. These included examples of biased security charges in favour of transfer passengers, same charges at different terminals despite different infrastructure arrangements and examples of inappropriate consultation and transparency arrangements in two Member States.

Government Response

  The Government thanks consultees for this information.

17.  Do you think it is reasonable for security charges to meet security costs exclusively?

  All except one of the respondents who answered this question believed that it was reasonable for security charges to meet security costs. Several respondents thought that what constituted "security costs" needed to be defined. It was generally thought that it was sensible to ring-fence security costs as they could be separately identified from other charges, but that this practice should not be extended to other types of charges. One airline thought that Member States should meet security costs and that other airport users, such as retail outlets, should also pay a charge. Another airline wished to avoid foreign airlines subsidising other Member States' security costs. Several respondents referred to other agencies involved in security at airports, such as police, suggesting again the importance of defining what are security costs for the purposes of this Directive.

Government Response

  The Government agrees that, where a separate charge is levied for security costs, it is reasonable for security charges to meet security costs. It also agrees with stakeholders that a definition of security costs would be beneficial.

18.  Do you think the Commission's proposals to regulate airport charges are targeted at, and proportionate to, the problems it has identified?

  6% of respondents thought that the Commission's proposals were well targeted and proportionate to identified problems and 83% did not. 11% were unsure. One respondent fully supported the Directive.

  Six respondents considered the Directive as drafted to be disproportionate. Two airports and one trade association in particular wondered whether the Commission had any evidence of problems at airports and asked how a Directive could be drafted without such evidence. Small airports commented that the Directive would place an unnecessary cost burden on them.

  Several airlines considered that the Directive as drafted lacks teeth as it is two wide in scope but shallow in detail. One full service carrier considered that the basis of the Directive should be ICAO's principles on airport charging.

  Many respondents thought that the Directive was not well targeted, which is reflected in responses to Questions 1,1a and 2.

Government Response

  The Government believes that competition is preferable to regulation.

  Indeed, the Government shares the European Commission's policy goals, namely to ensure that the entire aviation supply chain is as competitive as possible, which we see as benefiting airports, airlines and, most importantly, passengers. Our overarching, negotiating objective is to ensure a good outcome for passengers through well targeted and proportionate regulation.

  As such, the Government would like to see a Directive targeted at airports where problems exist by means of a market power test and a 1% EU market share threshold. The Government believes that a revised scope would make the Directive more effective.

19.  Are there any other issues in connection with airport charges which you think need to be addressed within the scope of this Directive?

  Consultees suggested the following as features that could be addressed within the scope of the Directive:

— Directive should address issue of airport charges levied directly on passengers eg, airport development charge at Newquay and Norwich;

— Inclusion of a provision on ICAO principles in the Directive;

— Single till should be a requirement;

— Amending of definition of airport charge to include "reasonable return on assets" rather than "recovering all or part of costs";

— Airports must retain scope to design tariffs to include environmental incentives;

— The Directive should include provisions on airport costs effectiveness and efficiency. The aim of regulation is to simulate competitive market conditions in monopoly situations.

Government Response

  The Government thanks consultees for the points they raised in this section and we are keen to consider some of the points as part of the negotiating process.

20.  Do you have any other comments you wish to make?

  Respondents had the following additional comments:

— Difficulties could arise with existing pricing arrangements/ contracts. Would the Directive include grandfathering/transition arrangements?

— The proposals will result in increase in cost of flying for the passenger and affect the viability of many existing services;

— It is important that the Directive does not undermine the existing UK system of regulation.

Government Response

  The Government recognises the importance of the points raised above and would wish to consider them as part of the negotiating process. We are particularly interested in transitional arrangements for existing contracts and ensuring that the Directive is consistent with the existing UK system of regulation.

Annex A—List of Respondents

  Air Transport Users Council

  Airport Operators Association

  BA

  BAA

  Board of Airline Representatives (BAR) UK

  Birmingham Airport

  bmi

  Bristol Airport

  Civil Aviation Authority

  EasyJet

  Exeter Airport

  Glasgow Prestwick Airport Consultative Committee

  Highlands and Islands Airports Ltd

  Infratil

  London City Airport

  Luton Airport

  Manchester Airport

  Newcastle Airport

  RDG Solutions

  UK Airport Consultative Committees Liaison Group

  Unite (Amicus Section)

  Virgin

Title of Proposal

1.  Proposal for a Directive of the European Parliament and of the Council on Airport Charges.

2.  A Partial RIA was originally published by DfT in March 2007 to inform consultation with UK industry stakeholders on the above proposal. This version has been updated to take into account views received in response to the consultation, in particular on the nature and scale of potential impacts which may result from implementation of the draft Directive, to inform the Government's negotiating strategy.

Purpose and Intended Effect of Proposed Directive

Objective

  3.  The view of the European Commission is that there is a lack of transparency between airport operators and airlines on how airport charges should be calculated and what components should be taken into account in their determination. It notes that most Member States do not possess legislation which regulates airport charges to the satisfaction of both parties, and that disparate charging systems have resulted. The Commission has accordingly proposed to issue a Directive that establishes a common framework to regulate the way airport charges are set.

Background

  4.  The Commission's proposal would require Member States to ensure that the charges levied by airports do not discriminate among airport users or air passengers where similar levels of service provision apply. It establishes a consultation procedure between airport operators and their client airlines to inform the setting of airport charges, and specifies the information which each party should provide to serve as the basis for determining the level of charges. It also requires Member States to ensure that airport operators enter into discussions with a view to agreeing service level agreements with their client airlines, and establishes a right of appeal to an independent regulatory authority in the event of disagreement over either airport charges or service levels.

  5.  As currently proposed, the arrangements would apply to all airports in a Member State with an annual throughput of over one million passengers or 25,000 tonnes of cargo. This would include twenty UK airports on the basis of 2006 data, and 144 across the EU.

  6.  Other than EU competition law which applies to all sectors of the economy including airports, there are no other existing Europe-wide provisions in the area addressed by the proposal.

Rationale for government intervention

  7.  The Government's stated position is that competition is preferable to regulation. Even where competition is weak and there is a risk of anticompetitive effects, there are now wide-ranging powers in domestic and EU law to tackle anti-competitive agreements and practices. As a general rule, these legislative provisions provide the requisite tools to safeguard competition. However, there might, exceptionally, be circumstances which merit consideration of additional regulation but only if it can be expected to deliver a clear net benefit. The draft Directive needs to be measured against these principles.

Regulation of UK airports

  8.  In the UK, the Airports Act 1986 established a sector specific regulatory regime for airports. This envisages a system of general safeguards for airports meeting a £1 million annual turnover threshold. They must seek permission to levy charges from the Civil Aviation Authority (CAA), and the CAA can take action (under Section 41) if the airport acts in an abusive way.[23]

  9.  The CAA does not actively regulate charges at most of these airports. However, an additional level of regulation is provided for airports `designated' by the Secretary of State. For these airports, the CAA is responsible for setting a price cap on aeronautical charges every five years. Currently there are four designated airports in the UK, Heathrow, Gatwick, Stansted and Manchester.

  10.  The UK has a significant number of large or medium-sized airports offering domestic and international services and in mixed ownership. Their geographic proximity and the intensification of airline competition means that airlines and passengers increasingly have a choice of airports, particularly outside the South East where infrastructure constraints are less severe. As such, the UK airport market is competitive and, with the exception of the four currently designated airports, airport operators are free to determine and collect their own charges in line with the market fundamentals and European and domestic competition law.

  11.  In the UK, Heathrow, Gatwick, Stansted and Manchester airports are currently designated for the purposes of price cap regulation. However, there have been calls for the de-designation of Manchester and Stansted airports, which the Department intends to consult on in the second half of 2007. The cost of this price regulation is significant; the cost of the CAA's review process that leads to the setting of price caps every five years is in the region of £2 million for the CAA. A similar cost is incurred during this process by the airport operators and by the Competition Commission.

  12.  The proposed Directive would apply to the four designated airports and at least sixteen others which are currently free from active regulation of their charges, other than the provisions of domestic and EU competition law. It is assumed that the system of designation for the largest airports will remain in place alongside the arrangements introduced through implementation of the Directive. The Directive clearly has potentially far-reaching implications for the operation of all of the airports concerned and their airline customers, arising from the extension of regulation where the UK has to date not found it necessary to do so. The Directive would also affect UK airlines' use of a large number of airports in other Member States.

Consultation

  13.  Prior to going out to formal consultation, DfT discussed the Commission's proposals with the CAA, and held informal discussions with some airport operators and airlines and their representative bodies.

  14.  A formal consultation with industry stakeholders was launched on 26 March and the relevant documents were published on the DfT website. The consultation period ended on 18 June, The Department hosted a stakeholder symposium during April at which emerging issues were discussed.

  15.  A total of 22 consultation responses have been received, including ten from airport operators and five from airlines. A summary of responses is to be published on the Department's website.

  16.  In summary, airports had a number of concerns about the Directive. Many considered that the 1 million passenger threshold meant the Directive was poorly targeted at airports that might possess significant market power where there could be a case for regulation.

  17.  Airports were also concerned about:

— the requirements for annual consultation, particularly where airlines and airports had longer term agreements about charges;

— the right of appeal to a National Regulator if airlines and airports could not agree about airport charges, which might mean the NRA becoming involved in setting charges at a number of airports;

— the transparency and information sharing requirements, which would add costs and may cut across airports competitive position;

— the difficulty of mandatory service quality agreements given airlines varying requirements.

  18.  Airlines were more supportive of the Directive, in particular mandatory consultation on airport charges and the transparency and information sharing requirements. While one airline agreed with the 1 million passenger threshold, others thought this would lead to the scope being too wide and the Directive needed to be more closely focussed on airports that possessed significant market power.

Options

  19.  The purpose of the consultation was to help inform the approach the Government's approach to negotiating of the Directive. A "do nothing" option, in terms of taking no part in the negotiations, would not be in the UK's interests. Other options range from supporting the Directive fully in its current form to opposing it in its entirety, via a number of positions in which the UK might support some parts of the Directive while actively seeking to modify others.

Costs and Benefits

  20.  The following sectors and groups are affected:-

— UK airport operators—both the four largest, designated airports, and other airports which exceed the threshold criterion set out in the proposed Directive;

— UK airlines—full service, low-frills, regional and charter carriers who would be subject to the consequences of regulatory intervention at over 100 European airports;

— other businesses, groups and individuals involved in the air transport industry;

— the Government;

— the Civil Aviation Authority; and

— air passengers.

Analysis of costs and benefits

  21.  Our assessment of the areas in which costs and benefits may arise as a result of the Directive, informed by the responses to consultation, is set out below.

  22.  The basis of UK policy is that, beyond the exceptional circumstances of airports facing little or no competition, the general safeguards provided by competition law and the Airports Act 1986 provide sufficient protection for airport users.

  23.  The Commission's Impact Assessment recognises the merits of the UK system, stating "Only in very few cases, notably that of the UK, is legislation in place that regulates airport charges to the general satisfaction of both market players even if on details disagreement may persist." However the proposed Directive appears to extend regulation beyond the reach of the current UK system. The costs of the greater degree of regulation proposed by the Directive might accordingly be seen as outweighing its benefits.

Transparency and Consultation

  24.  The Directive aims to introduce transparency into the process of setting charges at large and medium-sized airports throughout the EU. This seeks to establish a clearer relationship between the level of charges at individual airports and the level of services and facilities which are provided for their airline customers. This may be welcome to airlines operating services to airports where the link between charges and service provision has not previously been clear.

  25.  The Commission believes that the consultation process proposed by the Directive to inform the determination of airport charges, and its other provisions such as those related to transparency, are likely to exert a downward pressure on the level of airport charges as airport efficiency improves. An alternative view is that the degree of competitive constraint from alternative airports and other modes of transport such as road and rail provides adequate discipline to behaviour. Regulation can adversely affect the normal commercial relationships between airports and their users and has the potential to be time-consuming and impose significant additional costs. For example, the Directive's provision for a right of appeal to the independent regulatory authority in the event of airport and airline disagreements on price or service quality could work to undermine the incentives for commercial negotiations and dialogue between the two parties, with the result that the dispute resolution process was increasingly turned to.

  26.  Moreover, if the arrangements already in existence at individual airports are satisfactory, the prescribed consultation process could serve to add costs in to the process. In addition, there is concern that the transparency requirements may compel competitive businesses to reveal commercially sensitive information beyond that required for normal accounting transparency, thereby undermining competition.

  27.  Medium and smaller airports may not currently possess the information specified to inform the consultation process in the necessary form. The collation of this information and the administration of the consultation itself, and of any subsequent arbitration process conducted by the regulatory authority, would be expected to impose additional costs for the companies concerned. One regional airport operator has estimated the costs of putting the necessary systems in place at £100,000, plus annual running costs of several tens of thousands of pounds.

  28.  A number of stakeholders have questioned whether a mandatory consultation process is necessary at airports operating in a competitive environment. Alternatively, it may be desirable to reduce the frequency at which consultation occurs; under present arrangements, charges often apply for periods substantially in excess of 12 months. A less burdensome approach than that currently proposed might be to invoke the consultation process only where an airport operator proposes above-inflation changes to the level of its charges, or to their structure, rather than annually.

Service Level Agreements

  29.  The Directive requires that airport operators and their client airlines enter into service level agreements, which some may already do. However, if airports and airlines do not currently do this or find it difficult to reach agreement about service levels and seek the input of the independent regulatory authority, the costs in terms of time and resources could increase substantially. Consultation responses on this issue varied, with some pointing to the difficulty of agreeing service quality agreements when airlines might have divergent views. Others supported the principle of consultation on service quality but questioned why this was necessary where airports operated in competitive markets.

Independent Regulatory Authority

  30.  The CAA would be the primary candidate to assume for the UK the responsibilities envisaged for the independent national regulatory authority (NRA). Those responsibilities would entail additional operating costs for the CAA, which would in turn be passed on to the industry through the current system under which the industry pays charges for its regulatory services, which contribute towards the operating costs of the CAA, plus a rate of return set by the Government. If another body assumed the role of regulatory authority, the assumption should be the Government would again look to the industry to meet the resulting costs. Most consultation responses favoured CAA taking this role.

Dispute Resolution

  31.  The Directive provides for binding arbitration by the NRA on a wide range of disputes between an airport operator and an airport user. The CAA response noted that this may include requiring the authority to reach a conclusion on the appropriate level of airport charges, which would amount to de facto economic regulation. The CAA said that from its experience of undertaking this role in respect of the four designated airports in the UK, this could be a complex and costly undertaking for the authority.

  32.  Possible options to reduce the potential costs imposed by the Directive on the regulatory authority would include seeking to narrow the scope of the Directive by focussing it more closely on airports with significant market power.

  33.  Another option would be to narrow the focus of the roles of the authority. For instance, it might be required to determine disputes on the level of charges and service level agreements only in cases where there is evidence to suggest anti-competitive behaviour by an airport operator or airline, rather than assuming this role in respect of any dispute as currently envisaged.

Incidence of costs

  34.  Should any increased costs fall to the airport operators as a result of the draft Directive, they would invariably be reflected in the charges levied on airlines. This could have a significant impact on UK carriers who serve predominantly European destinations. The Commission believes that airport charges constitute some 4 to 8% of airlines' operating costs, although for low cost carriers this figure may be significantly higher. Any incremental increase in charges may not therefore appear that significant in terms of their effect on airlines' cost base at an individual airport, but where they serve to push up charges at over 100 European airports the aggregate cost effect faced by airlines could be much more significant. However, a number of airline responses argued that possible cost increases would be worth the benefits they thought the Directive would deliver.

  35.  The costs of legislating in order to transpose the Directive into UK law, including costs associated with prior consultation, will fall to the Government.

Small Firms Impact Test

  36.  The sectors directly affected by the proposed Directive will be airports, airlines and their users who will include the wider business community. The Directive is intended to have effect at airports with an annual throughput of greater than one million passengers or 25,000 tonnes of cargo. Most airports exceeding these thresholds are substantial organisations employing in excess of 250 people, the commonly accepted definition of a small firm. A limited number of the smaller airports affected, such as Cardiff Wales Airport, may however fall into this category, and other airports which grow to exceed the million passenger threshold in future may also do so. The Directive is expected therefore to encompass a number of airports that would be classed as "small firms." The proposed changes to the process of agreeing an airport's charging structure, the requirement to consult on an annual basis and the extra costs involved in resolving disputes all have the potential to impose proportionately higher costs upon this segment of the UK airports sector, especially in view of the limited resources of the airport operators concerned.

  37.  Airlines would face the potential costs arising from the introduction of the Directive at the UK airports that are caught by it and also at all European airports which are also subject to the Directive's provisions. Some regional airlines operating smaller aircraft, such as Air Southwest and Scot Airways,[24] and carriers with small fleets of larger aircraft, such as Global Supply Systems, might employ fewer than 250 people, and would therefore fall within the commonly accepted definition of a small firm. As with airports, the resource implications and costs might be expected to be proportionately higher for these smaller companies.

  38.  In addition, there may be indirect effects for small firms with a presence at the airports concerned, for instance those engaged in the catering and retail sectors, surface transport or baggage handling, and for the travel industry.

  39.  Any knock-on effect on the price of airline tickets will also have implications for those small firms which utilise air transport for their business travel.

Competition Assessment

  40.  As discussed above, the Government's stated position is that competition is preferable to regulation. Regulation should only be turned to exceptionally where it would be expected to deliver clear net benefits over domestic/EU competition law. Against this context, this section assesses the nature of existing degree of competition faced by UK airports.

  41.  The largest operator of UK airports is the BAA group, which owns three of the four largest airports by passenger throughput (Heathrow, Gatwick and Stansted), all situated in the South East of England and all of which are currently designated for price cap regulation. Of these, Heathrow had just under 30% of the UK market in 2005, with Gatwick at 14% and Stansted 10%. These airports face a degree of competition from within the region from Luton Airport, which offers primarily low-cost scheduled and charter services, and London City, with a network of short-haul scheduled services geared towards the business traveller. An element of competition from outside the region comes from airports such as Manchester and Birmingham.

  42.  BAA also has a very strong presence in the Scottish market, operating three of the four largest airports—Glasgow, Edinburgh and Aberdeen. In the Central Lowlands area, its only competitor is Prestwick, which is active in the low-cost and freight sectors.

  43.  In total, BAA airports handle over 60% of air passengers in the UK.

  44.  Outside the South East, Manchester is the only other designated airport, with just under 10% of the national market in 2005. The North of England is well served by airports and Manchester faces competition from, amongst others, Liverpool, Leeds Bradford, Doncaster Sheffield, and further afield East Midlands Airport (although this is owned by the Manchester Airport Group) and Birmingham. However, competition in the long-haul market is limited, with Manchester's main competitor in this field being Heathrow.

  45.  Elsewhere, UK airports are seen to operate in a competitive market. Their close geographical locations and separate ownership mean that many airports have a number of natural competitors, examples being Bristol and Cardiff, the two Belfast airports, and the network of airports in the Midlands and the North of England mentioned above.

  46.  The Office of Fair Trading (OFT) completed its market study into UK airports earlier in the year and has referred BAA's UK airports to the Competition Commission for detailed investigation. The OFT has also suggested that there may be a case for considering the de-designation of Manchester Airport. In addition the CAA, as part of its price review of the BAA London airports, has recommended that the Government consider de-designating Stansted Airport. The Department expects to consult on these issues in the second half of 2007.

  47.  At smaller airports, additional regulatory and administrative costs arising from the new procedures could contribute to rising airport charges. This may be of particular concern to the low-cost carriers and other airlines that predominantly use these airports. The operations of a number of such airlines are concentrated at second-tier airports. The possibility of a rising cost base for the operators of smaller airports could restrict the growth of such services, to the detriment of passengers since these airlines have been the main driver in the recent growth of regional airports. In some circumstances, the potential additional costs could offer a competitive advantage to airports of fewer than one million passengers per year which are not subject to the Directive.

  48.  The airline sector in Europe is characterised by its varied and dynamic nature, operating as it does in a very competitive and liberalised market. It is particularly strong in the UK, with leading carriers across all of the principal segments of the market, including full-service scheduled airlines such as British Airways and Virgin, low-cost carriers (EasyJet, FlyBe) and charter carriers (Thomsonfly, Monarch). The Directive would allow for differentiation in the level of charges, reflecting variations in the quality of service and facilities on offer to carriers.

  49.  The changes which would result from the implementation of the Directive would not be expected to fundamentally affect the structure of the UK airport industry, or to result in higher set-up or ongoing costs for new firms that existing firms do not have to meet. However, it could impose additional regulatory burdens and costs on existing operators with potential effects for their competitive positions within their respective markets. One airport operator has suggested that the additional costs could affect the viability of many existing services from regional airports.

Enforcement, Sanctions and Monitoring

  50.  If the Directive is adopted, Member States will be required to legislate to create the laws, regulations and administrative provisions necessary to implement the Directive within 18 months.

  51.  Member States are also required to nominate or establish an independent regulatory authority which will oversee the correct application of the Directive and intervene in the event of disagreements between airport operators and airport users in a manner similar to that of a mediator in industrial disputes. The precise extent of this role is dependent on the final form of the Directive, but it appears that the authority would not be required to undertake an enforcement role in terms of investigating allegedly inappropriate behaviour and taking punitive action where necessary. The regulatory authority will be required to publish an annual report on its activities.

Recommendation

  53.  Based on the consultation responses and analysis discussed above the Department's view is that it cannot support the draft Directive in its current form. The additional regulatory burden imposed on UK airports would be likely to outweigh substantially any potential benefits. The Department also recognises that certain airports can possess significant market power where the benefits of regulation may outweigh the costs. The Department does not believe therefore that opposing the draft Directive in its entirety is an appropriate response. UK airlines welcomed a number of its provisions.

  54.  The Department's recommended option for a negotiating strategy is to seek to amend the Directive so that it:

— encourages a competitive airport sector providing choice and value for passengers while minimising regulatory costs;

— facilitates constructive commercial relationship between airports and airlines;

— help reinforce benefits of liberalised air transport services;

— ensure airport users are adequately protected from abuse by airports which have substantial market power; and,

— facilitate new investment incapacity to meet rising demand.

  55.  The following changes to the draft Directive's provisions should help achieve this:

— focussing the scope of the Directive much more closely on airports that possess significant market power rather than by a passenger threshold;

— ensuring that consultation requirements are appropriate and not unduly burdensome;

— providing more clarity about the circumstances in which appeals to the NRA can be made and criteria by which regulators should reach decisions;

— ensuring transparency requirements are appropriate, not unduly burdensome and do not affect the competitive position of airports.

  Thank you for your update to the Committee on the outcome of your consultation. The letter was considered by Sub-Committee B at its meeting on 19 November. The Sub-Committee agreed to keep this proposal under scrutiny.

The Sub-Committee reiterated its concerns about this matter and noted that some of the outstanding issues may be settled during the Council meeting on 30 November. The Sub-Committee is very keen, therefore, to receive a final update on progress made in the Working Group ahead of that Council meeting.

21 November 2007

  Further to my letter of 8 November 2007 I am writing to update you on the above Directive, and to inform you of the Government's likely position at the forthcoming Transport Council, where the Presidency hope that a General Approach will be reached.

The text which is planned to go to Council on 30 November is still under discussion. However, further to the position I set out in my last letter, it is expected that the text will contain a number of provisions which will help to reduce the potential regulatory burden on the aviation industry.

  For example, the requirement for airports and users to consult over the level of charges has been amended so that it is no longer a yearly obligation, but allows for multi-annual agreements. This reduces the potential for a heavy administrative burden and recognises the stability provided by constructive commercial relations. The extent of information which airports need to provide to users when consulting over charges has also been reduced—airports no longer need to provide detailed breakdown of the costs and revenues associated with each type of airport charge. This decreases the burden on airports whislt still allowing airport users to benefit from appropriate transparency over the basis for the level of charges.

  As I explained in my last letter, the UK hopes to secure an amendment allowing existing arrangements, under which a regulator can intervene in airport charge disputes, to continue in place of the Directive's requirements. If accepted, this will be of particular benefit to the UK, allowing our long standing and successful approach to airport charge regulation by the Civil Aviation Authority to continue.

  The scope of the Directive is likley to be set at airports with 5 million passengers per annum, compared to 1 million in the previous draft. This would reduce the number of UK airports the Directive applies to from 20 to 11. This is not our initially preferred position, but given lack of support from other Member States for a more targeted approach to the Directive's scope, and in light of the other changes to its provisions outlined above, it is acceptable.

  In light of these improvements to the draft text is my intention that the UK supports a General Approach on this dossier at the Transport Council on 30 November, subject to the text being along the lines set out above and otherwise being acceptable.

  The European Parliament's TRAN Committee voted on the Rapporteur's report on 21 November and the document is currently scheduled to have its plenary first reading in January. Following the Council's consideration of the dossier we will be in a position to assess our progress and forumlate our future approach. I will of course keep the Committee informed of progress.

23 November 2007

  Sub-Commitee B considered this matter again at its meeting on 3 December 2007, following the evidence given by officials from the Department for Transport, and has decided to clear it from scrutiny.

4 December 2007

Further to my letter of 23 November and Department for Transport officials' appearance before Sub-Committee B on 3 December, I am writing to confirm the outcome of discussions on the Airport Charges Directive at Transport Council on 30 November.

The Council reached a General Approach on the Directive. I am pleased to be able to report that the amendments on the requirements for consultation and transparency which I described in my previous letter were part of this text, and that the provision for the UK's existing arrangements for the settling of disputes to continue was also included, as my previous letter anticipated. As expected, the Directive's scope was set to apply to airports with over 5 million passengers per annum, which would cover 11 UK airports.

  The Council also resolved a number of other relatively minor outstanding issues, on the subject of the relationship between costs and airport charges, the treatment of airport networks and the length of the Directive's implementation period. The agreement reached on all of these points was satisfactory for the UK.

  The European Parliament's plenary vote on this Directive is expected in January. I will of course keep you updated on progress.

10 December 2007

  Further to my letter of 10 December 2007, I am writing to inform you of the outcome of the European Parliament's plenary vote on the Airport Charges Directive.

The Parliament adopted 45 amendments which broadly reflect the key areas covered by the Council's negotiations. Some of these amendments represent minor textual changes with minimal policy implications. These include provisions allowing airports to differentiate the services they provide, providing that this is done on a non-discriminatory basis. Other amendments provide helpful clarification on issues such as compatibility with existing legislation on passengers with reduced mobility, and on the publication of information regarding the airports to which the Directive applies in each Member State. We welcome such amendments. On the issue of the Directive's scope, the Parliament's proposed threshold of 5 million passengers per annum and other airports with a 15% national market share is close to the position reached in Council negotiations.

  However, other aspects of the Parliament's proposed text differ from the Council's approach. We would not wish to see the adoption of certain amendments regarding the independent supervisory body, for example, that complaints must be brought by two unrelated airlines or at least 10% of annual aircraft or passenger numbers at the airport concerned. We consider this approach to be arbitrary and would prefer to see a filter based on objective, non-discriminatory criteria.

  The Parliament's amendments also include references to the pre-financing of new airport infrastructure. Whilst we do not oppose this principle, we do not believe that it is necessary to address this in the Directive, as such issues are best decided at Member State level. On the issue of service level agreements, the Parliament has favoured mandatory fixed-level agreements, whilst the Council would prefer voluntary agreements, in order to retain an element of flexibility and choice for airports and users. Similarly, we do not support the Parliament's amendment allowing airport managing bodies to opt for either single or a dual till system. Such a provision is unnecessary for purposes of the Directive and regulators or national authorities currently play a key role in determining this in many Member States.

  The Parliament has also introduced amendments relating to security charges. In the light of the recent agreement on a replacement for Regulation 2320/2002 on aviation security (EM 12588/05), which includes provisions on security charges, we would prefer not to see separate provisions on this matter in the Airport Charges Directive. This would have the potential to cause confusion, and we would instead support the inclusions a cross-reference to the replacement for Regulation 2320/2002.

  These issues will now be subject to negoatiations between the Parliament, the Council and the Commission. We will continue to work towards a constructive agreement which we hope will reflect the UK's key priorities for this Directive. The Council has recently begun its consideration of the Parliament's amendments and the Slovenian Presidency has indicated that it hopes to make good progress on this dossier, with a view to possble political agreement at the Transport Council on 7-8 April. I will of course keep you updated on future developments.

20 February 2008

24   Source: JP Airline Fleets 2005-06. Back