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Evidence to Transport Select Committee on Aviation

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BA chiefs give evidence to Transport Committee – 12.03.03

On the 12 March, the Transport Select Committee heard evidence from industry representatives as part of its ongoing inquiry into aviation. Giving evidence were representatives of BA and BA Citiexpress, bmi, Virgin Atlantic, BAR UK and The Charter Group.

First to give evidence were Rod Eddington, chief executive of BA, Andrew Cahn, BA's director of government affairs, and David Evans, chief executive of BA Citiexpress.

Mr Eddington opened the session by welcoming the opportunity to address the Committee - particularly in the light of the recent consultations on airports and the challenging environment in which the sector now finds itself. The industry must grasp the current opportunities in partnership with the Government, he declared, but warned that this 'British success story' is being hampered by over-regulation and a lack of infrastructure. The White Paper, expected by the end of the year, must address this, along with liberalisation and regulation, he insisted, stressing the need for the Government to pursue an international approach to UK aviation.

Asked by Committee chair Gywneth Dunwoody to clarify the meaning of 'infrastructure', Mr Eddington stated that BA's main interest is 'runway capacity at Heathrow'. On liberalisation and deregulation, BA is keen to see an environment that permits 'rational business consolidation', Mr Eddington went on. 'The nationality clause effectively prohibits real consolidation in our industry', he complained.

The estimates for the future of the UK aviation industry put forward in the consultation document match BA's, Mr Eddington went on, but he warned that they might be 'conservative' in the light of past growth’.

Graham Stringer noted BA's stated opposition to a 'predict and provide' approach to infrastructure development, and asked what is wrong with such an approach. Mr Eddington explained that infrastructure must be built in the right places - pointing to growth at Manchester - for the industry to take proper advantage. Predict and provide 'is not something we think necessarily gives us the best outcome', he argued, because the industry needs as much infrastructure - by any mechanism - that can be provided, especially in the south east.

Mr Stringer asked if the slow development of infrastructure in the south east is due to BAA's virtual monopoly of runway capacity in that region . Mr Eddington replied that it is more to do with the planning process, noting that Luton is not a BAA airport. Mr Stringer suggested that breaking up BAA would increase competition and stimulate infrastructure growth, noting that BAA is happy to await the Government's decision on capacity growth. 'For me, that's not the major issue', Mr Eddington stated, pointing instead to the charging regime at Heathrow. Mr Stringer went on to ask, in that context, how Heathrow Terminal 5 should be paid for. 'There's no question of the need for Terminal 5', Mr Eddington insisted, expressing concern, however about the 'overly generous' return T5 will generate for BAA. Asked how BA's profitability compares to BAA's, Mr Eddington maintained that airlines receive only 'very thin' margins even in good years.

In the absence of new capacity in the short term, Mr Stringer asked how BA will accommodate customer demands. Mr Eddington noted that this is a problem for all UK-based airlines, who must consider the problem of growing their businesses in an environment where infrastructure is not available. Business will go to other hubs in Europe, which are permitted to expand, Mr Eddington warned, and British firms will be 'marginalised'. Brian Donohoe took over the questioning, seeking information about BA's belly freight projections. The new wide-bodied aircraft, Mr Eddington stated, are 'very freight friendly', noting that around 10 per cent of BA's business is freight.

Mr Donohoe turned to air traffic control across the EU and bilateral open skies agreements with the US. Mr Eddington stated that BA would prefer to see EU-US discussions, expressing concern about the terms of the bilateral agreements, which refuse access to US skies under the 'Fly America' agreement. A genuine open skies deal, Mr Eddington argued, would give opportunities to many more carriers.

Mr Donohoe noted BA's suggestion for a small regional runway at Heathrow, and asked if this would not be a 'wasted opportunity'. Mr Eddington explained that the aviation issues must be balanced against environmental issues - in this context, a short runway is appropriate for much of the traffic using Heathrow, and it is 'politically doable'. From a purely business perspective, however, he acknowledged, BA would prefer to see a full size runway. Mr Donohoe turned to BA's decision to abandon the Gatwick hub plan. Mr Eddington admitted that this failed due to the excessive proximity of Gatwick to Heathrow, and the limitations imposed by the single runway. Instead, BA operates more of a point-to-point service at Gatwick, he stated. The size and scale of airports such as Amsterdam's Schiphol makes the operation of a hub and spoke operation between Heathrow and Gatwick uneconomic, he explained. Asked by Mr Donohoe when BA last environmentally audited itself, Mr Eddington stated that this is done on an annual basis.

Louise Ellman asked how BA has demonstrated its stated support for regional aviation. Mr Eddington insisted that over 20 per cent of BA flights out of Heathrow are regional, as are 30 per cent from Gatwick. Mr Evans noted that BA operates regional flights from 19 UK airports to 45 European destinations (or 'over 100' 'City Pairs'). He acknowledged that there has been 'some consolidation and removal of overlap' - there are 23 fewer regional routes today than there were 18 months ago. However, Mr Evans pointed out, new services will be added at London City and Manchester airports. This, he contended, demonstrates that the industry 'will respond' when infrastructure is provided.

Ms Ellman expressed concern that airlines will inevitably head for the more profitable routes, rather than less profitable regional ones. Mr Evans acknowledged the profit motive of private business, but insisted that BA's commitment to regional aviation has made it the second largest regional airline in Europe.

Ms Ellman asked if BA has been cutting services at some smaller airports, including Leeds-Bradford, Southampton, Cardiff and Bristol. Mr Eddington acknowledged that this is the case, and is due largely to the rise of local and low-cost airlines in recent years. 'We cut those services because we couldn't make any money operating them in the environment in which we found ourselves', he declared . In the case of Cardiff and Bristol, he explained, the decision was taken that the airports are too close to one another to operate out of both effectively.

Nonetheless Mr Eddington denied that this indicates that BA's commitment to regional aviation is questionable. He insisted, in addition, that there are far more airlines now serving the regions that there were in the past - and he suggested that BA 'does not withdraw from a route lightly', and in most cases seeks an alternative operator to take over any route from which it withdraws. Mr Evans pointed out that new airlines have started up in all the airports mentioned by Ms Ellman, including two at Leeds-Bradford. 'If you look at the UK regions as a whole, services have increased quite dramatically', he argued, insisting that the 5 million passengers BA carries domestically is 'not insubstantial'.

Ian Lucas took over the questioning, asking what consultations with governmental bodies had taken place before BA decided to withdraw from Leeds-Bradford and Cardiff airports. Mr Evans stated that 'we had discussions with chambers of commerce in those areas' and made the decisions clear to them. Mr Lucas suggested that BA should have consulted with the Welsh National Assembly before withdrawing from Cardiff. Mr Eddington replied 'at the end of the day, we have to make the right decisions for our business'. Mr Evans insisted that the routes operated out of Cardiff 'were to a very large extent duplicated by our services out of Bristol'.

Tom Brake asked Mr Eddington about BA's perceived role in achieving sustainable development. Mr Eddington replied that aviation must make a commitment to sustainable development if it hopes to continue to expand - 'it is critical at British Airways that we recognise that reality'. In practice this means ensuring the environmental standards observed by aircraft, and consideration of environmental practice in engineering and catering, he stated.

Mr Brake asked if BA would see there being any final limit on development at Heathrow. Mr Eddington acknowledged that the environmental factors will be critical to getting new development at Heathrow. Mr Cahn pointed out that BA's alternative to Predict and Provide inserts environmental assessment and consultation between the two terms.

Mr Brake asked, in this context, what is being done to mitigate the impact of Heathrow expansion on the local environment and community. Mr Cahn explained that work is proceeding in the communities and with the Government - noting that local people have an interest also in expansion in terms of job creation.

Turning back to freight, Mr Brake asked if there is any prospect of BA moving its freight to other airports than Heathrow - noting that much freight is put onto a lorry and sent around the M25 back through the Channel Tunnel. Mr Eddington acknowledged that there is much more work that needs to be done on integrating types of transport and improving links to airports, noting in addition that BA has a separate freight operation at Stansted.

George Stevenson noted BA's low proportion of slots at Heathrow Airport compared to other airlines' allocations at their own hubs. 'It means we compete with one hand tied behind our backs', Mr Eddington warned, suggesting that the Government's multi-airline policy has 'effectively divided the slots of the home players between three airlines rather than one'. Mr Stevenson turned to bilateral open skies deals, asking if an EU approach to negotiation of such deals would include Heathrow in BA's opinion. Mr Eddington insisted that no airline chief executives in Europe could reasonably claim that their agreements have given them any sort of access to US airspace. Mr Stevenson asked what, then, BA would expect the EU to be able to extract from the US. Mr Eddington replied that concessions would have to be won on the Fly America policy and on cabotage - without these, he stated, there should be no agreements.

Ms Dunwoody asked how many airlines BA has acquired in the last 16 years. Mr Eddington stated that, since its inception (as Imperial), BA has probably included around 50 airlines. Ms Dunwoody asked if regional residents' deal has improved in that time. Mr Eddington replied that it has. He insisted that there are not fewer services in the regions.

Ms Dunwoody sought an explanation of BA's opposition to Public Service Obligations (PSOs). Mr Cahn insisted that PSOs are 'very sensible' where there is no carrier willing to cover a route, but not in any other case. Mr Eddington agreed that in such cases, PSOs are 'perfectly sensible'. Mr Cahn stated that BA is 'aware' of the Scottish Executive's negotiations on an Inverness-London PSO, but is not a party to them. Mr Eddington pointed out that BA should not be a party, because Easy Jet already operates an Inverness-London Stansted service.

Turning to growth projections, Mr Eddington stated that BA believes that both long haul and short haul business will increase for the company - although he could not make the same prediction for the whole UK airline industry.

bmi, Virgin and BAR UK representatives give evidence to Transport Committee – 12.03.03

On the afternoon of 12 March, the Transport Select Committee heard evidence from industry representatives as part of its ongoing inquiry into aviation.

Those to take the floor were Tim Bye, bmi; Barry Humphreys, Director of External Affairs and Route Development, Virgin Atlantic Airways, Virgin; and Peter North, chief executive of North BAR UK

Committee chair Gwyneth Dunwoody asked what the key issues facing UK aviation are. Mr Bye stated that infrastructure growth is the key factor - particularly the need for an additional runway at Heathrow. Mr Humphreys added that runway capacity at other airports, particularly Gatwick and Stansted was also important.

George Stevenson asked about the terms of bilateral agreements between European countries and the US. Mr Humphreys complained that the US is extremely protective in respect of aviation. Mr Bye agreed that one of bmi's primary objectives is to secure more competition on Heathrow transatlantic routes. Mr Stevenson suggested that a 'mini deal' is almost completed that would increase bmi's access. Mr Bye was sceptical about this. Mr Humphreys noted that no progress has been made on any such deals in the last 8 years, and he insisted that 'the only way to address the issues…is by Europe-US negotiation'. Mr Stevenson asked if the panel agree with Rod Eddington of BA's view that there should be no EU-US air service agreement unless there is progress on access. Mr Bye stated that he did not agree, because such a refusal would not be in the interests of consumers. Mr Humphreys, however, declared that Virgin would agree with BA.

Ms Dunwoody asked why Heathrow is so important to airlines. Mr Bye stated that it is the only airport that can provide the benefits of more than one alliance of airlines competing with one another on a single site.

Brian Donohoe asked if the witnesses agree with Mr Eddington's view that the third runway at Heathrow should be a short one. Mr Humphreys stated that commercially, Virgin would prefer a long runway, but it acknowledges the problems of getting a full length runway. Mr North reiterated this position. Mr Humphreys argued that there is a need for three new runways in the south east over the next 30 years, and Virgin would like to see these first at Heathrow, then at Gatwick and then at Stansted. Mr North agreed that BAR UK would be happy to see development at any of these airports.

Ms Ellman asked Mr Bye for clarification about bmi's warning that airlines should not be regarded as a tool of regional policy. Mr Bye replied that airlines must have incentives to provide services on a public service basis - 'we do not stop flying services simply because we do not like people in the regions - we stop because they are not commercially viable', he argued. Nonetheless, bmi is not against Public Service Obligations per se, but sees them as only being justified in very specific conditions. Noting that bmi operates the Leeds-Bradford to London route, Mr Bye argued that one could nonetheless argue that this route is served adequately by rail.

Ms Dunwoody suggested that many airlines abandon regional routes not because they are unprofitable in absolute terms, but in preference for more lucrative long haul slots. Mr Bye acknowledged that firms will indeed be looking to maximise their revenues.

Ms Ellman turned to Virgin's claim that subsidies to other modes of transport puts aviation at a disadvantage. Mr Humphreys acknowledged that no work has been done to quantify this. Mr North pointed out that the industry is taxed (through air passenger duty) to the tune of some £900 million per year. He echoed Mr Bye's earlier point about the substitutability of some air routes with other transport forms, such as London-Birmingham routes.

Asked about the Cliffe proposal, Mr North warned that there is no call for such a development with three other major London airports available. Mr Humphreys agreed, warning that similar developments have tended to be 'white elephants' - pointing to Montreal. Graham Stringer asked whether BAA should be broken up, on the basis of monopoly on airline slots in the south east. Mr Bye stated that Heathrow access charges are excessive, and he warned that this will push up fares. He suggested that there would be more inter-airport competition had different companies been running Heathrow, Gatwick and Stansted. He nonetheless shied away from suggesting that BAA should be broken up. Mr Humphreys agreed that Virgin was 'horrified' by the CAA's decision to allow BAA to raise airport charges, and he suggested that breaking up BAA would be a way of increasing competition. Mr North agreed - noting nonetheless that regulatory proposals prevent cross-subsidy between the airports.

Mr Stringer asked how the airlines would change the planning system. Mr Humphreys argued that the Heathrow Terminal 5 inquiry was of no benefit to anyone, and the rules that brought that about should be changed.

Tom Brake asked about the introduction of more environmentally friendly aircraft. Mr Bye stated that bmi is committed to such standards. 'Clearly we have to work to sustainable development or we will not grow', he declared. 'I would echo that view', Mr Humphreys declared, insisting that the environmental costs must be weighed against the enormous economic benefits aviation brings. Mr Brake asked if the witnesses had any guilt about promoting a third runway at Heathrow - to which all insisted that they did not.

Ms Dunwoody asked the panel's views on air fuel taxes. Mr Bye warned that this would only work on a global basis. On small aircraft, Mr Bye argued that these are often necessary to ensure the commercial viability of regional routes.

Ms Dunwoody sought the airlines' views on how best use of airport capacity could be ensured. Mr Bye stated that this should be ultimately the responsibility of the regulator - in a context of liberalisation. Ms Dunwoody asked how liberalisation would cope with the problem of flags of convenience airlines. Mr Humphreys replied that there must be harmonised safety rules to prevent such a problem. There is already movement in this direction, he suggested. Mr Bye pointed out that any EU carrier can operate in the UK already, if one cares to regard an EU country as a flag of convenience.

Charter airlines give evidence to Transport Committee – 12.03.03

On 12 March the Transport Select Committee heard evidence from charter airlines. Those who gave evidence were Bob Parker, of Britannia, and Peter Long, of First Choice Holidays, on behalf of the Charter Group.

Mr Long opened the session by admitting that it seems odd to be discussing the next 30 years of aviation when the industry is in such a difficult situation. Outlining the scale of the charter industry's business, Mr Long declared that its main concerns are the level of Air Passenger Duty, the fairness of bonding rules since the development of low cost airlines, and the terms of the European Package Directive as it relates to product warranties.

The industry's main forward looking concern is future capacity, Mr Long went on, particularly at Gatwick.

Graham Stringer suggested that the charter industry takes a lot of business away from British tourism, and he asked what contribution it makes to the UK. Mr Long pointed to the 50,000 people it employs and the cheap holidays it provides to British people. Mr Parker expressed concern about the aviation consultations and the assumptions made therein that charter is a declining industry. He contended that it is in fact a growing industry.

Mr Parker warned that charter airlines must not be optioned out of slot allocations in the south east, or people on moderate incomes will be priced out of many airports. He warned that too much attention is paid to business passengers and not enough to leisure passengers.

Mr Stringer asked if the witnesses could not get around some of the bias against charter airlines could not be avoided by changing the name. Mr Parker suggested that this indeed primarily just a question of nomenclature, insofar as both schedule and charter airlines now cross over one another's functions quite considerably.

Louise Ellman asked how important charter airlines are at Gatwick and Stansted. Mr Parker explained that Gatwick is critical to charter airlines because of the historical exclusion of charter airlines from Heathrow. Mr Long pointed out that members of the Charter Group operate out of some 20 airports across the UK. He insisted that there is no bias towards the south east - citing the heavy use of Manchester. Mr Parker pointed out that the Charter Group comprises 5 very competitive airlines, each of which will gladly take up routes wherever they arise.

Ms Ellman asked about the importance of surface links to airports. Mr Long stated 'it is important, and what has happened at Stansted now has…has helped significantly'. He insisted that there is no problem in terms of infrastructure at present. Mr Parker warned however that insofar as charter airlines' customers are largely families with luggage, public transport access needs essentially to be door to door. 'This is a public requirement', Mr Parker argued, suggesting that no one has really taken any responsibility for this. 'Each airport is currently required to consider public transport to its facility', he suggested, but insisted that major changes are not 'covered adequately'.

Mr Donohoe sought the panel's views on the use of Redhill as a feeder for Gatwick, Mr Parker stated that this is primarily an issue for schedule airlines, which when considered previously had been ruled out as a 'non starter'.

Mr Donohoe asked if charter airlines have been caught out by the rise of low-cost airlines. Mr Parker acknowledged that they have taken away some of the charter sector's routes, but he insisted that they have added traffic on those routes as well. Mr Parker maintained that charter airlines are in fact low-cost airlines (not 'no frills' airlines), pointing to a recent article in the Telegraph suggesting that charter flights offer a better deal than many 'no frills' airlines.

Ms Dunwoody sought the definition of a charter airline. Mr Parker acknowledged that this is a difficult question, explaining that originally there were distinct sets of rules governing charter and schedule airlines (with charters 'essentially being wholesale'), but liberalisation has resulted in the two types of traffic being 'completely blurred'. He insisted that there is no real difference at all today.

Mr Donohoe suggested that charter airlines are primarily run by tour and holiday operators. Mr Parker denied that this is the case, arguing that 30 per cent of German charter passengers are 'wholly schedule'. Ms Dunwoody asked why then the charter sector does not sell itself in these terms. Mr Long acknowledged that 'we do need to make the case that we are a low-cost airline'. The issue at stake is primarily bonding, he argued. 'Charter' is a statistical term that is continued 'by other people', Mr Parker argued. However, Mr Parker acknowledged that - unlike schedule airlines - charter airlines negotiate their own bilateral agreements with non-EU countries, rather than relying on the Government.

Ms Dunwoody asked how the consumer can be put at the heart of aviation policy making. Mr Parker argued that planning for the appropriate amount of capacity to meet the demand of consumers is essential. Ms Dunwoody asked 'why is air travel a necessity'. Mr Parker argued that holidays are increasingly important to people.

Ms Dunwoody asked how important to BAA the charter airlines are. Mr Long argued that charter airlines take 15 million people on holiday each year, and are therefore important. The raison d'etre of holiday companies is their capacity to put the pieces of a holiday back together more cheaply than individual consumers are able to do, he stated.

Transport Committee hears evidence from BAA – 19.03.03

On Wednesday 19 March the Transport Select Committee heard evidence from BAA. First to give evidence was Mike Toms, group planning and regulatory affairs director at the British Airports Authority (BAA) and Donal Dowds, managing director of BAA Scottish Airports.

Mr Toms began by outlining BAA's vision for the future of the aviation industry: firstly, low cost airlines 'are here to stay'; secondly, the role of international hubs will decline vis a vis, the importance of regional airports; and mid-size airlines will face the toughest pressures. The key variable for the industry, he argued, will be whether the low cost model can be extended from short haul to long haul flights.

Brian Donohoe asked for the panel's views on the creation of a central Scottish airport to replace Glasgow and Edinburgh airports. Mr Dowds explained that BAA has long thought that 'it was an idea that was at least 50 years past its time' - in view of the massive investment already undertaken at those airports. The most recent assessments take the view that a new airport would cost £7 billion, and that it would therefore be economically unviable, he stated.

Mr Donohoe expressed concern about the idea that passengers are being 'funnelled' away from regional airports to hubs. Mr Toms denied this, insisting that BAA provides airport capacity only - it is the airlines that provide services.

Graham Stringer confronted BAA about its failure to provide any extra runway capacity in the south east for many years - and noted BAA's written submission, which makes reference to additional airport capacity, but not runway capacity. Mr Toms insisted that BAA's focus on Heathrow Terminal 5 was the correct policy, insofar as there was previously a lack of match between terminal and runway capacity. Since 1985, BAA has spent £3 billion adding airport capacity, he noted. Now, he went on, BAA is looking at expanding runway capacity - but to do this, the firm needs a 'strong policy framework' that will expedite the planning process. Mr Stringer noted that BAA is a 'virtual monopoly provider' of runway capacity in the south east, and through its lack of incentive to expand capacity, aviation is being diverted away from the UK. Mr Toms argued that, to accuse BAA of monopoly behaviour, one needs to determine whether the three London airports would have performed better as separate companies.

BAA has been regularly inspected by competition authorities, he pointed out, with none of them finding evidence of malpractice. ' We're going to invest as much as we can getting as much capacity as we can out of the runways we have in the next ten years', Mr Toms declared, pointing to the various investment programmes the company has for expanding the capacity of each of its airports. Nonetheless, Mr Toms insisted, adding capacity is not as simple as building new runways - there is a need for buildings, transport infrastructure, software and the reorganisation of London airspace.

Mr Stringer concluded by asking, if BAA could have one extra runway, where it would put it. Mr Toms insisted 'it's actually slightly too soon to say'. Mr Stringer declared that this was 'an extraordinary thing to say'. Mr Toms explained that the firm's position has been overturned by the addition of Gatwick to the range of options that the industry was facing a month ago. With the addition of this option, Mr Toms insisted, BAA needs time to give the new range of choices proper consideration. He admitted, 'we have not looked at great detail at Cliffe', warning that it 'seems to be extremely problematic'.

George Osborne suggested that the Cliffe proposal was something of a 'red herring' as no one in the airport industry was willing to invest at present. Mr Toms said that he thought the Department had undertaken its consultation in good faith but that it would be right to note the scepticism of airlines. New airport sites are generally more difficult to 'get off the ground,' he told MPs, as airline companies had already concentrated resources in areas of core demand - to the west of London.

Mr Osborne wanted to know what could be done to minimise the impact of airport expansion on communities. Mr Toms told him that a 'significant amount' could be done to address this. On air quality technical improvements could minimise effects, while further technological developments and changed operating procedures alongside insulation work on the ground could reduce noise. He noted that better public transport access would be integral to the construction of any additional runway.

Mr Osborne went on to ask if the Government should give BAA the power to fine airlines whose planes went off track. Mr Toms said that he would write to the committee on the issue, as he was unsure of whether BAA or NATS was the right body to fine airlines. Mr McDermot confirmed to the chair that BAA had not requested those powers but that it had been working with airlines at Gatwick to identify the cause of off-tracks.

Mr Osborne told the witnesses that Manchester Airport was 'very good' at getting airlines to stick to tracks but that some specific airlines were particularly poor. In this context a fine would be a useful weapon, he suggested. Mr Toms said that BAA had already pioneered the principle of levying penalty charges for planes that exceed noise levels enforced by microphones. Mr Osborne's response was to point out that these microphones, located as they were on-track, would not be able to monitor flights that went off-track.

Asked by Mr Osborne how the European Court of Human Rights' ruling on aircraft noise would affect the airport industry in coming years, Mr Toms told MPs that the Government was set to launch a noise consultation in coming months and that it was difficult to anticipate the outcome. He thought this would give Ministers additional focus on community concerns. The chair welcomed the prospect of governmental focus.

Mr Osborne suggested that airports need to accept late-night arrivals to accommodate night flight bans in Australasia. Mr Toms informed the committee that the main problem was with early morning arrivals, not late night flights. Few Far East airports had late-night bans as few passengers wanted to arrive for a flight in the small hours. It was suggested by Mr Osborne that it was better for 400 people to be inconvenienced in catching their flight that for thousands to be woken by its arrival. Mr Toms looked forward to changes in flying time that would clarify the situation.

Gwyneth Dunwoody raised the issue of air freight. She noted that freight carriers would lose a third of their capacity if night flying ceased. Mr Toms pointed out that early arrivals from the Far East tended to carry lots of 'belly hold' and that this was indeed at risk. The decision on what to do in early mornings was a trade-off of interests, MPs heard.

Mr Osborne concluded his questions by asking about passenger number and movement restrictions at Stansted. He wanted to know if BAA had exceeded the apparent 15 million limit. Mr Toms said that the restrictions had been flexible and did not limit the number of passengers that could be handled by the existing terminal. He stood by BAA passenger number forecasts when pressed by the chair.

Tom Brake opened his questions by asking if BAA had any inkling of the Government's direction on its consultation. He had heard that Stansted and Gatwick, in that order, were the frontrunners for new runways.

Mr Brake returned to Mr Toms' suggestion that hubs will decline in importance, and asked why it is that there is such a 'clamour' for Heathrow to become a hub. Mr Toms explained that Heathrow is primarily a centre for transport to and from the UK, whereas a US-style hub like Atlanta is less of a destination than a staging post.

Louise Ellman asked for BAA's views on a third short runway for regional traffic at Heathrow. Mr Toms explained that BAA has not fully explored its position yet. Ms Dunwoody expressed surprise that BAA has 'only recently begun this technical work', given its monopolistic position in the south east . Mr Toms insisted 'it would be easy for us to give you a glib answer', maintaining that it is better for the public that the firm does the proper groundwork and presents its findings in May.

Ms Ellman asked what BAA's position is on regional services. Mr Toms pointed out that regional traffic is 'broadly the same as it was ten years ago' at Heathrow, whilst it is 'massively grown' at Gatwick and Stansted. Nonetheless, he insisted that he had not meant that there was no problem with regard to Heathrow - 'there will be pressure for airlines to use those slots as profitably as possible', he admitted, acknowledging that there has been a change in the structure of regional flights out of Heathrow.

Ms Ellman asked if BAA is looking at ways of reducing this process of substitution. Mr Toms replied that BAA is not seeking to manage the distribution of available slots. However, he stated, 'the issue will be addressed in our submission'. On Public Service Obligations, Mr Toms stated that the industry has benefited from liberalisation over the last 20 years. 'For government now to step back in and start allocating capacity…stands a significant risk of eroding those benefits that the consumer has had from the liberalisation of the industry', Mr Toms insisted. 'We are not advocating PSOs', he declared.

'If there is loss of domestic service, it may be because there is more international service', Mr Toms argued, noting 'that may be what customers want'. Ms Ellman asked about BAA's research into substitution between air and rail travel within the UK. Mr Toms undertook to provide the Committee with its research, explaining that the shorter the journeys, the more substitutable rail becomes - given the fixed costs (check in times etc) of air travel. BAA's research is largely based on the Strategic Rail Authority's research, he noted.

In response to Ms Ellman's question about the wisdom of expanding Heathrow in the current economic and housing context, Mr Toms insisted that this is a public policy issue, and that what BAA wants is a clear decision from the government that can be stood upon. Nonetheless, he admitted that the regional policy dimensions of the issue will be acknowledged in the BAA submission.

George Stevenson opened his questions by asking what BAA's profit margin was last year. Mr Toms stated that the 'return on turnover was around 30 per cent', whilst the 'return on capital was about 7.5 per cent'. Noting that BAA has CAA authority to increase its charges to airlines by 40 per cent over the next few years, Mr Stevenson asked what BAA's response to the accusation that the regulator is too lenient on the firm. Mr Toms argued that the return on capital vis a vis the cost of capital is the key comparator between BAA and airlines' profits - insisting that all economists agree that excessive profits are determined by return on capital.

Airlines face competition, Mr Toms argued, but BAA is regulated by the CAA as a means of controlling its charges. Mr Stevenson asked if the increased charges are going to fund Terminal 5 and what proportion of BAA's investment is funded by borrowing. Mr Toms explained that around two thirds are 'revenue based' (which includes BAA's income from other sources). Mr Stevenson asked if BAA has considered other ways of paying for infrastructure that are not so harsh on airlines. Mr Toms replied that this has been examined frequently by the competition authorities - 'it's a sad fact of life, but ultimately the customer will have to pay for investment', he declared.

Mr Stevenson asked what BAA's position on the government giving up its 'golden share' in National Air Traffic Services. 'That is a matter for the government', Mr Toms replied. Mr Donohoe returned to the question of slots and slot optioning. He asked what the price of an individual slot would be. Mr Toms declared that 'the price of every slot is different' - dependent on a range of factors. 'The lowest price is nothing', he admitted. BAA approves of a 'liquid market' in slots, and whilst it does not actively encourage trading, it supports a situation where slots are traded, he explained.

Airports give evident to Transport Committee – 19.03.03

The Transport Select Committee met on 19 March to hear more evidence in its inquiry into aviation. Second to give evidence, after BAA's representatives, were Ed Anderson and RA Lund of Leeds Bradford (LB) Airport; and Paul Kehoe and Natalie Raper London Luton Airport.

Mr Anderson opened his submission by stating that LB is very concerned about its local operator of flights to London's (bmi) attitude towards maintaining services to Heathrow. George Stevenson turned to the issue of charges and the CAA's decision to allow BAA to increase its charges, Mr Anderson noted that bmi is very concerned about the new charges, and has made it clear to LB that it may have to reconsider its position on Leeds Bradford to London flights. Mr Stevenson asked if this could be regarded as an excuse for switching to more profitable slots. Mr Anderson replied that there is a 'whole host' of reasons why bmi might act.

Mr Stevenson asked if air service agreements negotiated by the EU would help regional air services. 'I don't think it would particularly', Mr Anderson replied. Mr Stevenson concluded by asking who owns slots. Mr Kehoe stated that all those parties who pay for it own it. He denied that the airlines own them exclusively. Asked how slots should be allocated, Mr Kehoe replied 'fairly'. He admitted, however, that Luton is not 'slot constrained' in the same way as BAA's airports.

Graham Stringer asked if it matters to LB whether its passengers fly to Heathrow or Gatwick. Mr Anderson explained that the benefit of a service to Heathrow is the interlining that is possible at Heathrow. 'Gatwick is a much smaller service', he went on, and only 25 per cent of them are inter-lining. Mr Stringer asked what LB is doing to retain its services. Mr Anderson complained that it has been a victim of BA's latest review.

Tom Brake sought Mr Kehoe's explanation of how competition might improve within the industry, to which he replied that London Luton has only 5 per cent of the south east/London market. He argued that his airport should grow, in order to provide a benchmark of competition to BAA - 'but at the moment we're a minnow'.

George Osborne turned to the environmental impact of airports, seeking the panel's view on government proposals for fining aircraft that are off-track. Mr Lund explained that LB has been looking at such a scheme - but insisted that 'when there is a deviation, there is usually a reason for it'. As such, he argued that there should not be an automatic scheme. Mr Kehoe explained that Luton has been trialling a system that seeks to use an aircraft's flight management system to 'fly a very accurate course' - rather than the '1950s' system of following land beacons.

Ms Dunwoody intervened, asking if the airport itself can tell when people are off course. Mr Kehoe admitted that the system is currently in abeyance, but it was run in conjunction with the CAA . He added that the power to fine airlines employing noisy aircraft had been very successful - noting that fines raised had been reinvested in environmental measures.

Mr Brake asked if all airlines were as bad as one another in this regard. Mr Lund warned that some modern aircraft have difficulties with their navigation systems. Mr Kehoe declared that the biggest noise problems had been experienced by an airline 'with a harp on the tail' - but added that their aircraft are nonetheless compliant with legal standards. Mr Lund admitted that LB has the same airline and the same problem.

Ms Dunwoody asked about the importance of no frills airlines to the witnesses' airports. Mr Anderson stated that these airlines are very important to its airports. Ms Raper noted that the arrival of low cost airlines has permitted growth at her firm's facilities.

Clive Efford asked what Luton's priorities for expanding air capacity would be. Mr Kehoe replied that Luton would like to see a loosening of planning restrictions, to permit the airport to expand, so that it provides genuine competition to BAA's airports. He complained that the planning framework seems unable to think beyond Luton handling 10 million passengers pa. He argued that there is 'a case for considering the use of Luton in a bigger role'.

On the Cliffe option, Mr Kehoe warned that the presence of bird sites and the cost of the project would be prohibitive. Luton's preference would be to make maximum use of existing capacity (including mixed-mode at Heathrow if necessary), he explained, followed by a 'planned incremental approach' - which spreads environmental 'pain' and economic 'gain' amongst the four London airports. Indeed, he noted, development led by the airport would be very beneficial for Luton, given the closure of the Vauxhall plants. Mr Anderson stated that LB is keen to see Heathrow and Gatwick develop, because they are airports that LB's passengers want to fly to. 'I think that the options are realistic', he added.

On Public Service Obligations, Mr Anderson argued that there should be an allocation of slots for regional airports.

Mr Brake returned to Mr Kehoe's concerns about a Heathrow third runway. Mr Kehoe explained that this would seriously interfere with Luton's ability to fly to the west. Furthermore, he argued that it seems unwise to create a runway just for regional services when there are questions over the airlines willing to run such services. He argued in addition that it would be sensible to go for a full runway if a third runway is to be sought at all.

Mr Brake asked how Luton would like to see transport infrastructure improved alongside airport infrastructure. Mr Kehoe admitted that he was concerned about the lack of attention paid to road and rail links - particularly in respect of other not specifically aviation-related projects, such as the Oxford to Felixstowe rail project and the M1 widening project. Mr Anderson stated that LB would like to see a light rail project to extend to the airport.

Transport Committee hears evidence from Manchester Airport Group – 19.03.03

The final set of witnesses of the session on 19 March were from the Manchester Airport Group - chief executive Geoff Muirhead, group strategy director Rowena Burns and Jonathan Bailey.

Brian Donohoe sought the panel's views on the future of hub airports. Mr Muirhead replied that hubs like Atlanta - where there is mostly inter-lining by a single carrier - are likely to decline. However, he argued, hubs like Heathrow, where there are many services onwards from many operators are likely to thrive.

Mr Donohoe noted that Manchester Airport attempted to establish itself as a hub and 'it didn't really come off'. Mr Muirhead admitted that Manchester hopes to set itself up as a regional hub, in partnership with a dedicated partner - something assisted by the addition of the second runway. Nonetheless, he acknowledged that Manchester could not aspire to the sort of hub status as that of Atlanta.

Mr Donohoe returned to his previous question - to which Mr Muirhead replied that the congestion of airports actually turns transfers into 'a problem', suggesting that this is now a problem at Heathrow. He acknowledged that some airports that are purely transfer-oriented rather than being destinations in themselves are increasingly 'in trouble'.

Graham Stringer pointed out that BAA had argued earlier in the session that inter-lining is in fact a benefit for the UK. Mr Muirhead replied that this is only the case when congestion is not a problem - whilst 'traffic that flies over a country doesn't add much value to the country itself'. Mr Bailey added that 'the importance of transfer traffic diminishes over time' when destination traffic is increasing - although he acknowledged that transfers are important in developing a network.

Mr Bailey pointed out, in respect of the hub point, 'airlines need to take a decision to start a hub' - as Atlanta has a single main carrier, dominating the hub and its spokes.

Louise Ellman turned to the recent cuts in rail services to Manchester Airport. Mr Muirhead stated that the airport was simply told about the cuts, and not consulted formally. He suggested that MAG should be more involved in such decisions, warning that 'the structure isn't there' - although he admitted that the Strategic Rail Authority has a lot on its plate at present. Ms Burns pointed out that MAG is in dialogue with the SRA on rail access, insisting that 'they have consulted us extensively' on the North Pennine franchise.

Ms Ellman went on to ask about air service agreements and their impact on regional air sevices, Dr Bailey replied that 'competence for negotiation of air service agreements is inevitably going to shift towards the European Commission'.

On Public Service Obligations, Mr Muirhead argued that MAG believes that if employed, these should be 'city specific' rather than airport specific. However, he expressed scepticism about the desirability of interfering in the market provision of services through measures such as PSOs.

George Stevenson turned to the matter of slots, asking what MAG's position is on the ownership of slots. Ms Burns replied that airlines do not own the slots, but that MAG has not tested this legally. Insofar as Manchester Airport is seeking to develop regional services, Mr Stevenson suggested that the process of allocating slots is inevitably going to lead airlines into substituting regional services for international ones, which are more profitable. 'I think that's inevitable', Mr Muirhead acknowledged. However, Mr Muirhead was sceptical about Mr Stevenson's call for 'radical' action on slot allocation.

Mr Stevenson suggested that there should be a progressive taxation scheme aimed at encouraging regional services. Mr Muirhead was deeply opposed, warning that aviation is already heavily taxed compared to other modes of transport. He argued that a scheme to put a price on different types of service 'would be a hugely complex area to get into'. Mr Muirhead added that the aviation industry cannot simply be viewed as a UK concern - insofar as it necessarily competes in an international arena.

George Osborne - in whose Tatton constituency Manchester Airport is situated - asked what lessons MAG learned from the process of acquiring its second runway. Mr Muirhead stressed 'you have to be honest about the implications', warning that such projects have to be embarked upon in full awareness of all the implications. He insisted that this was what had taken place at Manchester.

Mr Osborne asked whether the development of airports through the arrival of low-cost airlines has a discernibly different impact on local economic development than airport growth driven by other types of airline. Mr Muirhead replied that there is insufficient evidence to come to a view on this.

Finally, Mr Osborne asked if MAG would like to be given powers to fine aircraft that go off-track. Mr Muirhead stated that MAG would indeed like to see this power, noting that airports already have powers to fine on noise - whilst there is extensive co-operation with airlines on routes, 'there are still a few rogues and you need an ultimate sanction to bring them into line'.

Mr Stringer sought the panel's views on the claim that airlines do not come to Manchester Airport because of the terms of the existing air service agreements. Mr Muirhead noted that Air Jamaica is an example of an airline that is not permitted to fly to Manchester - but he undertook to provide a note to the Committee on the full list.

Mr Stringer also sought Mr Muirhead's view on the suggestion that Manchester is discriminated against by CAA regulation. Mr Muirhead explained that economic regulation of the aviation industry has led to an unfair situation, whereby the congested south east airports are the cheapest to fly from.

Committee chair Gwyneth Dunwoody turned to Bournemouth Airport - one of MAG's other holdings - and asked why it has not taken off as well as expected. Mr Muirhead insisted that Bournemouth continues to function well. He admitted that it is always difficult to grow capacity for aviation where there is not already a strong base.

Business Groups give evidence to Transport Committee – 26.03.03

Six sets of witnesses appearing before the House of Commons Transport Select Committee called for the building of extra runway capacity at Heathrow Airport on 26 March.

The Committee heard evidence from:
David Stewart MP of the Regional Air Access to London Group
Philip Pain, Airport Director, Isle of Man Airport,
Maeve Bell, Chief Executive, General Consumer Council for Northern Ireland
Alan Walker, Head of Consumer Affairs, General Consumer Council for Northern Ireland
Peter Morris, Chief Economist, IATA
Philippe Rochat, Director, Aviation Environment, IATA
John Macdonald, London Airports Project Manager, IATA
Piers Merchant, Director of Campaigns, London Chamber of Commerce
Michael Roberts, Director, Business Environment, CBI
Joe Quill, Senior Policy Advisor, Infrastructure Group, CBI

David Stewart, MP for Inverness East, Nairn and Lochaber, was the first to give evidence, arguing that the peripheral regions of the UK have suffered as a result of the free market, urging the Government to take positive action to deal with the capacity crisis at airports in the South East, if EU initiatives to encourage regional development are not to be set at nothing.

Mr Stewart pointed out that peripheral areas have suffered as the result of a strong trend towards a loss of air services direct to London. He argued that this was the responsibility of the Government rather than the companies involved, and suggested that the Government should change regulations to ensure that regional air services are sustained.

He went further, suggesting that the Government is merely paying lip-service to regional development, arguing that it should be protecting routes rather than being apathetic. Principles of social inclusion should be applied to aviation, he said, describing the lack of runway building since the Second World War as a 'disgrace'. Mr Stewart then suggested a package of measures to improve links and protect regional airways, referring to his written evidence submitted to the committee.

Asked by committee chair Gwyneth Dunwoody why air services should be preserved when they are driven out by market forces, David Stewart said that it is a matter of regional development. Otherwise all jobs would be in the South East, he said. He made clear that the key to solving the problem is direct links to Heathrow and Gatwick, which he said was vital for tourism and business, emphasising that air services and surface public transport are not comparable. The answer would be a dedicated short runway at Heathrow, he said, which could be ring fenced for shorter flights. David Stewart went on to shrug off the suggestion that airlines still need to make money out of operating flights to peripheral regions. 'It has to be dealt with', he said.

Mr Stewart then suggested that regional bodies could have a role, perhaps setting up groups to get hold of 'slots' at airports, and in looking for new ways to use Public Service Obligations (PSOs). Without good air links, the regions would be 'starved', he said.

Mr Stewart went on to call for the building of extra runway capacity at Redhill in Surrey. He dismissed arguments in favour of expanding existing airports like Luton and Stansted, arguing that they do not have good enough transport links into London.

Asked by George Stevenson who owns runway take-off and landing slots, Mr Stewart said that the EU Commission does not believe that slots are owned by airlines, but he thought the UK Government would take a different view of that. He added that the EU should be involved in the allocation of new slots to new entrants, but said that the issue of compulsorily removing slots from companies that already have them could pose problems.

Finally, Mr Stewart expressed concern that if a UK based company were given greater access to the US, involving greater access to Heathrow, this would squeeze regional air services even further out of the market.

Next to give evidence were Philip Pain of the Isle of Man Airport and Maeve Bell and Alan Walker from the General Consumer Council for Northern Ireland.

Peter Pain began by making the case for greater regional access from the Isle of Man to Heathrow, stressing the individual nature of the Isle of Man, given its dependency on air transport and its high average GDP. He described the removal of slots as a 'blow to the economy'.

Mr Pain called for more runway capacity to be provided in the Heathrow area, and at Gatwick, and for Heathrow access to be restored. He also argued that alternatives to Heathrow are not really satisfactory, emphasising the importance of access to the west of London.

Maeve Bell made a similar case for Northern Ireland air passengers, stressing that access to Heathrow is her organisation's number one priority. She called for immediate rather than longer-term actions.

Asked by Clive Efford why the Isle of Man's slots were squeezed out, Peter Pain said that he could see no economic advantage to the move, given that the slots were then used for flights to and from Aberdeen, Barcelona, Boston and South Africa. He said that the Isle of Man now requires a minimum of four slots per day to and from Heathrow.

Overall, the witnesses agreed on the need for a dedicated regional runway at Heathrow, and indicated that they would be willing to look at the possibility of PSOs, although Peter Pain made the point that since the Isle of Man is not a member of the EU, it will not be able, on the current rules, to apply for a PSO.

Next to appear were Peter Morris, Philippe Rochat and John MacDonald of the trade association representing the aviation industry, IATA. After they had made an initial statement, George Stevenson asked them who owns runway slots.

John MacDonald said that the airlines believe the slots belong to them, although he admitted that he understood the arguments against this. George Stevenson found this answer 'strange', given that IATA represents airlines, who all believe that they own the slots.

Philippe Rochat said that the question of slot ownership was a difficult legal issue, and called for a search for a fair allocation, supported by everyone, with neutral slot co-ordinators. Asked about the possibility of auctioning slots, Philippe Rochat said that this would represent another significant cost at a time when the aviation industry is facing serious problems. If slots were to be 'gifted' he suggested that the IATA would advocate allocation by Member States rather than the European Union, under a European framework.

Moving on to environmental issues, Philippe Rochat said that he agreed that it should be a long-term goal of the aviation industry to reduce its environmental impact, but supported emissions-trading as the best way to achieve climate change reduction. He later called for an international emissions scheme for aviation outside the Kyoto framework, which would be as universal as possible.

After the witnesses had said that extra runway capacity at Heathrow, followed by Gatwick and Stansted was their main priority, they went on to call for a single authority to co-ordinate aviation policy and initiate new development. Yet Peter Morris conceded that there were no examples within Europe of major aviation infrastructure development initiated by any nongovernmental body.

The final witnesses were Piers Merchant of the London Chamber of Commerce and Industry and Michael Roberts and Joe Quill from the CBI.

Piers Merchant began by calling for three new runways for the South East by 2030, arguing that the capacity crisis is already threatening to undermine London's economic competitiveness. He also argued against the building of a new airport, arguing that development at Cliffe was not a viable proposal. Mr Merchant went on to call for planning reforms to bring about a 'sturdy and fair' planning system providing certainty, which would benefit the economy.

On planning, Michael Roberts went on to add that where a major proposal of national significance is involved, this should be taken outside the usual local planning inquiry and dealt with at a national level.

Piers Merchant argued against the idea of having co-ordinated hub operations linking Heathrow and Gatwick, claiming that transport between the two would not be sufficiently fast. If better transport was introduced, this could become an option, he said.

Asked by George Stevenson whether, in their view, BAA had not given enough priority to runway investment, the witnesses expressed no view. Pushed further by George Stevenson, Michael Roberts admitted that he would expect BAA to examine future policy for expansion, but said that he had no evidence that it had not done so.
 

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