Terms of Reference

Background

The UK aviation industry plays a critical role in our economy contributing more than £11 billion to our national wealth and directly supporting around 200,000 jobs. The industry has seen significant change in recent years with our more global economy increasing the need for international movement of people and goods; and greater airspace liberalisation allowing passengers to benefit from more choice of flight destinations at lower prices. But this progress does not come without challenges, that we must face up to, not least the economic constraints created by a lack of airport capacity in the UK and the global impacts of climate change.

In 2003, the Government set out a sustainable framework for the development of airport capacity over the next 30 years in the Future of Air Transport White Paper. This recognised the need for some expansion of airport capacity, which is why my Department recently consulted on Adding Capacity at Heathrow Airport. 

Economic regulation can play an important role in maximising the effectiveness of scarce capacity at airports in the South East, for example by ensuring it provides the right incentives to deliver the necessary investment and ensuring that the owners of UK airports are capable of financing that investment.  The Government recognises the Competition Commission's concerns, and those of others, with the current regulatory system.   

It has been over 20 years since the Airports Act 1986 put in place the current regime of economic regulation and as such it is one of the oldest economic regulation systems in the country which was originally designed at the time of BAA's privatisation, and did not envisage the significant changes in the aviation industry which have occurred since then.  In particular, it did not consider how major expansions in airport capacity - such as those we are currently contemplating - should be financed and delivered.

Scope of the work

This work is expected to cover three key areas:

(i) What should be the objectives of effective economic regulation of airports?
(ii) What are the weaknesses in the current systems of regulation?
(iii) What lessons can be learned from alternative regulatory systems?

The Review will take into account the Department's commitment to the aims of the Government's better regulation strategy and the work will ensure that the need for sector-specific regulation and the administrative costs of that regulation are kept to the minimum necessary.

Administration

The work will be undertaken by the Department which will be advised by a panel of experts covering a range of key stakeholder groups. The Panel Chair will be Professor Martin Cave of Warwick University who is an expert on economic regulation.

The work will complement the independent inquiry of the Competition Commission on its market review of BAA and the independent Strategic Review of the CAA being undertaken by Sir Joseph Pilling. It will allow the Department to provide well informed evidence to the Competition Commission for their on-going inquiry, and to respond to any relevant recommendations.

The Department will be seeking evidence and views from a range of key stakeholders, including of course the CAA who have over 20 years experience of regulating airports within the existing legislation.

Timing

If legislation is required as a result of this work, it would be taken forward in a future legislative session. Therefore we will not make changes to the basis on which the current price caps at Heathrow and Gatwick airports are set.  This also applies to the cap which will take effect at Stansted from 1 April 2009.