COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE ADMINISTRATIVE COURT
Mr Justice Collins
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE MAURICE KAY
LORD JUSTICE RIMER
| THE QUEEN ON THE APPLICATION OF EASYJET AIRLINE COMPANY LIMITED
|- and -
|CIVIL AVIATION AUTHORITY
|- and -
|GATWICK AIRPORT LIMITED||Interested Party
for the Appellant
Michael Beloff QC and Gemma White (instructed by Legal Adviser to the CAA)
for the Respondent
Thomas Sharpe QC and Conall Patton (instructed by Herbert Smith LLP )
for the Interested Party
Hearing dates : 25 & 26 November 2009
Crown Copyright ©
Lord Justice Dyson:
The statutory framework
"7. [The relevant statutory framework is] contained in the 1986 Act and the [1986 Regulations]. Gatwick is an airport designated by the Secretary of State under s.40(10) of the Act which means that the defendant must impose conditions which regulate the maximum amounts which may be levied by way of airport charges. In imposing any conditions (which extend to conditions as to accounts) the defendant is required by s.39(2) to act:-
'… in the manner which it considers is best calculated:-
(a) to further the reasonable interests of users of airports within the United Kingdom;
(b) to promote the efficient, economic and profitable operation of such airports;
(c) to encourage investment in new facilities at airports in time to satisfy anticipated demands by the users of such airports; and
(d) to impose the minimum restrictions that are consistent with the performance by the CAA of its functions …'
Users are defined in s.82 to include (inter alios) airlines and passengers.
8. S.40(3)…….requires the imposition of 'such conditions as the CAA considers appropriate" for regulating the maximum charges over successive 5 year periods. S.40(4) empowers the CAA to modify existing conditions for a succeeding 5 year period. S.40(5) provides:-
"(5) Without prejudice to the generality of subsections (3) and (4), conditions imposed or modified in pursuance of those provisions-
(a) may provide-
(i) for an overall limit on the amount that may be levied by the airport operator by way of all airport charges at the airport, or
(ii) for limits to apply to particular categories of charges, or
(iii) for a combination of any such limits;
(b) may operate to restrict increases in any such charges, or to require reductions in them, whether by reference to any formula or otherwise;
(c) may provide for different limits to apply in relation to different periods of time falling within the period of five years for which the conditions are in force.'
S.40(9) requires the CAA to make a reference to the Competition Commission (CC) before imposing or modifying any condition.
9. S.43 provides for what a reference must cover. Broadly speaking, it will require the CC to investigate and report on what are the maximum amounts which should be capable of being levied by way of airport charges and whether the airport operator has since the last reference pursued a course of conduct which has or might be expected to have operated against the public interest. This case does not concern any issue other than the appropriate maximum charges. S.44 requires the CAA to cooperate with the CC and give it any information which may assist it in carrying out its investigation and enables it to specify any view it may have formed as to what the maximum amounts should be. In reporting, s.45 requires the CC to reach definite conclusions on the questions put to it, giving 'such an account of their reasons for those conclusions as, in their opinion, is expedient for facilitating proper understanding of those questions and of their conclusions' ( s.45(1)(a) ).
'The Commission's conclusions on a reference under s.43(1) so far as relating to the maximum amounts referred to in paragraph (a) of that provision shall take the form of recommendations as to what those maximum amounts should be during the five years in question; and any such recommendations may do any of the things referred to in paragraphs (a) to (c) of section 40(5).'
10. On receiving the report from the CC, which the CAA must publish (subject to questions of redaction if necessary to protect commercially sensitive information or information which it would not be in the public interest to disclose), the manner in which the CAA must deal with it is set out in s.46. S.46(1) requires the CAA, once it has the report, to impose conditions or modifications. S.46(4) and (5) indicate that the CAA is not bound to follow the recommendations of the CC. So far as material, they provide:-
'(4) Before imposing any conditions or making any modifications … the CAA shall have regard to the recommendations [as to what the maximum amounts should be]
(5) Where the CAA has imposed any conditions or made any modifications … it shall publish the following matters, namely –
(a) particulars of the conditions or modifications in question, and
(b) insofar as those conditions or modifications do not accord with the recommendations [of the CC], a statement of the CAA's reasons for not implementing the Commission's report.'
11. The CAA's duties once it has received the report from the CC are further spelt out in the 1986 regulations. Regulation 12 provides:-
'(1). Where the CAA has received a report from the Commission and is required by sections 40(3), (4) or 46 of the Act to impose or modify a condition in relation to an airport, it shall publish notice of the conditions or modifications it intends to impose; and insofar as the proposed conditions or modifications do not accord with the recommendations made by the Commission as to what the conditions or modifications should be, the notice shall include a statement of the CAA's reasons for not implementing the Commission's report.
(2) The notice shall be published in such manner as the CAA considers most suitable for bringing it to the attention of the airport operator and other persons who, in the opinion of the CAA, would be affected by or be likely to have an interest in the proposed conditions or modifications.
(3) A decision as to the form of the conditions or modifications to be imposed shall be taken only by a member of the CAA after considering any written representations served on the CAA within 30 days of the date of publication of the notice given by the CAA pursuant to paragraph (1) of this regulation.'
Regulation 18 provides:-
'The failure of the CAA to give notice or publish any particulars in the time or manner provided for in the Act or in these Regulations or any other procedural irregularity shall not invalidate the action taken by the CAA, and the CAA may, and shall if it considers any person may have been prejudiced, take such steps as it thinks fit before reaching its decision to cure the irregularity, whether by the giving of notice or otherwise.'"
"The current reference to the Competition Commission (CC) is only part of the quinquennial review process, the final determination of charges being by the CAA in the first quarter of 2008 after taking into account our recommendations and a further round of consultation with BAA, the airlines and other interested parties. Prior to making the current reference, the CAA encouraged a process of 'Constructive Engagement' between BAA and the airlines, with the aim of their reaching agreement on the main issues. That process has continued throughout the six months of our inquiry. During this period BAA has made substantial changes to its future capital expenditure (capex) programmes at both Heathrow and Gatwick. The scale of these increases in capex is surprising coming as they do at the very end of a lengthy process of consultation. There have also been significant increases during the reference in forecast operating expenditure (opex) (primarily to improve security service standards following significant increases in security requirements in 2006). It is unusual for there to have been so many substantial changes to key inputs into a pricing determination during the course of a CC inquiry. The consequence is that a number of them will require further detailed examination by the CAA before it can put forward its final proposals. There are also a number of other outstanding issues for consideration by the CAA."
"We consider that the CAA's treatment of the cost items that it allowed for separately (for example, security costs, the net cost of opening Terminal 5 and closing Terminal 2, night-noise costs, the cost of the Heathrow Express and pension costs) is broadly sound, although we have revised the treatment of several of these cost items to take account of more up-to-date information. In particular:
(a) Additional security costs, including the most recent BAA projections of additional costs not only to meet the current service standards but also to meet an improved security standard adopted by BAA, that queue lengths should not exceed 5 minutes for 95 per cent of the time (see paragraph 6.40). We considered whether to disallow these costs, given that airlines were opposed to this revised standard and that BAA, as it acknowledged, failed to consult with them, although the revision was supported by the CAA. On the other hand, increased expenditure is likely to be desirable, first to improve the resilience of BAA's security operation, which has been the source of extensive criticism by airlines and others; and secondly to meet the additional security standards we recommend in paragraph 6.33 et seq. As we note in paragraph 6.34, revisions to the current security service standards are subject to further consultation between BAA, the CAA and the airlines, following which we recommend that the CAA examine the appropriate level of security costs to be allowed for in airport charges to take into account the final standards agreed for the SQR."
"1.12 While this document constitutes notice by the CAA of the conditions it intends to impose for the purposes of Regulation 12(1) of the Civil Aviation Authority (Economic Regulation of Airports) Regulations 1986, some of the proposals in this document are necessarily provisional in nature. In its final decision on the conditions the CAA will take into account the representations made in response to these proposals as well as any new or updated information that emerges during the period of consultation up to the end of January 2008.
1.17 The CAA proposes to publish its final decision in early March 2008 that will set the price controls from 1 April 2008. Consequently, the CAA will not be able to take into account any further submissions made to it after the oral hearings at the end of January 2008.
6.30 The CAA is concerned about the scale of BAA's revised security cost estimates and the fact that it has not had the opportunity to consider BAA's projections in detail nor to discuss these with airlines or other interested parties. Airlines have also expressed concerns, in particular around the extent of the cost increases proposed and the lack of transparency over BAA's cost modelling of these standards. For these reasons, the CAA intends to initiate a work programme over the next two months through which it will scrutinise these costs thoroughly and will work closely with BAA and with airlines to ensure that all parties have a clear understanding of the costs associated with delivering higher levels of queuing standards.
6.31 The CAA will ensure that any additional costs allowed for in price caps are consistent with the service standards agreed through the service quality regime and with the CAA's statutory duties, in particular the duties to further the reasonable interests of airport users and to promote the efficient, economic and profitable operation of airports. As a holding position, the CAA has adopted the Commission's projections of security costs (net pensions costs) in the modelling for this document."
"Over the last few weeks there has been a substantial amount of productive engagement between BAA, airlines and the CAA on issues associated with the setting of price controls at Heathrow and Gatwick airports from 1 April 2008. It is apparent to the CAA that much progress has been made, but there remain a number of topics on which continued engagement between BAA and its airline users may yield further benefit. Against this background, and given the commitment to the review shown so far by the various parties, the CAA wishes to ensure that all parties are aware of the process for the remaining stages of the review of the price controls at Heathrow and Gatwick airports.
On 20 November 2007 the CAA published for consultation its proposals for price controls for Heathrow and Gatwick airports for the five years from 1 April 2008 to 31 March 2013. In formulating these proposals the CAA had regard to the recommendations of the Competition Commission in its report (published by the CAA on 3 October 2007) and built on agreements reached between the airports and airlines through the process of constructive engagement at the two airports as well as over two years of consultation. The CAA invited written responses to its proposals by 21 January 2008 to be followed by oral hearings with the main stakeholders to be held at the end of January.
The CAA's document recognised that in certain respects some of its proposals were necessarily provisional in nature. The CAA's final decision on the price control conditions would therefore take account of the representations made in response to its proposals as well as any new or updated information that emerged during the period of consultation up to the end of January 2008. The CAA's proposals document identified a number of specific areas where material new information either had been received from BAA shortly before the CAA published its proposals that it had not been possible to reflect in the proposals or was likely to emerge subsequently through the continuing process of constructive engagement. In addition, at the industry seminar held on 3 December 2007 the CAA described the issues that were still outstanding, how they were being taken forward and, where possible, the scale of their potential impact. (The CAA subsequently published on its website the presentation it gave at the seminar). These issues included:
(i) Operating expenditure, including the costs of meeting security requirements and service standards;
(ii) Capital expenditure, in particular the timing and scope of particular projects;
(iii) Cost of capital and financeability;
(iv) Gatwick traffic forecasts; and
(v) The treatment of Heathrow expansion
The CAA expected many of these significant issues to be taken forward, and where possible resolved, through further airport/airline discussion during the final two months of the process of constructive engagement. In deciding the most suitable process for the remaining stages of the review the CAA has had in mind the need to ensure proper process while allowing the CAA to be in position in March to make its final price control decision on the basis of the most up to-date information and analysis. The CAA considers it most likely that this will enable it to reach a final decision that will best meet its statutory objectives in section 39 of the Airports Act 1986.
In its November consultation document the CAA invited written responses by 21 January 2008. In October 2005, the CAA set out the process it would follow for the review. The CAA said that it would not rule out responses made after the deadline it had set but could provide no general assurance that it would be able to take account of 'late' responses. Having reviewed its processes the CAA is proceeding as follows:
Written representations should be made to the CAA by 21 January 2008, the original date, on the basis of respondents' latest information. This will allow the CAA to review the responses and publish them promptly, as they will be a key background to the discussion at the oral hearings that are being held by the CAA on 28 and 29 January 2008.
Where outstanding issues are the subject of continuing dialogue between airlines and airports, the CAA encourages the parties to make continuing efforts to achieve resolution by the end of January. These issues should be identified in submissions made by 21 January 2008.
The CAA will not be able to take account of any written or oral representations made after Thursday, 31 January 2008. This is therefore the final deadline for any information resulting from constructive engagement.
"BAA believes that its modelling approach is robust and therefore the costs that were presented to the tripartite meeting on 19 December 2007 (ref. BAA-Q5-586) are an accurate representation of the costs that will be incurred by BAA in order to provide the agreed 95%: 5 minute service level within a "more than one bag" security regime.
BA believes that BAA's modelling adds contingencies at all stages, resulting in an inflated forecast of the number of lanes required and the costs for central search. We believe that 3 fewer lanes are required and that at least £10m of annual opex can be reduced compared with BAA's current estimate for central search.
Most of the work has concentrated on the central search costs because we believe that this accounted for the major part of the costs as well as the major part of the cost increase. Information provided last week by BAA shows that the other security costs are just as significant as central search, however it has been difficult to examine this and the data that we have seen does not account for the large increases proposed."
"…what we have set out in a note we put on the web I think last week…was that there are some continuing constructive engagement discussions going on. The last dates for submission for anything is the 31st. If at the end of these sessions parties feel there are points where they need to add some further clarification to what they have said, then they may put something further in, but everything has to be in by the 31st and that is the final deadline. "
"(ii) The airlines repeatedly suggested to BAA that:
(a) The airlines and BAA work collaboratively to determine the reasons for the differences between the modelling.
(b) The airlines would welcome BAA running the CAST model to verify the findings of the BA simulation model.
(c) The airlines would like to collaboratively devise an approach with BAA that both parties agree would accurately evaluate the additional infrastructure requirements to accommodate any increases in demand caused by potential extreme exogenous shocks.
(iii) Until today, 31st January, BAA's position has been that there is insufficient time left. However, some of the information requested has been provided today and the airlines are willing to consider further work if this is of benefit to the CAA."
"Finally with respect to Gatwick, we highlight, as with Heathrow, we have not been able to review non central search costs and therefore believe the CAA should review and scrutinise such cost closely as we are concerned these too may contain excessive contingency and associated cost".
"40. Airlines have spent more than two months considering these issues in detail with BAA and have struggled to get to the bottom of BAA's proposal. Nevertheless, airlines have been able to identify enough shortcomings in BAA's modelling of central search costs to cast doubt over the rigour of BAA's modelling of other elements e.g. the additional costs of compliance and staff/transfer search where BAA has failed to provide much support for or validation of its proposals.
41. In order to facilitate debate at the Panel ERG has set out four potential options for dealing with this:
· Option 1 – accept BAA's proposal in full. This option does not seem credible given the scale of the increases proposed, the lack of detailed explanation from BAA and the modelling issues that have been identified by airlines.
· Option 2 – retain the current (Nov 07) numbers in price caps with an undertaking to carry out a systematic audit and review of BAA's projections over the spring with a view to adjusting prices in 2009/10 if BAA is able to provide robust evidence to support its projections. The advantage of this approach is that it signals publicly to BAA that we take a very dim view of BAA's approach and that BAA must go much further in justifying and explaining cost increases of this magnitude to both the CAA and to airlines. This would also reverse the perverse situation in which the CAA and airlines are seeking to justify reducing BAA's projections and would instead place the onus on BAA to properly substantiate and validate its proposals. The disadvantage is that this approach creates uncertainty over the settlement as a whole and is likely to have wider implications for the implementation of the service quality regime in particular.
· Option 3 – present our misgivings to BAA and give them the opportunity to present a more robust case for including these costs. However, it seems unlikely that BAA would be able to provide much more evidence in the timescales available than it has already exhibited.
· Option 4 – apply judgment to reach a view on the appropriate level of costs on the basis of the material that BAA has provided.
· (a) one approach would be to accept the airlines proposed reduction to central search costs (i.e. £16m p.a.) and apply an aggressive efficiency factor (e.g. 3% p.a.) to the remainder of security costs;
· (b) an alternative would be to base the settlement on a one-bag scenario and effectively disallow the costs BAA has identified for moving back to a more than one-bag approach."
"1. BAA/Q5/608 sets out a high-level summary of the numbers behind BAA's road map. In relation to the summer 2006 base: please disaggregate these costs by central search, transfer, staff, patrolling, control post or other split as appropriate (where you have included estimates or made pro rata adjustments, please set out details of your assumptions.)
2. Please provide an equivalent disaggregation for BAA's most recent projection of security costs (i.e. those underlying BAA/Q5/621).
3. For each of these submissions, please also provide the same disaggregation split by man-year.
4. Please provide a copy of the model(s) that you have used to support your projections of additional security costs.
5. There appears to be a difference between BAA and the airlines regarding the performance standard to which BAA is planning and resourcing. The airlines' modelling appears to suggest that BAA should plan to fail the 5 minute central search target on up to 5% of occasions (i.e. so that no rebate of bonus would be due). BAA's modelling suggests that it is resourcing to achieve a higher certainty of exceeding the 95/5 standard, which might suggest an in-built upward bias to opex.
Joint response by BAA and BA on modelling of central search
6. Table C on page 5 of the submissions sets out details of BAA's assumptions on central search and other security costs. Please provide more details of, and evidence to support, the £700k you have allocated for cleaning/waste/equipment.
7. Please provide evidence to support your projection of 'Blackjack' costs (e.g. contacts with suppliers).
8. In relation to training, communications, cleaning, the CAA is concerned that provision for these costs may already be included in the opex baseline. Please provide evidence to support your view that these costs are incremental.
9. Table 4 sets out a reconciliation to BAA's financial plan and includes a row for 'staff costs (incl pension adjustment)'. Please provide details of the adjustment that has been made.
10. Table 4 includes a provision for '3rd Party Agency' of £2.8m. Please provide more details of, and evidence to support, these costs. How is this item accounted for in Table C?
11. Please confirm whether the pension costs included within the additional staff costs are based on accounting (service cost) cost rather than cash.
12. Appendix 12 summarises BAA's evidence on the impact of lifting the 1 bag restriction on images per pax. The appendix notes that the impact of laptops and bags was based on surveys examining these items. Please provide more details of these surveys.
Security Cost presentation for CAA / Gatwick Airlines / BAA
Gatwick tripartitite meeting (BAA/Q5/586).
13. Slide 7 refers to a DfT review and audit of other areas which led to an increase in perimeter patrolling and external control posts, including airside control zones. Please confirm when this audit and review concluded. Please provide more details of the changes to man-year requirements and costs that were implemented as result of this audit. Please also provide a copy of the output of the review and audit (e.g. DfT report).
14. Slide 12 refers to a '23% improvement included in base' as well as further productivity assumptions which were built into the forecasts. Please set out details of how these efficiency assumptions were incorporated into BAA's July 2007 projections of security costs.
15. Slide 15 refers to a 'Review of Performance - both Central Search and Others' and notes that this process was assisted by DfT and Group Security. The slide suggests that this review led to a requirement for - 171 additional staff plus additional 'Blackjack' contractors. Please provide a report or other output which summarises the findings of this process.
16. Slide 19 shows modelling of the trade-off between improved queuing standards and additional costs. Please provide the underlying data for this analysis (NB this may be addressed by question 4 above).
17. Slide 21 suggests that the additional 87 man-years required for central search will cost £4.4m. Please provide details of the assumptions which underpin this calculation.
18. Slide 22 refers to the requirement to meet new Vehicle searching requirements which came into effect from May 2007. Please provide details of the contracts and / or tender document put in place with Servisair and PACE to fulfil this requirement."
"If airlines had had access to BAA's model, they could have run a variety of alternative service options though it, or through any improvements to that model, and seen what difference it made to resource requirements. Our perspective on such data might have been very different from that of BAA, which was concerned to achieve the maximum earnings from any hours and secure the maximum cushion on its levels of staffing."
"The CAA has listened carefully to the arguments advanced by both sides in bi-lateral and tri-lateral meetings to discuss these complex issues in some detail. In parallel, the CAA has undertaken it own detailed review of BAA's analysis and modelling assumptions".
The grounds of challenge
The first ground: the failure to consult the airlines after the 31 January 2008 deadline was unfair.
Summary of the parties' submissions
Is regulation 12 sufficient to meet the requirements of fairness?
"So far there is in our judgment nothing in the scheme which blocks the application of the longstanding default principle that the common law will supplement such procedures to the extent necessary to ensure that they operate fairly".
"To use the phrase which better expresses the underlying concept, what the requirements of fairness demand when any body, domestic, administrative or judicial, has to make a decision which will affect the rights of individuals depends on the character of the decision-making body, the kind of decision it has to make and the statutory or other framework in which it operates. In particular, it is well-established that when a statute has conferred on any body the power to make decisions affecting individuals, the courts will not only require the procedure prescribed by the statute to be followed, but will readily imply so much and no more to be introduced by way of additional procedural safeguards as will ensure the attainment of fairness. It follows that the starting-point for the examination of all the appellants' submissions on this aspect of the case is the Act of 1982"
"…(1) where an Act of Parliament confers an administrative power there is a presumption that it will be exercised in a manner which is fair in all the circumstances. (2) The standards of fairness are not immutable. They may change with the passage of time, both in the general and in their application to decisions of a particular type. (3) The principles of fairness are not to be applied by rote identically in every situation. What fairness demands is dependent on the context of the decision, and this is to be taken into account in all its aspects. (4) An essential feature of the context is the statute which creates the discretion, as regards both its language and the shape of the legal and administrative system within which the decision is taken. (5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result; or after it is taken, with a view to procuring its modification; or both. (6) Since the person affected usually cannot make worthwhile representations without knowing what factors may weigh against his interests fairness will very often require that he is informed of the gist of the case which he has to answer."
Was the consultation that was undertaken adequate to meet the requirements of fairness?
"Whether the model has weaknesses is a matter on which consultees may properly have something to say. Indeed, they already do have things to say on the basis of the read-only version, and attention is properly paid to their representations. The carrying out of additional tests that are possible only with the fully executable version does not give rise to any difference of principle. On the face of it, to limit the extent to which consultees can engage in the legitimate task of testing such an important element in the appraisal process does seem to me to be unfair."
The second ground: the regulation 12 issue
"I did at one stage wonder whether the notice was indeed within Regulation 12 on the basis that there were no firm proposals in a number of respects. Regulation 12 requires that the notice should contain the conditions or modifications the CAA intends to impose. The lateness of the increased security costs made it impossible to reach a firm view on this major issue and there were other investigations to be made as a result of the CC's recommendations. It would have been open to the CAA to defer the imposition of Q5 for up to 12 months, but in the end the claimant has not submitted that that course should have been adopted. Suffice to say that there were good reasons not to do that. But, as was made clear in Paragraph 20 which I have referred to, the intention to reach a particular figure was expressed albeit it might change as a result of the further consultation or CE to be carried out. Thus I am satisfied that the notice did comply with Regulation 12."
Lord Justice Maurice Kay :
Lord Justice Rimer:
I agree with both judgments.