CAA to End Air Fares Regulation

Date: 20 November 2006

The Civil Aviation Authority (CAA) announced today that it has decided to remove its regulation of long-haul air fares because of greater competition in the airline market.

The CAA will discontinue fares regulation in two stages. The first will cover long-haul routes other than UK-USA and will take effect from 1 December 2006. The second stage, covering UK-USA routes, will be deferred until other pricing restrictions in the UK-USA market are removed. This signals the end of more than 30 years of fares regulation by the CAA.

In reaching its decision, the CAA has taken account of a number of significant changes to the long-haul market, including:

· The gradual liberalisation of air transport markets, such as UK–India
· Cheaper and more widely available fares for travel via an intermediate stop
· More intense competition between airlines
· An increase in the range of fares and products available, now that airlines price more competitively
· Greater transparency through the internet, allowing the consumer to make informed choices about air travel by comparing prices and alternatives.

The CAA consulted consumer bodies as well as the aviation industry prior to taking this step: there was a general consensus that the removal of fares regulation was appropriate in the context of today's market.

Harry Bush, Group Director of Economic Regulation, announcing the CAA’s decision, said: “This is a historic step. The CAA has regulated fares for more than 30 years. Airline competition has now reached the point where it is simply no longer appropriate for a regulator to dictate fare levels.”

The CAA has issued a decision document with more detail which can be downloaded at www.caa.co.uk/farespolicy. The original consultation document can be downloaded at www.caa.co.uk/docs/589/20060803ConsultationDocument.pdf

For further press information contact Chris Mason on: 020 7453 6026.

Notes to Editors

The current fares regulation regime was created in the 1970s when there was only limited competition between airlines, and it was considered normal for fares to be set by international agreement. Although its preference has generally been for airlines to set fares according to their own commercial judgement, the CAA has, in the past, seen a need for a safeguard against certain passengers being overcharged where competition was lacking.

This need for fares regulation has, however, been declining as airline markets have become more competitive. Fares within the EU, including domestic fares, have already been effectively deregulated since the creation of the single EU aviation market in 1993. However, in long-haul markets, regulation has persisted, although it has been diminishing. In 2006, the CAA regulated around 40 long-haul routes – those where competition is most constrained by government limits on which airlines can fly and how often. Regulation on such routes was confined to the fully flexible economy fares, i.e. those applying to last-minute, changeable, refundable economy tickets, where airlines generally have the least incentive to compete on price. Available data suggests that in recent years fewer passengers have been buying such fares in any case, and they now form only a tiny proportion of the hundreds of thousands of fares available in the market.

The CAA is committed to the principles of good regulation and to keeping its
regulatory policies under review. It is the CAA’s belief that the more competitive market means that continued day-to-day regulation of fares is no longer appropriate. It seems most unlikely that the CAA would see a need to introduce such safeguards for passengers were it considering the issue afresh today. UK competition law has been strengthened considerably since the CAA’s fares policy was last reviewed, and would provide a backstop against any serious competition problems in the market.

The first stage of removing regulation will cover routes other than UK-USA and takes effect from 1 December 2006. The second stage, covering UK-USA routes, will be deferred until other pricing restrictions (which the UK Department for Transport asks the CAA to apply on behalf of UK airlines denied access to the US domestic market) are removed, most likely when the UK-USA market is liberalised. These other restrictions (commonly known as the ‘sum-of-sector’ policy) limit the ability of airlines to offer fares for travel via an intermediate point that are lower than those available on direct UK-USA services. The availability of such lower-price indirect alternatives is a key element in the CAA’s reasoning for removing regulation, and so the CAA believes the current UK-USA scenario justifies deferral for now.

As a result of the first stage, regulation will be removed from flexible economy fares to Israel, Russia, Egypt, Ghana, Mauritius, Nigeria, South Africa, Bangladesh, India, Pakistan, Japan, Thailand, Mexico and Brazil.