My right honourable friend the Secretary of State for Transport (Ruth Kelly) has made the following Ministerial Statement.

I am today announcing a review of the economic regulation of the UK airport system, supported by a panel of experts. This recognises the points made by the Competition Commission in its interim report this morning, together with those of the aviation industry and other key stakeholders, about the potential shortcomings of the current regulatory system. 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.

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, which has opened up opportunities that for many simply did not exist before. But this progress does not come without challenges, 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 providing the right incentives to deliver necessary investment and ensure that the owners of UK airports are able to finance that investment. I welcome the Competition Commission's views, among others, that the current system needs to be reviewed to ensure it is effective for the 21st century.

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 regulatory systems in the country. Much has changed since then, and there is an urgent need to consider how the framework needs to be updated to reflect today's realities. In particular, this work will look at how best to provide incentives to:

improve the passenger experience;

encourage appropriate and timely investment in additional capacity to help deliver economic growth in line with wider government policy;

and address the wider environmental impacts of aviation on airport development.

In taking this work forward, I am keen that we identify and learn from best practice from the regulatory frameworks in other industries and the Government's better regulation strategy.

We have already said in the Government's response to the House of Lords Select Committee inquiry on economic regulation that, if particular issues were identified as part of the Competition Commission's inquiry, we would consult at the appropriate time on the wider economic regulatory role of the CAA including the way in which airport regulation operates.

The work I am announcing today will be taken forward to 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 me to provide well informed evidence to the Competition Commission for their inquiry, and allow me to respond to any relevant recommendations. My department will be advised by a panel of independent experts led by Professor Martin Cave.

The Competition Commission's report also raised a number of other issues, to which the Government will respond in due course.