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Mr. Terry Dicks (Hayes and Harlington): The theme of my hon. Friend's remarks--I apologise for missing the start of his speech--is that such subsidies are like a vegetarian saying that he wants no nuts, tomato or mayonnaise in his diet, which is possible but highly unbelievable. My hon. Friend makes the point, much more eloquently than I can do, that the claim made by the Commission and the airlines that they are not really keen on state subsidies but use them out of necessity is nothing more than a pack of lies.
Mr. Wilkinson: My hon. Friend is more trenchant in his comments but, as usual, is highly perceptive. Like me, my hon. Friend has many constituents whose livelihoods depend on civil air transport and on a vigorous British air transport industry. The Government have been firm, but they must maintain their firm stance on behalf of British airlines against unfair competition.
Mr. Keith Mans (Wyre): I welcome the opportunity to say a few words in support of my hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson) on the important subject of civil air transport. Again and again over the years, we have seen a continental airline ask for money from its Government, and we have been told by the European Commission in Brussels that such aid will be a
one-off payment and the last to the particular airline. On that basis, such aid has been allowed. Again and again, such support has been to the disadvantage essentially of British airlines that are much more commercially oriented, particularly since the privatisation of British Airways.
It goes a bit further than that. If air transport is to become more competitive, more commercial and give a better service to the customer throughout Europe, the only way forward is the way that has been pioneered by airlines in this country--airlines that are commercially viable and that are now the best in the world. Some continental airlines have seen the light. Lufthansa, for instance, is following the same route as British Airways, and that is to the advantage of Europe and customers throughout the European Union.
I also fully endorse the remarks made by my hon. Friend the Member for Ruislip-Northwood about the Commission having negotiating rights with the United States. Not only do continental airlines have to prove their commercial viability but the Commission that has to be made to understand that--before it can take on the responsibility, if it ever does, for negotiating air rights with the United States and other parts of the world on behalf of European Union countries--it too must be seen not to support those who wish to subsidise airlines in their countries.
I strongly believe that we should not give negotiating rights to the European Commission until it stops allowing states within the European Union to subsidise their own airlines. I would also like to see a clear situation in which we have time, after the subsidies have stopped, to see how those airlines perform before any thought is given to giving some of our own rights away to Brussels.
There is no doubt in my mind that there must be a limit to the way in which airlines that are in the public sector continue to receive subsidies. It is all very well to say that airlines in the private sector will be able to compete because they are more efficient, but the problem lies in the way in which some of the subsidised airlines operate. My hon. Friend the Member for Ruislip-Northwood mentioned Iberia and it is a classic case. The subsidised airlines use subsidies, not for infrastructure improvement or to reduce the number of employees and stop overmanning, but to target routes and make it difficult for competitors to operate profitably on those routes in the hope of getting sufficient market share to push competitors off those routes. That is the wrong approach and it will result in profitable airlines being unable to offer the service that they can at the moment and in those airlines that are not profitable asking for more subsidies to fly routes that were not profitable in the first place.
The Minister for Transport in London (Mr. Steve Norris):
I am grateful to my hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson) for giving us the opportunity of this debate today. When he introduced the debate, at a rather unexpected hour, I thought that I perceived a note of mild and customarily gentlemanly disappointment in his voice at the thought that he and I would execute a pas de deux this morning. As an Under-Secretary, I declare myself on this occasion an unsatisfactory substitute. I assure my hon. Friend that, although on this occasion we are using the device of an Adjournment debate and although my noble Friend Viscount Goschen is the Minister for Aviation and Shipping, my right hon. Friend the Secretary of State for Transport takes the issue that my hon. Friend raised today extremely seriously. As I say, I am grateful to my hon. Friend for raising the subject and for expressing himself in such a clear and, if I may say so, trenchant fashion.
We also enjoyed an unexpected but none the less immensely pleasurable minor explosion from my hon. Friend the Member for Hayes and Harlington (Mr. Dicks), who, although he is a parliamentary private secretary for a Transport Minister, was obviously speaking in a private constituency capacity. It would be a shame to lose him. We also heard from my hon. Friend the Member for Wyre (Mr. Mans). My hon. Friends who have spoken are all characterised by the fact that they have taken an interest for many years in the subject. Heathrow is in the constituency of my hon. Friend the Member for Hayes and Harlington, and my hon. Friend the Member for Wyre has long had an interest in aviation matters. I do not believe that there is an hon. Member who has been clearer about his interest in the issue of European state aid than my hon. Friend the Member for Ruislip-Northwood.
Some £56 billion of United Kingdom visible trade passed through British airports in 1994. Each year, expenditure by air travellers visiting the UK, and by foreign passengers on UK airlines, totals nearly£10 billion. Total employment in airlines and airports within the UK is estimated at over 100,000. Air transport is a major industry, and a substantial UK success story, which fully deserves the attention of the House.
My hon. Friend the Member for Ruislip-Northwood will know that the Government, as he suggested, are firmly committed to competition in aviation, because competition is good for our airlines, good for our airports, good for the UK economy, and good for users. It is because we are convinced of the benefits of competition that the Government have long championed the cause of aviation liberalisation in Europe. The liberal bilateral agreements that the UK reached with Germany and the Netherlands in 1984, with Luxembourg and Belgium in 1985, and with Ireland in 1988, gave impetus to the momentum towards liberalisation throughout the European Community. The UK was instrumental in promoting and concluding the series of legislative measures, culminating in the so-called third package, which created the single market in aviation in Europe.
The single European market in aviation has formally existed since 1 January 1993. On international services within the Community, the third package opened up
access to all Community carriers. Member states must use the same criteria when issuing licences on grounds of safety and financial fitness. Member states can no longer favour their national carriers by issuing licences on a discretionary basis, and restrictions on cross-border investment have been removed.
Fares, frequency and capacity are now decided by airlines according to commercial principles, instead of being regulated by member states, subject only to safeguards against anti-competitive practices. The pattern of services can respond freely to changes in the pattern of demand. High-cost carriers can no longer rely on market protection from Governments to ward off more efficient and innovative competitors.
The only remaining restrictions apply on domestic services, and until 1 April 1997 member states may prohibit access to airlines registered in other member states. But that final barrier to access will be lifted in less than 12 months' time. All Community carriers will then be free to compete on all international and all domestic services within the Community. National carriers will no longer have the advantage of protection on busy internal routes from their major Community competitors. Competition will be further enhanced on international routes that are fed by those domestic services. The elimination of the final vestiges of regulated market access will present new commercial opportunities for UK airlines, which they are well placed to exploit with their experience of operating in the private sector.
European liberalisation has already brought pronounced benefits both to users and to efficient airlines. In both international and domestic markets, liberalisation has helped to trigger significant increased competition. For example, 43 new routes are being served, and 38 routes are now supporting an increased number of competitors. I am pleased to say that about a third of the new routes are within or to the United Kingdom.
Customers enjoy wider choice and lower fares. Small independent airlines now have a genuine opportunity to compete by differentiating their product in terms of price and quality. The larger flag carriers that are the target of the increased competition benefit indirectly as the pressures of open competition breed a more commercial attitude and greater efficiency, making them more competitive in the world market. It is true that on some Community routes fares remain higher than users might like to see them. But providing air transport is a high-risk, capital-intensive operation and competitive services may take some time to emerge. The legislative framework within which competition can flourish is in place. We can look forward with confidence to increasing benefits from liberalisation as time passes.
Even in domestic markets, where so far only home-registered carriers have been entitled to compete, the third package has had a number of beneficial effects. In Spain, Iberia's dominance of the Madrid-Barcelona route has been challenged successfully by two small airlines, Air Europa and Spanair. Iberia's share of the domestic Spanish market has fallen from 100 per cent. in 1992 to below 80 per cent. now. In France, Air Liberte has taken on Air Inter on the Orly-Toulouse and other internal routes, with resulting falls in business and economy fares.
I stress again that it is the United Kingdom that has led the way in encouraging free and fair competition. It is instructive and encouraging that the UK register boasts
more privately owned international airlines than any other member state. From BA and British Midland down to the smallest company, each makes an important contribution to the wealth of the UK. They flourish because of the Government's pro-competitive and liberalising policies. They are carrying the message into the heartlands of their competitors, with companies such as Deutsche BA in Germany and TAT in France.
In 1987, as my hon. Friend the Member for Ruislip-Northwood said, we privatised British Airways. Today, as my hon. Friend observed, thanks to Lord King and Sir Colin Marshall, British Airways is widely recognised as about the most successful and profitable airline in Europe. By any standards, it is a major player on the global aviation scene. It has been the model for other European major carriers to follow. Moreover, British Airways has created jobs. As my hon. Friends know, the conventional wisdom in some European countries was that flag-carrying airlines had to be owned by the state and financed by it, to protect employment. British Airways has shown that that proposition was crassly erroneous. In the private sector, BA has increased its work force by about 35 per cent. over the past 10 years. As a result, it is employing more people than before privatisation, but at much higher levels of productivity.
It is worth saying that BA--the same can be said about British Midland, Virgin, Air UK and other operators--has achieved its pre-eminence without a penny of state aid or subsidy from the taxpayer. The BA example is clearly, however, the most spectacular. I am grateful to my hon. Friend for saying that state aid remains the greatest single threat to effective implementation of the single market.
State aid to national airlines has been an integral part of the aviation scene in several European countries for many years, yet it is entirely incompatible with the competitive regime that member states collectively have now established. If there is to be a genuine free market in air transport, the Community must put an end to the injection of public subsidies. They distort competition and penalise efficient carriers in countries that do not provide state aid. They perpetuate inefficiency and discourage innovation, to the detriment of passengers and business. There is no reason why taxpayers should subsidise airlines which, because of their inefficiencies, cannot survive in the marketplace.
As the House knows, the treaty of Rome puts the onus on the European Commission to control state aid. Over many years, we have been pressing the Commission to take a tougher approach towards member states that wish to continue paying outmoded state subsidies. Under the treaty, other member states have only limited powers to influence the Commission's decisions. The UK, however, has taken every opportunity to do what it can to ensure that state subsidies become a thing of the past. I can assure the House that we shall not weaken our efforts.
We have demonstrated our resolve, as my hon. Friend was kind enough to say, to tackle those issues head on by taking the Commission to the European Court over its decision in 1994 to allow the French Government to pay a £2.4 billion subsidy to Air France. Several European airlines, including British Airways and British Midland, have also challenged the decision. For the information of the House, the Government's case is currently stayed at our request, pending the outcome of the airlines' case. The Government had intervened in support of the airlines, and we hope that hearings will begin this year.
The Air France decision represented a major threat to liberalisation and to the interests of UK airlines. It was a massive injection of funds, equivalent at the time of the decision to about 60 per cent. of BA's market capitalisation. Aid on that scale could damage the European air transport industry for years to come.
United Kingdom airlines compete head on with Air France on several routes. They will be severely disadvantaged if Air France can reduce its prices or improve its quality of service as a result of state aid. United Kingdom airlines have to develop their networks out of their own resources. Air France's ability to maintain a wider range of services than it would without subsidy deprives efficient airlines of the commercial opportunities that they are entitled to expect.
Air France produced a restructuring plan to accompany the request for aid. We have grave doubts whether the plan can succeed. It was not based on cost reductions of the sort or on a scale that a loss-making private sector airline would put in hand. On the contrary, Air France intended to purchase a substantial number of new aircraft. That itself was unnecessary, and would have utilised funds that might have reduced the effect of the aid that was sought. A loss-making private sector airline would have to focus on its core activities if it wanted to achieve viability. The Commission's decision did not ensure that Air France financed as much of its proposed restructuring as possible by disposing of non-core assets, which is the obvious route that a private sector operation would take.
All in all, our view was that the Commission made a thoroughly bad decision, apparently without due consideration. We look to the courts to rectify the situation. Meanwhile, we are maintaining the pressure. Air France has realised its investment in Sabena and postponed some of its aircraft orders since the aid was approved. We have pressed the Commission to take that into account in deciding whether final payment of all the aid is justified.
The recent Commission decision to approve a£460 million payment to Iberia is the latest in a long line of disappointing decisions. The Iberia case is not directly comparable with that of Air France. The funding is not on such an immense scale, although it is still very large. Largely for geographical reasons, the immediate commercial threat to UK airlines is not so great. As the Commission has decided that the payment to Iberia is justified as a commercial investment by the Spanish Government as a shareholder, the case raises different issues.
The Commission says that the approved funding is not state aid. The effect, however, will be the same--to shore up an inefficient company and to distort consumer choice. It is the second large payment to Iberia--my hon. Friend drew attention to an extraordinarily large catalogue of payments--over four years. As my hon. Friend said,£670 million was approved in 1992. We are now faced with the latest payment. It is unfair to airlines such as British Airways, British Midland and other UK carriers that compete without subsidy.
We are especially concerned about the possible precedent that could be set for other state-owned airlines that might seek capital injections in future. We could not tolerate a situation in which state aid was allowed to pass
when dressed up as commercial investment, thereby circumventing the Commission's powers to disallow state aid under the treaty. That would undermine all our efforts to close the door on aviation subsidies. The Government have made clear to the Commission their views on that decision, and we are looking closely at its text to see what further options are open to us. My hon. Friend may be assured that the Government will act in whatever way is best to protect the long-term interests of the UK's aviation industry and, indeed, in a way that best promotes our objective of eliminating altogether state subsidies to airlines.
It is worth putting it on the record that not only state aid is a threat to liberalisation. As a few minutes remain, I shall, with my hon. Friend's indulgence, refer to one or two areas where it will be equally important to ensure that appropriate arrangements are in place. My hon. Friends will be aware of the importance, for example, of airport slots. It is unlikely that the growth in transport across the Community will be able to keep pace with the increasing demand for air travel, so congested airports will be increasingly common. We must ensure a fair and efficient system for managing airport capacity if the benefits of the liberalised market are to be realised.
Heathrow and Gatwick are respectively the first and fifth busiest airports for international traffic in the European Union, so the UK's airports have had a head start in developing processes for the allocation of take-off and landing slots. European law has already established the principle of a slot co-ordinator who is independent of airlines and the airport itself. It also gives preferential access for new-entrant airlines into the most congested airports, especially airlines that are willing to compete on monopoly or duopoly intra-Community routes.
The existing EC regulation is now due for review, and the United Kingdom Government are taking an active role in that process. Given the experience of three years' operation of the regulation, we are stressing the need first and foremost for its provisions to be properly implemented in every member state. In particular, that means that allocation decisions must be entirely free from interference by Government or any dominant airline.
We also believe that there is scope for the market to play a greater role in the distribution of slots. We acknowledge, of course, that a free-for-all auction would bring immense practical difficulties, but we are pressing for some trading of slots to be permitted between airlines once they have been allocated by the co-ordinator. That would tend to channel slots towards airlines that value them most, and strengthen the link between provision of services and consumer demand.
The second potential threat to liberalisation is air traffic control constraints, as delays add to the operating costs of airlines. Following UK proposals in the late 1980s, the European civil aviation conference launched initiatives to increase airspace capacity: through the establishment of European-wide flow management; by harmonising and integrating European air traffic management; and by increasing capacity in and around airports. In Europe, since 1990, air traffic control delays have halved in duration, while traffic has increased by an average of5 per cent. a year. The United Kingdom wholeheartedly supports those initiatives.
Restrictions on the provision of ground handling services at Community airports are another potential brake on liberalisation. At some airports, monopolies run by the
airport authority or the dominant carrier provide inefficient or unduly costly services. We have therefore been a strong supporter of moves to open up the ground handling market.
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