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Mr. Brian H. Donohoe (Cunninghame, South): Will the hon. Gentleman give way?
Sir Peter Fry: I am sorry; I have only a short time left.
The Secretary of State for Transport (Sir George Young): I am grateful to my hon. Friend the Member for Wellingborough (Sir P. Fry) for raising what he rightly described as a very important subject, and bringing his insight and experience of civil aviation matters to our debate. If I do not manage to deal with all his questions, I will indeed write to him and be as helpful as I can.
Let me make two points clear at the outset. The first relates to the position being taken by the United Kingdom in its current negotiations with the United States, which will resume in Washington on 4 February. I hope that the House will understand that it would not be appropriate for me to go into details of the UK's negotiating position here: it would make life much harder for the Department of Transport negotiators if their US counterparts were able to formulate a position based on their reading of Hansard.
We have adopted a robust negotiating posture in the negotiations--so robust, indeed, that the Americans withdrew from them last August. We are beholden to no particular sectional interest in the United Kingdom. Let me respond to the point raised by my hon. Friend at the end of his speech by expressing the hope that the
UK Government will be able to reach a liberalising deal with the US, to the benefit of consumers, UK business and airlines generally; but I have no quarrel with his broad description of our overall objectives.
Mr. Donohoe:
Will not the whole process of the bilateral discussions be improved and strengthened, given that the Governments of both countries have perhaps been dragging their feet in terms of the proposed alliance between British Airways and American Airlines? Will not attention be focused on the process in a way that it may not have been so far? That is why we have been negotiating, or attempting to negotiate, for so long.
Sir George Young:
I think that I agree with the hon. Gentleman. My own view is that it is in everyone's interest for a liberalising agreement to be reached between the UK and the US, involving more competition, more services, more innovation and more competitive tariffs, but there are difficulties that need to be resolved before we can arrive at that point.
The second qualification that I need to make clear at the outset relates to the proposed alliance between British Airways and American Airlines. The Director General of Fair Trading is currently considering responses to his examination of the proposed alliance under the merger provisions of the Fair Trading Act 1973 and article 85 of the treaty of Rome. My hon. Friend will understand that, because of the formal position of my right hon. Friend the President of the Board of Trade, it would not be appropriate for me to comment on specific competition or consumer aspects of the proposed alliance. My hon. Friend dwelt on those aspects in some detail. I will, however, draw what he said to my right hon. Friend's attention, and see whether he can respond on issues for which he has ministerial responsibility.
It may help if I set out the current position on UK-US air services. Aviation relations between the UK and the US are governed by the Bermuda II agreement, signed in 1977, which has subsequently been amended on many occasions. As it stands now, the arrangement allows full access by US airlines to all airports in the United Kingdom except for Gatwick and Heathrow, which means that there are no restrictions on carriers mounting transatlantic services to airports such as Birmingham, Glasgow, Manchester and Stansted.
Capacity and designation restrictions apply at Heathrow and Gatwick airports. On the routes operated, rules specify the number of airlines which may operate and the capacity that each side may operate in relation to the other. Only a limited number of routes can be operated from Heathrow--to 12 specified destinations--which are restricted to two carriers from each side: British Airways and Virgin Atlantic Airways, for the UK; and American Airlines and United Airlines, for the US.
Bermuda II is a balanced agreement, providing UK and US airlines with broadly equivalent opportunities. Over the years, market share has typically been split 50:50, although recently the split has been 60:40 in the UK's favour--which is due partly to the capacity UK carriers provide the market by using larger aircraft and to the high quality of service provided by British Airways and Virgin. Anyone who has travelled across the Atlantic on either of those carriers does not need me to point out that they lead the world in the product they offer.
Since Bermuda II was signed, the market has grown threefold, and the consumer has been well served in choice of destination and competitive fares. It is a UK success story. One in every four passengers travelling between Europe and the US travels with BA or Virgin, and many passengers from continental Europe choose to fly over London with a UK carrier rather than with a carrier based in their own country.
I shall now deal with the point made by the hon. Member for Cunninghame, South (Mr. Donohoe) in his intervention. The Government are committed to liberalising the air service relationship between the UK and the US. We believe that the consumer is best served in an open and fair market, in which carriers can choose which services to operate. By allowing competition from both established and new entrant carriers, such a liberalised arrangement leads to increased choice, better service and lower fares.
The UK has long been in the forefront of pushing for liberalisation. Our experience of liberal markets has shown that more carriers come on to routes, fares become more competitive, service standards rise and everyone benefits--such as other businesses, the travelling public and, not least, the airlines themselves.
In 1993, the then Secretary of State for Transport, my right hon. Friend the Member for South Norfolk (Mr. MacGregor), and his US counterpart, the then Transportation Secretary, Federico Pena, made a public commitment to liberalisation of the UK-US market. The Government believe that liberalisation of that market must be based on a balance of opportunity for carriers of both sides. Crucial to that goal is the ability of UK airlines to obtain fair access to international travellers originating in or travelling to the large US domestic market, without which UK carriers would suffer a competitive handicap.
Nearly one third of all passengers start or end their journey in the US behind a gateway point. The Government believe that access to US "beyond gateway" traffic is important, and that one of the best ways of achieving such access is through alliances between UK and US carriers. That view has been taken by other Governments and airlines in Europe, where in recent years there have been a number of transatlantic alliances.
Recent attempts to liberalise the UK-US aviation agreement have not been entirely successful. After the 1993 commitment by the UK and the US to liberalise arrangements within a year, the UK proposed a phased liberalisation approach, built around British Airways's plans for further investment in USAir. The US broke off those negotiations in December 1993.
In 1995, both sides resumed a phased approach to negotiations, and, in June 1995, a limited deal was reached. The deal allowed a second US airline on the Chicago-Heathrow route and increased services by BA to Philadelphia; agreed expanded code-sharing opportunities for both sides; agreed some limited access to US Government traffic--known as "Fly America"--through BA's arrangement with USAir; and, perhaps most significantly, agreed regional liberalisation, enabling any number of US and UK airlines to operate from any point in the US to anywhere in the UK, apart from Heathrow and Gatwick.
The 1995 deal was followed by an immediate resumption of negotiations on further limited and balanced access to Heathrow and Gatwick, cargo services,
charters and pricing, and some additional limited access to "Fly America" traffic was allowed. In October 1995, however, the US again broke off negotiations.
Since the 1995 breakdown in negotiations, the US-Europe market has developed. Several large alliances have been created, such as those between United Airlines, Lufthansa and SAS, covering the German and Scandinavian markets; Delta, Swissair, Austrian and Sabena, covering the Austrian, Belgian and Swiss markets; and KLM and NorthWest, covering the Dutch market. The US authorities have given anti-trust immunity to each of those alliances, enabling them to co-operate in such areas as routes and pricing, and to build large multinational networks.
We believe that the UK-US aviation market should not be viewed in isolation, but in the context of the overall European-US aviation market. The UK is strong in that market, as 40 per cent. of the US-Europe market travels to or from the UK. The next biggest share is held by Germany, which has 18 per cent. Heathrow is the pre-eminent international gateway for travelling to the US, and many passengers choose to do so via other points in Europe and beyond. Gatwick is increasingly important in that market, and regional airports, including Manchester, have benefited from recent liberalisation.
We are doing well, but strong competition is developing from the other European alliances and airports--such as Frankfurt, Charles de Gaulle and Schipol--which are challenging our pre-eminence. It would not be in the UK's interest to lose our strong position in that market. The alliances developed between other European and US airlines--some of which are very large--represent a competitive challenge to the UK's strong position, and undoubtedly they were formed, in part, to challenge our position. UK airlines can be expected to wish to make similar arrangements so that they can continue to compete strongly.
The Government believe that the proposed BA-AA alliance could provide the basis for liberalising arrangements with the US, provided that the competition authorities are satisfied with the alliance. In its report of 30 July 1996, the Transport Select Committee supported our position. It stated:
Control of aviation state aid is one sphere in which the Commission undeniably has responsibility to ensure free and fair competition. Over the years, however, the equivalent of many billions of pounds have been poured with the Commission's full approval into state-owned national carriers by some of our European partners. My hon. Friend the Member for Wellingborough mentioned that matter in his speech, and I should like to give the House some examples of aid packages authorised by the Commission. In 1993, the Commission authorised about £165 million to be paid, over three years, to Aer Lingus. In 1994, it authorised about £700 million to be paid, over three years, to the Portuguese airline TAP. In 1994, it authorised about £1 billion to be paid, over three years, to Olympic Airways. Again in 1994, it authorised about £2.4 billion to be paid, over three years, to Air France.
More recently, in 1996, the Commission authorised Iberia Airlines to receive about £460 million, with the possibility this year of receiving another £100 million. In addition to that distressing catalogue of single market distortions, the Italian Government have recently asked permission to inject about £1.2 billion into Alitalia. The Commission is investigating the matter.
In contrast, UK carriers have received not a penny of assistance from the UK Government. They have had to compete by funding their investment out of their own resources, knowing that they would go to the wall if they failed to keep pace with their subsidised competitors. I am proud that BA, Virgin, British Midland and so many other UK carriers have risen so successfully to that challenge. They are still disadvantaged, however, by the failure to get to grips with state aid elsewhere in Europe.
My hon. Friend asked one or two specific questions that I shall now answer. The Department has not asked the Civil Aviation Authority to undertake a balance and benefits study for the precise reason that he gave. I shall make inquiries about earlier studies into matters European and write to him.
"We would not wish the UK to 'miss the boat' in these developments and believe the alliance between British Airways and American Airlines could be a means of ensuring that the United Kingdom continues to be a major player in the world air transport industry to the great benefit of the UK economy."
Formal negotiations with the US are under way--they will reconvene on 4 February 1997--and will be without prejudice to investigations by the relevant competition authorities. As I said, I cannot comment on specific competition or consumer aspects of the proposed alliance, but I should like to make one point clear. The Government firmly believe that the UK competition authorities possess the necessary powers to investigate and, if appropriate, to approve the proposed alliance. The UK's credentials on general airline competition speak for themselves. No member state in the Community has more consistently
and actively been in favour of open competition on equal terms within the single European aviation market than the UK.
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