Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 24 MAY 2000
MR FRED
W. SMITH, MR
RUSH O'KEEFE,
MR NIGEL
GOODSON AND
MR MORGAN
FOULKES
40. What percentage of your business is made
of the line to line work between the US and UK?
(Mr Smith) Our European/US business, I think, of the
four some billion dollars both ways would be some place in the
billion 1 or 2—I might be off there 10 percent but roughly
there and I would imagine the UK is some place in order of magnitude
of 20 percent of that. This is just off the top of my head; they
would be directionally right I think.
41. And you, sir?
(Mr Foulkes) We do not have any figures we can give
you on behalf of UPS.
42. Can you tell me how many Fifth freedom rights
you have?
(Mr Goodson) Fifth freedom rights that UPS has—sorry.
(Mr Foulkes) In Europe or out of the UK?
43. Out of the UK?
(Mr Foulkes) Out of the UK we operate one Fifth freedom
operation at present. One going to Germany and the other one coming
back, so two segments.
44. And out of the US?
(Mr Foulkes) To Europe?
45. Yes.
(Mr Foulkes) I would say that at the moment we would
probably have seven Fifth freedom operations in Europe.
Mr Donohoe: Okay.
Chairman
46. Do you want to tell us what those are?
(Mr Foulkes) Yes, I need to get back to—
Chairman: While you are searching we will come
back.
Mr Donohoe
47. Mr Smith?
(Mr Smith) We have regulatory authority under Bermuda
2 for Fifth freedom operations from the United Kingdom to India,
Syria, Iraq and Germany and at the present time we do not exercise
any of those Fifth freedom authorities out of the UK because those
Fifth freedom authorities are point to point authorities that
were of the type and vision when the Chicago Convention was first
done in 1944. What we need is the authority to take something
from the United Kingdom to any place on our system. So it does
not make sense for us to go to one of our shippers and say: "We
have a wonderful service to Syria, but we cannot take it to the
other 99½ percent of the world".
48. Can you tell me why having fought so hard
to get your rights at Prestwick you have now withdrawn that service?
(Mr Smith) I would be happy to. First of all I told
you at the start that my name is Frederick W Smith. My middle
name is Wallace, so nothing was more controversial in my Mother's
family than when we eliminated a service to Scotland, I can assure
you.
49. You maybe should put it back in.
(Mr Smith) We have been working on this issue for
a long time. We think the restrictions on all cargo operations
are very injurious to the United Kingdom and its importers and
exporters. In frustration, over a year ago, we came and I made
courtesy call on Mr Prescott along with a member of our Board
of Directors, Senator George Mitchell, who of course is well regarded
in the United Kingdom and told Mr Prescott at the time we were
going to make an extra bilateral application to Her Majesty's
Government and we would take in the obligation of service to Scotland
as well as to the south of England as long as we were given open
beyonds, but we would not accept authority from one point without
the other. Of course we were granted the Fifth freedom rights
from Scotland. Throughout the Fall we were told we were being
disingenuous, in fact the head of the BCAA was quoted in the paper
as saying that this was an enormous bluff, that we would never
pull the service down from Scotland. We felt the United States
and the UK had a deal and were told that as late as October and
then we became hostage to the so-called mini-deal and for whatever
reason the political landscape changed over here and I felt that
I needed to be a man of my word so we ceased service to Scotland.
We will not resume it until such time as there is a more liberal
regime. As I mentioned a moment ago, we are prepared to announce
on the date that a new Bermuda 2 concerning `Open Skies' for all
cargoes launched, we will resume wide body Fifth freedom service
into Scotland. It may or may not be to Prestwick. We do not want
to be tied to one airport and I know you are from Ayrshire, but
we will resume service to Scotland.
50. If it is not to Ayrshire where will it be?
(Mr Smith) Well, I think you have three choices here.
You can go to Prestwick, you can go to Glasgow and you can go
to Edinburgh. Silicon Glen is closer to the first two so it will
probably be one of those but we certainly would want a little
competition between those two airports than somebody just assuming
they are going to get our business.
(Mr Goodson) I might add, incidentally, that UPS operates
out of Edinburgh, 60 miles away from Prestwick and when we intended
to set up an operation there we thought we had Fifth freedom rights
which had been granted to us when they were originally set up.
But the Government told us that we did not have Fifth freedom
rights operating out of Edinburgh. The lack of logic in that position,
I think, tells its own story, that Prestwick, 60 miles away, is
granted unrestricted Fifth freedoms and yet Edinburgh there is
no Fifth freedom operations granted to UPS at all.
51. Maybe you should have lobbied me earlier
then.
(Mr Goodson) Well, maybe!
(Mr Smith) By the way, Mr Donohoe, I want to point
out that when we asked Her Majesty's Government for that authority,
we made it very clear we were not seeking exclusive authority,
that we would be perfectly okay if this applied to any US carrier
and in fact it did apply to any US carrier.
52. If we just expand this into the more general,
what rights are you looking for? If you were offered something
what would you be having as a shopping list as to demands you
would think would meet your business?
(Mr Smith) The only thing we have ever asked for is
open beyonds, so called Fifth freedom rights out of the United
Kingdom so we can pick up traffic in the United Kingdom and take
them to third countries and we have that authority from virtually
every other country in the world that we serve, almost without
exception. There are a couple of exceptions; Russia is one, Russia
and the United Kingdom.
Chairman
53. You do not think, Mr Smith, that that is
because you have enormous economic muscle and that the British
are in fact, even yourself said, a very small nation? When they
are negotiating they must have something on their side?
(Mr Smith) Well, Madam Chairman, I think that you
are right. I think that is exactly the problem here. The all cargo
rights, which were not until last Fall, particularly controversial
with anyone, including British Airways. I talked to Bob Ayling
about it personally. Then they became controversial. The net result
of it was not anything other than British importers and exporters
and British jobs being affected. So yes, it was used as a negotiating
chip for Heathrow with the American Airlines/British Airways alliance,
regardless of what it was doing to the UK economy. You see, our
position has been supported by the Freight Transport Association,
the Scottish Electronic Manufacturers Association. In fact, almost
all of the broad economic interests in the United Kingdom has
supported our position and in fact yours in your 1994 finding.
Mr Olner
54. Yes, but the fact at large is that UK companies
cannot compete in the USA and these rights are never going to
be granted until UK companies have the right to compete over there.
How are we going to get out of this impasse?
(Mr Smith) You are going to have to convince the—well,
first of all, as I said to you, you need to read Article 7 of
the Chicago Convention—I have a copy of it here if you want—but
it was put in there precisely to prevent what you are trying to
do which is to have an international operation or exchange of
rights to force a country open up its domestic market. Now I have
said we do not have any opposition to that—we support it—but
I think as long as that is a requirement of Her Majesty's Government,
I do not think you will get an agreement.
55. Well your Government has requirements that
we cannot wet-lease and charter aircraft, have they not?
(Mr Smith) And that was on the table, Mr Olner. I
personally spoke to the Secretary of Transportation, I personally
worked with the head of the FAA and in fact the US Government
offered wet-leasing, offered Fifth freedom and offered Seventh
freedom rights, which is again an international air cargo market
that is seven times bigger than the United Kingdom. Make sure
everybody understands what that is; Seventh freedom rights are
that you can originate a flight in our country and go to a third
country without having any connection to the homeland. We have
never suggested that for the United Kingdom. That is why we have
been most puzzled by the BCAA's thing. We have never suggested
that we would have intra-EU authority or could compete with them
in their operations. We have only suggested that there be Fifth
freedom authorities on through international flights.
56. I am mindful of time; could you perhaps,
both of you, whether you cross-subsidise your European operations
from your domestic revenues in the United States?
(Mr Smith) We do not. We have a very profitable operation
in Europe and we do not cross-subsidise the European operations.
Taken together, the westbound traffic is profitable, our westbound
traffic is up 28 percent out of Europe. European exports are pouring
into the United States and absent services like we offer, and
our good competitors, UPS, I dare say that the modern, high-tech
and high-value added world simply could not compete. It is those
services which you are denying yourself by having this impact
and I wish I could solve it, because I have said I have no objection
to everything that you want, everything.
(Mr Goodson) UPS does not cross-subsidise its operations
in Europe. Its European and international operations generally
have to stand on their own feet commercially and they are commercially
successful.
57. So how do the hourly rates of charging or
wet-leasing one of your Boeing 727s, for example, in the States
and in Europe compare?
(Mr Goodson) UPS does not wet-lease any aircraft so
it does not apply to us.
58. And you as well?
(Mr Smith) We do not either.
59. Finally, what proportion of your aircraft
meet or exceed Chapter 3 noise damage?
(Mr Goodson) UPS, 100 percent and that has been the
case since 1996.
(Mr Smith) 100 percent.
| 
