Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of Witnesses (Questions 780 - 799)

WEDNESDAY 28 JUNE 2000

MR BOB COTTERILL, MR TREVOR SMEDLEY AND MR DAVID BATCHELOR

  780. That is a rather tactful way of not answering what I asked you. We can agree on an ultimate objective but if you say the government is coming at it sideways like a crab and the United States government is coming at it from the opposite direction, I ask you again: do you think we are handling it in the right way?
  (Mr Cotterill) The issue is one of negotiating strategy. Frankly, that is an issue for the government. It is not an issue for the CAA. We advise them. In our evidence, we tried to make it as clear and as honest as we can.

  Chairman: I am not seeking to trap you into saying something you have not said but I think the Committee are very interested in this attitude.

Mr O'Brien

  781. What benefit does the United Kingdom derive from the provision of air services between the United Kingdom and the United States? If no bilateral agreement is reached between the two countries, what will be the effect on the economy of the United Kingdom?
  (Mr Cotterill) The benefits are very substantial. The most recent and I think really the only major study of the benefits of the United Kingdom aviation industry more generally has been recently done by Oxford Economic Forecasting. They estimated something like £10 billion per year benefit to the United Kingdom and something like 180,000 jobs. That was aviation in its totality. There is then the difficulty of how much of that benefit accrues to the North Atlantic. We have done some simple figures on that by looking at relative passenger volumes and our conclusion from that is that, in terms of employment, it is probably about 20,000 people but that may be an under estimate, given that we are talking about long haul routes, which I think on balance probably employ rather more per passenger.

  782. If no agreement is reached, what will be the effect of that?
  (Mr Cotterill) I do not think we think there is any immediate black hole. We tried to explain that in our written submission to you. If one looks at what has happened to the United Kingdom's share of traffic on the North Atlantic over the last ten years, it has stayed remarkably stable at around 40 per cent or just under, despite the fact that a lot of other European countries have agreed Open Skies agreements with the US. Logically, one would expect over time, with natural, underlying forces, for the United Kingdom to decline somewhat. Why do I say that? Essentially because ours is probably the most mature and by far the largest market between the EU countries and the US. Naturally, you would expect some of the smaller countries' traffic to grow, so it is not necessarily that our traffic declines but, as a proportion of the total, it would decline. Similarly, the congested infrastructure position at London must have some effect. Interestingly, despite that, it does not seem to have been happening in the last ten years. If anything, it has edged up a percentage point or two. It is against that background that I do not see a black hole. I do not think it is something that we need to panic about.

  783. If these European cities develop their direct contact with the US and the fact that London is accepted as a gateway for passenger traffic into Europe, what effect will that have on our position as the gateway to Europe? How do you see that scenario?
  (Mr Cotterill) There is a logic to it. It is possible it will become a smaller proportion over time. It does not seem to be happening in practice, which I think is interesting.

  784. What timescale are you thinking of?
  (Mr Cotterill) One would imagine over the next 10, 15 or 20 years that that would happen to some degree, but the strength of the United Kingdom's markets, the high frequencies because we have such big markets and the competitiveness of British airlines has, to a large extent, staved that off. I do not think there is a serious short-term problem. That is why we are reasonably happy in saying that the important thing here is to try and get the long-term position—

  Chairman: We may come back to some of your estimates because there may be a distinct difference between the last ten years and the next ten years, given the very factors that you have identified.

Miss McIntosh

  785. On the table one that you have given in your evidence, the scheduled services that you refer to presumably for United Kingdom and US airline traffic are scheduled passenger services as charters are given underneath. Could you provide us with similar figures for cargo?
  (Mr Cotterill) You are absolutely right. These are passenger figures. On cargo, I think we would have to put in a further submission.
  (Mr Smedley) There would be no problem in providing similar figures for cargo.

  Chairman: We would welcome that because it is an important point and there is a clear divergence between the two markets.

Miss McIntosh

  786. If the government is not going to pursue from our side of the negotiations, the United Kingdom side of the negotiations, the Fly America policy, wet leasing and access to cabotage, I think in your evidence you have suggested this is not a very fair negotiation. It does seem to be slanted heavily towards the US advantage. I think that was the expression that you used. Would you agree, if that is the case, that it is even more slanted in their favour towards cargo traffic than passenger traffic?
  (Mr Cotterill) We were not suggesting that the government is not going to play very hard for doing away with Fly America and indeed the CRAF programme and wet leasing. That is very firmly on the government's list. As I understand it, the only thing that has been put aside for the time being—and I think it is just for the time being—is ownership and control and cabotage. The others are very firmly an issue. So far as cargo is concerned, philosophically and in practical terms, the case that the British Cargo Airlines Alliance put to you is very strong. It is really, for cargo, saying very much the same thing that we are saying for both passenger and cargo. That is important. That is very consistent with our long-term aim. There are issues which are really for the government and not for the CAA, of the extent to which one should make that one whole negotiation. As I understand it, the government sees that as one whole negotiation and we would support that view and say that is the right view at this stage.

  787. Against the background of what you have said, that there is probably going to be a fall off in traffic on the United Kingdom side, possibly to the benefit of other US carriers or other city carriers from Europe pairing with the US, can I just ask what the implication from your standpoint as the CAA would be of an eventual European Union mandate to negotiate these?
  (Mr Cotterill) I do not think I was suggesting there would be a fall off in traffic but logically there are some underlying, natural forces if you like that may lead to the United Kingdom's very high 40 per cent share declining somewhat over time, though whether it will actually happen remains to be seen. So far as the European Union is concerned, this is certainly not an issue of dogma. This is simply practical—

Chairman

  788. Nobody would accuse the CAA of being dogmatic.
  (Mr Cotterill) This is an issue of aviation outcome, if you like. For the reasons we and others have explained, it is simply not possible for the United Kingdom alone to negotiate a full liberalisation as we have described it. There is only one way and that is through the European Union negotiating with the US. That does bring some other advantages in that it creates opportunities for the United Kingdom airlines to operate from other European points. That seems to me to be in exactly the same way as has happened within the European Union, extending those sorts of opportunities and seems likely to be to the benefit of the United Kingdom because the United Kingdom carriers, certainly in the internal market, have shown themselves to be good competitors and ahead of the game.

Miss McIntosh

  789. In your view, is it a handicap that the European Commission is not a signatory to the Chicago Convention?
  (Mr Cotterill) This is an area, in terms of the technicalities, which I am not very good at. Looking at what has happened in practical terms, it does not seem to have been. The Commission has negotiated via an EC Council mandate with the Swiss successfully. That is still to be put into force but for reasons, I understand, outside aviation and that should come soon with luck. They have negotiated with the ten central European states, barring the two that still have to ratify that, and that should come into effect. I believe they are now starting with Cyprus, so it seems to be something they can do.

Chairman

  790. Those are rather different in scale, are they not?
  (Mr Cotterill) Indeed.

Mr Donaldson

  791. Do capacity constraints at Heathrow and Gatwick mean that the practical effect of an agreement which liberalises access to London airports will be rather limited?
  (Mr Cotterill) Clearly, they are a practical issue which are going to have an effect in limiting competition generally. What we would argue is that the way to deal with that is not through refraining from liberalising, but rather through finding instruments that deal with that issue properly. Put simply, if the bilateral system did not exist, I do not think one would put something like that into place to solve the congestion problems. It is a rather simplistic point but I hope it illustrates what I am trying to say. In other words, there are better instruments than the bilateral system to deal with that sort of issue, but it is a real problem of course.

  792. Are runway and airport capacity more important in deciding the future of the US/United Kingdom aviation market than bilateral agreements therefore between the two governments?
  (Mr Cotterill) They are both very important but I certainly would not under estimate the importance of liberalisation.

  793. Which is the more important, in your opinion?
  (Mr Cotterill) In terms of something that can be achieved, if the will is there, I would say the bilateral is the priority.

  794. Are you nevertheless in favour of more capacity and particularly what is your view on a third runway at Heathrow?
  (Mr Cotterill) I do not think we are in a position where we can say we are either in favour or not. The reason I say that is that, whilst the CAA has no statutory responsibility for environmental matters, we are very conscious and agree entirely with the government's view that, when looking at infrastructure, one must adopt the principle of making sure that the costs, including the environmental costs, are fully taken account of. The government, as Mr Griffins explained last week, is involved in detailed studies looking at the economic, environmental and social aspects of infrastructure in building up to its Aviation and Airports White Paper. Those studies are trying to help look at that very balance. The end result could be anything from no extra capacity through to significant extra capacity, but the CAA is not in a position to make that judgment. I do not think we have the information to say that more capacity is warranted. It depends on the environmental and social implications.

  795. You have indicated in your submission that you would like to see the right incentives being created for infrastructure providers to expand their capacity, so that would imply that you are in favour of seeing infrastructure capacity increase, particularly in the south-east, where we have growing congestion.
  (Mr Cotterill) In terms of the demand for Heathrow and increasingly for Gatwick, the demand is outstripping, by a substantial margin in the case of Heathrow, the supply. That does not lead on automatically to the view that there should be more capacity, because one has to take account of the full effects of including it and of course the environmental effects. We are not in a position to say there should be more capacity and I do not think we were implying that there should be.

  796. You were saying that, because of the infrastructure constraints, the full economic benefits of liberalisation may not be realised. Surely that implies that if the benefits of liberalisation are to be realised there needs to be an increase in capacity?
  (Mr Cotterill) No. That is the economic benefit and, yes, we would certainly stand by that. Plainly, the full economic benefits will not be realised because of capacity constraints, but economic benefits are only one part of the equation.

  797. What incentive do you think should be given to the providers of airports and runway infrastructures to expand capacity to meet demand?
  (Mr Cotterill) Having the right economic incentives for investment is important. One possibility—and this is something that would need very careful thought—is the idea that, if new slots are created, for example by an addition of runways, airports might take some of the benefit of that. That is very much an embryonic thought, but that is an example.

Chairman

  798. An encouragement to do what they should really be doing then?
  (Mr Cotterill) The problem at the moment is the way the slot allocation system works. At the moment, if new slots are created, there are many ways of creating new slots. They can be squeezed out of existing runways or they can be as a result of new runways, but if they are, under the present slot systems, the airlines immediately then are allocated those slots and they hold those slots in subsequent seasons so long as they use them. In effect, airlines are given the economic benefits of those slots, and airlines alone. That is the issue I was addressing with Mr Donaldson. That does not give any obvious incentive to the airports to do that. That is a complex issue that would really need to be thought through. It is an example of how one might think.

Mr Donaldson

  799. Should the RPI pricing formula at regulated airports be brought to an end?
  (Mr Cotterill) That is an issue which will need to be addressed as airports become more congested, but again it is a complex subject. The CAA has signalled in our economic regulatory role to the industry and others that we are expecting to take a pretty careful look at the whole economic framework, those things which are within our powers under the Airports Act to do, over the next year or so. I do not think I can begin to say what conclusions we will come up with because we shall need to think very carefully and consult during that process. The question is certainly an interesting one.


 
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