Examination of Witnesses (Questions 800
- 819)
WEDNESDAY 28 JUNE 2000
MR BOB
COTTERILL, MR
TREVOR SMEDLEY
AND MR
DAVID BATCHELOR
800. To what extent does the lack of competition
between airports, particularly in the south-east, limit the incentive
to expand airports and to provide more and better facilities?
(Mr Cotterill) The answer to that is by no means clear.
One can think of ways in which it might lead to more incentive
for investment. At the same time, it may have the opposite effect.
That is something the government is looking at.
Chairman
801. What concerns the Committee is that you
are doing the economic forecasting and those are the things on
which the government will really base its policies in the future.
Some of the decisions will be political decisions and you have
said that the parameters are fairly wide, but the Committee would
like to know what your general view of these things really is
and how much work you have put into it.
(Mr Cotterill) We are taking part with the government
in the studies it is doing, but our expertise is in the aviation
and economic area.
Mr Stevenson
802. I am interested in your last comment about
your expertise being in the economic area. I look at your written
evidence and I see quite a number of pretty forthright views that
could be construed as touching on the political. In your written
evidence, you say that increased access to Heathrow for US airlines
constitutes the major source of negotiating leverage for the United
Kingdom. In your view, the United Kingdom should make significant
concessions in this regard only as part of an agreement which
would deliver full liberalisation, a very straightforward, non-economic
argument, I would have thought. Do I correctly interpret that
paragraph as meaning that the CAA is very clear in its mind that
Heathrow is the jewel in the crown in this negotiation?
(Mr Cotterill) Yes, we think that access to Heathrow
is the most powerful negotiating leverage.
803. Therefore, if I read the paragraph further,
the United Kingdom should make significant concessions in this
regard only as part an agreement which would deliver full liberalisation.
In the light of what you have said and what you know of government
negotiating stance, would you care to elaborate a little more
on what you mean by "deliver full liberalisation"?
(Mr Cotterill) By "full liberalisation",
we mean the removal of all bilateral constraints such as on the
routes that airlines can operate, the number of airlines that
can operate on any one route, the capacity and frequency any one
airline can operate on each route, the limitations on prices that
they can charge but, beyond that, the removal of the fundamental
system of ownership and control, the opening up of domestic or
cabotage and also, in the case of America, the removal of the
restrictions on—
804. The full monty?
(Mr Cotterill) Yes indeed.
805. You are pretty clear on that. Your evidence
and advice is, "Look, United Kingdom government, do not make
any significant concessions here unless you are pretty sure that
you are on a path that will deliver in the not too distant future
a full liberalisation." My next question is about slots.
I was intrigued by your evidence regarding secondary trading.
I do not necessarily want to ask you a question about that, but
in that paragraph you say that secondary trading should be made
transparent, thereby helping to ensure that slots are put to the
use of highest value. What do you mean by that? Do you mean that
if this happens and if there is greater access by US carriers
to Heathrow, slots being at a premium which they are, highest
value would mean the largest aircraft and therefore regional services
would not get a look in? Is that a correct interpretation?
(Mr Cotterill) I do not think highest value necessarily
means the largest aircraft. As far as regional services are concerned,
Mr Griffins said last week that the government would be seeking
to give some priority to the allocation of slots to regional routes
from Heathrow. I think we fully understand that position. We would
go a little further in the light of what you were quoting from
our submission and say that we think it is important that slots
can be allocated flexibly as well over time. Sir Michael Bishop,
in giving evidence to you a few weeks ago, quoted examples of
his Teesside service and his Leeds/Bradford service and pointed
out that, quite unlike the other things that have happened where
slots have been moved from a regional route to a long haul route
or whatever, sometimes the market just went down or up and it
was not the opportunity cost. In that case, he was saying the
development of more direct services to continental points had
led to changes in traffic. We are concerned that slots do not
become too frozen into a particular use. Secondary trading will
help in that. It is already happening. Everybody knows it is happening.
There is a very public and obvious one in the case of the sale
to BA of the Air UK slots on Guernsey, which was the subject of
a court case, which incidentally came to the basic conclusion
that that was legal and indeed that money being part of a slot
transaction was legal. We found that encouraging. There is also
a case for extending that right to hold and trade in slots beyond
the airlines of today and it seems to us that that might be particularly
useful in the case of local and regional authorities. We would
add that thought about flexibility in there. I am not suggesting
that will be easy to achieve but it seems to me that that will
be something that could at least be part of helping this regional
issue.
806. In your submission, the conclusion you
come to is that the only way this issue can be satisfactorily
resolved is on a European Union basis. That is based, as far as
I can see, on arguments surrounding ownership routes in European
countries. Given that 11 of the 15 European Union countries have
reached Open Skies agreements with the US—and as far as
we can ascertain there has been no movement whatsoever on the
issue of wet leasing, cabotage, ownership routes, Fly America
as a result of any of those negotiations—and given the fact
that those countries will be represented in one way or another
in the Commission, what makes you so optimistic and so reassured
that the European Union, 11 of which Member States have entered
into bilaterals on Open Skies that have not dented the US market
at all, is going to deliver for us in the future?
(Mr Cotterill) We cannot be confident. That is consistent
with our submission. However, we think there is a reasonably good
chance that, if the European Union were to really put its mind
to achieving this, that would be possible. The fact that the substantial
majority of European Union Member States have already signed Open
Skies does not necessarily mean, certainly in the case of some,
that they would vote against a mandate for the Commission to negotiate
full liberalisation with the US. Exactly what the support and
opposition to that is going to be has not become entirely clear
yet, but the discussions and the developing of the mandate, as
I understand it, are reasonably advanced and there is at least
a prospect that that can be achieved within the next year and,
some would argue, perhaps even this year. There is then a quite
difficult negotiation with the US. I do not think we would under
estimate that but equally the other route is not entirely plain
sailing either. Negotiations with the Americans have been going
on a long time to get a considerably more liberalised position.
We are not saying it is easy; we are not saying it is a push over.
We are saying we think there is no reason why it should not be
achievable if the will is there. When it came to the single, internal
European market, that looked very difficult at the beginning.
I was involved in those negotiations in Brussels with the DETR
over a few years. It came out very well in terms of exactly the
full liberalisation we are talking about. There were a number
of countries trying to make it something rather less, but they
did not succeed. Yes, it will not be straightforward, but it is
possible. If the United Kingdom can play its full part in that,
just like it did in the late 1980s and early 1990s, a lot can
be achieved.
Chairman
807. You do not think in effect we would be
putting in a great deal? As to some of those countries that you
are talking about, you are not even vaguely comparing like with
like, are you? I would not mind negotiating a deal with Switzerland
and then saying to Britain, "Open Skies is what we actually
want." It is not a comparable negotiation.
(Mr Cotterill) What has happened so far has been a
widening out of the market of the 15. It is a different thing
in kind but nevertheless the EU will have a lot of strength and,
yes, the access to Heathrow will be the single, most important
card that either the United Kingdom will have or the European
Union will have.
808. Let me be devil's advocate for a moment.
If I am negotiating such a deal and I am working for the Commission
and I am then told, "The way we can get a completely Open
Skies deal is for you to give way on the access to Heathrow",
because that is what the Americans want, on the whole, they would
love to fly to Lyons but they are not going to fight over it.
Who do you think would then benefit from an agreement which would
give Open Skies to all of these other smaller aviation industries?
Would that be a good enough benefit to justify my giving away
my only trump card?
(Mr Cotterill) If one can achieve full liberalisation
by giving away that trump card, then one has achieved full liberalisation
so that—
809. That includes in your case cabotage, Fly
America and all the others out of the window?
(Mr Cotterill) No. It would be a fully liberalised
EU/US market. It would be just like the internal European market,
but it would now encompass the US internal market and the EU internal
market and the routes between.
Mr Donohoe
810. Sticking with some of the other negotiations
that are going on on the periphery, why is that you have said
to Singapore Airlines, for instance, that they are not going to
get Fifth freedom rights until such time as they sit at negotiations
for the bilaterals that are going to be completed?
(Mr Cotterill) That is a negotiation that the government
is doing. We are advising on that but the thrust of our advice
generally is that we should be aiming towards global liberalisation.
What the Department is saying there, as a matter of negotiating
strategy, is that until they have liberalised the US agreement
if another country's airline were to have a high degree of freedom
to operate the North Atlantic that could put United Kingdom carriers
at a disadvantage.
(Mr Batchelor) In the case of Singapore, the Department's
position has been resisting its demands for access to the transatlantic
market until the United Kingdom has succeeded, by whatever means,
in liberalising access to that market for the United Kingdom airlines.
Our advice to the Department on that case has been in many senses
similar to the advice we have been giving to them on the US case.
We believe the United Kingdom should be asking Singapore for full
liberalisation in the terms we have been speaking about. So far,
that negotiation has not taken place, but we think that there
are things that the United Kingdom should be demanding from Singapore
in exchange for granting those rights.
Chairman
811. What? The Singaporeans would say, "We
virtually allow, because of historic negotiations, the British
to come in and use our facilities and we have agreements which
give them virtually all that they want". What extra could
we ask for?
(Mr Batchelor) I would agree that cabotage rights
in Singapore will not be worth very much but rights such as ownership
control, although Singapore is clearly a very small market, to
be consistent with a policy of seeking full, global liberalisation,
that is something which would be of enormous value, certainly
in setting a precedent for the rest of the world.
Mr Donohoe
812. Why would the government give the same
airline the right to fly via Manchester with the same Fifth freedom
rights? Why on the one hand give access to the Fifth freedom through
Manchester and not through Heathrow to the same airline? It does
not seem to marry in that respect. That is the advice that you
have given the government.
(Mr Batchelor) I cannot speak too much for the Department
but my understanding is that their position on that was as part
of their wider policy of granting access to regional, United Kingdom
airports.
813. Can I turn to the benefits of these negotiations?
The question has been asked about the benefits to the United Kingdom
but if one takes a balance sheet and looks at the benefits to
the Americans what would the balance sheet show on the basis of
what is being asked by both parties? Would there be a plus for
the United Kingdom or would there be a plus for the US?
(Mr Cotterill) If one compares full liberalisation
with American style Open Skies, we would say that the full liberalisation
will come out better in the balance for the United Kingdom airlines
than Open Skies. The reason we say that is because we think Open
Skies, at the European level, 15 separate bilaterals of Open Skies,
gives a clear advantage to US airlines.
Mr Donohoe: Has the CAA been asked as an organisation
to do any analysis of that particular proposal in terms of the
balance sheet?
Chairman: The Committee stands suspended for
15 minutes. There is a division.
The Committee suspended from 4.40 p.m. to
4.50 p.m. for a division in the House
Mr Donohoe
814. We were talking about the balance of benefits
and what was the benefit to the United Kingdom as against the
US. Has the government in a specific sense asked you to do any
analysis of that particular situation? Has the CAA been involved
in that?
(Mr Cotterill) We do do analyses for the government.
A comparison of full liberalisation at the EU level against Open
Skies is an extremely difficult evaluation to do in practical
terms, so perhaps I can try and say what some of the elements
are that make us think the balance sheet would be—
815. What analysis has been done about Heathrow
in particular? If you took Heathrow, what is being proposed? What
benefits would there be to the US in terms of entry by another
two airlines against that of the United Kingdom? I do not see
any advantages for the United Kingdom as far as Heathrow is concerned.
Maybe you can shed some light on this as far as any analysis you
have undertaken.
(Mr Cotterill) We have not done a detailed analysis
of a phased access deal for a deepening alliance. We did do detailed
analyses earlier in the year of the so-called "mini deals"
because they were a thing you could more manageably do a detailed
analysis of. I think it becomes very speculative when one is trying
to quantify these rather more expansive liberalisation deals.
We have advised what we think the factors are but if you are saying
have there been detailed, quantified analyses, the answer is no.
816. If one looks at it in a practical sense,
I cannot see a single advantage to a British airline on the basis
of Heathrow if you isolated that from any of the other negotiations.
It has been said earlier by Mr Stevenson that Heathrow is the
jewel in the crown of the negotiations but it is also our only
card. It is a case of giving it away rather than to get anything
that is tangible or real in return, as far as Heathrow itself
is concerned.
(Mr Cotterill) As I understand it, the deepening alliance
as access is opened up to Heathrow, presumably BA and another
American carrier—presumably American Airlines—
Chairman
817. That is not what your figures show, is
it? Your figures which are excellent show that there is a dominant
performance of United Kingdom carriers on the transatlantic routes.
We want to know what benefits we would get by challenging the
status quo. United Kingdom carriers have a significant advantage
when you talk about those who attract passengers to connect to
transatlantic services in London.
(Mr Cotterill) United Kingdom carriers, in terms of
their share of passengers, have been out-carrying US carriers—
818. Mr Donohoe is saying, if you go outwith
the whole business of Heathrow, where is the advantage? Where
is the benefit? You are saying in effect, on the one hand, from
your own figures, that United Kingdom carriers are dominant on
the transatlantic routes and, if you try to compare like with
like, the British attract more people who are going to fly onto
the internal route than their American colleagues do in the opposite
direction. That means that, if you say, "What we are going
for is a form of Open Skies that is a very wide liberalisation",
the next question we have to ask you is where is the benefit to
the United Kingdom airlines if the only thing that we are negotiating
on is the slots and the movement into Heathrow?
(Mr Cotterill) The three areas of benefit that I can
see would be that the deepening alliance for British Airways should
allow it better to access the US market. We have said that we
think the long term objectives should be to allow all our airlines
to find the best way they want to do that and, in a fully liberalised
market, the ability to merge—subject to competition policy
of course—would be in the long run the best way of doing
it, because that can bring costs savings of integration as well.
Nevertheless, despite the fact that alliances may have been less
stable than full mergers, the government would say that there
is an advantage to BA. If, as is their clear intention, they can
persuade the US as part of the deal to dispense with the Fly America
policy, there is another one. There is the wet leasing. Our airlines—our
cargo airlines are one obvious example of this—would dearly
like to be able to lease into the US domestic market. There are
benefits there. It would of course also allow the access of British
Midland. That is important and we do not under estimate that.
British Midland have been a very good competitor in Europe.
Miss McIntosh: My understanding is that the
government is not pushing for wet leasing as part of this negotiation.
Mr Donohoe
819. In real terms, when we are talking about
what there are the arrangements, in particular about Singapore
Airlines, if one looks at British and Australian carriers into
Singapore and again at the balance as to what the Singaporeans
are asking for. It is minuscule by comparison to what we have
on these routes that go into that airport, is it not? There is
really something wrong, I think, in that as an equation in that
it is grossly unfair.
(Mr Cotterill) What we would like to see with Singapore
and other countries in the Far East as part of the long term objective
would be full liberalisation because we think that is an important
plank in getting through to full global liberalisation.
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