Examination of Witnesses (Questions 820
- 839)
WEDNESDAY 28 JUNE 2000
MR BOB
COTTERILL, MR
TREVOR SMEDLEY
AND MR
DAVID BATCHELOR
820. Moving on to wet leasing, I had not heard
of it until six months ago and I did not know what it meant until
about two months ago. On the basis of what I have been learning,
it does seem that the US could argue that there is something wrong
with that as far as the way that you apply it, but more particularly
there is a discrimination as far as the European rules of interpretation
are concerned towards that of British carriers, in that you interpret
something of the order of two sections in terms of short term
and exceptional circumstances in a different way than any of the
other Member States inside Europe.
(Mr Cotterill) I am not aware of that. In the United
Kingdom, the United Kingdom is applying carefully and properly
the article in the licensing regulations.
821. We seem to apply it in a practical sense.
The rest try to find a way round it. It is damaging our airlines
that are operating on the question of wet leasing because they
are being told that they are no longer able to operate on the
basis of exceptional circumstances and that their licence is going
to be withdrawn.
(Mr Cotterill) Perhaps it is worth saying what the
CAA's underlying policy on wet leasing is. We set that out in
terms in our statement of policies on licensing. What we say there
is that we believe that we should adopt a liberal policy but,
at the same time, we have to take account, because the United
Kingdom has to take account, of the terms of the relevant EC regulations.
We are required to advise the DETR whose responsibility the approval
or disapproval of wet leasing is by British airlines, foreign
registered aircraft, in the context of the EC regulations. Our
underlying preference, if you like, is to be in a position where
British airlines can exploit those advantages because they allow
them to be more efficient and to serve air travellers well, but
we have to take account of what the EC regulations say. Ultimately,
it is the DETR that takes that decision. Most of the time they
agree with our advice, but there have been times where we have
recommended approval of wet lease and it has not been approved.
It is quite rare but it does happen.
Mr Donohoe: If one looks at this, it is again
part of this overall jigsaw that we seem to be putting into place
and we do not hold all the pieces; nor will we ever because we
do things the wrong way round, it seems, whereas the Italians,
with wet leasing, interpret it completely differently.
Chairman: You cannot expect the flexibility
of the Italian government from the DETR.
Mr Donohoe
822. The problem is it is affecting commercial
routes opening up that can be operated through a wet leasing arrangement
to a British airline. It is a further diminution in terms of their
abilities to be able to operate.
(Mr Cotterill) I am acutely conscious of the restrictions
on wet leasing in the EC regulation. It seems to me that one of
a number of advantages of a full liberalisation arrangement between
the EU and the US is that that arrangement could be changed, I
would hope. Both US leasing would become more liberal, but also
I would argue that the wet leasing arrangement in the EU regulation
is not ideal.
Miss McIntosh
823. We have not received evidence to suggest
that the problem is with the EU regulation. The evidence that
we have received is from United Kingdom based cargo carriers,
who feel that it is unfair that American carriers can wet lease,
whichever way round it is, but they are not allowed to wet lease
over there. It would be helpful if you would agree with that.
The problem is not lying with the EU regulation; the problem is
that our carriers are not being allowed access to wet leasing,
cabotage or ownership and control but wet leasing is such a simple
thing that the Americans could give as part of the negotiating
process.
(Mr Cotterill) You are absolutely right. The problem,
as I understand it, that particularly our cargo carriers see is
the US wet leasing rules and, in particular, the fact that they
have an absolute ban on leasing United Kingdom aircraft into the
American market for use in the US. Mr Donohoe was asking me about
the EU regulation and the phrase "exceptional circumstances"
in there. Member States can be more restrictive than the regulation
but they cannot be less restrictive than what it says. What it
says is you can grant waivers to the general rule. In the United
Kingdom, the general rule is you have to operate United Kingdom
registered aircraft, but the EU regulation allows waivers to that
for what is called short term use. When you look in the minute
statement at the back of the regulations, it says by "short
term" we mean up to a traffic season, which means in winter
five months and in summer seven months, or otherwise in what it
calls "exceptional circumstances". The problem is that
those words, "exceptional circumstances", are open to
interpretation. What exactly do they mean? There have been a lot
of occasions where we have advised the DETR—and they have
taken that advice—that something is exceptional and it is
reasonable to call it an exceptional circumstance.
Chairman
824. You will be aware that we have taken evidence
on both those aspects. For instance, there are British airlines
who feel they are very unfairly discriminated against in the tourist
trade because they feel they are not getting enough warning if
there are problems with their licences. If they have to sell holidays,
they must know a certain time ahead and they feel that they are
in turn being discriminated against because of the whole question
not only of wet leasing but the way that the two groups of airline
developments are taking place.
(Mr Cotterill) I find it very difficult to comment
on whether they are discriminated against as between what the
United Kingdom does and other European countries. One sometimes
hears allegations of discrimination and the substance is not quite
as strong as the allegation. It is very difficult, sitting here,
to say that is true. What I can say is the EU Regulation certainly
applies constraints that I think would not be part of the CAA's
policy if it was not there but we make very clear in our policy
statement—
825. Are you tempted to do what the Germans,
Italians and French do then?
(Mr Cotterill) This is the DETR's decision as to whether
to approve or not approve wet leasing, we only give advice. I
was not intending to imply they are doing anything wrong.
Chairman: I want to move on from that because
I think Mr Cotterill has told us what the problem is.
Mr Donohoe
826. If I can finally ask a question in terms
of what was being asked by Mr Donaldson earlier. That was a question
as to the capacity in the South East. From the evidence we got
a fortnight ago from the BAA there was some indication given that
there will be an expansion, or a trial, on the whole question
of mixed mode. That is bound to lead to the addition of further
slots. What estimates, if any, are you making of that as an organisation
at this stage? What is the potential in relation to the number
of slots at Heathrow if it were to be at a more regular and more
advanced stage than it is today?
(Mr Cotterill) All I am aware of is the study that
was done jointly by, I think, IATA, BAA, NATS were involved in
it, and this goes back to the mid-1990s.
Mr Donohoe: It is going on just now.
Chairman: We cannot question Mr Cotterill on
something he is not aware of. Mr Bennett?
Mr Bennett
827. Can you convince me that getting this deal
with everything in place would be good news for an airport like
Manchester and the North West of England?
(Mr Cotterill) It seems to me it has to be in that
direction. Under the bilateral, of course, from some years ago
there is now freedom of access to Manchester, to all airports
other than Heathrow and Gatwick, on a Third/Fourth freedom basis.
What this would give to flights into and out of Manchester would
be what is called Fifth freedom today. All of those concepts would
disappear, airlines would be able to fly where commercially they
wanted to, subject to getting the slots and that sort of thing.
It seems to me that it opens the opportunities for Manchester
to develop services from there.
828. Is it not much more likely that everyone
will want to use Heathrow and we will be less likely to get more
direct flights from places like Manchester or Teesside to the
United States?
(Mr Cotterill) I would not have thought that was at
all obvious, particularly given the recent issue of congestion
at Heathrow anyway. It is not obvious to me why people for whom
Manchester is a convenient airport would not fly from there.
829. Why is it that British carriers have been
so reluctant to develop routes from Manchester to the US?
(Mr Cotterill) The size of the traffic volumes at
present do make it difficult unless you have some means of increasing
traffic volumes. The American carriers, of course, tend to be
feeding traffic in from their hubs at the other end and, therefore,
strengthening volumes up. Presumably as traffic develops one would
hope in a more liberalised environment that would help in that
direction and more services would become possible.
830. Do you think developments are going to
have to be big planes across the Atlantic with lots of feeder
routes or more point to point services?
(Mr Cotterill) It is very difficult to speculate.
The tendency in the industry—
831. Do not speculate. Which is best for the
environment then?
(Mr Cotterill) Can I just go back to your earlier
point. The tendency has been for more feeder services into hubs
for the network carriers alongside that. This has not been developed
significantly on the North Atlantic yet, it has been the point
to point lower fare type service. What liberalisation would do
is allow more freedom for airlines, just as it has within Europe,
to develop the sorts of services they want and give choices to
passengers. We have clearly seen that happen in Europe in the
last six or seven years since the internal market was opened.
In terms of the environment—
Chairman
832. Be careful, Mr Cotterill, the whole of
your future is hanging on a word.
(Mr Cotterill) It is not obvious to me that it would
have an adverse effect.
833. "It is not obvious to me that it would
have an adverse effect".
(Mr Cotterill) I find it very difficult to speculate.
Mr Bennett
834. Would it have the other effect then? How
would the use of fuel work out between lots of feeder services
and point to point services?
(Mr Cotterill) The difficulty when one is looking
forward into this sort of radically changed regulatory environment
is predicting exactly what is going to happen because it all depends
on how the airlines react to the changed circumstances.
Chairman
835. I am going to bring you back to some of
the things that I think we can get out of you. What are the relative
yields, revenues and profitability achieved by US carriers on
their trans-Atlantic routes as compared to those achieved by the
UK carriers?
(Mr Cotterill) If I may I will ask Mr Smedley to answer.
836. Mr Smedley, forward.
(Mr Smedley) The historical data suggests that the
UK airlines do achieve higher yields than US airlines across the
Atlantic.
837. Yes, you have made that clear to us in
the information you have given us.
(Mr Smedley) The only information we actually have
on American airlines is for the whole of their European operations,
their trans-Atlantic operations. We do not have any data which
specifically relates to UK operations but one would expect the
general tendency to be the same. I am sorry, I have forgotten
the other part of your question.
838. You are saying that you have only got the
information about what US carriers do within Europe, is that what
you are saying to us? The relative yields seem to indicate that
the UK carriers have got a higher response, is that so?
(Mr Smedley) Certainly this overall data is interpreted
in the light of assuming that what happens on UK routes is typical
of what happens in the EU. Survey evidence which looks at the
split of business traffic, etc., traffic mix on different carriers,
suggests that the UK airlines have generally in the past been
of higher yields and generally higher profitability than the US
carriers.
839. Do you know of airlines that have operated
or are operating in the UK that have been owned or controlled
by foreign individuals or companies?
(Mr Cotterill) The two obvious ones are Britannia
and Monarch, both of whom were given special exemption within
the EU package. Sorry, KLM UK, that has a base here, is 100 per
cent owned by KLM now. In terms of major airlines I think they
are the only ones that I am aware of.
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