House of Commons - Environment, Transport and Regional Affairs

Select Committee on Environment, Transport and Regional Affairs Eighteenth Report

AIR SERVICE AGREEMENTS BETWEEN THE UNITED KINGDOM AND THE UNITED STATES

Other matters

81. The jewel in the crown of the air service negotiations between the United Kingdom and the United States is access to Heathrow and, to a lesser extent, Gatwick. Both airports are 'full': the Government told us that "demand to use Heathrow massively exceeds the ability of the infrastructure to accommodate it. Throughput is constrained by terminal and aircraft stand limitations as well as runway capacity. Gatwick is operating to the limits of its capacity for much of the day".[280] BAA invited us to consider "the challenges for the operation of Heathrow and Gatwick of a more liberal air service agreement".[281] It observed that liberalisation has tended to lead to additional demand for services, and thus greater need for slots for take-offs and landings, as well as parking and terminal facilities, at airports. We have already commented at length on the problems of airport capacity in the south east of England in earlier reports.[282]

82. In the past, discussions about capacity constraints at Heathrow and the allocation of slots to airlines which want to begin new trans-Atlantic services from the airport have formed a major part of negotiations over a new air service agreement between the United Kingdom and the United States: indeed the matter has frequently proved to be a stumbling block to progress in negotiations.[283] However, the apparent agreement of both Governments that they will seek to ensure only that access to airports is liberalised under a new air services agreement, obliging airlines to rely on 'self-help' means to obtain slots,[284] has to an extent removed the allocation of slots from the centre of the negotiations.

83. Indeed, a number of our witnesses appeared confident that, given access to Heathrow, they would obtain slots needed for trans-Atlantic flights either from alliance partners or from the pool of slots which come up for allocation each year.[285] Delta Airlines said that it might obtain slots "through the normal process, through our partners, possibly through Air France".[286] British Midland told us that it has "the slots available within our portfolio of slots to be able to accommodate the plans that we have".[287] Singapore Airlines said that it was "only asking for one flight a day. We do not think there should be any problem in getting slots for that".[288] BAA foresaw that airline alliances would rationalise short-haul routes from Heathrow in order to provide capacity for long-haul flights.[289]

84. Other witnesses were less content with the means currently available to obtain slots. Delta Airlines and Continental Airlines called for a clear procedure by which they would be able to obtain slots:[290] without such clarity, Delta Airlines concluded that a new air service agreement might amount to "open skies without open ground".[291] Similarly, Virgin Atlantic told us that "the turnover in slots at the principal London airports has been far too low to enable either new entrants or established smaller airlines such as Virgin Atlantic to expand sufficiently to meet consumer demand".[292] It was proposed that the rules governing the allocation of slots should be amended, or at least made more transparent.

85. Slot allocation in Europe is subject to European regulation EC 95/93. Under the regulation airports are designated as 'fully-coordinated' when the demand for slots exceeds supply at certain periods: in the United Kingdom, Heathrow, Gatwick, Stansted and Manchester are so designated.[293] At such airports an independent arbiter manages the allocation of slots according to rules set out in the regulation, by IATA, and, in some cases, agreements reached locally with users of the airport. For example, one of the principal rules set out by EC 95/93 is that first claim on a slot is given to an airline which occupied it in the previous equivalent operating season: what the Government described as "the right of historic precedence, or 'grandfather rights'".[294] Such rights are subject only to the requirement that the slot is used for at least 80 per cent of the operating season.[295] Although the question of ownership of slots has not been resolved,[296] airlines can switch slots they operate from one route to another, or exchange them with other operators, subject to the agreement of the arbiter. It is expected that EC 95/93 will be amended in due course, but proposals to do so are awaited from the European Commission.[297]

86. A number of alterations to the current system of slot allocation have been proposed. In a report published earlier in this Parliament we recommended that during renegotiation of EC 95/93 the Government should advocate the abolition of 'grandfather rights', although current holders of slots should be permitted to continue holding them for a number of years.[298] Our view has been echoed by the House of Lords Select Committee on European Communities, which has concluded that the system of grandfather rights "is now increasingly anomalous and anti-competitive ... The system of grandfather rights combined with the flexibility afforded to airlines to switch slots between routes provides incumbent airlines with too powerful a tool against current and potential competitors".[299] In its evidence to this inquiry, Virgin Atlantic took a similar view, comparing airport slots to television and mobile telephone franchises: it argued that "slots should be held only for a limited period, perhaps ten years, and then returned to the pool for re-allocation".[300] Similarly the CAA told us that grandfather rights worked against competition on a number of routes to and from London, and were "an increasing bottleneck to the further development of competition".[301]

87. Virgin Atlantic also called for a sensible slot trading mechanism,[302] and agreed that one means of establishing such a mechanism would be to permit secondary trading in slots: that is, to allow airlines to buy and sell slots.[303] The CAA said that "secondary trading in slots should be formally recognised and thereby made more transparent ... while historical precedence remains at the heart of the slot allocation system, airlines, large or small, chartered or scheduled, will need to exchange slots and money payments will be an inevitable part of the system if, as will often be the case, exchanges involve slots of significantly differing values".[304] BAA agreed that buying and selling slots already goes on,[305] and said that more transparent secondary trading would improve the way in which slots are used at Heathrow.[306] The Government reported that it expected the Commission's proposals to amend EC 95/93 to include measures to legitimise secondary trading in slots.[307]

88. We are, as we have already said, concerned about the risk that liberalising access to Heathrow will put pressure on airlines to switch slots from the provision of regional and other short-haul services to long-haul flights. Heathrow is, after all, particularly successful because of its ability to offer a range of services to regional, short-haul and long-haul destinations: any diminution of the array of routes it serves will threaten its status as the 'crown jewel'.[308] In an earlier report we commented on the loss of services to regional airports from Heathrow,[309] and proposed that the Government take steps to protect regional services. In particular, we proposed that different categories of slot should be defined for domestic, short range international and long-haul flights, so that swapping of slots between different sorts of services could be controlled.[310] The Government told us that as the Commission's amendments to EC95/93 were developed, it would seek to ensure that it would include "the facility there for Member States to give priority to regional services at the airports where the regulation applies".[311]

89. Reform of European regulation EC95/93, which governs the allocation of slots at airports such as Heathrow and Gatwick, is imperative, particularly if a new air services agreement liberalises access to Heathrow. The Government should review 'grandfather rights' over slots, make clear instead that slots are "community assets",[312] and establish a system whereby slots are allocated to airlines for a defined period of time. The Government should also support amendments which put in place a transparent means by which airlines can trade slots with one another, whether or not such a system involves secondary trading. Such measures will make access to Heathrow and Gatwick for new operators more straightforward, and will therefore encourage competition. However, steps should also be taken to protect regional and other short-haul services, and we welcome the Government's intention to support amendments to the regulation which will achieve that aim.

90. Many of the difficulties experienced in the relationship between the United Kingdom and the United States have resulted from the shortage of capacity at Heathrow and, to a lesser extent, Gatwick.[313] Moreover, the concern that a more liberal regime of access to routes from Heathrow to the United States will put pressure on the airport's network of regional and short-haul services also result from the fact that inadequate capacity at the airport will mean that some existing services will be lost if new services are introduced. British Airways told us that "unless an expansion of Heathrow can be achieved at the same time as an 'Open Skies' deal is announced, British Airway's current short-haul network (including its services to the UK regions) will be under pressure ... a failure to expand Heathrow's infrastructure will undermine the benefit of 'Open Skies'. In terms of timing these two issues must be run together".[314]

91. It seems highly unlikely, however, that the conclusion of a new air services agreement with the United States could await the construction of new runway and terminal capacity at Heathrow. The CAA told us that "there seems to be little prospect of a major expansion of aviation infrastructure in the short to medium term".[315] Nevertheless, we concluded in 1998 that the Government must address the problem of airport capacity in the south east of England as a matter of urgency.[316] Two years later the implementation of that recommendation is all the more pressing. In its evidence the Government told us that a consultation document about aviation would be published later this year, and the review of air services in the south east of England "some time later next year":[317] no date was given for the publication of a statement of the Government's aviation policy. We are disappointed to note that publication of a document setting out the Government's aviation policy still seems to be a long way off. Without a clear statement of Government policy and a commitment to investment in runways and terminal facilities, the current lack of capacity at Heathrow and Gatwick, and the potential increase in 'mixed-mode' activities there, which is likely to be exacerbated by a new liberal air services agreement between the United Kingdom and the United States, will not be permanently addressed.

AIRLINE MERGERS

92. During the course of our inquiry British Airways announced its intention to merge with the Dutch airline KLM.[318] We do not intend to comment in detail upon the two airlines' plans in this report, although we note in passing that such a merger would have a significant impact on the provision of air services within Europe, particularly from the United Kingdom, as well as on the development of British airports, particularly Heathrow. It also has implications for airline alliances, and thus for competition. KLM is allied with Northwest, and British Airways with American Airlines, and the possible merger between KLM and British Airways appeared at one time to be matched by moves to bring Northwest and American Airlines together.[319] However, our concern in this report is the impact plans for such a merger have had, and will have in future, on negotiations for a new air services agreement between the United Kingdom and the United States.[320]

93. Bilateral air service negotiations are based, as we have said, on a basic principle: that certain airlines can be identified as being of a certain nationality, such that Governments can negotiate one with another on their behalf.[321] The merger of airlines of different nationalities undermines that principle, and consequently the basis for bilateral negotiations. The difficulty is particularly acute in the case of British Airways and KLM, since the Netherlands has an 'Open Skies' agreement with the United States, and so KLM enjoys much more liberal access to the United States than does British Airways. It is not clear whether British Airways would benefit from such liberal access if it merges with KLM: media reports suggest that it would not.[322] Moreover the status of other airlines which provide air services between this country and the United States is also under review: as we have said, talks appear to have taken place between Northwest and American Airlines, talks are underway between United Airlines and USAir,[323] and there are reports of possible mergers between Delta Airlines and Continental and between Delta and American Airlines.[324] Such developments are certain to influence the attitudes of competition authorities on both sides of the Atlantic to proposed 'immunised alliances' between British Airways/KLM and any US carrier.

94. We are concerned that the uncertainty caused by the current round of talks between airlines about possible mergers will lead to a lengthy delay in the conclusion of negotiations over air service agreements between the United Kingdom and the United States. For that reason we urge the two Governments in the interim to reach a preliminary deal about those areas of common interest not affected by airline mergers: the charter market and matters relating to all-cargo carriers. We also urge both Governments to recognise that bilateral negotiations will prove increasingly difficult, if not irrelevant, if, as seems likely, airlines merge and form closely-co-operating alliances. However, it is clear that the instigation of multi-lateral rather than bilateral negotiations would have a considerable impact on the economic and consumer interests of the United Kingdom. We therefore recommend that the Government urgently investigate the effect that moving to multi-lateral negotiations would have on the economic and political rights and interests of the United Kingdom.

NEGOTIATIONS BETWEEN THE EUROPEAN UNION AND THE UNITED STATES

95. The most advanced proposal for multi-lateral negotiation would permit the European Commission to negotiate with the United States on behalf of all member states of the European Union. Although the Council of Ministers has so far declined to grant the Commission a full mandate in the matter, in June 1996 it approved a limited mandate for the Commission to hold exploratory talks with the United States on a possible regulatory framework for a future trans-Atlantic Common Aviation Area (TCAA).[325] Such a Common Aviation Area would resemble the existing European single aviation market, allowing airlines to provide services according to their commercial judgement. There would be common regulation, dealing only with ensuring that competition was free and fair, that airlines operate to high standards of safety and security, and that consumers are protected. The Government pointed out that "this would be a total departure from the traditional bilateral system where commercial entitlements are exchanged incrementally and would bring regulation of aviation more into line with that of other sectors".[326]

96. In practical terms, the establishment of trans-Atlantic Common Aviation Area would require considerable changes to current regulations both in the European Union and particularly in the United States. The Government told us that in negotiations the Commission would seek unconstrained market access, including seventh freedom rights and cabotage rights;[327] relaxation of limits on investment and control of airlines, initially to 49 per cent of stock, which is the level currently permitted in the European Union, and later to 100 per cent; free pricing, subject to regulations to prevent excessively high or low fares; convergent application of competition rules; consistent regulatory regimes; and an effective procedure for resolving disputes.[328]

97. It is argued that a trans-Atlantic Common Aviation Area would bring significant benefits. The Government told us that "experience with airline deregulation in the US, and with the European single aviation market, suggests that a liberalised TCAA would provide user benefits through enhanced competition. This ought to result in lower prices, increased frequencies, improved quality of service and a wider range of choice. A TCAA would in principle provide extensive commercial opportunities for UK carriers, allowing them to compete on equal terms both with US airlines and with their competitors in Europe".[329] The CAA told us that "compared with a fully liberalised North Atlantic aviation market, the presence of government-imposed restrictions on air services ... inevitably imposes a cost".[330] It argued for "full liberalisation of the European Union-United States market ... The model which such an outcome would establish would then provide the basis for global liberalisation".[331] Global liberalisation, the CAA said, would enable British airlines to build global networks through alliances, mergers or takeovers, to flourish as strong and effective companies, and to access capital markets, helping them to obtain capital more cheaply. Aviation investment, activity and thus employment would therefore increase,[332] bringing considerable economic benefits to the United Kingdom as a whole.

98. The CAA also argued that negotiating through the European Union was not only desirable, it was in some senses inevitable. Rules governing the ownership and control of airlines are set by the European Union, not by the United Kingdom.[333] Regulations controlling the allocation of slots at airports are determined at European rather than domestic level. The single aviation market is governed by European legislation. Finally, although member states of the European Union can grant fifth freedom rights beyond their borders, only at European level can flights operated under fifth freedom rights be viewed as cabotage services, and thus negotiated against rights to operate cabotage services in the United States. Thus, the CAA said, "it is simply not possible for the United Kingdom alone to negotiate a full liberalisation... There is only one way and that is through the European Union negotiating with the US".[334]

99. We note British Airways's view that the framework needed to support negotiations by the European Commission with the US would take some time to put into place.[335] We also note the Government's comments that the Commission "is not likely to get a [full] mandate [to negotiate with the US] before the end of this year", and that "in terms of resources and personnel ... clearly in terms of aviation negotiations the Commission does not possess the experience and expertise that some Member States, notably the United Kingdom, possess".[336] In fact, the Government's view was realistic: it did "not rule out granting the Commission a full mandate at some point in the future, but we would need to be convinced that a fully liberalised TCAA was achievable and that the interests of UK consumers and airlines would be best served by Community-level negotiations".[337] Whilst we recognise that the creation of a trans-Atlantic Common Aviation Area would be desirable, we agree with the Government that the European Commission should only be given a mandate to negotiate with the United States when it becomes clear that a Common Aviation Area is achievable, and that its creation is in our best interests.

280 AS01, para.41. Back

281 AS17, para.8. Back

282 See Regional Air Services, HC (1997-98) 589-I, paras.67 ff, and Aviation Safety, HC (1998-99) 275, para.97. Back

283 See, for example, AS19, para.2.2, and Q.722. See also the dispute between the United Kingdom and the United States over USAir's bid to operate a service between Charlotte and Gatwick, and British Airway's application to begin a service to Denver, raised in Secrets of the transatlantic slots game, The Guardian, 4 February 2000, p.29. Back

284 Characterisation in Q.592. Back

285 Each year new slots become available due to incremental improvements in operating procedures at the airports, and the return by airlines of slots they do not need or have not used. Of these, half must be offered to new entrant airlines under European slot allocation rules. See Regional Air Services, HC (1997-98) 589-I, para.71. Back

286 Q.594. Back

287 Q.159. Back

288 Q.362. Back

289 See Q.456. Back

290 See paras.40 and 70. Back

291 Q.593. Back