Memorandum by Virgin Atlantic Airways
(AS 13)
AIR SERVICE AGREEMENTS BETWEEN THE UNITED
KINGDOM AND THE UNITED STATES
1. INTRODUCTION
1.1 Virgin Atlantic Airways welcomes this opportunity
to present its views to the Transport Sub-committee on the topical,
complex and increasingly thorny subject of air service agreements
between the United Kingdom and the United States.
1.2 The history of Virgin Atlantic is well
known. Now almost 16 years old, it has overcome enormous barriers
to market entry and fierce opposition from entrenched interests
to establish itself as one of the leading airlines in the world.
The substantial number of awards received reflects Virgin Atlantic's
renowned innovative, high quality, value-for-money products. By
June this year a total of 10 US destinations will be served, consolidating
Virgin's position as the third largest European carrier across
the Atlantic. Virgin also serves Johannesburg, Cape Town, Tokyo,
Hong Kong, Shanghai, Barbados, Antigua, St Lucia and Athens, and
Delhi will soon be added to the route network
1.3 Virgin Atlantic has never shied away
from competition, provided it is fair competition. Virgin's first
service was on the largest intercontinental route in the world,
against some of the biggest airlines. The same pattern has been
followed ever since. Unlike many other airlines such as British
Airways and British Midland, Virgin Atlantic does not participate
in IATA tariff co-ordination. Competition is at the heart of Virgin's
business approach.
1.4 There have been allegations recently
that fares between the UK and US are excessive, reflecting the
fact that only two UK and two US airlines are allowed to serve
the US from Heathrow under the Bermuda II agreement. Such allegations
are highly misleading:
— there are actually seven, not four,
airlines permitted to serve the US from Heathrow;
— promotional fares to the US from
London, including Heathrow, are among the lowest in Europe, as
the Civil Aviation Authority has shown, hardly suggesting a lack
of competitive pressure;
— the same is true for fully-flexible
Economy fares, used primarily by cost-conscious business travellers;
— published business class fares may
appear relatively high, but very few passengers actually pay them.
Discounting is particularly prevalent in the UK market, almost
certainly more so than in most other European countries;
— the quality of the products offered
by UK long-haul airlines tends to be superior to that offered
by most other carriers. This is especially true of Virgin Atlantic,
whose service quality is unrivalled. Virgin's Upper Class offers
limousine service at each end of the journey, unique Drive-Through
check-in, unrivalled lounges at Heathrow and Gatwick, and beauty
therapists, a bar and restaurant-style Freedom meal service on
board the aircraft. No airline across the Atlantic provides such
a high level of service to its business class passengers. Virgin
also has a unique Premium Economy cabin offering more space and
comfort and superior service than Economy at a price level considerably
below business class fares;
— the idea that Virgin would collude
with BA to fix fares would quite rightly appear preposterous to
most observers.
2. BERMUDA II
2.1 Bermuda II was signed in 1977, and immediately
ran into criticism from powerful interests in the United States.
It has been a central tenet of US international aviation policy
ever since to seek to replace Bermuda II with a more liberal agreement.
However, it is wrong to view Bermuda II as an agreement set in
concrete. It has evolved over the years to permit substantial
expansion of air services between the two countries. The UK still
accounts for some 40 per cent of total traffic between Europe
and the US. More US cities are served from London, at greater
frequency, than from any other European city. Only Heathrow and
Gatwick still have significant restrictions on the provision of
services to the US.
2.2 Nevertheless, Bermuda II is a restrictive
agreement, one that should be replaced as soon as possible. Virgin
Atlantic has consistently and actively lobbied for reform over
many years, a position unique among UK scheduled airlines. Virgin's
approach is straightforward. Air transport is now a mature business
and should be treated like other mature industries. There is no
justification for regarding airlines as being "different"
and in need of special protection. The role of governments should
be limited to encouraging competition and ensuring that it is
fair. This approach is consistent with the positions taken by
both the current and previous UK Governments.
2.3 The US authorities similarly protest
that they favour a competitive environment and have now signed
almost 50 so-called "open skies" bilateral agreements
with other countries. Each of these provides for operational and
pricing freedom for services between and beyond the two countries
concerned. At the same time, the US has repeatedly criticised
the US for being protectionist and refusing to allow open competition,
at the expense of consumers. Such criticism is wholly unfair.
2.4 The US version of open skies is in fact
itself protectionist, designed essentially to serve the interests
of US airlines against their foreign competitors. This is primarily
because it omits certain key areas of liberalisation.
2.4.1 The US refuses to consider the opening
up of its enormous domestic market, which accounts for almost
40 per cent of world aviation. Protecting this market from foreign
competition gives US carriers substantial advantage over foreign
airlines. Yet the US insists that any open skies agreement it
enters into should include full fifth freedom rights to enable
US airlines to fly without restriction beyond the foreign country
concerned. In the European Union this means that US airlines are
able to fly between Member States, for example from Copenhagen
to Vienna, or Frankfurt to Lisbon, but European carriers are prevented
from serving Chicago from New York or Atlanta from Boston. Even
in strictly mercantilist terms, there is a clear balance of opportunity
if the European Economic Area is treated as equivalent to the
US domestic market. In terms of geography, population and economic
activity the two areas are broadly similar, and the European Aviation
Area is about to be extended to include several additional countries.
2.4.2 All countries place restrictions on
the foreign ownership and control of their airlines. However,
the US rules are particularly restrictive. Foreigners can own
only 25 per cent of the voting shares of a US airline (compared
with 49 per cent of a European carrier) and are not allowed to
exert significant managerial control. There are also severe restrictions
on Board and senior management appointments. This is a purely
protectionist move unthinkable in the UK, where a US citizen heads
BA's subsidiary, Go. Virgin has made no secret of its wish to
establish an airline in the US, as we have already done in Brussels
and are about to do in Australia. However, we are unable to do
so in the US, despite strong encouragement from consumer groups
and communities. It simply defies logic that Virgin can open Megastores
at will in US cities, or produce and sell soft drinks there, but
is prevented from establishing an airline. The UK has for long
adopted a far more flexible approach to foreign ownership and
has permitted some large British airlines to be fully owned by
foreign nationals.
2.4.3 One of the most glaring examples of
US protectionism is to be found in its so-called Fly America Policy.
This stipulates that anyone employed by or having a contract with
the US Government can buy an air ticket only from a US airline
while travelling on business. This overt discrimination costs
carriers such as Virgin Atlantic many millions of pounds each
year in lost revenue. It is indefensible, especially when applied
by a government that claims to favour fair and open competition.
The arguments advanced in defence of it do not stand up to any
serious examination. No similar policy is applied in the UK. Indeed,
the Foreign Office has a contract with United Airlines for its
staff travel to the US. The US also restricts the carriage of
US mail on foreign airlines.
2.4.4 Another example of US protectionism
involves the wet leasing of aircraft. (Essentially, wet leasing
is the leasing of aircraft together with their crew; dry leasing
is the leasing of the aircraft alone.) US companies earn many
millions of pounds every year from wet leasing aircraft to UK
carriers. The US authorities, however, apply severe restrictions
on foreign airline wet leasing operations in the US, making such
activity wholly uneconomic. The UK all-cargo airlines have been
particularly affected by this protectionism, but other carriers
are disadvantaged as well. Virgin Sun, for example, has been prevented
from leasing aircraft to US operators during off-peak winter seasons.
The US authorities justify their policy on safety grounds, but
it is difficult to conclude that this is anything other than a
front. For example, the US has indicated that it is prepared to
accept a wet lease operation for international flights, such as
London to New York, but not for US domestic sectors, such as New
York to Boston. How can an aircraft and its crew be perfectly
safe when they land in New York, but unsafe to continue on to
Boston?
2.4.5 Over the years the US has sought to
apply many other restrictions on foreign airlines, designed essentially
to favour US carriers. A relatively recent example is the so-called
Hatch Amendment. This law states that the airport security measures
applied by foreign airlines in their own markets must be identical
(not similar to or equivalent to) those applied by US carriers
in the US. It was introduced following intensive lobbying by large
US airlines concerned that they were incurring more security costs
than their foreign competitors. There is no evidence that security
measures at UK airports are any less effective than those at US
airports. If anything, the opposite is true. We are pleased that
the UK Government has refused to accept this unnecessary, discriminatory
and unworkable law. It is indicative, however, of the US approach
to international aviation competition.
2.5 If the US version of open skies is so
unsatisfactory, why have so many other countries agreed to it,
especially in Europe? The answer is to be found in the grant of
anti-trust immunity to airline alliances. The US Department of
Transportation is responsible both for US international aviation
policy and for approval of international airline alliances. Essentially
the DOT has "sold" anti-trust immunity in return for
acceptance for its restricted version of open skies. If Lufthansa,
for example, wanted approval for its alliance with United, it
had to persuade the German Government to agree to an open skies
agreement on US terms.
2.6 This has had two unfortunate results.
First, the US has been able to force its one-sided open skies
agreements on many more countries than it would otherwise have
been able to do. Secondly, there is a widely-held view that airline
alliances have not received the depth of investigation by the
US authorities that they deserve. It is relevant that the Department
of Justice, which is responsible for the application of US competition
law in almost all other industries, has been highly critical of
the anti-competitive effects of certain airline alliances, a view
apparently not shared to the same extent by the Department of
Transportation.
2.7 The UK has been fortunate in avoiding
the same mistake that most other European countries have made.
It is also fortunate in having something that the US desperately
wants, namely additional access to Heathrow. This is the jewel
in the UK's negotiating crown, something that the US is willing
to pay a high price to obtain. It should not be wasted. In particular,
so-called "mini-deals" involving additional Heathrow
access for US airlines risk weakening the UK's position by chipping
away at its key negotiating strength, and thereby reducing the
US' appetite for a more comprehensive open skies deal. If the
UK is to achieve genuine liberalisation with the US, either alone
or as part of a wider negotiation, it is vital that it makes full
use of whatever negotiating leverage it has. This may take longer,
but the end results will more than justify the delay, for consumers
and the UK airline industry.
2.8 Recently the US has urged the UK to
allow USAirways to serve London-Pittsburgh, following BA's withdrawal
from the route. In principle, Virgin Atlantic has no objection
to such a proposal, provided similar rights, of equal value, are
made available to UK airlines. (This exchange of rights has in
fact now taken place). It is worth mentioning, however, that for
many years Virgin sought permission to serve Las Vegas from London.
We were repeatedly denied the right to do so by the US authorities
on the grounds that all the UK's route opportunities under Bermuda
II were already utilised. Yet when a US airline found itself in
the same position, the UK Government was accused of being protectionist
and of not caring about consumer interests, and threats were made
against the services of the UK airlines.
2.9 The US has shown repeatedly that it
is prepared to ignore the provisions of the Bermuda II agreement
in order to pressurise the UK to accept its demands. This is one
of the reasons why Virgin Atlantic has been so opposed to unilateral
concessions by the UK, such as the granting of additional fifth
freedom rights to US all-cargo airlines at Prestwick, which invariably
are not reciprocated.
3. EU/US NEGOTIATIONS
3.1 For some time Virgin Atlantic has urged
the UK Government to support air services negotiations between
the European Union and the US. There are several reasons why the
European Commission should be given such a mandate. One of the
more obvious is that repeated attempts to liberalise UK/US air
services on a bilateral basis have failed, often resulting in
ill-feeling on the part of one country or the other, or even both.
Mistrust now seems to be endemic in these negotiations, with the
result that there is little likelihood of achieving the UK's long-held
objective of full liberalisation. Only limited agreements are
possible, and as already argued, there is a risk that these will
undermine the UK's (and the EU's) negotiating leverage to achieve
a larger deal.
3.2 In addition, given the similarities
between the EU and US in terms of geography, population and economic
activity, there is a clear logic in negotiations taking place
at this level. Neither side could argue that a full exchange of
rights would be unbalanced in favour of one party. The US in particular
would no longer be able to protect its home market while insisting
on almost unfettered access to the European market. Furthermore,
airline ownership and control rules, probably the most important
single reform yet to be widely achieved in aviation, are governed
in Europe by an EU Regulation. The UK can continue to press the
US to allow up to 49 per cent foreign ownership of airlines, in
line with the existing EU Regulation. But if airlines are to be
treated in the same way as other industries, and the US is to
be persuaded to change its ownership and control rules, the EU
Regulation must be changed—and that requires the involvement
of the European Commission. Slot allocation and wet leasing rules,
issues which similarly must be addressed in any negotiation with
the US, are also covered by EU Regulations.
3.3 Virgin has been disappointed that the
UK Government has so far not agreed to grant the Commission the
negotiating mandate it has sought. The political sensitivity of
granting more power to Brussels is recognised. However, successive
governments—Conservative and Labour—have accepted
that international trade issues are dealt with at an EU level.
Air services are clearly a trade issue. The Commission negotiates
on behalf of the EU in almost every other industrial sector.
3.4 It is vital that as a matter of urgency
the UK seeks to influence the EU's negotiation mandate. We can
assume with confidence that other Member States are engaged in
just such behind-the-scenes lobbying. The EU's objective should
be to create a Trans-Atlantic Common Aviation Area similar to
the one that already exists within Europe. It is reassuring to
note that the other major European scheduled airlines represented
by the Association of European Airlines (including British Airways
and British Midland), have now publicly supported this approach.
3.5 It is distinctly possible that the Commission
will receive its negotiating mandate within the next year, leading
to an agreement with the US after that. This, however, would not
be the end of the matter. Virgin Atlantic would expect other countries
committed to the liberalisation of air services to seek to join
an EU/US Common Aviation Area. Eventually aviation could be included,
just like most other industries, in the General Agreement on Trade
in Services (GATS).
4. FIFTH FREEDOM
SERVICES
4.1 Given that Virgin Atlantic seeks the
full liberalisation of air services, across the North Atlantic
and elsewhere, it follows that we believe that there should be
no restrictions on fifth freedom operations. Airlines should be
free to fly wherever they want, subject only to safety and competition
supervision.
4.2 However, Virgin does not support the
unilateral grant of fifth freedom rights by the UK, whether for
regional or London airports. Fifth freedom rights can be of considerable
value to foreign countries. There will be occasions when they
can be used by the UK to obtain rights for British airlines, benefitting
both the industry and consumers. In Virgin's view, it would be
foolish for the UK to give away even the possibility of such a
mutually beneficial exchange. Each case should be examined on
its merits, taking into account any regional, economic and consumer
benefits as well as the interests of the airlines involved.
5. INFRASTRUCTURE
CONSTRAINTS
5.1 Virgin Atlantic has expanded rapidly
in recent years, doubling in size since 1996. However, its rate
of expansion has been restricted because of the absence of viable
take-off and landing slots at Heathrow and increasingly Gatwick
Airports. This problem will almost certainly get worse, even if
decisions were taken today to increase available capacity. Virgin
currently has some 2 per cent of all slots at Heathrow and Gatwick,
compared with BA's control of 37 per cent and 45 per cent respectively
at each airport.
5.2 The Deputy Prime Minister is to be congratulated
on launching a review of the UK's airport requirements over the
next 30 years. Such a long-term approach is vital if consumer
demand is to be satisfied and UK economic growth not held back.
Virgin is participating in the studies now taking place and looks
forward to the Government's White Paper on Aviation Policy due
to be published next year. Virgin fully supports the Sub-committee's
recommendation in its 1997-98 report on regional air services
that "the Government must produce a clear statement of airport
and aviation policy, given the changes in the aviation industry
over the past 10 years and the capacity pressures in the system.
In view of the reluctance of BAA to make plans for future runway
capacity, it must be for the Government to make statements on
this vital national matter."
5.3 However, airport development is necessarily
a long-term business. Something needs to be done now if the benefits
of airline competition are not to be frustrated. A particularly
severe barrier to entry faced by smaller, innovative airlines
such as Virgin Atlantic at Heathrow and Gatwick is the existence
of so-called grandfather rights for airport slots. Grandfather
rights mean that provided an airline continues to use a slot,
it is guaranteed to keep that slot in perpetuity. This cements
into place the current industrial structure and prevents sufficient
slots becoming available to ensure that real competition can flourish.
5.4 Slot allocation at Heathrow and Gatwick
is governed by an EU Regulation. The stated aim of this Regulation
is to encourage competition, particularly by new entrant carriers.
In this respect it has failed. 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. The Regulation is in desperate
need of reform, yet the Commission has repeatedly failed to honour
its commitment to produce a new proposal. Virgin Atlantic believes
that any reform should abolish grandfather rights. Slots should
be held only for a limited period, perhaps 10 years, and then
returned to the pool for re-allocation. This is how other scarce
resources are dealt with, such as TV and mobile telephone franchises.
Virgin's position on this issue would seem to be very close to
the recommendation made by the Sub-committee in its 1997-98 report
on regional air services. ("The Government should advocate
changes to the European slot regulation so that it . . . establishes
that slots are not the property of the airline and abolishes indefinite
grandfather rights over slots, although airlines should be able
to use them for a number of future seasons").
5.5 The US has made no secret of its desire
to achieve meaningful increased access to Heathrow, not just theoretical
access. Any negotiation on air services liberalisation, whether
bilaterally or between the EU and US, will have to address this
issue. It is not in the UK's power, and in any case would not
be desirable, to allocate Heathrow slots to US airlines by means
of a special dispensation. The solution to the problem has to
lie in the reform of the current EU Slot Regulation. A combination
of the abolition of grandfather rights and a sensible slot trading
mechanism would ensure that liberalisation could be achieved in
practice as well as in theory. The benefits in terms of increased
competition, with consequential gains for the travelling public,
would be substantial.
Virgin Atlantic Airways
April 2000
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