Supplementary memorandum by Federal Express
(AS 90A)
I first would like to thank the Committee for
providing the opportunity for FedEx's chairman, Mr Frederick W
Smith, and myself to give evidence on the status of US-UK air
services agreement. Despite the limited amount of time available
in the session, the principal issues at stake with regard to a
liberalised US-UK air cargo regime received a broad and balanced
airing. The Committee should be commended for taking the initiative
of revisiting this issue at this time.
I understand that the Clerk has passed on certain
questions still remaining regarding Federal Express' business
in Europe and the obstacles that stand in the way of progress
towards a more liberalised US-UK air cargo agreement. We would
like to respond to these questions first before adding a few brief
comments, which we hope will be of use to the Committee in preparing
its final report.
OPEN SKIES
ELSEWHERE
With respect to the impact on domestic air freight
carriers of open skies agreements with the US, the Aviation &
Travel Consultancy report (provided with our initial submission
to the Committee) looked at the growth of cargo capacity in two
other countries, Germany and the Netherlands. In both countries,
growth far outstripped that in the UK—169 per cent in Holland
and 73 per cent in Germany, as compared with 24 per cent in the
UK. This demonstrates the confidence that these operators have
in their future success, which has obviously not been dampened
by the introduction of US competition under the open agreements.
We would also draw attention to the success
of operators such as Cargolux and CargoLion in tiny Luxembourg
as evidence that opportunities to exploit the significant levels
of US international traffic can and have been taken by carriers
of similar size to the BCAA members. These carriers have actively
embraced the entrée to the US market provided by their
country's open skies agreement. Additionally, major carriers such
as Lufthansa have dramatically increased their participation in
the US export/import market with the advent of cargo open skies,
offering new transatlantic freighter operations. With Seventh
Freedoms on offer from the US as well as the customary Fifths,
it would appear that UK carriers stand to benefit to an even greater
extent than many other European carriers in a liberalized environment.
Airports are also beneficiaries of open skies,
and are concomitantly penalized by restrictive agreements such
as Bermuda II. Some statistics demonstrating the impact of Bermuda
II on air cargo growth at UK airports are set forth in Attachment
1. It compares growth rates at major (in terms of cargo) European
and Asian airports in open skies jurisdictions with those at UK
airports. Even at the "integrator" airports—those
dominated by the express companies—the UK's growth rates
lag behind those on the Continent. Stansted and East Midlands,
which benefit from major integrator operations, had only a 1 per
cent and 4.5 per cent growth, respectively, over the last year,
while the rate for Liege (TNT's hub) was 26.8 per cent, CDG (FedEx
hub) 22.1 per cent and Brussels (DHL) 9.9 per cent. Only two UK
airports experienced double-digit growth: Edinburgh, a regional
hub for Royal Mail; and Birmingham—the latter with a rather
anomalous 44.8 per cent. The balance of the airports in the UK
had growth rates ranging from only 1 per cent to 6.7 per cent,
while open skies airports such as Munich in Germany and Seoul
in Korea experienced growth at well over 15 per cent.
In Section 5 of the Aviation and Travel Consultancy
report, longer-term growth at airports was examined, looking specifically
at London and Amsterdam (prior to slot controls). The report states
that between 1990 and 1997, cargo at the three London airports
grew by only 68 per cent on an aggregate basis, while at Schipol,
cargo grew by 92 per cent.
As impressive as these figures are, they do
not tell the whole story in terms of employment, regional economic
growth and increased competitiveness enjoyed by the countries
that have participated in all-cargo open skies. There is no reason
why similar growth patterns could not be generated and indeed
exceeded in the UK should a liberalized air cargo agreement be
reached with the US.
CARGO LIBERALIZATION
IN THE
UK-US NEGOTIATIONS
Given all those potential benefits, the concern
must be that if an agreement on cargo is not realized before the
end of this year, it will be delayed for at least another 12 to
18 months. A change in the US presidency at the end of this year
and a UK General Election at some point in 2001, will effectively
paralyze the negotiation process for some time, and UK shippers,
airports and regions will once again be forced to wait. The most
recent negotiating session between the US and the UK appeared
to be stalled once again by the commercial concerns of the passenger
carriers—this time, the potential merger of BA and KLM.
Mr Devine questions whether liberalisation of
air cargo will be a priority for US, and UK negotiators in the
upcoming aviation negotiations. Federal Express has made numerous
representations to both Governments and now before both a Senate
Hearing and your own Committee to the effect that air cargo must
not be overlooked once more in pursuit of a new agreement. Traditionally
treated as the poor relation of passenger issues, air cargo liberalisation
has been "just around the corner" according to successive
US and UK administrations. However, we have reason to believe
that this will change. In June this year the US Department of
Transportation reaffirmed its commitment to dealing with both
passenger and cargo issues in any new bilateral agreement.
THE EFFECT
OF THE
BCAA
As we sought to clarify for the Committee during
oral evidence, apart from the fact that we both fly planes with
no seats, comparing the business of integrators such as Federal
Express, and the BCAA members is both misleading and counterproductive.
While Federal Express (along with UPS, DHL and TNT) offer regular,
scheduled express services, the British operators essentially
provide charters for those seeking one-off or ad hoc deliveries
as well as leasing their aircraft to airlines seeking to hold
out freighter services. To meet the special needs of the types
of operators, the US has offered not only Fifth Freedom rights,
but also Seventh Freedoms. With those rights, charters may easily
be offered by UK carriers in the US export-import market without
any linkage to the homeland.
The extent to which the UK Government's room
for compromise within the talks will be restricted by pressure
from these "British" carriers is difficult to predict.
We were amused to see from the transcript of the evidence that
the BCAA now describes TNT and DHL as "supporters" of
these British interests. TNT, the express arm of TPG Groep NV
(the Dutch post office) of course, is not an airline at all, but
contracts out its aircraft to various European operators, including
Air Foyle, a BCAA member. TNT is now in the process, however,
of forming a wholly-owned Belgian air carrier based at Liege,
which action eventually will result in the removal to the Belgian
registry of the nine BAE146 aircraft which Air Foyle operates.
The DHL network includes two airlines whose operations touch the
UK—a US carrier (which has no Fifth Freedom rights at all,
due to the strictures of Bermuda II) and a Belgian carrier, EAT,
based at Brussels.
The BCAA is asking that the UK government obtain
cabotage for its members, a right that neither the US nor the
UK have granted to any country through the bilateral process.
Under US law, cabotage operations are forbidden in all but emergency
circumstances. This statute would have to be amended in order
to accommodate the desires of these carriers, which is simply
not in the political cards during this election year. The effect
of the BCAA's position is to impose an impossible condition on
the negotiators, for the foreseeable future. Furthermore, we question
whether cabotage is as important an issue for the BCAA as they
make out. In his evidence, Sir Michael Bishop explained to you
why he believed that cabotage is a non-issue for passenger carriers.
In the cargo context, it is not just a non-issue, but it is worse
than that—it is a bar to any further progress.
"RUSSIAN"
AIRCRAFT
I know that you requested the BCAA to give you
data on Russian aircraft operations, but I also hope that you
look at other former Soviet aircraft held out under the names
of BCAA carriers. Heavylift, one of the BCAA members, does in
fact wet-lease Russian aircraft, according to CAA records, painting
them with the livery of both Heavylift and Volga-Dnepr (the Russian
airline that owns and operates them). However, another BCAA member
also benefits from Antonov aircraft, this time on the Ukrainian
registry, without "operating" them in the technical
sense of the word. Air Foyle, a UK AOC holder, acts as "exclusive
GSA" for the Ukrainian Antonov Airlines, and those large
aircraft are painted with both Air Foyle and Antonov livery.
CONCLUSIONS
Based on conversations with a wide range of
officials and government representatives, there appears to be
a general recognition of the wider benefits to UK business consumers
and employees from a more liberalized regime. These benefits were
outlined in the Aviation and Travel Consultancy's report. In offering
UK negotiators Fifth and Seventh Freedom rights and a reformed
wet-lease/charter regime, the US administration is, in our view,
providing the basis for a reciprocal agreement by any definition.
The US export/import air cargo market is a rich one for airlines—seven
times larger than the UK market, in 1998. What is on offer to
the UK carriers is not only valuable, but a package unrivalled
by any other country with whom the US has negotiated an open skies
agreement, according to US officials.
Mr Smith has personally been engaged for around
20 years in efforts to try to liberalize Bermuda II, which is,
as Sir Michael Bishop reminded the committee in evidence following
ours, one of the most restrictive aviation agreements still in
existence. While encouraged by the recent statements from both
the US and UK governments, FedEx remain cautious in light of the
many false dawns that have been witnessed down through the years.
As an island economy, and with its track record
as a trading nation and supporter of free competition, the UK
can no longer afford to be left isolated amongst its major European
counterparts. Federal Express' written submission to the Committee
highlighted the relatively small amount of cargo moved by air
from the UK compared to other EU Member States. Figures were also
produced demonstrating the comparative lack of success that the
UK has had in convincing major US and Asian companies to site
their European Distribution Centers in the UK.
Federal Express remains ready and committed
to expanding our UK business under a new agreement. As Mr Smith
stated to the Committee, we will re-instate wide-bodied service
into Scotland as soon as an open skies agreement for air cargo
is agreed between the UK and US. This will be backed by further
investment at our Stansted and Scottish facilities and, in time,
commitment to other regional airports, which will be used to feed
into our UK and European hubs. Not only will this create additional
jobs, it will improve services to customers, stimulate regional
economic growth and increase the competitive position of UK companies.
This catalytic effect was recognized by the Transport Committee
in its 1994 report, and its recommendations regarding air cargo
liberalization are ones that Federal Express continues to wholeheartedly
endorse. It is our sincere hope that now, six years after that
report, both the UK and US governments will now demonstrate the
political will to act upon those recommendations.
M Rush O'Keefe Jr
Vice President—Regulatory
16 June 2000
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