Supplementary memorandum by Virgin Atlantic
Airways (AS 13A)
AIR SERVICE AGREEMENTS BETWEEN THE UNITED
KINGDOM AND THE UNITED STATES
1. Since Virgin Atlantic's April submission
to the Sub-Committee on the subject of UK/US air services, there
have been several significant developments. The purpose of this
supplementary submission is to update the Sub-Committee on those
developments.
2. Our own Government's position is fundamental
to understanding the future of trans-Atlantic air services. Two
principles have for long guided the policy of the UK government
in air services negotiations with the US:
— in return for granting additional
access to Heathrow and Gatwick airports to US airlines, all UK
carriers must have effective access to the US domestic market
and US discriminatory practices must be removed. In particular,
the UK has consistently sought liberalisation of US rules governing
airline ownership and control, of the so-called Fly America policy,
of restrictions on the carriage of mail and of wet leasing arrangements;
and
— any deal with the US, whether covering
the whole of the air services agreement or more restricted arrangements,
must be balanced, offering broadly equal benefits to the UK and
the US.
The Government has restated these principles
as recently as the beginning of this year—see Annex.
3. During the past few weeks there appears
to have been a significant shift in UK policy towards air services
negotiations with the US. Despite their previous commitments to
removing US protectionist policies and achieving a balanced deal,
DETR Ministers have signalled that they are prepared to consider
the US version of open skies, which permits access to the US domestic
market only through granting anti-trust immunity for alliances
between UK and US airlines.
4. The US model for "open skies"
would not satisfy the UK's principles. Indeed, it would damage
UK interests. Clearly, if the UK were to give the Americans everything
they want, particularly open access to Heathrow, the UK would
be conceding any chance of persuading the US to amend its protectionist
and discriminatory aviation policies. The UK would be giving up
all its negotiating leverage, and in reality, once given up such
leverage is lost forever. The US would be under little pressure
in future to open up its domestic market and remove (or even refrain
from increasing) discriminatory policies.
5. In return, DETR Ministers appear to be
seeking anti-trust immunity for alliances involving UK and US
airlines. Yet no such applications for immunity are currently
on the table. BA is known to be reviewing its proposed alliance
with American, and has been widely reported also to be in discussion
with several other airlines. British Midland appears to have been
surprised by the new UK position and has been forced to review
its strategy with its US partner, United. It is surely not the
role of Government to seek to influence such critical commercial
decisions by regulatory intervention, particularly with no real
consultation with most UK airlines and consumer groups.
6. The grant of immunity from competition
law requires the approval of the competition authorities on both
sides of the Atlantic. Such approval is not in the gift of the
DETR, although unfortunately the US Department of Transportation
is able to grant immunity—even against the advice of the
US Department of Justice—along with the negotiation of an
open skies deal. It is by no means obvious that the competition
authorities in London and Brussels will amend their demands for
substantial concessions, to redress the anti-competitive effects
of an alliance, in return for approval of an alliance such as
that previously proposed by BA and American. These important concessions
proved to be unacceptable to the two airlines involved as recently
as last year.
7. It is a reasonable conclusion that a
trans-Atlantic alliance is of broadly equal value to each of its
participants. In other words, in the case of the BA/American alliance,
American will benefit at least as much as (and probably more than)
BA. (Analysis by the CAA has confirmed this conclusion). Why,
then, should the UK pay a bilateral price to the US to obtain
approval for such an alliance? The UK Government has repeatedly
insisted that acceptance of the US version of open skies would
benefit the US far more than the UK. Yet it is now, apparently,
prepared to consider such a deal. Such an arrangement can only
be viewed as hopelessly biased in favour of the US. It is certainly
not "balanced."
8. The real interests of consumers do not
appear to have featured in the DETR's calculations. The Consumers
Association, the Air Transport Users Council and the Civil Aviation
Authority (which is required by statute to regulate the UK air
transport industry in the interests of consumers) have all expressed
concern about the competition implications of global airline alliances,
and particularly of course that between BA and American. It is
Virgin Atlantic's understanding that they are all opposed to an
unbalanced deal with the US which would remove the principal UK
negotiating leverage to force the US to become less protectionist.
They recognise the substantial longer-term benefits for consumers
which would flow from a truly liberal bilateral agreement, and
that this is a prize worth holding out for.
9. The structure of the world airline industry
is still in a state of flux, and will continue to be so until
the outdated rules on the ownership and control of airlines are
abolished. Airline alliances are fragile structures, subject to
constant entry and exit, and even disappearance—as recent
manoeuvrings by Alitalia, BA, KLM, United and US Airways show.
The only certainty is that the number and membership of the current
global alliances will look very different even 12 months from
now. This is not a sensible basis on which to give away treaty
rights, and with them the remaining UK negotiating leverage with
the US, particularly when any anti-trust immunity granted by the
US Department of Transportation is time-limited and subject to
review and withdrawal. The true measure of the value of a bilateral
deal between the UK and US is that it will still look balanced
even if the airline alliances collapse.
10. Without detracting from the achievements
of other independent carriers, there can be little doubt that
Virgin Atlantic has been the most successful British airline of
recent years, by almost any reasonable measure and of course despite
having to overcome enormous legal and illegal barriers. It would
be unfortunate, to say the least, if the DETR were to decide to
reward this success by adopting a policy that would undoubtedly
impose severe penalties on Virgin and the many consumers who choose
to travel with us, with no compensatory benefits. It is no coincidence
that fares between London and the US for the vast majority of
travellers remain lower than those from anywhere else in Europe.
11. It is equally notable that more airlines
compete on UK-US routes than on any comparable routes from other
European points, and that there are flights from London to far
more US destinations than from any other place in Europe. Far
from being stifled, the UK-US air travel market continues to grow.
In 1998 (the latest year for which we have figures), UK-US scheduled
passenger numbers grew by 5.1 per cent—faster than the two
next biggest markets, Germany-US and Netherlands-US, both of which
have US model "open skies" agreements in place. And
passengers continue to vote with their feet: only 1.3 per cent
of passengers flying from London's airports travelled to the US
via European hubs in 1999. These figures do not illustrate a market
throttled by restrictions and lack of competition. By contrast,
the number of carriers on some key, busy routes from Heathrow
to the EU has actually gone down, while flexible business fares
to places like Brussels remain far more expensive in pence per
mile than comparative trans-Atlantic fares.
12. Finally, it is unfortunate that others
cast doubt on Virgin Atlantic's position on the liberalisation
of North Atlantic air services. Some three years ago US aviation
officials were briefed by their UK opposite numbers that Virgin
had no real interest in establishing an airline in the US. Such
a demand was being put forward, it was claimed, solely as an attempt
to block a more liberal bilateral agreement. This was untrue,
as Virgin subsequently demonstrated, and UK officials were forced
to acknowledge their "mistake." Virgin has gone on to
show that it is indeed serious about building new airlines in
other countries, most recently in Australia. Yet US officials
are now openly saying that they have been led to believe that
Virgin's opposition to open skies reflects it unwillingness to
see the current bilateral arrangements liberalised.
13. Virgin Atlantic is not opposed to open
skies, only to a version which will keep in place US policies
which are discriminatory and against the long-term interests of
consumers and the UK airline industry as a whole. Virgin of all
UK carriers has surely demonstrated that it has the ability to
thrive in a competitive environment. We see real opportunities
in a fully deregulated trans-Atlantic (and indeed world) aviation
market. But the competition has to be fair. There is a grave risk
now of creating a market permanently distorted in favour of US
airlines, something which even British Airways might come to regret—particularly
just when a new Chief Executive has arrived and is once again
reviewing BA's overall strategy.
Virgin Atlantic Airways
30 May 2000
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