Supplementary memorandum by British Airways
(AS 19B)
AIRCRAFT WET-LEASING ARRANGEMENTS—PARTICULARLY
BETWEEN THE UNITED KINGDOM AND THE UNITED STATES
INTRODUCTION
1.1 International air-freight is a highly
competitive business, and one which is chiefly driven by price.
A great deal of the high-volume market is carried on a sixth freedom
basis. Even when UK carriers have been successful in building
up a particular market, if they are not able to maintain this
service at a competitive price, the business will be lost to other
more competitive carriers.
1.2 In the UK, British Airways is the only
passenger carrier to have a significant cargo business, as the
comparison with British Midland below shows (the figures from
the AEA unfortunately do not include Virgin Atlantic—but
IATA figures suggest that in tonnes carried Virgin's annual volume
is around one fifth of that carried by BA). Our cargo performance
is weaker than many of our European competitors, particularly
in the freight-only sector. This reflects our competitors' ability
to operate fleets of freighter aircraft from their main operating
hubs.
AEA SCHEDULED FREIGHT TRAFFIC IN 1999
|
| Airline | Total cargo carried (million tonne kilometres)
| Cargo carried on freighter aircraft (million tonne kilometres)
| No of freighter aircraft owned (and leased)
|
|
| LH | 6,599
| 4,253 | 25 (+0)
|
| AF | 4,724
| 2,756 | 11 (+2)
|
| KL | 3,915
| 731 | 2 (+1)
|
| AZ | 1,635
| 836 | 2 (+1)
|
| BA | 4,235
| 560 | 0 (+2)
|
| BD | 7 |
— | —
|
|
1.3 Infrastructure issues in the UK make it particularly
difficult for UK airlines to justify investment in freighters.
Traffic distribution rules at Heathrow and Gatwick discriminate
against all-cargo operations, and increasing slot congestion at
Stansted is causing concern. No other major European cargo operator
faces such restrictions on its services at its main hubs. Neither
Birmingham nor East Midlands airports have runways or warehouse
capacity that can support longhaul freighter operations, so UK
airlines would in effect be limited long term to base freighter
operations from Manchester or Scotland. However, the freight market
in the North is insufficient to justify basing an entire freighter
operation there, as the majority of the cargo forwarding industry
is based in the South of England.
1.4 The industry generally accepts that the minimum commercially
viable fleet size (taking into account factors such as crew and
maintenance costs) is six aircraft. Until an airline's freight-only
business reaches this size, it does not make commercial sense
to acquire a fleet of freighter aircraft. Even when such acquisition
does make sense, the purchase cost of a Boeing 744F is around
USD190m and current delivery times are a minimum of 2½ years,
reflecting the high demand for these modern and highly efficient
aircraft.
BRITISH AIRWAYS'
FREIGHT-ONLY
BUSINESS
2.1 BA World Cargo needs flexible freighter capacity
at the right cost level in order to be able to compete effectively
at the international level. Since the level of business is not
sufficient to justify acquisition of a freighter fleet yet, BA
wet-leases freighter aircraft of a range, capacity and efficiency
appropriate to the business. Our arrangements with Atlas Air over
a number of years have given us the benefit of brand new equipment
at low cost, with specialist back-up systems and expertise which
has provided us with outstanding economic performance.
2.2 Since Atlas Air is a US carrier, wet-lease waivers
were granted and renewed by the UK DETR under "exceptional"
circumstances (as defined under the EU regulation 2407/92) primarily
due to the uncertainty and volatility of our developing cargo
markets and the absence of similar aircraft on the UK register.
2.3 In February 2000 BA made an application to renew
the wet-lease waivers for both aircraft for a further year. Although
both applications were objected to by other UK cargo operators,
the DETR approved the wet-lease for the second freighter for a
full year under the exceptional circumstance that BA was developing
a new cargo market (primarily a new freighter route between the
UK and Japan). However the wet-lease for the first freighter was
refused on the grounds that the markets served were no longer
temporary nor uncertain, and that AFX, a new UK cargo operator,
had recently leased a 742F and placed it on the UK register, and
the DETR felt it was sufficiently similar to the Atlas 744F to
prove that it was viable for BA to place a 744F on the UK register.
2.4 BA has investigated the commercial possibilities
of using the AFX 742F but has concluded that because of the range,
capacity and performance of this aircraft it would be impossible
to continue our operation at a profit. The CAA have agreed with
our findings on the commercial viability of this aircraft. As
regards the viability of placing such aircraft on the UK register,
we understand that the 742F has been leased under very special
conditions due to its age and performance.
2.5 BA and Atlas have worked hard to find an acceptable
means of placing the wet-leased 744F on the UK register. If Atlas
were to transfer the aircraft to us under a dry-lease, BA would
lose all the benefits of utilising Atlas air crew, back-up and
expertise and the freighter operations would incur a loss. Alternative
(and expensive) methods of placing the aircraft on the UK register
were also pursued, but had to be reluctantly abandoned due to
commercial problems.
2.6 At the same time, Atlas attended the UK/US bilateral
talks in June 2000, and witnessed the UK leader handing over text
to the US side proposing liberal wet-lease text that would permit
the current arrangement between BA and Atlas to continue without
the need for UK registration. Although the DETR maintains this
wording was visionary rather than a concrete proposal, and could
not be implemented because it conflicts with EU regulations, the
US negotiators have reinforced Atlas' view that this is a serious
UK proposal that could be implemented within two years. Atlas
thus feels there is no longer any need to continue expensive,
time consuming and potentially risky measures to place their freighters
on the UK register.
NEXT STEPS
3.1 British Airways would of course welcome any liberalisation
of the UK-US wet-leasing market as suggested by the DETR, but
unfortunately linking this to cabotage and the cargo equivalent
of the Fly America policy, as advocated by some UK cargo carriers,
is likely to mean no progress with the US DOT.
3.2 Similarly, adhering strictly to current legislation
(on own-state registration) is also unlikely to lead to progress.
The US could be justified in claiming to be more liberal on this
matter than the UK. Waivers have been and continue to be granted
to our carriers to wet-lease on US international routes, whereas
the current situation clearly illustrates the problems faced by
US carriers attempting to wet-lease to UK carriers for similar
international use. In addition, the US government has been granted
waivers for at least one UK cargo carrier to wet-lease aircraft
for use even on US domestic routes.
3.3 For this reason, the US DOT might well seek to react
in kind by refusing waivers to UK carriers if the DETR refuse
to grant one to Atlas' wet-lease. This would inflict a serious
blow to some UK cargo airlines, together with their associated
handling and ground operations. The DOT has therefore suggested
it is in the interests of both sides to extend the current approvals
while bilateral discussions continue and the whole wet-leasing
issue is under consideration.
3.4 In a recent press interview, the secretary of the
BCAA Steve Guynan suggested the US could be encouraged to liberalise
by "hitting them in the pocket" ie the financial effect
on Atlas Air of the non-renewal of our wet-lease. Unfortunately,
quite the reverse is true. Atlas have no shortage of alternative
customers for their modern aircraft (ironically many of these
are our European competitors, who are able to obtain waivers more
freely). This means the only financial effect would be on British
Airways, as we lose the business, the UK cargo handling industry
that supports our operations, and the UK industries whose goods
we carry.
3.5 It seems curious that the DETR is willing to approve
wet-lease operations whilst we are building up cargo markets,
but withdraws the approvals once they are successful. For this
reason, and to deflect any potential damage to the UK cargo industry
as a whole, we are continuing dialogue with the DETR to allow
us to continue our wet-lease arrangement, pending any liberalisation
of the UK regulations, or until we are able to build up sufficient
cargo business to warrant the acquisition of our own UK-registered
freighter fleet. We are also exploring the possibility of wet-leasing
a 744F from a European supplier, but would again need to rely
on a DETR waiver as this arrangement, whilst permitted under EU
regulations, might be rejected under the UK interpretation of
those regulations.
3.6 The safety of non-UK registered aircraft should also
be mentioned. Us safety regulation is very strict, and given Atlas'
744 aircraft are new, and that their safety and maintenance regime
is excellent, we do not believe that there should be any concern
about these aircraft (or any EU registered aircraft with a similar
rigorous safety and maintenance regime) operating in UK airspace
on our behalf.
July 2000
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