Examination of Witnesses (Questions 40
WEDNESDAY 19 DECEMBER 2001
40. Mr Wiltshire, the war and terrorist cover
premium, how does this affect your members and what will be the
anticipated cost per year? How do you think this matter should
be addressed for the future?
(Mr Wiltshire) The insurance costs, we estimate for
UK airlines to be in the order of $250 million per annum, and
I mention that in our writ10 submission. That figure comprises
the increased premiums that airlines were asked to pay within
seven days of the events in September which gave them back their
passenger insurance under the war and terrorism element of their
insurance. It also covers the hull insurance which has been going
up a lot in insurance renewals that have been happening since
11 September. Also I have included in that the premium to governments
that we are likely to pay from November. The likely premium to
the UK Government will be in the order of $70 million per annum,
roughly £50 million per annum, so in fact it will be slightly
larger than the support figure that Stephen Byers announced the
41. How should it be addressed in the future?
(Mr Wiltshire) We believe these premiums should really
be focused on a long-term solution. One way forward, rather than
paying what is effectively an arbitrary sum of money, albeit to
provide us with cover, we should be looking at this whole issue
in a rather more global, international way and creating something
such as an airline mutual fund which would enable the airlines
to have some control over the premiums they are paying, at the
same time allowing Government to withdraw somewhat from the insurance
responsibility without, we believe, total withdrawal from that
(Mr Parker-Eaton) May I add to that, please. Looking
in the future one of the concerns which we have in the charter
mode is that the way the Government has addressed it and the Commission
has arranged it is that it should be based on a per passenger
basis. That means that an aircraft that is carrying half a load
is paying half the premium of an aircraft which is flying full
and efficiently. Particularly, say, in the charter mode we fly
at 95 per cent load factor which means that disproportionately
we are paying much higher premiums than airlines which are flying
at much lower load factors and effectively we are subsidising
them. Because we are in the low cost area for us, and this is
a narrow sectional view, we believe this is unfair and it should
be addressed on a per flight basis, not on a per passenger basis.
42. Could I ask what has been the response then
in negotiations with insurance companies on this question of the
increase in the premiums that we are referring to now?
(Mr Wiltshire) I think it would be fair to say there
has been no negotiation.
43. No negotiation?
(Mr Wiltshire) No. The offer of renewal of insurance
and the seven days' notice of withdrawing most of the war and
terrorism third party cover was made as an offer to every airline.
The letters were remarkably similar, the figures were the same,
the timescale and the renewal terms were the same, and there was
no chance to renegotiate that. The insurance industry has not
shown any sign of coming back to deliver more of that third party
or ground damage cover.
44. So you are saying that since 11 September
insurance premiums have been increased and there has been no negotiation
with the insurance companies?
(Mr Wiltshire) There have been negotiations on hull
insurance, that is airlines' own insurance of hull and passenger
cover, but not the third party or the ground damage cover which
was the thing that was so evident in the events of 11 September.
45. In view of the fact that there has been
no real discussion or negotiation on insurance, what changes would
you like to see? I know the point was made by Mr Parker-Eaton
but for the record could you give us some indication as to what
the industry would like to see on the question of future insurance
(Mr Wiltshire) We would like to see the insurance
industry come back with a commercial offer and allow us to negotiate
with them on the basis of risk, premiums related to risk. As they
are not doing that, or they do not feel able to, we believe that
the Government's role will be a fairly prolonged one providing
underwriting of this ground cover or third party damage cover
for some prolonged period of time.
46. What about the suggestion from Mr Parker-Eaton?
(Mr Wiltshire) The methodology for doing this we would
want to discuss. The decision made by the insurance industry to
charge a per passenger figure was a fairly arbitrary one that
they made up very rapidly after the events of 11 September and
it was driven by the need to achieve a certain fund in the global
insurance market rather than looking at individual airlines' risks
47. How much are new security measures going
to cost the industry?
(Mr Wiltshire) The cost of security is something that
we have not got to the bottom of yet and that is simply because
security measures internationally are still being implemented.
In the UK we are responding very rapidly. The UK Government responded
very rapidly with a set of measures. They were quickly implemented
and bedded down and over a short period of time. We probably have
an understanding of those costs, and those are shared between
the airlines and the airports.
48. Can I ask you what those costs are?
(Mr Wiltshire) I am sorry, I do not have an estimate
of those costs.
49. Do you have an approximation, Mr Wiltshire?
Mr Parker-Eaton, do you want to have a go at guessing?
(Mr Parker-Eaton) Yes. We have had to make budget
assumptions for next year because of the pricing structure. We
believe that the extra security costs are going to be in the order
of £5 per passenger round trip.
50. Is that directly because of something that
is connected with the way you operate?
(Mr Parker-Eaton) No.
51. Or would you be in that sense the same as
(Mr Parker-Eaton) The same. This is our best estimate
of the extra cost of security but it is very much a guess. As
Mr Wiltshire is saying, we have not got any figures.
(Mr Wiltshire) If I may add some more information.
The incremental difference in security measures in the UK was
less than we hope will be happening in other countries, in other
words the UK was at a reasonably high level of security measures
so the difference, the additional costs in the UK, may, for example,
be well below a pound a passenger but it is the overseas costs
which will be quite high where there is a large step to be made
between the current standards and those that they wish to aspire
52. What would be a reasonable apportionment
of those costs?
(Mr Wiltshire) As I mentioned in my opening remarks,
I think after the events of 11 September, which clearly identified
terrorism as an attack on the state, we believe now is the time
to review the way in which costs are apportioned. In the UK we
pay 100 per cent of our security costs, that is the industry,
the airlines and their passengers and customers. In other European
states we do not believe it is quite as straight forward as that.
We believe we were already at some disadvantage before 11 September.
The events of the 11 September I think mean that we should review
the amounts which are paid for by states and the amount that is
paid for by the industry.
53. Did you want to comment, Mr Cahn?
(Mr Cahn) Yes, if I may, Chairman. Simply to say that
the amount of extra costs that airlines would face because of
advanced security measures remains unknown. They are being added
to all the time. I simply observe that in the USA the administration
made available 3 billion dollars3 billion dollarsto
pay for additional security costs. Quite clearly, there was a
bigger gap to be made up there. Security levels were lower in
the States than they were here. Nevertheless, I think it shows
that potentially very huge sums are at stake.
54. Who decides what reasonable security measures
(Mr Wiltshire) The Government through the DTLR set
the aviation security standards. Those are the ones that airports
and airlines fulfil.
55. Are there any factors to do with economic
uncertainty or lack of public confidence in flying which are affecting
the airlines, apart from apparently the no frills airlines?
(Mr Wiltshire) I think it is fair to sayand
I will ask my colleagues flying transatlantic routes to commentthat
the UK the market was more comfortable initially after the 11
September to fly close to home. More long distance travel, particularly
to destinations which were considered to be risky, were less attractive.
The situation in the US market, on the other hand, is rather different.
56. Mr Cahn?
(Mr Cahn) Simply to respond to Mrs Ellman. Clearly
transatlantic traffic has been hit harder than most other areas.
For example, we found our traffic down around 24 per cent compared
with European traffic down around 10 per cent. I think that was
connected with the fact that the attacks had occurred in America,
that American people were particularly affected and particularly
influenced not to fly, at least for a period of time, and that
was seen obviously in their domestic flying. The transatlantic
has been a particularly challenging area where traffic has been
way down. The other area which has been particularly badly affected
has been premium traffic, if you like people paying full fare,
particularly in the front cabins of an aircraft. That will certainly
have something to do with the pre-existing economic downturn which
the Chairman referred to at the beginning. It also seems to have
something to do with businesses in the immediate aftermath of
the crisis of the events of 11 September putting travel bans on
and those travel bans have only gradually been lifted and have
not yet fully been lifted. It is a mixture of economic downturn,
a mixture of a crisis of confidence, a mixture of travel bans
and perhaps companies thinking in these difficult circumstances
they could do without travel for a little bit.
57. Mr Humphreys?
(Mr Humphreys) Our experience has been very similar.
As Mr Cahn said, the North Atlantic has been hit very, very badly
and there have been differences in separate markets on the North
Atlantic. New York has been particularly badly hit. In other parts
of the world, we find our services to South Africa and China and
Hong Kong are extremely buoyant, Japan, on the other hand, has
been badly affected. It is a mixed picture. Leisure traffic tends
to be holding up better than business traffic but business traffic
is slowly coming back.
58. Have the no frills airlines been affected
(Mr Nicol) Yes. As I said earlier, we did see an initial
downturn in demand. We have to keep fares a couple of percentage
points lower than we would normally have done at this time of
year in order to encourage people back flying. I think the comments
from my colleagues here really enforce our view that we are talking
about two separate segments. There is the short haul European
sector in which we are experts. I do not pretend to talk for the
North Atlantic. I think British Airways runs a very efficient
North Atlantic business. Certainly its losses within Europe over
the last couple of years, over £470 million, perhaps demonstrate
that now is the time for British Airways to let the low cost airlinesbe
it easyJet, Go, Ryanairtake over a bit more.
Chairman: When we want advertisements we will
let you know, Mr Nicol.
59. Is there a case for any additional financial
support from the UK Government?
(Mr Wiltshire) If I could take that first and my colleagues
can add to it. I think I have mentioned in my introductory remarks
that we believe it is time to review security and insurance. The
Government are already providing insurance underwriting cover
but, of course, the airlines are paying a premium. We are expecting
to pay for all our security costs, including the enhanced ones,
but we think it is appropriate for this to be reviewed, particularly
in relation to what other states provide their own airlines.
Chairman: I am anxious not to go over the same
points again, if I may.