Select Committee on Transport, Local Government and the Regions Eleventh Report

III. Long-term prospects for the United Kingdom air transport industry

24. The events of 11 September provided the "catalyst" for the air transport industry to rectify some of its fundamental problems.[60] Mr Jamieson told the Sub-Committee that the Government had a role to play in restoring the industry, including "maintaining the confidence of the travelling public, overseeing the safety and security arrangements and ... making sure with our European colleagues the framework for fair competition for the airlines". He also stressed that the Government should not "buck the market place", or "artificially try and boost demand".[61]

Duration of the downturn

25.   The duration of the current downturn has been forecast by comparison with previous serious events such as the Falklands and Gulf wars, although many in the industry believe the present situation to be of a different order due to the unequivocal use of aircraft as instruments of terror and the open-ended nature of the 'conflict'.[62] The evidence that we received predicted that it would take between one and two years for the industry to recover to previous traffic levels.[63] There was greater optimism about an early recovery in domestic and short- haul markets, and there have even been signs of recovery on North Atlantic routes.[64] The evidence that we received at the beginning of this inquiry about the duration of the current downturn seems to have been pessimistic. We welcome signs of recovery that suggest that in the absence of another incident traffic levels could recover within the two years forecast by the more pessimistic analysts, although we do recognise that the recovery in traffic may have been achieved with some dilution of revenue.

Government financial support

26.   The United States and United Kingdom Governments and the European Commission have all announced measures to help the industry. The United States introduced the largest and most comprehensive package, which encompassed compensation, insurance, security and loan guarantees. In the United Kingdom, the Government provided insurance cover, and a compensation scheme was announced for losses incurred during the period of closed airspace. The European Commission agreed that compensation and insurance assistance could be provided and agreed to a suspension of the 'use it or lose it' rule.

The United States Air Transportation Safety and Stabilization Act

27.   The Air Transportation Association of America (ATA) estimated the total loss to the industry in the United States for September directly attributed to the attacks to be $5 billion.[65] On 22 September 2001, Congress passed the Air Transportation Safety and Stabilization Act, which provided financial assistance in two main ways.

·    $5 billion in compensation to air carriers for direct and incremental losses incurred as a result of the 11 September attacks.

  •    up to $10 billion in loan guarantees to air carriers.[66]

The Act also provides assistance for increases in insurance and security costs.[67] According to the ATA, "neither cash grants nor the loan guarantees constitute government subsidies".[68] In return for the risk assumed by the Federal Government in making the loan guarantees, airlines are required to provide warrants or other equity instruments.[69]

The European response

28.   The European Commission has said that member states' Governments may compensate airlines for losses resulting directly from the four-day closure of American airspace, but may not provide aid in respect of financial difficulties that pre-date the attacks.[70] The Commission is also recommending a flexible application of the rules on slots and the suspension of the 'use it or lose it' rule, which requires airlines to use a slot 80 per cent of the time in order to retain their 'grandfather rights' for that slot in the next equivalent scheduling season. The Commission has agreed to suspend the 'use it or lose it' rule for the winter 2001-02, summer 2002 and winter 2002-03 seasons.

29.   British Airways released slots for winter 2001-02, but sought to retain its grandfather rights to those slots.[71] bmi British Midland was concerned that some of its European competitors enjoyed "a more 'understanding' relationship with their own national authorities" and called for a clear and unambiguous suspension of the rules for all airlines.[72] Although we accept the rationale for waiving the 'use it or lose it' rule, the Government should firmly resist implementing any further European Union directives on slot allocation that are inappropriate to the United Kingdom's needs and circumstances.

The United Kingdom's compensation package

30.   The United Kingdom Government announced up to £40 million of financial assistance to compensate airlines for losses due to air space closure arising directly from the 11 September terrorist attacks.[73] Those compensation arrangements comply with the measures announced by the European Commission that allow for aid "to make good the damage caused by ... exceptional occurrences".[74] The Civil Aviation Authority expressed some reservations about the industry receiving subsidies from central Government, although it did not "disagree strongly" with the compensation package .[75]

Maintaining the United Kingdom's competitive position

31.   The long-term competitive position of the United Kingdom's air transport industry depends on the outcome of major structural questions now being considered in this country, the European Union and the United States. We consider those issues briefly in this Report and will return to them in our forthcoming inquiry into the Aviation White Paper. It is imperative that the United Kingdom continues to provide "a very competitive and very wide range of air travel products".[76] The rescue package will mitigate the immediate difficulties, but some in the industry believe that the level of assistance granted to the airlines in the United States may have prejudiced the ability of United Kingdom airlines to compete.[77] The United Kingdom Government was not consulted before that assistance package was put in place.[78] Many witnesses considered the discrepancy in the assistance being offered and the scale and scope of the United States Government's assistance to represent state aid that provided the industry in America with an unfair advantage.[79] Sir Roy McNulty told the Sub-Committee that the Civil Aviation Authority would "watch very carefully", and "monitor" the situation.[80] The Committee considers the United States compensation package to have provided an unfair advantage to US carriers. It is imperative that the United Kingdom Government ensure that the competitive balance between US and UK carriers is restored.

International agreements

32.   At present, United Kingdom—United States bilateral negotiations on open skies have stalled, although the Government has said that it remains "committed to achieving the full and genuine liberalisation of the UK/US aviation market".[81] The Department's "nirvana" would be "a full and fair liberalised market between us and the United States ... either/or with both cabotage ... and/or waving their controls over ownership and control of US carriers".[82] The Government's approach, "pending nirvana" would be to gain access to the United States domestic market through alliances, the conditions attached to which would have to be acceptable to the competition authorities and the carriers involved.[83] The quid pro quo for such alliances "would be access to Heathrow [where] slots ... are available and can be made available", although not guaranteed access to such slots.[84] However, there is no evidence to show how the slot situation would be resolved without the loss of other routes into Heathrow and Gatwick, or placing regional routes at particular risk. We received evidence from Airport Coordination Limited which confirmed that the requests for slots at Heathrow and Gatwick, particularly for Summer 2002, still exceeded those available by a substantial margin.

33.   The European Commission has a vision of a Trans-Atlantic Common Aviation Area, with the European Commission negotiating directly with the United States. The Government said: "The UK has no policy that air services agreements which it concludes with the US, or indeed with any other country, should be subject to review by the European Court or the European Commission."[85] However, the Government is a "strong supporter" of the Single European Sky, which it believes will overcome delays and congestion caused by structural problems in Europe's Air Traffic Management system. [86]

34.   The Government must ensure that any future international aviation agreements maintain the competitive position of United Kingdom carriers. However, the Government should not make concessions to United States airlines in receipt of US State Aid, merely to hasten the signing of a new US UK bilateral on open skies. The Minister confirmed that there would be no agreement unless the United States made concessions that were advantageous to the United Kingdom.[87] Despite the importance of the issues of open skies, cabotage, wet leasing and foreign ownership, the Department was not negotiating on those issues because they would make it impossible to reach agreement within the desired timetable.[88] This Committee believes that the bilateral agreements on open skies must include progress on the critical issues of open skies, cabotage, wet leasing and ownership. As we concluded in our July 2000 Report into Air Service Agreements between the United Kingdom and the United States, it is imperative that the Government maintain its efforts to agree beneficial aviation bilateral agreements with the United States.[89]

Consolidation and Restructuring

35.   Airlines have an appetite for consolidation to reduce costs, despite a lack of evidence that size improves performance, removes overcapacity or enables airlines to escape the cyclical nature of the industry.[90] The experience of United States and United Kingdom low-cost carriers, which have by and large grown organically, suggests that management competence and improved use of resources and capital assets have a greater impact on profitability than consolidation and operating from congested hub airports.

36.   The British Air Transport Association considers "international consolidation" to be the way forward. Current rules on ownership for international airlines largely prohibit such consolidation.[91] bmi British Midland supported the abolition of "all restrictions on ownership and control of UK airlines".[92] The Civil Aviation Authority and many airlines share that view.[93] We remain to be convinced by arguments in favour of changes to the rules of ownership or that consolidation will bring benefits to the industry or consumers. The Government should be cautious about changes to the rules of ownership that would allow unfettered consolidation within the industry. We recommend that the relevant competition authorities give rigorous scrutiny to any further moves towards consolidation of the United Kingdom airline industry.

Slot allocation

37.   Slot allocation at European airports is governed by European Regulation 95/93. The Government is currently consulting the industry on the Commission's proposals to amend those regulations, which were issued before 11 September.[94] The availability of slots, particularly at Heathrow and Gatwick, is crucial to the industry's future development. We received conflicting evidence about changes in the availability of slots at major airports following the attacks on 11 September.[95] Despite the reductions in routes, there has been no significant increase in the numbers of free slots at either Heathrow or Gatwick. Evidence from BAA states that since 11 September British Airways have stopped flying twenty routes from Gatwick and plan to stop a further six routes in the summer of 2002.[96] Slots for peak periods and premium routes remain scarce.[97] As the industry recovers trading in slots is likely to increase. Demand will continue to outstrip supply, and new entrants will have difficulty in becoming established at major hub airports.[98] However, BAA was keen to highlight the benefit of attracting low-cost carriers to Gatwick.[99]

Regional air services

38.   The Government accepts that regional air services are socially and economically vital for the United Kingdom's remoter regions.[100] Regional slots can be protected, or "ring-fenced", through designation as Public Service Obligations.[101] The Minister told us that the Government considered the present availability of slots to be sufficient to preclude the need to intervene to ensure the protection of regional air services.[102] Nevertheless, we were assured that the Government was aware of the importance of regional air services and had, for example, listened "very, very carefully to the argument ... put forward for protecting their slots from Inverness to Gatwick".[103] The Government has confirmed in a written answer that any changes to the "rules for imposing public service obligations will need to be agreed at the European level".[104]

39.   The Minister's optimism may be misplaced. British Airways, the largest regional operator in the United Kingdom, withdrew the important Heathrow-Belfast route immediately after the events of 11 September even though it had served the route for fifty years, although the company expressed the intention to continue to serve the regions.[105] It claimed to have done so because it had been losing money on the route for several years.[106] However, Mr Nicol of easyJet told the Sub-Committee that his company's Belfast route was "highly profitable".[107] TBI plc, which owns three United Kingdom airports, including Belfast, criticised the British Airway's decision, saying: "The slots at Heathrow used for this route were not offered to other carriers prepared to operate the route but have been handed over to non-vital holiday routes from Gatwick in order to keep them 'warm' for BA".[108]

40.   The present situation has strengthened arguments in favour of Public Service Obligations to ensure the continuity of vital regional links with Heathrow and Gatwick. We recommend that the Government ensure that slot allocation at the main London airports be consistent with its aims of ensuring access to the United Kingdom's peripheral regions as regional air services are "socially and economically vital to the regions". Prior to the availability of any additional runways in the south east, we believe the Government must adopt Public Service Obligation protection for the most vital links to the United Kingdom regions. This is a widely established policy within the European Union. We do not see or anticipate any European regulatory impediment to securing such slot protection. We are aware that some airlines and airport operators may be against the use of such designation at congested hub airports but the needs of the United Kingdom regions should have priority.


41.   The industry remains convinced of the importance of developing infrastructure in the medium term in order to provide additional airport capacity, particularly in the south east.[109] Airport owners and operators are responsible for developing and pursuing plans to increase airport capacity. Such plans are subject to the full gamut of planning legislation and consultation. Airport operators are unlikely to pursue the costly exercise of planning to expand capacity or build additional runways without a firm policy for increasing airport capacity from the Government.[110] The Sub-Committee intends to consider aviation infrastructure and capacity requirements when it conducts its inquiry into the Aviation White Paper.

Air Travel Trust

42.   The CAA manages the Air Travel Organisers' Licensing scheme, which protects holiday makers from being stranded or losing money as a result of tour operator failure. The Authority is concerned that the Air Travel Trust Fund, which acts as a back-up to bonds provided by licensed tour operators, is exhausted. The Fund had a deficit of £8.96 million at the end of 2000, which was underwritten by an overdraft of approximately £10 million, which is guaranteed by the Government.[111] The Air Travel Insolvency Protection Advisory Committee, which was set up by the Secretary of State to advise on financial protection arrangements for air travellers and customers of air travel organisers, is "deeply concerned that the annual interest burden is more than double the amount required to meet the year's passenger claims", and maintains that "allowing the Trust Fund to remain in deficit is detrimental to the protection system for air travellers and the delay in putting in place long term arrangements is wholly unsatisfactory".[112] The CAA, supported by the travel industry, is lobbying the Government to allow the levy of an additional charge to replenish the fund.[113] Since 1991, successive Governments have promised to make Parliamentary time available to introduce the necessary legislation. However, no legislation has been proposed yet. The Minister confirmed in evidence that primary legislation would be required, and that a draft Bill was being prepared.[114] The Committee is concerned that the Air Travel Reserve Fund should be maintained at a sufficient level and calls on the Minister to bring forward legislation providing for that at the earliest opportunity.

60  Q 228. Back

61  Q 314. Back

62  Q 101; Ev. p 84. Back

63  QQ 100, 127. Back

64  Ev. pp 100, 102; HC Deb, 7 February 2002, cols 1104W-1105W;EasyJet and Go zoom ahead, The Daily Telegraph, 8 February 2002; see also Q 229. Back

65  Letter of Carol Hallett, President and CEO ATA, Regarding allegations of fare subsidisation. See also Testimony of the Air Transport Association on the Financial Condition of the Airline Industry, =1332. Back

66  Air Transportation Safety and System Stabilization Act, Public Law 107-42-Sept. 22, 2001, section 101 (a) (2); US Department of State press notice, 25 September 2001; Ev. p 50. Back

67  Air Transportation Safety and System Stabilization Act, Public Law 107-42-Sept. 22, 2001, sections 201 (a) (3), 201 (b) (2); section 501; Letter of Carol Hallett, President and CEO ATA, Regarding allegations of fare subsidisation; FAA APO Aviation Insurance Program, Back

68  Letter of Carol Hallett, President and CEO ATA, Regarding allegations of fare subsidisation. Back

69  Regulations for Air Carrier Guarantee Loan Program; United States Department of the Treasury, press release, PO-666, 5 October 2001, Regulations issued for air Carrier Loan Guarantee ProgramBack

70  The European Commission approved a one-month bridging loan of euro 125 million to Sabena from the Belgian Government on 17 October 2001. The French Government proposed to grant euro 55 million in emergency aid to French airlines. In Switzerland a complex financial package was put together following the collapse of Swissair, including euro 650 million of direct aid from the Swiss federal and Canton Governments. HC Deb, 12 February 2002, col 223W. Back

71  QQ 266-269. Back

72  Ev. p 137. Back

73  QQ 365, 327; HC Deb, 13 December 2001, cols 1013-1014W. Back

74  Ev. pp 176-177. Back

75  Q 242; Ev. p 54. Back

76  QQ 62, 64. Back

77  QQ 68-70. Back

78  QQ 317-321. Back

79  QQ 217, 276, 308, 327; Ev. pp 107, 121, 166. Back

80  QQ 272-274. Back

81  HC Deb, 4 February 2002, col 728W; see also HC Deb, 17 January 2002, col 423W and HC Deb, 15 April 2002, col 704W. Back

82  QQ 341-342. Back

83  QQ 345, 367-368. Back

84  QQ 345, 347-348, 350-351. Back

85  HC Deb, 4 February 2002, col 728W. Back

86  HC Deb, 19 March 2002, col 231W. Back

87  QQ 343-344. Back

88  Q 367. Back

89  Eighteenth Report of the Environment, Transport and Regional Affairs Committee, Air Service Agreements Between the United Kingdom and the United States, HC (1999-2000) 532. Back

90  Q 261. Back

91  QQ 4, 16; Ev. pp 50-51. Back

92  Ev. p 138. Back

93  QQ 259-260. Back

94  HC Deb, 15 April 2002, col 739W. Back

95  QQ 72-76, 235; Ev. pp 55, 129, 151-152. Back

96  Ev. p 172. Back

97  QQ 111, 183; HC Deb, 30 January 2002, col 326W. Back

98  QQ 170, 183, 185. Back

99  Ev. p 172. Back

100  Q 354; Air Transport Consultation Document, Department for Transport, Local Government and the Regions, December 2000, p 34, para 118. Back

101  QQ 264, 354. Back

102  Q 353. Back

103  QQ 354, 353. See also HC Deb, 11 April 2002, col 505W, the Government expects to announce shortly its decision on the Scottish Executive's request for a Public Service Obligation to be imposed on Inverness-Gatwick air services. Back

104  HC Deb, 21 March 2002, col 493W. Back

105  Q 110. Back

106  QQ 28-30. Back

107  Q 33. Back

108  Ev. p 71. Back

109  QQ 128, 166; Ev. p 167. BAA state that "Terminal 5 would secure Heathrow's status as the world's leading international airport, reinforce its vital role in the UK economy, and help meet people's expectations to fly in the most efficient and environmentally acceptable way". BAA Issue brief: Terminal 5, BAA, September 2001. Back

110  QQ 171-173. Back

111  Q 355. Back

112  Report of the Air Travel Insolvency Protection Advisory Committee 31 March 2001, Civil Aviation Authority, July 2001. Back

113  QQ 243-247; Ev. pp 92, 147-148, 150-151. Back

114  QQ 355-356; HC Deb, 15 January 2002, col 210W. Back

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