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Baroness Elles: My Lords, I thank my noble friend the Minister for his reply, which has been extremely helpful and has encouraged every speaker who took part in the debate to recognise the role of government in the development of information technology and in keeping, as he said, the United Kingdom way ahead in this field. I thank all noble Lords who took part in the debate. When I initiated it, I realised that I had a lot to learn. Having heard the debate this evening, I realise that I have even more to learn. I congratulate and thank most warmly all those who have brought instruction, knowledge and the benefit of their personal experience and the benefit of their own thinking on a subject which is undoubtedly not only affecting us today but even more so will affect us in the coming years. With those few words and with my grateful thanks, I beg leave to withdraw my Motion.
Lord Brabazon of Tara rose to call attention to the current state of aviation liberalisation in the European Union, and in particular to the competence of the European Commission in negotiating aviation agreements with third countries; and to move for Papers.
The noble Lord said: My Lords, I am pleased to be able to introduce this debate today. It is some little while since we have debated aviation in this House and there are a number of developments taking place at the moment which I believe make this debate timely.
I would first of all like to reflect on why aviation is so important to us in this country. Aviation is a great British success story. In British Airways we have one of the world's most successful major airlines and one of the few that is profitable. That was not achieved easily and great credit is due to my noble friend Lord King, under whose leadership the airline was turned round from near bankruptcy to a successful privatisation and now to a world leader. But we also have a number of smaller airlines that have done much to improve customer choice
At this point I should perhaps declare a non-interest in that I am a director of a small airline in the Channel Islands. But as the Channel Islands are not part of the EU, nor with a fleet of Trislanders and a Shorts 360 is the airline thinking of starting transatlantic services, it is not covered by the terms of today's debate.
All the airlines I have mentioned are operating successfully in the private sector, and it is the presence of these competitors to BA that has done so much to bring fares down and improve service to the people who we should be most concerned about, the passengers, whether business or leisure travellers. That is, after all, the main purpose of liberalisation. Incidentally, for proof of that one need look no further than the enormous improvements on our own domestic routes, such as Glasgow and Edinburgh, since competition was allowed in the early 1980s.
Our geographical position in Europe makes us probably more dependent on air travel than any other major European country and is one of the reasons why we have the busiest airports in Europe. In 1990, about 15 million business journeys took place through our airports, and that figure is expected to double by the turn of the century. The majority of those will be to and from Europe, where we have more than 60 per cent. of our trade. In 1990I am afraid I do not have any more up-to-date figuresUK companies spent some £6.4 billion, or 1.3 per cent. of UK GDP, on air fares. This proves the need for our Government, and our European partners, to do what they can to create the conditions for a more liberal market and better value for money for the business passenger, and hence for the process of liberalisation that has been going on for some 10 years to continue.
It was indeed some 10 years ago that I first stood at the Dispatch Box answering questions on the subject, mainly from the late Lady Burton of Coventry. We should pay tribute to her persistence and vigour in keeping the House informed, and the Government up to the mark, on the progress, or lack of it, that we were making. I should also pay tribute to my noble friend Lord Bethell, who I am delighted is taking part in this debate, for all that he did to further the cause.
This country led the way in liberalisation, and because we felt the Community was moving too slowly we negotiated our own liberal bilateral agreements with like-minded countries such as the Netherlands in advance of the Community as a whole. Aviation agreements had previously been conducted on a purely bilateral basis, largely modelled on the 1946 Bermuda agreement between the UK and the United States. These air service agreements gave the right to fly between two countries, and the three main elements were capacity, designation of airlines and fares.
Typically, the first of these, capacityin other words, the number of flights between the two countrieswas shared 50:50 by the airlines of the two countries. Designation covered the airlines allowed to operate on the route, and was usually only one from each country. The third element, fares, had to be agreed by the governments
In gradual steps capacity was broken down from 50:50 to 60:40 and then unlimited. Countries were allowed to designate more than one airline on a route, and the system of double-approval of fares was changed to one of double-disapproval; in other words, where both countries had to disallow a proposed fare before it could be stopped, so one country could not stop a lower fare on its own. I hope noble Lords, and in particular the noble Lord, Lord Clinton-Davis, will forgive me if I may have perhaps rather over-simplified what are very complicated issues.
But if we were to have a true common marketI am a great believer in the European common marketthen we had to move to a position where any European airline could operate freely on any route in the EC, whether between countries other than one in which the airline was registered or even with another countrycabotage. In other words, a British airline should be allowed to operate not only between London and Paris but between Paris and Frankfurt and between Frankfurt and Berlin. These and other matters were the subject of the second and third packages, the last of which came into force on 1st January 1993. No doubt my noble friend the Minister will be able to bring us up to date on the progress of that stage.
I said earlier that the main purpose of all this was to bring down fares and improve service for the passenger, so let us see what has happened on a typical route, London to Paris. Since 1990 this has been transformed into one of the most competitive routes in Europe, with six airlines flying from four London airports battling for 4 million passengers a year against 2.8 million in 1990. Before British Midland's entry in 1990, the cheapest business class tariff with BA and Air France was £240. Now British Midland offers a Eurobudget fare at £205 and another airline offers one at £192. That represents a very worthwhile saving, particularly in view of inflation in the intervening years. Now contrast that with Air France fares on three other big routes with fewer competitors: Paris to Rome, okay a bit further, but £820; Paris to Frankfurt at £452; and Paris to Amsterdam at £403. Economy fares have also tumbled, with fares as low as £77 return being offered on this route. In other words, as we all know, competition works.
Incidentally, it is also good for UK plc; where there are two British airlines on a route, the overall share of the market held by British airlines has on the whole risen dramatically, sometimes by nearly 20 per cent.
So I believe liberalisation in Europe is working well and has the potential to work even better. But, sadly, there is one particularly big black cloud up there in the sky, and I refer to the issue of state subsidy. Since 1991 some European airlines have been allowed to receive about £6.8 billion of state aid. State aid is illegal under Article 92.1 of the treaty if it has the potential to distort competition between member states. But so far the Commission has
The new Commissioner, Mr. Kinnock, will shortly have to pass his first big test as I understand there are three cases currently before him. There are new applications from Air France and Iberia and a breach of conditions by Aer Lingus. The acid test is whether Mr. Kinnock will stick to the words of his predecessor that there should be no more subsidies or whether he will cave in under pressure from the governments involved. I hope the message will go out to him from all sides of this House that he should stand firm.
In 1993 the Commission set up a so-called comité des sages to study the problems of the European airline industry and to draw up an action plan for the future. Financial losses, amounting to some 2 billion dollars in 1992 alone had led some to suggest that liberalisation should be delayed or even reversed. The comité's highly commendable report was surprisingly unequivocal.
That is clear enough. State aid has the potential to kill off the new market regime, even before it has got fully under way. Free from pressures to adapt to changing circumstances, state aided airlines can simply undercut their competitors to maintain or even expand their market share and eventually to drive them out of the market altogether. But restructuring is possible without state aid. As I said earlier, British Airways did it in 1981, became profitable in 1983 and has been ever since. More recently Lufthansa restructured, moving from 80 per cent. state owned to 40 per cent., all done by raising money in conventional capital markets. It is painful but it can be done, and must be done if good airlines are not to be driven out by the bad, leaving the passenger with no competition and rising fares.
One must question whether every country in Europe needs a national flag carrier if we are in a truly Common Market. I believe this question will have to be faced before very long, and the answer will be pretty unpalatable to some. So the Commission still has a lot of work to do in Europe, which makes me wonder why it should now be distracting us, and itself, by trying to stop individual countries negotiating aviation agreements with third countries, in particular the United States. This issue is particularly timely as I understand that it is to be discussed at the Transport Council next week.
Let us look at the background to the issue with the USA. Europe/North America is the biggest intercontinental air transport market in the world. The UK/USA market is easily the largest, with almost as many passengers as the next three, US/Germany, US/France and US/Holland, put together. These four markets account for three-quarters of all Europe/US passengers. So UK/US is about 37 per cent. of the grand total, and of
There are a number of fundamental issues that have to be resolved if the EU is ultimately to conduct these negotiations. Sir Colin Marshall, Chairman of BA, summed them up in a speech he made earlier this year:
I say that the answer is no. These negotiations are extremely complicated and highly technical and there simply is no one in the Commission with the expertise to handle them. I was much involved in the negotiations following the collapse of PanAm and TWA and the transfer of their routes to United and American. The Americans started by thinking it would be a straightforward transfer and were somewhat taken aback when we ventured to suggest that there was a price to be paid. I believe that we got a good deal for this country and although BA criticised us at the time, the US Government were even more strongly criticised by their airlines, so I think we got it just about right. So I am pleased that Sir Colin went on to say:
The important point to makeI am not sure that the Commission has grasped thisis that these negotiations are commercial, not political. I shall give just one example. The revenue which can be generated by the right to operate a daily Boeing 747 flight from Heathrow to New York is over 100 million dollars a year.
At Question Time on 22nd May my noble and learned friend Lord Hailsham asked what was meant by open skies. The US version simply removes some of the barriers to free tradeactually the ones that it does not like. True open skies would mean a genuine unified market involving free access to markets within the area, the ability to set up or acquire a business in any part of the area without restrictions on nationality of ownership or control, freedom as to the movement of capital and many other issues. One day there may be a role for the Commission to negotiate that, but in the meantime I end with a quote from the Financial Times leader of 7th June:
Lord Desai: My Lords, we are grateful to the noble Lord, Lord Brabazon of Tara, for introducing this important topic. The noble Lord is knowledgeable about this question and one might even think that his family has a family monopoly having practically invented civil aviation themselves.
The two aspects of the noble Lord's Motion are joined together in a slightly different way from the way he argued. I completely agree with him that it is important that liberalisation and competition be introduced in the entire EU aviation market. It would be good for Her Majesty's Government to make strong representations on this issue and not allow any of the usual sorts of excuses to be used. We have seen that happening in the steel industry. British Steel is the most efficient producer but quotas have been proposed whereby both efficient and inefficient companies take the same cut in output. We are quite right to reject that. I hope that eventually when the steel industry negotiations are finished it will be recognised that the lead, low-cost companies do not have to sacrifice their output in favour of high-cost companies. I would not propose the same thing for health or housing but I have no problem with that as regards aviation, steel or coal. In those areas market rules must be applied rigorously.
I believe there will be much resistance, trading off and "log rolling" about this matter. But be it in the Council of Ministers, be it in the meeting of transport Ministers or be it in the inter-governmental conference, we must make it quite clear that we regard the European Union as a single market which was negotiated eight years ago. It is about time we had a proper single market established in every industry that one can think of. Civil aviation is an important industry in that regard.
The UK has the advantage of being the most efficient country as regards this industry we are discussing and it has borne the costs of making adjustments already. Therefore it is time that we pressed other nations to do that too. It is clear that Mr. Kinnock, the EU commissioner for transport, will have to be very tough on Spain, France and other countries which want to continue state aid to their airlines.
I agree with the noble Lord when he says that there is no reason for every nation state to have its own flag carrier. There is no logic in that. As technological change occurs in the industry and more and more people want to fly we shall see a great many mergers and combinations. State airlines will not be well equipped to withstand that kind of competition. Therefore, it is in the interests of the European Community to press liberalisation and show a competitive front.
When it comes to the second question we may have differences. I do not see a distinction either in time or concept between negotiations with the United States and the liberalisation of airlines. As we know to our cost,
In bargaining with the United States we are confronted with an unequal opposite number. The United States has a much larger aviation industry, although the UK has the second largest industry. The US has six out of 10 air carriers and two-thirds of business, measured either in miles or in numbers of flights. Therefore, there is a very large competitor with whom we have to negotiate and, while it is true that individual airlines such as British Airways and Virgin are large companies and efficient bargainers, it may still be to the advantage of European airlines as a group not to allow the Americans to divide and rule. They may start, as they already have, negotiating with smaller countries. That may erode the advantage that we might be able to negotiate. For example, if the US starts by negotiating with Austria, Portugal or Greece it may be able to gain the advantage of intermediate stopsthe so-called fifth freedomwhich might be to the disadvantage of the UK.
In negotiations in the Uruguay Round of GATT the principle followed by the Community was that the European CommissionerSir Leon Brittannegotiated on behalf of all countries. That proved tremendously advantageous, especially in the final stages when a lot of pressure was placed on Community countries by the United States both individually and collectively.
Bilateral negotiations take place all the time, and the relative strength of the two partners comes into play. Even the EU aviation industry as a whole, much less that of the UK on its own, will not measure up to the American aviation industry. The American industry is much larger than that of any single European country.
Therefore, there is a genuine dilemma. I respect what the noble Lord said. He believes that bilateral negotiations are a better bet, and perhaps a quicker bet. I wonder whether it is not better for the EU to negotiate on behalf of all European air carriers and secure advantages for Europe as a whole which will not be to the disadvantage of any one country.
I gather from reading such information as has been issued by the Commission that if, when the EU has negotiated an agreement with the US, any individual country has a better agreement that country will not lose out. That is an important principle. The EU has promised that if any air carrier has a better deal from the US than the EU has secured it will not have to give up the freedom that it has achieved. That is a no-lose situation. We are not likely to lose as a result.
Other noble Lords may know more about that and may go into detail. It is not a party matter. It is partly a matter of technical knowledge. However, if it is true that such a no-loss situation exists, we should think carefully whether we should not approach this on two fronts and try to pursue the advantage of a multilateral strategy as far as we can in order to fend off any attempt by the United States to play off one European carrier against another.
Therefore, inasmuch as during the GATT negotiations that principle workedand I dare say that in matters of international trade and commodities life is no more competitive in Europe or within the United States, or
I do not want to continue for too long. I want only to say that the multilateral strategy will have advantages and no disadvantages. The multilateral strategy will have to be pursued at the same time as the liberalisation of civil aviation within the EU. I do not see any conflict. Some noble Lords may argueand I should like to hear the argumentthat in pursuing a multilateral bargaining strategy some countries may want derogation or concessions to preserve their subsidies. We have to reject that path. The elimination of state subsidies has to be a priority. I regard multilateral negotiations as a second option, and we should pursue both strategies.
Perhaps the noble Viscount who will reply from the Dispatch Box can answer a question for me. In legal terms the Community has competence in this matter. There may be some peculiar legal problems, because I am told that under a judgment of the European Court the EU has competence which overrides the competence of individual countries. I should be grateful if the noble Viscount could clarify that point for me without causing too much riot on his Back Benches, either here or in the other place. If that is the case, that is another problem: how do we pursue the bilateral advantages which the UK may gain while keeping within the law that we have agreed to?
Baroness O'Cathain: My Lords, I thank my noble friend Lord Brabazon of Tara for raising this matter. At the outset, I must declare an interest. I am a director of British Airways. In fact, I began my career in an airline nearly 40 years ago, and I have had an abiding interest in the airline industry all that time.
I refer back to that era because, however illiberal air transport seems to be in the European Union today, there have been many positive developments. The illiberal nature of the air transport sector has already been described by my noble friend. He spoke of the carving up of routes, pooled routes and so on, and referred to a cartel by any other name. Sadly, the pace of development in terms of liberalisation has been slowing down and now seems to have come to a full stop.
It is important that this debate should not degenerate into another series of carping criticisms of the European Union. I would much prefer that we came up with some ideas as to how to help the Commission to achieve liberalisation, because at present it appears to be at an impasse.
The nub of the problem, which has already been eloquently stated by my noble friend Lord Brabazon, is the unacceptable existence of huge state subsidies to national airlines. Those are condoned by the Commission. It really is ludicrous. On the one hand there are demands
Most of what I had planned to say has already been said by my noble friend Lord Brabazon, but in the interests of making sure that the message gets home I shall quickly go through the points, underlining how important it is that we do everything in our power to ensure that free and fair competition is achieved.
The concept of a national airline being seen as a national status symbol has been with us since air transport became more widespread; and it still persists. In the airline business, I remember it being said over 30 years ago, "As soon as the new flag is raised at the ceremony marking independence, the new national airline takes off on its inaugural flight". Some of the countries where this happened have such great needs for resources to cope with their economic and social deprivation that they really cannot afford highly expensive and relatively huge investment in a national airline, but they have made it. That is not necessarily the case in Europe, but the status symbol of a national flag carrying airline persists. Within the European Union there are several countries which support airlines which by no stretch of the imagination could be called efficient or economic. Nor indeed are they giving good service to their customers, despite the heavy load of state aid.
All the market research, all the customer research, which one reads regarding favourite airlines indicates an inverse relationship between those which receive massive state aid and customer esteem for those airlines.
The most recent example of state aid is probably the most blatant to date. Iberia, the Spanish airline, was bailed out to the tune of about £750 million three years ago. The EC gave its approval, but the restructuring package which it was insisted should be put in place at the time of that approval, still has 18 months to run and Iberia is back again with the begging bowlthis time for £660 million. British Airways has stated that it will take the European Commission to the European Court if the Commission approves the latest package, which was arranged, of course, on the basis that airlines find it difficult to exist because of the problems facing them in a highly competitive, unstable and recessionary European situation.
As my noble friend said, since 1991, over £6 billion has been approved by the European Commission. While that level of subsidy is being continued, there is no hope of further liberalisation. State aids must be outlawed before we can even think about allowing the European Commission to negotiate for member states as a whole. To use an overused phraseit is wholly inappropriate for this debate, but I cannot think of a better onewe must have a level playing field. The phrase, "level skies", I fear, does not mean anything. Although the noble Lord, Lord Desai saidand I was relieved that subsequently he conceded that state aids would have to gothat we were unlikely to lose if the European Commission negotiates for everyone, that cannot be possible.
The European Commission could never be even-handed in the circumstances, while on the one hand approving state aid to airlines, and on the other seeking to negotiate multilateral agreements. We must resist any
We recognise that there are genuine problems with airlines and that if there were no state aids there could be quite substantial unemployment problems. Unemployment is the greatest pan-European anxiety. We think that it is purely a British problem: it is not. There are high levels of unemployment in the European Union generally. But there is little honesty around. Those airlines which have slimmed down and concentrated on customer service, and which rank with the best in the world, are at a considerable competitive disadvantage.
The airline business is tough, but all business is tough. However, I have to say that not as many other businesses are as badly affected by events such as the Gulf War. That is the peg on which Iberia is hanging its new approach. Any major international upset is reflected instantly in passenger numbers and cargo loads. The airlines which are now either benefiting from or appealing for state aids quote international incidents as justification for support. I simply ask the question: how have British Midland, BA, KLM and Lufthansa managed, despite the recession and incidents such as the Gulf War, to continue to operate efficiently and to provide an excellent and essential service?
There is no free competition in the airline industry in the European Union at present. We need free competition in the airline industry in the European Union. We must press the Commission to strengthen its backbone and resist ever more applications for approval of state aids to airlines in member states. Until that is achieved, Britain must "go it alone" and work out its own aviation agreements.
Lord Bethell: My Lords, like the previous speaker I must declare an interest in that I have been the founder of a consumer organisation known as the Freedom of the Skies Campaign which for some 15 years has worked to bring down the costs of European air travel. One must remember that in the early 1980s there was a straitjacket around the whole body of European air travel called the International Air Transport Association. When it ruled the roost, it decided how many prawns there should be in a prawn cocktail; and the cheapest route to London from Copenhagen was via New York. Happily, as previous speakers have pointed out, those days are past. We now have a better regime of fare structures.
However, there is plenty of room for improvement. I support my noble friends Lord Brabazon of Tara and Lady O'Cathain for the constructive proposals that they made regarding state subsidies. Indeed, it is a scandal that those state subsidies have been allowed to proceed.
I wonder onlyperhaps the Minister would like to comment on thiswhether there has been a sea change in the Government's attitude to litigation regarding state aids and other restrictive practices. We know that action is being taken against state aids to Air France. Have the Government contemplated taking the Commission to the European Court of Justice for failure to act by putting a stop to those measures?
As has been pointed out by my noble friend who introduced the debate, there are now many airlines on some European routes. He mentioned the Paris route. Perhaps I may mention the Dutch and Irish routes, and pay tribute to the airlines which pioneered the reduction of fares on flights to the Netherlands and Ireland. British Midland is one of the few airlines which was able to survive the period of recession without going under. Other airlines,British Caledonian, Air Europe and the sadly-lamented Air Laker were unable to survive and were gobbled up (if that is the right expression) by British Airways. In particular one remembers its merger with British Caledonian.
On the routes to Dublin, other Irish destinations and Amsterdam there is certainly a variety of fares available. Nevertheless, for some bizarre reason, it still costs £205 to fly one way by British Airways from Brussels to London. That is the cheapest economy fare one way, from Brussels to London. The cheapest fare from London to Brusselsexactly the same routeis not £205 but £145. Such are the incomprehensible complications of European air travel.
While there has been progress, I fear that there is still not sufficient diversity in the business. There is not enough competition to bring air fares down to the level which they would reach if they were a truly functioning free market, a common market right across the continent.
The fact seems to be that in Britain we lead the struggle for a free market. As has been pointed out, we are the country that most needs reasonably priced air travel. With very few exceptions our business people and our visitors to the continent have to fly. Of course, there is a change now that the Channel Tunnel is available, but by and large we have to fly because of the barrier of the Channel between us and our markets. In this arena British Airways is still far and away the biggest beast in the jungle. The other day I read that British Airways still controls 90 per
British Midland and the Irish airline, Ryan Air, are the only two airlines able seriously to compete with British Airways. They do not have many routes at their disposal and are not able to provide the range of services that the big British airline still dominates. I do not know quite how the Government should tackle the problem. They may care to consider whether British Airways remains within the bounds of Article 96 of the treaty that prevents one enterprise from dominating a route. However, it would be desirable if more British airlines and continental airlines were available to cover this important market. We have made great progress in liberalising the market but the Government or the Commission can only take a horse to the water, they cannot make it drink. They cannot make an airline charge cheap fares if the airline feels that it will go bankrupt if it does and as so many airlines have done during the recent difficult years.
I hope that the Government will also look at the privileges still enjoyed by the large airlines in this country and on the continent. The automatic appearance of a great airline, for example, on a computer reservation system is a factor that encourages many travellers to take the big airline rather than the cheaper, modest-sized airline. It is the large airline that is offered to most travellers who consult travel agencies, and privileges are offered by the large airlines to travel agents' employees.
It is also suggested that the big airlines, including BA, enjoy privileges at the big airports of the Community. Therefore, they have a great advantage in that respect. But there is no excuse for the state subsidies that are applied not to British airlines but to those across the Channel, as has been pointed out by my noble friend Lady O'Cathain and others. There is no reason why we should tolerate the continuance of state subsidies paid year after year to Air France, Iberia and other airlines. I am glad to see the noble Lord, Lord Clinton-Davis, nodding, I am sure he will have much to say about it in a few moments.
It may be that a government wish to subsidise their social policy, their regional policy, to reduce their unemployment or even to contribute to their defence. But that should not be at the expense of the taxpayer or the fare-paying traveller. It should come out of the budgets under those headings. Hidden subsidies such as the training of pilots should also be considered and outlawed.
I hope that the Government will look at all those ways in which the Commission is failing in its task to protect the interests of the European air traveller. If I may say so, it very much strengthens the view recently put forward by Mr. Douglas Hurd that the Commission ought to concentrate on improving its own performance in the areas where it has a clear duty and responsibility, rather than venturing into new pastures and new arenas where its competence has yet to be proved. I hope that Mr. Kinnock will be able to make progress in the area where his predecessors
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