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Lord Monson: My Lords, before the noble Lord, Lord Bethell, sits down, perhaps I may ask a question. Will he acknowledge that cheap scheduled air fares between London and Switzerland are available? The fact that Switzerland is not in the EU may have something to do with that.

Lord Bethell: My Lords, the noble Lord has a point. Another point to be made is that Swissair is one of the few airlines in Europe to be entirely privately owned.

6.18 p.m.

Lord Mountevans: My Lords, I share the pleasure of joining in thanking my noble friend Lord Brabazon for giving us this opportunity to debate our airline industry in a European and transatlantic context. His exposition of the main issues was excellent. My only regret is that his speech and those that followed have left me with little to do but agree with the sentiments expressed. I hope, however, that I can add my little mite to the debate.

Let me start by mentioning two airline ticket stubs in my possession—each of them kept because they were major steps in my life. The first is a Delta economy excursion ticket from Knoxville, Tennessee, to London via Atlanta and a PanAm code share. The date was December 1969 and the fare 414 US dollars. Despite it being a restricted fare, despite Gulf wars, oil shocks, inflation and exchange rate variations, that fare is now available and is in fact slightly lower. Airlines have made a great deal of progress in reducing fares in the 25 years since I bought that ticket, especially the professional heavyweights like Delta. My other ticket is a 1973 British European Airways ticket stub—which dates the story a little—from Heathrow to Stockholm at £144. With the restrictions slightly changed, it is still available at a slightly lower rate even now.

I feel that both transatlantic and European liberalisation is an achievement for which we, the consumers, should be grateful to all those governments, commissioners and airlines who have influenced the scene. I have no doubt that the airline product is a better value one, in most instances more readily available than ever before.

But it is not only the fares and flights—the most customer visible elements—which we should consider. We should not overlook the success of BAA plc; or of the major local authority airports in the country. They too have made a big contribution to both customer satisfaction and to our export earning, as has the CAA, especially through the air traffic control system. As my noble friend Lord Brabazon reminded us—and my noble friend Lord Caithness gave us the details during Question Time on 22nd May—British carriers dominate the Europe to North America traffic. But many of those European and American passengers who choose, for whatever reason, a foreign airline,

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contribute to our earnings because of our unique position at the eastern end of the great circle route and our ATC input.

Mention of the great circle reminds me that, as I speak, there are a number of European airbuses, and indeed quite a large number of Rolls-Royce engines, flying the great circle route. So there is a fourth pillar to the aviation industry. We must take care of all of them, and not think simply in terms of airlines. If European or transatlantic liberalisation goes wrong, all four will suffer.

However, that is not to say that everything is perfect if one looks at Europe. I would not dream of saying that. As several noble Lords have said, if we cannot absolutely eliminate state subsidy to national carriers, it must be controlled. Like others who have spoken tonight, I admire Sir Michael Bishop's achievements at British Midland. I admire him the more when I recall that on two major routes, London to Paris and London to Dublin, British Midland competes with Air France and Aer Lingus. In spite of the conclusions of the comité des sages—my noble friend Lord Brabazon summarised those conclusions—these airlines have access to a bottomless fund, an illegal fund under EC rules, of bail-out state subsidies. Air France competes with British carriers on price, and with Aer Lingus on price; but its advertisements are also dominated by frequency, reliability and quality of service.

That is not the whole story. If as a result of what can only be called commercial incompetence, either Air France or Aer Lingus moves towards failure, it simply receives more state subsidy from its state owners. It then receives a subsidy for the last time, and then it receives another load of subsidy from what might be called the "last chance subsidy saloon".

My noble friend Lady O'Cathain mentioned Iberia and how it got into trouble in 1992, pleading the Gulf War in aid. I believe I am right in saying that in 1992 Spain had the Olympics; it had Expo in Seville; and Madrid was the European capital of culture. If you have three golden carrots of that sort which fill your planes I find it very difficult to see how you can go wrong. Even more ironic in the Iberian context is that I gather it is now going to court, and one of the petitioners is TAP, which is not totally innocent in the subsidy field either, as I recall.

Such subsidies distort competition and, just as importantly, discriminate against not only our own carriers but other foreign private-owned carriers. The liberalised European regime, if it continues to tolerate subsidies and discriminate against private enterprise, must get its act together. It must get together the regulation, the control and the monitoring of those subsidies.

State aid should, as Air UK reminded me, be once-off; be wisely used; and be thoroughly monitored by Brussels. I hope that in winding up this debate all Front Bench Speakers will remind Commissioner Kinnock that abuse of state aid should be his first priority. I am sure that my noble friend Lord Goschen

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will do so. And in so doing, I hope that he will confirm that subsidy is the biggest threat to fair and equal competition.

I turn to the transatlantic—or perhaps we should widen it and call it the third party—negotiating position that Brussels is exploring. Like my noble friend Lord Brabazon, I find this unacceptable in the short term, though like my noble friend I take on board Sir Colin Marshall's Brancker Memorial Lecture remarks, and especially those regarding hard-and-fast rules governing the Commission's conduct of such responsibilities should they ever arise; the allocation of concessions; and the resolution of disputes. I might say that much of that also applies to the European scene. Such rules seem to me a very, very long way away. They seem to me so far away that one might eventually have very nearly global open skies—in which case, both the Brussels role and the present bilateral role seem to fall away. But until then, and in the short term, I very much hope that the Government will fight to preserve the present bilateral status. I also hope that in so doing, they have the support of the parties opposite.

I should like to make two final points. They are outside the strict terms of the Motion and also outside the responsibilities of my noble friend Lord Goschen. Nonetheless, I hope that he will ensure that airport departure tax is never looked upon as a levy to be increased at will. I also hope that carriers' liability—medieval, as my noble friend Lord King once called it—will be equably enforced on all airlines, and indeed maritime carriers. One must be concerned that diplomatic judgments are allowed to override the level playing fields for which so many of us have looked in other contexts this evening.

6.25 p.m.

Baroness Thomas of Walliswood: My Lords, I recognise that this evening I am once again an amateur in a Chamber full of professionals, or at least experts, in this matter. I shall try to be brief and confine myself to three major points. The first has not been touched upon by anybody in this debate. I introduce it with a certain amount of fear. On the other hand, everything that has been said, and all the briefings that I was sent and have obtained, assume that air traffic will inexorably and continuously increase and that that is a desirable and indeed major objective of the whole liberalisation policy. In that context I do not feel that I can let the environmental point go entirely unmentioned.

I draw the attention of the House briefly to two particular recommendations from the Royal Commission on Environmental Pollution, one of which was that increased competition within the European Community should be accompanied by a full assessment of the environmental implications. The other is that the UK Government's policies should be to encourage transfer from air to rail, particularly for domestic or near European journeys, and the upgrading of rail links to main airports to discourage air feeder services.

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I shall not say that all the suggestions that the Royal Commission (it made seven recommendations in relation to air policy) should be adopted. They may not all be feasible. I am not scientifically equipped to determine that. But in the light of government commitment to sustainable development, do the Government share the broad approach that the demand for air transport cannot be satisfied for ever without very severe damage to our environment? I draw noble Lords' attention again to the Royal Commission report, which states in paragraph 5.39:

    "An unquestioning attitude towards future growth in air travel, and an acceptance that the projected demand for additional services and facilities must be met, is incompatible with the aim of sustainable development".

All my remarks should be read within those constraints. Like the noble Lord, Lord Desai, for example, I am not in the least opposed to liberalisation, provided that standards of safety and so on can be maintained, and that the entire burden of that liberalisation is not entirely borne by the employees in the various companies. Also, I believe that my party is in general committed to a competitive approach, to a competition-oriented approach, to industrial policy; and more particularly to ensuring that private monopolies do not succeed state monopolies. I believe that that point was raised by the noble Lord, Lord Bethell.

The second point that I wish to address is the competence of the Commission. As I understand it, the Commission's certainty of its own competence stems from the implementation of the single market. In respect of air transport—as people have said to me, transport always seems to lag behind other industries in this sort of respect—the implementation of the single market should be completed by 1997. That completion would involve such things as full cabotage, which was an issue addressed by the noble Lord, Lord Brabazon of Tara; and the possibility of mergers between other companies and open access to routes and airports, which were points raised by the noble Lord, Lord Bethell, in particular with reference to the smaller airlines. Presumably completion of that process would lead to the cheaper fares to which the noble Lord, Lord Brabazon, referred and which probably we would all like to see. The noble Lord, Lord Bethell, has been a doughty campaigner in that regard.

It is out of the involvement with the single market that the Commission draws its claim for competence and also as a result of its existing role as a negotiator, for example, with and within GATT, on international affairs. It is so confident that it has declared its intention to take out legal proceedings against Belgium, Denmark, Luxembourg, Austria, Sweden and Finland because they have initiated open-skies deals with the United States.

How, therefore, do the Government justify their opposition to the Commission's competence when confronted by that level of certainty? Is the Government's opposition temporary, pending either completion of the single market or some other event? Does the Government's scepticism about Community competence extend to an unwillingness to allow it to operate in such a way as to facilitate a more integrated air traffic control system, for example? That is becoming increasingly more urgent because of the

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growth of air traffic, and the airlines themselves very much want to ensure that it takes place. What reaction will the Minister have to what I thought was the suggestion of the noble Lord, Lord Brabazon, that the Commission could be competent in international negotiations at some point at which sufficient rules about competence have been agreed between the member states? Will it be part of the Government's policy to attempt to agree such rules?

At one point, the noble Lord, Lord Brabazon, seemed to suggest that the UK should seek routes within continental Europe but should fear the trade-off which might result if the Commission takes on international negotiations. For example, in obtaining a benefit from the United States, it might be willing to grant a particular form of access into the United Kingdom. I found that an interesting way of looking at the situation from someone who is in favour of liberalisation. Presumably "liberalisation" means that our own routes and internal national markets should be as open as everybody else's. I should like to hear what the Minister has to say in response to that and look forward to his reply.

Finally, there is the point raised by the noble Lord, Lord Desai, about the relative advantage to be obtained—my reference to the speech of the noble Lord, Lord Brabazon, leads on to this point—by negotiating as a single country or as a group of countries in this matter. I shall not repeat all that the noble Lord said, but there is a problem with the comparative strength of the international countries in that respect with the very strong United States' presence in aviation worldwide. The United States already has certain concessions in our markets which it has been not very willing to give to us in return.

I should like to know, when we are negotiating for open-skies, whether we are indeed looking for the cabotage—that is to say, the ability to fly from (for the sake of argument) Washington to Seattle, as well as into Washington or into Seattle, and in fact even independently of those, which is what "full cabotage" in fact means. Would we, in fact, be able to negotiate that level of agreement and opening of the US markets unless we are willing to grant a level of European freedom in compensation?

As I say, the question of liberalisation cuts both ways. Indeed, has not the United States indicated its concept of its own powers by virtually announcing its intention to pick off the smaller countries—in fact, those that are currently facing action by the Community—before concluding negotiations with the UK?

In response to another point raised, will the Government reassure the airline industry about the method of international negotiation that is normally undertaken by the Commission? If we take as an example the GATT negotiations, the Commission officials who do the negotiating are nearly always accompanied by not merely national representatives but also by industry representatives. The Commission does not exclude either of those two important parties when it is dealing on behalf of the Community as a whole.

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I have asked a number of questions. I hope that I shall receive some answers. Meanwhile, I thank the noble Lord, Lord Brabazon of Tara, for initiating this debate.

6.36 p.m.

Lord Clinton-Davis: My Lords, first, I wish to declare two interests. One is that I am the current president of the British Airline Pilots Association, though I must add immediately that my views do not coincide in several major respects with those of the association. So, whether I shall be asked to continue as president remains to be seen. I get on with the association very well. My second interest is that, I was a commissioner in this area. I am grateful to the noble Lord, Lord Brabazon, for what he said about the efforts that I and my colleagues in the Commission made between 1985 and 1989 to get the first steps going. I had that interest and I shall reflect a little about that in a moment and about the chronology of events which have taken place.

As others have done, I should like to congratulate the noble, Lord Brabazon, who has ministerial experience in this field, on initiating the debate and on raising a number of salient issues. As he said, the debate is timely because it enables us to review progress in liberalisation and to consider the position of the bilateral agreement which has recently been struck with the United States. So far as that agreement is concerned, the debate enables us to look at the more fundamental long-term objectives. It also enables us to consider the rationale underlying the draft mandate which has been submitted by the Commission to the Council and which, I understand, is to be debated before the Council of Ministers next week. The Commission claims that it has exclusive competence to conduct air service negotiations with third countries and with the United States in particular on behalf of the European Union. I should like to look at that matter in some greater depth in a moment.

Perhaps I may consider these matters in the order in which I have just stated them. It follows the line taken by the noble Lord, Lord Brabazon. So far as concerns progress in liberalisation, the first steps, to which I have alluded, were agreed in 1986 but did not come into operation until 1987, because there was the problem over Gibraltar which held things up for a year. The noble Lord, Lord Brabazon, will remember that only too well. Incidentally, I want to thank him for all the support that he and his Government gave to the Commission at that time. It was not full progress of course but simply the first vital steps in creating a common market in air transport.

In the European Parliament, I was very often pressed by the noble Lord, Lord Bethell, who wanted to go much further than I thought was practical at the time. That was the dispute between us. We were doing it on a step-by-step basis—which I thought was the only basis upon which one could proceed—but having regard to the enormous frenzied opposition that he will recall was evoked from a number of member states, even to go so far as we were proposing was too far for many of them. Eventually they saw the light, albeit in a limited way, and we were able to proceed with the first stage.

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Then we had the second and third packages, which were agreed in 1993 and allowed European airlines to operate under a single air licence, enabling them to fly between any European Union country. That is to be further developed in 1997 when airlines will be at liberty to operate domestic services in other member states. That is real progress, as the noble Lord, Lord Brabazon, indicated. At the same time—this goes back before my time as commissioner, though it was developed in those four years also—regional air services have been developing and will continue to progress. And all that is to be welcomed.

However, as the noble Lord rightly said, a heavy item appears on the debit side. I refer to the recent sanctioning by the previous Commission of state aids to Air France and, on a lesser scale, to Aer Lingus, Sabena, TAP and Olympic Airways. Earlier in 1992 the first tranche of state aid to Iberia was approved and it is now requesting a further tranche.

I have said previously in this House and elsewhere that it was wrong of the Comité des Sages, to which the noble Lord made reference earlier—he said he approved of the report, which was helpful in many respects—to contemplate further "once-and-for-all" provisions of state aid (the "last chance saloon" doctrine) even if they were to be subject to substantial conditions. That situation has happened before, but the requests did not stop. I do not believe that they will stop in the future.

My view is that there should be no more chances. But let us not underestimate the task that now faces Commissioner Kinnock. First, we have the framework operating under the guidelines of the Comité des Sages; we then have the decision of the previous Commission—that was an unfortunate precedent and to some extent the commissioner may be imprisoned by it. I hope that that is not so and that when he reflects upon these matters, while we have a great deal of sympathy with his personal situation and that of the present Commission, he will in fact decide that there is to be no more sanctioning of state aid. There may be special circumstances, but they are narrow in their limitation and that must be the prevailing doctrine.

There is no question but that such aid distorts competition; it confers unfair competitive advantages which have not been earned, and that is the point. It was therefore damaging in the extreme when the Commission took its position in the latter part of 1994. I understand the pressures that were imposed upon President Delors. He wanted to be a candidate at the time and it was difficult in those circumstances to turn down Air France. In those specific circumstances the whole thing should have been put into touch until the new Commission took over. That would have been easier. I am glad that the Government as well as BA are challenging the position of Air France state aid. I wish them well in that litigation.

We come now to the agreement with the United States. That agreement, which was recently negotiated, is very modest, as the Government will concede. Further discussions are to take place shortly which will elaborate on that position. It must be viewed against the changes in our air services relationship with the United States since 1977, when we reviewed the Bermuda agreement.

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I was aviation Minister at that time, a position later occupied by the noble Lord, Lord Brabazon. The results of the negotiation have rankled with the United States authorities ever since. It ended the substantial dominance which had been enjoyed by the United States airlines on the Atlantic routes, which we found plainly unacceptable, and provided instead a framework enabling competition to take place on broadly equal terms.

That is the background. Even against the latest deal, which is quite modest, the United States appears to be dissatisfied with the outcome. It believes that United States carriers were not given sufficient opportunities to serve London and beyond, but it must not assume that the overall benefits from the negotiations can be only one-way—the United States way. I wish our negotiators well in those further discussions.

Then I come to the question of the Commission's draft mandate. I am pleased that this debate has not taken on the tone of a principled opposition, as some have said in relation to the Commission's proposals. The test for those few of us on these Benches is: what is best for Europe and for British aviation in particular? A pragmatic approach, which I encapsulated in that one sentence, is shared by British airlines—by British Airways in particular—and by the Civil Aviation Authority. Neither we nor they see this in simplistic Thatcherite terms—always saying "No, no, no" to anything to do with Brussels, almost regardless of the issue. We do not see this as a belligerent attempt by the Commission to extend its competence. The Commission entertains the view that a mandate along the lines it suggested, perhaps amended in part by the member states, would be in the best interests of European Union aviation, as stated by the noble Baroness, Lady Thomas, a moment ago. I do not necessarily agree with that conclusion, though it is a perfectly respectable argument. It has some logic in law because the legal position of the Commission is based on the case law of the European Court of Justice in the judgment of AETR in 1971, confirmed by an opinion in November 1994, according to which,

    "In particular, each time the Community, with a view to implementing a common policy envisaged by the Treaty, adopts provisions laying down common rules, whatever form these may take, the Member States no longer have the right, acting individually or even collectively, to undertake obligations with third countries which affect those rules".

However, though I am advised that the Commission rests its case on that, I am not convinced that it will be as easy as that. It would be a travesty to suggest that the Commission is bereft of acceptable arguments in favour of its stance. Perhaps I should briefly outline them and touch on my major reservations.

First, member states ceded to the Commission in 1986 not dissimilar powers in relation to shipping. The Minister at the time will recall that. I know that because I negotiated the agreement and even the Government of the day acceded to that proposition. Of course, while the parallel is relevant in legal terms, there are major differences in practice between aviation and shipping. Secondly, over many years the Commission negotiated at the GATT on behalf of member states and again the United Kingdom concurred in that position.

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Thirdly, the Commission believes that although it is preferable for the issues affecting the mandate to be resolved by diplomatic agreement, it believes that it has the legal right, which may have to be tested in the courts, to negotiate air service agreements on behalf of the Union as a whole. As I say, it is prepared to litigate on this point.

Fourthly, the Commission believes that the bilateral agreements which have been concluded by Belgium, Denmark, Luxembourg, Austria and Finland—and also Switzerland although that country is not within the Union—as well as the United Kingdom, damage the solidarity of the European Union and affront the liberalisation policy which has been pursued. It sees the smaller countries as being "picked off" by the United States, with little being granted in return, and is in conflict, it argues, with the more substantial gains which could be procured on a multilateral basis.

I am not sure where I am as regards the number of points, but I believe that this is the fifth. The Commission rejects the view that it does not have the resources available to undertake the role of negotiator for the reasons that were given by the noble Baroness a moment or two ago. It says that it had that experience in any event in dealing with the former EFTA countries and eastern and central Europe.

The Commission also says that its draft mandate extends to all major issues involving concessions to be made by the United States on cabotage in the United States; relaxing conditions of ownership by United States airlines, mirroring the European Union's own conditions which would enable a foreign airline to acquire up to 49 per cent. of a national airline; pushing for the real opening of the United States internal market and removing all United States discrimination concerning the computer reservation system; and that it will aim at establishing a real "open skies" agreement. If the agreement is less than the one reached by existing bilateral arrangements, then the more liberal agreement will be left untouched.

On the allocation of routes the Commission says that is not all that difficult, but I am not so sure about that. The Commission claims that there has been considerable movement in its favour in the debate on the part of Germany, France, Spain and Denmark and poses the question: if that is so, why is the United Kingdom so hesitant?

Perhaps I may now briefly turn to the position which I, on behalf of my party, adopt here. Essentially, it is for the Commission to satisfy us that a multilateral system for negotiating air service agreements, now or in the near future, will have positive effects for this country, its airlines and the European Union more generally.

British Airways is Europe's largest and most successful carrier. It is not opposed in principle to the initiative undertaken by the Commission; but not unnaturally, it is concerned about its own North Atlantic routes, which contribute about 40 per cent. towards its operating profits. It is entitled to fight to ensure that evident benefits will result from any change of the regime.

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British Airways accepts that the deals being struck by the United States with the smaller countries might be objectionable in that they include fifth freedom rights and provisions concerning computer reservation systems which might well be prejudicial. It concedes that if a unified market for the North Atlantic is to be established, which would also cover the domestic markets of the United States and Europe, which it would welcome, it would be for the Commission alone to negotiate such an agreement on behalf of the member states.

But we believe, as it does, that any such agreement must be seen to be beneficial for the industry and that the rules of competition are fair and seen to be fair; that the mechanics for ensuring and enforcing this situation must be firmly in place and that until these points can be agreed the bilateral system has to continue.

Consequently, I believe that it is for the Commission to demonstrate that all the main barriers to free trade, not just those which the United States industry cannot accept, are removed. There must be free access to all markets within the area without limits on capacity and prices. There must be complete freedom for the movement of capital and common rights of establishment without discrimination so far as citizens of the free trade area are concerned. There must be common competition rules and methods of enforcement. There must be rapid and effective sanctions against predatory behaviour. In determining any mandate the Commission's priorities must be very clearly set out, and they are not clearly set out at present.

Equally, the Commission must assert how it will resolve major variations of commercial practice and enforcement in relation to competition. We have to remember the United States anti-trust laws, including the vexed questions of triple damages suits and claims for extra-territorial jurisdiction. They are very different from our own approach to competition law.

The Commission must resolve its approach to the use in the United States of Chapter 11 to sustain airlines which are in or close to a state of bankruptcy—which is not a million miles away, in my view, from the whole question of state aid. The Commission must also resolve once and for all that further state aid to European Union airlines is out. Major practical problems arise in negotiating for 18 European Union airlines operating to the United States, all of whose interests, together with those of airports, regions and cities, have to be reconciled, especially as regards the allocation of routes. After all, airlines have invested very heavily in these routes. That is a matter to which the Commission must pay proper attention. I believe that we are well within time so far as concerns this debate.

The issue, as I have said before, is what is best for Britain and the European Union. I am not opposed in principle to what the European Commission is seeking

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to do. It has to prove that there is a strong and immediate case for it, but I do not believe that it has yet done that.

6.56 p.m.

The Parliamentary Under-Secretary of State, Department of Transport (Viscount Goschen): My Lords, this has been an exceptionally well-informed and topical debate. I thank my noble friend Lord Brabazon for initiating it and for his forceful opening speech.

The debate has happily concentrated on the real world of the airline industry rather than on the more traditional dogma which can sometimes be associated with a debate with a European angle. Indeed, with some surprise I found myself in agreement with the noble Lord, Lord Clinton-Davis, in much of what he said on the subject. I welcome his condemnation of state aid as being anti-competitive, of which more later.

My noble friend Lord Brabazon is right: the airline industry is big business. What is more, the United Kingdom companies are world leaders in this extremely valuable field. The number of air travellers using our airports totals nearly 124 million a year. It also provides, through direct employment, some 60,000 jobs in the United Kingdom and many more in the supporting service industries. Historically, air transport has been characterised by over-regulation and by complex barriers to trade. The Government's policy has been for some time to encourage full liberalisation, which we have achieved now in the United Kingdom. The benefits of this are self-evident. More competition leads to more frequencies and better services at more competitive prices. That is good for the consumer and good for the industry, as well as being good for the country as whole.

As a result of our competition policy, our airlines are in an excellent position to take advantage of the opportunities offered in Europe by the single market and elsewhere in the world. We have a relatively large number of airlines in this country—a rather surprising figure of around 50—all of which operate in the private sector, none of which receives state subsidy and most of which operate international, scheduled or chartered passenger services. That has been achieved without sacrificing our commitment to ensuring that the highest standards of safety and security are maintained.

I also believe that the environmental considerations raised by the noble Baroness, Lady Thomas, are extremely important, but I do not believe that our aims of liberalisation conflict with our policies of minimising the environmental consequences of transport. I should mention also that the noble Baroness sprayed a fair number of questions at me in the course of her remarks, most of which concern the very real issues which surround this subject. I hope that at the end of my remarks she will be satisfied that I have addressed the key issues which she indicated.

Progress towards liberalisation of the international air transport market has been most notable within the European Community. The Third Aviation Package,

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which came into effect on 1st January 1993, introduces uniform criteria for operator licensing and removes restrictions on cross-border investment. Member states are no longer able to favour national flag carriers in issuing route licences and access to routes within the Community and subsequently throughout the European economic area, which has also been opened up.

The third package also ensures that carriers are now free to set fares according to their commercial judgment. That subject was developed by my noble friend Lord Bethell, who went on to point out that, although fares might not be regulated, it is up the commercial airline concerned to set the fare which it considers appropriate. That series of measures has resulted in reduced fares on a number of key EEA routes, including London to Paris and London to Amsterdam. My noble friend gave us some helpful examples of the movement in fare levels on the London to Paris route. The only remaining restrictions, which relate to the provision of domestic cabotage within other member states, will be removed in April 1997.

The rules now applying in Europe established the framework within which we and other member states are required to operate. It is, however, equally essential that all member states follow the rules and that the Commission is prepared to act to enforce them wherever necessary so that the benefits of that liberal framework are fully realised. That is why we have fought so long and hard to secure access for our carriers to Orly airport in Paris. I am pleased to say that a number of UK airlines have now successfully established services on the London-Orly route, opening up a new route for air passengers, who can now choose between two airports in Paris rather than being obliged to fly into Charles de Gaulle.

It is clear that there is still plenty more to do. For instance, it is essential that ground handling should no longer be operated on a monopoly basis, as is the case at many European airports. We have therefore welcomed the Commission's proposals for a framework directive and hope that negotiations on this matter can be completed as soon as possible.

My noble friend Lord Brabazon referred to a black cloud in the rosy picture. That black cloud was the issue of state aid. My noble friend Lady O'Cathain and a number of other noble Lords concentrated on the difficulties and inequalities which the high levels of state aid have meant. It is now particularly important that the Commission grasps the nettle of state aid to national airlines. State aid is one of the most serious impediments to realising the full benefits of the single market. It removes the incentive for state-owned airlines to become efficient and consequently results in a bad deal for passengers. UK airlines have had to face the pain of restructuring without state help but still have to compete with inefficient airlines supported by state subsidies.

Despite that, the Commission has so far approved the six applications it has received from member states since 1991 for restructuring aid for their ailing flag carriers. This amounts to approval of £5.3 billion of state aid which has been allowed to distort competition within the single market, nearly half of which went to one airline, Air France. This is our reason for challenging the

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Commission's decision to allow £2.4 billion of state aid to Air France. We are also giving our full backing to the legal challenge made by a number of European airlines, including British Airways, British Midland and Air UK. I can advise my noble friend Lord Brabazon, who asked about the state of play with regard to those challenges, that the Government's case has been stayed pending the outcome of the airlines' cases, which we understand may begin later this year.

A further test for the Commission's policy will be the Spanish Government's second application for state aid for Iberia. It was a key condition of Iberia's previous state aid injection, which the Commission approved in 1992, that the airlines should receive no more aid during the current restructuring period. It is essential that the Commission upholds its earlier decision. I cannot emphasise too strongly that failure to tackle the issue of state aid continues to threaten the single market in air transport and calls into question the Commission's ambitions to negotiate external air services agreements.

The UK has an excellent record of negotiating liberal arrangements with states outside the Community and in recent years has successfully negotiated more liberal arrangements with, among others, South Africa, New Zealand, Singapore and a number of central and eastern European states.

That brings me to the issue of competence, to which the noble Lord, Lord Desai, addressed himself. It was investigated also by the noble Baroness, Lady Thomas. Under Community law, as the European Court of Justice confirmed in its Opinion on the GATT agreement last year, competence for external relations in transport is shared between the Community and member states. Therefore, member states remain free to negotiate air service agreements with third countries, provided that their negotiations will not affect the Community rules or alter their scope.

There are some circumstances where the European Commission may legitimately negotiate air service agreements with third countries on behalf of the Community, but it may do so only on the basis of a mandate which has been approved by the Council of Ministers. Indeed, there are such circumstances in which the UK has supported and continues to support Community level negotiations; for example, in extending the second and third air transport packages to Norway and Sweden, and more recently in agreeing a mandate for Community negotiations to extend the benefits of the third package to Switzerland. Such Community-level negotiations are legitimate because they involve other European countries adopting internal EC rules. The negotiations with Switzerland are now under way.

However, in other areas, most notably with regard to the United States of America, we are not convinced that Community negotiations would be in the best interests of member states; nor that they would achieve a better result for our airlines and passengers than continuing negotiations at national level. The Commission has recently proposed a draft mandate for negotiations with the US. However, this is little more than a wish list and lacks a thorough analysis of the potential advantages and disadvantages for the European Community and its industry, consumers and regions. It fails to address the key

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question of whether negotiations on this basis could realistically—that is the key word in the entire debate—achieve a better result. In the absence of that analysis, we do not believe that the mandate can provide an adequate basis for further discussion.

Also, on a practical level it would be extremely difficult to secure agreement on a mandate for negotiations with the US which would reflect the divergent interests of the 15 member states, their airlines and regional interests. It is important to put that into context when considering the practical difficulties. It took nearly two years for the member states to agree a mandate for Community-level negotiations with Switzerland which was based almost entirely on extending existing Community legislation on the single market in air transport to Switzerland and where the practical and economic complexities are not nearly as great as those relating to the United States.

From our considerable experience of such highly complex bilateral negotiations, it is clear that it is not an easy matter to reconcile the often conflicting interests of the individual airlines involved, the consumer interest and the interests of regional airports. At Community level, the difficulties would be multiplied many times over. It is also clear that there is little consensus among the member states on the policy to be adopted on air transport relations with the United States—whether protectionist or seeking liberalisation. For the Commission to secure a mandate which satisfies those members who favour a fully liberal agreement and those who advocate a more protectionist stance must be unrealistic. And, unlike the creation of the single market within Europe, there is no treaty obligation which obliges member states to liberalise air services relations with the US.

The European Commission has now announced its intention to pursue action against the six member states which have initialled so-called "open-skies" agreements with the United States. The Commission also wrote to the UK about our bilateral negotiations with the United States. I firmly believe that it is in our best interests that we continue to negotiate air service agreements bilaterally with the US. We have the necessary powers to do so and nothing in our on-going negotiations with the US conflicts in any way with our obligations under the Treaty of Rome.

The North American market is the biggest long haul market from Europe, with some 30 million passengers each year. It is especially important for the UK, which accounts for nearly 40 per cent. of the total traffic—ahead of both Germany (with 18 per cent.) and France (12 per cent.). It is extremely important in commercial terms for UK airlines.

We have heard expressed this evening that BA feels that last year routes to the Americas contributed some 40 per cent. to its operating profits. In any case, we believe that national governments are best placed to identify what is in the interests of industry and consumers, to identify a strategy and realistically to carry out the negotiations. The Commission has failed to produce any evidence to suggest that that is not the case. The Government will therefore continue to resist the Commission's claims to exclusive competence in this area and its attempts to take over responsibility from the member states.

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I believe that the Government are in the best position to negotiate our air service agreements with the US. As we have heard, as recently as 5th June we signed an agreement with the US which provides new opportunities for both the UK and US airlines. The deal allows BA to offer more services from Heathrow to Philadelphia, and allows UK airlines the opportunity to carry some US government traffic, which until now has not been open to UK airlines. Those are the so-called "fly American" provisions. It also moves further towards liberalising code-sharing arrangements between the UK and the US, as well as allowing a second US airline on the Chicago-Heathrow route.

We have also swept away many obstacles to the ability of both countries to benefit from the unilateral offer which my right honourable friend the Secretary of State made in October last year to open up transatlantic services to all UK regional airports, including Stansted and Luton. That should result in an increase in transatlantic services, and we have recently seen a new service on the Birmingham-Chicago route.

The process of liberalisation must not stop here. Work will start on the next stage of negotiations with the aim of opening up further opportunities for transatlantic traffic very soon.

The agreement signed on 5th June will ensure that passengers will be able to benefit from a greater frequency of transatlantic service and wider choice, bringing with it the prospect of more competitive fares. We have not abandoned the goal of wider liberalisation with the United States, but in view of the difficulties which noble Lords have highlighted during the course of the debate we feel that it is best to proceed on an incremental basis by focusing on specific issues and by trying to secure a balanced agreement which can be built upon and which meets the needs of our airlines and passengers.

In conclusion, therefore, I believe it remains in the UK's interests to negotiate bilaterally with the US. A significant proportion of transatlantic traffic (as we have heard, some 40 per cent.) is accounted for by the UK. We have a strong negotiating position, and I firmly believe that it is within our rights to continue such negotiations with the goal of achieving further liberalisation.

7.15 p.m.

Lord Brabazon of Tara: My Lords, I am most grateful to all noble Lords who have taken part in the debate. I hope noble Lords found it interesting. It has been well informed. It may not have had many speakers but all those who spoke did so with a great knowledge of the subject. I should like to thank especially my noble friend the Minister for the care and attention that he gave to his reply.

We have had a degree of unanimity—it is rare in this House for it to be so strong—on the issue of state subsidies. I hope that Commissioner Kinnock, if he has an opportunity, will be able to read the debate. I doubt if he will. The noble Lord, Lord Clinton-Davis, might use his good offices as a former Commissioner and as a colleague in the Labour Party to draw it to his attention. If he manages to resist the calls for state subsidy, he will at least know that he has the wholehearted support of the House of Lords, for what that is worth.

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On the other issue which was the subject of the debate—negotiations with the United States—slightly more balanced views were expressed. I said that I did not rule out for ever the possibility of that happening. The approach of the noble Lord, Lord Clinton-Davis, was similar. He might like to get there a bit quicker than I would, but nevertheless there was a certain degree of agreement within the House. As I said, I am grateful to my noble friend the Minister for having given such a detailed response on that point.

A number of other issues were raised. It is not the custom for me to answer in detail, much as I might like to. The noble Baroness, Lady Thomas, made the point that I was in favour of cabotage within Europe, which I am, and that is part of the third package. She asked why I find it difficult to accept that another European airline might be given a right to the US in exchange for an American airline being given a right to London. Those two things at the moment—I say "at the moment"—are different issues. There might be a case for that one day, but not right now.

The noble Baroness also mentioned the environment. My noble friend the Minister made the point that I would have made. I do not consider liberalisation, in itself, poses a threat to the environment in any way. Air travel, whatever the Royal Commission on Environmental Protection might like, is, by all forecasts, set to grow, and to keep on growing. While I agree entirely with the noble Baroness that we would like to see more cross-Channel traffic through the tunnel, I believe—I may be wrong—that the last figures I recall hearing were that the total capacity for passenger trains through the tunnel accounts for about one year's anticipated growth in air travel. So I am afraid that it will not make an enormous impact.

I should like again to thank all those noble Lords who took part in the debate, and I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.

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