Select Committee on European Communities Minutes of Evidence

Examination of witness (Questions 187 - 199)




  187.  Dr Humphreys, good morning and welcome. I hope I am right in addressing you as Dr Humphreys. If I am right, my apologies for the incorrect assignation I am looking at in front of you. I am sure that was not intentional. I am very grateful for your coming to give evidence on behalf of Virgin Atlantic. You are aware, of course, because we have your written evidence, for which we are most grateful and have read, that we are looking to the proposed Competition Regulations emanating from Brussels. You are also aware—and, indeed, you have made reference to it in your written evidence—that it is not within the brief of this Committee to get into the proposed British Airways (BA)/AA alliance. I would be grateful if you would avoid any reference to it other than a general reference because it happens to be a proposed alliance. We do not want to get into the pros and cons of that particular proposal. Could I start firstly by asking you a very simple question. Your notepaper is headed Virgin Atlantic but you fly elsewhere than across the Atlantic. Do you call yourselves something different when you go to Hong Kong, for instance?
  (Dr Humphreys)  No, my Lord, we are Virgin Atlantic in all our markets. We are, however, distinct from Virgin Express, which is a short-haul operation based in Brussels.

  188.  Thank you very much. As I say, we have your written evidence and we are genuinely very grateful for it. We find on these occasions that the most benefit is got from questions and answers but if you have any opening statement, (hopefully a short one), that you would like to make, we would like to hear it.

  A.  Perhaps I might just start by apologising that the Chairman of Virgin Atlantic, Richard Branson, could not be here today. As you know, our appearance here was arranged at short notice and I am afraid he could not change arrangements he was already committed to. I would just like to say a few words, to put the position of Virgin Atlantic on this subject into context, if I may. Virgin Atlantic is a growing airline. Although we are only 14 years old, we are already the third largest European airline across the North Atlantic. We have introduced innovative value for money services in markets that were desperate for new competition. However, clearly we are still substantially smaller than many of our major competitors. Air transport is an industry that has developed in a highly regulated environment. Many of those regulatory restrictions are disappearing but the results of past developments are still very much with us. For example, most national markets are still dominated by a single airline able to exert considerable economic power. Barriers to market entry, for example in access to slots at principal airports, are a major problem for smaller airlines, and predatory behaviour in this industry can be both relatively attractive and economically rational for the major carriers. Virgin Atlantic has experienced all of these problems. We were fortunate in having significant financial backing to survive and become the highly profitable operation that we are today. Others have not, and will not be so lucky. This is why we believe it is vital for the success of competition in the airline industry, with all the benefits that this brings for consumers, that there is an effective competition policy diligently applied. Within the European Union internal aviation market we have the provisions of the Treaty of Rome, particularly Articles 85 and 86. These do not, at present, extend to air services between the EU and third countries. Similarly, United Kingdom domestic competition legislation does not currently apply to international scheduled air services. It is this vacuum which the European Commission's proposal would fill. Virgin Atlantic believes the removal of the vacuum is very important and for this reason we support the Commission's proposals. Thank you.

  189.  Thank you. May I just pick up that word "vacuum". In the letter that you were kind enough to write to me on 23 June, you implied that the Regulations emanating from the Competition Directorate would not, in themselves, affect the operations of airlines. Now, I would like to quote to you (and you may have seen or read it) one paragraph from a very interesting pamphlet produced by solicitors Norton Rose, Air Transport: Significant Changes in Competition Law. I do not know whether you have seen this but it looks like this. This particular section is headed: "What the effects of change be". I will just quote one paragraph, if I may, and then ask you to comment on it. "If the proposal to remove the geographic limitation on the scope of application of Regulation 3975/87 is adopted by the Council, the extension of the Commission's ability to apply directly Articles 85 and 86 to third country routes will have significant consequences of a nature that should not be under-estimated. Depending on how the Commission used its new found powers, the extension of its competence (as well as the consequent increased ability of private litigants to use Article 85 in national court proceedings) to third country routes will change the way in which the air transport industry operates internationally." It then goes on to elaborate. My reading of the second paragraph of your letter is that if you look at it in an extremely narrow vacuum-like way, you are absolutely correct. But I ask you, what is the point of having competition rules if the Directorates concerned do not, or are not, influenced by those Competition Rules when they draw up their Rules?

  A.  First of all, I do not disagree with the quotes that you read out at all. What I meant to imply—in the paragraph you quote—was that, in itself, this proposal from the Commission does not give the Commission negotiating rights with third countries. However, clearly it will have an impact on bilateral negotiations that Member States undertake. In our view, although the full implications of that are not yet clear, that could have a very positive effect. It is extremely important, as I have said before, that Member States take full account of the competition implications of the agreements that they negotiate. It is important for the success of competition in Europe and particularly for the smaller airlines. We see this development as a positive development. However, as we also said in our evidence, I think there is a need, if these proposals were to be accepted, to clarify precisely how they would be applied and how they would affect bilateral negotiations undertaken by Member States. That clarification has not yet been sought.

  190.  Would it not flow logically that such clarifications as you are looking for, would emanate from DG VII once the DG IV Directorate has been approved, assuming that it will be approved?

  A.  I am not sure that is necessarily the case. May I give you an example of the type of problem that can arise. The United Kingdom includes now in its bilateral agreements (or attempts to), provision that permits code-sharing, which is a growing concept in international aviation. Partly because of pressure from us and other carriers, included in the provisions of the bilateral agreements is a statement that says: "Nothing in this section affects the application of the competition rules." As I am sure you can imagine, code-sharing can be a very positive development for competition. It can also be a very negative development. It is very important that Competition Rules should be applied. There is absolutely no reason, other than acceptance of the logic of that argument, why the United Kingdom Government should have gone along that road. They were not under any obligation to do so. Fortunately, they did. Other Member States maybe would not have done that. However, in the absence of that clause, airlines would be free to engage in all sorts of anti-competitive behaviour. There would be no or very limited things that people could do about it.

  191.  Let us just stick on this code-sharing. You have half answered the question but I will ask it in full. How do you consider these Regulations would affect existing bilateral air service agreements between Member States and third countries?

  A.  I think they would affect them, in particular, in that Member States would have to be aware and take account of the competition rules when negotiating bilateral agreements. Again, if I might give you one example. Already there are in place Regulations that apply to aviation in Europe beyond the internal markets, or at least have an effect on aviation beyond the internal market. For example, there is a Regulation governing computer reservations systems. There is a Regulation governing the allocation of slots at Community airports. No Member State can negotiate a bilateral agreement that contradicts the provisions of those Regulations. They have to take account of them. In just the same way, if these proposals were accepted, Member States would have to take account of the competition rules in their negotiations. Now precisely how that would be done would have to be subject to discussion between the Member States and the Commission because clearly Member States are negotiating with other sovereign states. If those sovereign states insisted on certain clauses that were not consistent with the competition laws of the EU, some way would have to be found to square the circle.

  192.  Interestingly, I used exactly that last expression in discussions just before you came in. A point that has been worrying this Committee ever since we started this enquiry is the apparent total opposites of the proposed Regulations emanating from DG IV and the United States anti-trust legislation. Other than continued exemptions ad infinitum, how can you see those two actually getting together?

  A.  My own understanding—and I should emphasise I am not a lawyer—is that the anti-trust legislation in the United States, the Sherman Act, and the Competition Rules of the Treaty of Rome are actually quite similar. They have the same underlying principles. In other industries there is already in place an agreement between the Commission and the Department of Justice in Washington to consult and to deal with competition problems as they arise. I believe that agreement provides for one of those authorities to take the lead in any single investigation that affects both markets, but which perhaps affects one market more than another. As far as I am aware, these agreements work extremely well and both parties are happy with them. Now aviation, as ever, is treated differently here. In the United States it is the Department of Transportation which is responsible for the granting of anti-trust immunity to international airline alliances, not the Department of Justice, although I think it is true to say that there has been some criticism of that. There is a growing voice in Washington to suggest that authority should be passed back to the Department of Justice who already deal with the vast majority of anti-trust issues. So I do not really see there is a major problem here. The Commission and the United States authorities do discuss competition issues and can come to agreements.

  193.  But surely, Dr Humphreys, you have just put your finger right on it. There you have, as we understand it, the anti-trust legislation in the United States. We have had ample evidence that the trans-Atlantic market is the big slice of the cake. That is the really big one and everything else is relatively unimportant; I repeat, relatively. It is fine for the Department of Justice and for the United States legislation to have anti-trust laws, but having said that if virtually every agreement is operated under immunity to those anti-trust laws, how are those two going to come together?

  A.  I think you are referring there to the airline alliances that have been granted anti-trust immunity—or at least some of them have—and that is correct. However, the bilateral agreements are quite different. These are agreements entered into between governments. They are not subject to anti-trust immunity. My understanding is that virtually all, if not all, the bilateral aviation agreements entered into by the United States are executive agreements and not treaties. Therefore, they do not take precedence over domestic anti-trust competition law.

Lord Berkeley

  194.  You mentioned earlier the comment about code-sharing: sometimes you felt it was beneficial to competition and sometimes you did not. You have also mentioned the question of slots. We have heard evidence from another witnesses about the problem of slots. However much competition may come in between a Member State and a third country, if the allocation of slots makes it impossible for new entrants to get a reasonable place in the market it makes life very difficult. First of all, how does it work at the moment? Is there buying and selling of slots or is it all negotiated? Who should own the slots? Do you think the competition authorities should have a role in requiring changes to take place and who uses them?

  A.  I could talk for a long time on that subject so I will try to be brief. Certainly slots are a major problem for smaller airlines. Undoubtedly the shortage of slots at Heathrow and increasingly at Gatwick has held back the expansion of Virgin Atlantic, for example, to a very substantial degree. We believe that the current slot Regulation which applies in Europe and is subject to review ought to be radically reformed. At present, at the major airports in Europe, particularly the most congested ones, the dominant airline sits on a very sizable proportion of slots and is able to manipulate that pool to its own benefit. For example, at Heathrow, British Airways is able to withdraw domestic regional services and transfer the services to airports such as Gatwick or other airports, and use those slots released to engage in competition against us on the North Atlantic. We do not have that option so we are at a significant disadvantage.


  195.  Can we be quite clear on this. Our apologies because we are amateurs and you are a professional. What you are saying is that a slot is a slot and it is not specific to a route. It is specific to the airline that has that slot.

  A.  That is the current rule.

  196.  Thank you. Sorry to interrupt you but I wanted to make that clear.

  A.  The fundamental problem, we believe, is what is known as grandfather rights. This means that once an airline has been given a slot, provided it uses that slot for a given proportion of time it keeps the slot in perpetuity. We believe that, first of all, airlines do not own slots. That is a commonly held position nowadays. They are loaned the slots for use.

  197.  By whom?

  A.  That is a question which has never been finally settled. One thing which has been settled to most people's satisfaction is that it is not the airlines that own the slots. In other businesses that face a similar problem these sorts of resources are not granted in perpetuity. For example, television franchises or railway franchises. These are granted for a given period. After that period the rights are redistributed, sometimes back to the original holder and sometimes to other people. We believe that this would be a major step forward to encourage competition if it were applied to slot holdings. So a slot might be granted for ten or 15 years or so—ample time to recoup the investment necessary to develop a route—but after that time it ought to be handed back into the pool and everyone given the opportunity to apply for it.

Lord Berkeley

  198.  Following on from that, in the other industries you mentioned it is almost a kind of competitive tendering or auction process. Would you favour an auction process by the Government or the Civil Aviation Authority (CAA) or somebody?

  A.  No. I do not think we would. Firstly, as I said before, it is not clear who owns these things and, therefore, who would get the money? More importantly, if there was an auction, as Mr van Miert has pointed out, it would create an additional barrier for smaller airlines and there are enough of those already about. That does not mean to say we are against the trading of slots once they have been awarded to airlines. That already goes on behind the scenes. There is an argument that it ought to be made more public. However, the fact that it does go on behind the scenes suggests that it is not actually a significant solution to the current shortage of slots.

Lord Tordoff

  199.  I am just a bit baffled by something you said about the major slot holders exchanging slots from regional flights to international flights, or internal flights on to international flights. I have always been told that the reason why everyone wants slots at Heathrow is because this is where the interchanging goes on. If what you are saying is that local services are being shifted to Gatwick, or even to Stansted, the logic of that begins to fall apart, it seems to me.

  A.  There are two factors. One is the amount of profits that an airline can make, which is substantially more on a long-haul service than a short-haul service. Secondly, there is the amount of competition it faces. For example, I apologise for giving a British Airways example, I do not want this to be anti-British Airways, but it just so happens that they do provide excellent examples of the problem.

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1998