Examination of witnesses (Questions 1
THURSDAY 4 JUNE 1998
WALDEN and MR
1. It is a great pleasure to see you as
always. This is not the first time and, I hope, not the last that
you have been kind enough to give evidence to Committees of this
House. We are particularly grateful that you have come in such
force at such short notice. Would you be kind enough to introduce
yourself and your team and if you wish to make any opening comments
on these two proposed Regulations which we are looking at on airline
regulation, please do so and then we will get into what will hopefully
be a constructive question and answer session.
(Sir Michael Bishop) Thank you, my Lord Chairman.
May I introduce my colleagues on the team this morning to you.
On my left, Tony Davis, British Midland's Manager for Industry
Affairs and he deals with all aspects of regulatory matters that
the airline currently deals with. On my right is Sir Lenox Hewitt,
who has been an adviser to the company since 1981. He was formerly
a Deputy High Commissioner for Australia in the United Kingdom,
formerly acting Permanent Secretary to the Prime Minister's Department
in Australia and Director and Chairman of Qantas Airways from
1973-80. On his right, Timothy Walden, who is our Manager for
Government and International Affairs, a Director of Airport Co-ordination
Limited and Chairman of the Heathrow Scheduling Committee.
2. Thank you very much. I think it is probably
right to say that it is outside the brief of our enquiry to get
into any of the specifics of the proposed British Airways/AA alliance.
We are looking at the two Regulations as a whole and not any specifics
that may or may not arise from them or despite them. With that
caveat, if you would like to make an opening statement, please
(Sir Michael Bishop) Thank you, my Lord Chairman.
I think it would be fair to say that successive United Kingdom
governmentsLabour and then Conservative and then a Labour
governmentover the last 25 years have added a progressive
liberalisation and deregulation theme to Directives in civil aviation.
The United Kingdom civil aviation industry is undoubtedly the
most competitive in Europe of all the Member States. The government
of the day in the 1960s and early 1970s progressively liberalised
charter flights for passengers travelling to holiday destinations
which has now grown to be a significant element of the United
Kingdom air transport industry. The Labour government in 1977
licensed the first liberalisation across the North Atlantic with
the Laker Skytrain. The Conservative government between 1979 and
1997 progressively liberalised both domestic services within the
United Kingdom and were at the forefront of deregulation and liberalisation
in Europe. The present government has followed a similar overall
path of supporting deregulation and liberalisation of the air
transport industry. As a result, we have a thriving and very successful
industry not just in scheduled services but in the non-scheduled
activities of package holiday inclusive tours and charter flights.
It is a huge industry, it supports ten of thousands of jobs in
the United Kingdom and, in particular, the success of the industry
has meant that British airlines more recently have been a huge
supporter of Airbus Industrie. The European Aircraft Manufacturing
Consortium. British Midland itself placed the largest order ever
by a British airline for new airbus aircraft last year and we
are receiving the first deliveries in 1998. In broad terms we
support the government's position on these Directives, as has
been outlined in the memorandum signed by the Parliamentary Under-Secretary
of State in the Department of the Environment, Transport and the
Regions, Ms Jackson, and we really support any effort to enable
effective competition. Indeed, not only have we supported liberalisation
in Europe and on domestic routes, but we are strongly in favour
of route liberalisation and deregulation on a global scale. Therefore,
whilst we support the Government's direction in this area, we
have reservations about the Commission yet being in an administrative
position to develop the position they would like to adopt in relation
to handling external relations for the entire Community on behalf
of all countries in our industry. Whilst we support the Government's
memorandum, we do actually feel that there is a developing place
for the Commission in this issue, but we feel that the learning
curve and the point in the process by which they should take over
all responsibility is a long way away. It could be five, ten,
15, even 20 years away. I think that the proposals that the Commission
would like to see enacted are very premature for our industry.
Indeed, in the areas where they already have status to negotiate
for the Community some of the results are not too successful.
Therefore, whilst we support the Government's view in principle,
we would not close out that gradually and on a developing basis
the Commission should play a progressively larger role in this
issue. At this particular moment such an interest would be premature
and we would support the Government's position with that particular
3. Thank you very much. It is very interesting
that you should put quite a lot of emphasis on that last point.
You are our first witnesses in this enquiry and already the subject
you have just raised is one that has bothered us, i.e., how would
the mechanics work of Brussels negotiating with third countries
for the whole of the European Union. It seems an absolutely mind-boggling
task. How do you see the mechanics of this working?
(Sir Michael Bishop) We do not think that the
general integration of the Community as a whole has reached a
position where it would be appropriate for the Commission to take
on these particular responsibilities at this stage in the development
of the Community. Maybe in ten years time or maybe if the single
currency has become established when there is much greater integration
on a much broader front in the European Community this may be
one of the subjects eventually which could have a Community dimension,
but at the moment we believe that that is very premature and that
it would lead us undoubtedly to a very, very serious risk that
the United Kingdom airlines would be very gravely prejudiced,
particularly in relation to services and bilateral agreements
with the United States where as the major English speaking country,
clearly the dimension of traffic between the United States and
Britain is quite different in scale to any other country in Europe
and I think the potential share of that traffic which British
airlines can develop and exploit would most probably be curtailed
by the fact that the European Commission are negotiating on behalf
of a number of European countries who would probably have a great
interest in developing routes through the United Kingdom rather
than developing services from their own country. I think the comparison
I would give is that in two-thirds of the 20th century national
airlines have been to national governments in Europe what their
neighbours were in the second half of the 19th century: they have
been matters essentially of political prestige and flag raising
and, of course, it is only in the last 25 years, led by Britain,
that our industry has become less nationalistic in that sense
and more commercial and that is perhaps why it is more successful
too. The process has not yet filtered down throughout Europe.
One only has to see the issues in Air France currently, which
is still a national airline which has received huge subsidies
from the European Union. The landscape of airlines in Europe is
very uneven at the moment and we are very concerned that political
decisions would have priority over practical commercial decisions
for the benefit of the consumer.
4. Do you consider that if the Commission
did take on this role, at whatever stage in time, it could be
in any way effective if national airlines remained their government's
(Sir Michael Bishop) I think it would make it
very, very difficult indeed. The industry almost certainly would
have had to have reached a position where transparently the ownership
by shareholders of all the carriers was much more diverse than
it is at the moment. In this country we are not exceptional in
this. Every national government bats hard for its own national
carriers. There are a number of carriers who are sponsored by
the British Government in bilateral negotiations and we believe
that this Government and the previous Government have always supported
British airlines very strongly. Most recently we have been a beneficiary
of that with the Government being very very supportive of us developing
new routes into Eastern Europe. Every national government supports
its national airline in some form or another. What has happened
in the United Kingdom is that our airlines have become much more
diverse in their shareholding much more quickly than carriers
in Europe. I think until that process goes on throughout the whole
European system that would be one of the early landmarks that
would be needed for the kind of Regulation that Brussels is thinking
of now could be brought into action.
Lord Howell of Guildford
5. Why do you think this would ever change
and why would it change in any way the direction of more European
centred arrangements? One might think that all the trends were
the opposite, that the involvement of national governments arises
because of the geography situation, it is their landing rights
that they can control. We could be going in the other direction
of a more local demand of control over their landing rights. You
might find the Scots having more of a say over their landing rights.
It seems to me the trend is going to be the other way and not
towards Europe at all.
(Sir Michael Bishop) I am not sure about that.
If you take the shipping industry, which is not a dissimilar industry,
it is 100 years since national governments took the same interest
in their shipping activities as they did in aviation. It just
happens to be a very very high profile industry which everybody
finds quite entertaining getting involved in. It is glamorous
industry about which all sorts of people have an opinion on and
it is always going to be something that is at the forefront of
the public eye. Whether that is ever diluted or not one cannot
say at the moment. It will probably get diluted because if you
take a comparison with the United States, the United States has
had a specific and important interest in promoting the activity
of the United States airlines around the world but it does not
see them to be national airlines in quite the same way the Europeans
do. It is a huge and far more competitive industry. Quite the
opposite is happening in the United States in that the United
States government appears to be so alarmed about the consolidation
that is taking place in the industry they are about to hit them
with a major anti-trust investigation similar to Microsoft. So,
if anything, the United States government has become hostile to
consolidation of alliances on a global scale. We have not even
started that process in Europe. We are just in the process of
forming alliances let alone breaking them up.
6. Sir Michael, to what extent do the present
arrangements constrict and restrict a company such as your own,
and to what extent would the proposed Regulations give you elbow
(Sir Michael Bishop) Perhaps I could ask one of
my colleagues to answer that question. Tim, would you like to
(Mr Walden) I am not sure that the current regulations,
certainly as far as EEA states are concerned, constrain us at
all. One of the problems we do have is in operating outside of
the Union itself. We have previously operated to Zurich and currently
operate to Prague. We do have difficulties with the various governments
there that are, as far as we are concerned, not fully applying
the provisions of the bilateral air service agreements. One of
the things that happened in 1987 when the first of the three packages
was introduced was it gave a company like British Midland a supreme
opportunity to develop further into Europe. One of the things
that we do have a problem with, of course, is that European Union
liberalisation has not completely clarified the operating rights
for us in non-European Union countries that we consider that we
should have rights to operate to.
7. I think what you are saying is there
are still constraints within phases one and two.
(Mr Walden) Not within the Union itself but with
countries outside of the Union, in our case from London to places
like Switzerland and the Czech Republic. We are also going to
operate to Poland very, very shortly. We are running into problems
and difficulties there.
8. Where are you running into those problems,
let us take Poland as an example, in Poland or at the United Kingdom
end or Brussels?
(Mr Walden) No, not at the United Kingdom end.
The United Kingdom Government has been extremely helpful to us.
We are running into the problems at the Polish end. One of the
problems that we are having is that the deals that have been negotiated
are not being implemented to their full extent and we are left
(Sir Michael Bishop) I think the point that is
being made is that in the third package there is complete liberalisation
and deregulation, we are free to fix tariffs, we are free to operate
whatever schedules we wish to subject to the availability of slots.
We are free to offer whatever frequency we wish to have. Some
countries have adopted a third package, such as Norway which is
outside the Union, but it actually adopted all the parameters
of the third package on liberalisation in Europe. We can operate
between the United Kingdom and Norway or other European Union
countries to Norway in the same way as if Norway was a member
of the European Union. We are able to fully develop all the facilities
of the third package. However, the European Union has still not
been able to establish its relationships with other Eastern Europe
countries and although we are able to operate to Switzerland,
we did not have freedom of tariffs out of Switzerland. We only
survive because we are operating competitive fare levels and we
offer fares which we believe will switch traffic from established
carriers to us, the new entrant carrier, but in Switzerland we
were not able to set our own tariffs. So we still have a lot of
issues even with European countries to resolve before we can even
tackle the whole issue of Europe acting as the statutory authority
for regulating international route licences and bilaterals into
9. To whom do you look to assist you in
resolving these sort of problems? Is it to national government?
(Sir Michael Bishop) Yes, but increasingly to
Brussels, which is why I think the whole theme of our evidence
is that the paper from the Parliamentary Under-Secretary of State
really shuts the door in a sense to Europe having a dimension
in this area. We feel the door should be kept a bit more ajar
than the Government is proposing because we find that we not only
get good support from the Commission when we go to them with a
problem, but they can often be effective, even though the timescales
in which they are effective are frequently much slower than our
national government. It is obvious to all of us who operate increasingly
in Europe that the European Commission has an increasing dimension
in every part of our business life and they are, contrary to general
views, very accessible, they respond to our enquiries, they will
see us at short notice as necessary and they will progress our
case. Their authority for developing and assessing cases is more
limited than the national government not least because they have
hundreds of cases coming at them from every country in Europe.
So the actual workload that they are under is a great pressure.
Perhaps I could ask Sir Lenox if he would like to add anything.
(Sir Lenox Hewitt) I would like to emphasise the
point you made in opening, Michael, which is that the door should
be kept open. The Commission has already the authority to explore
with Switzerland and Eastern European countries and with the United
States the modus operandi and the practicality of negotiating
on behalf of all Member States. I think the proposal that is the
subject of Ms Jackson's memorandum is really one to be considered
after the Commission reports under the authority it now has for
discussions with those other countries. Perhaps I may supplement
that by taking the Chairman's question to you, Michael, about
what will be the practicalities of negotiating on behalf of all
Member States and give an illustration from my own country, Australia.
We are a federation of States and the central government, in this
case in Canberra, negotiates on behalf of all the constituent
States as does the United States on behalf of its constituent
States. The Federal government can, for example, conclude a bilateral
with the Middle East States and consent to Emirates Airlines flying
to Melbourne but not to other capital cities. What I think will
come out of the Commission's report is the difficulty of concluding
with another third country air traffic rights on behalf of all
Member States for their airlines to fly to a third country destination
in response to that third country's request to fly to London Heathrow.
Then comes the practical decision to be made, i.e., which airline
will give up slots at Heathrow, to enable, for example, Alitalia
to commence flying London Heathrow to the third country destination.
I think that is one of the practical but very substantive problems
that will arise out of the Commission's report on its current
discussions and I think it raises very critical problems for the
Member States. In the particular illustration I have used, for
the United Kingdom itself to wake up and discover that the traffic
rights will be utilized by Alitalia to fly from Heathrow to that
third country destination.
(Sir Michael Bishop) And other carriers.
10. Presumably the ultimate extension of
this is that the Commission would become judge and jury.
(Sir Lenox Hewitt) Precisely. It would be the
federal authority for the Member States of the European Union.
I would be extremely interested to see what the Commission's report
on these already authorised discussions with third countries will
show up in answer to the very practical question, if I may say
so with respect, that you raise, my Lord Chairman.
11. I may have missed a nuance but I think
some of it has been uncharacteristically ambivalent. Can I get
to the fundamental position that you take in relation to the Regulations.
It seems to me that you are taking a position where you do not
really see the Regulations as such as realistic in the immediate
future at all and you see a real role for the Commission, but
basically that is facilitating bilateral agreements and that,
of course, is not the sort of role which the Commission sees itself
taking in this. I was slightly puzzled at the beginning where
you seemed to be saying that the Regulations are not bad and they
are quite interesting as long as you can throw your mind forward
20 years and say what might possibly happen, but you would rather
get on and deal with it in the meantime.
(Sir Michael Bishop) I think that is a very fair
assessment. I personally feel the development of Europe may well
be over that period. Everybody anticipates that the integration
of Europe will happen sooner rather than later. I have a view
that it will happen but it will take a much longer process. I
think that the pitch that the European Commission are taking at
the moment with this proposal is a pitch that may well be very
relevant in 15-20 years time, but they are pitching for the power
now when actually in practice they simply could not carry it out
even if they were given the power and I think that we would finish
up with a really hopeless muddle. I understand where they are
coming from. In principle it is something that the general integration
of Europe may well bring about, but it would be hugely premature
of them to take this position now.
Baroness Dean of Thornton-le-Fylde
12. I would like to take up the issue of
consumers and you yourself have mentioned consumers on a couple
of occasions. I think a lot of the public would possibly have
a perception that they have got choice but they have got high
prices and I would like you to tell me how you think the present
competition provisions have benefited consumers in a wide sense,
not just in choice and what differences this proposal from the
Commission will make.
(Sir Michael Bishop) First of all, air fares at
their current level are without doubt at the most outstanding
value for money for any retail product that you can buy in the
industry. What progressively has happened over the last 25 years
is that the consistent reduction in air fares comparative to the
cost of living over 20 years has brought the ability for people,
especially in lower income groups, to be able to travel frequently.
No industry has produced that kind of benefit for the Community
this century. A good example would be that the cost of an air
fare to New Zealand is now the same as it was in 1975.
13. I do not want to interrupt you but I
would like to come back on these points you are making.
(Sir Michael Bishop) The cost of package holiday
flights when you bear in mind the distance that is travelled and
the investment in aircraft which is made are all exceptionally
low. I think that the level of competition which has been developed
for leisure travellers is exceptional. Where there is a stronger
case in point is that business fares have progressively increased
disproportionately higher than leisure fares and British Midland's
whole debate over the last 15 years has been to bring more competition
into the higher range of fares and I think that we have been successful
in that area. I think mainly for leisure travel air fares compared
to the cost of living are the lowest they have ever been and that
mainly at present is because fuel is at the lowest cost it has
ever been for the industry.
14. I am not absolutely convinced. You did
not answer the question I asked. Are you saying that it is European
competition law that has helped this? You talk about best value
in retail. I could think of at least five areas where I do not
accept that, e.g., car purchase, information technology, communications,
domestic utilities and I think all those sorts of things will
stand as an easy comparison. My question is how has the European
Union, which is what we are looking at, not fares to New Zealand,
helped benefit the consumer?
(Sir Michael Bishop) The third package of deregulation
and liberalisation is liberalised tariffs and many airlines have
taken advantage of that, but mostly the advantage has been taken
by United Kingdom airlines, which is the point I was making, where
more competition has developed as a result of the third package
which was introduced by the European Commission. The British airline
industry has taken more advantage of that than any other country
in the Union. What has happened is that air fares are lower for
passengers going outbound from the United Kingdom than from any
other European country, particularly on longer routes, but, also,
increasingly, as you have seen with the new low cost airlines
and with charter airlines, from the United Kingdom to Europe and
so there is confusion about that.
15. Maybe at the beginning I should have
differentiated between scheduled and charter flights.
(Sir Michael Bishop) Charter flights take up nearly
50 per cent of the traffic revenue of United Kingdom originating
16. In scheduled flights you cannot always
get a charter to go off to Paris for the weekend. I think that
is where the consumer does feel they have not had a fair crack
of the whip from competition.
(Sir Michael Bishop) I would just submit that
the third package which was introduced by the Community has been
a huge spur to developing new competition and what you are seeing
at the moment with the range of low cost airlines in the United
Kingdom (I think there are four at the moment) is all of them
have been inaugurated directly as a result of their ability to
enter new markets.
(Mr Davis) Perhaps just one extra point was that
the liberalisation introduced by the third package enabled the
entry of third carriers like ourselves on to many of the routes
where historically there were just two carriers, perhaps British
Airways and its European counterparts. I think the European Commission's
own evidence certainly shows that where, for example, a carrier
such as British Midland enters a route as a third carrier air
fares have come down and certainly in our written submission we
could give you copies of both the Commission's findings and our
own which generally support the premise that where there is real
competition air fares come down. I think the point we would like
to emphasise is that the third package enabled us to enter many
of the markets which historically we were prevented from operating
because of the restrictions contained in the respective Air Services
Agreements. We can certainly include some evidence in our written
submission on that.
Chairman] I think
that would be very helpful to the Committee.
17. One man market surveys are pretty unreliable,
I am quite prepared to accept that before you say it. My understanding
and, I think, a lot of people's understanding is that business
travel within Europe is considerably more expensive than within
the United States and that in both cases probably it is a question
of charging what the market will bear and the market will bear
a great deal.
(Sir Michael Bishop) With the greatest respect,
public perceptions often lag behind what has happened in the market
18. I got that point in first!
(Sir Michael Bishop) The observation you made
would have been very true indeed two or three years ago. What
has happened in the United States and one of the reasons why the
Department of Justice is getting so agitated is because in 1998
many air fares in the United States, which generally people would
have considered as being lower than Europe, are in fact higher
and in some cases significantly higher than equivalent distances
in Europe. In fact, the current shuttle fares between New York
and Boston and New York and Washington are 50 per cent higher
than between London and Manchester, which is about the same distances,
on some of the fares that are available and some of the point
to point fares like Chicago and New York and Chicago and Miami
are beginning to be more expensive on a mile to mile basis than
many similar twin city points in Europe. If you were to go up
to an American Airlines check-in desk in New York today and ask
for a ticket without any restrictions, say you wanted to go to
Dallas and come back when you wanted to come back, you would be
astounded at the price because it is very high indeed. What has
happened is that in certain pockets in the United States, Los
Angeles to San Francisco and in the south-west of America, fares
have stayed very low because of the nature of the carriers who
compete on those routes, they are low in comparison to fares in
Europe, but in the majority of the United States fares are becoming
even more expensive than the equivalent fares in Europe, hence
the American Department of Justice interest.
19. Forgive me, Sir Michael, if this is
a bit wider than your present operations, but there was a very
interesting article in European Voice of 20-27 May quoting
Susan McDermott, Assistant Director of the US Department of Transportation.
The article says that Susan McDermott "... concedes that
Washington's hands are tied over foreign ownership of US airlines
and cabotage as its negotiators are forbidden to discuss these
issues by statute." Does that ring true with you?
(Mr Davis) My Lord Chairman, I believe it was
linked with the legislation introduced by the US Congress during
the Second World War or perhaps earlier regarding foreign ownership
of US airlines and the US interpretation of that legislation is
in order to liberalise the ownership rules of the US carriers
it would need an act of congress to change that law and they did
not feel that was something they could successfully achieve.