Examination of witness (Questions 200
- 220)
THURSDAY 2 JULY 1998
MR BARRY
HUMPHREYS
Chairman
200. I am sure in about half an hour they
will have a chance to rebut it.
A. A British
Airways wholly-owned subsidiary, operating services from the west
country to Heathrow, they face no air competition on that route.
British Airways decided to transfer the services to Gatwick and
use the slots so as to add services on long-haul routes, including
and particularly routes operated by Virgin Atlantic. Since we
did not have the option of doing that ourselves, in order to expand
our services to compete with BA, you can appreciate why this was
not an attractive proposition for us.
Lord Paul
201. I would like to go a little bit more
basic. We keep hearing that if there was the competition and people
like you did not have many constraints, the consumer would benefit.
If you had it your way what benefit would the consumer get? 20
per cent reduction? 50 per cent reduction? What is at the end
of the line for the consumer because I guess that is what we are
talking about?
A. I do not think
it is only Virgin, although Virgin Atlantic has been highly innovative
both in terms of introducing lower fares and new products to meet
passenger demand. It is a well established fact that when smaller
carriers enter routes within Europe, or a long-haul, they tend
to shake up the market. They tend to force these larger airlines
actually to start to compete. The beneficiaries are undoubtedly
the consumers. We have seen this with British Midland in Europe,
Virgin Atlantic on the long-haul routes, and other markets as
well. The former Chairman of the CAA described the behaviour of
the major carriers, when left alone, as a cosy cartel. I think
there is a lot to be said for that. When third or fourth carriers
enter the market that cartel is shaken up. I cannot say precisely
the percentage of fare reduction because it varies from market
to market, but without a doubt there are fare reductions. In every
market we have entered fares have gone down.
202. That is okay, but this is for the last
14 years. We are talking about now and the future. A time comes
when your operating costs have reached a level when there is no
more chance of a reduction in cost—or a very substantial
one. Like America, on some of the routes people went to a level
of fares on which they could not compete. Then they were all talking
to each other. As you have said, you will find that the relationship
is very cosy and they are absolutely involved with each other,
but then the next day—that is what I am trying to get at.
A. I think there
are many markets left where we can enter and bring very positive
benefits to the consumer. The United States market is a good example
of how things can go wrong. What has presently happened has been
a substantial move towards more concentration which the competition
authorities are investigating. There are growing concerns in the
United States about the level of air fares. Wherever I go I am
absolutely amazed. This is because whereas a few years ago we
used to hear regularly that it was cheaper to fly across the Atlantic
than it is from London to Glasgow, in Washington you hear that
it is cheaper to fly across the Atlantic than it is from Washington
to New York. There is very real concern about the level of fares
and the service there, which is one reason why the Virgin Group
wants to establish a Virgin Airline there. We would like to see
the investment rules changed so that Virgin can do what we did
in Brussels and set up a low fare operation to compete. We are
hopeful that the climate in the United States is such that this
may be possible in the future.
Lord Howell
203. I too wanted to ask some questions
in a moment about what has happened in the United States, which
I think is very interesting. However, before I do that, at the
risk of going backwards may I ask you another question about paragraph
2 of your letter. I am still bemused by the confidence with which
you state that the issue of extending the Treaty of Rome competition
powers to relations with third countries, (flights to third countries),
and the issue of giving the Commission powers to negotiate bilateral
agreements with third countries, are, in your words, quite different
issues. I do not fully yet understand why you are so confident
about that and why you do not see them all as a continuum of the
same issue.
A. I think we
say they are "quite separate proposals" from different
parts of the Commission. However, as I said earlier, there are
implications of the DG IV proposals for the negotiation of international
air services rights, but these proposals do not in themselves
give the Commission the right to negotiate air services agreements.
That would have to be a separate mandate approved by Member States.
There is an overlap but at the same time those proposals are different.
204. And your attitude to that second possibility,
that they might acquire the habit and right to negotiate on behalf
of the whole Community with other States, is that something you
fear or you welcome? I am not quite sure.
A. First of all,
it is our view that it is an inevitability that the European Commission
will acquire negotiating rights to negotiate on behalf of the
whole Community. That is a view very widely held as well. The
only question is when will they acquire those rights? We are much
more relaxed about that possibility than some other parties. We
see opportunities there as well as potential problems. On the
whole, where there are opportunities we would like to seize them.
For example, if the Commission negotiated with the United States
a North Atlantic aviation area similar to the one that applies
within the Community, that would give Virgin the opportunity to
start flying services from Continental cities to the United States.
We might be able to exploit it. It would remove, one hopes, the
investment restrictions that apply at the moment, so Virgin would
be able to establish an airline in the United States, as I mentioned
previously. All sorts of opportunities arise. It is true that
the United Kingdom accounts for 40 per cent of Europe/United States
traffic. Therefore, routes out of London tend to be much more
attractive to airlines and there is a possibility that the likes
of Lufthansa or Alitalia would seek to operate from London and
be able to operate more effectively than United Kingdom carriers
might out of the Continental airports. But as I mentioned before,
London airports are highly congested. The opportunity to acquire
slots, to operate large-scale services, is very limited. So the
risk there has to be put into context.
205. I mentioned fear because I just wondered
whether there was not an unspoken concern behind your differentiation,
arising from what actually has happened in the United States.
As you have already hinted, from the heady days of deregulation
onwards, far from there being a perpetuation of small airlines
buzzing all over America, we have seen an unparalleled period
of mergers and concentrations. I just wondered if this was not
connected with the fact that in the United States there is a central
point from which the bilateral negotiations are done. If we go
down the same route here and all European airline negotiations
and bilateral arrangements were done with America, let us say
through Brussels, you might get an internal pressure for all kinds
of so-called rationalisation; in other words, mopping up the small
airlines and undermining the competition which most of us want
to see perpetuated.
A. Clearly there
may be a risk, but one would hope that the competition authorities
would be alert to that risk in Europe. The lesson we draw from
the United States experience is that the competition authorities
were not alert. As a result, one has had the concentration and
disappearance of low cost airlines. The Reagan and Bush Administrations
in the United States adopted a very laissez faire approach
to competition policy, as applied to air transport, in the immediate
post-deregulation period. It is our view that this was one, if
not the main, reason why the smaller airlines who were bringing
very real benefits to the community, were squeezed out of the
market. There were examples of blatant anti-competitive behaviour
which the authorities chose to ignore. They are more aware of
that problem now. We see, at the moment, the Department of Transportation
trying to introduce guidelines about anti-competitive behaviour,
and expressing a willingness to take much more aggressive attitudes
towards such behaviour by the major carriers. Of course it may
be too late, but better late than never, to use a cliché.
Lord Marsh
206. One of the things which concerns me
is that when governments get involved in these things they do
tend to be become more bureaucratic and they lose sight of the
ball. I would have thought that the system does not work quite
as badly as you imply as far as the consumer is concerned. I am
not sure you are suggesting what should happen to the franchising
of slots. If they are allocated by governments in some way, under
a given franchise, I do not know whether that is a particularly
attractive proposition.
A. We are not
suggesting that they should be allocated by governments. There
is already in place, under the present Regulation, a procedure
for allocating slots. That, or something similar to it, could
be applied if there were a larger number. With respect to bilateral
negotiations, of course, governments are already closely involved.
Our preferred position is to get them out as much as possible.
We strongly support liberalisation or open skies, whereby air
transport is treated just like any other business. It is a mature
industry now and there is no obvious reason why there should be
so much government involvement. The role of government should
be restricted to ensuring that competition thrives in the market
place.
Baroness Dean of Thornton-le-Fylde
207. I find it interesting sitting and listening
to your evidence. The first statement you made is that you are
the third largest airline operating in Europe. You then go on
to talk about small companies and that what we need is a shake-up
of the cartel. It is still dearer for many of us to fly from the
United Kingdom to parts of Europe than to cross the Atlantic.
I am concerned about how you see the Regulations will affect airline
concentration within Europe. It follows on very much from the
point that Lord Howell raised with you. Would you say there is
going to be a concentration? Looking to the immediate Regulation
you say it is going to shake up the cartels. It is going to help
smaller airlines. Actually, you did not mention the consumer's
affairs; but looking to the medium term and the longer term, how
do you see the Regulations that you want and the shake-up you
want? Do you see that this will result in the concentration that
we have seen elsewhere?
A. First of all,
may I add that if you took Virgin Express across the Continent,
it would be cheaper than flying across the Atlantic. There are
two processes involved here. On the one hand there should be some
more concentration. There are some airlines in Europe that should
not exist. They are in existence because they have been, and to
a large extent still are, protected by their governments. There
has to be some form of shake-up there. At the same time that can
go on while smaller airlines are entering the market and expanding
and benefiting the consumer. Some of those smaller airlines, as
in any market, will go out of business, but hopefully they will
go out of business because they failed to meet the demands of
the market place, not because they have been forced out of business
by anti-competitive practices. That is our major concern and why
we support anything that strengthens competition policy. It is
a question of protecting competition rather than competitors.
Lord Thomas of Macclesfield
208. I would like to ask two questions,
my Lord Chairman. First of all, I would like to explore the possibilities
of the two-stage process of the European Commission. Would it
be true, based on your evidence, that if there is a clear competitive
structure, clearly defined, that those negotiations, either by
carriers or by governments, could continue, with the Commission
having the right to call in agreements that fell out with that
structure? Is that a possibility rather than the European Commission
being involved at first hand in negotiations?
A. I think the
answer to that is probably yes. There is no fundamental reason,
I believe, why these proposals could not co-exist with the current
bilateral approach if you accept that some form of understanding
would have to be reached, either before or during the negotiations
or after the negotiations, in the way you suggest, to make sure
that whatever was agreed bilaterally was not inconsistent with
the law.
209. By the word "understanding"
you mean explained or examined to make sure it was in accordance?
A. One option,
for example, might be that a Member State entering into a particular
negotiation, knowing that it was likely that a sensitive subject
would arise, would discuss that with the Commission and agree
what was possible. It may be that because of the position of the
other sovereign state involved, the end result would have anti-competitive
elements to it. It might restrict competition in some way. But
providing that was discussed and agreed that this was the only
possibility available, it is not clear to me why that could not
be made to work.
210. My second question is this wonderful
complex area of monopoly because whereas in your evidence you
said about slots and quality of slots and we well understand that,
from other evidence we have had it is not just the control and
monopoly situation there, it is also the luggage handling, the
ground handling, the business travel, the frequent fliers, the
travel agents, the display units which only display certain deals
and certain users, the large corporate agreements, and indeed
the restriction on ownership as well of the national carriers.
To an extent, is Virgin Atlantic offending any of those monopolies?
A. Hopefully,
we are not offending at all. We are complaining very vociferously
about them.
211. I know.
A. Some of them,
certainly the arrangements with travel agents, we have complained
to the European Commission about, and the European Commission
have issued two statements of objection in our favour. We are
awaiting confirmation of those. Similarly, we are critical of
the impact of frequent flyer programmes, as British Airways has
been in the past. We believe these very much favour the major
carriers and are a barrier to entry for small operators.
212. So we can quote you, as Virgin, on
all these matters?
A. I am not aware
that we are at fault on any of these.
Chairman] Such is
the wealth of your evidence, Dr Humphreys, that Members of the
Committee are queuing up for questions but we are rapidly running
out of time. We will see if we can get through. Lord Haslam.
Lord Haslam
213. You suggest in your written note that
cosy cartels exist. Also, again quoting you: "smaller airlines
bear significant and competitive problems and have a right to
look to competition authorities for support." Does this imply
that such authorities as the Commission, the Office of Fair Trading
and other comparable European agencies, are currently ineffective?
Indeed, I have to say that there is little evidence of airline
companies being fined for price fixing and other misdemeanours.
Does this, in fact, imply that a sort of quasi anti-trust immunity
exists in Europe, as in the United States, and that it is likely
to persist in the future even if the new Regulations were to be
implemented?
A. First of all,
within Europe, within the Community, clearly the powers exist
for the Commission to take action against anti-competitive behaviour.
They have, on a number of occasions, done so. The major problem
there is not so much the willingness to operate, as the resources
to operate effectively. They are limited in their manpower and
there has been a significant number of complaints, particularly
from smaller airlines, about anti-competitive behaviour; and indeed
complaints from larger airlines about state aid, ground handling
monopolies, and so forth. So within the Community it is primarily
a question of resources and political will to act. Outside of
the Community there is frequently a vacuum and that is a cause
of concern. This is why we support these proposals. There is no
doubt that the movement is towards liberalisation and increased
competition, but there are still a lot of problems left behind.
Until they are addressed we will not have fully competitive markets.
Lord Methuen
214. Lord Haslam has already asked one question
I was going to ask about the significant delays in Brussels handling
complaints. You have mentioned this business of regulation of
slots. What Regulations are there because I have got the impression
that it is more-or-less a free-for-all with no Regulations at
all. These things are sitting with particular airlines.
A. There is a
Regulation within the Community that prescribes how slots at congested
airports should be allocated, a set of rules.
215. Is this effective?
A. On the whole,
yes, within the confines of the Regulation. As I said, we believe
it could be radically reformed, in particular by addressing the
problem of grandfather rights. But in terms of the allocation
of slots, for example at Heathrow or Gatwick, the procedure works
relatively fairly. Our complaint primarily is about the shortage
of slots rather than their allocation.
Lord Methuen] That
is much more difficult to deal with.
Chairman
216. The shortage of slots is surely an
entirely practical situation. There are only so many hours in
the day and there are only so many runways, I suppose you could
get round it that way.
A. It is true.
Clearly our preference would be to create more slots. That can
be done by building more runways. Indeed, there are possibilities
at Heathrow to increase the throughput of air services but that
does have environmental implications. However, the fact is that
because of the history of air transport, the dominant airline
at most of the major European airports sits on a very sizable
chunk of slots. We would like to see more fluidity enter the market
which would benefit more carriers.
Chairman] I am sure
you would.
Lord Methuen
217. May I ask a supplementary to this.
Would you see the slot situation being eased by the introduction
of larger capacity aircraft?
A. Yes, but airlines
are aware of that and it is happening already at Heathrow, for
example. There is a very significant increase in the average size
of aircraft. Certainly in our case we are moving towards larger
aeroplanes all the time, as is true of British Airways and it
is true of British Midland. Airlines are forced to do this. But
there is a limit to what you can do.
Chairman
218. Just two quick ones, if I may. Specifically,
what comments would you make on the European Court of Justice's
very recent finding that the Commission was wrong to allow Air
France to receive their most recent subsidy?
A. We are very
pleased with that decision. We were critical of the European Commission's
decision to grant state aid in the circumstances that it did.
For once we are at one with British Airways on this question.
219. That is a nice note, I was going to
say, on which to finish but I have one more for you. I asked you,
at the beginning, under what name you flew, when you flew other
than across the Atlantic. You said you used the word Atlantic.
What impact do you think these proposed Regulations would have
out with the Atlantic? In other words, on your Far Eastern runs
or Africa? What sort of practicality? Everyone is concentrating
on the Atlantic for good and 21proper reasons. It is a huge chunk
of the market. But it is not the only bit of the market. It is
not the whole market.
A. No, indeed.
I think the principles are identical, irrespective of the market.
Competition rules should apply. The practicalities become more
complex as you move into other markets because although there
are exceptions to this, on the whole the rest of the world tends
to be more protective of their national airlines and, therefore,
less willing to encompass pro-competitive agreements. So there
would be more difficulty in applying these rules there, but that
does not mean to say it is impossible by any means. It is perfectly
feasible to apply them.
220. Also, presumably, by definition, the
fragmentation would increase the problem because you are not just
dealing with one entity like the United States, you are dealing
with endless different countries?
A. That is the
way the bilateral system works at the moment. Every country is
a sovereign nation and bilateral negotiations take place between
governments on that basis, so whether you are negotiating with
the United States or with a small African country, it is exactly
the same approach in principle.
Chairman] Dr Humphreys,
thank you very much. It has been a very interesting session of
evidence and you have given us quite a lot to think about. We
are most grateful.
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