Select Committee on European Communities Minutes of Evidence

Examination of witness (Questions 200 - 220)




  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.


  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.


  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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