Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 221- 239)




  221.  Mr Holmes, good morning. I thank you and your colleagues very much for coming to give evidence before us. I should say, and I do not think even members of the Committee are aware of this, that your written evidence, through no fault of yours, I may say, has only just reached us. We have not had a chance to read it, so we apologise for that. Could I also emphasise, and I am aware you were sitting in during the evidence from Virgin Atlantic, that we do not regard it as part of our brief, and therefore will not get into discussion, on your proposed alliance with American Airlines, so if you would be so kind to bear that in mind, we would be very grateful. If you would like to introduce your colleagues and make a short opening statement, we would like to hear it.
  (Mr Holmes)  My Lord Chairman, thank you very much for your words. We are grateful to the Sub-Committee for taking evidence from British Airways. On my right is Mr Allen, Head of Competition and Industry Affairs in the company and on left is Mr Hall, who is Head of International Relations. I am very sorry our written evidence turned up so late. The proposals which the Sub-Committee is dealing with do not just concern the application by the Commission of competition rules to aviation services between European states and third countries, in fact they extend to the whole question of aviation relations between European countries and the rest of the world and the respective responsibilities of national governments and the Commission. These are very important questions for the United Kingdom. The United Kingdom has a thriving and competitive air transport industry, which is second in size only to that of the United States. The United Kingdom has 1 per cent of the world's population, 4 per cent of the world's Gross Domestic Product, and nearly 8 per cent of its output of air transport services. British Airways alone employs 45,000 people in the United Kingdom, and other companies employ tens of thousands of people and a lot of secondary employment depends on these jobs. Civil aviation policy in the United Kingdom in the last few years has been largely bipartisan. It has been aimed at encouraging competition between British carriers, at creating opportunities in international markets, and enabling British airlines to compete on fair terms with foreign airlines. It has very largely been successful in that respect, I think, in meeting the interests both of the airline industry and the consumer. The United Kingdom is unique in Europe in having so many domestic competitors. For example, Lufthansa and Air France do not face at their principal centres of operation competitors such as Virgin Atlantic and British Midland, which we face at Heathrow. So the United Kingdom has the most to lose by getting this issue wrong. The main reason why the Commission's powers do not currently extend to air services with third countries is because the Council of Ministers decided they should not, and that was because the regulation of air services and the competition between airlines in flying to third countries is governed by bilateral agreements between sovereign governments of the Member States and the other country concerned. To apply the Commission's competition powers directly to airlines whose activities are governed by air service agreements could create serious conflicts. Airlines might, for example, be required to do one thing by the air service agreement and forbidden to do it by the competition rules as applied by the Commission. I think it is worth bearing in mind that the Commission would not seek to negotiate the application of its competition rules to these agreements, it would simply try to enforce them whether the other governments agreed or not. The result would be damaging confusion, of benefit mainly to the legal profession. It is likely there would also be damage to relations with third countries because the Commission would be intervening in matters to which it was not a party. So the proposals by the Commission in the field of competition policy are inextricable from the other proposals by the Commission to take over responsibility for the Member States in negotiating air service agreements. The Commission have asked for a mandate from the Council of Ministers to open negotiations with the United States. This raises major questions of policy and practice which have not been properly addressed so far. First, the negotiation of such a mandate may prove to be so complex that it actually slows down the process of liberalisation rather than speeds it up. Secondly, there are serious questions about whether the terms of competition would be fair, for example, in relation to subsidised airlines. Third, any negotiation involves giving up something in order to get something. As the country with the most developed air transport industry in Europe, the most valuable markets and 40 per cent of the market between Europe and the United States, the United Kingdom has the most to lose if this negotiation is not handled properly. These matters are of increasing importance. The liberalisation of aviation markets and the development of global airline alliances underlines the importance of competition between networks as well as competition on individual routes. The BA/AA alliance—and this is the only time I shall refer to it, my Lord Chairman—is intended as a competitive response to the alliances between Lufthansa and SAS and United, KLM and North West, which are based in continental Europe. The globalisation of the industry and liberalisation of bilateral agreements also underlines the need to harmonise competition rules and the methods and practices of enforcement as between different jurisdictions. By the nature of their businesses—we are operating in international markets and we are flying from one country to another—airlines are particularly vulnerable to conflict between competition rules and without harmonisation the Commission's proposals would simply make these problems worse. Thank you, my Lord Chairman.

  222.  You made a very interesting comment a couple of minutes ago, that unless things are handled properly you could find, because it is a very complex situation, that it is detrimental to the open market competition situation rather than the other way around. Let me ask you a very general question: how would you like those negotiations to proceed and along what lines?
  (Mr Holmes)  I am not sure I understand the question, my Lord Chairman.

  223.  I am picking up the remark you made, unless things are handled very carefully.
  (Mr Holmes)  I was referring to a situation in which the Commission might be negotiating with the United States or another foreign government. As far as British Airways is concerned, we are content with the present system under which bilateral negotiations are undertaken by Member States. It may be in the future that it would be beneficial all round for the Commission to undertake these negotiations but the method by which those negotiations are carried out, the objectives, the system for distributing benefits and costs between airlines, simply do not exist, they have not been worked out, so I think any question of negotiation between the Commission and third countries would be quite a long way off.

  224.  How far off?
  (Mr Holmes)  I do not know. If it were a matter of great priority then no doubt the Commission could create the necessary apparatus to carry out these negotiations, but there is the principle that if it ain't broke, don't fix it, and that seems to me to be relevant in this context.

Lord Berkeley

  225.  If one takes the view of the consumer for a moment in these things, there is quite a lot of evidence to suggest that bilateral agreements between a Member State and a third country—let us exclude the US for the moment—have not created the low fares which have been achieved when a third or fourth airline enters the market. We have had some evidence from British Midland, which you may have seen or may not, but it is common knowledge that when there are three or four airlines competing on a particular route the fares often go down. You said just now that you favoured the bilateral approach to agreements with third countries to continue and this should not be changed, but in paragraph 14 of your evidence you support the Commission having a mandate to negotiate with ten Central and Eastern European countries and you support the principle of the Commission doing it, "which would in effect lead to an extension of the common aviation area to these countries". Why is it good for the Commission to negotiate with Eastern Europe but not anywhere else in the world? I know they are not on the scale of the United States but you can leave them out for the moment. Why is it different in Eastern Europe from the rest of the world?
  (Mr Holmes)  I think the process of negotiation between the Commission and Eastern Europe is, and I hope I will not be misunderstood, a quasi-imperial process. The Commission is offering to Eastern European countries, who are on the whole poorer than countries in Western Europe, the advantages of joining the European Union or being associated with the European Union, and along with that goes a number of things, including signing up to the competition rules of the European Union. The situation with the United States is quite different. These are agglomerations of roughly equal size, the United States has its own very long tradition of anti-trust laws, and there is no question of the United States simply be assimilated to the European Union's practices. It is rather like if we had the Roman Empire and they decided to have relations with China; it would have been a similar situation. So there has to be a negotiation of a totally different kind between Europe and the United States or, say, between Europe and Russia.

  226.  What about Europe and the Far East or Europe and Africa? I do not know whether there is an imperialistic view of Africa with the French and British competing for that, but is this not the same principle, if you leave out the United States?
  (Mr Holmes)  I do not know, it would be matter for negotiation. Some of the countries in Africa, for example, regard the development of their national airlines as a matter of national importance.

  227.  A status symbol.
  (Mr Holmes)  That may from the point of view of European carriers and indeed from the consumer be less than ideal. That is why we support the British Government's policy of liberalising these agreements. It takes two willing partners to conclude an agreement and I am not sure the major African countries would be willing to sign up just like that to whatever Europe decided was the right tempo.

Lord Paul

  228.  Mr Holmes, I have just two question. One is that you have described the state of the British aviation industry, and by all accounts it is very good, but why is it that fares from Britain for going from one point to another are higher than for going to the same places from Europe? Secondly, you seem to be much more doubtful about the ability of the Commission to handle competition than perhaps any other industry in this country. If I got that message correct, can I know why you feel that? Because other industries are living with Europe. It suggests the point that perhaps the established airlines in these countries are too cosily related to their governments so they feel they can do better with national governments than a new authority?
  (Mr Holmes)  My Lord Chairman, I can deal with the second part of that question first and then I will ask Mr Allen to deal with the first. It is perfectly true there has been a too close association between governments and airlines, particularly when airlines were state owned. That is a process which is changing but it will take a long time to change. As regards the institutions of the Commission, I think it is important to bear in mind that the United Kingdom has got some very well developed institutions, it has got not just the Office of Fair Trading and the Monopolies and Mergers Commission, it has also got the Civil Aviation Authority which has got nearly 30 years' experience in dealing with airline competition questions, making judgments about allocations of scarce opportunities. British Airways does not always agree with the decisions but the system is fair. There is nothing like that in the European Union. There is nothing as good as that I think in any other Member State of Europe. So one is concerned about throwing away, perhaps superseding, machinery which does work for something which is unknown and has to be created.

  229.  That is exactly what I feel would be a benefit because, after all, the United Kingdom is part of the Commission and the United Kingdom can impart that knowledge to help the whole industry of Europe to be competitive.
  (Mr Holmes)  If that were the case, that would be very desirable. I think there is one other point which is that in my view all questions of competition and all questions about the allocation of scarce resources are ultimately political. There is a lot of science about the analysis of competition issues but in the end somebody has to make a judgment about the public interest, and there is a question whether the judgment about the public interest is best taken in London by ministers or best taken in Brussels.
  (Mr Allen)  I think I would question the premise of the first part of the question. It is certainly true that there are certain fares which are more expensive in the United Kingdom, in particular much has been made recently of the fact business class and first class fares between the United Kingdom and the United States are generally higher than between the continent and the United States. They are a prominent exception to the rule. It is generally true that it is cheaper to buy a ticket in the United Kingdom to fly throughout the world than elsewhere, and indeed on the North Atlantic the cheapest fares are in fact from the United Kingdom to the United States. It is simply that one class of fare which is higher. That is a consequence of the laws of demand and supply. Demand for those fares is much higher in the United Kingdom proportionately than it is on the continent. This is in contrast to the general demand which pushes down the lower priced fares, and fares are therefore higher.

  230.  Would this not help? If there is new competition with those airlines which were able to fly through London, their fares will go down?
  (Mr Allen)  If there is an increase in supply, inevitably prices will fall. So if opening up the skies leads, as it will inevitably do, to an increasing supply, then there will be a reduction in fares.


  231.  What Member State carriers do you think would be advantaged or disadvantaged by the proposals? Who are going to be the winners and who are going to be the losers if these proposals go through?
  (Mr Holmes)  If these proposals go through, and one is talking about the proposals which simply extend the competence of the Commission to apply the European competition rules to third country agreements, I doubt if there will be any winners except possibly the legal profession, because it will simply create confusion about what the rules of the game are.

  232.  I take your point but you probably heard me pressing Dr Humphreys on that. Taking that in isolation, the logical extension must be moving further down the line would actually affect or bring in legislation from DG VII to pick up the points that DG IV at that stage have already achieved. Who then would be the winners and the losers?
  (Mr Holmes)  I think it is very difficult to say because the mandate which the Commission are seeking is so ill-defined. They have neither defined the sequence nor the priorities and what they would go for first. My suspicion is that whoever the winners were, the losers might well be British carriers, because as we have said the market between the United Kingdom and the United States is so much larger than the markets from continental countries. The market between the United Kingdom and the US is as big as the market between the US and Germany and France, and even bigger than that. So there would be some loss to British airlines, both to Virgin Atlantic and British Airways, if there were an open skies agreement, as it were, between the whole of Europe and the United States, but I would not like to hazard a guess as to who the gainers might be.

Lord Howell of Guildford

  233.  I was very interested in your paper and in your comment where you suggested there could be this conflict between the search for more competition internally and extending competition powers to third country operations and the Commission acquiring the mandate from Member States for negotiating for the whole Community. I must say I sympathise with your fears. Is there behind that really the commonsense view that there is an asymmetry between the United States, which is one country where negotiations are conducted which appear to ride consistently with their own internal competition, although that is not as great as it was, and Europe where (a) we are not one country and (b) the whole system, while we aspire to competition, is still riddled with protection, subsidies, funny little airlines being kept alive when they should not be and so on? If the Community took these powers it might end more with a political carve up, or a carve up with all kinds of national pulls on the decisions, rather than a negotiation taking full account of competition. Is that the worry behind your comment?
  (Mr Holmes)  Yes, that is indeed my worry. The United States Government finds it actually quite difficult to manage a bilateral negotiation with a country like the United Kingdom because they find it difficult to balance the interests of their airlines, and there are six or seven US airlines which fly to Europe. They produce an enormous delegation consisting of states, regions, airports as well as airlines, so the political process in America is quite different. In Europe there are something like 23 airlines which fly across the Atlantic to the United States, belonging to ten or so of the Member States, so balancing the interests of those airlines would be very much more difficult than balancing the interests of the American airlines, particularly, as you have said, as one is not dealing with a unitary state where ultimately there is a government which can decide. So I share exactly your concern.

Lord Tordoff

  234.  Of these 23, how many are state owned?
  (Mr Holmes)  I am not sure. I would think something of the order of half.


  235.  Is that information you would have back at base?
  (Mr Holmes)  Certainly, yes.

  236.  Could you let us know the answer to that?
  (Mr Holmes)  Certainly. I may be wrong on the 23, but I will find out.[1]

  237.  Whatever the number is, how many of that number are state owned.
  (Mr Holmes)  Certainly.

Lord Howell of Guildford

  238.  Without putting words in your mouth, are you saying that this ambition of the Commission to unify the negotiations with the United States or with other countries on behalf of the whole Community is premature, to say the least, and given that we in the United Kingdom have the lion's share of the traffic with the US it would almost certainly work directly against our national interests?
  (Mr Holmes)  Yes, I think that is fair in the short term. I think in the longer term there could be some advantage in removing some of the restrictions which exist. For example, restrictions on ownership and control which in the United States are very rigid. A non-American airline is not allowed to own more than 25 per cent of the voting equity of an American carrier, and in Europe no foreign carrier is allowed to own more than 49 per cent of a European carrier. Those restrictions are outmoded in my opinion and it may be that it would take a European-level negotiation to deal with them. But that is quite a different question, I think, from saying that the European Commission should be responsible for negotiating bilateral agreements and the allocation of rights. I think in that case the United Kingdom almost certainly would be the loser.


  239.  Why do you think that DG VII wants to get such powers?
  (Mr Holmes)  I think that is a difficult question to answer, my Lord Chairman.

1   Note by witness: Out of 23 European airlines which fly across the Atlantic to the United States, 10 are 50 per cent or more state-owned. Back

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