Examination of witnesses (Questions 240-
256)
THURSDAY 2 JULY 1998
MR DAVID
HOLMES, MR
CHRIS ALLEN
and MR MIKE
HALL
240. I was hoping you were going to answer!
(Mr Holmes) The Commission has never quite stated
it. It seems to me that the Commission does not behave like a
national government. A national government has policies which
it decides collectively and then decides how to pursue them and
it prioritises its policies. The Commission does not behave like
that. I think in this case some element of the Commission's desire
to negotiate on behalf of national governments is that it thinks
the Treaty requires that. That is one reason, so it is a legal
matter. Indeed, in support of that, the Commission has started
proceedings against Member States who have themselves negotiated
an open skies agreement with the United States. Another part of
it is that the Commission believes that unity provides strength.
I do not think myself that is necessarily the right conclusion,
because unity can also lead to weakness. If you have a unified
operation, you expose a bigger flank to the enemy than if you
are small and more focused. I think there is also a desire in
the Commission simply to extend its own influence, but I would
not like to offer a firm view on that. I am not an expert.
Lord Marsh
241. We are moving into the realities of
the situation, I think, now. Is it not a fact that virtually all
major airlines, whether they be in public ownership or not, are
normally quite overtly pressurised by governments of the day,
because they are seen as a national symbol to an extent which
other industries are not? I find it difficult to understand how
those national interests would be allowed to be subsumed consistently
into one negotiation by the Community. Is there anything around
the world, a regional agreement of substance, which operates in
that way? I find it difficult to envisage it as a practical possibility.
(Mr Holmes) Not to my knowledge. The common aviation
area in Europe is a unique phenomenon. I beg your pardon, I stand
corrected—Australia and New Zealand may have an arrangement
of that kind.
(Mr Hall) They have created it between them internationally.
242. Yes, that is a bilateral agreement.
(Mr Holmes) That is not quite the same. I think
the common aviation area in Europe is a unique phenomenon. But,
of course, it is simply part of a common market where there is
a community of interest on a whole range of issues. There are
clearly deficiencies in the way the common aviation area works
because there are still signs of state intervention. Dealing with
third countries is quite another matter.
Lord Thomas of Macclesfield
243. Tell me if I am doing a disservice
to your evidence but the flavour I read into what you have been
saying and writing is that what is bad for British Airways is
bad, by definition, for the United Kingdom, and certainly bad
for the short-term, but you have just recently made the point
that there may be benefits in the long-term. I am puzzled as to
why aviation should not be treated just like any other industry,
or is it because we are very cosy with the arrangements which
currently exist?
(Mr Holmes) I hope I was not arguing that what
is good for British Airways is good for the United Kingdom, but
I am here to represent British Airways.
244. That is quite clear, is it not!
(Mr Holmes) So I hope the Committee will take
that into account. Before British Airways was privatised, the
then Government issued a White Paper on airline competition policy
in 1984 in which it defined its relationship with British Airways
and with the airline industry, and its position, which was clearly
set out, was that British Airways would be treated in no way differently
from any other airline. We feel we have actually been treated
differently because we feel the Government has tried to promote
competition at the expense of British Airways, but that is a different
matter, there is certainly no identity of interest between British
Airways and the British Government. I think aviation is different
largely for historical reasons, that it has been a developing
industry, and everyone knows every country has a national anthem,
a national flag and a national airline—the most expensive
of that is usually the national airline—so they have been
associated with national prestige, and there has been the convention
of bilateral agreements regulating airlines which is still there
and there are questions of safety and security which have to be
dealt with on a bilateral basis. So there are special factors.
British Airways, and I am sure the rest of the British industry,
would like to see over the course of time a normalisation; we
would like to be treated like any other industry, like banking
or insurance. The issue is how you get there and whether this
particular step of bringing the European Commission in is the
right way to do it.
Lord Haslam] I was
going to raise much the same point. Virgin in their submission
suggested, and other witnesses, particularly airline user organisations,
that ideally they would like to see a situation where the airline
industry, which is now fairly mature, is treated like any other
industry. I was involved in the steel industry for a time and
I have been through a period of high regulation, quotas, and constant
interference from Governments and the Commission. This was all
eventually swept away and it was clearly highly beneficial for
the industry. It was very painful and very demanding but at the
end of the day it is the ultimate answer. Therefore, I believe,
what we are discussing even now is only tinkering with the competitive
situation rather than dealing with it in a fundamental way. I
believe, therefore, that we shall be willing to reflect on the
ultimate solution. British Airways, which is a very fine airline,
should be able to thrive in this environment and should not be
in any way inhibited, when viewing this potential the future.
Sorry, that is a statement rather than a question.
Chairman
245. Do you want to comment on that?
(Mr Holmes) No, my Lord Chairman.
Lord Berkeley
246. Mr Holmes, you mentioned earlier problems
about owning an airline in America or a shareholding of it, and
I think you expressed a wish that ownership of an airline based
in America should be opened up, that it does not have to be in
American ownership. Presumably therefore the same would apply
in reverse here or in Europe, and one would therefore move away
from the concept of a national airline being owned by a certain
minimum percentage in a particular country? If one was starting,
as Lord Thomas was suggesting, possibly from a clean sheet of
paper, it would basically be a free-for-all, one would assume,
regulated by competition laws in the US, Europe, here or anywhere
else. Would that be good from your point of view, being able to
fly anywhere with the ownership of an airline anywhere with the
only constraint to a new service or a new airline being the safety
and other things which would obviously be required? Because from
what you are saying the problems with the American negotiations
at the moment are that there are eight or nine airlines vying
for what you called political, top-of-the-pile, if you like, negotiations,
whereas you said there were 23 in Europe. To me that is much the
same in either direction. What is the difference between eight
or nine airlines playing politics on Capitol Hill and 23 of them
playing politics in Europe in the other direction, apart from
the state ownership?
(Mr Holmes) I think on the last question, Lord
Berkeley, it is not just a question of the airlines playing politics,
there are the national governments, the Commission, and the various
Member States who might also find themselves engaged in this process.
The virtue of the British system has been that it has been transparent,
there are applications to the Civil Aviation Authority, there
is a hearing by an independent body, there is a decision and there
is a right of appeal to the minister, which seems to me to be—I
do not want particularly to praise the system—as good a
system in principle as one can get. I think on the first point,
on the question of ownership, the United Kingdom traditionally
has had a more liberal policy about ownership, it allowed, for
example, Monarch to be wholly owned by non-United Kingdom nationals
and the same I think with Britannia. When the European Union—the
Community as it then was—developed its own membership rules
it reined back the liberal instincts of the British Government
and it is in fact now not possible to allow a situation like Monarch
and Britannia to arise, and we have supported that. On the second
question, yes, British Airways would feel it could survive and
prosper in a big market provided there was genuine equal opportunity,
there was not subsidisation, there was not political interference
and provided, as I said in my opening statement, there was a consistency
of competition laws. If I may just give an example, the issue
which Dr Humphreys mentioned, the complaint against British Airways'
practice in giving incentivised commissions to travel agents and
discounts to customers, this is general practice in the aviation
industry worldwide. It is a practice which has not been found
unlawful in the United States and on which the United States Government
intends not to take any regulatory action, so there is a problem
that we are being complained against in Europe for practices which
are general in the United States and in fact found lawful, and
really it is very difficult to do business with that confusion.
Lord Tordoff
247. I can see the point you are making
about the confusion which arises from that, working in two systems
at the same time, as it were, but do you see the argument that
says that this can be anti-competitive? Where a smaller airline
may not be able to come into the market because of the fact it
is all tied up by the big ones? It does seem to me that there
is a prima facie case that this is an anti-competitive
practice.
(Mr Holmes) We would argue it is not an anti-competitive
practice, that in fact giving discounts for quantity is a perfectly
normal business practice. All I am saying is that if it is an
anti-competitive practice, then some regulatory authority should
investigate it and it should be declared to be an anti-competitive
practice universally. It should not be dealt with piecemeal in
one jurisdiction and not dealt with at all in another.
Lord Marsh
248. Can I ask a direct and possibly embarrassing
question because you have had experience both of Government and
of industry? Do you think British Airways as British Airways has
a political interest and ministerial direct interest—which
used to be a phrase used in the lunch table directives although
I am sure you do not get directives—which is on a par with
the generality of large industries?
(Mr Holmes) I am not sure I understand the question,
Lord Marsh.
249. The extent to which ministers and politicians
are directly interested in the activities of British Airways as
a public company compared with Marks and Spencer, Tube Investments
and the rest is the same or more? It certainly would not be less,
I suspect.
(Mr Holmes) There is no doubt ministers have a
greater interest in British Airways, and that is largely because
they have to take decisions which affect important aspects of
British Airways' commercial future. Marks & Spencer can open
branches in the United States or France subject only to the laws
of those countries. British Airways often requires ministerial
approval or ministerial backing to engage in a particular enterprise
because it needs a bilateral agreement, so inevitably ministers
are drawn much more into British Airways' business.
250. The point is, which I think is established,
that in all countries a major airline is different from the generality
of the businesses to the extent it is seen as part of the national
interest. I suspect although you are not now nationalised it is
different and possibly even less, but I suspect it is a very different
relationship.
(Mr Holmes) Yes, I think it is.
Chairman
251. Mr Holmes, we are in danger of encroaching
on your time but I am staggered we have got thus far in our questions
to you and no one has raised the subject of slots. I am going
to rectify that if I may. Could you tell us as briefly as you
can, first of all, do you know who owns slots? Secondly, is there
a market in slots? If so, what is it?
(Mr Holmes) My Lord Chairman, I do not know who
owns slots and I do not think the question really arises. A slot
is a permission to operate an aeroplane either inwards or outwards
from an airport at a particular time of day. There may be attached
to that permission conditions about the size of the aircraft because
with an airport slot goes the ability to use the facilities at
the terminal. So I regard the question of ownership of airport
slots as a metaphysical question which is not particularly interesting
and probably cannot be answered.
252. What about the second part of my question?
Is there a market in slots?
(Mr Holmes) There is a market in slots. Airlines
depend on slots at both ends of the route in order to be able
to operate their services, and the allocation of slots is one
of the businesses which the international air transport industry
manages quite well I think. Every six months they have conferences
on slots which all the airlines and all the airports come to,
and they talk about the exchange of slots and they optimise, to
use that word, the use of slots, so that airlines can get the
best possible match of slots at their places of departure and
places of arrival. These conferences go on for several days with
the airports saying what can and cannot be done and facilitating
the exchanges between airlines. If you did not have that, then
the international aviation industry would not work properly.
253. In your view, does it make any sense
to even attempt to apply competition rules without direct reference
to the availability and right to use slots? They are surely inextricably
interwoven, are they not?
(Mr Holmes) I do not think they necessarily are,
and I stand subject to correction. I think the application of
competition rules is about the behaviour of airlines in relation
to each other performing agreements or behaving in an anti-competitive
way towards each other, and their behaviour towards customers.
I think the allocation of slots or the number of slots which the
airlines have is, as it were, part of the furniture, it is part
of the datum against which the competition rules operate. There
are European Union regulations on the allocation of slots which
by and large have taken the IATA practices and given them the
force of law throughout the European Union, and these rules, for
example, give priority to new entrants in the allocation of new
slots. They also preserve the principle of grandfathering which
airlines need in order to be able to offer continuity of operation.
We are public transport operators and we need to be able to give
some assurance that the services we operate this summer will carry
on into the winter and next year. So this security gives us the
ability to raise capital. If we did not know the principal tools
of our trade would be within our control next year, I do not see
how we could raise capital from the markets. So they contribute
to the stability of the industry and that is subject to European
regulation.
254. How do new entrants—and I know
they are still here at the back of the room—like Virgin
manage to raise capital? They do not have the advantage that BA
have got. I do not expect you to answer my question directly because
that is a matter for Virgin but I am picking up your point, and
I think I heard you but please correct me if I am wrong, that
one of the advantages of having slots is that it then—these
are my words, not yours—secures your business because you
know you have the slots and therefore you can raise capital in
order to invest in more aeroplanes or whatever you want to invest
in. That does not seem to gel with a new entrant.
(Mr Holmes) I think it does, my Lord Chairman.
A new entrant will typically start operations in a small way.
The airline industry is an extremely risky business and a lot
of people do not make it at all. They will start in a small way.
They may start, as Virgin Atlantic did, at Gatwick. The advantage
with slots is that on the whole they appreciate in value and as
you invest in the route you invest in the people, the marketing
of the route, and the business gains value. British Airways has
been investing in our Heathrow slots for 50 years, since Heathrow
was opened. That is one thing but it is another matter to say,
"I need to raise capital so I need to get somebody else's
slots."
Lord Berkeley
255. So slots have a value.
(Mr Holmes) Slots do not have a value in the sense
we do not put them in our balance sheet, but in the sense that
slots are necessary in order to be able to trade, they have an
enormous value.
Lord Methuen
256. A bit like a business's goodwill?
(Mr Holmes) That could be one way of describing
them.
Chairman] Mr Holmes,
we are very grateful to you. My apologies, we have strayed considerably
over the time but it just shows the value of the evidence you
and your colleagues have given to us. Thank you very much.
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