Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 240- 256)



  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.


  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.


  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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