Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



Mr O'Brien

  40. Mr Wiltshire, the war and terrorist cover premium, how does this affect your members and what will be the anticipated cost per year? How do you think this matter should be addressed for the future?
  (Mr Wiltshire) The insurance costs, we estimate for UK airlines to be in the order of $250 million per annum, and I mention that in our writ10 submission. That figure comprises the increased premiums that airlines were asked to pay within seven days of the events in September which gave them back their passenger insurance under the war and terrorism element of their insurance. It also covers the hull insurance which has been going up a lot in insurance renewals that have been happening since 11 September. Also I have included in that the premium to governments that we are likely to pay from November. The likely premium to the UK Government will be in the order of $70 million per annum, roughly £50 million per annum, so in fact it will be slightly larger than the support figure that Stephen Byers announced the other day.

  41. How should it be addressed in the future?
  (Mr Wiltshire) We believe these premiums should really be focused on a long-term solution. One way forward, rather than paying what is effectively an arbitrary sum of money, albeit to provide us with cover, we should be looking at this whole issue in a rather more global, international way and creating something such as an airline mutual fund which would enable the airlines to have some control over the premiums they are paying, at the same time allowing Government to withdraw somewhat from the insurance responsibility without, we believe, total withdrawal from that responsibility.
  (Mr Parker-Eaton) May I add to that, please. Looking in the future one of the concerns which we have in the charter mode is that the way the Government has addressed it and the Commission has arranged it is that it should be based on a per passenger basis. That means that an aircraft that is carrying half a load is paying half the premium of an aircraft which is flying full and efficiently. Particularly, say, in the charter mode we fly at 95 per cent load factor which means that disproportionately we are paying much higher premiums than airlines which are flying at much lower load factors and effectively we are subsidising them. Because we are in the low cost area for us, and this is a narrow sectional view, we believe this is unfair and it should be addressed on a per flight basis, not on a per passenger basis.

  42. Could I ask what has been the response then in negotiations with insurance companies on this question of the increase in the premiums that we are referring to now?
  (Mr Wiltshire) I think it would be fair to say there has been no negotiation.

  43. No negotiation?
  (Mr Wiltshire) No. The offer of renewal of insurance and the seven days' notice of withdrawing most of the war and terrorism third party cover was made as an offer to every airline. The letters were remarkably similar, the figures were the same, the timescale and the renewal terms were the same, and there was no chance to renegotiate that. The insurance industry has not shown any sign of coming back to deliver more of that third party or ground damage cover.

  44. So you are saying that since 11 September insurance premiums have been increased and there has been no negotiation with the insurance companies?
  (Mr Wiltshire) There have been negotiations on hull insurance, that is airlines' own insurance of hull and passenger cover, but not the third party or the ground damage cover which was the thing that was so evident in the events of 11 September.

  45. In view of the fact that there has been no real discussion or negotiation on insurance, what changes would you like to see? I know the point was made by Mr Parker-Eaton but for the record could you give us some indication as to what the industry would like to see on the question of future insurance cover?
  (Mr Wiltshire) We would like to see the insurance industry come back with a commercial offer and allow us to negotiate with them on the basis of risk, premiums related to risk. As they are not doing that, or they do not feel able to, we believe that the Government's role will be a fairly prolonged one providing underwriting of this ground cover or third party damage cover for some prolonged period of time.

  46. What about the suggestion from Mr Parker-Eaton?
  (Mr Wiltshire) The methodology for doing this we would want to discuss. The decision made by the insurance industry to charge a per passenger figure was a fairly arbitrary one that they made up very rapidly after the events of 11 September and it was driven by the need to achieve a certain fund in the global insurance market rather than looking at individual airlines' risks and profile.

Mrs Ellman

  47. How much are new security measures going to cost the industry?
  (Mr Wiltshire) The cost of security is something that we have not got to the bottom of yet and that is simply because security measures internationally are still being implemented. In the UK we are responding very rapidly. The UK Government responded very rapidly with a set of measures. They were quickly implemented and bedded down and over a short period of time. We probably have an understanding of those costs, and those are shared between the airlines and the airports.

  48. Can I ask you what those costs are?
  (Mr Wiltshire) I am sorry, I do not have an estimate of those costs.


  49. Do you have an approximation, Mr Wiltshire? Mr Parker-Eaton, do you want to have a go at guessing?
  (Mr Parker-Eaton) Yes. We have had to make budget assumptions for next year because of the pricing structure. We believe that the extra security costs are going to be in the order of £5 per passenger round trip.

  50. Is that directly because of something that is connected with the way you operate?
  (Mr Parker-Eaton) No.

  51. Or would you be in that sense the same as other airlines?
  (Mr Parker-Eaton) The same. This is our best estimate of the extra cost of security but it is very much a guess. As Mr Wiltshire is saying, we have not got any figures.
  (Mr Wiltshire) If I may add some more information. The incremental difference in security measures in the UK was less than we hope will be happening in other countries, in other words the UK was at a reasonably high level of security measures so the difference, the additional costs in the UK, may, for example, be well below a pound a passenger but it is the overseas costs which will be quite high where there is a large step to be made between the current standards and those that they wish to aspire to.

Mrs Ellman

  52. What would be a reasonable apportionment of those costs?
  (Mr Wiltshire) As I mentioned in my opening remarks, I think after the events of 11 September, which clearly identified terrorism as an attack on the state, we believe now is the time to review the way in which costs are apportioned. In the UK we pay 100 per cent of our security costs, that is the industry, the airlines and their passengers and customers. In other European states we do not believe it is quite as straight forward as that. We believe we were already at some disadvantage before 11 September. The events of the 11 September I think mean that we should review the amounts which are paid for by states and the amount that is paid for by the industry.


  53. Did you want to comment, Mr Cahn?
  (Mr Cahn) Yes, if I may, Chairman. Simply to say that the amount of extra costs that airlines would face because of advanced security measures remains unknown. They are being added to all the time. I simply observe that in the USA the administration made available 3 billion dollars—3 billion dollars—to pay for additional security costs. Quite clearly, there was a bigger gap to be made up there. Security levels were lower in the States than they were here. Nevertheless, I think it shows that potentially very huge sums are at stake.

Mrs Ellman

  54. Who decides what reasonable security measures are?
  (Mr Wiltshire) The Government through the DTLR set the aviation security standards. Those are the ones that airports and airlines fulfil.

  55. Are there any factors to do with economic uncertainty or lack of public confidence in flying which are affecting the airlines, apart from apparently the no frills airlines?
  (Mr Wiltshire) I think it is fair to say—and I will ask my colleagues flying transatlantic routes to comment—that the UK the market was more comfortable initially after the 11 September to fly close to home. More long distance travel, particularly to destinations which were considered to be risky, were less attractive. The situation in the US market, on the other hand, is rather different.


  56. Mr Cahn?
  (Mr Cahn) Simply to respond to Mrs Ellman. Clearly transatlantic traffic has been hit harder than most other areas. For example, we found our traffic down around 24 per cent compared with European traffic down around 10 per cent. I think that was connected with the fact that the attacks had occurred in America, that American people were particularly affected and particularly influenced not to fly, at least for a period of time, and that was seen obviously in their domestic flying. The transatlantic has been a particularly challenging area where traffic has been way down. The other area which has been particularly badly affected has been premium traffic, if you like people paying full fare, particularly in the front cabins of an aircraft. That will certainly have something to do with the pre-existing economic downturn which the Chairman referred to at the beginning. It also seems to have something to do with businesses in the immediate aftermath of the crisis of the events of 11 September putting travel bans on and those travel bans have only gradually been lifted and have not yet fully been lifted. It is a mixture of economic downturn, a mixture of a crisis of confidence, a mixture of travel bans and perhaps companies thinking in these difficult circumstances they could do without travel for a little bit.

  57. Mr Humphreys?
  (Mr Humphreys) Our experience has been very similar. As Mr Cahn said, the North Atlantic has been hit very, very badly and there have been differences in separate markets on the North Atlantic. New York has been particularly badly hit. In other parts of the world, we find our services to South Africa and China and Hong Kong are extremely buoyant, Japan, on the other hand, has been badly affected. It is a mixed picture. Leisure traffic tends to be holding up better than business traffic but business traffic is slowly coming back.

Mrs Ellman

  58. Have the no frills airlines been affected at all?
  (Mr Nicol) Yes. As I said earlier, we did see an initial downturn in demand. We have to keep fares a couple of percentage points lower than we would normally have done at this time of year in order to encourage people back flying. I think the comments from my colleagues here really enforce our view that we are talking about two separate segments. There is the short haul European sector in which we are experts. I do not pretend to talk for the North Atlantic. I think British Airways runs a very efficient North Atlantic business. Certainly its losses within Europe over the last couple of years, over £470 million, perhaps demonstrate that now is the time for British Airways to let the low cost airlines—be it easyJet, Go, Ryanair—take over a bit more.

  Chairman: When we want advertisements we will let you know, Mr Nicol.

Mrs Ellman

  59. Is there a case for any additional financial support from the UK Government?
  (Mr Wiltshire) If I could take that first and my colleagues can add to it. I think I have mentioned in my introductory remarks that we believe it is time to review security and insurance. The Government are already providing insurance underwriting cover but, of course, the airlines are paying a premium. We are expecting to pay for all our security costs, including the enhanced ones, but we think it is appropriate for this to be reviewed, particularly in relation to what other states provide their own airlines.

  Chairman: I am anxious not to go over the same points again, if I may.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 21 March 2002