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


Memorandum by British Air Transport Association (AT 23)

AIR TRANSPORT INDUSTRY

INTRODUCTION

  1.  The British Air Transport Association (BATA) is the trade association of UK airlines representing both scheduled, charter and freight operators. BATA members (see Appendix 1) produce about 95 per cent of UK airline output.

  2.  The Sub-Committee has requested evidence on the economic and political implications of the downturn in passenger numbers, security, the role of international subsidies and the proposals for Government assistance for the industry, and the effect of the rules of ownership on the United Kingdom air transport industry, consequent on the incidents of 11 September 2001.

IMPACTS

  3.  The events of 11 September 2001 have precipitated a major crisis in the aviation industry. Before 11 September the international aviation industry was preparing for a global economic slowdown and some airlines were already having to deal with a looming financial crisis. In the UK airlines were financially healthy. Some sectors were growing strongly whilst others maintained a slightly reduced capacity in advance of an expected decline in business travel. The airspace closures triggered by the events on the 11 September effectively closed down significant parts of the UK airline business for a number of days.

  4.  This business closure cost UK airlines about £100 million and stranded thousands of passengers on either side of the Atlantic.

  5.  Higher levels of security were implemented immediately (details in Appendix 2). The estimated cost of these new measures for UK airlines is £100 million per annum.

  6.  Within a week the market for competitive aviation insurance cover effectively disappeared. The withdrawal of third party cover almost grounded the whole industry. Only Government assistance as insurer of last resort allowed the airlines to maintain services. The estimated additional cost of insurance for UK airlines is $250 million per annum. Details of the changes to airlines insurance cover and premiums are shown in Appendix 3.

  7.  Following the reopening of airspace and repatriation of stranded passengers, airline operators to North America and some other international routes suffered a massive drop in demand. Airlines took immediate action to reduce capacity but demand remains significantly depressed (over 30 per cent) in several key markets.

  8.  In Europe the drop in passenger numbers was more limited (circa 10 per cent) with demand for business travel being most affected.

  9.  The impact of this depressed market has been felt immediately by scheduled airlines, particularly those with significant operations to North America and some other longhaul destinations.

  10.  This crisis has tipped those airlines with pre-existing financial problems into various forms of bankruptcy, part or full closure. Those scheduled airlines with most exposure to North Atlantic routes have been affected most, but action taken by both British Airways and Virgin Atlantic has ensured that they are well placed to take advantage of any market recovery. The impact on the tour operating/charter airline sector is likely to be felt a little later. Most passengers, having booked and paid for their holidays, are still travelling but new bookings have dropped away dramatically especially to North America and other longhaul destinations.

AIRLINES RESPONSE

  11.  UK airlines reacted quickly to this sudden downturn in demand by cutting capacity and costs. So far, over 10,000 jobs have been lost, and over 50 aircraft have been grounded.

  12.  Promotional activity has been used to stimulate air travel initially in those markets least affected by the events of 11 September and more recently in a wider range of markets. However, with a continuing climate of war and crisis the targeting and timing of such activity is crucial. Regaining the full confidence of travellers in the most nervous markets will require a successful conclusion to the crisis, confidence building from the industry and governments—and time.

WIDER ECONOMY

  13.  There has been a fairly rapid cascade effect in sectors related to aviation. Jobs have been lost in Aerospace Manufacturing and a variety of companies that support the airlines.

  14.  Perhaps the greatest single impact has been on Inbound Tourism where the sudden drop in visitor numbers, especially from the USA and Japan, has hit an important sector already suffering from the Foot and Mouth crisis earlier in the year.

  15.  The current crisis has displayed, in fairly stark relief, the economic importance of the aviation industry in the UK. Even more important it could be demonstrating that a lack of confidence in aviation, especially a perceived lack of freedom to travel by businesses, can have a seriously damaging impact on international trade and hence the UK economy as a whole.

THE ROLE OF GOVERNMENT

  16.  The nature of the atrocities of 11 September meant that the priority for Governments was to ensure aviation security. The airlines and airports responded quickly to the additional security requirements in the UK and we support efforts by the UK Government to ensure a high level of security, consistently implemented across Europe and worldwide.

  17.  UK airlines believe the current crisis does not justify state-aided rescue of airlines that were already in financial difficulties before 11 September. Higher costs and a sudden drop in demand has created a financial crisis across the industry but our primary request of Government in this even more competitive market is to ensure that UK airlines are not disadvantaged.

  18.  The United States Government reacted swiftly to the crisis and the US airlines have been offered an $18.5 billion package of aid:

    —  $5 billion of direct aid (cash) for immediate impact and continuing loss of business up to

    31 December 2001.

    —  $10 billion of Loans and Loan Guarantees.

    —  $3.5 billion of investment in security at airports and on aircraft.

  In addition the US Government took responsibility for any third party liability over $100 million caused by "an act of terrorism" during the next 180 days. Also, US carriers have been granted a three month deferment of tax payments to Federal authorities.

  19.  The European Transport council meeting on 16 October 2001 concluded that States may offer support to airlines in a number of areas including:

    —  Underwriting of Third Party Insurance risk.

    —  Additional Security costs; and

    —  Compensation for losses due to the consequences of airspace closure.

  This is a very modest package of measures in comparison to that available to US airlines and we are particularly concerned about distortion of competition on routes where US and UK airlines compete.

  However, if implemented consistently, we believe that these measures will provide the minimum necessary support and ensure that State Aid is not used to distort competition within Europe.

  20.  We have formally requested this support from Government. We have also requested that, as they have been hit by sudden increases in security and insurance costs, airlines should be allowed to delay payments to Government (for example payments of APD) during the next few months. We await a response to this request and continue to hope that Government will act positively to ensure that the UK's aviation industry is not left at a competitive disadvantage at this critical time.


21.  INSURANCE

  The current failure of the Aviation Insurance market came close to halting the airline industry at the end of September. We welcomed the Government's decision to underwrite the gap in insurance cover which allowed us to maintain our services and we welcome the European decision to extend the period of cover until the end of December this year. However, it is becoming clear that there will be no early return to a robust and competitive insurance market covering aviation war/terrorism risks and we will be seeking to extend the current arrangements for what is likely to be a prolonged period. The airlines are also considering possible long-term alternatives to commercial insurance in this area.

22.  RULES OF OWNERSHIP

  The crisis has served to focus attention on the national and international restrictions that constrain the development of the industry. The Chicago Convention of 1944 established the basis for a system of bilateral agreements between countries governing air services between those countries.

  At the heart of this system is government "designation" of air carriers. Before a government will designate a carrier for international (and in most cases domestic) service, it will usually want to be satisfied that the carrier is substantially owned and controlled by nationals of the country (usually interpreted to mean that nationals must have 51 per cent or more of voting shares in a carrier). This provision was intended to prevent foreign ownership of what were then considered strategic assets, and to reserve the benefits of traffic rights between two countries principally for carriers of those countries. Similarly, the government of the country at the opposite end of a route can generally refuse to accept designation of a carrier which is not owned and controlled by nationals of the designating country.

  These provisions remain in place in most jurisdictions. However, there are some exceptions. Within the European common aviation area, carriers do not have to be designated by national governments—though they must have an Air Operator's Certificate (AOC) issued by an EEA government and must not be controlled or owned by non-EEA nationals. The practical effect of this is that nationals of any EEA state can provide air services to, from or within another member state of the aviation area. This has allowed, for instance, German tour operators to own UK charter carriers, or UK citizens to control a Belgian carrier.

  There are thus no barriers to consolidation of ownership of carriers operating entirely within the EEA. But it would still be possible for a third country to refuse to accept the designation of a carrier attempting to operate from one EEA member state to the third country while being substantially owned and controlled by nationals of another EEA state. So, the US could object to Italy attempting to designate a French-owned carrier for services from Rome to New York.

  Similarly, it remains impossible in most countries outside the EEA for non-nationals of that country to own and control an airline operating domestic air services. The evidence from Australia, where foreign ownership and control of domestic airlines has been allowed, shows the consumer benefits which can result from the removal of these archaic rules.

  The current ownership and control rules militate against normalisation of the airline industry since cross-border mergers, which are usual in other industries from car manufacture to telecoms, are greatly discouraged. BATA believes that liberalisation of ownership and control rules could provide an important boost to industry consolidation and efficiency, allowing weaker carriers to be taken over by stronger carriers (which should be better at generating and sustaining wealth and jobs) from outside the country of designation. This is more important than ever as the aftermath of 11 September exposes fundamental fault lines in the business models and efficiency of some carriers, although any mergers must be subject to the application of competition law, as in any other industry.

  The Government has championed this issue. We expect it to continue to negotiate with other countries to include reciprocal liberalisation of ownership and control rules and that designation should be based on carriers with their principal place of business and AOC in the country of designation. The detailed steps and the order in which they are taken are a matter for Government but we would expect the interests of the UK's valuable, competitive and highly successful airline industry to be a prime consideration.

23.  REGULATORY BURDEN

  Airlines accept that they operate in a highly regulated industry and that Safety and Security regulations are even more important following 11 September. However, there are a number of developments in the UK and within Europe, outside the fields of Safety and Security, which could result in significant new burdens on aviation. One example of this is the proposed change to airport economic regulation in the UK recently announced by CAA. The proposed move away from the "single till" approach would inevitably increase airline costs which would in turn have to be passed on to the consumer in the form of higher fares.

  We do not believe it is appropriate, at a time when EU states are considering how they might best support their aviation industry, for the EU, individual Member States or Regulators to be considering how to add further economic burdens on air travel.

.  CONFIDENCE BUILDING

  The airlines expect a return to previous levels of demand and a continuation of the natural growth in air transport. The timing of this will remain unclear until world events have stabilised, but there is no reason to believe that the current crisis will have any significant effect on the previous long-term trends. Therefore, we believe it is very important for Government to press ahead with its plans to produce a 30-year framework for UK air transport in a White Paper during 2002. This would not only meet the primary objective of a timely decision making framework for an industry with long lead times but would also be a vote of confidence in the UK's highly valued and hugely successful air transport industry.

British Air Transport Association

20 November 2001

APPENDIX 1

BATA MEMBERSHIP

  Air 2000

  Airtours International

  Britannia Airways

  British Airways

  British European

  bmi British Midland

  Channel Express

  Heavylift Cargo Airlines

  JMC Airlines

  KLM uk

  Monarch Airlines

  Royal Aeronautical Society*

  (Incorporating The Society of Licensed Aircraft Engineers and Technologists)

  Society of British Aerospace Companies*

  Virgin Atlantic Airways

  * Associate Members

APPENDIX 2

AVIATION SECURITY FOLLOWING 11 SEPTEMBER

  The following new security requirements were imposed on airlines:

    —  All catering and aircraft stores to be searched before being taken on board.

    —  All vehicles conveying passengers to aircraft to be searched.

    —  All aircraft not in service to be searched internally and externally before being taken into a Restricted Zone (ie airside) and guarded until it reaches the Zone.

    —  Further internal and external search close to boarding.

    —  All aircraft operating to the US and Canada shall be guarded from the start of the search until takeoff. All service personnel accessing the aircraft to be searched.

    —  All other aircraft to be placed under continuous surveillance while airside and visited by a patrol every 15 minutes.

  Further requirements in relation to terminal and baggage searches have also been imposed on airports.

  The new measures included controlling carriage of sharp implements on board the aircraft. Check-In processes now include making passengers aware of these new regulations.

  Of all the impacts since 11 September, the cost of the new Security measures is the most difficult to estimate. The requirements are delivered by both airlines and airports in the UK and costs have yet to be finalised. At airports overseas the position is further complicated by differences in measures being undertaken, additional measures being planned and the various approaches to the cost of aviation security.

APPENDIX 3

AVIATION INSURANCE FOLLOWING 11 SEPTEMBER

  The following changes were imposed on airlines on 24 September 2001.

    —  A surcharge of $1.25/passenger/journey was immediately imposed to reinstate existing policies with substantially reduced third party war and terrorism liability cover of $50 million compared with previous levels of well over $1 billion.

    —  Aggregate cover limits were imposed in place of "each and every incident" limits.

    —  Hull war insurance underwriters imposed a premium surcharge of 0.05 per cent of fleet value.

    —  Insurers demanded payment of all surcharge premiums in advance by as much as 12 months.

    —  Insurers imposed the right of re-price as often as they wish at only seven days notice if the total premium does not meet anticipated levels.

    —  Insurers are unable to guarantee continuation of cover following any future terrorism event.

  In addition just two insurers offered a "top-up" third party war and terrorism liability cover at an additional surcharge of $1.85/passenger/journey. These terms were effectively non-negotiable. The two underwriters offering the "top-up" policy share ownership with the two largest aircraft lessors who, in turn, were insisting that airlines procure the insurance on offer.

  The market for competitive insurance cover has effectively disappeared.

  The premium to be paid for Government cover above $50 million is still being discussed. The annualised cost estimate in paragraph six is based on the assumption that this will be the equivalent of approximately $1/passenger/journey.

Memorandum by the Charter Group (AT 24)

THE AIR TRANSPORT INDUSTRY

STATUS OF SUBMISSION

  1.  This submission has been produced by the Charter Group, which represents all the UK's major charter airlines. Its members, Airtours International, Air 2000, Britannia Airways, JMC Airlines and Monarch Airlines collectively carried just over 27 million passengers last year (CAA airline data statistics 2000), representing 60 per cent of all passengers travelling abroad by air. They collectively operate over 170 aircraft and employ 13,174 staff. Airtours, Air 2000, Britannia and JMC are subsidiaries of inclusive tour groups.

Scope and summary of submission

  2.  The Sub-Committee has requested evidence on the economic and political implications of the downturn in passenger numbers, security, the role of international subsidies and the proposals for Government assistance for the industry, and the effect of the rules of ownership on the United Kingdom air transport industry, consequent on the incidents of 11 September 2001.

  3.  The UK charter sector has experienced a reduction in demand similar to that in the scheduled sector and consumer confidence has not noticeably recovered since 11 September. However, the pattern of that reduction is distinctive.

  4.  The impact will affect not only carriers but also the entire supply chain, which covers almost 520,000 jobs.

  5.  Although the logistical complexity of strengthened security requirements can be accommodated, they impose significant additional costs which, when added to considerable increases in insurance premiums, threaten the stability of the charter sector.

  6.  We accept that State subsidy by way of compensation for force majeure is not in itself justifiable. However, it would be equitable and, from Treasury's point of view, economically desirable for the State to seek to alleviate the consequences of market failure (insurance) and the financial impact of Government-imposed requirements (closure of airspace; security). Current levels of support are unlikely materially to mitigate those consequences.

  7.  While accepting that the events of 11 September have added to the financial problems that were already being experienced by a number of airlines, subsidies or a relaxation in competition or slot allocation rules which would distort the market and are unnecessary.

Impact of 11 September—comparison between charter and scheduled operations

  8.  As a preface to the impact data that follows, the Sub-Committee should be aware that:

    —  The UK charter sector was healthy prior to 11 September, with average passenger loadings in excess of 93 per cent (compared to 73 per cent for a typical scheduled carrier) and strong demand growth.

    —  The sector is the most price-competitive in Europe. It has certainly not lost volume through offering poor value: even "no frills" scheduled airlines are often unable to match UK charter carriers' fare component in holiday packages.

    —  The charter sector is in direct competition with scheduled leisure services. They are not separate sub-markets and differ only in their mode of operation, with charter airlines selling the bulk of their seats to tour operators rather than direct to the public.

    —  All charter passengers are covered by carriers' Bond. Charter airlines would therefore have been obliged to cover the cost of repatriation and associated welfare throughout the delays overseas which ensued from 11 September.

  9.  The immediate consequences of 11 September were a sharp drop in bookings for the winter 2001-02 and Summer 2002 seasons, which have averaged 15 per cent and 45 per cent respectively below last year's level.

  10.  This has in turn precipitated 7,100 job losses in the inclusive tour sector, including 720 within charter airlines and a freeze on recruitment amounting to several hundred more. Orders for 11 aircraft have been shelved and 16 aircraft in the current fleet have been mothballed. These and other cost reductions have had impacts throughout the supply chain, with at least one major supplier having announced a significant reduction in its airport operations.

  11.  The assessed impact on UK charter carriers of the four day closure of airspace (US and Israeli) following 11 September was over £10 million in lost revenue and consequential costs. Because a feature of charter operations is that delayed flights are not cancelled (in contrast to scheduled services), some carriers were still repatriating stranded passengers on 21 September.

  12.  The market for competitive insurance cover has effectively disappeared.

    —  A surcharge of $1.25/passenger/journey was immediately imposed to reinstate existing policies with substantially reduced third party war and terrorism liability cover of $50 million compared with previous levels of well over $1 billion.

    —  Proposed "top-up" third party war and terrorism liability cover was priced as an additional surcharge of $1.85/passenger/journey.

    —  Aggregate cover limits were imposed in place of "each and every incident" limits.

    —  Hull war insurance underwriters imposed a premium surcharge of 0.05 per cent of fleet value.

    —  Insurers demanded payment of all surcharge premiums in advance by as much as 12 months.

    —  Insurers imposed the right to re-price as often as they wish at only seven days notice if the total premium does not meet anticipated levels.

  13.  These terms were effectively non-negotiable since only two insurers were willing to provide cover and there was no competition between them. Furthermore, the underwriters offering the "top-up" policy share ownership with the two largest aircraft lessors, who are themselves able to demand that the "top-up" insurance is procured. It should be noted that the imposition of a per passenger surcharge has a greater impact on charter services because of their much higher passenger loading.

  14.  The following new security requirements were imposed on airlines:

    —  All catering and aircraft stores to be searched before being taken on board.

    —  All vehicles conveying passengers to aircraft to be searched.

    —  All aircraft not in service to be searched internally and externally before being taken into a Restricted Zone (ie airside) and guarded until it reaches the Zone.

    —  Further internal and external search close to boarding.

    —  All aircraft operating to the US and Canada shall be guarded from the start of the search until takeoff. All service personnel accessing the aircraft to be searched.

    —  All other aircraft to be placed under continuous surveillance while airside and visited by a patrol every 15 minutes.

  While these are logistically feasible, the compliance cost has averaged £1.33 per passenger. Further requirements in relation to terminal and baggage searches have also been imposed on airports, and it is assumed that those costs will be added to airport charges, possibly increasing the total to £1.78. Taking security and insurance together, we estimate the total additional cost per passenger will be £4.77 in a sector where the elasticity of demand is around 1.5.

  15.  The charter and scheduled sectors differ in the extent to which these impacts will last. While there is considerable uncertainty over the duration and outcome of the current conflict, we would expect that confidence in air travel will return from late-Spring 2002. However, while this should be reflected in an immediate increase in scheduled demand, charter volumes will recover much more slowly, since tour operators expect to sell holidays many months ahead (as an example, they would normally expect bookings to have filled 40 per cent of Summer 2002 capacity by now) and demand up to a year ahead will have been influenced by concerns created in the immediate aftermath of 11 September. Significantly, in respect of 10. above, consumer confidence has barely recovered in the two months since 11 September: bookings over the past two weeks are an average of 32 per cent down on the same period in 2000.

  16.  The aviation and outbound tour operating industry directly employ around 223,000 full time equivalents in the UK, with another 294,000 indirect or induced jobs depending on it. (Source: Oxford Economic Forecasting 1999 and tour operator information). This is a supply chain of the scale of Rover's and probably affecting more constituencies. Almost every link in that chain is under pressure and the survival of many SME suppliers is in question. It is inevitable under such circumstances that consideration has been given to seeking the temporary reintroduction of passenger surcharges, which are currently banned under the 1992 Package Travel Regulations. The submission of the Federation of Tour Operators covers this point in greater detail.

  17.  BAA data has indicated that the impact of the Gulf War was greater than that of 11 September. However, three qualifications should be made to conclusions drawn from BAA monthly statistics:

    —  they cover passenger throughput and do not reflect the significant downturn in bookings for future fights;

    —  currrent impacts arise not only from the "war against terrorism" but directly from concerns following aviation-related disasters; and

    —  in the Gulf War, the greatest impact on UK carriers was on demand for inbound flights from the US. In the present case, UK passenger confidence has collapsed and the impact is being felt in demand for flights to almost every destination.

The role of Government

  18.  To date, the UK Government has restricted its assistance to the establishment of short-term insurer of last resort following the cancellation of airlines' war liability insurance cover. On 21 September a 30 day Government-supported scheme, Global Aerospace, was instituted and on 22 November is was extended until 22 January 2002. From 8 November airlines have been required to find commercial cover for the first $50 million of war and terrorism liabilities and Government will provide cover above that level at tiered rates in accordance with European Commission guidelines. While we are grateful to Treasury for seeking to encourage a return by the insurance market to normal conditions, as para 14 above shows, even taking account of Government support the cost of UK cover has typically increased seven-fold and we are sceptical that those conditions can be re-established for some time to come.

  19.  We should stress that we do not believe that the payment by Government of compensation for force majeure is in itself justifiable and we do not support Government subsidy in respect of reductions in bookings. However, the enormous change in the structure of the insurance market, the significant rise in security costs and the impact of the closure of US airspace resulted, wholly or in substantial part, from the response by governments to the 11 September incidents. Under such circumstances, we would submit that it would be equitable for the UK Government to provide limited support as follows:

    —  broadening its current insurance scheme to offer lower premiums in the light of the lack of private sector competition;

    —  following the US in agreeing to guarantee the scheme for a further 120 days (ie matching the US 180 day support horizon);

    —  allowing an offset against Air Passenger Duty for higher security and insurance costs; or at worst, deferment of APD payments until September 2002; and

    —  compensation for direct and consequential loss arising from the closure of US airspace.

  20.  Such support also makes economic sense for the Treasury, since it would serve to arrest the loss of Income and Corporation Tax, National Insurance and multiplier expenditure throughout the supply chain that will result from further retirement of aircraft, reduction in supply requirements and associated job losses as well as staving off an increase in unemployment benefit.

  21.  Any support package must be even-handed as between scheduled and charter modes. We therefore believe that Government should not support any relaxation of EU competition rules in order to permit consolidation of carriers who may not have been operating efficiently prior to 11 September. The creation of a limited number of "super carriers" would risk the establishment of dominant bargaining power in slot allocation, scheduling and in access to airport facilities and would offer no apparent benefits to consumers, who still pay too much for many scheduled routes. If, force majeure aside, airlines cannot operate profitably there is no reason why their place should not be taken by others under a true Open Skies regime.

November 2001


Memorandum by the Department for Transport, Local Government and the Regions (AT 25)

THE AIR TRANSPORT INDUSTRY: IMPLICATIONS OF 11 SEPTEMBER

INTRODUCTION

  1.  The terrorist attacks on New York and Washington on 11 September have already had a profound effect on the air transport industry both in the UK and elsewhere. The use of aircraft as weapons, and the willingness of hijackers to sacrifice their own lives, have reshaped the background against which Governments and operators worldwide must seek to protect the security of aviation services. The immediate priority has been to ensure as far as possible that there can be no further attack similar in type or scale to those of 11 September. At the same time, a steep decline in consumer demand for air travel, combined with additional costs for security and insurance, have had immediate economic consequences for most airlines, and to a lesser extent for other parts of the air transport industry. In the short term the industry, which was already facing difficult financial circumstances before 11 September, must adapt to a radically altered commercial environment, and financial prospects for the medium and longer term remain uncertain.

  2.  The Committee will appreciate that events are moving swiftly, and are likely to continue doing so. Statements and references in this memorandum are up to date at the time of submission.

Downturn in Demand

  3.  Major uncertainties about the impact of the events of 11 September on air traffic include:

    —  the scale and duration of the short-term fall in traffic;

    —  the scale and time profile of the subsequent rebound in traffic;

    —  whether, and if so, how soon traffic returns to its long-term trend;

    —  the shape and strength of the UK air transport industry when the market has "settled down".

  4.  The closest previous analogy is the experience of the Gulf War at the beginning of the 1990s. The impact of the Gulf War, coupled with the onset of global recession, saw passengers carried by UK airlines falling by 6.2 per cent in 1991. However, this was a short-lived phenomenon, with traffic rising by 16.2 per cent in 1992. Although it is too early to tell how reliable a guide this will provide, it seems likely that this time the current decline in passengers carried will be deeper and longer lasting.

  5.  As with the Gulf War, the impact of the events of 11 September are hard to disentangle from wider economic influences. Before 11 September the industry was already encountering financial problems as a result of higher fuel prices and the economic downturn, resulting in excess capacity. Spot jet fuel prices increased by two-thirds in 2000 although they peaked by late 2000 and in August 2001 were 25 per cent less than in August 2000. Most major European airlines reported modest profits or losses in 2000 (although BA made a small operating profit in the financial year 1999-2000, its results were its worst since 1982), and US airline profits were well down. This year BA had seen sharp falls in North Atlantic and Far East traffic of 15-20 per cent in the months April-August 2001, only partly attributable to the foot and mouth outbreak.

  6.  This time round the initial impact appears to be significantly larger than during the Gulf War. IATA have forecast that worldwide passenger numbers between September and December will be 15-20 per cent down, with a 6-7 per cent drop in traffic in 2001 over 2,000. One source (Airline Strategy) is projecting falls in intra-European traffic and European international traffic of 15 per cent and 30 per cent respectively over the next year, with a recovery starting in late 2002 and strengthening in 2003. Even once traffic recovers to its previous long-term trend, the experience of the Gulf War suggests that it will take several years more before airlines regain satisfactory profitability.

  7.  The impact of 11 September will not be uniform across all UK carriers. Those airlines with long haul operations, particularly those with transatlantic services, will be most exposed while the indications are that airlines who operate domestic and European services will be better placed. This is illustrated by the most recent figures prepared by the Association of European Airlines (AEA), which show that in the five weeks since mid-September, North Atlantic traffic was down by about a third, Far East traffic by about 15 per cent, and intra-European traffic by about 10 per cent. There is also evidence that premium class traffic was more significantly affected than economy class in the immediate aftermath, with the volume of business-related travel sharply down on certain routes since 11 September.

  8.  By contrast, the UK's no-frills carriers such as easyJet and Go (and the Irish carrier Ryanair) report great confidence about their prospects, indicating that for their services any dip in demand following 11 September was short lived and that the market for their services is proving responsive to price cutting. All have exhibited strong growth in passengers and profits in recent years, and, without an exposure to transatlantic services, have not suffered significantly from the events of 11 September and see additional opportunities from reductions in the size of "full-fare" carriers. For example, easyJet reported that its passengers were just 3 per cent down in September compared with August, that its full year profits would be in line with expectations, and that bookings were back to normal in October. Go recently reported six month profits up by over 50 per cent on the previous year's corresponding figures, with passengers up by over 40 per cent, and plans to increase its fleet by at least seven aircraft in the next 12 months.

  9.  BA have reported that in the week of 11 September when US airspace was closed, operating results were adversely affected by some £40 million. Passenger numbers were down by 11.6 per cent in September and by 14.6 per cent in October 2001 compared with the same months in 2000. The overall monthly passenger load factor was 7.3 points down in September and 8.1 points down in October. BA's statistics confirm that the largest reductions in passengers were across the Atlantic which were 30 per cent down compared with 2000. Domestic and European passengers were less than 10 per cent down. Forward bookings for October and November indicate that traffic will be down by 25-30 per cent compared with last year, with capacity down by at least 15 per cent. On 6 November BA announced that it had raised a new £700 million loan facility in the commercial markets. This, together with other resources, would ensure it has the necessary liquidity to ride out the current adverse trading conditions.

  10.  With revenues significantly reduced, a number of airlines have cut schedules and cut their workforces. Soon after 11 September BA announced reductions in capacity for the coming winter season of around 9 per cent, additional to earlier plans of cuts of around 8 per cent. The three largest UK scheduled carriers (BA, Virgin Atlantic and bmi British Midland) have between them announced job losses of around 9,000 since 11 September. Gill Airways, a regional operator flying out of Newcastle Airport, has gone out of business with the loss of 240 jobs, and there have also been substantial job losses in the tour operator/charter airline sector. In the US the major carriers are reported to have shed some 80,000 jobs since the terrorist attacks.

  11.  Airlines in Europe are facing similar problems, and taking similar steps in terms of cutting jobs and services. Particularly noteworthy have been the recent collapses of Swissair and Sabena. In both cases the effects of the terrorist attacks were the final blow, striking at airlines which were already severely weakened pre-11 September, Swissair by its unsuccessful policy of purchasing minority shareholdings in a diverse range of European airlines, and Sabena by cumulative losses over many years (and latterly the withdrawal of Swissair funding).

  12.  Airports are also suffering from a combination of lower revenues and the cost of additional security measures (even though, in some cases, fewer flights can mean a reduction in airport security costs). Airlines typically pay charges to the airport per passenger and per aircraft. Income from passenger charges is already down with the fall in traffic, and income from aircraft charges is expected to decline as airlines respond to lower passenger numbers by reducing capacity. Airports will also face reductions in their commercial revenues, such as retailing and car parking. Higher costs will be incurred from the additional security requirements, and, in some cases, increased costs of policing. BAA has stated that passenger traffic levels at its airports, which account for some two thirds of all passenger numbers at UK airports, were 12 per cent down in October compared to the previous year. Within this, passengers in October decreased at Heathrow (¸20 per cent) and Gatwick (¸13 per cent) but rose at Stansted (7 per cent), Edinburgh (13 per cent) and Glasgow (7 per cent), reflecting the growth of the scheduled low-cost carriers. However, it is clear that the UK airport sector in general is not in such commercial difficulty as are some parts of the airline sector.

  13.  NATS charges airlines for the provision of air traffic services by volume of traffic. Its revenues are consequently at risk following the downturn in demand for air travel, and the company is in the process of reviewing its financial position. It is working on the production of a business plan for submission to DTLR, as it is required to do under the PPP deal.

  14.  In the course of this review NATS has examined the phasing of its capital investment plan. As a result, the Government has agreed to a proposal from NATS to delay construction of the New Scottish Centre at Prestwick, which was due to open by 2007-08. Preparatory work on the building and system design will, however, continue, in order to ensure that delay to the opening of the Centre is kept to a minimum. It is not possible to be precise about the revised timing, because future traffic levels are still not clear. The capacity of the existing Scottish Centre will be sufficient to meet traffic demand in the meantime.

  15.  In addition to the direct job losses announced by UK airlines, there are likely to be further effects on employment in aviation-related activities. A study by Oxford Economic Forecasting ("The Contribution of the Aviation Industry to the UK Economy"), published in November 1999, calculated that taking into account of various other routes by which the aviation industry helps to support jobs in the UK economy, the number of jobs supported was around three times the size of those directly employed in the industry (550,000 jobs in the UK compared with 180,000 direct employees). This does not include the 100,000 people employed in the UK aerospace industry.

  16.  The scale of any wider economic impacts, for example on the UK tourism industry, will depend on the duration of the fall in traffic, and in particular whether it extends into summer of 2002. It is evident that many travel agents and tour operators are facing difficult trading conditions as some holidaymakers hesitate to make bookings. The Government is conscious that this could increase calls on the Air Travel Trust Fund (ATTF), the back-up mechanism which stands behind the Air Transport Organisers Licence (ATOL) arrangements in the event of an ATOL holder defaulting and the ATOL bond being insufficient to refund and/or repatriate customers. Since the Fund is currently financed by a commercial overdraft backed by Government guarantee, any such calls would impact on public finances.

  17.  The implications of 11 September for regional services, ie services to London from regional airports, are as yet unclear. Already, before 11 September, there were concerns that UK airlines would withdraw or reduce domestic services so as to use the slots so released for more profitable long-haul services. Such concerns have no doubt been increased by BA's withdrawal of its Belfast International-Heathrow service from 27 October. However, bmi British Midland saw this as a commercial opportunity and reinstated four daily services on this route, so that there are still 31 services today from Belfast to London. One consequence of 11 September events is that the pressure on slots at Gatwick at least may be somewhat reduced for a time.

  18.  As slot allocation is not generally route specific, airlines are free to use the allocated slots as they wish. It is not Government policy to get involved with the commercial decisions of airlines. However, we are reviewing our policy on regional services and considering a number of policy options which might help provide greater assurance of the continuation of services from regional airports to London.

Security

  19.  In the UK, DTLR is responsible for regulating the transport industries in respect of security measures. DTLR has developed and administers the UK National Aviation Security Programme (NASP), which is a comprehensive set of measures designed to safeguard civil aviation in the UK, and UK airlines overseas, against acts of unlawful interference such as hijacking or sabotage. The Programme is threat-based, with measures stepped for Low, Moderate, Significant and High threat levels. The Programme is kept under constant review and the measures it contains are adjusted to take account of changes in the perceived threat to civil aviation in the UK and overseas. The attacks on 11 September clearly have enormous implications for the NASP, both in terms of the outcome of the hi-jack, and in terms of how the hi-jack was carried out—with minimal reliance on weapons.

  20.  Since 11 September, the threat to security at all UK airports and on all flights operating from the UK has been treated as "Significant". A package of Heightened Security Measures has been issued by legal direction to aerodrome managers, airlines, approved caterers and regulated air cargo agents. In particular, much stricter controls have been agreed with the US Federal Aviation Administration (FAA) and imposed on flights to the US and Canada.

  21.  UK baseline measures (for "Low" and "Moderate" threat) remain in place. The key requirement is for the aerodrome manager to provide a secure restricted zone for civil aviation operations. Access to this zone must be controlled by a pass system and all passengers and their hand baggage, staff and vehicles must be screened and/or be searched upon entry. All international cargo is subject clearance, and all hold baggage must be screened on international flights.

  22.  The following Heightened Security Measure supplement the baseline measures:

    —  random searching of hold baggage for flights to the USA or Canada prior to, or immediately after, check-in;

    —  more searching by hand of passengers and their cabin baggage upon entry to the RZ, plus a regime of secondary searching at the departure gate for flights to the US and Canada and in terminals where arriving and departing passengers are not physically segregated;

    —  an expanded list of articles which, as potential weapons, cannot be taken into the RZ or the aircraft cabin;

    —  screening or searching of goods for retail upon entry to the RZ;

    —  guards within the RZ for aircraft departing to the USA or Canada;

    —  additional mobile patrols within the RZ; and

    —  tighter rules on the transportation of cargo, especially when going to the US and Canada.

  23.  For the longer term, the Government has established two working groups under DTLR chairmanship, including industry representation, to consider additional security measures that could be applied to aviation in recognition of the new type of threat. Proposals from the groups include both pre-flight and in-flight measures. Pre-flight measures are designed to prevent an attacker getting on board an aircraft in the first place. In-flight measures are designed to offer the best protection should a hijacker succeed in boarding an aircraft, so that crew are given the support they need. All these possible measures will need to be assessed in terms of their cost, safety implication and potential benefits. Some of the measures, even if agreed, would take time to implement. Others could be implemented fairly quickly.

  24.  New measures being assessed for pre-flight security are:

    —  Systems to check passenger details against police and immigration suspects lists, and the validity of passports;

    —  Acceleration of work on passenger imaging including metal and explosive detection technology; and

    —  Extended background checks on airport employees.

  25.  The measures being assessed for in-flight security in consultation with the Safety Regulation Group (SRG) of the CAA are:

    —  Revised flight crew security training;

    —  Controlled access to the cockpit. A 12-point requirement, balancing safety and security needs, was issued by the CAA to UK airlines on 18 September, supplemented on 18 October by guidance on procedures for strengthening cockpit doors;

    —  Sky Marshals, or training to develop a core capability on high-risk flights;

    —  Extension of datalink technology to warn of flight deviations;

    —  A more robust alarm warning system by means of transponder;

    —  Remote or automated control and recovery of hijacked aircraft;

    —  Enhanced security regime for flying schools and general aviation; and

    —  Proposals for "less than lethal" weapons for flight crew.

  26.  The Emergency Anti-Terrorism Bill includes clauses on aviation security covering:

    —  Arrest without warrant for certain aviation security-related offences;

    —  Increase in maximum penalty for trespassing on an aerodrome;

    —  Powers to remove intruders from RZs or from aircraft;

    —  Approved lists of providers of aviation security services;

    —  Powers to detain aircraft when security may have been compromised;

    —  Powers to combat false air cargo agent documents.

  27.  On the wider international front, at recent meetings of the EU Transport Council British Ministers have supported proposals to make effective and uniform standards of aviation security legally enforceable. The common rules will be based on those of the European Civil Aviation Conference (ECAC), which are in turn being reviewed in the light of 11 September with input from DTLR officials. Multinational inspection teams will monitor the new system. The Commission and ECAC are also examining options for in-flight security enhancements. A similar review of international security measures backed by quality control systems is being pursued by the International Civil Aviation Organisation (ICAO). DTLR and CAA officials are closely involved in all this international work in order to ensure there is consistency between national and international standards; that the UK is able to apply security that is appropriate to the threat; and that UK industry is not disadvantaged compared to our competitors.

Government Intervention

  28.  The adverse commercial impact of the events of 11 September has prompted requests by airlines, both in the UK and elsewhere, for government support. In the EU any assistance to airlines must comply with the state aid rules in the Treaty, with responsibility for enforcing the rules resting with the Commission.

  29.  On 21 September the US Congress passed a substantial package of measures of Government assistance for US carriers (the Air Transportation Safety and System Stabilization Act, which became Public Law 107-42 on 22 September). Canada and Japan have also announced support for their airlines.

  30.  Insurance: shortly after 11 September the aviation insurance industry unilaterally gave airlines seven days' notice that it would restrict cover for war-related third party liability to $50 million. This compares to the $2 billion cover held by BA before 11 September. Since lack of adequate cover would invalidate aircraft leasing arrangements, and airlines' Boards might not wish to risk operating without adequate insurance, this raised the prospect of most if not all UK aircraft being grounded from 24 September.

  31.  In response to this clear example of market failure. HM Treasury, acting in collaboration with DTLR and after consulting the airline and insurance industries, announced on 21 September that it would provide an indemnity to fill the gap between the cover airlines had purchased before 11 September and the amount the insurance industry would now provide. The original scheme ran for 30 days, and has since been renewed, with modifications, for a further 30 days. Similar arrangements were made available for airports and aviation service providers (including NATS plc), which were likewise facing a withdrawal of cover. The scheme was notified to the European Commission, which approved the arrangements operating for the first 30 days as a permissible state aid.

  32.  The restriction of insurance cover applied world-wide, and other countries with a significant aviation industry have had to put guarantees in place. The UK was first to react to these developments, and our proposals were endorsed in the Conclusions of the ECOFIN Council on 21 September. Subsequently many countries, both inside and outside the EU, have based their guarantees on the UK scheme.

  33.  The Government, in common with its EU partners, has stressed that its involvement in the aviation insurance market is temporary and that it is looking to the insurance industry to resume full cover as soon as possible. The EU has set a deadline of 31 December 2001 for Government guarantees to end, but it remains to be seen whether sufficient cover will be available from market sources by that date to permit public authorities to disengage altogether.

  34.  Other aid: recognising that the events of 11 September would prompt call for further forms of government support from EU airlines, many of which were facing difficult economic conditions before that date, the Commission issued a Communication for discussion at the Transport Council on 16 October. In the Communication the Commission outlined how it intended to interpret the Treaty rules in the present circumstances. It listed a limited range of support measures (commonly referred to as the "de Palacio package") which it would regard as compatible with Article 87(2)(b) of the Treaty, which refers to aid "to make good the damage caused by. . . exceptional occurrences".

  35.  In addition to the insurance guarantees described in paragraphs 30 to 33 above, the Commission stated it would look favourably upon:

    (a)  measures to compensate airlines for losses directly attributable to the four day closure of American airspace; and

    (b)  contributions by public authorities to the costs of enhanced security measures following 11 September.

  36.  At the Transport Council on 16 October a majority of Member States endorsed the Commission's position, though a minority wanted to provide more substantial support for their airlines. In the Conclusions of the meeting the reference to "closure of American airspace" was widened to "closure of certain parts of airspace". Any aid provided by a Member State would remain subject to approval by the Commission.

  37.  UK airlines (though not the "no frills" operators) have now formally requested the Government to provide assistance in line with the "de Palacio package". DTLR and HMT Ministers are currently considering the Government's response to these requests. The requirement to make efficient use of public money has to be considered against the wish not to put UK airlines at a competitive disadvantage with their European counterparts. On security costs the Government is conscious that BA and many European carriers have already imposed ticket surcharges to reflect increased insurance and security costs, and of the long-standing principle that users should pay the full costs of airline services.

  38.  Use-It-Or-Lose-It Rules: as an additional measure of support for airlines, the Commission has indicated it is prepared to consider flexibility in applying the "use-it-or-lose-it" rules on slot allocation for the period up to the end of the Winter 2001-02 season. If agreed this would mean that a carrier which rationalises its schedules to match the decline in demand would do so without losing its historic slot rights for the winter 2002-03 season. The Government has supported flexibility (though for no longer than the end of the Winter 2001-02 season). Whilst in normal times we would welcome an increased turnover of slots at congested airports and the greater opportunities this would offer to airlines wishing to compete with incumbents, the Government recognises that these are exceptional times. We do not wish carriers to be incentivised to operate empty capacity in order to retain their slots, thereby adding to the general economic difficulties.

  39.  US Government assistance: the US Government has made available assistance to its airlines estimated to be worth some $18 billion, comprising $5 billion in direct cash compensation for the four day closure of US airspace and consequent loss of revenue up till 31 December (as of 7 November just over $2.4 billion of that had been paid out); the offer of up to $10 billion of loan guarantees, albeit with tough conditions (only one airline has so far applied); and $3 billion of assistance for enhanced safety and security. The US Government argues that the cash paid out so far is compensation, not subsidy, since the amount of money individual airlines have received is far less than their documented losses during the four day period.

  40.  Nevertheless, this sizeable package arouses concerns that US airlines will have an unfair competitive advantage on transatlantic routes compared to their EU competitors. This could have a particularly damaging effect on certain UK carriers, in particular BA and Virgin Atlantic, which depend heavily on North Atlantic traffic. To meet these concerns the Transport Council agreed a proposal that the Commission should seek to draw up a "Code of Conduct" with the United states with the objective of preventing unfair competition. The Commissioner has written to the US Transportation Secretary about a Code and senior Commission officials have made representations in Washington.

  41.  The Government recognises that in the current depressed state of the aviation market it may be appropriate for airlines to offer innovative fares to encourage market recovery. However, there is a danger that the financial assistance provided by the US Government might enable US airlines to cut UK/US fares by a far greater margin than they would otherwise be able to do. The Government is therefore monitoring tariffs filed by US airlines, and, if it appears that such tariffs contravene those provisions of the UK/US air services agreement ("Bermuda II") which are designed to ensure fair competition, the Government will use the consultation mechanisms available under the agreement to seek redress from the US authorities.

  42.  Airline Rationalisation: the UK Government supports the Commission in its firm line on state aid to airlines. The financial challenges facing many EU carriers pre-dated 11 September, and it would be highly regrettable if further injections of state aid, ostensibly justified by the events of 11 September, were to impede the process of reorganisation and rationalisation in the European industry which most commentators believe desirable. Compared to the US the EU airline industry is fragmented, with 16 EEA airlines currently providing scheduled services in the EEA/US market compared to only seven US carriers. The Government fully endorses the view expressed by the Commission in a paper to the April 2001 Transport Council that:

    "Europe has a number of medium-sized carriers that need new, external sources of investment and expertise, as well as greater economies of scale. . . whilst Europe also has a number of large, successful carriers which need to grow bigger and which, moreover, have the financial and management resources to do so. Consolidation within Europe is both desirable and necessary".

Ownership and Control Rules

  43.  One impediment to consolidation and rationalisation of EU airlines is the operation in the airline sector of ownership and control restrictions, which are part of the traditional regulatory landscape of international aviation. Stemming originally from concerns about national defence and security, bolstered by considerations of national prestige and (more legitimately) a wish to maintain safety oversight, these restrictions have had the practical effect of requiring airlines exercising traffic rights negotiated by a particular country to be majority owned effectively controlled by nationals of that country. In addition to removing or significantly reducing the incentives to efficiency which can flow from the potential threat of takeover, such restrictions inhibit airlines taking advantage of access to the global capital market and the widest possible pool of management expertise. In response to these restrictions airlines have been forced to form alliances as a second-best alternative to cross-border mergers or acquisitions.

  44.  Extra-EU Consolidation: in the EU the creation of the aviation single market dismantled national ownership and control restrictions for services within the Community, creating the concept of a Community carrier. But Community legislation replicated national ownership and control restrictions on a regional scale, with Article 4(2) of EC Regulation 2407/92 requiring that:

    ". . . (an undertaking granted an operating licence by a Member State) shall be owned and continue to be owned directly or through majority ownership by Member States and/or nationals of Member States. It shall at all times be effectively controlled by such states or nationals".

  45.  The Government believes that EU airlines should eventually be free to merge with or acquire non-EU airlines as happens in other industries, consistent with competition rules applied in other sectors. However, this would require an amendment to Regulation 2407/92, which could only be agreed on a proposal from the Commission and with the support of a qualified majority in the Council of Ministers. Moreover, some of the EU's main aviation partners, including the US, themselves maintain illiberal rules on ownership and control of their own airlines, and the Community needs to maintain negotiating leverage if it is to promote change world-wide. The Government therefore recognises that the process of normalisation towards a regulatory environment without nationality restrictions on ownership (subject of course to safety and security safeguards) will take time, and may have to be pursued on a reciprocal basis.

  46.  Intra-EU Consolidation: traditional ownership and control arrangements also impede intra-EU airline consolidation. Most bilateral air service agreements include a clause whereby each party reserves the right to withhold, revoke or impose conditions on an operating licence issued to a designated airline of the other party that is not substantially owned and effectively controlled by the designating state or its nationals. Whilst it is possible in most cases for a third country to take a policy decision to accept airlines designated by bilateral partners which are not substantially owned and effectively controlled by the designating state or its nationals, and there are several examples of where this has happened, there is no obligation to do so, and a third country may choose for its own reasons to create difficulties, or to try to extract a commercial advantage for its own airlines. Where the continuing operation of bilateral services might be put at risk there is clearly a potential obstacle to airline consolidation.

  47.  The Government accepts that there must be a link between the designating country and the airline designated, in order to prevent the emergence of "flag of convenience" airlines, and to maintain adequate oversight of security and safety. In negotiating air service agreements the UK attempts to persuade its bilateral partners that a test based on "principal place of business" is preferable to traditional ownership and control criteria. Where ownership and control criteria remain, the UK has been flexible in not revoking traffic rights in response to changes in ownership in third party airlines.

  48.  Restructuring of the airline industry within Europe would be facilitated if more countries were prepared to operate on a "principal place of business" criterion, or failing that to interpret ownership and control clauses in bilateral agreements more flexibly. The Government has recently submitted papers on this issue to both the Triennial Assembly of ICAO and to the October 2001 EU Transport Council and will continue to press the point as opportunities arise.

Department for Transport, Local Government and the Regions

November 2001

Memorandum by The Coalition of Aviation Ground Handling Service Providers (AT 26)

  We refer to the short inquiry which the Transport Sub-Committee is undertaking into the immediate implications of the current situation on the air transport industry. In particular the implications of the terrorist attacks of 11 September 2001, and the responses to those events by the industry, regulators and governments.

  In this regard the four signatories are submitting this memorandum to the Sub-Committee for its consideration.

1.  INTRODUCTION

  The aviation ground handling sector is comprised of companies that provide critical support to the UK's civil air transportation system, including ground handling of aircraft, aircraft fuelling, equipment maintenance, cargo handling, on-airport ground transportation, aircraft cleaning, aircraft de-icing, fixed base operations, and other services for aircraft operators and airports.

  In this regard the signatories to this memorandum, together with other ground handlers as detailed in Appendix 1, have formed themselves into a coalition to address the urgent and threatening situation facing aviation service providers in the United Kingdom and elsewhere resulting from the abrupt cancellation of their insurance protection for terrorism and war risk.

  The members of this coalition serve domestic and foreign airlines, general aviation and airport authorities at all major airports throughout the United Kingdom and in some 40 countries world-wide. Each had its aviation liability insurance cover for terrorism and war risk cancelled, usually on seven days notice, promptly following the events of 11 September. In the weeks since, it has been impossible to obtain adequate replacement coverage. Relatively small amounts of coverage—$50 million for some firms and $150 million for others—have become available at exorbitant premiums, in some cases in excess of 100 per cent higher than the entire cost of their aviation liability insurance held previously, of which terrorism risk was just one part.

  This situation, and the way it has been addressed by governments and regulators, has been inconsistent. In addition to the problems being encountered as a result of the cost and availability of war risk and terrorism insurance, competition problems are now also becoming apparent. This is as a result of the inequitable application of governmental indemnity programmes. Both issues threaten the stability and strength of the independent handling sector, and accordingly need to be addressed.

2.  THE ROLE OF THE GROUND HANDLING SECTOR

  The ground handling industry makes civil aviation in the UK, and globally, possible by providing important services at airports to airlines, business aviation, and generally aviation. A modern airline operation is an extraordinarily complex undertaking. Passengers, baggage, air cargo and the aircraft are dependent on a host of different products and services provided at commercial service airports. A passenger will experience or observe may of these services firsthand on a typical flight. Baggage checked with a ticket agent or skycap is documented, sorted, combined, and transported to the waiting aircraft. Cargo and mail, too, is processed at the airport to be carried on airline flights. Passengers continue through a screening checkpoint and may be transported by wheelchair or cart to the gate. While waiting to board, they may see a flurry of activity in and around the aircraft, which may operate several different flights each day. Aircraft cleaners and lavatory servicers prepare the cabin for new passengers, catering crews replenish the aircraft galleys with food and beverages, carts arrive with baggage and cargo to be loaded into the aircraft, fuellers fill the aircraft from tank trucks or hydrants, and line mechanics may be called in to perform minor repairs or maintenance. Once loaded, the aircraft will be towed out of the gate and may need to be de-iced.

  Most of the people involved in these functions are not airline or airport employees—they work for aviation service providers. At many airports outwith their home bases no one airline usually has a sufficient presence to justify using its own employees and facilities for all of these different activities. Even the largest airlines may have only a few flights a day at a particular airport, and it makes economic sense to contract almost all necessary services from an aviation service provider. Even airports contract out some of their own needs, such as ground transportation and fuelling, to aviation service providers. Contract services are generally the only way for smaller airlines to operate.

  Aviation service providers also are essential to the tens of thousands of small non-airline airplanes and helicopters that operate in the UK and overseas. Such non-airline aircraft carry more and more passengers and cargo each year, and all of these aircraft—whether operated by an executive charter fleet, a professional courier service, a corporate aviation fleet, or an "air taxi", just to name a few—rely on aviation service providers. Those same providers also serve aircraft used not for transportation, but for activities like medical evaluation, aerial photography, surveying, newsgathering, sightseeing and traffic surveillance.

  For these non-airline aircraft, aviation service providers resemble the network of service stations, repair centres, and rest areas that serve road traffic. One or more "fixed base operators" or FBOs, stands ready at almost every airport in the UK to refuel arriving aircraft, offer or arrange for aircraft maintenance and repair, and assist pilots and passengers. The smallest FBOs may be "family" operations offering no more than a fuel pump, snacks, a telephone and information on the airport and community. The largest FBOs offer different types of fuel and other products, maintenance and repair services, pilot lounges with weather and flight briefing facilities, food, ground transportation and car rentals, and lounge and meeting facilities for passengers.

3.  IMPACT OF LOSS OF AVIATION INSURANCE COVER

  As described above, commercial aviation insurers revoked War and Terrorism Risk coverage previously written for aviation service providers (policy endorsement AVN52C), as a result of the tragic events of 11 September 2001. The prompt recognition and response of the UK Government to this crisis, through the establishment of a Government sponsored insurance programme which extended beyond airlines to encompass the wider aviation services sector. This was an initiative widely welcomed amongst ground handlers and has enabled our sector to maintain full service to our airline customers in the UK.

  However, our worldwide operations depend on our being able adequately to manage risk and fulfil our licence and contractual obligations in all countries in which we operate.

  In addition to the UK some countries, most notably in Canada, France, Netherlands, Belgium, Ireland and Hong Kong also recognized the exposure and introduced government backed insurance or indemnity programmes which included aviation service providers. It had been our hope that other governments, particularly those of the EU and US, would also recognize the interdependence of world air transport operations and establish similar indemnity programmes. Unfortunately, this has not proved to be the case with the majority continuing to indemnify only their domestic airlines, and some taking no steps at all.

  We had also hoped that, within a short time, our ability to source full commercial cover would return, in the way it has for airlines. At the time of writing, this has not proved to be the case, with only limited commercial cover currently available for service providers, being a maximum of $50 million under existing policies, and a further $100 million under a secondary insurance programme. This cover is however only provided at significant additional premium. Significant exclusions in most cases have also been introduced for security screening functions. This is a particular issue for the UK air cargo sector where a regulatory obligation is imposed on UK cargo handlers to perform this function.

  Ground handling functions are critical to the efficient functioning of the civil air transportation system. To ensure minimum disruption to the global air transport network (including disruption to UK carriers' operations overseas), the majority of ground handlers have maintained uninterrupted service provision to airlines. Nevertheless, our industry has significant and growing concerns as to the degree to which we are currently under-insured, particularly in view of the significant risks now existing within the aviation industry.


4.  PRINCIPAL CONCERNS

  Following from the above our principal concerns can be summarized as follows:

United Kingdom

  The restoration of adequate commercial insurance to the levels available prior to 11 September 2001 is unlikely to be achieved by the aviation sector in the short term. The UK Government-backed Troika insurance scheme, introduced on 24 September 2001, has enabled service providers operating at UK airports to fill the gap between the level of commercial cover currently available and that enjoyed prior to 11 September. This was a move widely welcomed in the industry.

  The Government has however stated that the Troika scheme that currently operates on 30 day cycles, was only intended as a short-term solution and would be withdrawn in due course. We would like to emphasise that to do so until a satisfactory and long-term commercial solution is available, will leave the UK aviation service industry with inadequate War Risks cover.

International

  We need to ensure that other governments fully understand that the problems created by the cancellation of War Risk cover extend beyond the airlines into the wider aviation services sector. It is essential in our view, that, if operations are to be fully maintained, suitable state solutions are available within each country, along the lines of the UK model, until such time as the commercial market can do the job.

  In this regard we have:

    (i)  Written to EU Transport ministers urging them to establish insurance schemes on a similar basis to the UK model.

    (ii)  Engaged in consultation with the US Department of Transport to ensure appropriate and adequate coverage is provided in this key aviation market.

    (iii)  Engaged in a dialogue with the Foreign and Commonwealth Office to ensure appropriate representations are made to other governments in countries where UK aviation service providers operate.

  No satisfactory resolution has however been achieved to date on any of the issues we have identified.

Commercial Insurance

  Our ability to achieve and maintain adequate commercial insurance on a global basis is essential to the restoration and maintenance of effective air services. As an industry, we are engaged in active dialogue, both with the airlines and the insurance markets, to ensure our needs are fully recognized. We believe our effectiveness and the chance of resolution will be enhanced through the active involvement of government:

 

    (i)  Emphasizing to the commercial insurance sector the consequences and difficulties of not fully covering the wider air transport industry.

    (ii)  Considering whether it is in the public interest for government to actively assist in developing and maintaining a longer-term insurance programme for war and terrorism risk in view of the continuing reluctance of the commercial market to (fully) meet the threat.

  In this regard we would add that the issue of War Risk coverage has also now emerged as a more general issue within the insurance market, with terrorism exclusions beginning to appear in non-aviation policies.

Competition

  In many airports around the world, including the UK and EU, the independent ground handling sector faces significant competition from ground handling organizations that are in the ownership of airlines.

  There are some signs of market distortions appearing as a result of government responses. Airlines, some of which offer ground handling and other services in competition to independent handling companies have had their government scheme insurance premiums waived or set at a lower rate. The commercial market is also providing a greater amount of cover to airlines. Ground handling operations of airlines are protected by their parentage and in particular, the support of governments.

  A situation has accordingly been created where independent handlers such as Menzies, BBA, Servisair and Aviance have been placed at significant competitive disadvantage. In the countries of the EU where this has occurred, we believe this to be a breach of competition rules and have made representations to the EU Transport Commissioner to highlight this issue.

  This is a significant ongoing issue for the independent handling sector and is one which we intend to pursue vigorously to protect the interests of our shareholders.

Security

  The UK air cargo sector operates under a security regime regulated by the Department of Transport, Local Government and the Regions. This regime, which is amongst the most rigorous in the world, imposes a series of security requirements upon cargo handlers operating at the UK's airports. These security requirements are not mirrored elsewhere in the EU, although we understand that Ireland are looking to introduce a similar regime. Whilst we fully support the UK's security requirements, the operation of this regime imposes a significant cost, both financially and in time taken to process cargo shipments, which competitor airports, in particular those of Charles de Gaulle, Frankfurt and Schiphol do not have. The effect of this was demonstrated in the immediate aftermath of 11 September where substantial volumes of air cargo shipments were lost by Heathrow, Gatwick, Stansted and Manchester airports to those competitor airports, with the cargo then being trucked to/from the UK.

  In the longer terms we strongly believe that unless a level playing field is created throughout the EU, the UK will suffer a permanent loss of competitiveness in this area. This will threaten the long-term health and growth of the UK air cargo sector.

5.  SUMMARY AND FURTHER INFORMATION

  The independent ground handling industry is a significant, important and growing part of the aviation community, and a major employer within it. It is an area of significant economic interest to the UK with plc's such as Menzies, BBA, Servisair and Aviance amongst the world's market leaders. The issue of insurance and the competition and security issues it raises, represent key factors which need addressing as a matter of urgency if the long-term health of this sector is not to be put at risk.

Mr P S Smith,

Chief Executive—Menzies Aviation Group Plc

Mr A Wood,

Group Chief Financial Officer—BBA Group Plc

Mr J Willis,

Managing Director—Servisair plc

Mr P O'Boyle,

Managing Director—Aviance UK

November 2001

APPENDIX 1

COALITION OF AVIATION GROUND HANDLING SERVICE PROVIDERS

Company Principal office Principal activitiesNumber of
countries
served
Number of
employees
Menzies Aviation
Group plc
United Kingdom Passenger, ramp and cargo ground handling 259,500
Servisair plcUnited Kingdom Passenger, ramp and cargo ground handling 1510,500
BBA Group plcUnited Kingdom Business aviation and fuelling services 711,000
Aviance UK (a subsidiary of the Go-Ahead
Group plc)
United KingdomPassenger, ramp and cargo ground handling 44,500
AviaPartner NVBelgium Passenger, ramp and cargo ground handling7 6,000
Penauille Polyservices SA (parent company to Servisair and GlobeGround) FrancePassenger, ramp and cargo ground handling 11,500
Globeground GmbHGermany Passenger, ramp and cargo ground handling32 18,000




 
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