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


Memorandum by bmi british midland (AT 27)

THE AIR TRANSPORT INDUSTRY

INTRODUCTION

  British Midland Airways Limited, trading as bmi british midland ("bmi"), is an airline operator whose activities include the provision of scheduled passenger and cargo services, engineering services, charter and aircraft leasing. The airline is a wholly-owned subsidiary of British Midland Plc.

  The principal business of bmi is the operation of commercial scheduled air services on UK domestic and intra-European routes. bmi is the UK's second largest scheduled service airline with a fleet of 62 aircraft, and currently operates to a total of 29 destinations in Europe, of which 19 are served from the airline's primary base at London Heathrow. bmi operates other significant bases at Manchester and East Midlands airport. In addition, bmi also operates daily services from Manchester to both Chicago and Washington DC and is the largest British operator of transatlantic scheduled services from UK regional airports.

  Following the events on and since 11 September, 2001, 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 UK's air transport industry.

IMPACT

  Since the tragic events of 11 September, bmi's passenger traffic levels have fallen severely. There has been a reduction in business class travel, a migration by business passengers to the economy cabin and lower levels of interline and transfer traffic throughout bmi's network.

  The decline in passenger numbers, and most importantly, in yield, has meant a significant reduction in bmi's revenue for September and October. Overall, the total number of passengers carried in September 2001, was only 4.5 per cent lower than the previous year, but we expect the full impact of changing market conditions to become apparent in the final quarter of this year. Consequently, we have implemented a 20 per cent reduction in seat capacity for the Winter 2001-02 traffic season. Also, up to eight aircraft, out of the fleet of 62 have been withdrawn from service.

  We intend to operate lower capacity aircraft wherever possible and will increase frequencies or capacity only when strategic opportunities occur. The airline industry is in a volatile phase at the moment and it is impossible to predict if our prospects will deteriorate or conversely be improved by the actions of other carriers. As always, we shall be highly flexible in our response.

  The withdrawal of the aircraft from the fleet regrettably incurred a reduction in the work force throughout the entire infrastructure of the business. Overall, 600 jobs were lost across the company's entire network, from a workforce of 5,500, representing an 11 per cent cutback.

THE ROLE OF GOVERNMENT

  The issue of sustainability and long-term development of the UK aviation sector clearly requires governmental assistance. bmi welcomes the recent decision by the Secretary of State for Transport, Local Government and the Regions regarding Terminal 5 and believes such decisions will send a clear message of confidence in the continued success of UK aviation.

  In the short term, the most important issue for bmi, is the ability to react to market demands with certainty. The ability of airlines to make temporary adjustments to our schedules during the Winter 2001-02 traffic season is vital if we are to avoid the burden of excessive capacity. We can not however risk losing, forever, the limited slots we have built up at Heathrow over the last 20 years. We are extremely concerned that whilst UK airlines risk uncertainty in regard to the actions of the UK airport co-ordinators, some of our European competitors still enjoy a more "understanding" relationship with their own national authorities. There must not be a variety of interpretations on the relaxation of this rule across the Community. A clear and unambiguous suspension of the "use it or lose it" rules for all airlines this winter season is an absolute necessity.

INSURANCE

  The current failure of the aviation insurance market came close to halting the airline industry at the end of September. We welcomed the European Commission's decision to allow Member States to underwrite the gap in insurance cover, which allowed us to maintain our services and we welcome the European Commission's recent decision to extent the period of cover until the end of January 2002. 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.

  It should be born in mind that current estimates for the damage to the World Trade Center site range from $50 billion to $100 billion, figures which dwarf the standard $2 billion third party aviation liability insurance cover. Airlines are currently considering possible long-term alternatives to commercial insurance cover in this area and would urge the Government, in association with European Commission, to agree on a pan-European solution to this issue, rather than hoping that it is a short-term insurance market problem.

SUBSIDY/ASSISTANCE

  bmi believes that co-ordinated and appropriate efforts must be made to ensure that a level playing field is maintained within the global airline industry at this sensitive time. The Government needs to monitor and be aware of the range of financial aid packages that have already been handed out, or are being considered by other countries for their airlines.

  Airlines in the US have benefited from a $15 billion package of financial assistance, and the European Commission has permitted limited state financial support from governments for compensation to Community airlines covering the direct impact of the closure of US airspace.

  It is vital that the UK aviation industry is not disadvantaged through the activities of other Member States. Any payment of authorised compensation must be made on a pan-European basis and not left to the discretion of Member States.

  At the same time, bmi reaffirms its opposition to State Aid. Any financial assistance offered by governments should be specifically restricted to the operational disruption caused by the events of 11 September.

  If, however, European airlines are to be given the same short-term government financial support that their US counterparts have been offered, this must be accompanied by the relaxation of restrictive bilateral agreements that prevent market access to new carriers, and the removal of restrictions on ownership which prevent European consolidation and airline efficiency.

SECURITY

  bmi is keen to ensure that a co-ordinated approach to security is implemented throughout Europe, and that any additional measures are compatible and in harmony with heightened safety measures in the US.

  Owing to the operation consequences of enhanced security measures, bmi believes that the Government should provide short-term financial assistance to UK airlines to cover this additional cost burden. In the longer term however, security against terrorism is a public responsibility and it is the Government's duty to provide cost and operationally effective counter measures. bmi notes that the US Government is increasing subsidies to US airlines for additional security related costs in 2002 by an extra $500 million and $1.5 billion for US airports.

RULES OF OWNERSHIP

  bmi supports any moves by the Government to abolish all restrictions on ownership and control of UK airlines. The current rules within the EU strictly limit the participation of non-EU businesses and/or nationals, which in turn restricts the flow of inward and outward investment, and prevents the aviation industry from operating on a competitive global scale, as is the case in other industries.

  The ownership and control of EU carriers is regulated by the Licensing Regulation which requires any carrier that wishes to be licensed by an EU Member State to satisfy certain conditions. Therefore non-EU ownership and control of airlines can only be exercisable if EU legislation changes allowing non-EU nationals to acquire an EU carrier. It is unlikely that there will be a relaxation in the national requirement for ownership and control of EU carriers in the short term since this would require reciprocal agreements with the world's major countries, and particularly the US.

  In recent times, the Government has placed strong emphasis in bilateral negotiations on demanding that UK nationals have access to majority ownership and control of foreign carriers on a reciprocal rights basis, notably in recent UK-US negotiations. However, this has proved a stumbling block because the UK Government has no legal right to offer such rights to foreign carriers in the UK without the same rights being conferred to other EU Member States, which can only be sanctioned by the EU and with approval by all member states. As it stands, there is no EU mandate scheduled in the immediate future for this to take place.

  Therefore, bmi urges the Government to pressure the European Commission and all its Member States to set a mandate for removal of foreign ownership and control rules in air transportation, and to remove the issue as a negotiating tool in any future Air Services Agreement talks.

  Undoubtedly, the restriction on ownership and control has contributed to the growth of codesharing and alliances and prevented mergers taking place, but with the removal of such restrictions UK civil aviation will benefit from efficient organic growth, and reduce need for alternative indirect ways of obtaining market access. The market condition prompted by the recent events in the USA have served to focus attention on the national and international restrictions that constrain, in particular, the healthy development of the scheduled airline sector.

bmi british midland

19 November 2001

Memorandum by British Airways Plc (AT 28)

THE AIR TRANSPORT INDUSTRY

INTRODUCTION

  The Transport Sub-Committee wishes to consider the responses to the terrorist attacks of 11 September 2001 by airlines, regulators and governments, and has requested evidence on the economic and political implications of the downturn in passenger demand, security, the role of international subsidies and proposals for Government assistance, and the effect of ownership rules on the UK airline industry.

  This memorandum summarises the impact of the attacks and the subsequent fall in demand on British Airways' business. It outlines the airline's response to the crisis and the actions it believes the UK Government should take.

1.  IMPACT OF 11 SEPTEMBER ATTACKS

Background

  At the time of the terrorist attacks in the United States, the airline industry was experiencing the initial effects of a global economic downturn. British Airways had announced a series of measures in anticipation of this downturn, including the reduction of some 1,800 jobs and a number of route network changes.

Immediate impact

  The events of September 11 had an immediate effect on British Airways. These included:

    —  A four day shut down of US airspace, and subsequent disruption of schedules over several days as passengers, crew and aircraft were repatriated. This amounted to a £48 million revenue loss to British Airways over seven days, with operating revenue impacted by £40 million.

    —  The immediate introduction of additional security measures by DTLR including:

      —  a ban on sharp items in hand luggage and in the cabin;

      —  additional screening measures at airports (ie secondary searches);

      —  addition screening of cargo;

      —  the locking of cockpit doors and restriction of flight deck visits.

    —  Notification by insurers on 16 September of the world-wide withdrawal of third party cover, which threatened to ground all UK airlines on 24 September.

Medium to long-term impact

  For British Airways, the events of September 11 were reflected almost immediately in actual and projected levels of business:

    —  Actual flown traffic in September 2001, measured in revenue passenger kilometres (RPKs), fell by 22 per cent against the previous year. This comprised a 33.2 per cent decline in premium travel and a 20 per cent decline in non-premium travel.

    —  The load factor (percentage of seats filled) for the month was down 7.3 points on September 2000 to 69.2 per cent. Cargo (in cargo tonne kilometres) fell by 38 per cent.

    —  Actual October traffic figures in terms of RPKs fell 24.7 per cent, comprising a 36.2 per cent drop in the premium cabins and a 22.4 per cent fall in non-premium.

    —  The load factor fell 8.1 points on October 2000 to 63.1 per cent. Cargo tonne kilometres fell by 23.8 per cent.

    —  Forward bookings for November indicate a similar traffic decline to October. The US, Middle East and Japan are the worst affected markets.

  In general, the outlook for aviation globally is bleak:

    —  The International Air Transport Association (IATA) expects international scheduled capacity will, in aggregate, be cut by 15-20 per cent over the next three months.

    —  IATA has predicted a collective industry loss of US $10 billion (£7 billion) for 2001.

    —  The sudden introduction of new security measures will place a considerable additional financial burden on airlines.

    —  Insurance premiums have increased significantly. Airlines have been able to continue operating only through action by Government in the absence of appropriate cover being available on the insurance market.

  Analysis of the impact of the crisis has been based upon the experience of the Gulf War, after which demand for air travel returned to strong growth within a relatively short space of time. It is not clear when demand for air travel will return—in the short to medium term this will depend on the length and success of the "war on terrorism"; whether there are further terrorist attacks; and the extent and duration of the wider economic slowdown.

  After every previous economic, political or security shock, growth in demand has returned in the longer-term and it is expected that it will do so again. The CAA believes that "the long-term demand growth is likely to resume and then continue". (Summary and Preliminary Conclusions: Report into Heathrow, Gatwick, Stansted and Manchester Airports' Price Caps 2003-08, page 8.)

2.  BRITISH AIRWAYS' RESPONSE

  British Airways responded rapidly and, it believes, sensitively to the crisis in order to protect its long-term viability and the interests of shareholders, travellers and employees. This included measures to reduce capacity and curtail losses:

    —  The immediate grounding of 20 aircraft.

    —  Network changes including the reduction in the number of services to the US and Middle East; the suspension of eight European routes from London Gatwick; the suspension of services to Islamabad; withdrawal from the London Heathrow-Belfast route; and the accelerated transfer of certain routes from Gatwick to Heathrow.

    —  5,200 job losses (in addition to the 1,800 previously announced). These losses are measured as Full Time Equivalents and necessarily follow from the reduction in the flying programme. They will be achieved wherever possible through voluntary means such as part-time working or unpaid leave and the ending of over-time. British Airways has worked closely with trade unions throughout, and will continue to do so.

    —  Management pay cut: all levels of the management team have been requested to accept a cut in salary. Board members are taking a 50 per cent cut; the CEO and executive leadership team 15 per cent; senior managers 10 per cent; and middle managers five per cent. In addition, there will be no management bonuses payable for the year 2001-02. It is expected that these measures will save £11 million.

    —  British Airways has reached an agreement with the trade unions which represent 90 per cent of its operational and administrative staff in a cash-saving deal worth £15 million under which staff did not receive an extra week's pay in November.

    —  Commercial initiatives to encourage passengers to fly:

      —  "Kids fly free" offer—five million reduced European tickets were offered in October, including free tickets for children travelling with adults for travel until 31 March.

      —  British Airways Executive Club initiative—50,000 free business class tickets to kick-start the United Kingdom's business travel market.

      —  Daily Mail promotion—100,000 seats at very low prices available until 21 November.

    —  Increased security (see below).

    —  Introduction of security and insurance surcharge of £2.50 per one-way sector. British Airways follows more than 120 airlines around the world by introducing such a surcharge. The rate levied by British Airways is one of the lowest in Europe and does not fully cover increased costs.

    —  Re-launch of Concorde, giving a welcome boost of confidence in the industry.

3.  SECURITY

  Regulatory standards for aviation safety and security in the UK are already amongst the highest in the world. British Airways spends on average approximately £100 million a year on security. The airline has a long established programme that maintains a constant review of security threats, based on official advice and working in close contact with various Government departments. Four auditors are employed full-time to monitor adherence to operational standards world-wide.

  A complete review of ground and air security was initiated following 11 September. British Airways has not disclosed all aspects of its security programme for obvious reasons, but recognises the need to communicate certain aspects of this activity. Since 11 September a number of actions have been made public:

    —  Cockpit doors are now locked and will be reinforced with armour plating (costing £1 million). This will substantially strengthen the doors and prevent unauthorised access to the flight deck.

    —  Secondary searches were introduced for a proportion of passengers.

    —  Visits to the flight deck for commercial passengers have ceased.

    —  Flights were immediately re-routed to avoid flying through Afghan airspace.

    —  Plastic cutlery has replaced metal cutlery in all cabins on all flights.

  The decision to reinforce and lock cockpit doors was taken on the basis of the new risks identified. New flight crew procedures were issued which addressed the need for a "sterile flight deck" and which also dealt with important safety issues such as crew resource management and communication. The issues and concerns raised by the airline's flight crew were considered thoroughly and previous safety incidents were analysed against the new procedures before they were introduced.

  These measures constitute an interim step until new doors can be fitted which meet other specific safety requirements, the design of which must be agreed by April 2002.

  British Airways is considering the feasibility of requiring passengers to provide proof of identity on domestic UK flights. In the absence of national identity cards, the alternative is to check either passports or driving licences. However, this would disadvantage and discriminate against members of the travelling public who do not have such documents.

  The airline is also examining a number of other security measures including the introduction of closed circuit TV on board aircraft and new software capable of compiling a "passenger blacklist" accessible during the check-in process worldwide.

  No decision on any of these specific issues has yet been reached.

  In addition, British Airways is considering a range of measures that are under wider discussion in the UK and elsewhere, for example sky marshals and the introduction of tazar and stun guns. It has decided against implementation of some of these such as arming crew with guns or knives on the grounds that it could result in an unarmed hijacker gaining access to dangerous weapons.

4.  INSURANCE

  The continued absence of a viable aviation war insurance market has led to the current situation where the Government has stepped in as the insurer of last resort up to normal insurance limits. However, notwithstanding the withdrawal of war liability insurance, such insurance would have been unable to cover loss on the scale of the World Trade Centre. Even if the market does return in due course, it will never be able to offer sufficient cover to protect airlines against such incidents. Any cover that it does eventually supply will be limited and prohibitively expensive.

  Terrorism on this scale cannot be considered to be a commercial risk. The aviation industry cannot hope to handle liability on this scale. We have to look at methods of financial protection. A full indemnity from the European Union, backed by member states pro-rata would enable airlines to operate without fear of being held liable for unlimited damages arising from a terrorist attack. In return, airlines would pay a premium per departure into a central fund (the current UK Pool Re scheme is an example of how this might work).

  UK airlines are working together to investigate the possibility of forming a mutual fund. In time, this may provide a partial solution to the lack of insurance. An EU indemnity could then sit above such a fund to provide a comprehensive solution. In any event, such a mechanism will take time to develop. Meanwhile, UK airlines face a continued round of 30-day extensions to the current arrangement. This is unsatisfactory. British Airways would like the Government to agree to an extension of the current arrangements until 1 April 2002 to allow time and resources to be devoted to this.

5.  STATE AID

  These are exceptional times for the aviation industry. British Airways firmly believes normal market practices should prevail in the industry at this time. Old-fashioned state subsidy has no place in contemporary air transport, even in a crisis.

  Some European Union member states have indicated their interest in paying some form of state aid to carriers. The United States Government has provided US airlines with a substantial package of aid, which includes $5 billion in cash injections, $10 billion in loan guarantees and a further $3.5 billion for investment in airline and airport security.

  UK aviation has thrived in a competitive environment but Britain's ability to compete in the global marketplace will be damaged—and British airlines disadvantaged—if other governments are allowed to provide state aid for their national and regional carriers.

  British Airways supports the European Commission's firm stand against state aid. It is crucial for Britain's airlines that measures agreed at an EU level are applied in a fair and even-handed way and that UK airlines are not competitively disadvantaged against other European airlines.

6.  GOVERNMENT ASSISTANCE

  The European Transport Council has agreed guidelines under which assistance may be given to airlines directly affected by the events in the United States on 11 September. Within these guidelines, British Airways believes the Government should:

    —  Compensate UK carriers for the losses incurred by the closure of US airspace.

    —  Provide for the additional costs of security arising from 11 September.

    —  Maintain insurance cover as insurer of last resort to allow operations to continue as normal, until a more lasting solution can be found.

    —  Assist with airline cashflow by deferring payment of Air Passenger Duty—a tax unique to the UK.

    —  Make clear statements of support and encouragement for air travel.

    —  Ensure there is a "level playing field" so that UK airlines are not disadvantaged against foreign competitors.

    —  Continue to develop new infrastructure projects to cope with demand sustainably and allow for future growth. British Airways believes the timetable for consideration of and decisions on the future of aviation should remain as planned prior to September.

  British Airways welcomes the Government's restated commitment to the SERAS and RASCO studies and the publication of the White Paper next year. In addition, it welcomes the Government's positive decision on Heathrow Terminal 5.

7.  OWNERSHIP AND CONTROL

  Bilateral agreements between countries govern air services between those countries. These agreements usually allow only carriers which are substantially owned and controlled by nationals of the countries at each end of a route to fly on routes between those two countries, a feature permitted under the Chicago Convention of 1944 which enshrined the bilateral aviation system for international services.

  The concept of national ownership and control prevents cross-border consolidation, since an airline operating in country A but owned by nationals of country C would not normally be allowed to serve routes between countries A and B. The current ownership and control rules militate against normalisation of the airline industry since they thus discourage cross-border mergers.

  British Airways 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.

  We hope the Government will continue to negotiate with other countries to include reciprocal liberalisation of ownership and control rules—allowing designation of carriers with their principal place of business and AOC in the country of designation—in future bilateral air services agreements. Although this could still leave some ownership and control barriers in place (for example, the European common aviation area's prohibition on non-EEA nationals controlling EEA carriers), it would be a valuable step towards full liberalisation of ownership and control around the world.

  Alongside ownership and control rules, there remains insufficient flexibility in the use of aircraft across national boundaries. European Union regulations in this area are applied in the UK in such a way as to prohibit the long-term wet-leasing of foreign registered aircraft. In the current economic environment, a relaxation of the application of the rules could provide much needed flexibility for airlines. In other EU member states, the airline is given to understand the interpretation of the regulations is more liberal and open.

  British Airways believes that the Government should work within the EU for more flexible wet-leasing rules and should be more liberal in its interpretation of the current licensing regulation (2407/92).

8.  CONCLUSION

  The sharp decrease in revenue and accompanying increase in costs which resulted from the events of 11 September have placed immense pressure on the aviation industry, in particular on airlines exposed to the most affected markets in the US and Middle East. While British Airways remains confident of the long-term future of air travel, it is not complacent. The months ahead will be critical to the continued success of British Airways and other UK airlines and the future shape of the European aviation industry.

British Airways

20 November 2001

Memorandum by easyJet (AT 29)

THE FUTURE OF EUROPEAN AVIATION AFTER 11 SEPTEMBER 2001

INTRODUCTION

  The tragic events of Tuesday 11 September 2001 have undoubtedly had an impact on the outlook for commercial aviation in Europe. Forward bookings and revenues are down and consumer confidence in flying has been dented. Job losses, capacity cuts and even bankruptcies have become part of the fabric of the industry since 11 September.

  This paper outlines the extent of the impact on easyJet and, by extension, European aviation.

  The conclusions may surprise many people:

    —  not all of European aviation is suffering;

    —  the low-cost airline sector is thriving;

    —  those airlines which are suffering most are those which were in severe difficulties before 11 September and those with business models ill-equipped to cope with a downturn in the economy;

    —  Governments (national and European) must ignore the calls of those airlines which do not have the business models to adapt to changing market conditions and are trying to distort the market.

THE EASYJET EXPERIENCE

  The European short-haul point-to-point market in which easyJet operates suffered a significant shock due to the 11 September attacks. On the day following the attacks (Wednesday 12 September), sales dropped by approximately 26 per cent and some 12 per cent of passengers did not show-up for flights. In the following week, sales improved by approximately two to three percentage points per day; at this point, easyJet, like most airlines, was absent from the advertising market.

  Since easyJet was founded, in 1995, the airline has demonstrated that people will fly if the price is right. Therefore, on 21 September, while many airlines were announcing an increase in prices to compensate for falling demand, easyJet launched a seat sale to kick-start the market in the United Kingdom. Some 180,000 seats at reduced fares for travel between October 2001 and January 2002 were made available and similar sales were run in easyJet's two other main markets, the Netherlands and Switzerland, the following weekend.

  These sales had the effect of boosting volumes, at the expense of lower fares (Chart 1). The extra volumes ensured that easyJet would maintain high occupancy rates (load factors). In the month of September 2001, easyJet's load factor was 83.2 per cent, marginally ahead of that of September 2000; and in October it was 82.2 per cent, marginally behind October 2000.

  In total, the airline carried 1,396,400 passengers, in September and October combined, an increase of some 27 per cent on the same months in 2000. Profits for the financial year to end-September 2001 were 82 per cent up at £40.1 million. Passenger numbers for the full-year were 7.1 million, an increase of 27 per cent from the financial year to end-September 2000.

  The weeks since the promotions have seen easyJet's selling performance begin to return to normal levels, with average fare (Chart 2) and sales' volumes (normalised for year-on-year growth of about 25 per cent-Chart 3) down by a few percentage points on last year.

  Since the average easyJet passenger buys a seat five to six weeks in advance of the flight, the effects of the drop in sales in September were felt most on those flights which operated in October. From Chart 4, it can be seen that revenue growth for flights in October was affected by approximately £2.6 million. This equates to about 7.8 per cent of planned revenue for that month.

  Looking forward, easyJet expects any negative effect on revenue growth to reduce significantly in November (Chart 5) and December (Chart 6). Indeed, Chart 5 demonstrates that revenue for November has pushed ahead of plan as a result of the fare sales. December is currently performing to plan. This means that the effects of 11 September are expected to be "washed through" by the beginning of 2002 at the latest.

  easyJet has not seen this data for Europe's other major low-cost airlines, but imagines the impact has been broadly similar, given the statements to the London Stock Exchange by Ryanair and to the media by Go-Fly.

  This short-term fall in revenue is an inconvenience—nothing more at this stage. It certainly does not warrant the kind of assistance being requested by some of Europe's major airlines, which would cause a wholesale disruption to the European single aviation market.

So, why are other airlines complaining so much?

  Nobody can deny that European aviation was experiencing severe difficulties before 11 September. Bankruptcies, job losses, restructuring, capacity reductions etc were all inevitable—especially for those airlines heavily exposed to the North Atlantic. Tuesday 11 September merely brought forward the inevitable.

  Europe's biggest airlines run some very efficient and profitable long-haul networks. British Airways, for example, makes about 130 per cent of its annual profits on its North Atlantic routes. The corollary is that these same airlines often run very inefficient European networks, which may have been profitable in previous decades but do not now meet consumer demand in the age of low-cost airlines and high-speed trains. British Airways has lost £482 million on its European flights in the last two years. This is clearly an unsustainable position, as Rod Eddington, British Airways' Chief Executive has recognised.

  We accept that many of the national flag-carriers use their European services to feed long-haul routes, and any drop in demand for one will lead to a drop in demand for another. However, this does not mean that their inefficient European networks should receive special assistance or that the European networks of airlines, such as easyJet, should be disadvantaged.

Why are we in this position?

  We stand full-square with the European Commission in recognising that the adverse economic conditions prevailing even before 11 September were unlikely to have arisen or could have been resolved had the global aviation industry been able to respond to market forces through consolidation. Despite the liberal ownership regime which allows any European-registered airline to wholly own any other European airline, the problem lies outside of the EU. Air service agreements between countries usually only provide for airlines domiciled in either country to operate flights. This makes a mockery of cross-border airline mergers—as, for example, British Airways has no incentive to merge or acquire KLM as flights from Amsterdam to countries outside the EU would have to be operated by a Dutch airline.

  easyJet believes that a new world conference on air transport relations, akin to the 1944 Chicago Convention, is urgently needed to overturn the existing bilateral relationships and ensure that European aviation does not find itself in this situation again.


GIVEN THIS WIDER INDUSTRY CONTEXT, THERE ARE THREE SPECIFIC ISSUES THAT NEED ADDRESSING IN THE FACE OF LIKELY CONTINUED LOBBYING PRESSURE FROM THE NATIONAL AIRLINES:

1.  SLOT HOARDING

  We were initially heartened by the Commission's refusal to grant the widespread waiving of the "use it or lose it" component of the EC Slot Regulation. This principle has acted as a crucial restraint on the dominant airlines' potential abuse of the slot allocation system at heavily congested airports. Without it, airlines such as easyJet and Ryanair would never have gained access to congested airports such as London Gatwick.

  However, the Commission's apparent softening of resolve in the wake of strong lobbying by some of Europe's biggest airlines is nothing less than a victory for protectionism. We can see a case for regarding the severe downturn in demand for North Atlantic services caused by the events of September 11 as an exceptional circumstance under Article 10 of the EC Slot Regulation, possibly allowing some relaxation of the use it or lose it principle in respect of slots used for those services. Airlines must not be allowed to benefit from such a relaxation in respect of European operations, unless September 11 can be shown to be the direct cause of the airline's withdrawal from or reduction of service on a route. The burden should be upon airlines to provide compelling evidence of exceptional circumstances.

  We believe that, in many instances, airlines such as easyJet could replace those services, profitably, and ought to be able to claim historical precedence to the relevant slots accordingly.

  British Airways controls 65 per cent of the available slots at London's Gatwick Airport. It has built up this holding over many years and through reducing competition by acquiring airlines, such as CityFlyer Express. Despite this, it is an inefficient user of those slots. It constantly talks of abandoning its "two-hub" strategy and retrenching services to Heathrow, yet it seems unwilling to part with slots in meaningful numbers. British Airways has often taken advantage of problems in the industry to feather its own nest and now should play by the same rules, not look to distort them.

2.  STATE AID

  easyJet's concerns about the prospects of government funding for some of Europe's airlines is probably fairly well known. Many of those carriers reportedly seeking government assistance are those which fought most strongly against state aid in the mid-1990s. Cash handouts to individual airlines do not serve the interests of competition, of the sound development of the European aviation industry or of its employees, customers and shareholders. All forms of state aid are illegal and must remain so.

3.  INSURANCE

  Two distinct issues relate to insurance:

    (a)  The events of 11 September were clearly an attack on the apparatus of the state and economy. easyJet does not believe that the inherent risks associated with commercial aviation industry have increased—yet the airline's insurance premiums are forecast to increase eight-fold for the current financial year because of risks which are external to the ordinary risks of airline operations. While we welcome the UK Government's support for the industry with the Pool Re scheme, the additional burden of insurance costs flowing from acts of war and terrorism should not fall on the airlines. States should bear the costs of the impact of attacks on States.

    (b)  We have been encouraged to learn that the European Commission is already investigating the behaviour of the insurance industry in the immediate aftermath of September 11 and would encourage the UK government to do the same. We believe that the application of the uniform surcharge and limitation of scope of insurance cover by all insurers:

      (i)  amounts to a price-fixing agreement which infringes Article 81 EC, and/or the Chapter I prohibition of the Competition Act 1998, and

      (ii)  is an abuse of a collective dominant position in breach of Article 82 EC and/or the Chapter II prohibition of the Competition Act 1998 for excessive and discriminatory pricing.

CONCLUSION

  A radical overhaul of European aviation is long overdue. No-one can argue that some sections of the industry were already facing an uncertain future before September 11. It is also the same sections of the industry that have applied most pressure on national governments and the European Commission to bend the rules in their favour on the grounds that the European aviation industry is experiencing "exceptional circumstances". The low-cost airlines are not suffering and have business models that are robust enough to weather the storm given a level playing field on which to compete. easyJet concedes that certain assistance could be granted to carriers heavily exposed to the North Atlantic. But that is where any help should start and stop. The European aviation industry is unlikely to have found itself in this position if the EU Member States had put in place more liberal air service agreements with countries outside the EU.

  We call on the UK government to recognise that the fledgling low-cost airline industry needs protecting—protecting, that is, from the market distortions recommended by a number of airlines with more to lose, who are used to getting their own way.

Ray Webster

Chief Executive

19 November 2001



Memorandum by The Association of British Travel Agents Ltd (AT 30)

BACKGROUND ON ABTA

  ABTA represents over 1,700 travel agents and 800 tour operators with over 7,250 outlets who, between them, account for well over 90 per cent of the air holidays and 80 per cent of the air tickets sold in the UK. As such, our members make a substantial contribution to the UK economy and employ over 100,000 staff in the UK alone. We are major employers and trainers of school leavers. Over 2,000 of our members are SMEs. In recent years we have also seen a rapid growth in call centres which are typically located in low cost areas with relatively high unemployment. Together this means that our sector contributes important benefits to the wider economy.

CURRENT STATE OF THE HOLIDAY INDUSTRY

  Up until the end of August, according to AC Nielsen, bookings for all 2001 holidays were up by about four per cent compared with the previous year. Bookings have since plunged; in September, bookings for winter 2001-02 were down by 32 per cent and for summer 2002 down by 34 per cent; the figures deteriorated in October to ¸33 per cent and ¸56 per cent. These reductions are confirmed by ABTA's own figures which show turnover for members down by more than a third since September compared with the same period last year.

  The implications for the travel industry are extremely serious, especially when viewed against the way in which our industry is structured. We are typically a high volume, low profit sector. Independent figures from PricewaterhouseCoopers have shown net profits for travel agents averaging little more than 1 per cent of turnover. Average profits for tour operators have traditionally been a little higher but even these have been falling for the last two years.

  The reason for these low profits is largely a structural one. The holiday industry within and from the UK is fiercely competitive. Prices for the average package holiday have, historically, been much lower than the price of the equivalent sold in Germany or France. This reflects the size of the UK market, the relative efficiency of our tour operators and their methods of distribution. We also have an intensely competitive aviation sector with more low cost carriers than anywhere else in Europe. Not surprisingly, the result of this is that the UK consumer has got used to low prices.

  It means that the industry is not well placed to withstand the dramatic fall in sales that we have witnessed since the terrible events of 11 September. Inevitably this has already fed through into jobs with many of the major companies being forced to make staff redundant. Unlike the Gulf War, it does not look as though there will be a clawing back of sales in the coming months. On the contrary, it seems fairly likely that the international situation will remain uncertain through the crucial New Year period and into the first months of 2002. This is when the industry traditionally begins its main sales campaign for the coming year.

  As we would expect the number of business failures has started to increase. This will have a direct impact on ABTA itself because of our important role in protecting the consumer against member failures. Since 11 September, 16 ABTA member companies have collapsed. This compares with two member failures in the same period last year.

HELP WITH AVIATION INSURANCE COSTS

  We join with others in urging the Government to provide help to airlines with their spiralling insurance costs. The monthly extensions to the period in which the Government acts as insurer of last resort are very welcome but our airlines really need to be put in the same position as their US counterparts with 180 days cover. Even this will leave airlines facing bigger insurance bills which they cannot afford to meet. The Government must also help with this crippling cost for as long as no proper market exists in third party insurance (ie until the US Airlines return to the market).

  We have already written to the Government requesting financial assistance for our members so will not mention this further here.

SCHEDULED AIRLINE FAILURE

  The issue we would like to concentrate on is an area for which there is no comprehensive consumer protection, and that is scheduled airline failure.

  ABTA has been so successful in promoting itself as a consumer protection body that it is a common belief that the UK public is financially protected for any purchase made from an ABTA travel agency. In reality, only ABTA travel agents and tour operators are covered by ABTA's financial protection, not other principals' products they might sell. The Civil Aviation Authority's ATOL Scheme goes a long way towards protecting "consolidator/net" sales but does not cover the whole range of "published" fares sold directly by agents and airlines. The attached circular sent recently to ABTA members explains this.

  Airlines are vulnerable and operate in an increasingly competitive environment, particularly with the advent of the low-cost airlines. Over the past 20 years, there have been a number of airline failures, small and large, some of which have affected the trade and the travelling public more than others. Some have been localised and, whilst not appearing to have caused hardship generally, have given grave concern to certain communities. Amongst failures of UK airlines are: Laker (1982), Air Ecosse (1987), Scottish European (1990), Air Europe (1991), and Debonair (2000).

  Since the events of 11 September, consumers and agents have had to contend with the failures of Gill Airways, SABENA and Canada 3000. Ansett Australia ceased trading and, although it is now operating some routes, this caused financial loss to UK consumers. Swissair also ceased operating for several days resulting in losses to consumers; it is likely to emerge in coming months as a new smaller carrier based on Crossair. In the present economic climate, we are faced with the very real prospect of further airline failures.

  Protection can be obtained through self-insurance by passengers which would obviate the need for legislation. However, this does not inspire confidence in the carriers concerned and, in the current climate, can be difficult/costly to obtain. We should be encouraging passengers to travel, not putting further barriers in their way.

  ABTA has consistently made its concerns known for some years and favours the option of a common fund, based upon a small amount paid on each scheduled airline ticket whether sold direct by the airline or through an agent. Passengers would pay the same amount for protection regardless of the carrier chosen. ABTA has been working through its European travel agent association, ECTAA, with IATA to achieve such a scheme.

  The problem we have in implementing the IATA scheme in the UK is that compulsory insurance is illegal in the UK, unless backed by legal statute. An opt-out situation (such as practiced by some UK ATOL holders) could work but would involve greater work/costs to agents/airlines. Added to this, the airlines operating within and into the UK, led by British Airways, do not accept that such a scheme is necessary.

  As an interim measure, we are trying to protect monies due to be paid to airlines which are known to be in difficulty and who cannot be sure to continue flying in the future. Monies paid by consumers to agents are held in trust on behalf of the airline. The sales ticketed by agents for a calendar month are direct debited from agents on the 17th of the following month and simultaneously paid to the airlines via the IATA Billing and Settlement Plan. IATA-BSP can put these pipeline monies into escrow, but only where an airline has actually ceased operating. This has been done for SABENA's October sales, which is to be applauded, and it is intended that the monies held will be set against refunds on unflown tickets. However, carriers do not normally give advance notice of their impending failure so, depending on timing, there might not be any monies to put into escrow.

  The ticket forms the contract between the carrier and the passenger and we believe that the Office of Fair Trading has powers under the Unfair Terms in Consumer Contracts Regulations to prevent the use of unfair terms. The requirement by an airline for consumers to pay monies to it when it is aware that it may never be able to provide the service in question must be an unfair term regardless of the agent/airline relationship through BSP. The consumer has a right to travel and the necessary action should be taken by the Government and/or OFT to ensure this happens.

  We would welcome any support you could give towards a mandatory scheme to protect consumers against scheduled airline failure. Thank you for taking our comments into consideration during your deliberations.

I T Reynolds

Chief Executive

27 November 2001


 
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