Select Committee on European Communities Minutes of Evidence


Examination of witnesses (Questions 1 - 19)

THURSDAY 4 JUNE 1998

SIR MICHAEL BISHOP, CBE, SIR LENOX HEWITT, OBE, MR TIMOTHY WALDEN and MR ANTHONY DAVIS

Chairman

  1.  It is a great pleasure to see you as always. This is not the first time and, I hope, not the last that you have been kind enough to give evidence to Committees of this House. We are particularly grateful that you have come in such force at such short notice. Would you be kind enough to introduce yourself and your team and if you wish to make any opening comments on these two proposed Regulations which we are looking at on airline regulation, please do so and then we will get into what will hopefully be a constructive question and answer session.
  (Sir Michael Bishop)  Thank you, my Lord Chairman. May I introduce my colleagues on the team this morning to you. On my left, Tony Davis, British Midland's Manager for Industry Affairs and he deals with all aspects of regulatory matters that the airline currently deals with. On my right is Sir Lenox Hewitt, who has been an adviser to the company since 1981. He was formerly a Deputy High Commissioner for Australia in the United Kingdom, formerly acting Permanent Secretary to the Prime Minister's Department in Australia and Director and Chairman of Qantas Airways from 1973-80. On his right, Timothy Walden, who is our Manager for Government and International Affairs, a Director of Airport Co-ordination Limited and Chairman of the Heathrow Scheduling Committee.

  2.  Thank you very much. I think it is probably right to say that it is outside the brief of our enquiry to get into any of the specifics of the proposed British Airways/AA alliance. We are looking at the two Regulations as a whole and not any specifics that may or may not arise from them or despite them. With that caveat, if you would like to make an opening statement, please do.
  (Sir Michael Bishop)  Thank you, my Lord Chairman. I think it would be fair to say that successive United Kingdom governments—Labour and then Conservative and then a Labour government—over the last 25 years have added a progressive liberalisation and deregulation theme to Directives in civil aviation. The United Kingdom civil aviation industry is undoubtedly the most competitive in Europe of all the Member States. The government of the day in the 1960s and early 1970s progressively liberalised charter flights for passengers travelling to holiday destinations which has now grown to be a significant element of the United Kingdom air transport industry. The Labour government in 1977 licensed the first liberalisation across the North Atlantic with the Laker Skytrain. The Conservative government between 1979 and 1997 progressively liberalised both domestic services within the United Kingdom and were at the forefront of deregulation and liberalisation in Europe. The present government has followed a similar overall path of supporting deregulation and liberalisation of the air transport industry. As a result, we have a thriving and very successful industry not just in scheduled services but in the non-scheduled activities of package holiday inclusive tours and charter flights. It is a huge industry, it supports ten of thousands of jobs in the United Kingdom and, in particular, the success of the industry has meant that British airlines more recently have been a huge supporter of Airbus Industrie. The European Aircraft Manufacturing Consortium. British Midland itself placed the largest order ever by a British airline for new airbus aircraft last year and we are receiving the first deliveries in 1998. In broad terms we support the government's position on these Directives, as has been outlined in the memorandum signed by the Parliamentary Under-Secretary of State in the Department of the Environment, Transport and the Regions, Ms Jackson, and we really support any effort to enable effective competition. Indeed, not only have we supported liberalisation in Europe and on domestic routes, but we are strongly in favour of route liberalisation and deregulation on a global scale. Therefore, whilst we support the Government's direction in this area, we have reservations about the Commission yet being in an administrative position to develop the position they would like to adopt in relation to handling external relations for the entire Community on behalf of all countries in our industry. Whilst we support the Government's memorandum, we do actually feel that there is a developing place for the Commission in this issue, but we feel that the learning curve and the point in the process by which they should take over all responsibility is a long way away. It could be five, ten, 15, even 20 years away. I think that the proposals that the Commission would like to see enacted are very premature for our industry. Indeed, in the areas where they already have status to negotiate for the Community some of the results are not too successful. Therefore, whilst we support the Government's view in principle, we would not close out that gradually and on a developing basis the Commission should play a progressively larger role in this issue. At this particular moment such an interest would be premature and we would support the Government's position with that particular caveat.

  3.  Thank you very much. It is very interesting that you should put quite a lot of emphasis on that last point. You are our first witnesses in this enquiry and already the subject you have just raised is one that has bothered us, i.e., how would the mechanics work of Brussels negotiating with third countries for the whole of the European Union. It seems an absolutely mind-boggling task. How do you see the mechanics of this working?
  (Sir Michael Bishop)  We do not think that the general integration of the Community as a whole has reached a position where it would be appropriate for the Commission to take on these particular responsibilities at this stage in the development of the Community. Maybe in ten years time or maybe if the single currency has become established when there is much greater integration on a much broader front in the European Community this may be one of the subjects eventually which could have a Community dimension, but at the moment we believe that that is very premature and that it would lead us undoubtedly to a very, very serious risk that the United Kingdom airlines would be very gravely prejudiced, particularly in relation to services and bilateral agreements with the United States where as the major English speaking country, clearly the dimension of traffic between the United States and Britain is quite different in scale to any other country in Europe and I think the potential share of that traffic which British airlines can develop and exploit would most probably be curtailed by the fact that the European Commission are negotiating on behalf of a number of European countries who would probably have a great interest in developing routes through the United Kingdom rather than developing services from their own country. I think the comparison I would give is that in two-thirds of the 20th century national airlines have been to national governments in Europe what their neighbours were in the second half of the 19th century: they have been matters essentially of political prestige and flag raising and, of course, it is only in the last 25 years, led by Britain, that our industry has become less nationalistic in that sense and more commercial and that is perhaps why it is more successful too. The process has not yet filtered down throughout Europe. One only has to see the issues in Air France currently, which is still a national airline which has received huge subsidies from the European Union. The landscape of airlines in Europe is very uneven at the moment and we are very concerned that political decisions would have priority over practical commercial decisions for the benefit of the consumer.

  4.  Do you consider that if the Commission did take on this role, at whatever stage in time, it could be in any way effective if national airlines remained their government's property?
  (Sir Michael Bishop)  I think it would make it very, very difficult indeed. The industry almost certainly would have had to have reached a position where transparently the ownership by shareholders of all the carriers was much more diverse than it is at the moment. In this country we are not exceptional in this. Every national government bats hard for its own national carriers. There are a number of carriers who are sponsored by the British Government in bilateral negotiations and we believe that this Government and the previous Government have always supported British airlines very strongly. Most recently we have been a beneficiary of that with the Government being very very supportive of us developing new routes into Eastern Europe. Every national government supports its national airline in some form or another. What has happened in the United Kingdom is that our airlines have become much more diverse in their shareholding much more quickly than carriers in Europe. I think until that process goes on throughout the whole European system that would be one of the early landmarks that would be needed for the kind of Regulation that Brussels is thinking of now could be brought into action.

Lord Howell of Guildford

  5.  Why do you think this would ever change and why would it change in any way the direction of more European centred arrangements? One might think that all the trends were the opposite, that the involvement of national governments arises because of the geography situation, it is their landing rights that they can control. We could be going in the other direction of a more local demand of control over their landing rights. You might find the Scots having more of a say over their landing rights. It seems to me the trend is going to be the other way and not towards Europe at all.
  (Sir Michael Bishop)  I am not sure about that. If you take the shipping industry, which is not a dissimilar industry, it is 100 years since national governments took the same interest in their shipping activities as they did in aviation. It just happens to be a very very high profile industry which everybody finds quite entertaining getting involved in. It is glamorous industry about which all sorts of people have an opinion on and it is always going to be something that is at the forefront of the public eye. Whether that is ever diluted or not one cannot say at the moment. It will probably get diluted because if you take a comparison with the United States, the United States has had a specific and important interest in promoting the activity of the United States airlines around the world but it does not see them to be national airlines in quite the same way the Europeans do. It is a huge and far more competitive industry. Quite the opposite is happening in the United States in that the United States government appears to be so alarmed about the consolidation that is taking place in the industry they are about to hit them with a major anti-trust investigation similar to Microsoft. So, if anything, the United States government has become hostile to consolidation of alliances on a global scale. We have not even started that process in Europe. We are just in the process of forming alliances let alone breaking them up.

Chairman

  6.  Sir Michael, to what extent do the present arrangements constrict and restrict a company such as your own, and to what extent would the proposed Regulations give you elbow room?
  (Sir Michael Bishop)  Perhaps I could ask one of my colleagues to answer that question. Tim, would you like to answer that?
  (Mr Walden)  I am not sure that the current regulations, certainly as far as EEA states are concerned, constrain us at all. One of the problems we do have is in operating outside of the Union itself. We have previously operated to Zurich and currently operate to Prague. We do have difficulties with the various governments there that are, as far as we are concerned, not fully applying the provisions of the bilateral air service agreements. One of the things that happened in 1987 when the first of the three packages was introduced was it gave a company like British Midland a supreme opportunity to develop further into Europe. One of the things that we do have a problem with, of course, is that European Union liberalisation has not completely clarified the operating rights for us in non-European Union countries that we consider that we should have rights to operate to.

  7.  I think what you are saying is there are still constraints within phases one and two.
  (Mr Walden)  Not within the Union itself but with countries outside of the Union, in our case from London to places like Switzerland and the Czech Republic. We are also going to operate to Poland very, very shortly. We are running into problems and difficulties there.

  8.  Where are you running into those problems, let us take Poland as an example, in Poland or at the United Kingdom end or Brussels?
  (Mr Walden)  No, not at the United Kingdom end. The United Kingdom Government has been extremely helpful to us. We are running into the problems at the Polish end. One of the problems that we are having is that the deals that have been negotiated are not being implemented to their full extent and we are left with uncertainty.
  (Sir Michael Bishop)  I think the point that is being made is that in the third package there is complete liberalisation and deregulation, we are free to fix tariffs, we are free to operate whatever schedules we wish to subject to the availability of slots. We are free to offer whatever frequency we wish to have. Some countries have adopted a third package, such as Norway which is outside the Union, but it actually adopted all the parameters of the third package on liberalisation in Europe. We can operate between the United Kingdom and Norway or other European Union countries to Norway in the same way as if Norway was a member of the European Union. We are able to fully develop all the facilities of the third package. However, the European Union has still not been able to establish its relationships with other Eastern Europe countries and although we are able to operate to Switzerland, we did not have freedom of tariffs out of Switzerland. We only survive because we are operating competitive fare levels and we offer fares which we believe will switch traffic from established carriers to us, the new entrant carrier, but in Switzerland we were not able to set our own tariffs. So we still have a lot of issues even with European countries to resolve before we can even tackle the whole issue of Europe acting as the statutory authority for regulating international route licences and bilaterals into third countries.

  9.  To whom do you look to assist you in resolving these sort of problems? Is it to national government?
  (Sir Michael Bishop)  Yes, but increasingly to Brussels, which is why I think the whole theme of our evidence is that the paper from the Parliamentary Under-Secretary of State really shuts the door in a sense to Europe having a dimension in this area. We feel the door should be kept a bit more ajar than the Government is proposing because we find that we not only get good support from the Commission when we go to them with a problem, but they can often be effective, even though the timescales in which they are effective are frequently much slower than our national government. It is obvious to all of us who operate increasingly in Europe that the European Commission has an increasing dimension in every part of our business life and they are, contrary to general views, very accessible, they respond to our enquiries, they will see us at short notice as necessary and they will progress our case. Their authority for developing and assessing cases is more limited than the national government not least because they have hundreds of cases coming at them from every country in Europe. So the actual workload that they are under is a great pressure. Perhaps I could ask Sir Lenox if he would like to add anything.
  (Sir Lenox Hewitt)  I would like to emphasise the point you made in opening, Michael, which is that the door should be kept open. The Commission has already the authority to explore with Switzerland and Eastern European countries and with the United States the modus operandi and the practicality of negotiating on behalf of all Member States. I think the proposal that is the subject of Ms Jackson's memorandum is really one to be considered after the Commission reports under the authority it now has for discussions with those other countries. Perhaps I may supplement that by taking the Chairman's question to you, Michael, about what will be the practicalities of negotiating on behalf of all Member States and give an illustration from my own country, Australia. We are a federation of States and the central government, in this case in Canberra, negotiates on behalf of all the constituent States as does the United States on behalf of its constituent States. The Federal government can, for example, conclude a bilateral with the Middle East States and consent to Emirates Airlines flying to Melbourne but not to other capital cities. What I think will come out of the Commission's report is the difficulty of concluding with another third country air traffic rights on behalf of all Member States for their airlines to fly to a third country destination in response to that third country's request to fly to London Heathrow. Then comes the practical decision to be made, i.e., which airline will give up slots at Heathrow, to enable, for example, Alitalia to commence flying London Heathrow to the third country destination. I think that is one of the practical but very substantive problems that will arise out of the Commission's report on its current discussions and I think it raises very critical problems for the Member States. In the particular illustration I have used, for the United Kingdom itself to wake up and discover that the traffic rights will be utilized by Alitalia to fly from Heathrow to that third country destination.
  (Sir Michael Bishop)  And other carriers.

  10.  Presumably the ultimate extension of this is that the Commission would become judge and jury.
  (Sir Lenox Hewitt)  Precisely. It would be the federal authority for the Member States of the European Union. I would be extremely interested to see what the Commission's report on these already authorised discussions with third countries will show up in answer to the very practical question, if I may say so with respect, that you raise, my Lord Chairman.

Lord Marsh

  11.  I may have missed a nuance but I think some of it has been uncharacteristically ambivalent. Can I get to the fundamental position that you take in relation to the Regulations. It seems to me that you are taking a position where you do not really see the Regulations as such as realistic in the immediate future at all and you see a real role for the Commission, but basically that is facilitating bilateral agreements and that, of course, is not the sort of role which the Commission sees itself taking in this. I was slightly puzzled at the beginning where you seemed to be saying that the Regulations are not bad and they are quite interesting as long as you can throw your mind forward 20 years and say what might possibly happen, but you would rather get on and deal with it in the meantime.
  (Sir Michael Bishop)  I think that is a very fair assessment. I personally feel the development of Europe may well be over that period. Everybody anticipates that the integration of Europe will happen sooner rather than later. I have a view that it will happen but it will take a much longer process. I think that the pitch that the European Commission are taking at the moment with this proposal is a pitch that may well be very relevant in 15-20 years time, but they are pitching for the power now when actually in practice they simply could not carry it out even if they were given the power and I think that we would finish up with a really hopeless muddle. I understand where they are coming from. In principle it is something that the general integration of Europe may well bring about, but it would be hugely premature of them to take this position now.

Baroness Dean of Thornton-le-Fylde

  12.  I would like to take up the issue of consumers and you yourself have mentioned consumers on a couple of occasions. I think a lot of the public would possibly have a perception that they have got choice but they have got high prices and I would like you to tell me how you think the present competition provisions have benefited consumers in a wide sense, not just in choice and what differences this proposal from the Commission will make.
  (Sir Michael Bishop)  First of all, air fares at their current level are without doubt at the most outstanding value for money for any retail product that you can buy in the industry. What progressively has happened over the last 25 years is that the consistent reduction in air fares comparative to the cost of living over 20 years has brought the ability for people, especially in lower income groups, to be able to travel frequently. No industry has produced that kind of benefit for the Community this century. A good example would be that the cost of an air fare to New Zealand is now the same as it was in 1975.

  13.  I do not want to interrupt you but I would like to come back on these points you are making.
  (Sir Michael Bishop)  The cost of package holiday flights when you bear in mind the distance that is travelled and the investment in aircraft which is made are all exceptionally low. I think that the level of competition which has been developed for leisure travellers is exceptional. Where there is a stronger case in point is that business fares have progressively increased disproportionately higher than leisure fares and British Midland's whole debate over the last 15 years has been to bring more competition into the higher range of fares and I think that we have been successful in that area. I think mainly for leisure travel air fares compared to the cost of living are the lowest they have ever been and that mainly at present is because fuel is at the lowest cost it has ever been for the industry.

  14.  I am not absolutely convinced. You did not answer the question I asked. Are you saying that it is European competition law that has helped this? You talk about best value in retail. I could think of at least five areas where I do not accept that, e.g., car purchase, information technology, communications, domestic utilities and I think all those sorts of things will stand as an easy comparison. My question is how has the European Union, which is what we are looking at, not fares to New Zealand, helped benefit the consumer?
  (Sir Michael Bishop)  The third package of deregulation and liberalisation is liberalised tariffs and many airlines have taken advantage of that, but mostly the advantage has been taken by United Kingdom airlines, which is the point I was making, where more competition has developed as a result of the third package which was introduced by the European Commission. The British airline industry has taken more advantage of that than any other country in the Union. What has happened is that air fares are lower for passengers going outbound from the United Kingdom than from any other European country, particularly on longer routes, but, also, increasingly, as you have seen with the new low cost airlines and with charter airlines, from the United Kingdom to Europe and so there is confusion about that.

  15.  Maybe at the beginning I should have differentiated between scheduled and charter flights.
  (Sir Michael Bishop)  Charter flights take up nearly 50 per cent of the traffic revenue of United Kingdom originating passengers.

  16.  In scheduled flights you cannot always get a charter to go off to Paris for the weekend. I think that is where the consumer does feel they have not had a fair crack of the whip from competition.
  (Sir Michael Bishop)  I would just submit that the third package which was introduced by the Community has been a huge spur to developing new competition and what you are seeing at the moment with the range of low cost airlines in the United Kingdom (I think there are four at the moment) is all of them have been inaugurated directly as a result of their ability to enter new markets.
  (Mr Davis)  Perhaps just one extra point was that the liberalisation introduced by the third package enabled the entry of third carriers like ourselves on to many of the routes where historically there were just two carriers, perhaps British Airways and its European counterparts. I think the European Commission's own evidence certainly shows that where, for example, a carrier such as British Midland enters a route as a third carrier air fares have come down and certainly in our written submission we could give you copies of both the Commission's findings and our own which generally support the premise that where there is real competition air fares come down. I think the point we would like to emphasise is that the third package enabled us to enter many of the markets which historically we were prevented from operating because of the restrictions contained in the respective Air Services Agreements. We can certainly include some evidence in our written submission on that.

Chairman]  I think that would be very helpful to the Committee.

Lord Marsh

  17.  One man market surveys are pretty unreliable, I am quite prepared to accept that before you say it. My understanding and, I think, a lot of people's understanding is that business travel within Europe is considerably more expensive than within the United States and that in both cases probably it is a question of charging what the market will bear and the market will bear a great deal.
  (Sir Michael Bishop)  With the greatest respect, public perceptions often lag behind what has happened in the market place.

  18.  I got that point in first!
  (Sir Michael Bishop)  The observation you made would have been very true indeed two or three years ago. What has happened in the United States and one of the reasons why the Department of Justice is getting so agitated is because in 1998 many air fares in the United States, which generally people would have considered as being lower than Europe, are in fact higher and in some cases significantly higher than equivalent distances in Europe. In fact, the current shuttle fares between New York and Boston and New York and Washington are 50 per cent higher than between London and Manchester, which is about the same distances, on some of the fares that are available and some of the point to point fares like Chicago and New York and Chicago and Miami are beginning to be more expensive on a mile to mile basis than many similar twin city points in Europe. If you were to go up to an American Airlines check-in desk in New York today and ask for a ticket without any restrictions, say you wanted to go to Dallas and come back when you wanted to come back, you would be astounded at the price because it is very high indeed. What has happened is that in certain pockets in the United States, Los Angeles to San Francisco and in the south-west of America, fares have stayed very low because of the nature of the carriers who compete on those routes, they are low in comparison to fares in Europe, but in the majority of the United States fares are becoming even more expensive than the equivalent fares in Europe, hence the American Department of Justice interest.

Chairman

  19.  Forgive me, Sir Michael, if this is a bit wider than your present operations, but there was a very interesting article in European Voice of 20-27 May quoting Susan McDermott, Assistant Director of the US Department of Transportation. The article says that Susan McDermott "... concedes that Washington's hands are tied over foreign ownership of US airlines and cabotage as its negotiators are forbidden to discuss these issues by statute." Does that ring true with you?
  (Mr Davis)  My Lord Chairman, I believe it was linked with the legislation introduced by the US Congress during the Second World War or perhaps earlier regarding foreign ownership of US airlines and the US interpretation of that legislation is in order to liberalise the ownership rules of the US carriers it would need an act of congress to change that law and they did not feel that was something they could successfully achieve.


 
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