Select Committee on European Communities Minutes of Evidence

Examination of witnesses (Questions 20 - 39)



  20.  This brings us on to something that again even at this stage of our enquiry concerns us. Would you think that there was an almost built-in conflict between the US system within the airlines of wavers of anti-trust legislation on the one hand and the competition Directives from the EU on the other? These two seem to be absolutely head to head.
  (Sir Michael Bishop)  That is not unusual for international negotiations in my experience!

  21.  How do you see that being resolved?
  (Mr Walden)  Like you, my Lord Chairman, I do not see it being resolved very easily. There is, as you correctly said, a direct conflict. The United States will tend to go its own way, come what may, because of its great strength in all forms of negotiation. As Sir Michael said earlier, this is perhaps something that will take ten to 15 years to resolve both within the Community and to get the European Union to try to get the Americans to amend their attitudes towards it. I do not think it is anything that is going to happen overnight. I just do not see a clear way out of it. I cannot see this conflict changing.

  22.  What is the point of having the two Regulations if you have got this sort of head to head clash?
  (Mr Walden)  If I may, on the other hand, look back at European legislation within the airline industry and the bilateral situation going back to the 1950s, which is the time when I first got involved within the industry. The forerunner of British Midland was a company called Derby Aviation Limited and in those days it got its licences to operate on certain routes under a special permit from British European Airways—this is prior to the 1961 Civil Aviation Act. In that time, and even in my time in the business, things have changed considerably in the Community from the days when one almost had to go down on your hands and knees and negotiate a deal with your competitive airline to a situation now in effect, once we have the infrastructure and airports sorted out, we tell the world what time we are coming and we just say we plan to operate and we are going to operate at a certain time on a certain day. So things have changed and it is quite probable that over a period of time, as indeed has happened in the United States since 1977-78 when deregulation came in, they will change again. At that stage I believe that new US airlines just did not happen. When deregulation came in, of course, it opened the door for a lot of new airlines to start services. Some did not survive and some of the existing ones disappeared, ie, Pan American failed and Eastern Airlines ceased services. So over a period of time things can change, but just at this stage, in Europe, I am not sure how.

  23.  Sir Michael, does British Midland favour an open skies policy?
  (Sir Michael Bishop)  Yes, we do. I would like to see the airline industry be the same as the shipping industry whereby you can turn up and go wherever you want, but I think the difficulty that constrains the fulfilment of that is that in every country national governments are putting environmental constraints and passive constraints on the way in which the airports can developed and therefore there is not the freedom to implement open skies certainly in Europe as there is particularly in the United States where only four airports are constrained in the whole of the United States. In Europe more and more airports are being constrained for environmental reasons. We only have to see the staggering length of time that has been taken for the public enquiry for Terminal 5 at Heathrow, five years in the planning enquiry stage, possibly 12 years for the gestation of the entire project. These things have to go hand in hand with the development of our infrastructure to be able to operate. Whilst there are constraints on the infrastructure which we operate in that will give an advantage to carriers who are incumbent in those airports. It is not a level playing field. It is not like shipping where you can just build another dock or jetty.

  24.  Presumably you would couple that with a necessity for anti-trust immunity?
  (Sir Michael Bishop)  It does not apply to us particularly.

  25.  But it would do if you were going to and from the US.
  (Sir Michael Bishop)  Yes, it would prove essential.

Lord Paul

  26.  Sir Michael, I am just a little bit unclear about how third countries other than the European Union the Commission would be able to help more in negotiations than the individual governments. The British government would help and do whatever it could if you were negotiating flights to Europe or Zurich.
  (Sir Michael Bishop)  My understanding of this Regulation would be that if airlines from Britain want to operate to Brazil, for instance, the European Commission would be the responsible authority with advice from the British government. I think in the present context that would be very little.
  (Mr Davis)  The point we are making is you have to look at each of the negotiations individually and say whether the European Union has a better negotiating position collectively for all of the Member States and their airlines or would national government be more effective. We looked at the United States and we found it a very difficult area to determine competency. We have seen EU success with Iceland and Norway, neighbouring states which are not EU members but have signed up to the third package. We certainly feel that the EU could have an important role to play in negotiations with states such as Switzerland that they could help alleviate some of the difficulties that we face today in trying to establish our operations to Poland or maintain our operations to the Czech Republic. I think that is why we have taken a slightly balanced view in that in some negotiations like Brazil it would be very difficult for us to see the advantages of an EU pan-European agreement whereas perhaps with neighbouring states' their willingness to sign up to an open skies policy within Europe both intra EU and outside the EU I think we would certainly feel there could be a benefit to United Kingdom and EU airlines of doing that on a pan-European basis. It is a case of looking at each individual negotiation and saying this makes sense as an EU negotiation, as Norway did, as Iceland did, or saying this is not a EU common interest issue and should be retained by national governments.

  27.  Is it because in Europe we think some of these countries may still come into the European Union or is there any thing other than that?
  (Mr Davis)  The main issue is effective liberalisation, if you take Switzerland for example, as Sir Michael said earlier, we stopped flying to Switzerland in part because the Swiss authorities would not approve our fares. The fares that we were offering they were disapproving of and saying, "No, you are not allowed to sell those."


  28.  Because they were too high or too low?
  (Mr Davis)  Too low. They were undercutting Swiss Air so they were protecting their national carrier by preventing real competition. In a country like Switzerland which is engulfed by European Union states it obviously, to our minds, would be beneficial to negotiate with the Swiss authorities on a pan-European basis to get them to withdraw some of these restrictions.

Lord Paul

  29.  You want to use the muscle of the European Commission?
  (Mr Davis)  Where it is appropriate, where we think the balance is in both our interests and the consumers' interests.

Baroness Dean of Thornton-le-Fylde

  30.  Sir Michael, could I ask you to cast your mind forward a bit. Do you see consolidation within the airline sector? I notice on the papers we had, unless I am wrong, that British Midland is not part of the Global Alliance.
  (Sir Michael Bishop)  No we are not.

  31.  Do you see that happening?
  (Sir Michael Bishop)  In the last five years there has been a plethora of agreements between airlines culminating in basically four substantial groups emerging and a relatively small number of airlines are outside those groupings. I personally do not feel in the long-term that these groupings are in the interests of the consumer in every aspect. In some aspects they are. They provide many facilities for interlining and lower cost through fares through the network of these carriers, but there are also many reservations I have about some aspects of the global alliances which are forming and British Midland's policy has been not to join the Global Alliance but to have bilateral agreements with carriers whereby through having code sharing with a second carrier we give competition to the third carrier. In some markets it is very helpful where a third carrier is very dominant and strong and two carriers have not got such a strong market position. By having code sharing you actually give real competition to the major carrier. That has been very successful for us. We have some 17 different code shares with different airlines around the world where the object of that alliance and code sharing is actually to give stronger competition to the dominant carrier on the route and that has been very, very successful. What we do not do is go into any multi-lateral arrangement where we effectively close a market. One of the great concerns to me because it happens with the current two companies which have code sharing, to give an example, the arrangement between Germany and Scandinavia (and the European Commission approved this arrangement between SAS and Lufthansa) has effectively excluded real competition on those routes. I cannot fundamentally agree to that kind of arrangement. I think that that is not in the interests of the consumer or in the interests of competition and sadly a lot of these alliances more and more are trying to achieve that kind of situation.

  32.  Are you implying, Sir Michael, that in fact those kind of arrangements can bypass some of the European competition law?
  (Sir Michael Bishop)  They got exemptions very early in the process before the regulatory perception of what they were doing really caught up.


  33.  Exemptions from DGIV?
  (Mr Davis)  Basically they applied for permission to undertake the activity and the Commission imposed certain restrictions on them, such as if a carrier wished to compete in that market Lufthansa or SAS have to make slot available at airports but the reality is such that the size of those two airlines in their respective home markets means it is improbable another airline would enter as a third carrier and be able to survive because they are dealing with two national carriers in their respective home states. There were conditions attached to this arrangement similar to the Commission's attitude to the BA/AA Alliance where they intend to agree something which is perhaps anti-competitive in the purest form but they hope the remedies will be sufficient to preserve competition. The same thing happened between Scandinavia and Germany.

  34.  As I said earlier, we are got going to stray down that path. Going back to the SAS/Lufthansa example, that seems to show up at least one shortcoming, if you can have that word in the singular, of the Commission's de facto negotiating powers. Is that so and what are the other shortcomings?
  (Sir Michael Bishop)  I think the reason that happened was because the knowledge in the Commission to deal with that issue was not sufficient at the time to really deal with the matter most effectively in the industry. Frankly, I think it slipped through and it is interesting that the Commission are now in the case of American Airlines and British Airways retrospectively visiting the arrangements between Lufthansa and United across the North Atlantic which they never expected but is causing a good deal of concern. They realise that some of the earlier arrangements they allowed to go through with relatively simple remedies have not produced the result needed and that is more competition because, as Tony Davies said, nobody was prepared to stand up to the market strength of the Scandinavian and German carriers in their own countries.

Baroness Dean of Thornton-le-Fylde

  35.  You did not answer the first question about consolidation. The consumer presumably is going to benefit from lower prices through increased competition but it is not unknown for competition to diminish and prices to go up.
  (Sir Michael Bishop)  That is the point, if I may say, I was answering earlier in relation to the Americans. The American Department of Justice has noticed that in the United States the benefits that were perceived in the earlier stages of these consolidations are now being outweighed by disadvantages to the consumers and it appears they are going to take an interest in the whole area of airline consolidations where the whole process of consolidation is five or seven years ahead of what is happening in Europe.

  36.  You think it will happen in Europe?
  (Sir Michael Bishop)  I am sure and indeed we are going to have a much stronger regulatory process in Europe to deal with these issues. At the moment we have not the resources or the facilities to take on these cases. We have been involved in cases with the European Commission in regulatory competitive matters which have taken three years to go through the Commission by which time life has changed. Particularly at the moment the question of the interaction between major airlines and travel agencies and the way in which they receive commissions based on the amount of business they give the major airlines as incentives which is very harmful for competition by other carriers is currently being investigated by the Commission.

Lord Methuen

  37.  We have mentioned environmental limitations of airports. Would you see things like slots at airports being allocated by the EU in the extreme?
  (Sir Michael Bishop)  I certainly hope not. We certainly do not support that at all.

Lord Thomas of Macclesfield

  38.  I would like to build on what we have heard so far, Sir Michael. We started off saying that the European Union did not have administrative capacity and any movement in that direction would be somewhat premature. Later we have heard there is a need to keep the door open in terms of the European Union for obvious reasons. Then we hear that it is beneficial to use the European Commission at certain times with the muscle involved. We are trying to pick currants out of the bun here it seems to me. Now we come on to the point that there have been earlier exemptions, possibly faulty exemptions, because they did not have the capacity to understand what was happening at that stage. At an earlier point we talked about 15 or 20 years and I know from my own experience that is a euphemism for sometimes never. They will never have the administrative capacity if we leave things as they are. What should be the next logical step because clearly we do need something pan-European in order to redress the very circumstances you have raised now?
  (Sir Michael Bishop)  I think the text of what we are saying is an incremental approach to this. The Commission are proposing to take the whole responsibility——

  39.  I understand that.
  (Sir Michael Bishop)  We agree with the British Government that that certainly is not right and appropriate at the moment but we do feel that an incremental approach to them taking those powers over a lengthy period of time is probably the appropriate way of looking at it.

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