Examination of witnesses (Questions 20
THURSDAY 4 JUNE 1998
WALDEN and MR
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 Airwaysthis
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.
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
(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
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.
29. You want to use the muscle of the European
(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
(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
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
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.
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.