Examination of witness (Questions 187
THURSDAY 2 JULY 1998
187. Dr Humphreys, good morning and welcome.
I hope I am right in addressing you as Dr Humphreys. If I am right,
my apologies for the incorrect assignation I am looking at in
front of you. I am sure that was not intentional. I am very grateful
for your coming to give evidence on behalf of Virgin Atlantic.
You are aware, of course, because we have your written evidence,
for which we are most grateful and have read, that we are looking
to the proposed Competition Regulations emanating from Brussels.
You are also awareand, indeed, you have made reference
to it in your written evidencethat it is not within the
brief of this Committee to get into the proposed British Airways
(BA)/AA alliance. I would be grateful if you would avoid any reference
to it other than a general reference because it happens to be
a proposed alliance. We do not want to get into the pros and cons
of that particular proposal. Could I start firstly by asking you
a very simple question. Your notepaper is headed Virgin Atlantic
but you fly elsewhere than across the Atlantic. Do you call yourselves
something different when you go to Hong Kong, for instance?
(Dr Humphreys) No, my Lord, we are Virgin Atlantic
in all our markets. We are, however, distinct from Virgin Express,
which is a short-haul operation based in Brussels.
188. Thank you very much. As I say, we have
your written evidence and we are genuinely very grateful for it.
We find on these occasions that the most benefit is got from questions
and answers but if you have any opening statement, (hopefully
a short one), that you would like to make, we would like to hear
A. Perhaps I
might just start by apologising that the Chairman of Virgin Atlantic,
Richard Branson, could not be here today. As you know, our appearance
here was arranged at short notice and I am afraid he could not
change arrangements he was already committed to. I would just
like to say a few words, to put the position of Virgin Atlantic
on this subject into context, if I may. Virgin Atlantic is a growing
airline. Although we are only 14 years old, we are already the
third largest European airline across the North Atlantic. We have
introduced innovative value for money services in markets that
were desperate for new competition. However, clearly we are still
substantially smaller than many of our major competitors. Air
transport is an industry that has developed in a highly regulated
environment. Many of those regulatory restrictions are disappearing
but the results of past developments are still very much with
us. For example, most national markets are still dominated by
a single airline able to exert considerable economic power. Barriers
to market entry, for example in access to slots at principal airports,
are a major problem for smaller airlines, and predatory behaviour
in this industry can be both relatively attractive and economically
rational for the major carriers. Virgin Atlantic has experienced
all of these problems. We were fortunate in having significant
financial backing to survive and become the highly profitable
operation that we are today. Others have not, and will not be
so lucky. This is why we believe it is vital for the success of
competition in the airline industry, with all the benefits that
this brings for consumers, that there is an effective competition
policy diligently applied. Within the European Union internal
aviation market we have the provisions of the Treaty of Rome,
particularly Articles 85 and 86. These do not, at present, extend
to air services between the EU and third countries. Similarly,
United Kingdom domestic competition legislation does not currently
apply to international scheduled air services. It is this vacuum
which the European Commission's proposal would fill. Virgin Atlantic
believes the removal of the vacuum is very important and for this
reason we support the Commission's proposals. Thank you.
189. Thank you. May I just pick up that
word "vacuum". In the letter that you were kind enough
to write to me on 23 June, you implied that the Regulations emanating
from the Competition Directorate would not, in themselves, affect
the operations of airlines. Now, I would like to quote to you
(and you may have seen or read it) one paragraph from a very interesting
pamphlet produced by solicitors Norton Rose, Air Transport:
Significant Changes in Competition Law. I do not know whether
you have seen this but it looks like this. This particular section
is headed: "What the effects of change be". I will just
quote one paragraph, if I may, and then ask you to comment on
it. "If the proposal to remove the geographic limitation
on the scope of application of Regulation 3975/87 is adopted by
the Council, the extension of the Commission's ability to apply
directly Articles 85 and 86 to third country routes will have
significant consequences of a nature that should not be under-estimated.
Depending on how the Commission used its new found powers, the
extension of its competence (as well as the consequent increased
ability of private litigants to use Article 85 in national court
proceedings) to third country routes will change the way in which
the air transport industry operates internationally." It
then goes on to elaborate. My reading of the second paragraph
of your letter is that if you look at it in an extremely narrow
vacuum-like way, you are absolutely correct. But I ask you, what
is the point of having competition rules if the Directorates concerned
do not, or are not, influenced by those Competition Rules when
they draw up their Rules?
A. First of all,
I do not disagree with the quotes that you read out at all. What
I meant to implyin the paragraph you quotewas that,
in itself, this proposal from the Commission does not give the
Commission negotiating rights with third countries. However, clearly
it will have an impact on bilateral negotiations that Member States
undertake. In our view, although the full implications of that
are not yet clear, that could have a very positive effect. It
is extremely important, as I have said before, that Member States
take full account of the competition implications of the agreements
that they negotiate. It is important for the success of competition
in Europe and particularly for the smaller airlines. We see this
development as a positive development. However, as we also said
in our evidence, I think there is a need, if these proposals were
to be accepted, to clarify precisely how they would be applied
and how they would affect bilateral negotiations undertaken by
Member States. That clarification has not yet been sought.
190. Would it not flow logically that such
clarifications as you are looking for, would emanate from DG VII
once the DG IV Directorate has been approved, assuming that it
will be approved?
A. I am not sure
that is necessarily the case. May I give you an example of the
type of problem that can arise. The United Kingdom includes now
in its bilateral agreements (or attempts to), provision that permits
code-sharing, which is a growing concept in international aviation.
Partly because of pressure from us and other carriers, included
in the provisions of the bilateral agreements is a statement that
says: "Nothing in this section affects the application of
the competition rules." As I am sure you can imagine, code-sharing
can be a very positive development for competition. It can also
be a very negative development. It is very important that Competition
Rules should be applied. There is absolutely no reason, other
than acceptance of the logic of that argument, why the United
Kingdom Government should have gone along that road. They were
not under any obligation to do so. Fortunately, they did. Other
Member States maybe would not have done that. However, in the
absence of that clause, airlines would be free to engage in all
sorts of anti-competitive behaviour. There would be no or very
limited things that people could do about it.
191. Let us just stick on this code-sharing.
You have half answered the question but I will ask it in full.
How do you consider these Regulations would affect existing bilateral
air service agreements between Member States and third countries?
A. I think they
would affect them, in particular, in that Member States would
have to be aware and take account of the competition rules when
negotiating bilateral agreements. Again, if I might give you one
example. Already there are in place Regulations that apply to
aviation in Europe beyond the internal markets, or at least have
an effect on aviation beyond the internal market. For example,
there is a Regulation governing computer reservations systems.
There is a Regulation governing the allocation of slots at Community
airports. No Member State can negotiate a bilateral agreement
that contradicts the provisions of those Regulations. They have
to take account of them. In just the same way, if these proposals
were accepted, Member States would have to take account of the
competition rules in their negotiations. Now precisely how that
would be done would have to be subject to discussion between the
Member States and the Commission because clearly Member States
are negotiating with other sovereign states. If those sovereign
states insisted on certain clauses that were not consistent with
the competition laws of the EU, some way would have to be found
to square the circle.
192. Interestingly, I used exactly that
last expression in discussions just before you came in. A point
that has been worrying this Committee ever since we started this
enquiry is the apparent total opposites of the proposed Regulations
emanating from DG IV and the United States anti-trust legislation.
Other than continued exemptions ad infinitum, how can you
see those two actually getting together?
A. My own understandingand
I should emphasise I am not a lawyeris that the anti-trust
legislation in the United States, the Sherman Act, and the Competition
Rules of the Treaty of Rome are actually quite similar. They have
the same underlying principles. In other industries there is already
in place an agreement between the Commission and the Department
of Justice in Washington to consult and to deal with competition
problems as they arise. I believe that agreement provides for
one of those authorities to take the lead in any single investigation
that affects both markets, but which perhaps affects one market
more than another. As far as I am aware, these agreements work
extremely well and both parties are happy with them. Now aviation,
as ever, is treated differently here. In the United States it
is the Department of Transportation which is responsible for the
granting of anti-trust immunity to international airline alliances,
not the Department of Justice, although I think it is true to
say that there has been some criticism of that. There is a growing
voice in Washington to suggest that authority should be passed
back to the Department of Justice who already deal with the vast
majority of anti-trust issues. So I do not really see there is
a major problem here. The Commission and the United States authorities
do discuss competition issues and can come to agreements.
193. But surely, Dr Humphreys, you have
just put your finger right on it. There you have, as we understand
it, the anti-trust legislation in the United States. We have had
ample evidence that the trans-Atlantic market is the big slice
of the cake. That is the really big one and everything else is
relatively unimportant; I repeat, relatively. It is fine for the
Department of Justice and for the United States legislation to
have anti-trust laws, but having said that if virtually every
agreement is operated under immunity to those anti-trust laws,
how are those two going to come together?
A. I think you
are referring there to the airline alliances that have been granted
anti-trust immunityor at least some of them haveand
that is correct. However, the bilateral agreements are quite different.
These are agreements entered into between governments. They are
not subject to anti-trust immunity. My understanding is that virtually
all, if not all, the bilateral aviation agreements entered into
by the United States are executive agreements and not treaties.
Therefore, they do not take precedence over domestic anti-trust
194. You mentioned earlier the comment about
code-sharing: sometimes you felt it was beneficial to competition
and sometimes you did not. You have also mentioned the question
of slots. We have heard evidence from another witnesses about
the problem of slots. However much competition may come in between
a Member State and a third country, if the allocation of slots
makes it impossible for new entrants to get a reasonable place
in the market it makes life very difficult. First of all, how
does it work at the moment? Is there buying and selling of slots
or is it all negotiated? Who should own the slots? Do you think
the competition authorities should have a role in requiring changes
to take place and who uses them?
A. I could talk
for a long time on that subject so I will try to be brief. Certainly
slots are a major problem for smaller airlines. Undoubtedly the
shortage of slots at Heathrow and increasingly at Gatwick has
held back the expansion of Virgin Atlantic, for example, to a
very substantial degree. We believe that the current slot Regulation
which applies in Europe and is subject to review ought to be radically
reformed. At present, at the major airports in Europe, particularly
the most congested ones, the dominant airline sits on a very sizable
proportion of slots and is able to manipulate that pool to its
own benefit. For example, at Heathrow, British Airways is able
to withdraw domestic regional services and transfer the services
to airports such as Gatwick or other airports, and use those slots
released to engage in competition against us on the North Atlantic.
We do not have that option so we are at a significant disadvantage.
195. Can we be quite clear on this. Our
apologies because we are amateurs and you are a professional.
What you are saying is that a slot is a slot and it is not specific
to a route. It is specific to the airline that has that slot.
A. That is the
196. Thank you. Sorry to interrupt you but
I wanted to make that clear.
A. The fundamental
problem, we believe, is what is known as grandfather rights. This
means that once an airline has been given a slot, provided it
uses that slot for a given proportion of time it keeps the slot
in perpetuity. We believe that, first of all, airlines do not
own slots. That is a commonly held position nowadays. They are
loaned the slots for use.
197. By whom?
A. That is a
question which has never been finally settled. One thing which
has been settled to most people's satisfaction is that it is not
the airlines that own the slots. In other businesses that face
a similar problem these sorts of resources are not granted in
perpetuity. For example, television franchises or railway franchises.
These are granted for a given period. After that period the rights
are redistributed, sometimes back to the original holder and sometimes
to other people. We believe that this would be a major step forward
to encourage competition if it were applied to slot holdings.
So a slot might be granted for ten or 15 years or soample
time to recoup the investment necessary to develop a routebut
after that time it ought to be handed back into the pool and everyone
given the opportunity to apply for it.
198. Following on from that, in the other
industries you mentioned it is almost a kind of competitive tendering
or auction process. Would you favour an auction process by the
Government or the Civil Aviation Authority (CAA) or somebody?
A. No. I do not
think we would. Firstly, as I said before, it is not clear who
owns these things and, therefore, who would get the money? More
importantly, if there was an auction, as Mr van Miert has pointed
out, it would create an additional barrier for smaller airlines
and there are enough of those already about. That does not mean
to say we are against the trading of slots once they have been
awarded to airlines. That already goes on behind the scenes. There
is an argument that it ought to be made more public. However,
the fact that it does go on behind the scenes suggests that it
is not actually a significant solution to the current shortage
199. I am just a bit baffled by something
you said about the major slot holders exchanging slots from regional
flights to international flights, or internal flights on to international
flights. I have always been told that the reason why everyone
wants slots at Heathrow is because this is where the interchanging
goes on. If what you are saying is that local services are being
shifted to Gatwick, or even to Stansted, the logic of that begins
to fall apart, it seems to me.
A. There are
two factors. One is the amount of profits that an airline can
make, which is substantially more on a long-haul service than
a short-haul service. Secondly, there is the amount of competition
it faces. For example, I apologise for giving a British Airways
example, I do not want this to be anti-British Airways, but it
just so happens that they do provide excellent examples of the