Select Committee on European Communities Minutes of Evidence

Supplementary Letter from the Air Transport Users Council to Lord Thomas of Macclesfield

  On reading the transcript of the evidence we gave to this Enquiry on 18 June, I think that we were slightly at cross purposes on the question of how limited traffic rights might be shared between Community Member States (Question 138 to 146).

  We were discussing the hypothetical situation where the Commission had failed to negotiate a totally liberal agreement with a third country. The question would then arise of how limited traffic rights should be shared between the Member States of the Community and their airlines. I had seen this as a subject for negotiation between Member States in the Council of Ministers and expressed concern that the UK's negotiating strength in that forum might not be as great as in direct air service negotiations with third countries. In those circumstances, the UK might stand to lose out.

  You put forward the interesting proposition that the division of limited traffic rights might be left to market forces. This idea was new to me and I regret that I failed to do it justice in my response to your question. On reflection, I think it would be possible to bring market forces to bear. It would in principle be possible to allocate traffic rights by auction. Community airlines would bid for the traffic rights and these would be allocated to the highest bidder. (This is not greatly different from the idea of auctioning take-off and landing slots at congested airports).

  The logic behind such an idea is that the amount an airline is willing to bid reflects the revenue that it expects to earn and this, in turn, provides a measure of the value of the service to its prospective passengers. In principle, therefore, auctioning scarce resources is a way of ensuring that they are used to maximum benefit. In economic terms, the counter-argument to this is that airlines are profit maximisers and the service that returns the most profit to the operating airline is not necessarily the most beneficial to air travellers. While this is undoubtedly true, the proponents of such a scheme would argue that the outcome would be far closer to the optimum that allocation by regulation or by political negotiation.

  However, the scheme would not totally escape the political arena in that it would need to be agreed by the Council of Ministers in the first place. While the auctioning of traffic rights might find favour with our own Government, The Netherlands and possibly Germany, many Member States are still more concerned to protect their flag carriers than to promote competition and would therefore be reluctant to expose them to market forces in this way.

Philip Martin

Director General

30 June 1998

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