Memorandum by bmi british midland (AT
THE AIR TRANSPORT INDUSTRY
British Midland Airways Limited, trading as
bmi british midland ("bmi"), is an airline operator
whose activities include the provision of scheduled passenger
and cargo services, engineering services, charter and aircraft
leasing. The airline is a wholly-owned subsidiary of British Midland
The principal business of bmi is the operation
of commercial scheduled air services on UK domestic and intra-European
routes. bmi is the UK's second largest scheduled service airline
with a fleet of 62 aircraft, and currently operates to a total
of 29 destinations in Europe, of which 19 are served from the
airline's primary base at London Heathrow. bmi operates other
significant bases at Manchester and East Midlands airport. In
addition, bmi also operates daily services from Manchester to
both Chicago and Washington DC and is the largest British operator
of transatlantic scheduled services from UK regional airports.
Following the events on and since 11 September,
2001, the Sub-Committee has requested evidence on the economic
and political implications of the downturn in passenger numbers,
security, the role of international subsidies and the proposals
for Government assistance for the industry, and the effect of
the rules of ownership on the UK's air transport industry.
Since the tragic events of 11 September, bmi's
passenger traffic levels have fallen severely. There has been
a reduction in business class travel, a migration by business
passengers to the economy cabin and lower levels of interline
and transfer traffic throughout bmi's network.
The decline in passenger numbers, and most importantly,
in yield, has meant a significant reduction in bmi's revenue for
September and October. Overall, the total number of passengers
carried in September 2001, was only 4.5 per cent lower than the
previous year, but we expect the full impact of changing market
conditions to become apparent in the final quarter of this year.
Consequently, we have implemented a 20 per cent reduction in seat
capacity for the Winter 2001-02 traffic season. Also, up to eight
aircraft, out of the fleet of 62 have been withdrawn from service.
We intend to operate lower capacity aircraft
wherever possible and will increase frequencies or capacity only
when strategic opportunities occur. The airline industry is in
a volatile phase at the moment and it is impossible to predict
if our prospects will deteriorate or conversely be improved by
the actions of other carriers. As always, we shall be highly flexible
in our response.
The withdrawal of the aircraft from the fleet
regrettably incurred a reduction in the work force throughout
the entire infrastructure of the business. Overall, 600 jobs were
lost across the company's entire network, from a workforce of
5,500, representing an 11 per cent cutback.
The issue of sustainability and long-term development
of the UK aviation sector clearly requires governmental assistance.
bmi welcomes the recent decision by the Secretary of State for
Transport, Local Government and the Regions regarding Terminal
5 and believes such decisions will send a clear message of confidence
in the continued success of UK aviation.
In the short term, the most important issue
for bmi, is the ability to react to market demands with certainty.
The ability of airlines to make temporary adjustments to our schedules
during the Winter 2001-02 traffic season is vital if we are to
avoid the burden of excessive capacity. We can not however risk
losing, forever, the limited slots we have built up at Heathrow
over the last 20 years. We are extremely concerned that whilst
UK airlines risk uncertainty in regard to the actions of the UK
airport co-ordinators, some of our European competitors still
enjoy a more "understanding" relationship with their
own national authorities. There must not be a variety of interpretations
on the relaxation of this rule across the Community. A clear and
unambiguous suspension of the "use it or lose it" rules
for all airlines this winter season is an absolute necessity.
The current failure of the aviation insurance
market came close to halting the airline industry at the end of
September. We welcomed the European Commission's decision to allow
Member States to underwrite the gap in insurance cover, which
allowed us to maintain our services and we welcome the European
Commission's recent decision to extent the period of cover until
the end of January 2002. However, it is becoming clear that there
will be no early return to a robust and competitive insurance
market covering aviation war/terrorism risks and we will be seeking
to extend the current arrangements for what is likely to be a
It should be born in mind that current estimates
for the damage to the World Trade Center site range from $50 billion
to $100 billion, figures which dwarf the standard $2 billion third
party aviation liability insurance cover. Airlines are currently
considering possible long-term alternatives to commercial insurance
cover in this area and would urge the Government, in association
with European Commission, to agree on a pan-European solution
to this issue, rather than hoping that it is a short-term insurance
bmi believes that co-ordinated and appropriate
efforts must be made to ensure that a level playing field is maintained
within the global airline industry at this sensitive time. The
Government needs to monitor and be aware of the range of financial
aid packages that have already been handed out, or are being considered
by other countries for their airlines.
Airlines in the US have benefited from a $15
billion package of financial assistance, and the European Commission
has permitted limited state financial support from governments
for compensation to Community airlines covering the direct impact
of the closure of US airspace.
It is vital that the UK aviation industry is
not disadvantaged through the activities of other Member States.
Any payment of authorised compensation must be made on a pan-European
basis and not left to the discretion of Member States.
At the same time, bmi reaffirms its opposition
to State Aid. Any financial assistance offered by governments
should be specifically restricted to the operational disruption
caused by the events of 11 September.
If, however, European airlines are to be given
the same short-term government financial support that their US
counterparts have been offered, this must be accompanied by the
relaxation of restrictive bilateral agreements that prevent market
access to new carriers, and the removal of restrictions on ownership
which prevent European consolidation and airline efficiency.
bmi is keen to ensure that a co-ordinated approach
to security is implemented throughout Europe, and that any additional
measures are compatible and in harmony with heightened safety
measures in the US.
Owing to the operation consequences of enhanced
security measures, bmi believes that the Government should provide
short-term financial assistance to UK airlines to cover this additional
cost burden. In the longer term however, security against terrorism
is a public responsibility and it is the Government's duty to
provide cost and operationally effective counter measures. bmi
notes that the US Government is increasing subsidies to US airlines
for additional security related costs in 2002 by an extra $500
million and $1.5 billion for US airports.
bmi supports any moves by the Government to
abolish all restrictions on ownership and control of UK airlines.
The current rules within the EU strictly limit the participation
of non-EU businesses and/or nationals, which in turn restricts
the flow of inward and outward investment, and prevents the aviation
industry from operating on a competitive global scale, as is the
case in other industries.
The ownership and control of EU carriers is
regulated by the Licensing Regulation which requires any carrier
that wishes to be licensed by an EU Member State to satisfy certain
conditions. Therefore non-EU ownership and control of airlines
can only be exercisable if EU legislation changes allowing non-EU
nationals to acquire an EU carrier. It is unlikely that there
will be a relaxation in the national requirement for ownership
and control of EU carriers in the short term since this would
require reciprocal agreements with the world's major countries,
and particularly the US.
In recent times, the Government has placed strong
emphasis in bilateral negotiations on demanding that UK nationals
have access to majority ownership and control of foreign carriers
on a reciprocal rights basis, notably in recent UK-US negotiations.
However, this has proved a stumbling block because the UK Government
has no legal right to offer such rights to foreign carriers in
the UK without the same rights being conferred to other EU Member
States, which can only be sanctioned by the EU and with approval
by all member states. As it stands, there is no EU mandate scheduled
in the immediate future for this to take place.
Therefore, bmi urges the Government to pressure
the European Commission and all its Member States to set a mandate
for removal of foreign ownership and control rules in air transportation,
and to remove the issue as a negotiating tool in any future Air
Services Agreement talks.
Undoubtedly, the restriction on ownership and
control has contributed to the growth of codesharing and alliances
and prevented mergers taking place, but with the removal of such
restrictions UK civil aviation will benefit from efficient organic
growth, and reduce need for alternative indirect ways of obtaining
market access. The market condition prompted by the recent events
in the USA have served to focus attention on the national and
international restrictions that constrain, in particular, the
healthy development of the scheduled airline sector.
bmi british midland
19 November 2001
Memorandum by British
Airways Plc (AT 28)
THE AIR TRANSPORT INDUSTRY
The Transport Sub-Committee wishes to consider
the responses to the terrorist attacks of 11 September 2001 by
airlines, regulators and governments, and has requested evidence
on the economic and political implications of the downturn in
passenger demand, security, the role of international subsidies
and proposals for Government assistance, and the effect of ownership
rules on the UK airline industry.
This memorandum summarises the impact of the
attacks and the subsequent fall in demand on British Airways'
business. It outlines the airline's response to the crisis and
the actions it believes the UK Government should take.
1. IMPACT OF
11 SEPTEMBER ATTACKS
At the time of the terrorist attacks in the
United States, the airline industry was experiencing the initial
effects of a global economic downturn. British Airways had announced
a series of measures in anticipation of this downturn, including
the reduction of some 1,800 jobs and a number of route network
The events of September 11 had an immediate
effect on British Airways. These included:
A four day shut down of US airspace,
and subsequent disruption of schedules over several days as passengers,
crew and aircraft were repatriated. This amounted to a £48
million revenue loss to British Airways over seven days, with
operating revenue impacted by £40 million.
The immediate introduction of additional
security measures by DTLR including:
a ban on sharp items in hand
luggage and in the cabin;
additional screening measures
at airports (ie secondary searches);
addition screening of cargo;
the locking of cockpit doors
and restriction of flight deck visits.
Notification by insurers on 16 September
of the world-wide withdrawal of third party cover, which threatened
to ground all UK airlines on 24 September.
Medium to long-term impact
For British Airways, the events of September
11 were reflected almost immediately in actual and projected levels
Actual flown traffic in September
2001, measured in revenue passenger kilometres (RPKs), fell by
22 per cent against the previous year. This comprised a 33.2 per
cent decline in premium travel and a 20 per cent decline in non-premium
The load factor (percentage of seats
filled) for the month was down 7.3 points on September 2000 to
69.2 per cent. Cargo (in cargo tonne kilometres) fell by 38 per
Actual October traffic figures in
terms of RPKs fell 24.7 per cent, comprising a 36.2 per cent drop
in the premium cabins and a 22.4 per cent fall in non-premium.
The load factor fell 8.1 points on
October 2000 to 63.1 per cent. Cargo tonne kilometres fell by
23.8 per cent.
Forward bookings for November indicate
a similar traffic decline to October. The US, Middle East and
Japan are the worst affected markets.
In general, the outlook for aviation globally
The International Air Transport Association
(IATA) expects international scheduled capacity will, in aggregate,
be cut by 15-20 per cent over the next three months.
IATA has predicted a collective industry
loss of US $10 billion (£7 billion) for 2001.
The sudden introduction of new security
measures will place a considerable additional financial burden
Insurance premiums have increased
significantly. Airlines have been able to continue operating only
through action by Government in the absence of appropriate cover
being available on the insurance market.
Analysis of the impact of the crisis has been
based upon the experience of the Gulf War, after which demand
for air travel returned to strong growth within a relatively short
space of time. It is not clear when demand for air travel will
returnin the short to medium term this will depend on the
length and success of the "war on terrorism"; whether
there are further terrorist attacks; and the extent and duration
of the wider economic slowdown.
After every previous economic, political or
security shock, growth in demand has returned in the longer-term
and it is expected that it will do so again. The CAA believes
that "the long-term demand growth is likely to resume and
then continue". (Summary and Preliminary Conclusions: Report
into Heathrow, Gatwick, Stansted and Manchester Airports' Price
Caps 2003-08, page 8.)
2. BRITISH AIRWAYS'
British Airways responded rapidly and, it believes,
sensitively to the crisis in order to protect its long-term viability
and the interests of shareholders, travellers and employees. This
included measures to reduce capacity and curtail losses:
The immediate grounding of 20 aircraft.
Network changes including the reduction
in the number of services to the US and Middle East; the suspension
of eight European routes from London Gatwick; the suspension of
services to Islamabad; withdrawal from the London Heathrow-Belfast
route; and the accelerated transfer of certain routes from Gatwick
5,200 job losses (in addition to
the 1,800 previously announced). These losses are measured as
Full Time Equivalents and necessarily follow from the reduction
in the flying programme. They will be achieved wherever possible
through voluntary means such as part-time working or unpaid leave
and the ending of over-time. British Airways has worked closely
with trade unions throughout, and will continue to do so.
Management pay cut: all levels of
the management team have been requested to accept a cut in salary.
Board members are taking a 50 per cent cut; the CEO and executive
leadership team 15 per cent; senior managers 10 per cent; and
middle managers five per cent. In addition, there will be no management
bonuses payable for the year 2001-02. It is expected that these
measures will save £11 million.
British Airways has reached an agreement
with the trade unions which represent 90 per cent of its operational
and administrative staff in a cash-saving deal worth £15
million under which staff did not receive an extra week's pay
Commercial initiatives to encourage
passengers to fly:
"Kids fly free" offerfive
million reduced European tickets were offered in October, including
free tickets for children travelling with adults for travel until
British Airways Executive Club
initiative50,000 free business class tickets to kick-start
the United Kingdom's business travel market.
Daily Mail promotion100,000
seats at very low prices available until 21 November.
Increased security (see below).
Introduction of security and insurance
surcharge of £2.50 per one-way sector. British Airways follows
more than 120 airlines around the world by introducing such a
surcharge. The rate levied by British Airways is one of the lowest
in Europe and does not fully cover increased costs.
Re-launch of Concorde, giving a welcome
boost of confidence in the industry.
Regulatory standards for aviation safety and
security in the UK are already amongst the highest in the world.
British Airways spends on average approximately £100 million
a year on security. The airline has a long established programme
that maintains a constant review of security threats, based on
official advice and working in close contact with various Government
departments. Four auditors are employed full-time to monitor adherence
to operational standards world-wide.
A complete review of ground and air security
was initiated following 11 September. British Airways has not
disclosed all aspects of its security programme for obvious reasons,
but recognises the need to communicate certain aspects of this
activity. Since 11 September a number of actions have been made
Cockpit doors are now locked and
will be reinforced with armour plating (costing £1 million).
This will substantially strengthen the doors and prevent unauthorised
access to the flight deck.
Secondary searches were introduced
for a proportion of passengers.
Visits to the flight deck for commercial
passengers have ceased.
Flights were immediately re-routed
to avoid flying through Afghan airspace.
Plastic cutlery has replaced metal
cutlery in all cabins on all flights.
The decision to reinforce and lock cockpit doors
was taken on the basis of the new risks identified. New flight
crew procedures were issued which addressed the need for a "sterile
flight deck" and which also dealt with important safety issues
such as crew resource management and communication. The issues
and concerns raised by the airline's flight crew were considered
thoroughly and previous safety incidents were analysed against
the new procedures before they were introduced.
These measures constitute an interim step until
new doors can be fitted which meet other specific safety requirements,
the design of which must be agreed by April 2002.
British Airways is considering the feasibility
of requiring passengers to provide proof of identity on domestic
UK flights. In the absence of national identity cards, the alternative
is to check either passports or driving licences. However, this
would disadvantage and discriminate against members of the travelling
public who do not have such documents.
The airline is also examining a number of other
security measures including the introduction of closed circuit
TV on board aircraft and new software capable of compiling a "passenger
blacklist" accessible during the check-in process worldwide.
No decision on any of these specific issues
has yet been reached.
In addition, British Airways is considering
a range of measures that are under wider discussion in the UK
and elsewhere, for example sky marshals and the introduction of
tazar and stun guns. It has decided against implementation of
some of these such as arming crew with guns or knives on the grounds
that it could result in an unarmed hijacker gaining access to
The continued absence of a viable aviation war
insurance market has led to the current situation where the Government
has stepped in as the insurer of last resort up to normal insurance
limits. However, notwithstanding the withdrawal of war liability
insurance, such insurance would have been unable to cover loss
on the scale of the World Trade Centre. Even if the market does
return in due course, it will never be able to offer sufficient
cover to protect airlines against such incidents. Any cover that
it does eventually supply will be limited and prohibitively expensive.
Terrorism on this scale cannot be considered
to be a commercial risk. The aviation industry cannot hope to
handle liability on this scale. We have to look at methods of
financial protection. A full indemnity from the European Union,
backed by member states pro-rata would enable airlines to operate
without fear of being held liable for unlimited damages arising
from a terrorist attack. In return, airlines would pay a premium
per departure into a central fund (the current UK Pool Re scheme
is an example of how this might work).
UK airlines are working together to investigate
the possibility of forming a mutual fund. In time, this may provide
a partial solution to the lack of insurance. An EU indemnity could
then sit above such a fund to provide a comprehensive solution.
In any event, such a mechanism will take time to develop. Meanwhile,
UK airlines face a continued round of 30-day extensions to the
current arrangement. This is unsatisfactory. British Airways would
like the Government to agree to an extension of the current arrangements
until 1 April 2002 to allow time and resources to be devoted to
5. STATE AID
These are exceptional times for the aviation
industry. British Airways firmly believes normal market practices
should prevail in the industry at this time. Old-fashioned state
subsidy has no place in contemporary air transport, even in a
Some European Union member states have indicated
their interest in paying some form of state aid to carriers. The
United States Government has provided US airlines with a substantial
package of aid, which includes $5 billion in cash injections,
$10 billion in loan guarantees and a further $3.5 billion for
investment in airline and airport security.
UK aviation has thrived in a competitive environment
but Britain's ability to compete in the global marketplace will
be damagedand British airlines disadvantagedif other
governments are allowed to provide state aid for their national
and regional carriers.
British Airways supports the European Commission's
firm stand against state aid. It is crucial for Britain's airlines
that measures agreed at an EU level are applied in a fair and
even-handed way and that UK airlines are not competitively disadvantaged
against other European airlines.
The European Transport Council has agreed guidelines
under which assistance may be given to airlines directly affected
by the events in the United States on 11 September. Within these
guidelines, British Airways believes the Government should:
Compensate UK carriers for the losses
incurred by the closure of US airspace.
Provide for the additional costs
of security arising from 11 September.
Maintain insurance cover as insurer
of last resort to allow operations to continue as normal, until
a more lasting solution can be found.
Assist with airline cashflow by deferring
payment of Air Passenger Dutya tax unique to the UK.
Make clear statements of support
and encouragement for air travel.
Ensure there is a "level playing
field" so that UK airlines are not disadvantaged against
Continue to develop new infrastructure
projects to cope with demand sustainably and allow for future
growth. British Airways believes the timetable for consideration
of and decisions on the future of aviation should remain as planned
prior to September.
British Airways welcomes the Government's restated
commitment to the SERAS and RASCO studies and the publication
of the White Paper next year. In addition, it welcomes the Government's
positive decision on Heathrow Terminal 5.
Bilateral agreements between countries govern
air services between those countries. These agreements usually
allow only carriers which are substantially owned and controlled
by nationals of the countries at each end of a route to fly on
routes between those two countries, a feature permitted under
the Chicago Convention of 1944 which enshrined the bilateral aviation
system for international services.
The concept of national ownership and control
prevents cross-border consolidation, since an airline operating
in country A but owned by nationals of country C would not normally
be allowed to serve routes between countries A and B. The current
ownership and control rules militate against normalisation of
the airline industry since they thus discourage cross-border mergers.
British Airways believes that liberalisation
of ownership and control rules could provide an important boost
to industry consolidation and efficiency, allowing weaker carriers
to be taken over by stronger carriers (which should be better
at generating and sustaining wealth and jobs) from outside the
country of designation. This is more important than ever as the
aftermath of 11 September exposes fundamental fault lines in the
business models and efficiency of some carriers.
We hope the Government will continue to negotiate
with other countries to include reciprocal liberalisation of ownership
and control rulesallowing designation of carriers with
their principal place of business and AOC in the country of designationin
future bilateral air services agreements. Although this could
still leave some ownership and control barriers in place (for
example, the European common aviation area's prohibition on non-EEA
nationals controlling EEA carriers), it would be a valuable step
towards full liberalisation of ownership and control around the
Alongside ownership and control rules, there
remains insufficient flexibility in the use of aircraft across
national boundaries. European Union regulations in this area are
applied in the UK in such a way as to prohibit the long-term wet-leasing
of foreign registered aircraft. In the current economic environment,
a relaxation of the application of the rules could provide much
needed flexibility for airlines. In other EU member states, the
airline is given to understand the interpretation of the regulations
is more liberal and open.
British Airways believes that the Government
should work within the EU for more flexible wet-leasing rules
and should be more liberal in its interpretation of the current
licensing regulation (2407/92).
The sharp decrease in revenue and accompanying
increase in costs which resulted from the events of 11 September
have placed immense pressure on the aviation industry, in particular
on airlines exposed to the most affected markets in the US and
Middle East. While British Airways remains confident of the long-term
future of air travel, it is not complacent. The months ahead will
be critical to the continued success of British Airways and other
UK airlines and the future shape of the European aviation industry.
20 November 2001
Memorandum by easyJet
THE FUTURE OF EUROPEAN AVIATION AFTER 11
The tragic events of Tuesday 11 September 2001
have undoubtedly had an impact on the outlook for commercial aviation
in Europe. Forward bookings and revenues are down and consumer
confidence in flying has been dented. Job losses, capacity cuts
and even bankruptcies have become part of the fabric of the industry
since 11 September.
This paper outlines the extent of the impact
on easyJet and, by extension, European aviation.
The conclusions may surprise many people:
not all of European aviation is suffering;
the low-cost airline sector is thriving;
those airlines which are suffering
most are those which were in severe difficulties before 11 September
and those with business models ill-equipped to cope with a downturn
in the economy;
Governments (national and European)
must ignore the calls of those airlines which do not have the
business models to adapt to changing market conditions and are
trying to distort the market.
The European short-haul point-to-point market
in which easyJet operates suffered a significant shock due to
the 11 September attacks. On the day following the attacks (Wednesday
12 September), sales dropped by approximately 26 per cent and
some 12 per cent of passengers did not show-up for flights. In
the following week, sales improved by approximately two to three
percentage points per day; at this point, easyJet, like most airlines,
was absent from the advertising market.
Since easyJet was founded, in 1995, the airline
has demonstrated that people will fly if the price is right. Therefore,
on 21 September, while many airlines were announcing an increase
in prices to compensate for falling demand, easyJet launched a
seat sale to kick-start the market in the United Kingdom. Some
180,000 seats at reduced fares for travel between October 2001
and January 2002 were made available and similar sales were run
in easyJet's two other main markets, the Netherlands and Switzerland,
the following weekend.
These sales had the effect of boosting volumes,
at the expense of lower fares (Chart 1). The extra volumes ensured
that easyJet would maintain high occupancy rates (load factors).
In the month of September 2001, easyJet's load factor was 83.2
per cent, marginally ahead of that of September 2000; and in October
it was 82.2 per cent, marginally behind October 2000.
In total, the airline carried 1,396,400 passengers,
in September and October combined, an increase of some 27 per
cent on the same months in 2000. Profits for the financial year
to end-September 2001 were 82 per cent up at £40.1 million.
Passenger numbers for the full-year were 7.1 million, an increase
of 27 per cent from the financial year to end-September 2000.
The weeks since the promotions have seen easyJet's
selling performance begin to return to normal levels, with average
fare (Chart 2) and sales' volumes (normalised for year-on-year
growth of about 25 per cent-Chart 3) down by a few percentage
points on last year.
Since the average easyJet passenger buys a seat
five to six weeks in advance of the flight, the effects of the
drop in sales in September were felt most on those flights which
operated in October. From Chart 4, it can be seen that revenue
growth for flights in October was affected by approximately £2.6
million. This equates to about 7.8 per cent of planned revenue
for that month.
Looking forward, easyJet expects any negative
effect on revenue growth to reduce significantly in November (Chart
5) and December (Chart 6). Indeed, Chart 5 demonstrates that revenue
for November has pushed ahead of plan as a result of the fare
sales. December is currently performing to plan. This means that
the effects of 11 September are expected to be "washed through"
by the beginning of 2002 at the latest.
easyJet has not seen this data for Europe's
other major low-cost airlines, but imagines the impact has been
broadly similar, given the statements to the London Stock Exchange
by Ryanair and to the media by Go-Fly.
This short-term fall in revenue is an inconveniencenothing
more at this stage. It certainly does not warrant the kind of
assistance being requested by some of Europe's major airlines,
which would cause a wholesale disruption to the European single
So, why are other airlines complaining so much?
Nobody can deny that European aviation was experiencing
severe difficulties before 11 September. Bankruptcies, job losses,
restructuring, capacity reductions etc were all inevitableespecially
for those airlines heavily exposed to the North Atlantic. Tuesday
11 September merely brought forward the inevitable.
Europe's biggest airlines run some very efficient
and profitable long-haul networks. British Airways, for example,
makes about 130 per cent of its annual profits on its North Atlantic
routes. The corollary is that these same airlines often run very
inefficient European networks, which may have been profitable
in previous decades but do not now meet consumer demand in the
age of low-cost airlines and high-speed trains. British Airways
has lost £482 million on its European flights in the last
two years. This is clearly an unsustainable position, as Rod Eddington,
British Airways' Chief Executive has recognised.
We accept that many of the national flag-carriers
use their European services to feed long-haul routes, and any
drop in demand for one will lead to a drop in demand for another.
However, this does not mean that their inefficient European networks
should receive special assistance or that the European networks
of airlines, such as easyJet, should be disadvantaged.
Why are we in this position?
We stand full-square with the European Commission
in recognising that the adverse economic conditions prevailing
even before 11 September were unlikely to have arisen or could
have been resolved had the global aviation industry been able
to respond to market forces through consolidation. Despite the
liberal ownership regime which allows any European-registered
airline to wholly own any other European airline, the problem
lies outside of the EU. Air service agreements between countries
usually only provide for airlines domiciled in either country
to operate flights. This makes a mockery of cross-border airline
mergersas, for example, British Airways has no incentive
to merge or acquire KLM as flights from Amsterdam to countries
outside the EU would have to be operated by a Dutch airline.
easyJet believes that a new world conference
on air transport relations, akin to the 1944 Chicago Convention,
is urgently needed to overturn the existing bilateral relationships
and ensure that European aviation does not find itself in this
1. SLOT HOARDING
We were initially heartened by the Commission's
refusal to grant the widespread waiving of the "use it or
lose it" component of the EC Slot Regulation. This principle
has acted as a crucial restraint on the dominant airlines' potential
abuse of the slot allocation system at heavily congested airports.
Without it, airlines such as easyJet and Ryanair would never have
gained access to congested airports such as London Gatwick.
However, the Commission's apparent softening
of resolve in the wake of strong lobbying by some of Europe's
biggest airlines is nothing less than a victory for protectionism.
We can see a case for regarding the severe downturn in demand
for North Atlantic services caused by the events of September
11 as an exceptional circumstance under Article 10 of the EC Slot
Regulation, possibly allowing some relaxation of the use it or
lose it principle in respect of slots used for those services.
Airlines must not be allowed to benefit from such a relaxation
in respect of European operations, unless September 11 can be
shown to be the direct cause of the airline's withdrawal from
or reduction of service on a route. The burden should be upon
airlines to provide compelling evidence of exceptional circumstances.
We believe that, in many instances, airlines
such as easyJet could replace those services, profitably, and
ought to be able to claim historical precedence to the relevant
British Airways controls 65 per cent of the
available slots at London's Gatwick Airport. It has built up this
holding over many years and through reducing competition by acquiring
airlines, such as CityFlyer Express. Despite this, it is an inefficient
user of those slots. It constantly talks of abandoning its "two-hub"
strategy and retrenching services to Heathrow, yet it seems unwilling
to part with slots in meaningful numbers. British Airways has
often taken advantage of problems in the industry to feather its
own nest and now should play by the same rules, not look to distort
2. STATE AID
easyJet's concerns about the prospects of government
funding for some of Europe's airlines is probably fairly well
known. Many of those carriers reportedly seeking government assistance
are those which fought most strongly against state aid in the
mid-1990s. Cash handouts to individual airlines do not serve the
interests of competition, of the sound development of the European
aviation industry or of its employees, customers and shareholders.
All forms of state aid are illegal and must remain so.
Two distinct issues relate to insurance:
(a) The events of 11 September were clearly
an attack on the apparatus of the state and economy. easyJet does
not believe that the inherent risks associated with commercial
aviation industry have increasedyet the airline's insurance
premiums are forecast to increase eight-fold for the current financial
year because of risks which are external to the ordinary risks
of airline operations. While we welcome the UK Government's support
for the industry with the Pool Re scheme, the additional burden
of insurance costs flowing from acts of war and terrorism should
not fall on the airlines. States should bear the costs of the
impact of attacks on States.
(b) We have been encouraged to learn that
the European Commission is already investigating the behaviour
of the insurance industry in the immediate aftermath of September
11 and would encourage the UK government to do the same. We believe
that the application of the uniform surcharge and limitation of
scope of insurance cover by all insurers:
(i) amounts to a price-fixing agreement
which infringes Article 81 EC, and/or the Chapter I prohibition
of the Competition Act 1998, and
(ii) is an abuse of a collective dominant
position in breach of Article 82 EC and/or the Chapter II prohibition
of the Competition Act 1998 for excessive and discriminatory pricing.
A radical overhaul of European aviation is long
overdue. No-one can argue that some sections of the industry were
already facing an uncertain future before September 11. It is
also the same sections of the industry that have applied most
pressure on national governments and the European Commission to
bend the rules in their favour on the grounds that the European
aviation industry is experiencing "exceptional circumstances".
The low-cost airlines are not suffering and have business models
that are robust enough to weather the storm given a level playing
field on which to compete. easyJet concedes that certain assistance
could be granted to carriers heavily exposed to the North Atlantic.
But that is where any help should start and stop. The European
aviation industry is unlikely to have found itself in this position
if the EU Member States had put in place more liberal air service
agreements with countries outside the EU.
We call on the UK government to recognise that
the fledgling low-cost airline industry needs protectingprotecting,
that is, from the market distortions recommended by a number of
airlines with more to lose, who are used to getting their own
19 November 2001
Memorandum by The Association
of British Travel Agents Ltd (AT 30)
ABTA represents over 1,700 travel agents and
800 tour operators with over 7,250 outlets who, between them,
account for well over 90 per cent of the air holidays and 80 per
cent of the air tickets sold in the UK. As such, our members make
a substantial contribution to the UK economy and employ over 100,000
staff in the UK alone. We are major employers and trainers of
school leavers. Over 2,000 of our members are SMEs. In recent
years we have also seen a rapid growth in call centres which are
typically located in low cost areas with relatively high unemployment.
Together this means that our sector contributes important benefits
to the wider economy.
Up until the end of August, according to AC
Nielsen, bookings for all 2001 holidays were up by about four
per cent compared with the previous year. Bookings have since
plunged; in September, bookings for winter 2001-02 were down by
32 per cent and for summer 2002 down by 34 per cent; the figures
deteriorated in October to ¸33 per cent and ¸56 per
cent. These reductions are confirmed by ABTA's own figures which
show turnover for members down by more than a third since September
compared with the same period last year.
The implications for the travel industry are
extremely serious, especially when viewed against the way in which
our industry is structured. We are typically a high volume, low
profit sector. Independent figures from PricewaterhouseCoopers
have shown net profits for travel agents averaging little more
than 1 per cent of turnover. Average profits for tour operators
have traditionally been a little higher but even these have been
falling for the last two years.
The reason for these low profits is largely
a structural one. The holiday industry within and from the UK
is fiercely competitive. Prices for the average package holiday
have, historically, been much lower than the price of the equivalent
sold in Germany or France. This reflects the size of the UK market,
the relative efficiency of our tour operators and their methods
of distribution. We also have an intensely competitive aviation
sector with more low cost carriers than anywhere else in Europe.
Not surprisingly, the result of this is that the UK consumer has
got used to low prices.
It means that the industry is not well placed
to withstand the dramatic fall in sales that we have witnessed
since the terrible events of 11 September. Inevitably this has
already fed through into jobs with many of the major companies
being forced to make staff redundant. Unlike the Gulf War, it
does not look as though there will be a clawing back of sales
in the coming months. On the contrary, it seems fairly likely
that the international situation will remain uncertain through
the crucial New Year period and into the first months of 2002.
This is when the industry traditionally begins its main sales
campaign for the coming year.
As we would expect the number of business failures
has started to increase. This will have a direct impact on ABTA
itself because of our important role in protecting the consumer
against member failures. Since 11 September, 16 ABTA member companies
have collapsed. This compares with two member failures in the
same period last year.
We join with others in urging the Government
to provide help to airlines with their spiralling insurance costs.
The monthly extensions to the period in which the Government acts
as insurer of last resort are very welcome but our airlines really
need to be put in the same position as their US counterparts with
180 days cover. Even this will leave airlines facing bigger insurance
bills which they cannot afford to meet. The Government must also
help with this crippling cost for as long as no proper market
exists in third party insurance (ie until the US Airlines return
to the market).
We have already written to the Government requesting
financial assistance for our members so will not mention this
The issue we would like to concentrate on is
an area for which there is no comprehensive consumer protection,
and that is scheduled airline failure.
ABTA has been so successful in promoting itself
as a consumer protection body that it is a common belief that
the UK public is financially protected for any purchase made from
an ABTA travel agency. In reality, only ABTA travel agents and
tour operators are covered by ABTA's financial protection, not
other principals' products they might sell. The Civil Aviation
Authority's ATOL Scheme goes a long way towards protecting "consolidator/net"
sales but does not cover the whole range of "published"
fares sold directly by agents and airlines. The attached circular
sent recently to ABTA members explains this.
Airlines are vulnerable and operate in an increasingly
competitive environment, particularly with the advent of the low-cost
airlines. Over the past 20 years, there have been a number of
airline failures, small and large, some of which have affected
the trade and the travelling public more than others. Some have
been localised and, whilst not appearing to have caused hardship
generally, have given grave concern to certain communities. Amongst
failures of UK airlines are: Laker (1982), Air Ecosse (1987),
Scottish European (1990), Air Europe (1991), and Debonair (2000).
Since the events of 11 September, consumers
and agents have had to contend with the failures of Gill Airways,
SABENA and Canada 3000. Ansett Australia ceased trading and, although
it is now operating some routes, this caused financial loss to
UK consumers. Swissair also ceased operating for several days
resulting in losses to consumers; it is likely to emerge in coming
months as a new smaller carrier based on Crossair. In the present
economic climate, we are faced with the very real prospect of
further airline failures.
Protection can be obtained through self-insurance
by passengers which would obviate the need for legislation. However,
this does not inspire confidence in the carriers concerned and,
in the current climate, can be difficult/costly to obtain. We
should be encouraging passengers to travel, not putting further
barriers in their way.
ABTA has consistently made its concerns known
for some years and favours the option of a common fund, based
upon a small amount paid on each scheduled airline ticket whether
sold direct by the airline or through an agent. Passengers would
pay the same amount for protection regardless of the carrier chosen.
ABTA has been working through its European travel agent association,
ECTAA, with IATA to achieve such a scheme.
The problem we have in implementing the IATA
scheme in the UK is that compulsory insurance is illegal in the
UK, unless backed by legal statute. An opt-out situation (such
as practiced by some UK ATOL holders) could work but would involve
greater work/costs to agents/airlines. Added to this, the airlines
operating within and into the UK, led by British Airways, do not
accept that such a scheme is necessary.
As an interim measure, we are trying to protect
monies due to be paid to airlines which are known to be in difficulty
and who cannot be sure to continue flying in the future. Monies
paid by consumers to agents are held in trust on behalf of the
airline. The sales ticketed by agents for a calendar month are
direct debited from agents on the 17th of the following month
and simultaneously paid to the airlines via the IATA Billing and
Settlement Plan. IATA-BSP can put these pipeline monies into escrow,
but only where an airline has actually ceased operating. This
has been done for SABENA's October sales, which is to be applauded,
and it is intended that the monies held will be set against refunds
on unflown tickets. However, carriers do not normally give advance
notice of their impending failure so, depending on timing, there
might not be any monies to put into escrow.
The ticket forms the contract between the carrier
and the passenger and we believe that the Office of Fair Trading
has powers under the Unfair Terms in Consumer Contracts Regulations
to prevent the use of unfair terms. The requirement by an airline
for consumers to pay monies to it when it is aware that it may
never be able to provide the service in question must be an unfair
term regardless of the agent/airline relationship through BSP.
The consumer has a right to travel and the necessary action should
be taken by the Government and/or OFT to ensure this happens.
We would welcome any support you could give
towards a mandatory scheme to protect consumers against scheduled
airline failure. Thank you for taking our comments into consideration
during your deliberations.
I T Reynolds
27 November 2001