Examination of witnesses (Questions 221-
THURSDAY 2 JULY 1998
and MR MIKE
221. Mr Holmes, good morning. I thank you
and your colleagues very much for coming to give evidence before
us. I should say, and I do not think even members of the Committee
are aware of this, that your written evidence, through no fault
of yours, I may say, has only just reached us. We have not had
a chance to read it, so we apologise for that. Could I also emphasise,
and I am aware you were sitting in during the evidence from Virgin
Atlantic, that we do not regard it as part of our brief, and therefore
will not get into discussion, on your proposed alliance with American
Airlines, so if you would be so kind to bear that in mind, we
would be very grateful. If you would like to introduce your colleagues
and make a short opening statement, we would like to hear it.
(Mr Holmes) My Lord Chairman, thank you very much
for your words. We are grateful to the Sub-Committee for taking
evidence from British Airways. On my right is Mr Allen, Head of
Competition and Industry Affairs in the company and on left is
Mr Hall, who is Head of International Relations. I am very sorry
our written evidence turned up so late. The proposals which the
Sub-Committee is dealing with do not just concern the application
by the Commission of competition rules to aviation services between
European states and third countries, in fact they extend to the
whole question of aviation relations between European countries
and the rest of the world and the respective responsibilities
of national governments and the Commission. These are very important
questions for the United Kingdom. The United Kingdom has a thriving
and competitive air transport industry, which is second in size
only to that of the United States. The United Kingdom has 1 per
cent of the world's population, 4 per cent of the world's Gross
Domestic Product, and nearly 8 per cent of its output of air transport
services. British Airways alone employs 45,000 people in the United
Kingdom, and other companies employ tens of thousands of people
and a lot of secondary employment depends on these jobs. Civil
aviation policy in the United Kingdom in the last few years has
been largely bipartisan. It has been aimed at encouraging competition
between British carriers, at creating opportunities in international
markets, and enabling British airlines to compete on fair terms
with foreign airlines. It has very largely been successful in
that respect, I think, in meeting the interests both of the airline
industry and the consumer. The United Kingdom is unique in Europe
in having so many domestic competitors. For example, Lufthansa
and Air France do not face at their principal centres of operation
competitors such as Virgin Atlantic and British Midland, which
we face at Heathrow. So the United Kingdom has the most to lose
by getting this issue wrong. The main reason why the Commission's
powers do not currently extend to air services with third countries
is because the Council of Ministers decided they should not, and
that was because the regulation of air services and the competition
between airlines in flying to third countries is governed by bilateral
agreements between sovereign governments of the Member States
and the other country concerned. To apply the Commission's competition
powers directly to airlines whose activities are governed by air
service agreements could create serious conflicts. Airlines might,
for example, be required to do one thing by the air service agreement
and forbidden to do it by the competition rules as applied by
the Commission. I think it is worth bearing in mind that the Commission
would not seek to negotiate the application of its competition
rules to these agreements, it would simply try to enforce them
whether the other governments agreed or not. The result would
be damaging confusion, of benefit mainly to the legal profession.
It is likely there would also be damage to relations with third
countries because the Commission would be intervening in matters
to which it was not a party. So the proposals by the Commission
in the field of competition policy are inextricable from the other
proposals by the Commission to take over responsibility for the
Member States in negotiating air service agreements. The Commission
have asked for a mandate from the Council of Ministers to open
negotiations with the United States. This raises major questions
of policy and practice which have not been properly addressed
so far. First, the negotiation of such a mandate may prove to
be so complex that it actually slows down the process of liberalisation
rather than speeds it up. Secondly, there are serious questions
about whether the terms of competition would be fair, for example,
in relation to subsidised airlines. Third, any negotiation involves
giving up something in order to get something. As the country
with the most developed air transport industry in Europe, the
most valuable markets and 40 per cent of the market between Europe
and the United States, the United Kingdom has the most to lose
if this negotiation is not handled properly. These matters are
of increasing importance. The liberalisation of aviation markets
and the development of global airline alliances underlines the
importance of competition between networks as well as competition
on individual routes. The BA/AA allianceand this is the
only time I shall refer to it, my Lord Chairmanis intended
as a competitive response to the alliances between Lufthansa and
SAS and United, KLM and North West, which are based in continental
Europe. The globalisation of the industry and liberalisation of
bilateral agreements also underlines the need to harmonise competition
rules and the methods and practices of enforcement as between
different jurisdictions. By the nature of their businesseswe
are operating in international markets and we are flying from
one country to anotherairlines are particularly vulnerable
to conflict between competition rules and without harmonisation
the Commission's proposals would simply make these problems worse.
Thank you, my Lord Chairman.
222. You made a very interesting comment
a couple of minutes ago, that unless things are handled properly
you could find, because it is a very complex situation, that it
is detrimental to the open market competition situation rather
than the other way around. Let me ask you a very general question:
how would you like those negotiations to proceed and along what
(Mr Holmes) I am not sure I understand the question,
my Lord Chairman.
223. I am picking up the remark you made,
unless things are handled very carefully.
(Mr Holmes) I was referring to a situation in
which the Commission might be negotiating with the United States
or another foreign government. As far as British Airways is concerned,
we are content with the present system under which bilateral negotiations
are undertaken by Member States. It may be in the future that
it would be beneficial all round for the Commission to undertake
these negotiations but the method by which those negotiations
are carried out, the objectives, the system for distributing benefits
and costs between airlines, simply do not exist, they have not
been worked out, so I think any question of negotiation between
the Commission and third countries would be quite a long way off.
224. How far off?
(Mr Holmes) I do not know. If it were a matter
of great priority then no doubt the Commission could create the
necessary apparatus to carry out these negotiations, but there
is the principle that if it ain't broke, don't fix it, and that
seems to me to be relevant in this context.
225. If one takes the view of the consumer
for a moment in these things, there is quite a lot of evidence
to suggest that bilateral agreements between a Member State and
a third countrylet us exclude the US for the momenthave
not created the low fares which have been achieved when a third
or fourth airline enters the market. We have had some evidence
from British Midland, which you may have seen or may not, but
it is common knowledge that when there are three or four airlines
competing on a particular route the fares often go down. You said
just now that you favoured the bilateral approach to agreements
with third countries to continue and this should not be changed,
but in paragraph 14 of your evidence you support the Commission
having a mandate to negotiate with ten Central and Eastern European
countries and you support the principle of the Commission doing
it, "which would in effect lead to an extension of the common
aviation area to these countries". Why is it good for the
Commission to negotiate with Eastern Europe but not anywhere else
in the world? I know they are not on the scale of the United States
but you can leave them out for the moment. Why is it different
in Eastern Europe from the rest of the world?
(Mr Holmes) I think the process of negotiation
between the Commission and Eastern Europe is, and I hope I will
not be misunderstood, a quasi-imperial process. The Commission
is offering to Eastern European countries, who are on the whole
poorer than countries in Western Europe, the advantages of joining
the European Union or being associated with the European Union,
and along with that goes a number of things, including signing
up to the competition rules of the European Union. The situation
with the United States is quite different. These are agglomerations
of roughly equal size, the United States has its own very long
tradition of anti-trust laws, and there is no question of the
United States simply be assimilated to the European Union's practices.
It is rather like if we had the Roman Empire and they decided
to have relations with China; it would have been a similar situation.
So there has to be a negotiation of a totally different kind between
Europe and the United States or, say, between Europe and Russia.
226. What about Europe and the Far East
or Europe and Africa? I do not know whether there is an imperialistic
view of Africa with the French and British competing for that,
but is this not the same principle, if you leave out the United
(Mr Holmes) I do not know, it would be matter
for negotiation. Some of the countries in Africa, for example,
regard the development of their national airlines as a matter
of national importance.
227. A status symbol.
(Mr Holmes) That may from the point of view of
European carriers and indeed from the consumer be less than ideal.
That is why we support the British Government's policy of liberalising
these agreements. It takes two willing partners to conclude an
agreement and I am not sure the major African countries would
be willing to sign up just like that to whatever Europe decided
was the right tempo.
228. Mr Holmes, I have just two question.
One is that you have described the state of the British aviation
industry, and by all accounts it is very good, but why is it that
fares from Britain for going from one point to another are higher
than for going to the same places from Europe? Secondly, you seem
to be much more doubtful about the ability of the Commission to
handle competition than perhaps any other industry in this country.
If I got that message correct, can I know why you feel that? Because
other industries are living with Europe. It suggests the point
that perhaps the established airlines in these countries are too
cosily related to their governments so they feel they can do better
with national governments than a new authority?
(Mr Holmes) My Lord Chairman, I can deal with
the second part of that question first and then I will ask Mr
Allen to deal with the first. It is perfectly true there has been
a too close association between governments and airlines, particularly
when airlines were state owned. That is a process which is changing
but it will take a long time to change. As regards the institutions
of the Commission, I think it is important to bear in mind that
the United Kingdom has got some very well developed institutions,
it has got not just the Office of Fair Trading and the Monopolies
and Mergers Commission, it has also got the Civil Aviation Authority
which has got nearly 30 years' experience in dealing with airline
competition questions, making judgments about allocations of scarce
opportunities. British Airways does not always agree with the
decisions but the system is fair. There is nothing like that in
the European Union. There is nothing as good as that I think in
any other Member State of Europe. So one is concerned about throwing
away, perhaps superseding, machinery which does work for something
which is unknown and has to be created.
229. That is exactly what I feel would be
a benefit because, after all, the United Kingdom is part of the
Commission and the United Kingdom can impart that knowledge to
help the whole industry of Europe to be competitive.
(Mr Holmes) If that were the case, that would
be very desirable. I think there is one other point which is that
in my view all questions of competition and all questions about
the allocation of scarce resources are ultimately political. There
is a lot of science about the analysis of competition issues but
in the end somebody has to make a judgment about the public interest,
and there is a question whether the judgment about the public
interest is best taken in London by ministers or best taken in
(Mr Allen) I think I would question the premise
of the first part of the question. It is certainly true that there
are certain fares which are more expensive in the United Kingdom,
in particular much has been made recently of the fact business
class and first class fares between the United Kingdom and the
United States are generally higher than between the continent
and the United States. They are a prominent exception to the rule.
It is generally true that it is cheaper to buy a ticket in the
United Kingdom to fly throughout the world than elsewhere, and
indeed on the North Atlantic the cheapest fares are in fact from
the United Kingdom to the United States. It is simply that one
class of fare which is higher. That is a consequence of the laws
of demand and supply. Demand for those fares is much higher in
the United Kingdom proportionately than it is on the continent.
This is in contrast to the general demand which pushes down the
lower priced fares, and fares are therefore higher.
230. Would this not help? If there is new
competition with those airlines which were able to fly through
London, their fares will go down?
(Mr Allen) If there is an increase in supply,
inevitably prices will fall. So if opening up the skies leads,
as it will inevitably do, to an increasing supply, then there
will be a reduction in fares.
231. What Member State carriers do you think
would be advantaged or disadvantaged by the proposals? Who are
going to be the winners and who are going to be the losers if
these proposals go through?
(Mr Holmes) If these proposals go through, and
one is talking about the proposals which simply extend the competence
of the Commission to apply the European competition rules to third
country agreements, I doubt if there will be any winners except
possibly the legal profession, because it will simply create confusion
about what the rules of the game are.
232. I take your point but you probably
heard me pressing Dr Humphreys on that. Taking that in isolation,
the logical extension must be moving further down the line would
actually affect or bring in legislation from DG VII to pick up
the points that DG IV at that stage have already achieved. Who
then would be the winners and the losers?
(Mr Holmes) I think it is very difficult to say
because the mandate which the Commission are seeking is so ill-defined.
They have neither defined the sequence nor the priorities and
what they would go for first. My suspicion is that whoever the
winners were, the losers might well be British carriers, because
as we have said the market between the United Kingdom and the
United States is so much larger than the markets from continental
countries. The market between the United Kingdom and the US is
as big as the market between the US and Germany and France, and
even bigger than that. So there would be some loss to British
airlines, both to Virgin Atlantic and British Airways, if there
were an open skies agreement, as it were, between the whole of
Europe and the United States, but I would not like to hazard a
guess as to who the gainers might be.
Lord Howell of Guildford
233. I was very interested in your paper
and in your comment where you suggested there could be this conflict
between the search for more competition internally and extending
competition powers to third country operations and the Commission
acquiring the mandate from Member States for negotiating for the
whole Community. I must say I sympathise with your fears. Is there
behind that really the commonsense view that there is an asymmetry
between the United States, which is one country where negotiations
are conducted which appear to ride consistently with their own
internal competition, although that is not as great as it was,
and Europe where (a) we are not one country and (b) the whole
system, while we aspire to competition, is still riddled with
protection, subsidies, funny little airlines being kept alive
when they should not be and so on? If the Community took these
powers it might end more with a political carve up, or a carve
up with all kinds of national pulls on the decisions, rather than
a negotiation taking full account of competition. Is that the
worry behind your comment?
(Mr Holmes) Yes, that is indeed my worry. The
United States Government finds it actually quite difficult to
manage a bilateral negotiation with a country like the United
Kingdom because they find it difficult to balance the interests
of their airlines, and there are six or seven US airlines which
fly to Europe. They produce an enormous delegation consisting
of states, regions, airports as well as airlines, so the political
process in America is quite different. In Europe there are something
like 23 airlines which fly across the Atlantic to the United States,
belonging to ten or so of the Member States, so balancing the
interests of those airlines would be very much more difficult
than balancing the interests of the American airlines, particularly,
as you have said, as one is not dealing with a unitary state where
ultimately there is a government which can decide. So I share
exactly your concern.
234. Of these 23, how many are state owned?
(Mr Holmes) I am not sure. I would think something
of the order of half.
235. Is that information you would have
back at base?
(Mr Holmes) Certainly, yes.
236. Could you let us know the answer to
(Mr Holmes) Certainly. I may be wrong on the 23,
but I will find out.
237. Whatever the number is, how many of
that number are state owned.
(Mr Holmes) Certainly.
Lord Howell of Guildford
238. Without putting words in your mouth,
are you saying that this ambition of the Commission to unify the
negotiations with the United States or with other countries on
behalf of the whole Community is premature, to say the least,
and given that we in the United Kingdom have the lion's share
of the traffic with the US it would almost certainly work directly
against our national interests?
(Mr Holmes) Yes, I think that is fair in the short
term. I think in the longer term there could be some advantage
in removing some of the restrictions which exist. For example,
restrictions on ownership and control which in the United States
are very rigid. A non-American airline is not allowed to own more
than 25 per cent of the voting equity of an American carrier,
and in Europe no foreign carrier is allowed to own more than 49
per cent of a European carrier. Those restrictions are outmoded
in my opinion and it may be that it would take a European-level
negotiation to deal with them. But that is quite a different question,
I think, from saying that the European Commission should be responsible
for negotiating bilateral agreements and the allocation of rights.
I think in that case the United Kingdom almost certainly would
be the loser.
239. Why do you think that DG VII wants
to get such powers?
(Mr Holmes) I think that is a difficult question
to answer, my Lord Chairman.
1 Note by witness: Out of 23 European airlines
which fly across the Atlantic to the United States, 10 are 50
per cent or more state-owned. Back