Orders of the Day — Air Corporations Bill

Part of the debate – in the House of Commons at 12:00 am on 24th April 1969.

Alert me about debates like this

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury 12:00 am, 24th April 1969

I agree with all the points which the hon. Member for Poplar (Mr. Mikardo) made, except one. I agree that we can all rejoice that the Treasury changed its mind over Exchequer dividend capital. However, I feel that it did so in the wrong way and that it might have been better if it had decided to abandon the experiment for B.O.A.C. and not introduced it for B.E.A. The Second Report of the Select Committee on B.E.A. in 1967 said: If one of the three methods is to be chosen, the method (advocated by B.E.A.) of capital reconstruction with an element of Exchequer dividend capital similar to that of B.O.A.C. appears to Your Committee unsuitable. Although I was not a member of the Sub-Committee which made the Report, I feel that there is something bogus about Exchequer dividend capital and that when it is coupled with writing off a large chunk of debt it is even more misleading. It is possible, as B.O.A.C. has done, to pay a very large dividend on the Exchequer dividend capital, because the interest does not have to be paid on the debt which was waived. I think that in the case of B.O.A.C. it was £110 million. This gives a false impression as to the profitability of the airline, which may be good for the morale of those who work in it, but is less good for the morale of the taxpayers who are carrying the interest burden on the £110 million.

The Bill represents a further injection of subsidy into our two Corporations. In 1952 we injected £60 million; in 1968, I think, £110 million; and in 1969 the Bill proposes as much as £37½ million more, making a total of £227 million subsidy on capital account.

We should take a look at airlines in other parts of the world which have got through this, admittedly difficult, 20 years with much lesser sums in subsidy, or none at all in some cases. The House should muse a little as to why this has been necessary. I am sure that the greatest reason—and I shall mention three—is the question of buying aircraft. In so many instances we have bought unsuitable aircraft, which not only cost more to buy but very often cause large losses because they are unsuitable for the task for which they were bought. It is a pity that the VC 10, the Vanguard and the Trident have all proved not to be world sellers.

The time has come when we should consider whether it is the right policy to require the nationalised air corporations to commission and tailor-make aeroplanes from British manufacturers which are suitable to what they imagine to be their own needs. I do not say that the Government should not assist the British aircraft industry. I shall say in a few minutes how I think they should do so. But we must keep the boundaries of responsibility much more clear. If we tell airlines to make money in the business of carrying passengers, we give them a clear definition of what they are to do. If we tell aircraft manufacturers that they are to make money in the sale of aircraft, they also know what they are to do. The market for aircraft is world wide, they should do their market research world wide, design their aircraft for world markets and sell them in the world market.

The airlines, so far as I can see, should confine themselves to choosing in the world market that aeroplane which is most suitable and which is on the market, for the task they have in mind. This would enlarge our operations, and although we might buy more foreign aircraft I believe that we would also export more British aircraft, and the foreign exchange plusses and losses would balance out. At present we have a situation in which we are locked into a narrow protectionist view of the matter, which in the long run could well result in the strangulation of the British aircraft industry.

If the Government wish to subsidise the aircraft industry as a whole, or any particular aircraft, they can still do so by giving the industry or that aircraft special aid. But I am sure that the decision as to what aircraft to buy should be in the hands of the airline corporations and not in those of the civil servant, who probably does not know so much. If he does—and here I use the phraseology of the hon. Member for Poplar—he should be employed by the airlines and not the Board of Trade.

I think that we have also been wrong on the question of uneconomic routes. The duty of airlines should be to make money in the operation of their passenger and freight aircraft. If they have a route that is uneconomic there is no doubt in my mind that they should refuse to continue to operate it unless they are specifically rewarded for the loss by whoever wants it done, whether the Government or somebody else. B.E.A. is operating at least two routes at a loss—the Highlands and Islands network and the Berlin-Hanover route, which I happen to know does not pay.

If the Government want B.E.A. to continue to operate those routes it should not twist its arm or adjust its capital, but should ask, "How much do you want to run these routes?". If the reply is a sum that they think worth paying, that amount should be paid openly and annually to the airline. I realise that that gives the airline an opportunity to blackmail the Government. It could say that it would not fly to the Highlands and Islands unless the Government gave it such large sums of money that it would be making an unnecessarily large profit. That is why I believe that we need competing alternative airlines, so that if one takes the Government for a ride the contract can be given to another airline. There should be as many as three or four alternatives who can take up such contracts, one in competition with the other.

A third area in which I think we have been doing the wrong thing concerns the veiled reference to earning dollars made by the Minister in his speech. The subsidy to British airlines is often justified with a sort of undefined comment that they are major earners of foreign exchange, and that in a situation of financial crisis, such as we have permanently, it is wrong for anybody to question anything that earns foreign exchange; that it must be right. I want to question this assumption.

The price we must pay for earning foreign exchange depends on how much we are in debt and what our balance of payments is. But it may well be that rather than by investing another £37½ million into B.E.A., if we put that money into agriculture we might save more foreign exchange. To take another example, we have just put £40 million into an aluminium smelter which will certainly save foreign exchange, but may be a very high price to pay for it.

But in all these questions of how much foreign exchange we shall save by any particular subsidy or Government policy, we should assess what we are putting in in terms of subsidy in order to achieve the foreign exchange. In other words, we should put a price on foreign exchange; we should have a premium as to what it is worth our while in investment or subsidies to achieve a given quantity of foreign exchange.

In all this, it seems to me that airlines are not for earning foreign exchange, nor are they for promoting the British aircraft industry, nor are they for subsidising remote districts and areas which cannot economically maintain an air route by the strength of traffic which they generate.

These are perfectly legitimate objects of Government; to bolster the aircraft industry, to provide a service to the Highlands and Islands, or to earn foreign currency reserves. But in all cases the Government should require the airlines to be entirely commercial and to resist pressure to do things of this sort unless they are openly and suitably rewarded in the way I have indicated.

I ask myself how other airlines cope with these problems because they are not singular to us. I visited both K.L.M. and Lufthansa, and had the honour of long discussions with the directors and some of the officials in each of these airlines, when I discussed the very questions we are now discussing. They both said that this sort of interference is intolerable, that it makes it quite impossible to run their businesses if they are always going to be told what aircraft they should have, where they should fly to, or how they should raise capital and things of that sort. They said that it is a very competitive, very difficult business, that they have managed to pull Lufthansa and K.L.M. into the black out of loss situations, and that the one essential they have insisted on with their Governments is that the Governments stop interfering. The President of K.L.M. went so far as to tell me that the airline was in such a financial state that he was able to make his own terms. He is a distinguished industrialist and was able to say to the Government "I will not take on the Presidency of the K.L.M. unless you give me everything I want". They were so desperate that they agreed.

He said that the need to insulate the airline from the interferences of Government was so great that one could not trust good intentions, however much the Government of Holland, or indeed the Government here, might say "We have finished interfering. We are not going to tell you to do any more of these un-commercial things ever again". When chairmen of airlines had lunch with the Ministers there was no directive, but those subtle pressures, which those who have been in politics for a few years understand better perhaps than those who have not, began to be exerted.

The President of K.L.M. said "In order to make sure that you do not interfere with me and make me do uncommercial things, but allow me to run my airline according to my best commercial judgment, I want there to be a few other owners. I want a few other people who will be able to protest if I do anything which is not in their best interests." He insisted that half the equity shares were sold on the market to private individuals or companies of Dutch nationality in Holland. I do not know whether it was 49·5 per cent. or 50·5 per cent., but the fact is that an equity holding was introduced into both those airlines, as into other airlines on the Continent of Europe, in order to give a guarantee that other people will be involved if interference takes place.

There is one other advantage in this procedure. We know that the strain on our finances as a nation is becoming excessive. We know that one of the great difficulties in the future will be to raise these large sums of capital. The sums which are represented by this Bill, and by previous Bills, involve £227 million which has already been written off. This is as nothing compared to what we shall have to put in in future in terms of new capital.

Lufthansa airline and the Royal Dutch airline raised their new capital by means of rights issues. They simply say that all existing shareholders, Government and private, are able to take up their rights or sell them when they need new capital. Most of the new capital which has been put into our competitors in Europe has not come from the taxpayer, but from private investors. Of course, with an airline like K.L.M., which is half Government-owned, the Government must take up its rights or it loses control of the airline. Subject to what Edwards may say, and subject to all kinds of ifs and buts, I suggest that we should be wrong not to examine this sort of solution to the problems which beset British airlines.

I do not wish to be offensive, but I thought that there was a note of inevitability about the Minister's speech this afternoon when he said that this was a direct and foreseeable matter, indeed almost a consequence to be welcomed, arising out of the way we have run the airlines. There was no note of regret at all about the £227 million—which would be enough to float an enormous airline, a third airline on the world airline scene, or indeed to float a large company which could be situated in Scotland or in one of the development districts to manufacture and give employment. We must have regard to the value of the capital which we have written off over the years, and we must be careful that we do not commit ourselves in the future.

The argument of insulation against the effects of Government interference and the need to raise new capital are matters which are fundamental to the reasons why our airlines have not proved financially successful in the past. Whatever may happen in the future, this is a matter which from now on we cannot afford not to take up.