Orders of the Day — HS146 Project

Part of the debate – in the House of Commons at 12:00 am on 12th December 1974.

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Photo of Michael Meacher Michael Meacher Parliamentary Under-Secretary (Department of Industry) 12:00 am, 12th December 1974

I am most grateful to my hon. Friend the Member for Manchester, Blackley (Mr. Rose) for raising this important subject. I am impressed by the content of his speech and the restrained but forceful way in which he put over his case.

In the few minutes left I shall try to clarify a number of the issues. As my right hon. Friend the Secretary of State told the House on Monday, we have decided that it would be wrong to take on 100 per cent. funding of the project in response to Hawker Siddeley's action in terminating the project. When the project was launched in August 1973 the then Government agreed to invest a fixed sum of £40 million at 1972 prices, calculated as about 50 per cent. of the estimated launch costs.

When we came into office the Government were quite happy to continue the project on this 50 — 50 basis, which meant, among other things, that the management had a sizeable financial stake in its success. But 100 per cent. funding is a very different proposition, especially when management has lost some of its faith in the project's viability, certainly in the short term, though I agree that it still has confidence in its technical merits. Moreover, present circumstances are very different from those prevailing in 1973, as I shall hope to show.

My hon. Friend raised the question of the Government's latest assessment of the project in general, and I shall make one or two general points about that. First, the detailed market forecasts and so on, undertaken by the firm's and the Government's experts would be useful to our competitors. We are keeping open the option of continuing. We do not want to strengthen the position of our competitors by referring to our own work.

The second point I make in this connection is more basic. Assessments in this field depend on assumptions about a variety of inputs—the size and spread of the market, which in turn depends on general economic conditions, the strength of the competition, and so on. Forecasting as far ahead as we must inevitably seek to do is particularly difficult in times of inflation. One has to take a view of the rate of inflation in this country as against that in other countries, and the extent to which exchange rates will alter these facts in compensation. However, I still propose to be as forthcoming as is possible on our assessment.

When it was launched, the company thought that it would sell some 400 aircraft by 1985 and that this might turn out to be a pessimistic forecast. At the time, those who examined the project within Government Departments accepted that a market of this size might be captured by Hawkers, though particularly with this type of aircraft selling over a considerable period, in small numbers, to a wide variety of airlines, the forecasts were inevitably rather speculative.

There have been significant changes in the world economy since the project was launched, brought about, of course, by the oil crisis, in particular. The market visualised for the HS146 has been put back. The company has told us that it believes that a potential market still exists but it would be much slower to build up. There is a caveat: the 146 would have to be priced competitively, and this is something on which the company has some doubts.

One cannot ignore the fact that inflation has already increased the cost of development. If the contract had gone ahead, the Government's contribution—originally £40 million in January 1972 prices— would have risen to some £54 million in September 1974 prices, which suggests that the project cost from now on would be at least £120 million at today's prices. Moreover, we cannot ignore the fact that the company's unilateral action has increased the costs. For example, contracts would have to be renegotiated, and there would be additional costs because of the disruption to the flow of work. It is questionable whether the subcontracts would now be renegotiated on identical terms. Moreover, the increase in costs has increased the level of sales needed to recover costs and, coupled with the slower growth of the market, has put back the break-even point considerably.

It has been suggested that the type of airline which is likely to buy the HS146 is on the whole less affected by the oil crisis and that this sector of the market is markedly more buoyant than, say, the market for transatlantic jets. It is true that the depressing effect on the market is not uniform and some sectors have been less hard hit than others. But many of the areas where the HS146 would have sold have been hit by the oil crisis. About 40 per cent. of potential sales would, according to our forecasts, have arisen in Asia-Oceania, and a further 15 per cent. or so in South and Central America. As we know, the economic future for such Third World areas is not at all encouraging. Equally, one hears it said that the oil-rich States will be a good market for the plane, but these fall into our category of "Africa and the Middle East Sales", which might amount to only about 10 per cent. of the total.

I should add—contrary to the impression that my hon. Friend may have received—that we did approach British Airways to sound out their views about a possible launching order, but they told us that they were not in a position to give any commitment because the size and timing of any requirement they might have would be very imprecise, and could be quite a small number even up to the mid-1980s.

I should also mention another detailed input into our calculation of the project's viability. The degree to which the plane can penetrate markets depends on its sales price in comparison with the prices of its competitors. The F28 and the B737 are both in the fortunate position of having their development costs written off before the latest bout of inflation. They are in this respect in a markedly better position than the HS146, which will have to bear the full brunt of the development cost rises.

Taking all these uncertainties into account, the Government took the view that 100 per cent. funding would not be an appropriate use of resources. It is not so much that the money is not available but that it would be impossible to justify incurring considerable additional expenditure when the market has deteriorated in this way.

We also decided against building two prototypes. This possibility was also canvassed by my hon. Friend. This has been portrayed as a sort of "half-way house" but unfortunately it is no such thing. It would mean spending a considerable sum of money—at least £40 million—which would be abortive if the project were not then adopted and would add considerably to total costs, raising them to £130 million, if it were. This is why prototypes are generally produced only when firm orders are obtained, as in the case of Concorde. I suggest that to do this for the HS146 would give us the worst of all worlds.

We therefore concluded that we should aim to keep the project in being in another way, by maintaining the design capability and vital equipment such as jigs, tools, and so on, so that its future can be reviewed and, if desirable, the project go ahead at a later stage. I have been asked when this review might take place. We want to let the new nationalised aircraft company make its own assessment of the prospects. We also want to allow enough time for the present difficult worldwide economic climate to settle down. I should have thought that we should therefore anticipate a review around the middle of 1976.

I know that my hon. Friend and other hon. Members are worried because they fear that delaying this long will mean that those working on other projects coming to the end of their production runs will not be able to transfer to HS146 work. I ought to deal with one aspect of this—the rundown of the Trident line. It has been suggested that work will begin to cease as from the next six to eight months on. I am informed that this should not be the case and that a reasonable forecast would be that Trident work can be expected to continue at approximately the current rate until at least early 1976 and, indeed, for longer if further orders are obtained.