US-UK Air Service Agreement

– in the House of Commons at 12:44 pm on 22 January 1997.

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Photo of Mr Peter Fry Mr Peter Fry , Wellingborough

I am honoured that my right hon. Friend the Secretary of State will reply to my humble debate. It shows the significance and importance of the subject that I am raising.

The talks between Her Majesty's Government and the United States Government on changes to the bilateral air agreement between our two countries are of the greatest significance for civil aviation in this country. The move towards an open skies policy between us means not only that a new era has begun but probably that our Government will have to play the highest card left in their hands—control of access to Heathrow airport. Therefore it is surprising that this appears to be the first time that the negotiation has been debated on the Floor of the House, and then, alas, for only half an hour. I know that other hon. Members are anxious to take part.

The inevitable background to the talks and the proposed alliance between British Airways and American Airlines is the proposal that 168 slots at Heathrow will be transferred. This transfer is presumed to quieten concerns over the possible dangers to competition arising from the alliance.

Let me make it clear that I do not in any way endorse the view of the European Commission that the issue is its responsibility. A Commission that has allowed and condoned massive handouts to national airlines in France, Spain, Italy and Greece, to mention just a few, has no right to expect confidence in its ability to enforce fair competition.

In addition, I do not raise the issue to attack British Airways. I am well aware of its great success since privatisation. However, some considerations lead me to ask whether all the facets of the issue are being properly examined.

First, if confirmed by the bilateral talks, is the British Airways-American Airlines deal really in the best interests of the consumer? At the moment, the two airlines have a 100 per cent. monopoly of 13 transatlantic routes, and 80 per cent. of other routes, particularly the important ones—London-New York, London-Boston and London-Chicago.

Many of the slots that are supposed to be released will be only on a temporary lease and will not, in the eyes of many other airlines, really provide powerful enough competition, especially as they would have to be divided between seven competing airlines wanting to run new services from Heathrow, at least two of which are British. Such a monopoly on so many routes is not healthy. As we have seen over the years in Europe, we know to our cost that many fares are still too high. It is clear that at least three carriers are needed on each route to ensure adequate competition.

There is a further concern that British Airways, having given up some slots, could switch the use of other slots that it currently holds. There is a worry in some regions of the country that that could affect regional services, so they will require some guarantee or reassurance on that point.

If the intention is to strengthen competition, how can British Airways suggest that it sells its slots at about £3 million a time? That would amount to approximately £500 million for British Airways. I have never understood how any airline can claim to own something for which it has not paid, and which is of value solely because of Government action, for example licensing services into Heathrow.

As a member of the Select Committee on Transport, I asked the former Secretary of State for Transport, my right hon. and learned Friend who is now Foreign Secretary, what his views were. His response was similar to the remarks that he made to the American Chamber of Commerce on 24 July 1991. He said: No airline has a legal right to a landing or take-off slot. Rather, airlines have permission, and this must be subject to the public interest … People, rather than airlines, come first. The government will decide aviation policy on the basis of what is best for the travelling public, and if this conflicts with the interests of any individual airline, the former will take priority. He concluded by saying: British Airways has benefited over the years from the competition it has received from smaller British airlines. The government will continue to seek to extend the opportunities for all British airlines in Europe, in the United States and right around the world. Will my right hon. Friend tell the House whether Her Majesty's Government's policy on this point has altered? If so, when and why? If an airline sells only some of its slots and continues to use others, keeping the payments that are made for them, it has extra resources available to fight competitors.

My third question is whether Her Majesty's Government should make an agreement with the United States soley on the basis of the British Airways-American Airlines alliance. Many will argue that there are other considerations, such as the need not just to consider the consumer but to benefit other British airlines that also wish to use Heathrow more—British Midland would like to develop new European routes and says that it needs more slots to do so, and Virgin Atlantic also wishes to increase its intercontinental services—let alone meeting the need to make room for new services from new competitors.

Is there not a danger that if US negotiators feel that our overriding concern is to cement the British Airways-American Airlines deal they will not offer us much else in the negotiations? There are those who fear that a one-sided open skies policy would allow the United States to enjoy extra freedom rights beyond the United Kingdom to Europe and further afield, while British airlines, including British Airways, would gain no greater access to the US domestic market, which is by far the largest in the world with nearly half of all aircraft movements.

The possibility of giving away entry control at Heathrow has led others to ask for more meaningful access in the United States for all UK carriers that want it. The question of cabotage should surely be on the agenda for the intergovernmental talks.

I say to my right hon. Friend that I fully understand why the Government want to help British Airways in its competition with the biggest of the world's airlines, all of which are based in the United States. I suggest to my right hon. Friend that we should never forget that other United Kingdom airlines exist, and they deserve encouragement. I refer to his predecessor's speech from which I quoted.

At this moment we should recall the treatment of Laker Airways, which competitors froze out of the market, and where compensation was paid only long after the airline ceased to fly. I hope that my right hon. Friend will agree that that episode was not the happiest memory in the history of British civil aviation.

My fourth question relates to the ownership of airlines. We know that current United States law forbids foreign ownership or control of a United States airline. That means that, unless the law is changed, British Airways—or any other British airline—can never take over any American airline. Certainly, BA cannot take over American Airlines. Can my right hon. Friend tell the House of any similar legal device that would prevent American Airlines, or any other foreign airline, from taking over BA? In view of what has happened in the public utilities, I suspect not. Moreover, I understand that between 20 and 25 per cent. of BA shares are already in the hands of American investors.

My fifth question relates to the Government's intention regarding the treaty negotiations, and the apparent advantages and disadvantages to be gained or lost from any change. In an attempt to obtain information, I tabled a question to the Secretary of State—Question 5657—in November. I asked what information he has asked the CAA to provide concerning benefits to the United Kingdom that would arise from the proposed British Airways-American Airlines alliance; and what factors underlie changes from the previous practice in respect of consultation with the CAA. A junior Minister replied: It is for the competition authorities to analyse the proposed British Airways-American Airlines alliance. I understand that the CAA has contributed to the analysis carried out by the Office of Fair Trading."—[Official Report, 29 November 1996; Vol. 286, c. 420–21.] Not surprisingly, that reply did not entirely satisfy me, and shortly before the Christmas recess I tabled another question. I asked the Secretary of State whether his officials had discussed with the CAA the issue of commissioning a balance of benefits study in relation to the renegotiation of the US-UK Air Service Agreement (Bermuda II); and what assessment he has made of the adequacy of the analysis in relation to the bilateral talks. The same junior Minister replied: Officials regularly discuss UK-US aviation matters with the Civil Aviation Authority, and such discussions have included the feasibility of an overarching 'balance of benefits' study of liberalising UK-US air services. We decided not to instruct the CAA to undertake such an analysis; the number of variables which would need to be taken into account, and assumptions which would have to be made, would make it impossible to model results which could be treated with any confidence. I am however satisfied that UK negotiators are fully briefed for the current series of bilateral talks."—[Official Report, 13 January 1997; Vol. 288, c. 111–12.] I find that reply remarkable. I have been given to understand that, in the past year or so, the Department itself has requested the CAA to undertake an analysis of the benefits or disbenefits of a European-US open skies agreement. That is clearly much more complicated than the UK-US bilateral. I have also been informed that the CAA has been prepared to produce such an analysis for the present situation. I feel that I must ask my right hon. Friend to explain why the Department abandoned the chance to obtain a balance-of-payments study.

Furthermore, if no such study or analysis can be conducted, will it not be more difficult for the House and all interested parties to judge how successful or otherwise the negotiations turn out to be? Even our own negotiators would surely have been assisted by an analysis. It could even be asked how my right hon. Friend himself can be sure that any agreement is in the best interests of the United Kingdom's airlines and consumers.

I realise that I have asked my right hon. Friend a number of questions that he may not have time to answer fully today, but I believe that they need to be answered, and I hope that he will assure me that answers will be forthcoming.

Let me repeat that I have great admiration for British Airways and its achievements. Some critics, however, feel that it has somehow managed to "sew up" the Department of Transport on the question of the bilateral, and I think that such suspicions will only be confirmed by cagey departmental replies to the questions being raised. According to some newspapers, the chief executive of British Airways has also "sewn up" the Labour party in exchange for his advice to the Leader of the Opposition. I sincerely hope that neither statement is true, but, if either were true, it would not reflect well on the civil aviation policies of either of the main political parties, both of which are now supposed to believe in competition and value for the consumer.

Photo of Mr Peter Fry Mr Peter Fry , Wellingborough

I am sorry; I have only a short time left.

I believe that the guiding principles of our civil aviation industry should be fairer competition, less monopoly, greater opportunities for British airlines in foreign markets—including the United States—enabling new services and airlines to come into being, and the long-term consideration of the interests of the consumer. No one will be more delighted than me if my right hon. Friend can assure me that he agrees, and that those are the very principles that will be kept in mind during the current negotiations with the United States. I await his reply with interest, but, as I have said, I accept that he may have to expand on it at a later date.

Photo of George Young George Young Secretary of State for Transport 1:15, 22 January 1997

I am grateful to my hon. Friend the Member for Wellingborough (Sir P. Fry) for raising what he rightly described as a very important subject, and bringing his insight and experience of civil aviation matters to our debate. If I do not manage to deal with all his questions, I will indeed write to him and be as helpful as I can.

Let me make two points clear at the outset. The first relates to the position being taken by the United Kingdom in its current negotiations with the United States, which will resume in Washington on 4 February. I hope that the House will understand that it would not be appropriate for me to go into details of the UK's negotiating position here: it would make life much harder for the Department of Transport negotiators if their US counterparts were able to formulate a position based on their reading of Hansard.

We have adopted a robust negotiating posture in the negotiations—so robust, indeed, that the Americans withdrew from them last August. We are beholden to no particular sectional interest in the United Kingdom. Let me respond to the point raised by my hon. Friend at the end of his speech by expressing the hope that the UK Government will be able to reach a liberalising deal with the US, to the benefit of consumers, UK business and airlines generally; but I have no quarrel with his broad description of our overall objectives.

Photo of Brian H Donohoe Brian H Donohoe , Cunninghame South

Will not the whole process of the bilateral discussions be improved and strengthened, given that the Governments of both countries have perhaps been dragging their feet in terms of the proposed alliance between British Airways and American Airlines? Will not attention be focused on the process in a way that it may not have been so far? That is why we have been negotiating, or attempting to negotiate, for so long.

Photo of George Young George Young Secretary of State for Transport

I think that I agree with the hon. Gentleman. My own view is that it is in everyone's interest for a liberalising agreement to be reached between the UK and the US, involving more competition, more services, more innovation and more competitive tariffs, but there are difficulties that need to be resolved before we can arrive at that point.

The second qualification that I need to make clear at the outset relates to the proposed alliance between British Airways and American Airlines. The Director General of Fair Trading is currently considering responses to his examination of the proposed alliance under the merger provisions of the Fair Trading Act 1973 and article 85 of the treaty of Rome. My hon. Friend will understand that, because of the formal position of my right hon. Friend the President of the Board of Trade, it would not be appropriate for me to comment on specific competition or consumer aspects of the proposed alliance. My hon. Friend dwelt on those aspects in some detail. I will, however, draw what he said to my right hon. Friend's attention, and see whether he can respond on issues for which he has ministerial responsibility.

It may help if I set out the current position on UK-US air services. Aviation relations between the UK and the US are governed by the Bermuda II agreement, signed in 1977, which has subsequently been amended on many occasions. As it stands now, the arrangement allows full access by US airlines to all airports in the United Kingdom except for Gatwick and Heathrow, which means that there are no restrictions on carriers mounting transatlantic services to airports such as Birmingham, Glasgow, Manchester and Stansted.

Capacity and designation restrictions apply at Heathrow and Gatwick airports. On the routes operated, rules specify the number of airlines which may operate and the capacity that each side may operate in relation to the other. Only a limited number of routes can be operated from Heathrow—to 12 specified destinations—which are restricted to two carriers from each side: British Airways and Virgin Atlantic Airways, for the UK; and American Airlines and United Airlines, for the US.

Bermuda II is a balanced agreement, providing UK and US airlines with broadly equivalent opportunities. Over the years, market share has typically been split 50:50, although recently the split has been 60:40 in the UK's favour—which is due partly to the capacity UK carriers provide the market by using larger aircraft and to the high quality of service provided by British Airways and Virgin. Anyone who has travelled across the Atlantic on either of those carriers does not need me to point out that they lead the world in the product they offer.

Since Bermuda II was signed, the market has grown threefold, and the consumer has been well served in choice of destination and competitive fares. It is a UK success story. One in every four passengers travelling between Europe and the US travels with BA or Virgin, and many passengers from continental Europe choose to fly over London with a UK carrier rather than with a carrier based in their own country.

I shall now deal with the point made by the hon. Member for Cunninghame, South (Mr. Donohoe) in his intervention. The Government are committed to liberalising the air service relationship between the UK and the US. We believe that the consumer is best served in an open and fair market, in which carriers can choose which services to operate. By allowing competition from both established and new entrant carriers, such a liberalised arrangement leads to increased choice, better service and lower fares.

The UK has long been in the forefront of pushing for liberalisation. Our experience of liberal markets has shown that more carriers come on to routes, fares become more competitive, service standards rise and everyone benefits—such as other businesses, the travelling public and, not least, the airlines themselves.

In 1993, the then Secretary of State for Transport, my right hon. Friend the Member for South Norfolk (Mr. MacGregor), and his US counterpart, the then Transportation Secretary, Federico Pena, made a public commitment to liberalisation of the UK-US market. The Government believe that liberalisation of that market must be based on a balance of opportunity for carriers of both sides. Crucial to that goal is the ability of UK airlines to obtain fair access to international travellers originating in or travelling to the large US domestic market, without which UK carriers would suffer a competitive handicap.

Nearly one third of all passengers start or end their journey in the US behind a gateway point. The Government believe that access to US "beyond gateway" traffic is important, and that one of the best ways of achieving such access is through alliances between UK and US carriers. That view has been taken by other Governments and airlines in Europe, where in recent years there have been a number of transatlantic alliances.

Recent attempts to liberalise the UK-US aviation agreement have not been entirely successful. After the 1993 commitment by the UK and the US to liberalise arrangements within a year, the UK proposed a phased liberalisation approach, built around British Airways's plans for further investment in USAir. The US broke off those negotiations in December 1993.

In 1995, both sides resumed a phased approach to negotiations, and, in June 1995, a limited deal was reached. The deal allowed a second US airline on the Chicago-Heathrow route and increased services by BA to Philadelphia; agreed expanded code-sharing opportunities for both sides; agreed some limited access to US Government traffic—known as "Fly America"—through BA's arrangement with USAir; and, perhaps most significantly, agreed regional liberalisation, enabling any number of US and UK airlines to operate from any point in the US to anywhere in the UK, apart from Heathrow and Gatwick.

The 1995 deal was followed by an immediate resumption of negotiations on further limited and balanced access to Heathrow and Gatwick, cargo services, charters and pricing, and some additional limited access to "Fly America" traffic was allowed. In October 1995, however, the US again broke off negotiations.

Since the 1995 breakdown in negotiations, the US-Europe market has developed. Several large alliances have been created, such as those between United Airlines, Lufthansa and SAS, covering the German and Scandinavian markets; Delta, Swissair, Austrian and Sabena, covering the Austrian, Belgian and Swiss markets; and KLM and NorthWest, covering the Dutch market. The US authorities have given anti-trust immunity to each of those alliances, enabling them to co-operate in such areas as routes and pricing, and to build large multinational networks.

We believe that the UK-US aviation market should not be viewed in isolation, but in the context of the overall European-US aviation market. The UK is strong in that market, as 40 per cent. of the US-Europe market travels to or from the UK. The next biggest share is held by Germany, which has 18 per cent. Heathrow is the pre-eminent international gateway for travelling to the US, and many passengers choose to do so via other points in Europe and beyond. Gatwick is increasingly important in that market, and regional airports, including Manchester, have benefited from recent liberalisation.

We are doing well, but strong competition is developing from the other European alliances and airports—such as Frankfurt, Charles de Gaulle and Schipol—which are challenging our pre-eminence. It would not be in the UK's interest to lose our strong position in that market. The alliances developed between other European and US airlines—some of which are very large—represent a competitive challenge to the UK's strong position, and undoubtedly they were formed, in part, to challenge our position. UK airlines can be expected to wish to make similar arrangements so that they can continue to compete strongly.

The Government believe that the proposed BA-AA alliance could provide the basis for liberalising arrangements with the US, provided that the competition authorities are satisfied with the alliance. In its report of 30 July 1996, the Transport Select Committee supported our position. It stated: We would not wish the UK to 'miss the boat' in these developments and believe the alliance between British Airways and American Airlines could be a means of ensuring that the United Kingdom continues to be a major player in the world air transport industry to the great benefit of the UK economy. Formal negotiations with the US are under way—they will reconvene on 4 February 1997—and will be without prejudice to investigations by the relevant competition authorities. As I said, I cannot comment on specific competition or consumer aspects of the proposed alliance, but I should like to make one point clear. The Government firmly believe that the UK competition authorities possess the necessary powers to investigate and, if appropriate, to approve the proposed alliance. The UK's credentials on general airline competition speak for themselves. No member state in the Community has more consistently and actively been in favour of open competition on equal terms within the single European aviation market than the UK.

Control of aviation state aid is one sphere in which the Commission undeniably has responsibility to ensure free and fair competition. Over the years, however, the equivalent of many billions of pounds have been poured with the Commission's full approval into state-owned national carriers by some of our European partners. My hon. Friend the Member for Wellingborough mentioned that matter in his speech, and I should like to give the House some examples of aid packages authorised by the Commission. In 1993, the Commission authorised about £165 million to be paid, over three years, to Aer Lingus. In 1994, it authorised about £700 million to be paid, over three years, to the Portuguese airline TAP. In 1994, it authorised about £1 billion to be paid, over three years, to Olympic Airways. Again in 1994, it authorised about £2.4 billion to be paid, over three years, to Air France.

More recently, in 1996, the Commission authorised Iberia Airlines to receive about £460 million, with the possibility this year of receiving another £100 million. In addition to that distressing catalogue of single market distortions, the Italian Government have recently asked permission to inject about £1.2 billion into Alitalia. The Commission is investigating the matter.

In contrast, UK carriers have received not a penny of assistance from the UK Government. They have had to compete by funding their investment out of their own resources, knowing that they would go to the wall if they failed to keep pace with their subsidised competitors. I am proud that BA, Virgin, British Midland and so many other UK carriers have risen so successfully to that challenge. They are still disadvantaged, however, by the failure to get to grips with state aid elsewhere in Europe.

My hon. Friend asked one or two specific questions that I shall now answer. The Department has not asked the Civil Aviation Authority to undertake a balance and benefits study for the precise reason that he gave. I shall make inquiries about earlier studies into matters European and write to him.

There are restrictions that would prevent AA from taking over British Airways. European Union law requires effective ownership and control of an airline to be in the hands of EU nationals, so at least 51 per cent. of BA has to be in EU ownership.

Towards the end of his remarks, my hon. Friend mentioned the negotiations. I can confirm that the following issues are part of the current discussions: liberalised market access for transatlantic traffic, including the lifting of designation, access and capacity restrictions at Heathrow and Gatwick; a liberal pricing regime; a dispute resolution framework involving an independent panel to ensure swift action against any abuse of market power; rights beyond services between the UK and United States; access to the United States internal market—

Photo of Mr Michael Morris Mr Michael Morris , Northampton South

Order. We must now move on.