Airline Industry

Part of the debate – in Westminster Hall at 10:24 am on 14th November 2001.

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Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry) 10:24 am, 14th November 2001

I congratulate Mr. Wilshire on securing the debate and on the forceful and articulate way in which he made his case. To add to the ideological confusion of the argument, I follow two rather right-wing Conservatives from a right-wing party who made a case for Government intervention, but I come from a party to the left of them and will argue for a liberal, competitive market and against Government intervention. However, I acknowledge that the issue is more subtle and the hon. Gentleman made it clear that we are discussing not just broad dogma, but specific problems concerning security costs, the insurance market and so on. Those matters must be examined individually on their merits and the outcome is not a straight yes or no.

Although I am my party's spokesman on the matter, I also represent an airport constituency. It is not as large as that of the hon. Gentleman, but several hundreds, perhaps thousands, of my constituents work at the airport and many others use it for business purposes. Its commercial and broad economic importance is understood, and many people live under the flight path, as I do, and are conscious of the environmental impact and safety implications. The debate in my constituency is better balanced than that in Spelthorne.

It is important to understand that the situation in airport-dependent constituencies is not the same as in coal mining and shipbuilding constituencies. South-west London is part of the wider London and Surrey labour market; mining communities are not like that. A basic feature of the economy in my constituency—I am sure that this is true of Spelthorne—is a chronic labour shortage and there is a great deal of ability to absorb job losses in one area as against another for precisely that reason. The matter must be considered in its broader economic context.

The hon. Gentleman set out clearly the problems in the aviation industry: the massive loss of profitability for large carriers such as British Airways, the failure of Swissair and Sabena, and the collapse of air traffic. I want to emphasise what the hon. Gentleman said about the second round effects. It is not only the airlines that are affected, but the equipment manufacturers that supply the airlines, the aero engine industry and the tourism industry. The aviation industry, like livestock farmers, is well organised and has effective lobbies, but the tourist industry does not and its concerns are always overlooked, although it is a bigger industry. The impact of the disaster on the tourist industry has been much greater than that on the higher profile sectors.

There is a problem, but there are qualifications. As Mr. Wilkinson said, some parts of the aviation industry are doing rather well. Ryanair, easyJet and other low-cost airlines are relatively flourishing because they seem to have a business model that is better suited to the current environment than some of the flag carriers. The proprietors of easyJet and Ryanair have been aggressive in arguing against Government intervention precisely because they believe that they have made good commercial judgments and that they should be rewarded for that in the market. They argue that British Airways, for example, made serious commercial errors in opting for concentration on the executive market. The executive market may have been rewarding some years ago, but it has collapsed in the short term. The low-cost airlines have opted for a different segment of the market and have done well from that. Partly for that reason, Luton and Stansted are surviving the present crisis much better than Heathrow. There is an issue of commercial judgment as well as the knock-on effects of an international crisis.

I must emphasise that some of the airlines that are crying out for help have been bleeding money for many years. Sabena has been losing money for 39 of the past 40 years. The crisis has triggered its insolvency and subsequent rescue, but the problem is of long standing and had to be dealt with at some time.

It is dangerous to take at face value airlines' claims that they desperately need financial help. They will make claims in their own defence and argue for help, but it is clear from a superficial examination of British Airways' accounts—I have not analysed them carefully—that it is in a strong position. It has £1 billion in cash and probably £2 billion to £2.5 billion in realisable cash from disposal of property and credit lines. It must use its commercial judgment to deal with the problem and not run to the Government; it has the asset base to cope with it. That is what a commercial enterprise should do.

I want to confront the broad policy issues. Should a flag carrier go bust? Technically, it can, but there has always been an assumption that our national flag carrier and others should never be allowed to go bankrupt. I should like to pose the question why. These are privatised companies—I am in favour of the privatisation of airlines—that have assumed commercial risks. Their shareholders have done well over the years, and if they are in financial difficulties why should they not face the risk of insolvency like any other commercial operation? In extremis that should be contemplated.

There are several reasons why it is not the Government's job to protect the national flag carrier from the verdict of the market. It is unfair to other operators in the business. Ryanair and easyJet argue that they are competing with British Midland, which is now part of Lufthansa, and British Airways. If British Airways makes commercial misjudgments and suffers bad luck, that is its problem, not the Government's.

The hon. Member for Spelthorne did not touch on hidden implicit subsidies to the industry. Airlines pay passenger tax, which they argue it is an unfair and difficult imposition, but they enjoy many implicit subsidies. Until the Government began to reform the system, the airlines paid highly subsidised landing charges because of the way in which the regulatory system works—the so-called single till principle. The Government are addressing the problem, but landing charges at Heathrow are ridiculously low. Unlike United States' airlines, British airlines pay nothing for their landing slots. The slots are grandfathered and are effectively a large gift from the taxpayer. Those are hidden subsidies built into the airline business, and if airlines cannot make money in that environment, something is seriously wrong. We must question the assumption that the flag carrier must always be baled out by the Government.

A trickier argument, which must nevertheless be confronted, concerns the case made by the hon. Gentleman that if the Americans are helping their industry, we must help ours—the UK plc argument. I understand the level playing field argument, but it is not as clear cut as the hon. Gentleman implies. If one country chooses to waste its taxpayers' money, why should other countries do the same? The previous Government chose to take a firm line on industrial subsidies, and they understood this point. It used to be argued that we should subsidise the coal industry because the Germans do, but the previous Conservative Government rightly rejected the logic of that argument. People used to argue that the Koreans subsidise their shipbuilding industry so we must subsidise ours. Others said that the French subsidise their farmers so we must subsidise ours. That is the road to ruin, and we cannot do that on a national basis. That the Americans have done something so we should do the same is not a logical justification for industrial support.

Moreover, the American situation is different because its industry has been exposed to greater competition than the European industry. The issue of auctioning licence slots is a good example. American airlines in America pay the price of scarce landing facilities while our airlines do not. The Americans can reasonably question whether their position is exactly the same as ours.

Having made a general argument against Government intervention, I come to policy issues. There are some specific problems that must be addressed individually. I sympathise with the airlines on the compulsory four-day grounding, which resulted from a specific crisis for a specific period of time over which they had no control. The principle of compensation for that limited period, which occurred due to factors outside of the airlines' control that were induced by political circumstances, is fundamentally reasonable.

Similarly, I have some sympathy with the argument that the Government were right to help the industry with emergency insurance cover. It would have been wrong if the aviation industry had been grounded indefinitely because of a failure in a segment of the insurance market. The Government were right to act as a temporary insurer of last resort but, unlike the hon. Gentleman, I think that it is important to stick to the principle that that is temporary. Companies providing commercial insurance and reinsurance are emerging, and that market should provide for the needs of the industry. Even if that is at a relatively high cost, there is no need for an indefinite subsidy.

If there are additional security costs they should be paid for by the industry, which means that passengers will ultimately pay. That principle would apply to every other industry. However, there may be specific cases concerning security at airports, the cost of which will fall on the public.

The hon. Gentleman made a point with which I sympathise about the problems of cash flow in the industry. There may be ways in which the Government can affect the timing of payments of passenger tax. That would not represent a subsidy, but it would ease the cash flow position in the industry. I would be open to the argument that that is fundamentally reasonable. However, it is wrong to argue that the Government should provide open-ended support or large-scale assistance of the type that appears to have been provided by the US Government. The European Union is right to take a hard line on state aids—it may have relented in the case of Sabena, which would be unfortunate—and Loyola de Palacio, the European Union Transport Commissioner, has said the right things and has taken the correct view on industrial assistance.

At the end of his speech, the hon. Gentleman forcefully discussed whether the Government should give a signal of support for the industry by backing T5. I do not want to prejudge the argument, which we may have as early as tomorrow, about T5, but it would be wrong to decide that large, complex argument on the basis of a current crisis of confidence in the industry. There are strong long-term arguments, which we shall rehearse in due course, for and against T5, but it is wrong to argue that because there is a temporary crisis of confidence, we should give the industry a shot in the arm by giving planning approval. When the decision comes—I suspect that it will be an approval—the important issues will concern the conditions attached to it on matters such as night flights and restrictions on flights. Treating T5 in terms of a general crisis of confidence is not the way in which to approach a complex planning issue.

The Government must not be deflected from regulatory reform. As part of their aviation review, they have rightly begun to examine the system by which the aviation industry is regulated on matters such as slot allocation and landing charges. Airlines may have to pay more for landing rights because that is what the economy and the environment require. The Government must not be deflected by demands from the aviation industry.