§ 2.59 p.m.
The Earl of CaithnessMy Lords, I beg to move that the Bill be now read a second time. This Bill fulfils the commitments to legislation that the Government made in the Airports Policy White Paper, which was published last June. Its purpose is to establish a framework for the UK airport industry to take it into the 1990s and beyond.
The structure and ownership of airports has never been static; rather, it has changed and evolved as necessary to meet the demands of the civil air transport industry—an industry that over the last 50 years has grown from infancy to become one of the most successful and dynamic sectors of the economy. The present structure of airports is that proposed in the 1961 White Paper Civil Aerodromes and Air Navigational Services. That led to the transfer of the principal airports serving London and Scotland (namely, Heathrow, Gatwick, Stansted and Prestwick) to the British Airports Authority. The 1960s also saw local ownership and management extended to a much larger number of airports that served primarily local needs in addition to Manchester, Liverpool and Birmingham which had been handed over to the respective city corporations in the 1950s. With some changes—for example, the addition of Glasgow, Edinburgh and Aberdeen airports to the four 958 originally transferred to the British Airports Authority—the White Paper set the pattern of ownership that has existed to the present day.
In the intervening period the UK's airports have undergone substantial changes and development to accommodate the dramatic growth in demand for air travel. Airports have come of age and the airport industry is now a mature and in many cases expanding and highly profitable sector of the economy. The world, too, has changed. There is a new awareness of the disciplines of the market place, the importance of incentives and the desirability of leaving management to managers. The Government's objective with this Bill is to liberate airport management from political interference—from whatever direction—to enable airport operators to respond to the needs of their customers, rather than to the shifting priorities of politicians and officials.
I now turn, if I may, to the detail of our proposals. Part I of the Bill enables the privatisation of the British Airports Authority. Clause 1 provides powers to require the BAA to be restructured, while it is still a nationalised industry, and before its assets are transferred to a successor company. My right honourable friend the Secretary of State for Transport has put on record our intentions for the use of I these powers.
The BAA is to be privatised as a whole. Superficially the most attractive option might have been to split up the authority's airports in order to "promote competition". This initially struck others as well as me as the logical way to proceed, and indeed this option was most carefully considered. But we were forced to conclude that not only was effective competition not possible, but also that separate ownership would conflict with our aviation policies. Those policies are designed to build up a strong and competitive UK airline industry, with liberal arrangements for air services, and to ensure that better services are provided for all airline passengers.
If Heathrow and Gatwick were privatised separately from Stansted, the owners of Heathrow and Gatwick would seek to maximise the profitability of the limited capacity which they had available, squeezing out small aircraft and smaller operators, including domestic services, to the detriment of an expanding and competitive UK airline industry. In addition, separate privatisation would risk delaying the construction of additional capacity at Stansted, which is urgently needed. Nothing is more likely to inhibit the development of airline competition than a lack of airport capacity. Such a delay would conflict with our overall policies, and the UK airports' competitive position in relation to European competitors, such as Paris and Frankfurt, would be seriously damaged.
What benefits would we secure in recompense for these disadvantages in terms of UK aviation policy—disadvantages which include the inevitable delay to the privatisation programme with its attendant benefits? I have to say precious few—because effective competition between the BAA's airports is not possible. Heathrow is the dominant airport in the London system. The benefits to airlines from interlining opportunities at Heathrow, the world's largest international hub, far outweigh any differences in airport charges or services offered. 959 Charges are on average only 3½ per cent. of an international scheduled airline's costs, and the scope for price increases is restricted by our international obligations. There is also little scope for competition in the provision of facilities, bearing in mind that Heathrow and Gatwick are severely constrained by lack of runway capacity.
The Government therefore have to be involved in distributing traffic between the airports—an involvement which could have a crucial effect on the profitability of separate airport companies. Separation of the BAA's airports, especially those in the South-East, would require the Government to give firm commitments to private shareholders about their route licensing intentions. Such commitments would introduce excessive rigidity into the Government's policies.
Taking these points together—the adverse consequences for our broader aviation policies if the BAA's airports were privatised separately, and the lack of effective competition between them—we are firmly of the view that the London airports must continue to operate as an integrated system. I hope that your Lordships, many of whom are very knowledgeable about aviation matters, will see the force of these arguments. It was certainly the view of two Select Committees in the other place who investigated this question.
However, in formulating our proposals we have been very aware of the concerns expressed about the possible abuse of monopoly if the BAA were privatised as a whole. In particular, there is the concern of the regions about the development of Stansted and the way in which it will compete with regional airports. In the light of these concerns we have formulated three protective measures. First, my right honourable friend the Secretary of State has promised that he will approve a BAA restructuring plan under Clause 1 only if it provides that each airport will be operated by a separate subsidiary company. Secondly, Clause 38 places a mandatory requirement on designated airports, including the London airports, to publish separate transparent accounts which will reveal any cross-subsidy from another person or authority, including from any other airport.
Thirdly, and most importantly, our scheme of economic regulation will prevent Stansted (or any other airport) from indulging in any pricing policy which is "predatory". We have considerably strengthened this provision in response to criticism expressed in another place. The Civil Aviation Authority, using its powers in Clause 39, will now be able to prevent an airport operator from charging prices which are too low to cover costs, or are artificially low and harm, or are intended to harm, another airport. We have ensured that the definition of "artificially low prices" includes those which are lower than they would otherwise be by virtue of any subsidy. Thus the Bill includes categorical protection for airport operators against their business being hampered by an unfair cross-subsidy to a competitor. Together, these three measures ensure that the BAA, although privatised as a single group, cannot abuse its position in relation to other airports. I shall in due course turn to the protection our scheme of economic regulation offers to the airport user.
960 Part II of the Bill deals with local authority owned airports, many of which are now dynamic and successful enterprises. As with the BAA, we believe that these airports should exist in the commercial world, removed from political interference. The three key clauses in Part II, Clauses 12, 13 and 14, provide powers for my right honourable friend the Secretary of State to require the larger local authority owned airports with a turnover greater than £1 million per annum to be reconstituted as Companies Act companies, with the shares owned by the appropriate local authorities. There are no powers to require local authorities to sell these shares, although we hope that they will see the advantages in doing so.
Our first objective is simply to put local authority owned airports in the commercial world, where they belong. The Bill contains several provisions which will achieve that objective. Clause 16 provides for airport company boards to include full-time airport employees (except where outside management has already been brought in to run the airport) and not simply to consist of local councillors. Clause 22 limits the services that local authorities can provide to airport companies and ensures that any such services must be at commercial rates. This will give airport companies the freedom to buy in services from whoever offers the best deal. The directors of the airport company will have a duty under the Companies Acts to act in the best interests of the company, which may not necessarily coincide with the interest of their own local authority. These are major changes which will foster a more businesslike approach and promote greater efficiency.
In addition, local authority owned airports will operate within a more flexible expenditure control regime, in that internally financed investment will no longer come within the Government's capital control system. If a local authority exercises its right to sell a majority of the shares to the private sector, all investment will be free of Government controls.
In providing for the establishment of airport companies the Government have rightly responded to concerns voiced in another place by making provision to safeguard the pension position of airport employees. We expect most airport companies to negotiate to continue present pension arrangements, but in the unlikely event that they do not we have made provision for appropriate compensation.
Despite the advantages of putting airports into a more commercial environment, we have all along recognised that many of them enjoy a substantial degree of national or local monopoly. Therefore Part IV of the Bill provides a tough and comprehensive set of safeguards to ensure that an airport cannot abuse its monopoly position, be it a local authority airport or an ex-BAA airport. The basic mechanism we have instituted will be recognised by your Lordships who are familiar with the arrangements made for British Telecom, and proposed for British Gas. A prime regulator—in the case of airports, the Civil Aviation Authority, known as CAA—will be assisted by the Monopolies and Mergers Commission with its general expertise in fair trading and competition matters. Because of the number and diversity of airports to be regulated—from Heathrow with a turnover of £230 million a year to Blackpool with a turnover of just over 961 £1 million a year—we have provided for a two-tier system of regulation.
The first tier of regulation will apply to airports with a turnover above £1 million a year and will take the form of powers, set out in Clause 39, enabling the CAA to impose certain conditions to remedy or prevent the adverse effects of discriminatory, exploitative or anti-competitive behaviour by the airport operator, if and when such abuses of monopoly occur. I have already described how the CAA's powers under these provisions to prevent predatory pricing by an airport operator that harms another airport business have been considerably strengthened since the introduction of the Bill in another place. The CAA will also have powers to require accounting transparency.
The second tier of economic regulation will apply to the largest airports—initially BAA's London airports and Manchester—which will be designated under Clause 38. Unlike first-tier conditions (which will nonetheless be applicable to these airports), imposition of Clause 38 conditions will be mandatory for designated airports. First, the CAA will have a duty to impose exhaustive conditions to ensure accounting transparency. Secondly, it will have a duty to impose a limit on the maximum level of airport charges at these airports—probably by means of a formula—which will be reviewed every five years. Before imposing a pricing condition the CAA will refer the question to the MMC, which will carry out an investigation of the entire airport-related business. The MMC will also make recommendations on any practices found to be against the public interest as well as recommending what limit should apply to airport charges, for the next quinquennium.
Your Lordships will readily recognise that this two-tier regulatory regime has been carefully designed to cater for the widely differing requirements and circumstances of airports. We believe that it strikes the right balance between flexibility and incentive for management, and the protection of passengers and airlines.
Part V of the Bill, together with certain clauses in Part VI and Schedules 1 and 2, provide for airports within economic regulation to exercise certain powers, privileges and duties in relation to planning law and other such matters. They give airports the power to make by-laws, for example, and lay the basis for deemed planning permission under the general development order. The powers are broadly similar to those presently pertaining to the BAA. Other clauses in Part VI deal with the CAA's power to require information from airport operators and provide the technical framework for matters such as interpretation of terms used in the Bill and commencement. Schedules 3 and 5 are technical, dealing with consequential amendments and repeals to other Acts, while Schedule 4 contains provisions to ensure a smooth transition when the BAA's airports are vested in the successor companies.
Finally, I come to Part III of the Bill, which, though not contingent upon the privatisation of the BAA or the formation of airport companies, is also a response to the increasing maturity of the airport industry. Part III makes provision for the regulation of use of airports. Clauses 29, 30 and 31 provide three powers, 962 all of which are reserve powers, to be applied only if and when the need arises.
The powers are designed to operate at three levels: the strategic, the tactical and the administrative. The strategic element comprises traffic distribution rules, in Clause 29. The Secretary of State may, whore he judges it appropriate, make traffic distribution rules for airports which appear to him to serve the same area of the United Kingdom. The purpose of traffic distribution rules would be to allocate traffic within an airports system in such a way as to allow each of the constituent airports to realise its full potential.
The second, tactical, element of traffic regulation powers has very much more limited scope. This is the power in Clause 30 to set, by order, air transport movement limits at airports which have substantially underused and underutilised runway capacity and where the prospect of uncontrolled expansion would be likely to have adverse implications for the capacity of local infrastructure. The purpose of an ATM limit would be to control the growth in usage of an airport in such a way that the local infrastructure was not swamped. The Government have present plans for an ATM limit only at Stansted. This provision was the subject of considerable scrutiny in another place The Government have shown their willingness to respond by amending the clause so as to focus the provision specifically on those airports which show a genuine prospect for development, where runway capacity is substantially underused.
The third element, at the administrative level, concerns those airports where demand is very close to capacity limits, either physical capacity limits or a limit imposed under Clause 30. The Bill provides in Clause 31 for powers to direct the CAA to prepare, for the Secretary of State's approval, a scheme for allocating capacity, known as slots, at the airport concerned. Slot allocation is currently undertaken at congested airports by scheduling committees which draw their memberships from the airlines serving the airports concerned. The Government have a high regard for the efficient operation for the scheduling committees and are content for them to continue as long as the voluntary arrangements work satisfactorily. The power to establish new slot allocation schemes is simply an insurance against the voluntary arrangements ceasing to work properly as a result, for instance, of the pressure of demand.
Finally, Clause 28 provides reserve powers for the Secretary of State to give directions to airport operators, for example in the interests of national security.
In the year I was born, Heathrow was in the early stages of its development. Its terminal facilities consisted of a collection of tents and temporary buildings, with the fixed items being three telephone boxes and a post box. In their place is now the world's premier international airport with its new fourth terminal, the most modern and advanced in Europe. The airports industry has indeed come a long way, in a comparatively short time, and British airports lead the way. This Bill creates the framework for their continuing development and their ability to retain 963 their pre-eminence into the next century. My Lords, I commend it to the House.
§ Moved, That the Bill be now read a second time.—(The Earl of Caithness.)
§ 3.18 p.m.
§ Lord UnderhillMy Lords, the House will be grateful to the noble Earl for the courteous way in which he has introduced this Bill, a Bill of controversy, and also for the way in which he has clarified the various points involved. As noble Lords will be aware, the question of hybridity has been raised elsewhere. This is not the time to do so in your Lordships' House, but as we consider various clauses this question may have to be taken up.
My first question must be: what is the real purpose of the Bill? I listened to the noble Earl, and he seemed to give every reason why the situation should be left as it is. Noble Lords will recall what I think was a devastating speech by my noble friend Lord Stoddart of Swindon in dealing with the Second Reading of the Gas Bill. At that time, the Minister responsible said that the gas industry will return to the private sector, where it belongs. There was no justification for saying "where it belongs". I ask the same question about our airport system. In fact, if one took the noble Earl up on all his points, one could say that the Bill is unnecessary and that, far from assisting the aviation industry, it will do the opposite.
As to the question of efficiency, the noble Earl has today praised the efficiency of the British Airports Authority. Time after time Ministers have praised the efficiency of its management and workforce. Grieveson Grant, which is a leading firm of stockbrokers, is, in its detailed investment research, trying to encourage people to put money into a privatised British Airports Authority. What did it say in a report that was published in September 1985? On page 16 it stated:
The British Airports Authority is one of the most successful nationalised industries and has been profitable throughout its existence. In the nine years since its formation (1965) profits have risen on all but three occasions. In that time, the BAA has financed massive investment in airport facilities and terminals, almost entirely from its own resources".I understand that the figure of investment from the authority's own resources since 1965 is no less than £876 million. Noble Lords will welcome the opening of the fourth terminal at Heathrow, at a cost of some £200 million—all from the internal resources of BAA. We then have the additional terminal at Gatwick, which I understand is costing a similar amount.On page 20 of its report Grieveson Grant also says—and I am not quoting now from a socialist journal but from a leading firm of stockbrokers—that:
European airports had significantly lower productivity in terms of value added per employee and the number of passengers handled per employee";that is, comparing European airports with BAA airports. So productivity is not at issue. Again, we should give our thanks to both the management of BAA and its employees for the progress and development that has taken place.On the Second Reading of this Bill in another place the Secretary of State commented: 964
We are the first country to privatise airports and therefore the first to set up a regulatory regime".—[Official Report, Commons, 27/1/86; col. 698.]Why should we want to be the first, if everybody says that we have an efficient British Airports Authority operating at the present moment? No other country in the world is proceeding on the lines that this country will endeavour to follow by this Bill.I return to Grieveson Grant: I like quoting people who do not necessarily accept my political opinions. Page 3 of its report states:
Airports around the world are generally owned and operated by public authorities. This preponderance of public ownership reflects the heavy cost of building airports and the desire to regulate the airline industry, rather than any intrinsic operating requirement".The report continues on page 19:It is uncommon for airports to be run as a business at all. Most rivals to BAA in Europe are operated by a branch of government and have some sort of tax advantage or subsidy, and yet do not make the profits which the British Airports Authority achieves".We must ask what sum will be realised. The BAA balance sheet shows—and this is agreed by both Grieveson Grant and Kitcat and Aitken, which is another firm of stockbrokers—that the fixed assets are worth £1,179 million. Yet I find that it is suggested that a realistic figure that the Government might receive upon privatisation is between £450 million and £520 million. Are we now to give away our airports?In the Third Reading debate in another place, the Secretary of State was so coy about answering how much he expected to realise from the sale that instead of answering that question he asked the Opposition spokesman, "What figure would you suggest that we get?" We still do not know what figure the Government believe they can get for the authority's fixed assets valued at £1,179 million.
There is nothing in the Bill to ensure that foreign interests or airlines will not be able to take shares in privatised British airports. The danger in either case is obvious without me dwelling too much upon the matter. In Committee in another place the Minister said that he would examine that matter but had no intention of writing anything into the Bill. It is surely something that ought to be written into the Bill. We cannot have a situation in which foreign countries, perhaps influenced by their governments, or foreign airlines, are dominating a privatised airport system that the Minister himself has said must be a monopoly; that is why there are so many regulations that must be linked to it.
We believe that the Bill does absolutely nothing for the aviation industry or for industrial development in general. It is following typical Conservative dogma in not looking at what is really required for the British aviation industry. If noble Lords will think carefully about what was said by the noble Earl, it will be appreciated that the Government cannot use the argument of competition. I will not repeat all the statements that I have here, but the noble Earl repeated the statement made by the Secretary of State, and he made statements himself, as to why competition is illusory and why there cannot be competition between airports. What there can be, of course, is competition between the BAA system of airports and local authorities. That is one of the dangers on which I believe a number of noble Lords will speak.
965 We find it said in a statement that the BAA made in a memo to the House of Commons transport committee in March 1984 that:
The concept of airports competing with each other on an equal basis for the same traffic is illusory".That same view was arrived at by the Commons transport committee. We completely agree with the statement made by the Secretary of State, which was repeated by the noble Earl, that to privatise the BAA airports separately would be an absolute disaster. So competition is not the argument, yet we are always told that the reason for privatisation is competition.In the Second Reading debate in another place the Secretary of State stated:
the effect of privatising Heathrow and Gatwick separately would be that the managers … would seek to exclude all the less profitable traffic".—[Official Report, Commons, 27/1/86; col 692.]We have been saying that about almost every privatisation measure the Government have introduced. We tried that argument on the Transport Bill. In that case, instead of disposing of the whole of the National Bus Company as one complete unit the Government are making the National Bus Company sell off not only its regional components but also down to as many as 65 separate units. The Government cannot use the argument of competition because, in their own words:The concept of airports competing … for the same traffic is illusory".We agree completely that Stansted could not stand on its own feet. In fact, it could not be sold separately. It is very doubtful whether anybody would wish to buy Stansted separately. Certainly a privately-owned Stansted would, in my view, be a greater threat to Luton, Manchester and Birmingham than if it were to remain in the South-East London system that is proposed by the Government.The purpose of a private company is, obviously, to make money. I am not saying that critically, because obviously such, is a company's purpose. Nobody invests money to lose it. Money is invested in order to make money, and anybody who invests money in the privatised British Airports Authority will seek to do so.
I have carefully studied the Committee reports in another place. In the decision to write off debts before privatisation it seemed to be argued that the Government and the state will not be losing anything. Incidentally, I will be losing something: I have a stake in the British Airports Authority which the Government are taking away from me, as they have done with almost every other privatisation measure that they have introduced. The Government have already approved the investment of £290 million by the British Airports Authority to develop Stansted so that it can handle up to 8 million passengers a year. Can the Minister say exactly who eventually will pay that £290 million? Further, £33 million is already involved in the current year 1986–87. Will the £33 million for this year also be written off before privatisation?
I now turn to Part II of the Bill which relates to local authority airports. I am certain that, having looked at the list of speakers for the debate, quite a number of noble Lords will refer to specific local authority airports and their problems. Again, the excellent development of local authority airports has been 966 commented upon by Minister after Minister. Every time a Minister visits a local authority airport he lavishes praise upon these airports. The House of Commons Select Committee on Transport stated that it was impressed by the considerable progress of local authority control of their airports and that local authority involvement in the operation of transport has served industry well. The chairman of the Association of District Councils said that there is absolutely no evidence that any district council-controlled airport has behaved in a manner in any way to inhibit competition or damage passengers' interests.
What then is the basis for interfering with local authority airports? All local authorities have great pride in their airports and in the achievements that have been made; and that is irrespective of party. I have been impressed by talks that people have had with me in recent weeks. There is complete unanimity between the parties in areas where the local authority owns the airport. They want to resist the Government's proposals and they take pride in their airport development. In view of the comments made by the Government and the quotes that I have given, I cannot understand this talk about keeping airports at the arm's length of local authorities. It is one of those phrases, like a comedian's catch phrase, which, frankly, I should like to have understood.
Why is the £1 million turnover fixed at that level? How did the Government arrive at a turnover of £1 million or more as the figure at which a local authority is compelled to form its airport into a private limited company? There is no flexibility in this. There is no opportunity for local decision according to circumstances. There is no opportunity at all for the local authority to say that it is best for it to operate in this way or that way. As noble Lords will appreciate, a £1 million turnover is not a lot these days. In fact, it has been said that it would mean forcing a local authority with a passenger throughput of only 100.000 passengers a year to turn itself into a PLC.
The Secretary of State has the power under this part of the Bill to approve a scheme as he thinks fit. He can modify it if he so desires. Many local authorities have invested, often quite heavily, in the development of their airports. If the local authority retains a holding in the new PLC, presumably those debts will remain with the local authority. If so, the local authority will have to service that debt without having the advantage of any revenue income from its airport. This will present a problem for the local authority in facing block grants. Moreover, there will be capital controls on the airport PLC as long as it is under local authority control.
The noble Earl emphasised that point. If the local authority sells 51 per cent. it is removed from all these problems. If ever there was an example of saying to a local authority "You are under capital control, you are under our expenditure control, but if you sell that will be removed" that is one, and local authorities will bitterly resent it. It can only be said that it is a form of blackmail.
Even if the 51 per cent. is sold, what will happen to the debts at present on the airport? Will they remain with the local authority? That is a question to which we definitely require an answer before we reach the Commitee stage. Will a PLC set up to run the local 967 authority airport be free to develop other activities such as hotels, and so on, to help the tourist industry and, indeed, local industry; or will that be barred to the PLC airports set up by a local authority?
Why is there a constraint on elected members who are unpaid directors of a local airport PLC taking part in discussions or voting on matters affecting the airport? That is something which the Government must justify. I hope we have an answer this afternoon because we wish to raise some of these matters in Committee.
The noble Earl referred to pension rights. I believe that he referred only to the local authority airports staffs; but we shall want to look very carefully at the provisions in the Bill for pension rights, pay and conditions of service and industrial relations machinery for the employees of the British Airports Authority and the local authority airports.
One point is missing which we shall press for in Committee. This Bill is an opportunity to provide control on the working hours of air traffic controllers, which is what the ILO has been pressing for. The Bill seems to be a good time to introduce that.
I briefly refer to Parts III and IV of the Bill. These are important, and the noble Earl referred to them. They contain regulations on the use and economic regulation of airports. Considerable powers will rest with the Secretary of State. Admittedly he will have advice in many cases from the Civil Aviation Authority but he will still have the opportunity of taking final decisions. Under certain circumstances he can make traffic distribution rules. He can impose limits on air transport movements. He can determine the allocation of slots where air transport movement control is in force, and he can also deal with the levying of charges. As I say, some of these require consultation with the CAA.
What we must look at carefully in Committee is that there must be consultation with the relevant local authorities in the areas concerned and with the airport consultative committees. In fact, I cannot see anything in the Bill which states that the airport consultative committees will continue. Perhaps the noble Earl will deal with that point when he replies.
In October the CAA issued a consultation document, CAP 510, on air traffic distribution in the London area. I can readily understand the concern of local authorities which say that what is needed is an air transport consultative document dealing with the distribution of traffic throughout the United Kingdom and not just in the London area. A recent news release of the CAA on 20th March makes interesting reading. If noble Lords have not seen it, they should make a point of doing so.
A number of other observations need to be made but let me say a final few words. I notice in the criteria which have to be considered by the Civil Aviation Authority in preparing advice on these matters for the Secretary of State that there is complete exclusion of any reference to environmental considerations. That is one aspect to which we shall certainly pay attention when we reach the Committee stage. There is not the slightest doubt from what we have heard from the noble Earl that the Government recognise the danger 968 that their policy will create a private monopoly. That is why they are introducing yet another quango in order to endeavour to regulate the whole business. What is missing is a sign of any coherent national policy which takes in the development of airlines and airport policy. That is something for which we shall be pressing.