HC Deb 27 January 1960 vol 616 cc289-96

Motion made, and Question proposed, That the Clause stand part of the Bill.

9.37 p.m.

Mr. George Chetwynd (Stockton-on-Tees)

We had a very full discussion on the Bill on Second Reading and I intend only to ask the Parliamentary Secretary several questions which arise out of events since then.

Since we had our debate, before Christmas, there have been two very important events in the world of aviation which may well affect the borrowing powers of the air Corporations and have an influence upon their finances in the future. The first was the announcement by the Minister and the companies concerned of the reorganisation of the aircraft industry into two main groups. The second, which we all applaud, was the reported £2 million profit of British European Airways in 1959, with other very fortunate results, too.

Taking, first, the proposed mergers of the aircraft companies into two large undertakings, as both air Corporations have plans to purchase aeroplanes from both of these new groupings, can anything be said at this stage about the possible effect of the mergers on the production of the new aeroplanes? For instance, are they likely to be different in type, are they likely to be great changes as a result of new research, and so on? Is there any possibility, as a result of any greater efficiency after the mergers, of the aeroplanes coming forward before the expected date of delivery, which is, in the main, 1963? Thirdly, is there likely to be any reduction in the cost to the Corporations of these aeroplanes?

It may be that this is not the best time for the Minister to give us his views on this point, but as it seems that the Government will have to offer to the private industries concerned large sums by way of financial aid in order to get the regrouping going, by way of a carrot or bribe, we shall have something to say about it on a future occasion. As, however, the aircraft firms will be helped by financial aid, we think it right that one of the results of Government activity should be to relieve the air Corporations of much of the burden of the large cost of development which they have borne hitherto. If it is expedient to help private industry in this way, we believe there is every justification for assisting the public Corporations, too. I am hoping, therefore, that the Parliamentary Secretary will be able to give us information on that point.

My second question arises from a statement made during the Second Reading debate that the borrowings covered by Clause 1 do not reflect the total expenditure of the air Corporations in their activities during the period concerned. Is it possible to have a breakdown of the financing of the activities of the Corporations? For instance, how much are they expected to raise by internal financing? Some figures were given during that debate. For instance, it was expected that B.O.A.C. would be able out of its own internal resources to meet £63 million of expenditure out of the £83 million proposed, and that B.E.A. would meet £27½ million of expenditure from its own internal finances out of the £62½ million proposed to be spent. Is it possible to give us any reason why B.O.A.C. should be able to finance nearly three-quarters of its expenditure out of its own internal finances whereas B.E.A. can only finance something like one-half?

While on this point, could we also be told how much these figures will differ because, owing to the fall in the value of the old aircraft which can scarcely find a buyer these days, it may be that both Corporations will not be able to realise as much as they had hoped from the sale of second-hand aircraft? It may be that on this point the figures will have to be revised radically and that, of course, will affect the amount of money which the Government are proposing they shall have by way of loan.

The other point on which we need some guidance is how are these payments to be made by the Government? In the previous debate we heard something of how the coal industry was financed by Government loan. Can we take it that the same procedure applies here? Although we know something of how the payments are made by the Government, can we also be told how the repayments are made by the Corporations to the Government and whether the rate of interest paid is affected, directly or indirectly, by the recent increase in the Bank Rate? It seems to me that much of the money which the air Corporations are about to borrow at current rates of interest are to repay earlier loans made to them in the past, and it does not seem to me that this is a sensible arrangement.

In trying to assess the ability of the air Corporations to meet their liabilities in the future, can we be told, if possible on fairly reliable grounds, what are the estimates of the traffic prospects of the Corporations over the next four-year period? During the Second Reading debate we were told what their expenditure is likely to be, what their commitments are, both capital and running costs, but we were not given a firm undertaking about their prospects in respect of the increase in passengers and freight. It seems to me that there has been a fairly sharp increase in freight in the last year and I hope that this can be continued. To meet the large cost of the aircraft coming into operation in the next few years it is obvious that the rate of increase in passengers must be fairly steep also, to make it a profitable business. If we could know how this will work out it would be helpful.

9.45 p.m.

The other point concerns future borrowing. In column 1334 of the OFFICIAL REPORT of 15th December, 1959, the Minister of Aviation appeared to say that at some time in the future he would expect the Corporations to go to the open market to raise their capital. That would be a retrograde step so far as borrowing by a public corporation is concerned. Will the Parliamentary Secretary give us some firm information about what the Government have in mind about that?

My next point is the one raised by my right hon. Friend the Member for Vauxhall (Mr. Strauss), in column 1326 of the OFFICIAL REPORT. He asked the Minister his views about transferring some of the capital of the Corporations into equity stock so that they would not have to bear interest charges if no profits were made. The answer given on that occasion did not satisfy my right hon. Friend. Could we have some more information about that now?

We all hope that the Corporations will receive as much money as we want them to; that the aircraft will come into operation when they are scheduled to do so; and that the nationalised air Corporations will go on from strength to strength.

Mr. Charles Doughty (Surrey, East)

I do not want to delay the passing of the Bill but would like to point out that large and new aeroplanes are to be purchased with this money. We know that they can carry a large number of passengers. The question is whether, on a long run other than the North Atlantic run, they will be allowed to carry the new economy class passengers, which would mean many more passengers. The Corporations consider that they can receive as large a total income if they are allowed to carry a large number of passengers at perhaps cheaper fares. That is a question of international agreement, but it affects the Bill and whether they can repay this money at a slower or a quicker rate than they would otherwise be able to. Will the Parliamentary Secretary say whether there will continue to be restrictions on the passenger carrying capacity of the Corporations' aircraft? If the restrictions are not removed, will he continue to insist on carrying passengers at the economy fares on cabotage routes.

The Parliamentary Secretary to the Ministry of Aviation (Mr. Geoffrey Rippon)

I am grateful to the hon. Member for Stockton-on-Tees (Mr. Chetwynd) for the observations that he has made about our discussions. It is true that on Second Reading we went very fully into the matters raised by the Bill. He has now put a number of questions to me, some of considerable scope, which I will do my best to answer.

The hon. Member referred to the effect of the mergers. I agree that this is a matter which should be left for discussion on some other occasion. For the purposes of the Bill I need go no further than to say that there is no reason to assume that it affects the plans for purchasing aircraft which I outlined on Second Reading.

The hon. Gentleman then referred to development costs. I cannot add anything to what my right hon. Friend said on 15th December in col. 1336 of the OFFICIAL REPORT. My right hon. Friend made it clear that he was aware of the comments of the Select Committee on Nationalised Industries and he assured the House that the Government were giving the matter careful consideration.

Another point was the sale of aircraft. The figures for the sale of secondhand piston-engined aircraft have been taken into account. On Second Reading I referred at some length to the position. Those figures have been taken account of not only in assessing the total borrowing requirements of the Corporation, but also in assessing the position as far as internal finance is concerned.

The hon. Gentleman then asked how the money would be raised. I outlined the position in col. 1271 of the OFFICIAL REPORT. I pointed out that the Bill does not confer upon the Corporations any absolute power to borrow up to the prescribed limits. Treasury consent is required for all individual borrowing and my right hon. Friend is responsible for advancing money under Section 42 of the Finance Act, 1956."—[OFFICIAL REPORT, 15th December, 1959; Vol. 615. c. 1271–2.] As for rates of interest, we considered earlier this evening how far it is proper to discuss them in relation to a Bill of this kind. I can only repeat what my right hon. Friend the Minister of Power said then, namely, that rates of interest are not directly affected by changes in the Bank Rate. I understand that the powers under Section 42 of the Finance Act, 1956, as amended, will expire next August. During the debate on the monetary system on 26th November last year, which arose out of the Radcliffe Report, my right hon. Friend the Chancellor of the Exchequer indicated that the House would in due course have an opportunity of considering this question.

As the hon. Member said, I gave some figures concerning internal finance in the course of the Second Reading debate. The total capital expenditure of B.O.A.C. for the years 1960–61 to 1963–64 will be £83 million. The Bill increases the borrowing powers by only £20 million. The reason is that £63 million will be raised from internal finance, mostly from depreciation provisions. The comparable figures for B.E.A. are £62½ million for total capital expenditure, of which £27½ million will be raised from internal resources.

The hon. Member drew attention to an apparent discrepancy in these figures, and he was also good enough to draw attention to the very satisfactory position of B.E.A., which was revealed recently. It shows a profit of about £2 million in the calendar year 1959. The apparent discrepancy arises because of the incidence of the delivery of aircraft. Because of that incidence, B.O.A.C. will have relatively more depreciation provision within this particular four-year period. It does not follow that the B.E.A. contribution will be any less praiseworthy. Both Corporations normally depreciate in the same way, on a straight line basis over seven years, to a residual value of 25 per cent., and the proportion of depreciation they can apply in an arbitrary given period depends upon the rate of delivery of aircraft.

Mr. Chetwynd

Is the figure of 25 per cent. still being adhered to, bearing in mind the failure to sell aircraft?

Mr. Rippon

That is the normal position The hon. Member turned to the question whether or not the Corporations will be able to finance themselves in due course. Here again, I do not think that I can be expected to add anything to what my right hon. Friend said in the course of the Second Reading debate. There are favourable trends and, having regard to the proportion of internal finance that they are already providing, it may be thought that the Corporations are not doing too badly. It would appear that there is no prospect of their being able to go to the open market so long as they have to go on placing orders for new and increasingly expensive aircraft at relatively frequent intervals. For example, the possibility of having to finance supersonic aircraft arises in the case of B.O.A.C. We must accept that the airline industry nearly everywhere in the world must continue to operate with some measure of public support.

Nor do I think that I can add very much to the very general comments made by the right hon. Member for Vauxhall (Mr. Strauss) on the question whether part of the loan capital should be changed to equity capital. So long as the Government would hold all the equity the position is as broad as it is long on the question of public finance.

The final matter with which I was asked to deal concerned traffic trends. My right hon. Friend the Minister of Aviation dealt at some length with the prospects of both Corporations in the course of the Second Reading debate. At the moment the trends are reasonably favourable. In terms of passenger miles, the Corporations' traffic has increased by about 20 per cent. over the last year. As the hon. Member pointed out, freight traffic is also on the increase. We believe that it is implicit in the present policy that, in order to attract traffic, fares must be reasonably economic.

My right hon. Friend dealt with this matter in the course of his speech. He said: In order to make economic use of this greatly increased carrying capacity, a large increase in air traffic is essential. That was the point made by my hon. and learned Friend the Member for Surrey, East (Mr. Doughty). My right hon. Friend went on to say: I am convinced that the only way to achieve this is by boldly cutting fares."—[OFFICIAL REPORT, 15th December, 1959; Vol. 615. c. 1342.] Exactly how that admirable object is to be achieved is largely a matter of international negotiation and on that, again, I cannot say very much more. It is certainly true that the additional borrowing powers will be used largely for the purchase of new aircraft specifically to meet the growing demands of traffic.

The favourable trend is indicated by the fact that in 1956, B.O.A.C., with less competitive aircraft, carried only 28 per cent. of the traffic between the United Kingdom and North America, whereas in 1959 it carried 34 per cent. of this traffic. It is hoped that it will do even better this year. During recent years B.O.A.C. policy has been one of considerable expansion. For this reason B.O.A.C. has a large number of aircraft on order; in particular, the 15 Boeing 707s and the 35 VC10s.

If B.O.A.C. or, indeed, B.E.A., expanded its capacity less rapidly than is now proposed, undoubtedly the effect would be that they would slip back in the international traffic race. It is necessary to offer frequent public services on a route so as to capture the traffic. These orders for aircraft, which is the real reason why it is necessary to have this Bill, both by B.O.A.C. and B.E.A., are based on a policy of capturing a greater share of the world air traffic.

Question put and agreed to.

Clause ordered to stand part of the Bill.

Clause 2 ordered to stand part of the Bill.

Bill reported, without Amendment; read the Third time and passed.