BRITISH EUROPEAN AIRWAYS CORPORATION (BORROWING POWERS)

HC Deb 20 November 1967 vol 754 cc1028-99

8.33 p.m.

The Minister of State, Board of Trade (Mr. J. P. W. Mallalieu)

I beg to move, That the British European Airways Corporation (Borrowing Powers) Order 1967, a draft of which was laid before this House on 31st October, be approved. Happily, Mr. Deputy Speaker, we have time at a reasonable hour for this debate and, subject to your ruling, I would expect the debate to run fairly wide—

Mr. David Webster (Weston-super-Mare)

On a point of order, Mr. Deputy Speaker. Is there any limitation to the time for this debate?

Mr. Deputy Speaker (Mr. Sydney Irving)

This is exempted business.

Mr. Mallalieu

There was no suggestion that there was any limitation at all. I was merely remarking that we were able to begin our debate at a reasonable time.

It might be for the convenience of the House if, in the main, I were now to confine myself to matters directly relating to the Order and then, if the House will give me permission, I will later try to answer the points that have been raised.

There is, however, one immediate point about which I think the House, and indeed the country generally, would require information. That is the position about air fares following upon devaluation of the £. International air fares are decided by the International Air Transport Association, subject to the approval of Governments. I.A.T.A. has a provision that in the event of devaluation of either the dollar or of sterling, which is the basis for air fares, that for a period of 45 days, or a shorter perior if agreement is reached otherwise, airlines should accept fares on the basis of the local currency only. Fares paid in London will be paid in sterling and those paid in Paris will be paid in francs, and so forth.

There is also provision for calling an emergency meeting of I.A.T.A. at the earliest possible moment to work out new rates of fares as a result of devaluation. That has been done and an emergency conference of I.A.T.A. will be held in London the day after tomorrow. At the earliest possible moment it will produce a new agreement, subject to the approval of the Governments concerned, for air fares.

Mr. Cranley Onslow (Woking)

Can the hon. Gentleman give an indication in the light of past precedent of the direction in which our fares are likely to have been thus revised?

Mr. Mallalieu

I think there is very little doubt that sterling fares will rise.

Coming directly to the Order, under Section 22(1) of the Air Corporations Act, 1967, the outstanding aggregate of the British European Airways borrowings, apart from money needed to redeem stock or loans, is limited to £110 million, or such greater sum not exceeding £125 million as the Board of Trade specifies by Order. When these limits were set in 1962 it was expected that B.E.A. would reach the lower limit by the end of 1966. In fact it will not reach that lower limit until some time next month but, because it will reach it then, it is now necessary to extend the powers to the upper limit, which is the purpose of this Order.

These borrowings are for various forms of capital investment—aircraft purchases, for example. The House may remember that in August, 1965 the Government approved B.E.A. purchases of 15 Trident IIs. In December last the Government approved B.E.A. purchases of 18 BAC111, 500 series. The eventual cost of these two purchases for the fleet is likely to be around £75 million spread over 1965–66 to 1969–70. Progress payments have been and are being made. The amount of progress payments on the Tridents so far is £13 million, and on the BAC111s £51½ million. These have helped to bring the borrowings on investment account up to £98½ million. Further progress payments of £13 million will fall due before the end of the financial year on 31st March, 1968.

In addition to aircraft purchases, progress payments have to be made on such other investments as the new cargo terminal at Heathrow, which we hope will be ready in summer, 1969. The Corporation has payments on extensions to the Beacon Reservation System and on computer development and on the installation in the Trident aircraft of the Triplex auto landing equipment. In all, we expect the Corporation's capital expenditure in 1967–68 to be about £32 million. Of this, about £10 million will be met from internal resources, which leave, £22 million to be borrowed from the Exchequer.

Mr. Tim Fortescue (Liverpool, Garston)

The hon. Gentleman has referred to the new building at Heathrow. Is it not the case that the British Airports Authority is to pay for the building and rent it to B.E.A.?

Mr. Mallalieu

No. B.E.A. is paying for it.

With the Exchequer aggregate of borrowings being £98½ million, with the net progress payments—progress payments which have to be met by borrowing—less the amount which will be met from internal resources, of £22 million and with the £3 million which B.E.A. is allowed to borrow from the bank mainly for working capital, the upper limit we are now proposing in the Order is likely to be reached at or soon after the end of the financial year, 31st March, 1968.

Mr. J. T. Price (Westhoughton)

I raise no objection to B.E.A. being provided with the funds it requires for capital development and other purposes but I rise, as I have done on previous occasions, to question the wisdom of continually trying to finance these vast operations below the line in the Budget. This is a matter of principle, and I should be out of order if I developed it further, but, for example, I would point out that the Italian air lines, which are a completely nationalised State undertaking—

Mr. Deputy Speaker

Order. The hon. Gentleman is making a speech in place of an intervention.

Mr. Price

With respect, Mr. Deputy Speaker, I was coming to the point.

Mr. Deputy Speaker

I would be glad to allow the hon. Gentleman to proceed if he will come to the point quickly.

Mr. Price

The British Government persists in this policy of financing the nationalised industries below the line in the Budget when some of our greatest competitors abroad are doing it by raising 90 per cent. on the market and 10 per cent. from the Government.

Mr. Deputy Speaker

Order. I would be out of order in allowing the Minister of State to reply to that, as it would be outside the scope of this Order, as the hon. Member for Westhoughton (Mr. J. T. Price) himself indicated.

Mr. Mallalieu

I bow with diffidence, as always, to your Ruling, Mr. Deputy Speaker, but, no doubt, if my hon. Friend the Member for Westhoughton (Mr. J. T. Price) can use his accustomed ingenuity he may be able to develop some aspects of that point later in the debate.

As I was saying, B.E.A. is now up to an aggregate on borrowings of £98½ million and progress payments of a further £13 million fall due before the end of this year. But that is not the end of the story. More borrowing is bound to be required for the existing commitments, to pay for the fleets which have already been sanctioned. Further, beyond that, there is the whole problem of the second part of the re-equipment of B.E.A.

The House ought to know something of the complexity of this problem. It is a jig-saw. It is a matter, as I have personally found, of immense difficulty, and upon which my right hon. Friend hopes to announce a decision in the very near future.

Mr. John Rankin (Glasgow, Govan)

Will my hon. Friend explain a little more clearly what he means by the second part of B.E.A.'s equipment?

Mr. Mallalieu

I mean in relation to the Tridents and the BAC 111s which have already been sanctioned. I mean the possibilities of providing B.E.A. with an intermediate aircraft, intermediate in size, which has been very much canvassed in the House and the Press recently.

Mr. Rankin

When he refers to the possibility of providing B.E.A. with another aircraft, which has not been mentioned, has he got the BAC 211 in mind?

Mr. Mallalieu

That, among other things, has been very much in my mind for the past 12 months. Arrangements have to be made to make good the Government's undertaking, given on 2nd August, 1966, that they would take steps to ensure that B.E.A. is able to operate as a fully commercial undertaking with the fleet it requires. This all needs new legislation. It is not possible to prepare that legislation in detail until the vexed question of the second half of B.E.A.'s requirement is decided.

I give notice that, subject to the Parliamentary timetable, and as soon as possible after the announcement of a decision on that subject has been taken, legislation will be laid before the House. However, the future borrowing powers with which that legislation will deal, the future borrowing powers beyond the limit of £125 million with which this Order is concerned, are not especially germane to the present Order. This Order merely extends the limit to the maximum allowed under existing legislation, to permit the continued financing of projects already approved and in train.

Mr. Onslow

On a point of order. The House might be assisted if you could interpret for it the sense in which the Minister's last remark will limit the extent to which we may range in this debate. Is he correct in saying that future borrowing powers of B.E.A. would lie outside the scope of our debate?

Mr. Deputy Speaker

In general terms the Act of 1967 authorised the £110 million under Section 22. The Order covers only the difference between £110 million and £125 million so that anything that is said about future borrowing powers must at least be related to that £15 million.

Mr. J. T. Price

On a further point of order. Before we proceed with the merits of this debate, may I inquire whether it would be in order for me to stand up at an appropriate stage and amplify a little the argument that I put in an earlier intervention? In other words, is it in order to argue, on this Order, whether it is a correct method of financing and producing the money that the Order requires? Could I call this into question in this debate?

Mr. Deputy Speaker

The answer is "No." That was settled by the original Act.

8.50 p.m.

Mr. F. V. Corfield (Gloucestershire, South)

It might be helpful if I put on the record at the start of this debate the fact that the Opposition attach as great importance to the contribution that has been made and is being made to our economy by our airlines, whether nationalised or independent, and by the aircraft industry. In that context, the Government can rely on us to give a sympathetic hearing to any measures that appear to us to add to the airlines' prosperity. In considering the Order and any other measures, despite the apparently narrow scope of the debate, it is necessary to bear in mind the ramifications that any change in the financial arrangements of B.E.A., and the purposes for which they are made, may have upon the other nationalised Corporation, the independents, or the British aircraft industry.

The Order provides what in these days may be regarded as a relatively small increase in borrowing powers, particularly in relation to the very heavy commitments which the hon. Gentleman has mentioned and the others in the offing. Nevertheless, the increase from £110 million to £125 million brings the borrowing powers up to the existing statutory limits, and that makes it important that we should know that the Government have plans for early legislation which will not cause further delay or disruption.

I took it from the Minister that the increase was not in itself likely to be enough even to cover the present commitments for the Trident 2 and the BAC 111 leaving out of account, therefore, anything concerning the next generation, whether it be the Trident 3 or B.A.C. 211. The fact that the limit arises from an Act passed only in 1962 and consolidated only this year should impress upon us—if that is necessary—the speed with which circumstances change, particularly in the aviation world.

Before approving the Order we should ask that the Minister should be able to introduce further legislation in ample time to avoid some of the disruption and perplexities which at present face the Board of B.E.A. The first question is connected with the airline's procurement programme. It would be useful if the Minister would tell us to what extent the present increase in borrowing powers will fail to meet the commitments on the present programme.

Much more important, because it affects the whole financial approach of B.E.A., is that we must press the Minister to expedite the decision between the 211 and Trident 3B. This matter is already having an effect on B.E.A.'s finances and therefore, presumably, upon its needs to borrow. I suppose that the one lesson learned by all of us who have taken an interest in the aviation industry is that delay in decision-making is one of its most costly aspects. It is costly because, whichever way the decision goes, we shall have a situation, even if we are meeting only the needs of B.E.A., in which it will now be necessary to tool up for a faster rate of production than would otherwise have been necessary. My understanding is that that has already considerably increased the estimated development costs of both these aircraft.

There is no doubt that there is a demand for aircraft of that capacity and performance. No doubt the Minister has seen a statement on behalf of Lufthansa and other airlines to this effect. The outstanding lesson is that the chances to Britain's obtaining a share in that market depend very largely on the speed at which we can get into the field, bearing in mind the enormous advantages its big home market gives the American aircraft industry. Over and over again, we have had disappointing results with British aircraft solely because we were too late in the field.

Very often—I am not making a party point— this has been due to a delay on the part of Governments, whether Conservative or Labour, whom we have not yet succeeded in making reasonably good customers. We can, however, claim that the Conservatives were slightly better than the present Government. However that may be, the delay which has already occurred underlines the rather unsatisfactory situation on which the Select Committee on Nationalised Industries has commented concerning the channel of communication in the case of B.E.A. between the airline and the Government.

We have the situation in which the airline sponsoring Department is the Board of Trade, whereas any aircraft which it may order and which is a British project is within the competence of the Ministry of Technology. We now have a situation in which the President of the Board of Trade has, I understand, assured the chairman of B.E.A.—and the Minister has, in effect, repeated that assurance—that no decision has been made against the aircraft which B.E.A. prefers, namely, the 211, while, at the same time, we constantly read extracts from the Press which indicate that the Ministry of Technology has already taken an entirely contrary view.

I hope that not only the Board of Trade, but the Minister of Technology, will come out firmly and deny those Press reports, otherwise we are bound to be left with the suspicion that a battle is going on between the two Government Departments which one of them has thought fit, improperly, to fight in the Press. This is a very unsatisfactory state of affairs and it highlights the importance, from the national point of view as from that of B.E.A., of an early decision.

I hope that the assurance which we have just been given also indicates that the theory being put around by the Minister of State, Ministry of Technology, that we shall never build another aircraft of our own is not supported by his colleague. Although I believe as strongly as anybody in the advantages of European co-operation in this matter, we do not bring it nearer on terms that are likely to reflect the true potential contribution of the British aircraft industry by announcing in advance that we are to be entirely dependent on that co-operation and on the third parties to the arrangement.

Mr. R. F. H. Dobson (Bristol, North-East)

I have with me a copy of the speech, to which the hon. Member has referred, made by the Minister of State, Ministry of Technology, in Cheltenham a few days ago. It contains no such reference as was quite improperly reported in, I believe, the Daily Telegraph the following day. I thought that the hon. Member would like to know this before continuing with his speech.

Mr. Corfield

I am grateful to the hon. Member. If I recollect aright, however, at Question Time two or three days ago the question was put by my hon. Friend the Member for Eastleigh (Mr. David Price) and it was not denied. However, I do not in any way dispute what is in the handout.

Another matter which is important in this connection is that if we are to get the maximum co-operation—this will be extremely important to the cost of any British or European aircraft to B.E.A.—I believe that it is better done by genuine Anglo-French, German or Italian companies taking commercial decisions than by co-operation between two Governments which has so consolidated their industries that they can do it only between Governments, which are apt to produce political rather than commercial aeroplanes. I hope that we will bear this in mind before we charge ahead in making in this country a bigger, larger and, eventually, a single entity with which no foreign firm could form a joint company for this sort of operation.

The other important matter concerning all these aircraft is that the Government should assure us that the initial development cost will not be the only deciding factor. B.E.A. expects as it has every right to do, that if it is to be forced to use an aircraft which will cost a great deal more to operate than the aircraft of its choice, it should have some form of compensation from those who force that decision upon them—namely, the Government. I think this is generally accepted, and I think that the principle of it is accepted by the Select Committee on Nationalised Industries. I hope it is accepted by the Government, but in that case it adds very substantially to the actual cost of at least one of these aeroplanes, and I think we should also bear in mind—

Mr. Deputy Speaker

I am not sure how the hon. Member is relating his remarks to the Order, which, I think he will recognise, is very narrow in scope.

Mr. Corfield

I was going to move on from that, in any case, Mr. Deputy Speaker.

Mr. Webster

Will my hon. Friend not agree that Sir Anthony Milward argued with great cogency before the Select Committee that if the Corporation were to be diverted from commercial purposes an interest waiver on borrowings would be necessary? Therefore, interest rates would come under this Order?

Mr. Corfield

That was my understanding, that this would put up the costs and would require some form of capital compensation which, I should have thought, would have affected borrowing powers. I am not a financier, and I may be wrong in that matter, but that is how I read the Order.

I hope that the hon. Gentleman will bear in mind about all these aircraft, whether they be further Trident 2s or the Trident 3 or either of the BAC aircraft, the enormous importance which rightly is being attached by the public to noise. This is a consideration which I think is very important, not only in relation to the aircraft; I suspect that in future, at certain foreign airports at any rate, noise may be something for which there may be a penalty, and that, again, may add to the costs of operation of whatever aircraft it may be.

The hon. Gentleman has already referred to part of the effect of devaluation. I was glad he did so, although I had to tear up two pages of my notes, because this was a matter on which I found there was some confusion. I had taken it that the International Air Transport Association fixed fares in relation to current rates of exchange. The hon. Gentleman now tells us, what I rather suspected would happen, that there will have to be an upward revision of those fares, and I take it that that will be proportionate to the devaluation. So that in effect a foreigner will be paying exactly the same in his own currency as he paid before, even though he is travelling in a British aircraft. If that is so, devaluation will not help B.E.A.'s revenue as much as it may be expected to do other types of exports, the exports of goods as compared with exports of services.

As I see it, any increase in traffic we may secure through our rates being marginally cheaper will be largely offset by borrowing arrangements, and if fares do not go up proportionately to the amount of devaluation, then we shall be earning that much less foreign exchange for the same number of passengers or amount of freight as the case may be.

I think it would be helpful if the hon. Gentleman could also tell us what the effect of the very high Bank Rate will be on the rate on which these loans will be extended. As I understand the situation, B.E.A.'s borrowing arrangements, which, I think, were forced upon the Corporation, not volunteered, are for a period of seven years at the rate of interest which is ruling at the time the loan is arranged and remains payable throughout the period of that loan. If this is the case, I should have thought there were few less opportune moments from B.E.A.'s point of view to bring forward a borrowing Order, if B.E.A. is about to go and collect money at this high rate of interest which will be with the Corporation for this amount of money for the next seven years, as I understand it.

This, I imagine, would accelerate the need for the next Air Corporations Act which is necessary before any further funds can be made available.

I hope, too, that the Minister or his right hon. Friend will bear in mind, again in considering the actual aircraft to be used, the effects of devaluation on making the aircraft more attractive vis-à-vis American aircraft and the import saving effect which the further extension of British aircraft to B.E.A. can have upon our balance of payments.

There remain the two other financial matters which are apposite to this debate. First, there is B.E.A.'s suggestion that it might in future have a capital reorganisation on the lines of B.O.A.C., introducing what I believe is now called Exchequer dividend capital. It sounds a very odd cross-breed. The second point is the problem of the unprofitable services which it operates domestically for social and political reasons, on which losses have been increasing substantially recently and no doubt have accelerated the date on which B.E.A. has had to come to the House for further borrowing powers.

I do not want to form a judgment on the suggestion about Exchequer dividend capital. I know that the Nationalised Industries Committee did not look at it with a great deal of sympathy, and I would not suggest for a moment that I had studied it enough to form a judgment. However, I hope that the Government will consider at least the effect on morale which it could have. I cannot think of anything duller than B.E.A.'s working for a fixed agreed return on capital assets which it is perfectly possible to achieve while showing a thumping loss on revenue account. It is extremely un-encouraging, whereas the possibility of being able from time to time to declare a big dividend on its Exchequer dividend capital would be more encouraging to those who work in the airline.

As for the unprofitable domestic services, I hope that the Government will get away from any idea of a disguised subsidy in the form of lowering the target and, therefore, increasing the cross-subsidisation between profitable and unprofitable routes and making it impossible to isolate the true costs of those services, but, more important, lowering the whole target and, therefore, lowering the satisfaction which the staff get out of achieving a first-class financial result which, at the moment, is the only way that it has of measuring its success.

After a suitable study of the costs of these services, I hope that the Government will consider what real subsidy is required. Having worked it out and agreed it, I hope that they will then attach it to the services for a period of years and allow other air lines, including B.E.A., to tender for those services. When all is said and done, the independents have pioneered a number of our domestic routes and, as B.E.A. complains, they have now introduced modern aircraft on routes which B.E.A. found it difficult to do and about which B.E.A. finds some embarrassment in the fact that it now has to modernise on domestic routes faster than it would have done otherwise.

I do not believe that this is a subject for complaint. No doubt it has affected their capital programme and the borrowing powers, but the fact is that this is the best possible function of competition. It has forced B.E.A. to produce aircraft which are giving a far better service to the public on routes which otherwise, one suspects, might have become the Cinderellas of B.E.A. If the independents can do it without subsidy, there is no reason why B.E.A. should not be able to compete and give to the public the same advantages in modernised aircraft.

I hope that this consideration and others will induce the Minister to say to the Edwards Committee that the production of new suggestions and arrangements about air licences must be expedited, because so much delay has occurred through tardiness in appointing the members of the Committee.

I am sure that the right hon. Gentleman has read the passage in the Select Committee's Report which makes it clear that there is no sign of any thread of consistent policy in the decisions of the Air Licensing Board, that neither B.E.A. nor anyone else knows where it stands, and that this is no way to develop a domestic or international airline of our country. I hope that the Minister will be able to say firmly that he retracts from the statement that there should be no further independents on domestic routes.

It is significant that another source of B.E.A. capital, which has no doubt affected this Order, has gone in increasing its financial stake in Cambrian and B.K.S. It has done that presumably because it felt that the air routes that those airlines have developed were something worthwhile investing in. The idea that we should abandon for the future this spur to the nationalised industries which the independents have produced in the past, against very considerable odds, I think, would be disastrous for the true interests of British aviation.

Finally—and this ties in to some extent with what I have said about Cambrian and B.K.S.—we are much too much mesmerised, if that is the word, by the belief that this country is too small to fully development domestic airlines. This has been carried much too far.

Wearing another hat, I have been interested for some years in the problem of regional development. When one tries to find out why people are reluctant, despite the financial urges, to go to the development areas—Scotland, Wales and so on—it is a question not of the inadequacy of the bribe, but of communications. Over and over again, as the bigger firms get bigger, we are in danger of the branches of these firms in the development areas away from the centre of communications becoming the subsidiaries to be lopped off first if things go wrong and the subsidiaries which merely do the production, with all the research and development concentrated somewhere else. But it is the skills that research and development bring that are so badly needed to produce the technological growth within the development areas.

So much of this comes back to the fact that the executive requires to move to these outlying places quickly and, not only to move back, but to be able to get to the nearest airport and move to some of the continental centres straight away without coming via London. There is enormous scope for this and I hope that nothing we do in this House will either undermine the enterprise of B.E.A. or the competition of the independents in opening up those routes, which I believe have enormous possibilities and which are a prerequisite to a really successful regional development policy.

9.13 p.m.

Mr. John Rankin (Glasgow, Govan)

The hon. Member for Gloucestershire, South (Mr. Corfield) said a great deal with which I agree. Historically, if the Opposition, when they were in power and aviation was developing not only with the nationalised companies but with the independents, had then shown the good sense that the hon. Gentleman has shown tonight, the relationship between the two parties on the necessary development of aviation would have run on happier lines.

We in fact are not discouraging the independents. We are giving them a great deal of encouragement. All I ask from my hon. Friend the Minister of State is that, in the purchase of aircraft, British European Airways will be given all the freedom that is now being given to the independents, to purchase the type of aircraft which it thinks best suited to its needs.

The hon. Member for Gloucestershire, South referred to the importance of developing parts of our country, particularly Scotland, and he instanced the part which the independents could play in developing these somewhat scattered areas of Scotland where population is sparse. On this score, the independents have shown no desire to provide services.

In Scotland we have a magnificent airport, which is known to everybody, and whose reputation is blazoned abroad by many people. I am, of course, referring to Prestwick, which is not fully used, and which is there for the independents if they want to play their part in opening up the west and north of Scotland, which they are failing to do at the moment. One of our criticisms was that initially, at least, all that the independents wanted to do was to cash in on the pioneer work done by B.E.A.

Mr. Hector Monro (Dumfries)

Would not the hon. Gentleman agree that when the private companies take the initiative they are prevented from going ahead because B.E.A. complains to the Air Transport Licensing Board?

Mr. Rankin

I am not aware of any such thing happening. The hearing is public, and it is up to anyone, independents or nationalised industries, appearing at the hearing to defend the reasons for the attitude which is adopted. If B.E.A. feels that it can defend its attitude publicly, it is not for me, within the precincts of this House, to condemn it for carrying out what it feels to be its public duty.

Mr. Fortescue

The hon. Gentleman said that the independents were trying to cash in on the work done by B.E.A.

Mr. Rankin

I said initially.

Mr. Fortescue

As B.E.A. loses more than £200,000 a year on these services, perhaps "cashing in" is not quite the right term to use.

Mr. Rankin

I accept that it may not have been a very elegant phrase, but it indicated the attitude of the independents, for which I did not blame them. Here was a rich route, which in their view was inadequately served. They therefore tried to cash in, or to make cash out of it. I suppose that that is not something that we can condemn, but my attitude was that they should have done what B.E.A. did originally, namely, get out and pioneer the routes. There was plenty of pioneering work to be done, and there still is.

Mr. Speaker

Order. I hesitate to interrupt the hon. Member, but I am not sure whether the independent groups get any finance under this Statutory Instrument.

Mr. Rankin

That is one of our difficulties. The debate was beginning to strike a happy note, because we felt that there was a certain freedom creeping into this discussion which allowed us to explore the matter a little more fully than is possible under the strict rules of procedure. This was because of the tremendous interest which both sides of the House have in this subject.

Towards the end of his speech my hon. Friend said that he wanted to see B.E.A. becoming a fully commercial undertaking. He prefaced that by saying that he hoped the debate would cover a wider area than the Order before us would seem to allow. With his inspiration and your guidance, Mr. Speaker, I am sure that the avenues we try to explore will not be too narrow.

Mr. Speaker

The hon. Member must accept my guidance rather than the Minister's inspiration.

Mr. Rankin

Yes, Mr. Speaker. I take your guidance as a form of inspiration. I want to examine the phrase "a fully commercial undertaking". Under the Order before us, dealing with what my hon. Friend has described as a fully commercial undertaking, I expect that B.E.A. has been able to submit a budget to the Minister for the programme of aircraft that it wants to build, with the assurance that the budget will be accepted by the Minister.

I should like to know how far B.E.A.'s full commercial responsibility was or is being respected in relation to the suggested proposal from another Ministry that it should enter into an agreement with Germany and France on the purchase of the airbus. That is rather important, because this weekend we have devalued the £, with the result that if the work in France and Germany goes ahead Britain will have to provide more £s to pay the francs necessary for the French and the marks necessary for the Germans to carry out their part in the airbus.

That is a most important aspect of the matter, because the Ministerial decision will force B.E.A. to make a decision which it does not want to make because of the cost involved, and because the cost is a matter not just for B.E.A. but also Government funds. I therefore urge my hon. Friend to note the view of the president of Lufthansa, who has said that on no account will he purchase the airbus if it is ever completed. In that case, France and ourselves would be left to meet an even greater cost.

I take this attitude despite the fact that I firmly believe in the Common Market and in the need for technical cooperation in Europe, because there is the tremendous pressure and menace of the American market. Nevertheless, there is a price which hon. Members on both sides of the House would question before we were willing to pay it.

This is particularly so because B.E.A., seeking to be fully commercial, wants to budget for the BAC 211. I was talking to the chairman of B.E.A. at a function tonight and, when I asked if he still stood by this aircraft, he said that he did and that I should tell the House and the Minister, if I had the chance, that B.E.A. wants it, because among other things it will not present the Government with a bigger budget than at present.

At the same time, this will be an alternative to the scanty market and sales which the airbus will provide. The Italian, the Belgian and even the German airlines want the 211 machine. It will sell and will save Government funds and enable us to do something which we must do in the months ahead—economise. I therefore ask my hon. Friend to consider seriously whether he is going to try to make B.E.A. fully commercial, and to remember that if, unfortunately, speaking for the Government who want B.E.A. fully commercial, he forces on them the Trident 3B with a subsidy, that aircraft cannot, by itself, be run commercially.

Already, his colleague is promising B.E.A. that, if only it takes the Trident 3B, it will get a subsidy as well—which B.E.A. does not need for the BAC211. Surely my hon. Friend will be convinced that logic, economy and good sense are on the side of those of us who ask that when B.E.A.'s next budget is prepared and costed, with the help of the Government, the new aircraft for the Corporation should be the most profitable and the least costly to the Government—the BAC211.

9.29 p.m.

Mr. Henry Clark (Antrim, North)

This debate is a useful opportunity to discuss B.E.A. and there must be a temptation to carry it beyond the bounds of the Order. I hope that I will not be out of order if I stretch it no further than did the Front Bench speakers.

No one with the interests of British aviation at heart could oppose the Order. Aviation, particularly civil passenger and freight-carrying aviation, is a growth industry. A growth industry must continually go to its shareholders for capital and, in asking for additional borrowing powers, B.E.A. is behaving like a competitive, private enterprise airline.

One question which we must ask is whether the money for which it is asking is enough. I apologise to the Minister, but as the debate started rather earlier than we had expected, I missed the first part of his speech, but I presume that this increase in borrowing powers is purely an interim measure. I certainly hope that it is.

We must look very seriously at the question of capital for our growth industries, whether they are nationalised or commercial enterprises. In an industry of this size, it is essential to grow, and for that purpose inevitably more capital is needed. There are signs that B.E.A. are not getting enough capital to meet their growth potential. If an industry with a large growth potential is strangled for lack of capital, as can happen in both commercial and nationalised industries, that is a very serious situation, particularly if such an industry has then to scrape together its capital for various developments out of its profits and has to maximise profits on some routes in order to get other routes off the ground. Indeed, I should be happier if the House were debating a much more generous Order giving B.E.A. larger borrowing powers.

There is a good example of this situation. It is the example of the London-Belfast route, the air line on which I and my colleagues frequently travel. Almost every autumn I put down a Question to the Minister who, in reply, informs me that the growth of traffic through Belfast airport has been 13 per cent. or 14 per cent. That is a consistent figure. It is a wonderful trade where one can guarantee an increase of 13 per cent. or 14 per cent. in business every year.

There is clear evidence in the findings of the Air Transport Licensing Board that B.E.A. has been making money on the London-Belfast route. It was making money even in January, 1966, which was not the happiest time for profitability. In paragraph 65 of the Decision of the Air Transport Licensing Board of 5th January, 1966, there are clear indications that B.E.A. was making money on the Belfast route. Then paragraph 66 gives details of why it was making money on the Belfast route—partly because of the type of aircraft and the fact that freight could be carried in the hold of the Vanguard and it was not necessary to run a separate, regular Argosy service. It is a happy position for it to be able to make profits on this route even at a time when operations generally were not profitable.

This was confirmed at the end of July this year in another Decision by the Air Transport Licensing Board. In paragraph 27 the Board said that on some routes—there is little doubt that London-Belfast was one—B.E.A. was making profits. Incidentally, that was the hearing at which B.E.A. was trying to raise its fares. The Board said: In particular we took note of B.E.A.'s assurance that they had not applied the principle of maximising revenue on trunk routes and were proposing to take from profitable routes only such surplus as was necessary to make good inevitable losses elsewhere. That is an indication of what B.E.A. is, in fact, having to do. It is having to milk the profitable routes, such as the Belfast route—it has added 10 per cent. to its fares and is cutting out the potential growth of that route—in order to put capital into other routes such as that to the Highlands and Islands of Scotland. I agree that such services are necessary, but as an Ulsterman I cannot possibly agree that the Belfast route, which is a vital link between the industry of Northern Ireland and the rest of the United Kingdom, should be milked in order to help the Highlands and Islands service, highly admirable though the latter may be.

B.E.A. should be given more capital to provide that service and build it up to profitability with the right sort of aircraft. The Corporation should not be forced, because of the lack of capital, to milk a vital route like the Belfast one; and the addition of 10 per cent. to the cost of fares will inevitably cut down the growth potential of this route.

Last night—it was entirely my fault—I missed my aeroplane. It happened because the B.E.A. flight was on time. I had to wait for the next aeroplane and, while waiting, I had an opportunity to chat with various members of the airport staff. They told me, from personal experience, the sort of feelings that this 10 per cent. increase in fares had caused. They told me that businessmen did not appear to worry too much, but that for the ordinary man and wife it was an imposition to have to pay £38 12s.—the best part of £40—to travel from London to Belfast for the weekend. Indeed, several travellers had almost sunk into the ground when told the price of a ticket, and I cannot blame them.

Whatever fares should be charged, if we are to have a real growth in traffic—the growth that B.E.A. needs if it is to become a great airline—a 10 per cent. increase in a route which is already making money and on which there is increasingly effective competition from an independent airline seems to be madness.

There are also social aspects to this problem. It is all very well for hon. Members to sign warrants when travelling. Perhaps we forget the cost of air fares to ordinary citizens. The businessman may not pay the money out of his pocket, but it is paid by his business and must come out of the profits. It must be deducted before dividends are distributed. That aside, increased fares are particularly hard on young people, many of whom are working, studying or training here in London and want to fly home as often as possible to be with their families and get a breath of fresh air in Northern Ireland or some other outlying part of the United Kingdom.

B.E.A. has put forward schemes for young travellers but fares increases of this sort reduce the travelling public, and they help to keep families apart. More capital should be made available and the Government should be more generous in making provision for B.E.A. to borrow. I appeal to the Minister to ask B.E.A. to think again about milking the profitable routes to build up its capital to finance the unprofitable ones.

The social and business interests of Northern Ireland are bound to be affected by this increase in fares. Although I do not see why devaluation should mean an increase in fares on internal routes, we are told that there may be yet another increase as a result of it. If fares are allowed to go up yet again, it would be a serious blow to our attempts to bring new industries to Northern Ireland. The last increase was a retrograde step for regional development in Britain and a retrograde method of financing a growing nationalised industry.

9.38 p.m.

Mr. Robert Howarth (Bolton, East)

I apologise to the two Front Bench Speakers for not being in my place when the debate began. I gather that, like myself, certain other hon. Members were rather overtaken by events. I assure both Front Bench speakers that I look forward to reading their remarks in full in tomorrow's HANSARD.

I was inspired by the remarks of my hon. Friend the Member for Glasgow, Govan (Mr. Rankin) to comment on the problems that have been affecting B.E.A. in the last 12 months regarding the Corporation's re-equipment proposals. As I heard my hon. Friend giving vent to his views, I thought it should be said that many people interested in or connected with the aviation scene take an entirely opposite stand.

Ever since what I would call the remarkable B.A.C. proposal was conjured up out of the air to build for B.E.A. a twin engined 190-seater aircraft, I have been reluctant to believe that this is the answer to both B.E.A.'s need and to the British aircraft industry's need for an aircraft which will achieve a measure of world wide sales.

Having taken the trouble in the last 12 months to look at this matter very closely and to discuss it with as many people in the industry as possible, both here and abroad, I still think that the best course open to B.E.A. would be to take the Hawker-Siddeley Trident 3B as an aircraft to fill the gap in capacity that is clear to everyone to see before the European airbus comes along. It is from that end of the scale that I want very briefly to explain my reason—

Mr. Webster

Did the hon. Member ask the opinion of B.E.A. on the subject? If so, he did not pay much attention to it.

Mr. Howarth

I am, of course, aware of the opinion of B.E.A. on this subject. I also know that at one stage the Chairman said that he would like to take the Boeing 727–200, and that the Government have decided—and I fully support the decision as, I believe, does the House—that B.E.A. are not to be allowed to buy American aircraft.

The argument therefore boils down to a choice between the BAC 211 and the Hawker-Siddeley Trident 3B. In view of what I feel is the very limited market open to aircraft of the size of the BAC 211—which would only be coming into service four or five years from now—I can see no good reason why the Government should not only support the European airbus, as I believe they should, but also an aircraft tailored particularly to B.E.A. needs. My hon. Friend the Member for Govan spoke of all these airlines wanting this machine—I only wish they did. It would be nice to think that options from any airline existed for the BAC 211, but that is not the case. One has only to look at the very interesting editorial in the current issue of Flight International to see that the magazine takes the same view as I and others, which is that to fill this gap in capacity required in the next period—that is the early 'seventies until, roughly, the 1974–75 period—it would be as well to have an aircraft that would match the large fleet of Tridents, some of which are coming into service now—

Mr. Rankin

The figures I gave were based on an estimate provided by Mr. Stephen Wheatcroft, who has been accepted as a reliable estimator. There is no corresponding estimate for the airbus.

Mr. Howarth

It might be as well to deal with the merits of the BAC 211 versus those of the Trident 3B rather than introduce the airbus into this equation, as the European airbus is on quite a different time scale. It is generally recognised that the European requirement for the airbus comes in about the 1974–75 period, but we are now talking of the very urgent requirement B.E.A. has to fill several years earlier than this, and which I believe can be filled by the Trident 3B.

Mr. Onslow

To complete the picture, can the hon. Member tell us how many options B.E.A. has taken on the Trident 3B?

Mr. Howarth

The same as for the 211, precisely zero. The Trident was tailored, and, precisely because it was tailored to B.E.A. requirements, it has proved somewhat smaller with a less attractive field performance than the Boeing 727 and it has not sold as the Boeing has. The Boeing 727 has been the most outstanding jet passenger aircraft ever built. The 3B, if it is ordered, could present to the Government a bill considerably smaller than that involved in the launching costs of the BAC 211. The estimated launching cost of the BAC 211 is £100 million, whereas it is £17 million for the Trident 3B. If we work out the economic running costs, the launching costs need to be taken into account. On that basis a better bargain would be struck for this country by B.E.A. taking the 3B, and mating it up with the large number of Tridents it has. This would make it the possessor in the early 1970s of BAC 111 and the Hawker Siddeley Trident fleets Marks I, II and 3B. This makes sense. Having looked at the presentation by both companies of these aircraft, I have no reason to change my view.

Mr. Fortescue

Would the hon. Gentleman comment on suggestions that the 211 is likely to have the supreme advantage of being the quietest aeroplane yet built, even quieter than the Vanguard and far quieter than any plane yet on the drawing board?

Mr. Howarth

I have seen these claims and would like to think that they will be turned into fact. Whether they are exaggerated I am not sure. I have read the claim that this aircraft may be able to operate—I concede the point—without some of the restrictions which at present plague night operations for many aircraft in this country. But on balance, if we are to continue with the support, as I believe we should, of a European airbus, we are clearly limited to giving support only to the Trident 3B and not to the BAC 211. I do not see how the Government could find money for launching both these major projects.

Although it might be nice to think that we could build such an aircraft which would command wide markets, one has to be realistic and to recognise that all the civil jet airlines we have built in the last decade since the days of the successful Viscount have been plagued by the fact that we did not have a large market and a basis from which to work. This has affected our costs. Therefore, I take the view that the European airbus is the aircraft in which we should put our major effort and as an interim measure we should persuade British European Airways to take the Trident 3B. That seems an attractive aircraft. I understand that it has been further stretched. It would return quite good economics—though not so good as the Boeing 727–200—and I think everyone is agreed that it would be most desirable for British European Airways to operate that particular type.

I make a general comment on the question of the services operated in this country, particularly by B.E.A. but also by other operators. I had the rather enlightening experience last month of spending three weeks in the United States. Travelling from many major centres, I was staggered by the success of the American air transport industry extending into a new mass market. Clearly, they are doing this on the basis not of raising fares and therefore possibly lessening the market for air transport but by cutting fares and giving many inducements to people to travel by air. One literally sees an explosion in air transport which is a spiral going upwards instead of downwards, as in this country, which we achieve by pushing up fares, thus restricting the market, increasing costs and thereby bringing in further excuses for raising fares.

It would be nice to think that we might break out of that pattern. It is all too easy for politicians to give advice to those running the airlines in this country, I confess. Our airlines are facing stiff competition from other European airlines. B.E.A. is the major European carrier and it has done exceedingly well. But when one sees the success of American airlines and considers the fare levels achieved by them, one realises that we have a great deal to learn from them.

I was equally pleasantly surprised to find—and I hope that my hon. Friend will note this, because it is worth investigating—that, everywhere I went my wife, who was accompanying me, travelled at two-thirds of the full fare. Had my children been with me, they would have travelled at one-third of the full fare each, so that the four of us as a family would have been able to travel at the cost of about two adult fares. The American airlines go out of their way to persuade people to travel by air.

I, too, query whether the provision of the capital in this Order is sufficient. Are we recognising the growth potential which exists and of which B.E.A., if given the facilities, could presumably take advantage? I hope that B.E.A. will be able to overcome its temporary shortage of capacity early in the 1970s in the manner I have described and that we can look forward to B.E.A., Air France, Lufthansa and other European airlines by the mid-1970s operating a European airbus partly built here and partly built in other European countries.

I hope that, emulating America, we will have achieved a mass market in air travel. They have done it on the basis of offering services incomparable with anything I have yet seen over here and at fare levels which are quite remarkable. I hope that B.E.A. will look closely at the experience of American operators. The sooner it does so, the better it will be for our travelling public.

9.54 p.m.

Mr. David Webster (Weston-super-Mare)

The information given in this Order is, to say the least, sparse. It tells us that shortly the amount of money is to be increased. It is rather late, since the limit will in any case probably expire by March. It also states that the Order was laid before the House of Commons in draft in 1967. No date, or even month, is given. It says that it is to come into operation in 1967 and it is difficult to tell exactly when it comes into effect.

That is all the information we have. At the bottom there is the date "1967", again with no month indicated. I hope that the Minister of State will tell us when the Order was made and when it comes into operation, because these are matters of some substance as we are getting rather near the bottom level of borrowing.

I acquit the hon. Gentleman of any discourtesey. He is always courteous. He and I juggled night after night with the Anchors and Chain Cables Act, and I certainly do not want to repeat speeches I made then. I thank the hon. Gentleman for his courtesy and for explaining the problem of the travel allowance and how it will affect the fares and revenue of B.E.A.

Since the travel allowance was brought in, Sir Anthony Milward has repeatedly complained that it is having a deleterious effect on the revenue of B.E.A.

Now that we have devaluation, which is reducing the value of the travel allowance very considerably, I would have thought that we would need from the sponsoring Ministry a new estimate of what will be the peak Christmas traffic and the Christmas peak revenue. There will be many cancellations when would-be passengers look at the travel allowance after devaluation and the interest rates and other things which will require us all to tuck our belts in and there will be a very sharp drop.

With the progress payments that have to made on aircraft, and also the fact that the I.A.T.A. 45-day period after devaluation can be got round because of an emergency meeting of I.A.T.A., which I understand is happening this week, it would mean that fares would probably be put up a good deal before the expiration of 45 days, thus ruining the Christmas trade.

This will have a devastating effect on the economies of the Corporation during one of its most critical times. It seems as if there will be a risk of this extra tranche of borowing expiring in February and not March. I want an absolutely firm undertaking from the Minister of State that we will get the new Borrowing Powers Bill, because this is what will be required, before the money expires. We have had it on previous occasions after the money has expired. I hope that the Minister will look at this carefully and make sure that Parliamentary time is given.

There is also the redemption of stock. This is a difficult problem. We have a £93 million borrowing situation, with average interest rates on this of 5.2 per cent. and costs of £4.459 million to service, If, under the new Borrowing Powers Bill, there is to be the type of capital reconstruction that the Corporation seeks and which it calls equity capital, and I call nothing of the sort but simply a straight dividend waiver, the House will want to examine this situation thoroughly because the different structures of borrowing interest are very difficult in this Corporation.

When it gave evidence to the Select Committee we rather reluctantly came to the view that it did not take the financial objectives laid down in the White Paper, Cmnd. 1337 particularly realistically. It is not altogether difficult to find out why this is so. The Highlands and Islands route has been taken into account by reducing the earnings on capital invested from 6½ per cent. to 6 per cent., a drop of approximately £300,000. This includes the Scilly Isles, which I would like to leave out anyway. There is the difficulty of the Corporation as against the independent operator.

If the Corporation is to be allowed preferential treatment, regarding interest paid–5.2 per cent., which is taken into account after the earnings of 6 per cent. on capital—this is very different from the independent operator who is probably paying no less than 10 per cent. to the bank for his overdraft. I am not sure what the prime bill rate will be after devaluation. That would probably become about 7¼ per cent. I see that my hon. Friend the Member for Worthing (Mr. Higgins) is getting out his computer to work it out. It will be a much higher rate for the prime bill rate than for the interest paid on the small amount of capital that we are giving this evening.

As we so frequently saw in our transactions in the Select Committee, if one has management deflected from its prime function, which is surely to account for its assets and get the maximum earnings from them, we find again and again that it is the management of a nationalised Corporation.

The hon. Member for Bolton, West—

Mr. Robert Howarth

Bolton, East.

Mr. Webster

East is East and West is West, but maybe occasionally the twain will meet, and both become Conservative at the next election.

The hon. Member for Bolton, East (Mr. Robert Howarth) rightly said that almost a year ago today B.E.A. was told that it could not buy the Boeing 727. That being so, it looked for British aircraft, and in about February or March opted for the BAC211. I think that it was not until March that it chose the 211, and, in fairness to the Government, it could not do more than to say that it was not the aircraft it wished to have, but could not give very precise specifications. Then there was delay and great suspense. It appears to me that the Corporation, the people appointed by the Minister responsible to Parliament to run the industry, decided that if they could not have the Boeing they wanted the 211. In those circumstances, if one twice takes from the management of an industry the right to select the aircraft of its choice one is doing something wrong for the industry.

It is said that we must now allow B.E.A.—there are so many initials in the debate that it is very easy for somebody as confused as myself to get into complications about this—to opt for a tailormade aircraft. In the case of the Trident there is a potential market of 400, and Hawkers opted for a market of 40 to give a tailormade aircraft. I do not think that this was good for B.E.A., and certainly not for Hawkers who said in evidence that they would never willingly do the same thing again. Yet they have, because the Trident 3B is no more than a tailormade modification of the Trident for the purposes of B.E.A.

The BAC211 has been brought on very rapidly, but it would be the first of its type for the market for aircraft of about 200 passengers—the hon. Member for Bolton, East said 197 passengers and the figure I have is 203. It is estimated that there is a potential market of between 1,500 and 2,000 aircraft and it is one which the Americans have neglected. There is considerable potential, and B.A.C. might sell between 400 and 500 of such aircraft, with a possibility of earning £750 million, much of which would come from overseas.

Last week at the Mansion House the Prime Minister gave the latest modification of the "white heat of technological break-through" speech, and spoke about a technological community. I would remind him that it is no longer only the airbus that is international, for B.A.C. is negotiating with Sub-Aviation, which is very happy to sub-contract for 50 per cent. of the airframe work on the 211. Other foreign companies could well come into this. Many of the foreign airlines, particularly Alitalia, are most interested in the project.

In addition to the problem of the aircraft there is the problem of the engine, which may be more important. With the RB211, Rolls Royce is trying to get a very important contract with Lockheeds, and Lockheeds will reasonably say, "If you cannot sell this engine to a British airframe company we are not interested in it." I am certain that one of the reasons the nuclear power group failed to get the Belgian contract for an advanced gas-cooled reactor was that a reactor of this sort had not been bought for use in this country. Therefore, the Belgians could say, "You have not shown confidence in the reactor yourselves. Why should we buy it?" If we do not have the BAC211 and the RB211 engine, Lockheeds are likely to use exactly the same arguments.

Mr. Robert Howarth

When the hon. Member cuts out his asinine political asides, he makes, I suppose, a reasonable case. Surely, the test here, in view of the claims which the hon. Member is making for the BAC 211, is to set it against American practice. Probably the greatest present day manufacturer is Boeing. If it puts forward an aircraft which, it claims, has the sort of market which the hon. Member is claiming for the BAC 211, it goes out and finds its own money. Surely, B.A.C. could go out and see whether it could raise the money to build the sort of aircraft in question, but it does not do that. It asks the Government for £100 million. This is one of the keys to the decision which has to be taken.

Mr. Webster

I am glad that the hon. Member has raised the point, because I hope that the Minister of State, who is, I see, consulting the usual channels, can tell me whether B.A.C. has offered to put up some of the money itself. I repeat that. I hope that the Minister can tell me whether B.A.C. has undertaken to put up some of the money. This is a point of substance and we would like an answer from the Government.

Mr. Onslow

Perhaps, when the Minister devotes himself to the point, he might also tell the House whose money has so far been spent on the BAC 211. Is it B.A.C.'s money or have the Government put any money into it?

Mr. Webster

If the Minister of State has taken his notes on that, which, I see, he has not, and has digested the question and stopped talking to somebody else and can now answer whether B.A.C. has offered to put up any money for the project, I would appreciate an answer, because it is not on the record.

Mr. J. P. W. Mallalieu

I can answer right away. B.A.C. has put up a small amount—I do not know how much—just to keep the research going.

Mr. Webster

I was not meaning to be discourteous. I know that if a Whip speaks to a Minister, it must be an important matter and the Minister has to attend to it.

Mr. Mallalieu

I was checking one of the hon. Member's earlier questions.

Mr. Webster

I appreciate that, but I wanted to have the reply on the record.

I think that the hon. Member for Bolton, East, whose disapproval of my politics makes me more confident in them, will agree that if we have a Trident 3B carrying 146 passengers, it is the end of the line, and if we have the BAC211 carrying over 200 passengers, it is the beginning of the line. These industrial companies do not make estimates without having to follow them up with a good deal of their own endeavour, unlike those of us in this House who do not have to venture one's commercial judgment. I see that the hon. Member agrees with me. The difference is between the winding up of an old series and the start of a a new one. That is the key.

If we go straight to the airbus for about 300 passengers, that is a conjecture some way ahead. I am thinking of the interim period and I believe that both the company and the Corporation are thinking of the interim period, when they could be out in the cold. We know that the Trident was brought on because the Caravelle was taking a lot of passengers away from the great prestige routes of Europe. The same could happen here.

I do not want to digress too much on to procurement, but as, we understand. the Board of Trade and the Treasury seem to be keen on this subject and the Minister of Technology or his Minister of State seems to be leaking against it, although I know that the Cabinet has been busy during the last few days, I hope that we may be given an assurance that every care will be taken in reaching a decision which, once taken, will be irrevocable; and it could well be that the future of our aircraft industry would collapse if this engine and this aircraft were not allowed for B.E.A. I hope that sound judgment will prevail and that biased views, as the hon. Member for Bolton, East put at one stage of his speech about talking to people and then completely ignoring the evidence which they have put forward, will be ignored and that the merits of the case will be seriously considered.

10.10 p.m.

Mr. R. F. H. Dobson (Bristol, North-East)

I do not wish to follow too closely what the hon. Member for Weston-super-Mare (Mr. Webster) has said this evening, but I should just like to take up one point because, through an interruption, I think my hon. Friend missed it. It was that if the Government decide to put money into the 211 that virtually means they have to supply the complete cost of the aircraft, not only cost of research, which is carried on in a very minor way at the moment, but 100 per cent. of the cost. The hon. Gentleman may like to find his own reference to that in the Second Report of the Select Committee on Nationalised Industries where this was made very plain by the spokesman of the Ministry of Technology.

Mr. Ian Mikardo (Poplar)

And the manufacturers.

Mr. Dobson

And the manufacturers, as my hon. Friend reminds me.

I want to talk about procurement policy, because it is very germane to this Order. I realise that the Order is about things which are needed at the moment, but I believe there is need for the Government to make a firm decision soon about procurement, and it seemed to me that my hon. Friend the Minister of State would like to hear some views about procurement policy.

The Government were absolutely right to deny B.E.A. the right on this occasion to purchase the Boeing the Corporation wanted. One can only regret that the decision was not accompanied by some lead from the Government Departments concerned about what aircraft should be used to replace it. The Select Committee in its Second Report suggests that there is need for Government Departments to discuss much more fully with manufacturers—and the hon. Member for Gloucestershire, South (Mr. Corfield) said this as well—with the industry and with the airlines, the real need, which is for the types of aircraft for the routes, and detailed specifications, which do not seem to have been produced so far. I have my doubts whether we can at this stage say that for all time procurement policy should be to buy British. The query instantly arises whether the airbus will be a British aircraft. I understand that we in this country will get very little of the airframe work, and that we shall be very fortunate to get all the engine side, judging by the way negotiations have gone so far.

I thought, too, that the Committee which looked into this recently was absolutely right to stress the fact that from now on in procurement matters we should not think of tailormade aircraft for certain airlines. This has been a fault in the past. I know that the Minister of State appreciates this and I think he takes the same view. This does not, of course, mean that aircraft should not be used properly on the various routes for which they are required.

The difficulty for B.E.A. is that it has two types of route, the internal route and the European, and this causes some dilemmas. Nothing we decide in this House, except in the political sense, will help the Corporation in the choice it makes, and the choice it makes has to be of an aircraft which suits both routes, with conflicting problems, an aircraft for which, in the end, the money will come from the taxpayers of the country, or in some other direct way. That is why I think that the larger groupings of aircraft is a sensible thing to suggest.

This is why I am in some difficulty about deciding whether or not the Trident 3B or the BAC211 is the correct aircraft to suggest to my hon. Friend, who seemed to be asking for ideas. On the one hand if the 3B is virtually made for B.E.A., the BAC211 would be tailor-made for B.E.A. and we seem to be in deep water whichever one we choose. I can appreciate the Board of Trade's dilemma in its choice The delays must be wearing to everyone concerned. It cannot be any consolation to B.E.A. or to the aircraft manufacturers to know that a decision which has been awaited for almost a year is still awaited today.

Mr. Rankin

It will help my right hon. Friend to come to a decision if he realises that the Trident 3B must have a subsidy, whereas the BAC211 does not need one.

Mr. Dobson

I accept that immediately, but I remind my hon. Friend that, while the 211 does not need a subsidy, the Government will have to provide the complete manufacturing costs, which in themselves will probably add up to at least as much as the Trident 3B. That is the dilemma facing the Government, and I think that my hon. Friend the Member for Glasgow, Govan (Mr. Rankin) understands it.

It would not be germane to the argument to give the Minister of State any idea other than that we wish him well in his decision, when he comes to make it, but we hope that he will not make it before coming up with some clear ideas on the subject.

Another aspect which is equally important is that relations between the Board of Trade and B.E.A., I feel, have not been very warm, friendly or useful in the last year. There has been a lot of wrangling in a way which does not help an airline and certainly does not help the House to look at matters in a rational way. The procurement policy is at the back of it, no doubt, but it leaves us with the difficult problem of what to do about relations between the two and between the aircraft manufacturers and the Ministry of Technology, which seem to be fraught with difficulties.

The fault is not entirely on the side of the Board of Trade. B.E.A's attitude towards its statutory limit powers was remarkably stupid, and it ought to have thought a little more before advancing the arguments to the Nationalised Industries Committee that it did. They did it no credit.

It is accepted that, if we are to be involved in a lot of expenditure from this House, there must be some supervision in a direct sense by the Board of Trade. However, there is a danger in too much direct and constant supervision. A supposedly independent board is running a commercial airline, but, because it is now taking and using astronomical sums of money a large proportion of which comes from the Government, it means that it has a very difficult duty to discharge. Until recently, we said, "Go ahead. Have a completely commercial policy, and come to us if you cannot make it." If we now say, "Have a commercial policy, but we shall have to subsidise certain aspects of it or get you out of difficulty when necessary ", that is quite another matter and calls for a different attitude from the Government and from B.E.A., in their relations with each other. I hope that the next year will see some change in that.

I have been a little concerned about B.E.A.s attitude in the present dispute with its pilots, which now seems to be moving towards the withdrawal of the British Airline Pilots' Association from the National Joint Council.

I hope that I can impress upon my hon. Friend the Minister of State that it ought not to work in the same way as the B.O.A.C. Board has done in its negotiations with its pilot staff. I cannot for the life of me believe that that is the right way to treat staff of this calibre and type. I hope, if he obtains anything from the debate tonight, that he will look at this side of staff relationships very critically indeed. This is vital, because if we have a crippling strike, or even a reduction of working, such as exists at B.O.A.C., it can do nothing but harm to the accounts next year and to the way our airline, in which we have great faith and which we strongly support, is put over to the general public.

10.21 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

Everyone who has spoken so far has been very knowledgeable and very clever about the BAC211 and the Trident. I confess that I have not the faintest idea which of these two aircraft is the better, nor, I think, has the Minister. I do not think that he should have any idea, because it is not his job to decide. I see no point in setting up an independent Board, such as B.E.A., with all the knowledge and expertise in its own business, and then taking its important decisions for it. Why can we not allow it to take its own decisions? I would have thought that it was absolutely right that we should leave it alone to manage and cease to interfere, and, what is more, cease to delay it taking its own decisions.

If for balance of payments or strategic reasons, we wish to prevent or discourage British airlines from buying American aeroplanes, why do we not put a tariff on American aeroplanes? If one wanted to discourage something very much, one put on a big tariff. To try to have all the advantages of a tariff without actually putting it on is bound to result in the sort of endless muddle and confusion which is characteristic of every single major purchase which either of our airlines has tried to make in recent years. It would seem difficult to retrieve the situation now, but at least we should make some attempt to allow B.E.A. to manage its own house and only compensate it if it is required to do something which is strictly non-commercial.

One example is the Highlands and Islands service. It is known that this has cost between £167,000 and £356,000 in losses in various ways of the last five years and it is expected to average a loss in future of about £300,000. It is right that this service should be provided and it is a fair charge upon the taxpayer, but I do not see why the other travellers on B.E.A. should provide it. Why people travelling to Edinburgh or Belfast should be asked to provide this I cannot see. The only correct way to finance this loss is to pay a subsidy through the Department of the Secretary of State for Scotland which he would then make available to the airline performing the service The only fair way of determining who should run that service is for all the airlines, including perhaps, for all I know, foreign airlines and certainly the independents and B.E.A., to quote for doing the task which is required by the Secretary of State for Scotland. Everybody will then know what they are trying to do and will be clear as to their obligations, and the public at large will be aware that it is spending so many thousand pounds on a subsidy for this service and we in this House, if we like, can object to it or say: why not pay more? We can augment it or subtract from it.

The gist of the Select Committee's Report is that this should be done. I hope very much that the Minister will agree to do it. If not, it makes nonsense of Select Committees. What is the point of the Select Committee making this Report? I hope very much that the Minister will follow the recommendation in both these respects, particularly with regard to aircraft and I quote: Your Committee attach the utmost importance to the principle that any imposed decision is identified and that the full effects of the decision should be made abundantly plain in B.E.A.'s annual Reports for as long as they continue to be reflected in B.E.A.'s trading results. The important word is "identified". I am certain that all the interferences, noncommercial pressures, and so on, must be properly identified. The worst way is to write into the new capital structure, or the borrowing of the airline, some indeterminate amount to compensate it for something which is non commercial and the benefit of which is unmeasurable. This is the vaguest and most irresponsible way in which we in this House could conduct our financial business, and I am very much relieved to see the strength with which the Select Committee rejected any such suggestions.

B.E.A. is asked to make a profit of about 6 per cent. on capital. This is its target. This, presumably, is what it will be asked to earn on the capital that we are lending it tonight. I do not see why we should limit it to 6 per cent. The trouble with a target is that it implies that one must not make any more than 6 per cent.— one must not make less, and one must not make more. B.E.A. proudly proclaims that it has made just about this target in the past, but, being in full unfettered competition on practically every route, it could be charged to make as much as it can, and if it can make 20 per cent. good luck to it. It would be doing very well, and would be making it against very stiff competition. So I see no reason for a target of that sort.

Moreover, a target does not reflect the cost of borrowing. The average interest which B.E.A. is currently paying on its capital is about 4.3 per cent. It is paying £4.3 million on about £100 million working capital. It is being asked to make 6 per cent. from now on, on its new borrowing. Presumably it will be charged 8½ per cent. or 9 per cent. interest on it. There are all these different rates of return. If we want to reflect the true value of the capital to B.E.A., we should charge it more on its existing capital, and more on new capital, to make a fair comparison with the rates which private enterprise, its competitors, might have to pay, and for the much more important reason that we must make the rate of borrowing correspond in all cases to the availability of savings for investment.

Currently, we are under-saving. We are under-investing, too, but as we are greatly under-saving we ought to lend to the nationalised Corporations at rates which reflect the scarcity of the savings which they are using. I would say that the current scarcity value of capital is about 10 per cent., yet here, we have B.E.A. paying 4.3 per cent. I propose that we have a special tax whereby we do not say, "Make 6 per cent.", or give a target of 8 per cent., but put a tax on the borrowings. I suggest that we should augment the borrowing rate to reflect the true cost of the resources which these industries are using.

This would cut out the ridiculous anomaly which exists, because although the Treasury may say to B.E.A., "You must apply a discount rate of 8 per cent. on new borrowings", it will be asked to pay only 4.3 per cent. The difference between 8 per cent., and 4.3 per cent., that is 3.7 per cent., becomes additional profit to the Corporation. It becomes additional money to its own budget, which means that the effect of trying to make capital more expensive, to make investment more expensive, to B.E.A., in all cases will be simply to increase its profits, which will have the effect of giving it more money to invest in future because it has made a bigger profit. This anomaly runs through the nationalised industries but is particularly strong in an industry like B.E.A. which has a large amount of old capital which it borrowed at cheap rates.

B.E.A. has asked for some Exchequer dividend capital, which means, as far as I can make out, that it wants to have one chunk of capital at rates of interest which are not specific. This means that it can fail to pay interest when it feels like it and pay rather more if it has made a better profit. This conception is utterly meaningless, because the whole of B.E.A. belongs to the State, and if it makes a huge profit in one year it is the State which benefits—the entire increment goes to the equity—but if it does badly we have to pay the entire loss. There is not a single minority shareholder in B.E.A. who can either profit or lose, so we get the entire good and the entire bad in different years.

Therefore, to try to codify this by putting a slice of capital into the capital structure of the Corporation, whereby the profits and losses can be identified, is not helping; it is quite meaningless. We can do it already by making a big or little surplus, after paying interest on the stock.

I suspect that the plea by B.E.A. is an attempt to get a piece of capital into its capital structure on which it will not have to pay interest at difficult times. The least we can ask, as taxpayers, is that these great Corporations in State ownership should always at least pay the interest on their capital, and for B.E.A. specifically to ask for interest-free capital in some difficult years seems to be totally wrong. The Select Committee came down strongly against this, and gave some very strong reasons in addition to those that I have mentioned. I hope that the Minister will confirm that this idea is sunk and dead, as it should be for B.O.A.C. as well, and that it will not be repeated as an experiment.

One thing that we might be able to do is to offer a few more options to B.E.A. or other industries which are raising new capital. There is no reason why there should not be borrowings available in the Treasury for short or long periods. There could even be some undated stocks which they could borrow. There could be all sorts of gimmicky stocks, which could vary with the cost of living or with imports or exports, or some other factor, and the airline could then choose when to borrow and which of the various categories of stock at different interest rates it wanted to borrow. This would give it some more flexibility. I do not believe that it is possible to give it anything like the flexibility of a private concern, but it would give back to management a little of one of the prerogatives of management, which is to pick and choose, between available options, the one most suitable to itself.

We must them consider whether B.E.A. is the right size. In my opinion it is in the position of a giant amongst a large number of very small private airlines. This situation does not make for good competition either on our international routes of our internal routes. There is a strong case for dividing B.E.A. into two or three smaller units. They could perhaps serve different parts of Europe. Real competition between the parts might then be possible. Their performances could be compared. On the Highlands and Islands or much more important and profitable routes they could compete side by side or with private airlines and the rigid structure would be broken up.

The only argument against such a policy might be that economies of scale necessitated airlines being as big as B.E.A., but we know that this is not true. Swissair and Scandinavian Airlines are both much smaller. There are many examples of smaller airlines which are performing much more efficiently, so we should always consider not only making industries more monolithic but also breaking them up to achieve effective competition in which they can show their paces.

I wish B.E.A. well. I believe that it has performed well in the past, but, if we are to be excluded from Europe and perhaps from American association or any other larger grouping, we must get used to providing the desperately needed competition from within our own shores. The only way for the airlines is to do as I have said.

10.37 p.m.

Mr. Tim Fortescue (Liverpool, Garston)

The Minister said that this is an interim Order but did not say just how interim it will be. It allows B.E.A. to borrow an extra £15 million. They still have £10 million in hand before they reach the already authorised £110 million, but they have on order £72 million worth of aeroplanes, towards which they have paid only £18 million, and this does not take into account the order which must come soon, either for the BAC211 or the Trident 3B. So the requested sum is only a small proportion of the money which B.E.A. will need in the near future, amounting to £210 million in the next few years. Beside this, £15 million looks very puny.

I interrupted the Minister, when he said that part of the money would be used for B.E.A.'s new building at Heathrow, to say that I understood that it was to be rented, and he said that B.E.A. was buying it. I would refer him to Question 1696 of the minutes of evidence before the Select Committee on the Nationalised Industries, in which Mr. Marking, the Chief Executive of B.E.A. said: I believe the cost of operating Heathrow is likely to go up rather than down. The new building will certainly make it much more efficient, but the rent we will have to pay will be very large … That implies that B.E.A. will be renting the building and not buying it, and I should be grateful for clarification.

We have also heard that financial discussions with B.E.A. were promised to define the new financial objective—the present one lasts only until next year—in the autumn of this year. Are these discussions proceeding, and, if so, do they include discussions on the equity capital and on operating the "fully commercial undertaking", which was the phrase of a previous Minister of Aviation about a year ago? Will they include the question of the compensation which B.E.A. would receive if it were forced by the Government to operate aircraft which it did not want?

Procuring aircraft for B.E.A. is very much like the game of "I Spy", which we used to play as children, when parents would say, "I spy with my little eye, something beginning with 'M' ", and children would have to guess whether it was, say, microphone" or"mice" or "Minister". The parents would tell them when they guessed right. It seems to me that B.E.A. have to do that with aeroplanes. They say, "We want the Boeing 727". The Government reply, "You cannot have that". Then B.E.A. say, "We want the BAC211". In reply the Government—I hope not, but they seem or the point of saying it—say, "No. You cannot have that".

Ultimately B.E.A. get to the point of choosing an aeroplane which the Government have already decided that they will have anyway, whereupon the Government say, "You are a good little boy. You can have that one." I could not put this better than the Select Committee put it, very succinctly, in paragraph 64 of Section 2 of its Report: B.E.A. are put through the humiliation of making successive applications for sanction to order aircraft until eventually they apply to order the aircraft which the Government have in fact already chosen for them. It is inconceivable in these circumstances that B.E.A.'s morale and their relations with the Government will not be seriously impaired. I fully agree.

May I turn my attention, as many hon. Members have done, to procurement? B.E.A. decided that they wanted the BAC211. They told the Government so briefly in February, and in May they confirmed that with a full economic explanation. On 27th June it was announced that it was hoped that a decision would be made by the end of July. We are still waiting. It is now the middle of November and still B.E.A. have no word from the Government as to which aeroplane they may have. It is apparent that the whole problem is being tackled from. the wrong end and by another Ministry. Another Ministry has said that the European airbus is the aeroplane which B.E.A. should have eventually, and, having decided that—that it will cost this country £100 million or, perhaps rather less, £90 million—the question arises, what will B.E.A. do until this is available?

The Hawker-Siddeley Company has offered the latest version of the Trident—the 3B—which it says it can make at a launching cost of £20 million. But B.E.A. say that it will cost £3 million more to run the Trident 3B than to run the BAC211, which they say puts it out of court.

Many factors have been mentioned about the difference between the Trident 3B and the BAC211, though not such things as the fact that the BAC211 will carry 190 passengers, whereas the Trident will carry only 136. But the real factor is that the Trident 3B is the end of the line. There is no stretch left in it. It is the last possible stretch of the Trident aeroplane—and the only Tridents which have been sold outside this country are a very few to Pakistan Airlines and Kuwait Airlines. All the rest have been ordered and used by B.E.A. No one else has ordered the Trident 2 and it is inconceivable that anyone will order the Trident 3B, whereas the BAC211 is attracting much interest from many other airlines in Europe.

Mr. Robert Howarth

Could the hon. Member substantiate his claim that a great deal of interest is being shown in the BAC211? People who are also very knowledgeable, as is the hon. Member, have described the BAC211 to me as too small and too late. They say that it will be much too late and much too small. Within a year or two it will be overtaken by such aircraft as Lockheed 1011 and the European airbus. Yet here we have an aircraft which will cost the Government, the hon. Member says, £100 million.

Mr. Fortescue

I acquire my knowledge simply from reports in the technical Press dealing with flying and from the daily Press, too, but I understand that the Italians, Germans and Belgians have all expressed interest in the BAC211, and at the moment there is a team from B.A.C. in America attempting to sell the aircraft. There is no such effort in respect of the Trident 3B. What was the other question?

Mr. Howarth

I was referring to the launching cost of the aircraft.

Mr. Fortescue

The launching cost to this country of the airbus is about £100 million, about the same as the BAC211. The Trident 3B, the "interim" aeroplane, would be an additional cost. This being so, I suggest that the proper thing for us to do, especially in our present lamentable financial situation, would be to withdraw from the airbus altogether and rely on the BAC211. At least this would be an all-British undertaking, an aeroplane which is wanted and an aeroplane with a chance of being sold abroad.

In his evidence to the Select Committee, the representative of the Ministry of Technology said that an essential part of starting work on the airbus would be that it was required by the three national airlines: B.E.A., Air France and Lufthansa, each of which would be expected to order 25. When questioned, he added that it was scarcely conceivable that B.E.A. would not buy the airbus if the Government decided to build it. That was almost pressure before starting.

Within the last few days Lufthansa has announced that it will not place an order for the airbus until it is flying, which will be about 1973. It is doubtful whether the airline will order the airbus then because the company will look at the airbus and the other aeroplanes that will be available by then and then have to make its decision. Despite the undertakings that have been given by the German Government to the Ministry of Technology, I understand that Lufthansa is opting out of this. And since the Ministry has said that, unless the three national airlines order 25 aeroplanes each, work will not start, I fear that we are in grave danger of having neither the BAC 211 nor the airbus. Must we order the Trident 3B while we wait for the airbus, only to find that there is no airbus—thus finding ourselves stuck with the Trident 3B, which is the end of the line?

I recommend the Government to consider carefully whether we should not abandon the airbus. After all, there are precedents for one partner in a bi-national aeroplane withdrawing; this should not be left the prerogative of General de Gaulle. In our present financial state, this might well be the most sensible action to take.

I come to the subject of the domestic routes flown by B.E.A. In the first speech I made on aviation in the House, about a year ago, I recommended that B.E.A. should withdraw completely from domestic routes and leave them to the independent airlines. So little was thought of that suggestion by the then President of the Board of Trade that, when replying to the debate, he did not even mention my suggestion. The only thing to have happened, perhaps in consequence, was that in this year's B.E.A. Annual Report there was no mention of the loss made by the Corporation on domestic routes.

For the previous 10 years those figures were given; and I like to think that I had a small influence in that omission.

However, if one digs deep enough one can find the figures. In the last 10 years the domestic air routes flown by B.E.A. have resulted in a loss of about £16 million of the taxpayers' money. Every one of these routes has been unprofitable over that period, leaving aside the Highlands and Islands, which are recognised as being a socially necessary route. B.E.A. is expected to lose on that route, although it is not forced to do so. The Government have persuaded, not compelled, B.E.A. to go on flying it, although the Corporation loses between £200,000 and £300,000 a year in the process.

Consider, for example, the Manchester route. It is a short haul of about 200 miles, one of the distances about which B.E.A. complains bitterly. The Corporation has a monopoly on this route, uses old fashioned aeroplanes—no jets at all —and loses about £500,000 a year. Last year the loss was £509,000. B.E.A. has asked for the fares on that route to be raised and the Air Transport Licensing Board has agreed. Meanwhile, the independent airline which operates the Liverpool route—almost exactly the same distance as the Manchester route— has appealed to the Board to keep the fares down to the old level, it being able to make a profit at that level. Here is a supreme example of the monopoly position of a nationalised industry acting against the interests of the consumer.

The customer is being provided with a second-rate service, a service worse than the independent operator is providing on a similar route. The retort of B.E.A. to this is that it is known that the domestic routes are losing money, but the Corporation will "examine all the routes in depth" before next summer. It has lost £16 million of taxpayers' money and now it will examine all the routes in depth. Does this imply that it has not examined them in depth until now and that when it has lost £16 million that is the moment to examine them in depth? Should it not have examined them in depth if it had lost £15 million, £10 million, or £1 million on them?

Then it says that as a result of examining the routes in depth it is sure that the domestic routes will be made profitable in the summer of 1968, six months from now. That seems a most remarkable contention for any business to make, that after losing £1½ million a year for over 10 years, by looking at the routes in depth it can make them profitable overnight.

The Corporation may raise the fares on these routes, but has it not occurred to the Corporation that, if it does so, not so many will travel on them? It is not correct to say that there is no elasticity of payment between air routes and electric train routes between London and Manchester or Liverpool. The putting up of fares cannot be the panacea for all the troubles of B.E.A. on its routes.

The trouble is that British European Airways will always, by definition, have out-of-date aeroplanes on its domestic routes. This is its present trouble, because never has it put new aeroplanes on a domestic route, and when it puts jets on these routes they are entirely unsuitable because they are too expensive as they have been bought for the long-haul routes into Europe. So why does the Corporation not get off these routes? What would happen if it withdrew from domestic routes? This question was asked in the Select Committee by the hon. Member for Poplar (Mr. Mikardo). He asked: What would happen if you opted out of all the domestic routes? The answer came from one of the executives: The answer so far as the total domestic network is concerned is that if it were to disappear tomorrow we would be very much worse off in the short run. It would take us a lot of years to catch up with this by expansion of our international business. This is very difficult to understand because in the Report of British European Airways, 1966–67, appendix 5, an analysis of results shows that the profit on the international routes for that year, taking into account only the variable and allocated and apportioned costs, was £10½ million, which is about 20 per cent. of the turnover. The profit on the domestic routes was £684,000, about 3 per cent. of the turnover. When we add the cost of the centralised services, administration and so on, these figures turn into a profit for the international routes and a loss of about £1½ million for the domestic routes. Yet B.E.A. said that if it aban- doned all the domestic routes it would be very much worse off in the short run.

I find this extraordinarily difficult to understand. I would be grateful if the Minister could ask B.E.A. to look into this and to let us know its arguments in great detail.

10.55 p.m.

Mr. Cranley Onslow (Woking)

The Minister of State began by saying that he accepted that there would soon be the need for new legislation on this subject. I share the regret of other hon. Members that we are not now considering that legislation. The money B.E.A. is authorised to borrow under existing legislation was, as he said, expected to have been borrowed by it a year ago. The fact that it has not done so yet is a sad reflection on the way it has been allowed to run its affairs by the Government.

The Corporation has not been allowed to make the most of its potential. Instead, it has been put into a position of extreme difficulty. The hon. Gentleman said that this was all tied up with the terribly difficult problem of re-equipment which is so hard for the Government to solve. I also share the regret that we have not had a decision on that terribly difficult problem either. I believe that it was possible for us to have had a decision and that it is no excuse for the Government to plead their inability to make up their minds as a reason for B.E.A. being in its present predicament.

The Government have not come to a decision for want of pressing. On 2nd November, in another place, in reply to the Earl of Kinnoull, the noble Lord, Lord Beswick, said: The factors are now sufficiently defined and an early decision can be made."—[OFFICIAL REPORT, House of Lords, 2nd November, 1967; Vol. 286, c. 154.] One can always expect that, when a noble Lord has said something on behalf of the Government in another place, exactly the opposite will be said here within 48 hours. So it proved in this case, although it was 72 hours later.

The Minister of Technology, replying to a debate on transport on 6th November, said: … we now come to the much more difficult decision of the interim buy of B.E.A. There is the BAC211, which has been urged by B.E.A., and there is the possibility of the Trident 3B. There is the VC10 possibility, and the possibility of existing types. If the Minister of Technology is so mentally confused that he believes that the decision can be defined in these terms now, no wonder no one can make up their minds.

The fact is, whether the right hon. Gentleman knows it or not, that there is no VC10 possibility in this context and there has not been for months. What he means by … the possibility of existing types … I do not know because I should have thought that even he would have dismissed Sea Otter and the Beagle Pup from his consideration in this context. Either he does not know what is going on or he is deliberately misleading the House on the subject. He went on to say that no decision had been reached on the matter, which is probably just as well, seeing that he did not understand the position, and he added: A decision is expected quite soon, but that is as far as I can go on that issue now."—[OFFICIAL REPORT, 6th November, 1967; Vol. 753, c. 764.] When are we to get a decision? It is intolerable that matters should be allowed to drag on in this way. It is intolerable for the reputation of B.E.A. and for the position of men employed in air operations and in the manufacture of aircraft. Maybe the facts have been complicated by the effects of devaluation which, I suppose, will have the effect of making British aircraft more attractive in world markets and thus producing potential purchasers where none existed before last weekend. But it is time that the Government got around to making a decision and that they took note of the remarks addressed to them by B.E.A. on this subject.

I am glad to see the hon. Member for Bolton, East (Mr. Robert Howarth) still here because I want to quote from B.E.A.'s Annual Report and Accounts for 1966–67, which are very relevant to the subject. On page 66, it is stated: … B.E.A. is deeply concerned that the present trend of Anglo-French-German negotiations is leading towards an aircraft project which will have a substantially larger seating capacity than we think desirable even for the high density routes of our network. That is a point which has precisely been taken up by Lufthansa and it is pre- cisely the reason Lufthansa have given for refusing to commit themselves for European aircraft until a point so distant in time that definition must be completed before Lufthansa make up their minds.

The document goes on: It is still abundantly clear, however, that B.E.A. must have a new aircraft of the right size to come into service before the airbus, and a by-product of the BAC 211, which should not be forgotten, is that it is calculated to be as quiet in operation as the turbo-propeller aircraft operating today. I quote this because although we, on either side, may have opinions sometime, formed on the basis of our visits to, and conversations with, people involved in the aircraft industry, they may sometimes be coloured by the fact that we have a constituency interest in aircraft as well as in the industry as a whole, and we do not pay enough attention to the opinions and judgment of the people we hope are best qualified to run this business on our behalf.

Although there may be arguments, and we can debate as to what aircraft would be suitable if we were Mr. Milward and Mr. Marking, the point is what decisions they take on their commercial judgment. What factors do they take into account? They are not factors of sheer size, but of size related to network and frequency of service and its effect on demand, not the sort of arguments we have heard this evening. I do not intend to inflict that on the House, because I am not an expert.

We should have greater confidence in the men who run the valuable nationalised industries.

Mr. Mikardo

The hon. Member is right in saying that the chaps who run the airlines have the greatest expertise in deciding what is best for them, but he will appreciate that what is best for the industries is not necessarily best for the nation, which has other considerations, like maintaining an aircraft manufacturing industry and not greatly increasing the subsidies we have to give. One of the troubles with what he refers to is that experts are sometimes loth to convey to the sponsoring Ministry the calculations they have made.

Mr. Onslow

I will go so far as to say that what may be good for the Prime Minister may not be good for the nation Let us not have a debate like this.

Before the hon. Member for Poplar (Mr. Mikardo) came in, we were discussing B.E.A.'s judgment—that we should discuss this in the light of what B.E.A management said.

I will quote from page 52 of the Annual Report and Accounts where B.E.A. management says: BEA is in the course of committing itself to heavy capital expenditure of public money on new aircraft fleets without having assurance that its plans for using those new aircraft will not be overturned or significantly thrown out by new licensing decisions. A firm foundation for long-term planning is essential. This is coming on the point the hon. Member for Poplar made, and I am glad to do so. The point is that long-term decisions are essential before commitment of public money on this scale. It seems intolerable that they still lack decisions about the future of the Air Transport Licensing Board; about the extent to which nationalised and independent airlines are likely to be able to develop their fleets; about the extent to which airlines are to be backed by hotel facilities. It is regrettable that there is this kind of uncertainly and that we are spending time this evening which we have managed to extract from the Leader of the House—I do not know whether he knows that we are debating this interesting subject now—

Mr. Webster

Send for him.

Mr. Onslow

I do not think he would add a great deal to our debate. We will excuse him for once.

The Minister must understand that the climate of uncertainty simply cannot be allowed to continue very much longer. There must be a decision. A decision has been promised by the end of the month. I wish that it had been made before this debate. The last time that we had a Ministerial pronouncement upon B.E.A.'s finances was effectively on the Second Reading of the Air Corporations Bill, 1965, as it then was. The right hon. Gentleman who is now Home Secretary said: … the Bill will do little more for B.E.A. than to give statutory effect to what is already the de facto position. Shortly before that he suggested that we might say: Happy is the Corporation which has no history."—[OFFICIAL REPORT, 22nd November, 1965; Vol. 721, c. 38.] That may have been true then, but the history of B.E.A. since has been unhappy, largely through the Government's fault. The de facto position has changed consistently for the worse. I do not believe that this House would be prepared to say, "Happy is the airline which has no future", but we are in danger of having to say that with B.E.A. This is largely the Government's fault.

11.7 p.m.

Mr. Hector Monro (Dumfries)

A large part of the debate has consisted of argument upon aircraft procurement. I want to return to the point raised by the hon. Member for Bolton, East (Mr. Robert Howarth) about whether the borrowing powers in this Order will enable B.E.A. to give a satisfactory service to those in the British Isles and outwith it who wish to fly about the United Kingdom. Is the ultimate service as adequate and as good as we have every right to expect?

The hon. Gentleman talked of the passenger explosion. I want to look mainly at the Highlands and Islands of Scotland. It would be a gross overestimate of the situation to talk of a passenger explosion —a mini-blast might be as far as we can go there. Those people are entitled to an adequate air service, and B.E.A. or an independent airline must improve the existing situation.

We are conscious of the very large losses made in the Highlands and Islands as shown in the B.E.A. accounts—£250,000. It is important to point out that there are two particular reasons for this. One is that B.E.A. has never had the right aircraft at the right moment since, perhaps, the wartime Rapide. Secondly, as was brought out fairly dramatically in the Select Committee, there is the system of accounts, whereby onward journeys from Glasgow or Edinburgh, from the Highlands and Islands, have not been credited to that service. The Scottish Council has brought out a most valuable report in recent weeks on communications in Scotland, which touched upon the air services. It stressed the social element and the advantages of the air services to Scotland, particularly over water and at times of difficult conditions, such as when the roads and railways are blocked by snow.

We have now reached a position when B.E.A. and the independents should be thinking of expansion in Scotland. I am glad that the Army has built airstrips and that some of the old aerodromes such as Connell near Oban have been renovated to enable aircraft to fly from them again. It was a pity that they were allowed to deteriorate after the war. Is B.E.A. thinking of expanding in Scotland? Is it contemplating the purchase of the right aeroplanes? Evidence was given to the Select Committee by Mr. Robert McKean, and all of us who know his tremendous work for aviation in Scotland since the war pay him a warm tribute. He said, talking about the provision of aircraft for the smaller services: It is not that we are reluctant to do this, but we have not got the sort of fleet of small aircraft. Is B.E.A. contemplating providing a fleet of small aircraft? Basically, we have only the Viscount in Scotland, and it is far too big for the type of service we require.

At the same time, I do not want to feel that B.E.A. will tread on the toes of the one or two small operators we have, like Logan Air and Strathallan, who are doing an excellent job. I am always very disappointed when B.E.A. oppose their efforts to extend their services, and I hope that it will cease to do this in the future. Is it B.E.A.'s intention to provide more adequate services itself?

On the Anglo-Scottish routes, communications are most valuable when there is high frequency of flights. Could B.E.A. step up the frequency between Edinburgh, Glasgow and London? So often the times of flight are inconvenient to the traveller.

I note that in the Select Committee's Reports there are detailed questions of market research, and I am surprised that it takes so long for B.E.A. to come to a decision on whether or not to improve or increase services. When we are voting a large increase of money to B.E.A. I wonder whether it will use some of it to increase facilities for the passenger, which are very important. I am thinking particularly of the Scottish airports and whether B.E.A. could go out of its way to provide car park facilities. To leave a car in the British Airports Authority car park is very expensive, and B.E.A. could do a lot to help the travelling public in this way.

There is also the question of whether B.E.A. can try to provide a first-class service to the travelling public from Edinburgh, and whether it is pressing the Minister to provide a second runway there, which we feel is absolutely essential. In my modest career as a pilot I was stationed at Turnhouse, and I know just how difficult conditions are with a cross-wind on the present long runway. If the Minister can soon come to a decision the whole of Scotland will be grateful.

I wonder—

Notice taken that 40 Members were not present;

House counted, and, 40 Members being present—

11.15 p.m.

Mr. Monro

Even if we could not fill a Viscount at least it is a start to see that hon. Members on the other side are interested in aviation.

I wish to speak about what B.E.A. is doing to encourage the transport of freight from Scotland, not only to England, but to the Continent. I know that a new terminal is being built at Prestwick, but what efforts is B.E.A. making to increase the handling of freight there? I wonder, too, why B.E.A. is not making any effort to extend flight training at Prestwick, which seems to be an ideal airport for the purpose.

What is B.E.A. doing to help the development districts, which include all Scotland, with communications for industry? Is it the intention of B.E.A. to develop helicopter services? Could it, for instance, consider services in the South of Scotland linking up with a service by fixed-wing aircraft from, perhaps, Carlisle to the South? There seems to me to be tremendous scope for executive travel, with encouragement, where necessary, and the provision of feeder services by B.E.A. There is an enormous opportunity for aviation, both of the more conventional regular airlines and in executive and feeder airlines and helicopters.

I would like to have the assurance of the Minister that B.E.A. is looking at all these aspects and is worrying not only about the big enterprises of the BAC 211 and the airbus, but about the countless thousands of residents of the United Kingdom who are much more interested in smaller aircraft and getting from their homes to places of work and from their workplaces to the centres of population. I hope that B.E.A. is thinking on these lines and being progressive in thought.

11.19 p.m.

Mr. Alick Buchanan-Smith (North Angus and Mearns)

In his opening remarks, the Minister spoke about fares. He mentioned the context of devaluation and the effects that it may have and the discussions that the Government are planning concerning fares on international routes. I should like to turn my attention more closely to the internal routes. As all of us know, one of the effects of devaluation will be to increase fuel prices. This will, of course, put pressure on air fares, and we must realise how much greater the burden of increased air fares will be for those parts of the United Kingdom such as Northern Ireland and Scotland which are so much more dependent on air communications for enabling people to get about, and to move their goods.

I was interested to listen to the discussion earlier about services in the Highlands and Islands, and I should like to support very strongly indeed what my hon. Friend the Member for Gloucestershire, South (Mr. Corfield) was saying about the possibility of putting those services out to tender, to private airlines as well as to B.E.A., giving the services to whichever company is prepared to operate them at the lower subsidy. I think this is common sense, and it would make it quite clear that there is in these services an element of social subsidy. It is essential to maintain the economy of those regions that those services should be carired on and, indeed, improved.

I must say, though, that I wish more discussion were given to what B.E.A. is losing on these services. To take the figures for last year, there was a loss of about £270,000, so that the loss was running at about £800 a day. I heard one of my hon. Friends say that the loss on the Manchester services was running at double that, at £1,600 per day. I hope this helps put the matter in perspective, because those who live in Manchester have an alternative service, the electric train service, which can carry them quickly between Manchester and London, while those in the Islands have no such alternative. The alternative for them is not one of a journey which takes hours, but a journey which takes days. So it can be seen in social terms how much more important for those in the Islands and Highlands the air services are.

Another point I would make is on the relationship between the holiday fares which are charged by B.E.A.—the lower fares in the holiday season—and the fares charged during the rest of the year. This is very important indeed. One of the reasons for the recent increase in fares which came into effect this winter was the loss incurred through some of the lower fares charged during the summer. I question whether it is right that there should be this cross-subsidisation between winter fares and holiday fares for the tourist traffic in the summer. Of course we welcome the tourist traffic in the summer, and we welcome the tourist traffic which the airways bring, but we must realise that it is being paid for by the regular users of air services, those who use them throughout the year—the business community, for example. We are, after all, struggling to get more industry and development to Scotland. Yet the very people who are responsible for that development are having to subsidise those lower summer fares, and I question whether this form of cross-subsidisation is really correct and really in the right interests of Scotland.

I move on to a point touched on by my hon. Friend the Member for Dumfries (Mr. Monro) about cargo terminals, and I would follow him for a moment on the question not only of cargo terminals but proper airport facilities—particularly for Edinburgh, because of the tremendous development, for instance, in Fife and in the new town of Livingston. We know in the last nine months, and in the winter particularly, and some unfortunate weather we have had, the tremendously high number of flights which have been diverted because of the crosswinds at Turnhouse. I hope that we can soon have from the Government an answer which is favourable, because I seriously believe that delay and uncertainty can be a hindrance to economic and industrial development not only in the Edinburgh area. The same is true of the Tayside region as well. We know that the Minister, in conjunction with the Ministry of Defence, is making facilities avilable at Leuchars. But this is a short-term provision, not giving the long-term answer for the next 20 or 30 years in an area in which it is envisaged that population growth and industrial development will be at a far greater rate than that in any other area in Scotland. I hope, that these two points will be given the right hon. Gentleman's attention.

Moving on to the more specific point about cargo terminals, it is common knowledge that Glasgow and Edinburgh are very far behind in the facilities which they have. It is worth remembering that Scottish industry is concerned with many products which are particularly suited to air transport. Scottish firms already take advantage of air freight to send their products south and overseas. That is particularly true of the electronics industry which is developing in Fife.

When we remember that a far higher proportion of Scotland's industrial production is exported than that of the United Kingdom taken as a whole, we realise the tremendous potential that there is for air freight to service Scottish industry. However, a great amount of that freight has to be routed through London, with all the delays involved in going through the bottleneck at London Airport. It should be borne in mind that, when people send freight by air, they do it for reasons of speed. If there is to be a bottleneck on the way, it destroys a main part of the reason for using air freight for sending that product.

I should like to see B.E.A. giving some thought to the possibility of developing direct air freight services from Scotland to the Continent, instead of going through London Airport. We know the congestion at London Airport and the cost involved in it, and direct air freight services as well as passenger services would be in the interests of Scotland.

Mr. Mikardo

Is there one single route between Scotland and the Continent which would fill with freight even the smallest freighter even once a week?

Mr. Buchanan-Smith

One example, which is perhaps a slightly unusual one, is that of a firm in my constituency which processes shell fish and regularly charters a full plane to send its products to the Continent and the Mediterranean. I would refer the hon. Gentleman to the Report of the Scottish Council, which goes into the subject in detail. I will not weary the House with it now, but it develops the case for direct freight routes and gives examples of industrial products which could take advantage of them. It is a report prepared by Scottish industrialists, and the hon. Gentleman will find it well worth reading, if he does not believe me.

Turning finally to aircraft procurement, the Report to which I referred earlier drew attention to routes such as that between London and Glasgow, which is the busiest in Europe. It pointed out that it is not necessarily the best route for very large passenger aircraft. What is needed is a very high frequency service by medium-size aircraft. In this connection, the experience in the United States may provide the answer. There is a shuttle service between New York, Boston and Washington. The service has a very high frequency, with no pre-booking, and payment of the fare at the time of travelling. Something like that may give the answer for the development and growth of Scottish services, rather than thinking in terms of aircraft carrying two or three hundred passengers. In the peculiar circumstances of the very high density of traffic between London and Glasgow—and I hope in future between London and Edinburgh—a smaller type of aircraft with a high frequency of service may provide the answer at the end of the day.

Mr. Henry Clark

On present schedules between London and Belfast, there is a five-hour gap in the middle of the day when no plane takes off from London for Belfast. If one needs to be in Belfast for a meeting at 3.30 p.m., one has to get up at 7.30 in the morning to get to it. When the ordinary flight time is three and a half hours door to door, it is ridiculous that this large gap is left in the middle of the day. If we are to have 180 seaters there will presumably be only four planes a day.

Mr. Buchanan-Smith

I am grateful for that intervention. What the hon. Gentleman has said describes exactly the position also on the Edinburgh route. High frequency of medium-sized aircraft is probably the answer at the end of the day.

If we look at the success of certain of the private airlines on both the Edinburgh and Glasgow routes using the modern small jet, such as the BAC111, we realise the potential that there is for this particular type of aircraft.

It is particularly interesting to look, as I did, at the correspondence in the Financial Times at the beginning of August about the performance of the BAC111. We all know that what B.E.A. is trying to get for its domestic work is an aircraft which will give something of the same economy that it is getting with the Vanguard, which I understand runs at a cost of about 2.1 pence per seat mile.

A lot of figures have been put up for aircraft such as the BAC111, but one figure which was quoted in the correspondence which interested me was in relation to the BAC111 in the United States where it is operated by Braniff Airways on a short-haul network such as we have, showing a cost figure as low as 1.48 pence per seat mile. This demonstrates the potential of this type of smaller jet aircraft on these short-haul routes which we have between Scotland and England. This is important, because already this type of aircraft on the Scottish routes has proved its popularity with the travelling public—the customer. He is the one person who seems to be forgotten in discussions on air matters. When one is herded around London Airport in some of these cattle trucks one feels that the passenger is the last person to be thought about. Yet the way the independent airlines have developed their services in dealing with the passenger, by using modern aircraft instead of aircraft cast off from international routes, shows concern for passenger and passenger comfort which is an example to British European Airways.

I hope that the Minister will pay attention to these particular problems which face Scotland. Transport problems are greater in Scotland. A good air service not only -in the Highlands and Islands of Scotland, but in the regions, such as Tayside, is a thing which I believe can stem migration and help to solve many of our economic and industrial problems at the present time.

11.33 p.m.

Mr. Terence L. Higgins (Worthing)

We seldom have the opportunity of debating civil aviation, and there is no doubt that the standard of debate this evening has been extremely high. I would not presume to speak with great expertise on some of the technical aspects of individual aircraft. My hon. Friends the Members for Woking (Mr. Onslow) and Weston-super-Mare (Mr. Webster) have concentrated on these particular aspects, but I certainly support what they have said about the need to avoid delay in taking decisions about investment proposals.

Similarly, I agree with my hon. Friends the Members for Dumfries (Mr. Monro) and North Angus and Mearns (Mr. Buchanan-Smith) who have spoken of the need to take early decisions about some aspects of aviation in Scotland.

It has become quite clear, as my hon. Friend the Member for Gloucestershire, South (Mr. Corfield) pointed out in opening, that we do have to consider the regional aspects of civil aviation. These are very important indeed if we are to ensure that they have the communications which are necessary if they are to develop on a balanced basis.

Turning to the opening statement by the Minister of State, while I think it is fortunate that we have a debate on this subject, for reasons which I shall discuss in more detail later, I think it can be argued very strongly that this is not exactly the right moment to have had it and certainly not the right moment to debate this particular Order.

It is perfectly clear that the whole basis of this Order has been radically changed by the Government's decision to devalue the £. The Chancellor of the Exchequer has said that a number of cuts, amounting to some £400 million, are to be made in Government expenditure. For example, S.E.T. Premium is to be cut by £100 million, he says the elimination of the export rebate should save £100 million, and defence expenditure is to be cut by £100 million. This leaves another £100 million, which one presumes will come off the nationalised industries. Is there any question of this borrowing allowance for B.E.A. being affected by the general cut back which the Government have said they propose to undertake?

Secondly, what are the precise purposes for which this money needs to be borrowed? The Minister touched on this in his opening speech. He said that it was needed partly to account for programmes which had been sanctioned, and he then used a rather vague expression about covering the future modernisation of the B.E.A. fleet, and so on. It is not entirely clear to what extent the amount which B.E.A. requires to borrow is affected by past decisions, and future decisions, and also to what extent it has been affected by the takeover of Cambrian and B.K.S. to which my hon. Friend the Member for Gloucestershire, South referred. I hope that the Minister will give us a more precise breakdown of the purposes for which these powers are needed.

I propose, now, to relate the Order to the Government's White Paper Cmnd. 3437. "A review of economic and financial objectives", which is concerned with the new criteria which they have laid down for the nationalised industries. Paragraph 18 on page 8 is relevant to the question of cross-subsidisation, which was raised by my hon. Friends the Members for Antrim, North (Mr. Henry Clark), and North Angus and Mearns, namely, whether B.E.A. should cross-subsidise, either from profitable to non-profitable routes, or from operations which take place at one time of the year to operations which take place during a different season.

It seems that the White Paper is quite clear on this subject. Leaving aside the question of social subsidisation, to which I shall refer in a moment, it says: …to cross-subsidise loss-making services amounts to taxing remunerative services provided by the same undertaking and is as objectionable as subsidising from general taxation services which have no social justification". I hope the Minister will assure the House that B.E.A. will be conforming to the stipulation set down in the White Paper about cross-subsidies.

I want, now, to turn to the more difficult question of subsidies justified on grounds of Government policy, which has been discussed by a number of hon. Members tonight. I think that there is almost complete consensus that, if a service is to be run at a loss for social reasons, it is right and proper that this should be set out in the accounts separately from ordinary commercial services so that the House of Commons and the country as a whole will know what it is costing to operate such services.

This, too, is dealt with in the White Paper, which says on page 14: Nationalised industries, which command much greater resources than all but the very largest private undertakings, should expect to be numbered among the most progressive and efficient concerns in the country. Where there are significant social or wider economic costs and benefits which ought to be taken into account in their investment and pricing these will be reflected in the Government's policy for the industry: and if this means that the industry has to act against its own commercial interests, the Government will accept responsibility. This is relevant to two different questions tonight—first, whether the Government should subsidise a route to a certain part of the country. I do not want to elaborate in great detail what my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) said on this subject, although the White Paper is relevant to what my hon. Friend was saying. I want to deal with the question of Government subsidy to B.E.A. which specifically encourages the use of aircraft which is justified on the ground of Government policy rather than on purely commercial considerations. The whole purpose of the Government White Paper on Nationalised Industries—which is relevant to Order, enabling B.E.A. to finance investment proposals—is to say that in future investment decisions by the nationalised industries must be undertaken on a consistent basis, and one which is in line with the best possible techniques of capital budgeting.

I find myself in difficulty in reconciling the White Paper and the Order and I hope that the Minister can enlighten me. If we work out a capital proposal of the kind which will be financed under the Order and we spread out, through time, the sequence of income payments which are likely and the sequence of cash payments which will be incurred, in order to make an investment decision on a discounted cash flow basis, we should need to allow for an element of subsidy. We could include the subsidy either as a lump sum paid at the moment at which the present value is calculated, or, alternatively, allow for a series of operating subsidies spread out through time which can then be reduced to their "present value". We should thus express the whole thing on a consistent basis.

But once we do this the whole investment decision turns upon the size of the subsidy and the whole argument becomes completely circular. Whether we choose one aircraft with this series of cash flows and expenditures or an alternative aircraft with two different sets of figures, the whole decision must ultimately depend on the size of subsidy, whether it is an operating subsidy or a lump sum subsidy.

I should be grateful if the Minister of State would make clear how he gets round this circular argument. It is no good carrying out an investment proposal on the sophisticated lines laid down in the White Paper if the ultimate decision is a purely arbitrary Government decision on the question whether B.E.A. should invest in one aircraft rather than another.

I turn now to a related point mentioned in the Minister's opening speech. He expresses the borrowing requirements and the expenditures likely to take place under the Order as a series of amounts for different years. He gives us a figure for 1967–68 and a figure for 1968–69, and so on. I hope that when in future Ministers talk about such nationalised industry's accounts year by year they will also tell us what the significance is in present-value terms, otherwise we cannot always evaluate the figures they put before us.

In discussing some of B.E.A.'s investment proposals the Minister also said that about £10 million will come from internal resources. This is a problem familiar to those who are concerned with investment proposals in business—the problem of how one should relate the cost of capital raised outside to the cost of capital provided from internal resources. I should like to know, when the Government undertake investment proposals of this kind, whether the internal capital provided is charged at the rate of interest the Government are otherwise charging B.E.A. or at the actual rate of return on capital which the industry concerned—B.E.A.—could otherwise obtain on its investments. This is a technical point, but it comes up in other contexts, and I hope that we can have a clear answer, if not tonight, in the near future, and a ruling which would apply to all the nationalised industries.

I do not want to take the debate too wide into other points which arise on the White Paper, but I must mention paragraph 10, page 5, concerned with the procedure which the Government will use in the nationalised industries, B.E.A. for example, to relate the rate of return relevant to B.E.A. to that which could be obtained in any outside industry. The suggestion is that the nationalised industries should employ a different test rate from that of private industries, because the latter, unlike the nationalised industries, have to consider the effect of their investment allowances. I have a strong feeling that this alters the pattern of the cash flow and the nationalised industries should base their calculations on notional investment allowances. Again, I do not expect an answer at short notice, but there seems a flaw in the White Paper here.

Devaluation of sterling alters the impact of the Order. I have grave doubts whether this borrowing requirement, which was right before this week-end, is still right. Perhaps the hon. Gentleman should reconsider whether the Order should go through as it is. First, 74 per cent. of B.E.A.'s revenue comes from overseas flights, which are carried out not under free market conditions but under rates set by I.A.T.A. Contrary to the White Paper, prices in B.E.A. are not influenced by the Prices and Incomes Board but by I.A.T.A. Perhaps the hon. Gentleman could tell us whether the Board will have any say in this matter.

We are not clear what percentages of activities to be financed by these loans are concerned with overseas domestic flights. The 74 per cent. of operations which involve overseas flights accounted for £60 million revenue to B.E.A. in 1966–67. The crucial question following devaluation is what percentage of this amount was paid in foreign currency and what in sterling.

It is now possible for B.E.A. to adopt one of two alternative strategies. The first would be for them to leave the fares expressed in sterling at the same level and therefore to leave prices and margins unchanged. This would make B.E.A. more competitive, because foreigners travelling by B.E.A. would find that the price to them had been reduced. It is likely that more foreigners would travel by B.E.A. in the future than in the past. If so, we should expect revenue to go up and the increased turnover to be worth 14 per cent. more.

Mr. Mikardo

Has not the hon Member forgotten the pooling system? That would upset those calculations.

Mr. Higgins

I am aware of that. Having served with the hon. Member on the Air Corporations Bill in 1966 I feel that he knows that I have not forgotten about it. I shall touch on it in a moment and ask the Minister to explain exactly what the effect will be either of this alternative or of the subsequent alternative which I shall soon explain. The first proposal is that B.E.A. would leave fares the same, in terms of sterling, so that British airlines would become more competitive. Their revenue would tend to increase and in terms of sterling it would be worth 14 per cent. more. If we take a cash flow of £60 million we find that 14 per cent. is about £8.4 million in terms of sterling, and if I understand the situation correctly that would cover about half the increase in the borrowing requirement covered by this Order. If that is so, is it necessary for us to have the Order in this form?

Mr. Ridley

Surely I.A.T.A. would never allow us to do that? It is an alternative in theory but not in fact.

Mr. Higgins

This is a highly complicated matter and it is right that we should spell out both alternatives. I will come to the second alternative in a moment. My estimate is very crude and needs to be modified downwards to allow for the fact that not all fares paid on international routes are paid in a foreign currency. A very high percentage is paid in sterling. But it needs to be raised to allow for the fact that the turnover will increase if we become more competitive. This alternative may or may not be theoretical. We shall have to see how the I.A.T.A. conference goes.

The second alternative is for the Government to ask for fares quoted in sterling to be raised. The Minister clearly indicated that he thought that this was likely to happen. I thought it rather a surprising thing to admit so readily and I gather that the Government want it to happen. If we raise the fares quoted in terms of sterling, turnover will not rise as much as it would otherwise do. Nevertheless, even if we raise the fares, in terms of dollars, to exactly the same parity as that which existed before devaluation—we shall still be in a situation in which the value of the turnover in terms of sterling is 14 per cent. up. This means that a greater revenue will go into B.E.A. Again it should be possible for them, because they will have raised their prices and their profits and margins, to reduce the borrowing requirements.

The choice between these two alternatives will depend on what estimates B.E.A. and the Government make, first of the elasticity of demand—that is, how much demand is likely to fall or rise as a result of the changes in fares—and secondly of the shape of the cost curve, although in this context that is not all that relevant since few aircraft are working at full capacity.

I hope the Minister will indicate which of these alternatives the Government are likely to favour and why this will not increase the finance of B.E.A. in such a way that the borrowing requirement of the Corporation need not be as great and need not be raised by increasing the borrowing allowance from £110 million to £125 million.

The hon. Member for Poplar (Mr. Mikardo), who is an expert in these matters, said that this would be radically altered by the pooling arrangements. I hope that the Minister will spell this out—I admit that I do not fully understand the workings of the operation in the present situation—and will say what effect this will have on either of the two alternatives about which I have spoken. Will he also say how the pooling arrangement affects his decision about whether or not B.E.A. should raise its fares in terms of sterling?

Other important questions must be asked about the effects of devaluation. The right hon. Gentleman will be aware that the Select Committee Report pointed out on pages 276 and 277 that while international fares were governed by the I.A.T.A. arrangements, fares in the United Kingdom and on cabotage routes were a matter entirely under our control. Are we to understand that these fares are also to go up as a result of devaluation—because, for example, of the effects it will have on the price of fuel—or are they to remain the same? Have the Government taken into account the results of devaluation on the competitive power of British airlines compared with that of foreign airlines?

My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) stressed that some definite views may be held about the I.A.T.A. ruling. Is it intended that the I.A.T.A. conference, to be convened in a few days' time, should merely look at the question of fares, or will it also look into the question of capacity? It may be that as a result of devaluation—if we are to take advantage of it—there should be an increase in the amount of capacity British airlines have on routes controlled by I.A.T.A. Will the three conferences of I.A.T.A. be brought into this matter, or will it be confined to the European conference?

The Minister spoke with assurance. He expects the rates to go up. However, he will appreciate that the power within I.A.T.A. depends on the unanimous vote of all the individual airlines. The major way in which they influence rate determination is through the threat of creating an open market situation. That happens when a previous agreement has expired and when a new arrangement has not yet been negotiated. But it is difficult for any airline, person or government who wishes to raise the rates to produce the same sort of impact on such negotiations as the impact produced by those who wish to cut the rates. This being so, what hopes do Her Majesty's Government have of being able to alter the rates in the way they apparently intend to do?

Devaluation will, I believe, radically influence the whole question of B.E.A.'s future financial arrangements. It will alter the entire cash flow, not only on the revenue side—regardless of which of the two decisions are taken about fares—but also on the costs and fuel side. Also bound up with this are the costs of aircraft, both British and American.

All these mean that the whole situation has to be radically reappraised. I therefore express surprise that the Government should have decided to put forward this Order this evening when clearly they have not yet fully worked out the impact which devaluation is likely to have on the matter, and when I very much doubt that B.E.A. has had an opportunity to do so. We should be grateful if the Minister would say whether we shall be likely to have another opportunity of debating air fares after the I.A.T.A. conference.

12 m.

Mr. J. P. W. Mallalieu

I agree with the hon. Member for Worthing (Mr. Higgins) that this evening is not the appropriate occasion for discussing some of the matters which have been raised tonight, but I do not agree that it is not appropriate to discuss this Order. This Order brings to the maximum what is permitted to be borrowed and it is for expenditure entirely in sterling. Money that is required and the investment which will follow from it does not seem to be affected in any way by devaluation.

Wider matters which the hon. Member raised with great cogency are extremely complicated and I am not capable of giving an answer to many of them off the cuff. They may well be affected by devaluation. It will take some time to work out exactly what the effects will be on the whole future of capital investment for B.E.A. and its capital structure. I could not give an answer to that off the cuff. Obviously, it is a matter which is being, and has been, discussed ever since the devaluation decision was announced.

The hon. Member asked if I could give an assurance about a discussion in this House on fares after the I.A.T.A. meeting. I cannot give an assurance on that. It would be a matter for the Leader of the House, but when we have seen what the position is about fares, I will certainly convey to my right hon. Friend the point the hon. Member made. If there were great dissatisfaction, it would be open to the Opposition to raise the matter.

I wish to correct a statement the hon. Member made, or perhaps an impression I gave him, that the Government had decided on their policy about fares. I was asked what I though the effect would be and I said that sterling fares seemed likely to go up. That seems a fair deduction. Non-promotional fares, first-class tourist and economy fares to countries which have not devalued are likely to go up. That almost axiomatically would follow, but other fares—for I.T. holidays and to countries such as Ireland or Spain which have devalued, or are likely to devalue, might go up by small amounts, or not at all. It is still too early to make any pronouncement about what the future of fares is likely to be.

Mr. Higgins

But surely it is impossible to know how much B.E.A. will need to borrow in order to finance its operations if we do not know what decision has been taken on fares and, therefore, what the revenue and future cash flow to B.E.A. will be.

Mr. Mallalieu

I agree, but that is not affected by the Order. I cannot see that the Order is affected in any way by that matter. The wider things to which the hon. Gentleman has referred must be dependent to some extent on the effect of devaluation.

Mr. Ridley

For how long will the Order run? We do not want to pass the Order until we have much more knowledge of how long it will run. But we shall not know how long the Order will last while we do not know what the fares position will be. What is the money for? We must have more information.

Mr. Mallalieu

I do not know whether the hon. Gentleman was present earlier when I explained in detail what the money is for. The money will be required. Indeed, some of his hon. Friends have been saying that perhaps the Order is not generous enough and that more capital is required by B.E.A. There is not the slightest doubt that this capital is required and that we should provide it by this Order.

I want to deal with some of the detailed points raised before I touch on one or two of the wider general principles. First, there was, I think, a misunderstanding by the hon. Member for Liverpool, Garston (Mr. Fortescue) about whether B.E.A. is buying or leasing the terminal at Heathrow. He quoted Question No. 1696 on page 224 of the Select Committee's Report, implying that B.E.A. would rent the cargo terminal. That referred not to the cargo terminal which is being dealt with by money under this Order, but to the passenger terminal. The land for the cargo terminal will be leased but the building is being paid for by B.E.A.

Mr. Fortescue

The hon. Gentleman did not mention the word "cargo" in his reference to it. I thought he was referring to the passenger terminal.

Mr. Mallalieu

The hon. Member for Weston-super-Mare (Mr. Webster) seemed to be complaining that there was no date on the Order. It will come into force only when I have signed it and I would not dream of signing it before it had been passed by the House. To put a specific date on it before the House had passed it would be very rude. The Order needs the approval of this House only and not the other place because it is a money Order and, when this House approves it, it will be forthwith put into effect.

The hon. Gentleman also asked about the future of the travel allowance, which is very relevant to airlines generally and to B.E.A. in particular. There is a Question down to my right hon. Friend the Chancellor of the Exchequer tomorrow and, in the well-known phrase, I cannot anticipate his statement.

The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) asked about Exchequer dividend capital. This form of capital financing is certainly not contemplated either by the Government or by B.E.A. as a suitable means of discharging the Government's August pledge to B.E.A. simply as a means of passing dividends or cutting them.

There may be a case for the introduction of the Exchequer dividend capital into B.E.A. structure at a later date. If it puts forward proposals I would be prepared to consider them.

Mr. Webster

It is the practice for B.O.A.C. to have this Exchequer dividend capital grant, which is a waiver of interest rates. Without supporting the B.E.A. claim why is it that it was allowed for B.O.A.C.? What is the advantage of it?

Mr. Mallalieu

Not being a financial expert, I would say that it is a reasonable thing when an undertaking is commercially viable. I do not think that it would be a good thing as a means of deficit financing of any sort. Before we could consider that we have to be certain of what the future prospects of B.E.A. are likely to be.

Turnhouse has been mentioned and I am aware of the desire of all those concerned with Edinburgh to get their new runway. I have first to try to settle the vexed question of ownership. That is proceeding as fast as possible. Questions about B.E.A. services in Scotland and the help required in regional development are all matters of great concern to B.E.A. and the Government. No doubt these points will be fully considered by the management.

Almost every speaker has dealt with the highly difficult problem of the future requirement of B.E.A. There has been a good deal of cross-talk—directional and not in temper—between Members on the same side of the House and across the Floor. This shows how extraordinarily difficult it is to reach a decision upon this. Although I have heard every word on this subject tonight, there was no new point put forward that has not been considered, or is being considered.

Mr. Onslow

I suggested that the effects of devaluation upon the viability of the two types of aircraft under consideration would need to be examined. I doubt whether the Government have completed a full examination on this. The point, which the Minister must have taken, put forward by everyone, is the urgency of a decision.

Mr. Mallalieu

Even the devaluation point is not a new one. It has only just come up, but it was at once appreciated by everyone that this has a bearing, and it is being very seriously considered. I agree upon the urgency, from the point of view of B.E.A., of getting a decision.

As my hon. Friend the Member for Poplar (Mr. Mikardo) has said, it is the responsibility of the airline to choose what it thinks is the best aircraft for its purposes. It is the responsibility of the sponsoring Department, the Board of Trade, to put the airline's case as strongly as possible. It is equally the responsibility of every Department and the Government as a whole to look at the wider necessity—the possible use of resources in different ways. This sort of decision cannot be decided solely by the needs of the airline. Other considerations must be taken into account. The Government as a whole must make up their mind and then publish a decision.

12.15 a.m.

Various hon. Members have expressed doubt, as did the Select Committee, about the machinery for working out procurement. There is a thing called T.A.R.C., the Transport Aircraft Requirements Committee—[An HON. MEMBER: "Useless".]—It has a useful purpose in discussing fairly general topics, such as whether there will be a place in aviation for a minibus, but clearly when one has on that body representatives of management and one is trying to find what is valuable for British industry it is unlikely that one will get complete frankness. If I were a manufacturer with something up my sleeve I would not tell it to my opponents.

Because of this, it has now been decided that there should be a special executive of T.A.R.C. which will have powers to call in people, airlines, or manufacturers as and when required, and which will be able to make a serious attempt to find out what aircraft are available, when they are likely to be available, what marketing research has shown, and what is the best way of tackling the needs of civil airlines.

Mr. Dobson

To whom would that information be available and how soon would the people interested in airline questions be able to obtain it?

Mr. Mallalieu

It has to be available to the Government as a whole, because it is the Government as a whole who have to make these decisions.

Mr. Onslow

Is it going to be involved in the case at issue?

Mr. Mallalieu

No.

Mr. Onslow

Thank goodness for that.

Mr. Mallalieu

It has gone beyond that stage. Because of the urgency we shall be giving a decision very shortly.

A good many references have been made to the proposals and recommendations in the Select Committee's report. I have read it. I think all hon. Members will agree that it is a good one. I am not going to comment on it now because it needs thorough study. We hope later to be able to present our views on its recommendations. I am not sure that it would not be a good plan to delay our discussions on that until we have had thorough detailed recommendations and analyses from the Edwards Committee.

There was a suggestion from some of those who framed the Report, I think, that this discussion of the report might wait until then and the House might consider whether we should delay final discussion until Edwards has reported.

There has been a good deal of criticism, from both sides, of the Air Transport Licensing Board and criticism from outside, but I think the criticism has been a little unfair. If there are faults in licensing policy—and very few will deny it—it is not the fault of the A.T.L.B. or of the Board of Trade, but very much the fault of the Act.

The Edwards Committee is sitting now, just to consider the possible future roles of licensing and the structure of the airline industry. The Government appointed the Edwards Committee as an independent body. We did so honestly to try to get at the facts about civil aviation as it is at present, and to try to get an objective analysis of its structure and what the structure should be in the future.

Civil aviation is one of our most important industries. [HON. MEMBERS: "Hear, hear. It would be a great distress, to put it no higher, if it were to become in political and Parliamentary terms the sort of football that the steel industry became at one time. What the Government want to do is to try to find a solution, not a permanent solution, but one for the next 10 or 15 years, which will be so generally acceptable, not only to both sides of the House but to the people, that this great industry can go ahead for a steady period knowing the limits and the possibilities within which it must work.

Question put and agreed to.

Resolved, That the British European Airways Corporation (Borrowing Powers) Order 1967, a draft of which was laid before this House on 31st October, be approved.