HC Deb 25 May 1972 vol 837 cc1646-54
The Minister for Aerospace (Mr. Michael Heseltine)

I should like to make a statement on the present and future capital structure of the British Airways Board and on Concorde.

As the House will know, there has been a sharp decline in the profitability of world airlines in the last three years. The two British air corporations, BOAC and BEA, have stood up well—and better than most—to the strains of traffic recession and cost inflation. But, despite timely adjustments, they have not been able to insulate their undertakings from a world recession.

The two corporations have been taking vigorous action to meet a changing world situation. The short-term outlook is difficult, thanks to capacity out-running demand throughout the world. The longer-term outlook, though brighter, presents many uncertainties. The old distinction between scheduled and charter services is becoming blurred and the airlines have to meet the growing demand for low-cost travel. All this is happening at a time when costs are rising with inflation. It is impossible to tell now how far there will be satisfactory world agreement on fare structures. We are seeking to meet the reasonable needs of the travel-ling public, while enabling the airlines to achieve a proper return on their capital.

Both airlines are facing important equipment decisions. In BEA's case there is the selection of a wide-bodied aircraft—an important task facing the corporation and its parent Airways Board. The board's appraisal is being pressed forward urgently.

For BOAC there is the need to expand its subsonic fleet and, of course, the great challenge of Concorde. The Government. having weighed all the relevant investment considerations, believe that an investment in Concorde is in the interests of the country and the travelling public and that BOAC should lead the world in the introduction of civil supersonic flight. This being so, I am glad to tell the House that BOAC is today announcing that it will shortly place an order for five Concordes for use on a major part of its route network. The investment in these aircraft with spares and associated equipment will be £115 million at estimated 1974 prices. This purchase has been endorsed by the British Airways Board and I have given my approval. The whole House is aware that in the pioneering of any radical departure in types of aircraft there are bound to be financial risks. With supersonic flying many of these uncertainties are at present quite unquantifiable, and, indeed, some are outside airlines' control. The Government will, of course, do all they can at the appropriate time to ensure the successful operation of Concorde on BOAC's chosen routes.

The air corporations will be faced, like other major world airlines, with a number of challenging uncertainties over the next few years, of which Concorne is only one. It is the Government's task to provide the British Airways Board with a capital structure which will enable it to meet this challenge. We have in particular to give the board a sensible debt-equity ratio having regard to that existing in foreign airlines.

The board's present debt-to-equity ratio, 66:34, is considerably higher than is normal in world airlines. I consider a ratio of around 35:65 to 50:50 would be appropriate for the board. To achieve this range the Government have decided that the requirements of the board for new external capital will be met in the next two or three years by means of issues of public dividend capital, under Section 43 of the Act, to a total of approximately £200 million; that this facility will be available for refinancing existing debt as it matures as well as for financing new capital projects; and that the ratio will be maintained within the range thereafter by means of further issues of public dividend capital to finance a part of the board's capital expenditure.

I have also agreed that the Government will be prepared to review the financial position periodically with the board in the light of the outcome of the board's operations and of the conditions prevailing in international civil aviation at the time; and, if necessary, to take steps to ensure that the board maintains a sound financial performance. It would, of course, be perfectly open to the BAB to refer in its published reports and accounts to the way in which various assumptions made at the time of its equipment purchases had worked out in practice.

The board is now reviewing the forward plans of the two corporations, and it would be premature to set a target before the new board had done its work. It is my intention, therefore, to announce a realistic but nevertheless demanding target in the autumn.

Finally, I should like to express my appreciation to the British Airways Board and to the boards of the two corporations and their staffs for their efforts to expand the British share of world aviation markets on a profitable basis. and to BOAC for all that it has done over a long period to bring the Concorde over to fruition. I am sure the House will wish the Airways Board, BOAC and BEA well at the beginning of what promises to be an important and exciting era in British civil aviation.

Mr. Benn

I first of all thank the Minister for that most important statement, particularly in respect of the BOAC order for Concorde, which is a major step forward. I would express our welcome for it, and make it clear that this aircraft, now entering world markets without any foreign competition of any kind following the cancellation of the Boeing, has a much better prospect of success than might have been thought possible even until quite recently. Other world airlines will really need to order this aircraft if they are to keep abreast of BOAC. I am sure that everyone in the House, whatever may be their views on the aircraft, will wish BOAC well.

I hope the Minister will make it clear that when he talked about unquantified risks these are financial in character and not in any sense safety risks since this is an aircraft that has been more highly tested than any other aircraft ever manufactured in any country.

Dealing with the BEA order and the need for wide-bodied aircraft, may I ask when can we expect a statement on the purchase of the wide-bodied aircraft? Is the hon. Gentleman aware that the Rolls-Royce-powered TriStar should certainly be the choice for BEA on the same basis as has been announced for the Concorde order?

On the financing aspects of the statement, will the hon. Gentleman agree that BOAC has done very well and more than matched its foreign competitors in its economic performance, despite the damage done by the transfer of the West African routes and the allocation of routes across the Atlantic and the failure to protect the air corporations from charter competition, which we believe would in any case justify compensation from the Government of the order of £9 million or so?

Is the hon. Gentleman further aware that we shall now want a White Paper on Concorde and on the financing of the air corporations, we shall want to receive figures on the development and production costs of the aircraft, the pricing calculations, the significance of the issue of public dividend capital and the financial targets, and we shall really need to scrutinise these figures carefully? In addition, we shall want an early debate.

Finally, may I invite the House to congratulate, in addition to BOAC, the workers at BAC and Bristol Engines and Sud and SNECMA for the remarkable technical achievement of building an air- craft which is the first of its kind in the world and will without doubt go successfully into airline service?

Mr. Heseltine

I at once confirm that, of course, the risks are purely financial and that, as the right hon. Gentleman has pointed out, Concorde has been more extensively tested, and will continue to be more extensively tested, than any other aircraft introduced into service. I thank the right hon. Gentleman for his kind remarks and pay tribute to him for the part that he played in steering this remarkable British and French co-operative venture to a successful conclusion. I would also tell the House how appreciative I am to my right hon. Friend the Member for Brighton, Pavilion (Mr. Amery), who launched this project when he held my job, and I also pay tribute to my immediate predecessor, my right hon. Friend the Member for Gloucester-shire, South (Mr. Corfield) for bringing the BOAC order so close to fruition.

I appreciate the urgency of the BEA wide-bodied order. BEA is now considering and discussing with me its requirement, and the TriStar project is being considered very seriously. I fully understand the interest the House has shown in the whole Concorde project and the request for further information. It will always be my intention to give whatever information the House requests as quickly as I can. I doubt whether it is necessary to bring it together within one particular paper because it will become available over a period of time. Certainly the information requested from time to time will be given as quickly as I am able to give it. I would say—and anyone who has ever been involved in such a situation understands this—that financial targets can only be set in the light of an appreciation of circumstances prevailing nearer the time.

Mr. McLaren

Is my hon. Friend aware that his announcement about Concorde will be received with great pleasure and triumph, particularly in places such as my constituency where Concorde workers live? Is he further aware that after many nights of doubt and sorrow we are delighted to see the Secretary of State for Trade and Industry here wearing the Concorde tie? Will my hon. Friend say whether there are grounds for hoping that other airlines may shortly place further orders?

Mr. Heseltine

I must say that it is a relief to have the attention of the House drawn to someone else's tie rather than mine. I appreciate how much of an interest my hon. Friend has from a constituency point of view. It may be of interest to the House to know that approximately 1 in 4 Members have manufacturing interests, through constituencies, in Concorde. Approximately 152 constituencies are involved in the production of components for the aircraft. [Interruption.] I mention this point merely to indicate what a remarkable national effort this is. The placing of the first order for Concorde by BOAC moves us to the situation where interest is now focused on the next orders to come internationally, and I shall do everything I can to give support to BOAC in the very impressive efforts it intends to make, starting on 2nd June when the British prototype flies to the Far East.

Mr. David Steel

While we all wish BOAC well in this enterprise in the purchase of Concorde, may I ask the hon. Gentleman to expand on the rather cryptic sentence in his statement which says: The Government will of course, do all they can at the appropriate time to ensure the successful operation of Concorde on BOAC's chosen routes. Is this an open-ended financial commitment, and, if so, roughly what is involved?

Mr. Heseltine

No, this was not intended to refer at all to the financial situation, which is covered elsewhere. We are pioneering a new form of flying, and there will undoubtedly be occasions on which the Government will need to support the efforts of BOAC in pioneering that new form of flying.

Mr. Warren

Having worked for a time on this project, I am delighted to hear the announcement today. Will my hon. Friend tell the House what is involved in the £115 million, which seems a surprisingly large amount of money for five Concordes? Will he give a breakdown of the figure and assure the House that it and no other amount of money that he has talked about contains any visible or invisible subsidy for operating the aircraft?

Mr. Heseltine

I can help my hon. Friend in this respect. The £115 million to which I referred breaks down to a cost of £21½ million for each Concorde. That is the cost of Concorde, plus the necessary spares, allowing for the adjustment to 1974 prices. The basis upon which the price was worked out relates to earlier information given to the House of £13 million for the aircraft itself at 1971 prices. I confirm that nothing in what I have said in my statement or in reply to questions should be taken to imply that there is any operating subsidy for the aircraft, because that would not be the case.

Mr. Joel Barnett

The Minister spoke of "sound financial performance", which is another way of saying "commercial viability", before Government money is put in. He omitted to tell us what return he is expecting from the £200 million investment. Are we to take it that there will be no return to the country from that investment? On the question of the subsidy element, in view of the fact that he has not in the past, despite what he says, given the House or the country as much information as we are entitled to about this massive expenditure, will he tell us openly the full extent of the subsidy to BOAC on which it insisted before it agreed to order the Concorde?

Mr. Heseltine

It is important that all hon. Members understand that no hidden subsidy is involved in the arrangement I have put forward. I have to tell the hon. Gentleman that the repetition of what, therefore, are unfounded charges can only be taken as a deliberate attempt to make harder the work which is necessary to sell the aircraft. There is no subsidy, and it is totally irresponsible to suggest that there is. If the hon. Gentleman chooses to question the methods which I have adopted to reflect the uncertainties that lie ahead, I refer him to the speech of his right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) when he introduced the concept of public dividend capital on 22nd November, 1965. The right hon. Gentleman gave then substantially the same reasons to justify public dividend capital in those circumstances as I have given now to justify it on this occasion. I do not think it will be possible for the hon. Gentleman to use the arguments he suggests when he has seen the target which I intend to set the BAB later this year.

Mr. Allason

Now that we are first in what we hope will be a long queue, will my hon. Friend give an indication of what will be the return on overseas earnings?

Mr. Heseltine

The interesting question of the effect upon our balance of payments of the manufacture and sale of Concorde aircraft needs assumptions to be made which I cannot make about the number of sales, although I am optimistic. The House will appreciate the significance of it if I say that the cost of buying the first five is £115 million, so that on additional aircraft we sell we share with France benefits of that that order.

Mr. Russell Kerr

While I do not go all the way with the Minister and my right hon. Friend the Member for Bristol, South-East (Mr. Benn) in the "commercials" that we have heard on behalf of Concorde, I none the less wish the project well. Is he aware that many of us who still support him on this rather expensive journey are deeply distressed to learn that our worst suspicions are confirmed about the routes which have been stolen from BOAC and BEA, so that instead of the £6 million which his predecessor the right hon. Member for Argyll (Mr. Noble) gave at the time of the announcement, a total of more than £13 million-worth of routes has been stolen? Is not this a disgraceful display of ministerial irresponsibility?

Mr. Heseltine

With great respect to the hon. Gentleman, I am at a loss to understand from where he gets the £13 million. Nothing in my statement has any implication at all on the question which he seeks to raise. At the appropriate time I shall be happy to discuss it with him, but I assure him that nothing in my statement can be interpreted in the way he suggests.

Mr. Tebbit

In echoing the congratulations which my hon. Friend has received from both sides of the House on BOAC's order, may I pay tribute to his predecessor who did so much work to see the aircraft through to this stage? Will my hon. Friend confirm that the placing of this order by BOAC will start the clock going on the timing for the taking up of options which have been placed by other airlines, particularly Pan-American?

Mr. Heseltine

It does not trigger off the option period in respect of Pan-American, which is related to the placing of an order by BOAC and Air France, but I confirm that there are a considerable number of major international airlines whose option period is triggered off by the placing of the BOAC order alone.