Airlines (Competition) (Hansard, 8 February 1993)

§ Sir Keith Speed (Ashford)

I am glad to have the opportunity to concentrate on some aspects of international competition between the airlines serving the United Kingdom. I do not intend to deal with internal competition or with the slot problems at Heathrow, about which we have heard a great deal in recent times. I am sure that the Minister will be glad to hear that.

I am getting tired of sections of the media, the general public and others continually saying how uncompetitive British industry and British commerce are vis-a-vis Europe. By and large that is not true. It is especially not true of our airlines. None of them is state-owned. They do not receive subsidies, yet they provide high-quality service both for the customers and for the shareholders, without any assistance from the taxpayer. That goes for British Airways, British Midland, Virgin Atlantic and Britannia. These and many others are doing a great deal for the United Kingdom economy.

The same, alas, is not true of some of the airlines of our European partners. Many of them are wholly or partly state-owned. Many of them have overt or hidden subsidies. Some of us believe that the creation of a single European market on 1 January this year and the liberalisation of air services in the "third package" should have brought about the conditions for real competition in European air transport.

British airlines have nothing to fear and much to gain from fair competition, but is the competition fair? All the national flag carriers in the European Community, with the exception of British Airways, have state shareholdings, and usually the majority of the shares are Government-owned. That is okay, provided that Government money is not put into the airlines without any check or accountability or an examination of the airline's viability.

It is quite clear that many of the European airlines that have received Government money are not viable and that the share subscription or loans or other funds are put into those airlines on terms and conditions that are not available to private companies. Any Government guarantees to airlines in the EC must be valued and taken into account when the whole issue is properly looked at. Mergers or substantial financial investment in other companies should be examined with special care to make sure there is a proper market strategy that is subject to scrutiny by the competition authorities. That means that there should be no question of subsidies enabling an airline in country A to have a major investment in an airline of country B.

Air France recently took a controlling stake in the Czechoslovakian airline, CSA. The deal was financed by French state banks and the European Bank for Reconstruction and Development. Air France and its partner, Sabena, have also been able to pass on to CSA several of their excess Boeing aircraft orders. Air France, with the backing of the French Government, has managed to achieve a controlling interest in one of the emerging central European airlines.

Air France has also had new state aid for restructuring totalling some FF3,250 million. Iberia, the national airline of Spain, has had significant new state finance totaling 800 $1.2 billion. Al Italia, the state airline of Italy, has had over 25,000 million lire in contributions and grants from the European social fund and unspecified contributions from the Sicilian authorities towards promotion and advertising of the airline. Sabena was granted just under $1 billion in 1991 by the Belgian Government and other public authorities to sort out its problems at that time.

None of those grants or aids is subject to the stringent public service obligations that should be properly examined by the European Commission and the relevant national Governments. I am afraid that the situation is no better in terms of regulatory charges, which involve quite large sums. In the United Kingdom, the Civil Aviation Authority has to recover all its costs from the United Kingdom airlines and make a return on capital. That is right, and I pay tribute to the CAA for its work and its high standards. It does not cost the taxpayer a penny, but it means that our airlines have to make the equivalent of a recovery of 108 per cent. of the regulatory costs charged to them by the CAA. In the case of British Airways, that amounts to tens of millions of pounds each year for the services provided by the CAA.

Let us examine the position in Europe. Belgium recovers less than 5 per cent. from its airline; the rest is paid from taxation. Denmark is better, because it recovers 70 per cent. and is working towards 100 per cent.

In France, only 64 per cent. is recovered from the airlines; in Germany, from Lufthansa and others, only 15 per cent.; in Greece, only 14 per cent. In Holland it is better, with 55 per cent. recovered, largely from KLM. in Spain, from Iberia and other Spanish airlines, none is recovered. The entire sums are paid out of general taxation, because it is in the interests of the Spanish airlines. That is not good enough, and it means that national airlines gain a considerable subsidy from the Governments of those countries.

Before that other great aviation country, the United States, becomes too smug, let me make it clear that its carriers are not able to survive against tough competition unless they have a certain protection when they get into great difficulties. That is the protection from their creditors that is offered by chapter 11 of the bankruptcy code in the United States. That means that the prime aim of airline companies getting into difficulties and seeking protection under chapter 11 is to protect themselves from their creditors and generate cash flow rather than profit. They can continue trading without normal concerns for operating margins. The airlines operating under chapter 11 include Continental, which has embarked on a major advertising campaign in the UK, TWA and America West.

I hope that the Minister will agree that those European and transatlantic examples are to be condemned as unfair and subsidised competition, which, in 1993, casts doubts over the willingness of Governments to accept the implications of the single market and of competitive airlines that can operate within the rigours of the market.

Transparency, viability and the commercial regime should be the watchwords for the Commissioners in Brussels, and there is much still to be done. We should remind President Clinton and others in the new American Administration that chapter 11 solves nothing and distorts competition, not least to existing viable US airlines such as Delta, United and American.

801 The airlines are in a disgraceful situation. British airlines are trying to compete—indeed, are competing successfully and profitably—with their hands tied behind their backs.

I conclude by quoting the last paragraph of the report from the Air Transport Users Committee for 1992: The achievement of the single market for air transport has the potential to bring great benefits for consumers, but these benefits can easily he negated unless the Commission makes full and effective use of its powers under the Treaty to ensure that all carriers are able to compete on level terms. The greatest threat to the success of the Community's policies is in this vital sector of the economy lies in the distorting effect of state aids, and the Commission must use its powers under Articles 92 and 93 of the Treaty to ensure that such aids are not only banned in law but also in reality. I could not put it better, and I hope that my hon. Friend the Minister will tell me that the UK Government are taking a firm line with the less efficient, less viable, subsidised airlines in Europe and the US.

§ The Minister for Transport in London (Mr. Steve Norris)

I congratulate my hon. Friend the Member for Ashford (Sir K. Speed) on his good fortune in securing this Adjournment debate and on raising such an important subject. I echo his sentiments about the immensely impressive progress that our aviation industry has made in general over the past few years. The cornerstone of that progress is a policy which has been remarkably successful. It is one that is based on competition, and it is focused on two fundamental concerns. First, there is the need to encourage a healthy aviation industry in the United Kingdom. Secondly, there is the need to facilitate customer choice as between airlines. The two concerns go very much together.

I am sure that my hon. Friend agrees with the Government's firm belief that the pattern of air services and the fares charged should, as far as possible, be decided by the market. No outside influences should be allowed artificially to restrict the services available to the public and no collusion should be allowed to keep the prices charged unnecessarily high. It follows that those in the aviation industry who provide the right service profitably at the lowest price should thrive, but to do so they should be continuously open to challenge by competitors, and the barriers to new services should be minimal.

That belief remains the cornerstone of our approach to airline competition policy, because it is as true today as it ever was that competition gives customers choice. Competition between carriers produces better service to consumers as competing carriers seek to build new business and attract business from one to another by offering better deals and better services which better match what customers want.

We also continue to support the need for effective safeguard mechanisms to prevent anti-competitive behaviour, which is the thrust of my hon. Friend's remarks. It is vital for the maintenance of open and fair competition that all complaints of anti-competitive behaviour can be examined, and with appropriate speed.

Before I outline the arrangements which have been established in the European Community, I wish to echo my hon. Friend's praise of the United Kingdom aviation industry. We have a great deal to be proud about. In the United Kingdom there are 45 airlines. We have more airlines than any other country in the world, with the 802 exception of the United States. More than three quarters of our airlines—34—are licensed to operate international services. Quality as well as quantity has resulted from bringing competition to our home market. British Airways, British Midland, Britannia, Monarch and Virgin are all world leaders which are renowned for their service.

It is gratifying that so many United Kingdom carriers exemplify what a successful air carrier should be. They are financially strong, innovative and competitive. Perhaps most importantly, they are privately owned. They owe allegiance to no one but their shareholders and they operate wholly according to their own commercial expertise as inspired by customers' wishes. Lord King, during his 12 years as chairman of British Airways, succeeded in transforming BA from an airline which was known by its initials—I do not know whether this is unparliamentary—as bloody awful, into one which is among the finest in the world, if not the finest. That is the position on any test. I know that many hon. Members wish Lord King continued success in his role as president of BA.

Having seen at first hand the benefits of competition in our home market—benefits for consumers, the airlines, airports and the economy—we are keen to take the lead elsewhere. I am sure that United Kingdom carriers will be prominant in seeking to open up new markets and attract new passengers. So I fully expect United Kingdom air carriers to be introducing new ideas and services and to be setting new standards for service, pricing and frequency in order to generate business and make profits. I look forward to seeing the privately owned and commercially minded United Kingdom carriers benefiting most from the opportunities presented by liberalisation both within the Community's air transport market and elsewhere.

The United Kingdom has played a leading part in the arrangements which have been established in the Community. Here the results of our liberalisation policy have been impressive—even in the face of doubt caused by the fears of some about competition, itself heightened by the world-wide recession.

The European Community licensing arrangements which have been established are crucial because they identify carriers licensed by the United Kingdom and other member states as "Community air carriers". That now means something, as a Community air carrier has the freedom to establish anywhere in the EC, to attract EC and other investment, and to provide services within the EC. With the United Kingdom very clearly in the vanguard, the EC has decisively banished the old, outdated traditional system characterised by nationalism and protectionism, in which the consumer has been the principal loser, and instead established a truly liberal single market in air transport on 1 January this year. It would be over-ambitious to expect dramatic changes to take place overnight, but the single market created by the third liberalisation package sets the ground rules and creates the opportunities for the aviation industry of the future in Europe.

By introducing common criteria for operator licensing —in other words, removing the possibility of flag carriers being given preferential treatment—and by removing restrictions on market access and pricing through the EC, all Community carriers have now been put on an equal footing. The market is now open to those with a stomach for a competitive environment, and the onus is on carrier to offer the sort of services that the customer requires and to set fares in the light of market conditions, rather than 803 by cosy agreements with Government. This gives a green light to carriers which are prepared to go out and win business—provided always, of course, that they are safe; there has never been any suggestion that safety standards would be compromised.

I was sorry when my hon. Friend announced at the beginning of his speech that he did not intend to mention slots at Heathrow, as I had prepared an extensive part of my speech to deal with that—[Interruption]. I accept the invitation of the hon. Member for Hartlepool (Mr. Mandelson) to regurgitate at least part of what I had prepared.

I am immensely proud to say that BA holds a smaller proportion of slots at Heathrow than many of its major EC competitors hold at their base airports, which demonstrates the success of our competition policy. For example, it holds a smaller proportion of the Heathrow slots than Lufthansa holds at Frankfurt and Munich, Iberia at Madrid, Sabena at Brussels and Air France at Charles de Gaulle. That is directly relevant to the thrust of the first two major points that my hon. Friend made about the extent to which national airlines rely on state aid.

We regard it as essential that we follow up the liberalisation agreement with progress in the key area of state aid. Cash injections to state-owned airlines on terms which would not be available in the private sector place those carriers at a distinct and unfair competitive advantage. Those injections are made in large individual cash lump sums, of which my hon. Friend gave examples, or in subsidised regulatory fees, for which the Civil Aviation Authority endeavours fully to recover costs. My hon. Friend is right to point out that that practice is not followed across the Community, and there is clearly scope for further work on precisely that point. We are quite clear that state aid should be rigorously controlled, and where terms would not be available in the private sector those state aids should not be allowed.

The Commission published guidelines on aviation state aid in 1984. They are nine years old now, so we have sought the uprating of existing Commission guidelines to tie in with the single market under the changes in the legal framework in recent years. The Commission's commitment to do so is therefore welcome. It is important that the Commission applies the guidelines in a way which is consistent with the concept of a liberal single market, and we shall continue to press for that. We shall also continue to ensure that cases of anti-competitive behaviour are dealt with rigorously within the framework of effective safeguards already in place.

I hope that my hon. Friend will understand if I do not comment on each of the examples that he gave. I shall simply confine myself to sharing his concern about the logic that the Commission appeared to be pursuing in not finding some of the cases to which he referred obvious examples of state aid in circumstances which have conveyed an unfair competitive advantage.

The CAA currently has powers under the Civil Aviation Act 1982, EC regulations and supplementary domestic regulations to investigate complaints of anti-competitive practices made against United Kingdom carriers and to take appropriate remedies. Those powers 804 are part of the CAA's powers to vary carriers' EC operating licences or their United Kingdom non-EC route licences.

Member states can put their views to the Commission in cases where the free play of competition may have been distorted, and we shall continue positively and constructively to put forward the United Kingdom's views on individual cases.

United Kingdom carriers may make a complaint to the Commission under articles 85 and 86 of the treaty of Rome, as my hon. Friend said. Article 86, which covers abuse of a dominant position, is also actionable in the United Kingdom courts. Special regulations apply the articles to aviation and give the Commission important powers to intervene. They include the so-called "cease and desist" regulation, which enables the Commission to take quick interim action to stop a small airline being driven out of business before there is time to put any of the other procedures into operation.

The third package is very good news. It helps airlines to generate more business and earn greater profits. Successful carriers operating in a free market are less likely to need Government financial backing and state aid. It will also benefit consumers, as an efficient and competitive airline market will bring the prospect of new, improved services and will put downward pressure on air fares.

I should like to say one last word on the viability and attractiveness, or otherwise, of European airlines. It is surely extraordinary that, despite the examples of continued state funding—let us put it no more strongly than that—by other Community Governments of their national flag carriers, and despite the fact that British Airways, an example of a former flag carrier which is still a proud flag carrier for British aviation, operates in the free market and is entirely dependent on convincing hankers of the value of its capital programme if it wishes to reinvest, it is British Airways which continues to set standards throughout the world, and does so with a profit.

That should be the test. There must be a lesson to be learnt by every European Government: it is not state intervention and constant state subsidy which produce better quality services, but forcing airlines to accept the rigours of the market and of competition on entirely free and equal terms. That is how to improve the quality of airlines throughout Europe, and it will benefit me, my hon. Friend, every hon. Member and every citizen in this country and in the Community.

My hon. Friend also raised the important issue of unfair competition from United States airlines cushioned by chapter 11 bankruptcy protection. We flagged the anti-competitive implications of that protection with the United States Government in the context of our wider talks on liberalisation. However, a review of chapter 11 has not been one of our priorities to date. The two United States airlines supported by chapter 11 which currently operate transatlantic services—TWA and Continental Airlines—are not significant players in the market.

I asked my officials to examine the number of flights that they operate in the UK. United States carriers—non-chapter 11 protected carriers—operate 41 services a day to London and six to the regions. United Kingdom carriers operate 31 services a day to London and three to the regions. That is a total of 72 flights to London every day by non-chapter 11 carriers.

Against that, TWA has one service a day to London and Continental Airlines has four. In summer 1993—the 805 period for which I am quoting the figures—TWA and Continental represent only about 6 per cent. of the market. However, although I make that point to explain to my hon. Friend that it has not been our first priority—it is also in the context of other liberalisation and trading issues that we are currently discussing with our American colleagues —it does not mean that we do not take the issue seriously. We are certainly ready to take the issue further if it represents a real problem for United Kingdom airlines.

My hon. Friend referred to the whole philosophy of chapter 11, which is that it does not allow the market to operate in its normal sense. Broadly speaking, when a carrier is no longer able to provide services profitably and has exhausted its credit, it simply disappears from the market and allows stronger carriers to take on the services. To that extent, my hon. Friend is right: the whole concept of chapter 11 is at odds with the concept of a free market.

Elsewhere, we have sought arrangements with countries in the far east, in Australasia, in Africa and in South America which allow scope for extra competition between airlines and flexibility on routing, capacity and pricing. Significant progress has already been made with Hong 806 Kong, Malaysia, Singapore, South Korea, New Zealand, Brunei and South Africa, and we are currently in discussion with others in those regions.

As with all our moves towards the liberalisation of air services, we insist that safeguards must be put in place at the same time to protect against anti-competitive practices. That aspect of our policy is just as much in the interests of a healthy, competitive aviation industry as it is in the interests of air transport users.

I believe that my hon. Friend shares the conviction that the Government have led the way—within the Community, certainly—in establishing the parameters of the third liberalisation package. We have consistently led the way on the advantages of the free market. Through the strength of our domestic airlines, we have demonstrated that those policies are successful. I am sure that my hon. Friend shares my enthusiasm for continuing to press the important matters that he has raised today to ensure that the market works fairly and not to the disadvantage of United Kingdom carriers.