AIR CORPORATIONS BILL (Hansard, 11 February 1960)

§ THE PAYMASTER GENERAL (LORD MILLS)

My Lords, I beg to move that this Bill be now read a second time. The purpose of the Bill is to increase the authorised borrowing powers of the British Overseas Airways Corporation from £160 million to £180 million, and those of the British European Airways Corporation from £60 million to £95 million. The Air Corporations Act, 1956, fixed the limit of the Air Corporations' borrowing powers at £160 million in the case of the British Overseas Airways Corporation and £60 million in the case of the British European Airways Corporation. The new limits referred to in Clause 1 of the Bill are expected to cover the Corporations' borrowing requirements over the next four years; that is, up to the end of 1963–64.

Before explaining these additional requirements in some detail I should 1190 first like to say that the expenditures with which these increased borrowing powers are concerned are due in the main to developments which have been continually taking place in air travel, and will provide for the opportunities which are before the Air Corporations to participate to the fullest extent in the growing importance and scope for air travel and freight. As an indication of the growing use of civil aircraft, B.O.A.C. and B.E.A. together are carrying substantially more traffic. Last year, for instance, B.O.A.C. increased their percentage of transatlantic passenger traffic from the United Kingdom from 39 per cent. to an estimated figure of 42 per cent., and hope to do still better.

When the present limits were fixed by the 1956 Act, they were intended to cover, in the main, payments for aircraft which the two Corporations then had either on order or under consideration. On the 1956 estimate it was envisaged that B.O.A.C.'s net borrowings would reach a peak of just under £160 million in 1960–61. Because of changes in their requirements, and because it became necessary to spend more than was anticipated in 1956 on other items, including buildings, ground equipment, routine aircraft modifications and some subsidiary companies, and because B.O.A.C. will have less money than was anticipated from the sale of piston-engined aircraft, the Corporation may well exceed their present borrowing limit fairly early in 1960–61, instead of, as had been anticipated, at the end of 1961. B.E.A. expect that their net borrowings will exceed their limit of £60 million some time during the summer of this year and will reach about £69 million by the end of 1960–61.

During the four years up to the end of 1963–64 B.O.A.C. will have to provide, in all, some £83¼ million for capital expenditure, of which some £71¾; million is in respect of aircraft and spares, £3½ million on miscellaneous buildings, notably at London Airport and Victoria Air Terminal, and £8 million on miscellaneous ground equipment and modifications to aircraft. B.E.A.'s capital expenditure during the same period is expected to amount to £62½ million. Of this amount, £47¼ million is in respect of aircraft and spares, £8¾ million on premises, notably on a Training Centre at Heston and on permanent buildings 1191 at London Air Terminal, Cromwell Road, and some £6½ million on miscellaneous ground equipment and routine modifications to aircraft.

During the four-year period, B.O.A.C. expect to find from internal resources about £63 million of the £83 million they require, and B.E.A. expect to find from internal resources about £27½ million of the £62½ million they require. The reason why B.O.A.C. are finding a higher proportion of their capital expenditure from internal resources than B.E.A. is purely fortuitous. Both corporations normally depreciate their aircraft on the same basis—the historic cost over a period of seven years to a residual value of 25 per cent. It so happens that, due to the incidence of aircraft deliveries, B.O.A.C. will be setting aside relatively more depreciation during the four-year period than B.E.A.

The payment in respect of aircraft to be delivered to the Corporations to 1963–64 covers sums in respect of B.O.A.C.'s purchase of D.C.10s, the final payment for Boeing 707s, and for B.E.A.'s payments in respect of the D.H.121's, the Comet IVBs's and Vanguards. The cost of the new jet aircraft is undoubtedly heavy, but there is every evidence that they are proving highly successful in inducing traffic. The Corporations have to undertake expenditure of this magnitude in order to keep abreast of the fundamental changes which are taking place in the pattern of world air traffic.

Clause 1 (2) of the Bill is really a consequential provision designed to make clear that Section 1 (2) of the Air Corporations Act, 1956, shall refer to this new limit of B.O.A.C.'s borrowing powers. Your Lordships will remember that this provision was inserted in the 1956 Act for the avoidance of doubt and to give B.O.A.C. specific power to borrow from the International Bank for Reconstruction and Development or the Export-Import Bank of Washington. In fact this power has not been used and it seems improbable that it ever will be. At the same time, it seems right that the legal position should be maintained. In any event the power will not be used without the Government's specific consent. The Bill does not confer upon the Corporations any absolute power to borrow up to the prescribed 1192 limits. Treasury consent is required for all individual borrowing, and my right honourable friend is responsible for advancing money under Section 42 of the Finance Act, 1956.

This Bill provides an assurance that our air lines will not be hampered by the lack of finance necessary to ensure that they can provide regular air services of the increasingly fast, safe and comfortable nature which are necessary to maintain and, I hope, to improve our position in the air. I trust that the Bill will meet with your Lordships' approval and consent. I beg to move.

§ LORD SHACKLETON

My Lords, in the absence of my noble friend, Lord Pakenham, it falls to me to welcome this Bill on behalf of my noble friends on this side of the House. It is, of course, a limited Bill and it might be possible, as is sometimes done in another place, to extend this debate into a full-scale examination of civil aviation. But we really are in the position to-day of a meeting of shareholders called for the special purpose of increasing the authorised capital of the company of which we are members. I had thought until recently that we were in the position of a rather special group of shareholders who were not able to vote quite as freely, and that it was in fact a Money Bill, but I understand that this Bill has not been certified and is to all intents and purposes an ordinary Bill.

I think there can be no controversy about the necessity for the Bill or, indeed, about the case the noble Lord, Lord Mills, has made for granting this particular increase. Some of the financing, as we know, has been done by the Corporations out of their own resources, and it is, of course, open to nationalised industries to do this. They are in the same position again as a company in the private sector of industry; the Acts do not require them just to break even, but at least to break even, and it is satisfactory that some financing should come in that way. But quite clearly the bulk of new development of this kind is likely to have to come from the taxpayers' pocket, even though it comes in a rather special way. It does not come, of course, by a direct raising 1193 of money for the particular purpose provided for in the budget, but is shown as below-the-line expenditure. In the earlier days of these two Corporations they did, I think, make certain public issues which went to the market; but subsequently this procedure was found to carry a number of disadvantages and I am quite sure, despite various suggestions to the contrary that have been made for the revival of public issues, that it is simpler and generally more clear-cut for this money to be found directly from the Exchequer. For this view we have the authority once again of the Report of the Radcliffe Committee. They were quite specific on this point; that it was simpler that this should be so; that there were serious disadvantages about such issues coming on to the market, and that in the long run it was better for the Exchequer to provide the money.

There have been one or two suggestions, in view of the losses that have been made by these Corporations from time to time, particularly in the earlier days, that there should be some form of equity issue. That idea has been worked out in a good deal of detail, and has been canvassed from time to time. I do not see how, however this equity issue might be made, whatever kind of share it be, whether it he a form of stock similar to the index bond, or whatever it is, it can really carry any advantages. I think the present situation is as clear-cut and simple and, on the whole, as honest as any we could choose.

We are in a position to look quite clearly at the accounts of these Corporations and to see what they are doing. And we are, again in the analogy of shareholders, in a particularly good position because of the very exhaustive account given of the Corporations' activities. I would particularly commend the example that these two Corporations set in giving an infinite amount of information and with great frankness. There has been criticism from time to time, and in particular there has sometimes been criticism of the Chairman of B.O.A.C. I would particularly commend the statement which the Chairman of B.O.A.C., Sir Gerard D'Erlanger, makes at the beginning of the Annual Report as a model which might well be followed sometimes by chairmen of private com- 1194 panies. It certainly pulls no punches and conceals no skeletons in the cupboard.

One can indeed question the way in which this money is to be spent. I think we might very quickly (because to-day is not the occasion to go in for a full-scale debate on civil aviation) look at the measure of success and the measure of difficulties which the two airlines have had to face. B.O.A.C. in particular have been faced with serious difficulties. They have been faced with the difficulty of the great disappointment and delays over the introduction of certain aircraft, particularly the Britannia, and also the earlier disasters over the Comet. One point for consideration again—and we have a recommendation on this matter from the Select Committee on the Nationalised Industries—is whether the cost of development of new aircraft does not perhaps fall too heavily on the Corporations and places them at a disadvantage compared with their foreign competitors who use American aircraft.

It is a fact that, broadly speaking, airlines like K.L.M. buy their aircraft"off the peg", whereas B.E.A. and B.O.A.C. spend a good deal of money on development. Even with an aircraft like the Viscount, which went into service a good deal more easily than some aircraft, I believe the cost of development was something like half a million pounds. It is bound to be so. Extra care has to be taken, and there is the time spent between the inspections and maintenance. Whereas in the early days engine maintenance may be necessary once every 400 hours, by the time other operators buy it the time interval may be as much as 2,000 hours. This is a cost that is borne by these two great Corporations. It represents, in some respects, a subsidy to private aircraft manufacturers. I am not grumbling about it; we must have these aircraft. But it is important, as I am sure all noble Lords will agree, that where there are subsidies they should not be concealed ones; and this is a form of subsidy.

Again, there are certain other charges that fall on these Corporations. A good deal of the trouble for B.O.A.C. in the past year or so has been the loss on the associated companies. These associated companies in which they participate have played a useful part in building up B.O.A.C.'s own traffic: but clearly the loss that was being sustained 1195 was running at an unacceptable rate. We have the same analogy for British European Airways. Noble Lords will be familiar with the fact that, here again, there is another subsidy on the internal lines, particularly in Scotland, which amounts to about £350,000 per annum. Another recommendation from the Select Committee on Air Corporations recommends that it should not be absorbed in the accounts of British European Airways, but should be met in the Annual Estimates of the appropriate Departments. That seems to be a simple and reasonable proposition. On the w hole—I am not necessarily speaking for all my noble friends in this matter—I am inclined to think that it is probably a good thing that B.E.A. do carry that cost. After all, it is a publicly-owned body; it exists at the request of, and was created by, the community, and one of the advantages of this organisation is that they can do so. The alternative, of course, would be to give a special subsidy—the sort of subsidy that is given to some private operators like MacBrayne's who provide a different form of transport in the Highlands. But I think, here again, that it is important to recognise that British European Airways are carrying out this particular social service.

On the whole, the situation, particularly for British European Airways, is an encouraging one. We know that in the past calendar year they have made a £2 million profit. Of course, that is a smaller profit than would be shown in the accounts of a company in industry, because the interest—the very high rate of interest, even though no doubt it is the appropriate rate—which is charged by the Government for the money that is borrowed is, in fact, paid before they show that profit. So I think we can reckon that they are getting good results. I have no doubt that British Overseas Airways, too, will overcome the difficulties that they have had. Already there are signs, particularly—and this is important—in the economy that they are at last getting on the engineering side which has been a particular headache for British Overseas Airways.

There is only one further point that I should like to make at the end of these remarks—namely, that my noble friends and I are a little concerned about the Government's future policy with regard 1196 to the new air licensing authority. I understand that shortly we are to have a Bill. That, of course, will be the time to go into it in detail. I have no wish to-day to revive the controversy between the independents and the Corporations; we each have our particular principles or prejudices in the matter. On the whole, it seems to be settling down not too badly. The independents are certainly doing fairly well. They complain of lack of security, but they are getting, I am told, about one-third of the traffic in and from this country.

But we are investing a great deal of money in these Air Corporations. We are investing our own money and there is a great deal at stake. It will be no good if B.E.A. and B.O.A.C. continue to develop their productivity, either by improving their load factor as they have been able to do, or by buying new and expensive aircraft, if they are not going to be able to sell their product. We shall look with a good deal of interest at this Bill when it comes before this House because it will certainly be disastrous if the success of these Corporations, which is so important to this country, which is such a factor in the development of the aircraft industry, and is so important from the point of view of overseas earnings, was in any way damaged. In conclusion, therefore, I would urge the Government to continue the good work and continue to invest in success in these Air Corporations.