§ 3.28 p.m.
§ Order of the Day for the Second Reading read.
§ THE PARLIAMENTARY SECRETARY, MINISTRY OF TRANSPORT (LORD CHESHAM)
My Lords, there are two main objects in this Bill which I am now asking your Lordships to read a second time. The first one is that it provides for increases in the sums which British European Airways and British Overseas Airways Corporation may borrow, chiefly for buying new aircraft. The new limits are £125 million for B.E.A. and £300 million for B.O.A.C., which are increase's of £30 million and £120 million respectively. The second thing the Bill does is to enable both Corporations to borrow limited sums for a limited period to finance their deficits, if any, on revenue account.
My Lords, the present limits of borrowing, which are £95 million for B.E.A. and £180 million for B.O.A.C., were fixed by the Air Corporations Act, 1960, and were expected to cover, in general, payments for the aircraft then on order, together with spares, plant, equipment and building work. These limits we have reached rather sooner than was expected because of changes in the Corporations' investment programmes, notably the revision of B.O.A.C.'s VC.10 order and their purchase of three additional Boeings, and B.E.A.'s order for four more Comets and for three Argosy freighters. These changes are intended and will give the Corporations a more flexible fleet and improve their ability to compete in an increasingly competitive market.
The new limit will cover the balance due on B.E.A.'s 24 Tridents together with the twelve Tridents on which they have an option. In B.O.A.C.'s case, the limit will cover all outstanding expenditure on their order for VC.10s, the total value of which is approximately £150 million and also initial progress payments that they may make in respect of orders for supersonic aircraft. The decision to go ahead on the supersonic aircraft has been taken since this Bill was considered in another place and I am going to come back to that in a minute.
792 In addition to the sums borrowed from the Exchequer, the Corporations will, of course, be using their own resources. These new limits also take into account proposed building work and further purchases as may be necessary of plant, equipment and spares. Noble Lords will note that the Bill provides a new provision for further reference to Parliament before the Corporations are authorised to borrow to the full extent of the limits. That is to be found in Clause 2 and is, in effect, a limit within a limit requiring an Affirmative Order in another place. This is intended to give Parliament further control and an opportunity for discussing them if the sums mount to the high level which they nowadays reach. As things now are the Corporations can borrow, other than temporarily, only for capital purposes but it seems, in view of the poor trading results in 1961–62, and the possibility of further losses in the current year, at least prudent and desirable to provide powers for the Corporations to borrow for the purpose of financing deficits on current accounts. The Bill defines the limit of B.O.A.C.'s borrowing for deficit purposes as £100 million. That includes the existing accumulated deficit of £67.3 million and means that they can borrow another £32.7 million of new money for the purpose of such deficits occurring up to the end of March, 1964.
British European Airways' accounts at the end of 1961–62 were virtually in balance with no accumulated surpluses or deficits and the same limit of March, 1964, applies. The total amount in their case is set at £10 million. The limits of these deficit borrowings are also within the ceilings for the total borrowings which I have already mentioned. As I said, the deficit financing powers are asked for only up to March 31, 1964. The fact that we are making provision for deficits is not necessarily to assume that they are, quite inevitable; but it seems a realistic and prudent precaution to take in the light of current trends in traffic and in revenue.
This Bill provides also a convenient opportunity for making two other provisions which are, in fact, unrelated to the question of borrowing. They are the sort of matters which are seen to need attention from time to time and then await a suitable Parliamentary bandwagon on which to jump—and this is it. 793 They are found in Clause 4 which ensures that when an employee of one Corporation joins the board of the other he retains his right as a member of the airlines' joint pensions scheme. This has not happened yet but it could; it therefore seems reasonable to cover the possibility and to round off the intentions of the 1953 Act at this moment when it is convenient to do so. Clause 5 provides that where a member of a Corporation retires in special circumstances before the expiration of his normal term, the Minister can instruct the Corporation to make an ex-gratia payment. These payments will be subject to tax in the normal manner. The clause deals with only members because special powers are not needed for the Corporations to give this payment to employees under any written agreements which may be negotiated by their unions.
As I have said, the Corporations' results for the last financial year are relevant to this Bill. Both the Corporations have had difficulty and I want to say a little about the performances of each. Your Lordships would all join with me in agreeing that B.E.A.'s seven-year run of profits is very greatly to their credit and they did very well to confine their losses to such small proportions last year. They will, as I understand it, unfortunately make another loss this year; but I feel that the setbacks will prove to be only a temporary reverse. If it had not been for the combination in the same year of a fall in load factor combining with the heavy expenses of introducing a new aircraft they would not have made a loss at all, because neither of these alone would have caused it.
B.E.A. have asked for a subsidy to cover their loss on social service routes to the Highlands and the Islands. The Government recognise the importance of this problem, and my right honourable friend is giving it his immediate and active attention. I am sorry I cannot say more than that at the present time, but I can certainly assure the House that that is the kind of attention he is giving it. B.O.A.C.'s troubles have become a matter of public debate and the air is still reverberating with explanation and counter-explanation. Here and there it reverberates with expletive, too, but, so far, without counter-expletive. This discussion and public interest must not be 794 allowed to obscure the extremely serious situation which is postulated by the accumulated deficit of £67½ million at the end of last year. My right honourable friend dealt very fully in another place with the reasons which have lead up to this state of affairs.
I do not want to take up a lot of your Lordships' time by a repetition in lengthy detail of all the factors involved, but I think I must emphasise the salient points. The loss of £11 million on B.O.A.C.'s own operations can largely be accounted for by the coincidence of a substantial increase in capacity building up over the years with a severe tailing off in the rate of traffic growth, including the very important trans-Atlantic route. I understand they reckon that the nine-day strike at the height of the summer season lost them £3 million. Some of their subsidiary and associated companies helped to add to the deficit, too, and I should make it plain that, with one exception, these were commercial arrangements freely entered into. The accounts in that respect tend to emphasise the losses because they are plain for everyone to see. The incidental benefits of these associations are rather harder to measure as by their rather indirect nature they are more difficult to discern. The additional depreciation charged on the aircraft fleet is, of course, the biggest single item in that deficit.
There is always a large element of forward judgement in fixing depreciation rates, since estimates have to be made of future factors, such as the continued life of the aircraft and its ultimate sale value. Now that we are in the enviable position of being able to exercise some hindsight, we might say that perhaps some earlier adjustment ought to have been made. In saying that, we have to remember that the jet revolution (if I may call it such) is not something which has affected B.O.A.C. alone. Other large users of propeller aircraft have been hit in the same way.
I should like now to turn to the future. Particularly for B.O.A.C, there is need of a positive plan for improving trading results. It is with that in mind that my right honourable friend has commissioned a distinguished accountant. Mr. John Corbett, to investigate their affairs. His inquiry will be wide-ranging in scope and will have the benefit of specialist 795 advice when he comes to deal with particular aspects, such as engineering and maintenance. Its object will be to show what action is needed to make B.O.A.C. financially sound, while at the same time making sure of preserving the enviable reputation it has for safety and excellence of service.
The B.O.A.C. Report refers to the implications of the White Paper on The Financial and Economic Obligations of the Nationalised Industries. Contrary to what some people have said, the doctrine that the air corporations should pay their way is not by any means a new one, because the 1945 White Paper, issued by the Government of the Party of the noble Lords opposite, said:It is the view of His Majesty's Government that air services should be made self-supporting as soon as possible.The 1961 White Paper is a re-statement of the obligation on nationalised industries to pay their way, but it recognises that the industries may be expected to carry obligations of a national and noncommercial character. The declaration of policy in that White Paper does not fundamentally alter B.O.A.C.'s role. It re-defines the obligations of the industries to pay their way in terms of a reasonable return on capital consistent with the social responsibilities they are expected to carry. As with other forms of transport, I think it is necessary to be clear where the division between these two lies.
My Lords, I should now like to come back for a moment to supersonic aircraft and the Anglo-French project. For its commercial success it is essential, on the one hand, that B.O.A.C. should be closely associated with it from the outset, to ensure that full weight is given to operators' requirements and to provide the assurance of production orders at the appropriate time. The Government have recognised that B.O.A.C.'s requirement is for an aircraft confirming with the I.A.T.A. design objectives as regards safety, compatibility, operating economics and so on. On the other hand, if B.O.A.C. are to operate along commercial lines they should not be expected to enter into premature com- 796 mitments for production aircraft in advance, before they can know more precise specifications and see satisfactory solutions of the various problems which are involved, particularly with this aircraft.
There is, therefore, a dilemma, and to overcome this dilemma an arrangement has been made under which the Government will underwrite B.O.A.C.'s commitments in the early years up to the point when it would be reasonable to expect the Corporation to exercise their commercial judgment in deciding whether to place a firm order. During the initial stage of the project, therefore, any preliminary production order placed by B.O.A.C. would be underwritten by the Government. When development is sufficiently advanced—that is, after the flight of the prototypes in about 1966—B.O.A.C. would be called up to make a commercial judgment.
As the final decision on the Anglo-French project was made only after the passage of this Bill through another place, the £300 million limit on B.O.A.C.'s borrowings contains no specific estimate in respect of progress payments on the supersonic aircraft. The point is that any payments which B.O.A.C. might have to make between 1964 and the latter part of 1966, about which time the £300 million will probably be exhausted, are likely to be small and there would be no point in extending the borrowing limit by a marginal amount. As the limit is not tied to any specific date, the effect will merely be that if B.O.A.C. do enter into commitments of this kind in 1964 the £300 million will become exhausted only a little earlier than otherwise would have been the case, and legislation to sanction a further extension of borrowing powers would be needed just that much sooner.
I think that I have dealt with the main points that I should draw to your Lordships' attention in connection with the Bill. I can perhaps be more clear, if I have not been clear, when I come to wind up, because I shall know then more of what is in your Lordships' minds. I beg to move that the Bill be now read a second time.
§ Moved, That the Bill be now read 2a.—(Lord Chesham.)