§ 6.8 p.m.
§ LORD DRUMALBYN
My Lords, I beg to move that this Bill be now read a second time. There has already been some discussion of the Bill in the debate that has just been finished. I welcome this chance to say some further words. B.O.A.C. have a record in recent years of which they can be proud, a run of surpluses culminating in an operating surplus of £31 million in the financial year 1969–70. The Corporation's interim statement for the first half of the current year shows a sharp fall in profitability, due in part to the grounding of the 747 fleet through a dispute which happily has now been settled. The immediate outlook for B.O.A.C., as for other airlines, is of more modest profitability. The average return on net assets of 12½ per cent., which the Government fixed as B.O.A.C.'s objective over the four years, April, 1966, to March, 1970, has been extended to cover the six years, April, 1966, to March, 1972. This extension reflects the fact that the return envisaged in the final two years of the period is likely to be substantially less than the 12½ per cent. figure. The average for the four years ending March, 1970, was l7.4 per cent. That is one cause of the more modest results.
More important factors perhaps are some general over-provision of capacity by airlines generally and a progressive fall in average fare levels, which have 649 so far affected the profitability of B.O.A.C.'s competitors more seriously than their own. I recognise, too, that the route transfers will have some impact on B.O.A.C. in the year beginning April 1, when B.O.A.C. will have to alter their plans and redeploy their assets at relatively short notice. I should emphasise however that this is a subsidiary not a prime cause of the relatively modest result that B.O.A.C. are expecting next year, although I would not expect them to make light of it on that account. For the future, it remains B.O.A.C.'s aim to continue their record of profitability, and it will be the Government's objective to help them to fulfil this aim.
This Bill extends the present limits on B.O.A.C.'s borrowing of £120 million which will almost have been reached by March 31. I should mention that apart from the reckonable public dividend capital, to which I shall refer later, amounting to £35 million, the whole of the rest was financed by U.S. borrowings. The intermediate limit of £250 million in the Bill, which is expected to be reached in about three years' time, represents an increase of £130 million; and the further limit of £380 million, representing a further increase of £130 million, is expected to be reached in about five years' time. As with all such estimates, these are subject to a wide margin of uncertainty, affecting not only the size of the Corporation's capital requirements, but also the extent to which the Corporation is able to finance its needs internally.
Let me now summarise briefly the purposes for which B.O.A.C. propose to use these borrowings. Taking the first £130 million, much of the sterling expenditure will be financed from B.O.A.C.'s own resources, but a substantial amount in foreign currency will need to be borrowed over the next 15 months to meet payments due on aircraft already ordered, and especially on the remainder of the first 12 Boeing 747s. Of these 3 were delivered early last year, a further 3 are due this spring or early summer, and the remainder will be due in about a year's time. In addition to these 12 747s, B.O.A.C. are now ordering, with the approval of the Government, a further 4 747s at a cost, including spares, of 650 £45 million, some 80 per cent. of which will be met by borrowing. There will also be substantial sterling investment both on equipment and buildings; for example, a new hangar, needed in connection with B.O.A.C.'s subsonic capacity, and also by way of progress payments on Concorde. Some of these payments can be met from internally generated cash flow and some will require fresh borrowing.
So far as the use envisaged for the second £130 million is concerned, the B.O.A.C. estimate is that very substantial further borrowing for subsonic and supersonic capacity alike will be needed. This expenditure is subject to rather greater margins of uncertainty than the expenditure envisaged in the next two or three years. Both Houses will of course have an opportunity to debate it when an Order is introduced to raise the limits. I should add that this part of the Bill is somewhat academic. Noble Lords will know that it is the Government's intention to introduce legislation for the purpose of setting up an Airways Board. The limit for the Board's borrowing will include the borrowing needs of both B.O.A.C. and B.E.A.—home and external—as well as the Airways Board's own needs and any public dividend capital of the Airways Board. The Government thought it right in introducing this Bill to provide for borrowing for a full five years ahead in accordance with normal practice in relation to nationalised industries.
Finally, it may be useful to explain the situation as regards public dividend capital. When B.O.A.C.'s capital was reorganised in 1965, in addition to loan capital of £31 million, since repaid, a form of non-redeemable capital called public dividend capital was introduced into B.O.A.C.'s capital structure on an experimental basis. The amount involved was £35 million. Since then B.O.A.C. have been paying annual dividends on it, rising from £3.5 million for 1965–66 to £13 million for 1969–70. The public dividend capital was increased in two stages to £65 million. Only £35 million of this reckons against the statutory limit, because £30 million was created by capitalising the reconstruction reserve which was also set up in 1965.
651 The public dividend capital experiment for B.O.A.C. is due to end on March 31, 1971, unless extended by Order either for a further period or indefinitely. A decision will be made shortly. The order would be subject to Affirmative Resolution of both Houses. In my explanations to-day I have assumed that all B.O.A.C.'s requirements for capital in sterling will be met by advances from the National Loans Fund, but this does not necessarily mean that public dividend capital will not be continued in some form or another. I beg to move.
§ Moved, That the Bill be now read 2a.—(Lord Drumalbyn.)
§ 6.14 p.m.
§ LORD BESWICK
My Lords, I do not intend to say very much on this Bill but when I have an opportunity of agreeing with the noble Lord, I like to do so. I should like to say how much I agree with him that the financial results of the Corporation reflect great credit on all those responsible. I also add my word of praise to the contribution made by the retired Chairman, Sir Charles Hardie, and extend my good wishes to his successor, Mr. Keith Granville. Mr. Granville has seen many chairmen come and go, and I only hope that after his great experience he will be able to assimilate all the good qualities and characteristics of those chairmen who have succeeded him: if he can roll that experience into one person, then we shall have a very good chairman indeed.
I wish I could say that the labour relations of the Corporation have been as successful as their financial control. The history of the dispute which left the expensive Boeing 747 sitting on the tarmac for so long must surely constitute a classic case which it would be well worth while studying. I make the suggestion to the new chairman that he can do no better than appoint someone to make an independent, outside, objective inquiry into the causes of this dispute with a view to identifying the mistakes so that he can avoid them in the future.
I would also take this opportunity to refer to a most interesting article in to-day's issue of Flight International. The article comments on the well-known fact that the Corporation has been operating with an extremely high average load factor. This is a very profitable opera- 652 tion, but not one which necessarily gives the best service to the passenger. The article, however, also calls attention to the over-booking of the Corporation, and to a particular staff circular which went out on this subject. I know that the problem here is not an easy one; and I know that the parallel problem of the no-show is also extremely difficult to deal with. Nevertheless, I wonder whether on reflection the Corporation feel that the circular was happily worded; whether they think that it reflects credit on them, and whether it is something that ought to have gone out? I have given no notice to the noble Lord that I was going to raise this—and indeed, strictly speaking, it is not a matter for him. I do not expect a reply, but I should like to think that in accepting my congratulations on their extremely fine technical and financial results the Corporation may pay some regard to the criticisms that I have ventured to make.
§ 6.18 p.m.
§ THE EARL OF KINNOULL
My Lords, I should like briefly to intervene and to congratulate my noble friend on introducing this Bill. I see that the noble Lord the Leader of the Opposition has already left his place, but I would mention that I cannot personally accept the view expressed by the noble Lord on the previous Bill. I felt that my noble friend's reply to that Bill was more than adequate, and a great deal better than we experienced with the previous Administration. I wish also to associate myself with the words of the noble Lord, Lord Berwick, in regard to the outgoing chairman and the new chairman.
I wish to ask my noble friend (I have not given notice of this) as to the position of the Boeing 747. I should like to know whether the pilots' dispute has yet been settled, and whether it is yet known how soon this aircraft will come into service. I am told that the B.O.A.C. 747 Jumbo Jets are the safest in the world; but, of course, they have never flown. Will it not be possible, if the dispute is still going on, for at least the training period to start?
Another question that I wish to ask my noble friend, and one which I think is particularly relevant to the Bill, concerns the Concorde. I am sure that we should all be grateful for any news he 653 could give as to the progress of Concorde. Can he say when it is anticipated that B.O.A.C. will be able to come out firmly, together with Air France, and say, "Here is a firm order"? I apologise for not giving my noble friend any advance warning of these questions, and I shall quite understand if he is not able to reply immediately.
§ LORD DRUMALBYN
My Lords, I am grateful to noble Lords for the welcome that they have given to this Bill. I should certainly like to join with the noble Lord, Lord Beswick, in the tribute that he paid to the previous chairman of B.O.A.C., and in the good wishes that he has extended to the new chairman. I can assure him that his confidence in the new chairman is very fully shared. I am quite certain that the Corporation will be glad to read what he has said, and also that what he has said will curry considerable weight with them.
My noble friend asked me some questions, and I will try to answer them. First, with regard to the 747, I am glad to say that the pilots' dispute has now been settled. The truth of the matter is that a season's operation of the new aircraft has been lost by reason of the dispute, and by reason of the pilots' refusal to train to fly the new aircraft. I do not think it would be profitable to look backward and ascribe blame on this, but we should, I think, congratulate both sides on the statesmanship that they have shown in reaching a fair and reasonable settlement.
On the subject of Concorde, I should like to tell the noble Earl as much as I can. It is not customary to give any indication of cost so far as Concorde is concerned, nor is it possible to say what number of planes B.O.A.C. wish to purchase. All I can say is that B.O.A.C. are extremely anxious to purchase Concorde if it can be flown commercially. We hope that it will prove to be so. It is a remarkable fact that the round trip for Concorde, in comparison with the ordinary subsonic planes, will make a very great saving in time. I am sorry that I cannot lay my hands on the exact figure at this moment. I had hoped to be able to give it to the noble Earl. The future of Concorde will depend on whether it is commercially viable.
654 I should add that there is no question of providing a subsidy for operating Concorde in the forecasts underlying the limits in this Bill. Flight tests so far have gone well, and both prototypes reached mach 2 earlier this month. The British assembled prototype is now embarking on a critical series of performance tests at cruising speed. With those few remarks, I ask the House to give this Bill a Second Reading.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.