BRITISH AIRWAYS' FUTURE STRATEGY

HL Deb 06 November 1979 vol 402 cc785-806

6.53 p.m.

The Earl of KIMBERLEY rose to ask Her Majesty's Government whether they are satisfied that the future strategy of British Airways is adequate to meet the problems facing the industry. The noble Earl said: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In view of the proposed forthcoming sale of shares in British Airways to the public, I feel that it may well clear the air if tonight I raise a few controversial points, even at the risk of unpopularity in certain areas. I also hope that, under its new status, certain strategic errors with which British Airways seems plagued, will be able to be rectified, and as such I hope that my criticisms will be accepted in a constructive manner.

The object of the BOAC/BEA merger was to create a world airline through existing manpower and resources. It was to be more flexible and competitive, while simultaneously reducing wasteful duplicate administration. However, because of the entrenched attitude of key management, problems have arisen which have caused a marked decline of confidence in the upper echelon of management by those of more humble status, be they captains or cleaners. That has resulted in a lowering of morale to an alarming level. The two pyramids which should have integrated themselves into one are still side by side, and they sit with a third and very bureaucratic one sitting on top of them.

British Airways is top-heavy in administration and over-manned by perhaps 7,000 or 10,000 in those areas the merger was supposed to reduce. For example, a directive to reduce manning leaves the boardroom, it goes to the top echelons and is passed to middle management where this directive is most necessary. But middle management then puts the axe in at the level which can least afford it—engineers, pilots, loaders, and traffic handlers. The former Chairman. Sir Frank McFadzean, a tough and experienced industralist, tried to streamline the operation but even he could not cope with all the in-fighting. The amorphous mass of British Airways administration remains much the same, and the only sufferer is the passenger through insufficient tarmac-level personnel, which means that the airline fails to meet its schedules.

British Airways, like other large organisations, suffers from a lack of communication inside itself. However, that could be off-set by management's determination to promote good relations with its work force. Your Lordships may be surprised to know that BEA employed a consultant psychiatrist, Mr. Russel Smith, who advocated a policy of confrontation as the most efficient way to obtain the maxi mum productivity. Unfortunately, that policy appears still to be maintained at most levels and has had a disastrous effect on industrial relations. Management is despised; getting people to work becomes a problem; responsibility is not re- warded, and leadership is not encouraged. A reluctant workforce with little pride in the company, which resorts to restrictive union practices, combined with over-manning and under-utilisation practices leads only to inefficiency and a waste of money.

British Airways accountancy is run on a mini-budget system employing several thousand accountants. The system causes constant "Who pays for what?" bickering; massive over-charging for key equipment, which has even resulted in its standing idle because nobody knows who will pay for it. For example, British Air Tours once asked the European Division for a quote for handling 707s at Lisbon. The quote was rejected in favour of that of TAP which was less. However, if that is rationalised, money left the company, and even if the European Division's quote was far higher, it would still have been cheaper than paying out money to TAP.

Very often the aircrew and tarmac level personnel exist in shabby surroundings of litter and peeling paint. It could well pay some of the accountants to step out of their pristine offices and see conditions at the coal face at first hand.

British Airways is desperately short of aircraft. The buying policy of the European Division has resulted in inadequate capacity in the medium range caused by the Trident fiasco. Whatever British Airways may say, there has been an unbelievable lack of forward planning, and I have said that in your Lordships' House on several occasions in the past. British Airways has naturally denied that charge, but this lack of foresight means that British Airways has to react to events instead of anticipating them. As a result, it is often too little, too late, as well as probably being the wrong aircraft. This then leads to wholesale cancellation of services, and to sub-chartering. To lose revenue in that way is both inexcusable and commercially disastrous.

Comparisons are odious, but British. Airways staff productivity on short haul is about 25 per cent. of the best United States carriers. For instance, on the London-Glasgow run the wages cost per passenger is about £8 on a 344-mile route. On a similar route in California by Pacific South-West, it is about £4 and the American staff are paid twice a much. British Airways on short haul carries about 760 passengers per employee, and its equivalent in the United States, like South-West Texas or Pacific South-West, is 2,800 passengers per employee. Unfortunately, the baggage handling produces the same sad story. Over here it is about eight bags a minute and in America about 16 bags a minute.

Regarding maintenance, the aircraft are adequately maintained but are often inadequately cleaned inside and out. The last results in lower performance and increased fuel consumption. When a new aircraft is ordered the research and development section insists on a "bespoke tailor" requirement. This not only delays service entry, but also reduces operational flexibility. The buying policy leaves no buffer for unexpected expansion of demand. Even allowing British Airways the benefit of the doubt that the 737 is more suitable for its needs than the 1–11, the decision to purchase the 757 paper aeroplane instead of the airbus seems very odd. One wonders why there is this urgency for British Airways to buy American, and in particular Boeing, unless there are some other influences of which the public and T are unaware. Here it is perhaps pertinent to note that the following European airlines have all ordered the airbus in one or other form: SAS, Lufthansa, Hapag-Lloyd, Air France, Air Inter, British Caledonian and Laker, K LM and Martin-Air, Iberia, Alitalia, Sabena, Austrian Airlines, Olympic Airlines and Swissair.

Not long ago in this House I asked the question, "Can all these airlines be wrong?" At the moment the only two contenders for the 757 are British Airways and Eastern Airlines in America, and even Eastern uses the A300 on its shuttle services from New York. I am told that British Airways intends to cram about 223 passengers into the 757 at a full fare whereas Laker puts about 215 into an airbus at a cheap rate. So the excursion passenger will travel both in more comfort and at less expense.

I believe that British Airways does more damage to British industry and our balance of payments deficit than any other company in the United Kingdom. For two decades it has actively pursued a policy of not buying British unless under Government persuasion. It has then derided the aircraft, and the Government have usually had to subsidise the operation —for instance, as in the case of the VC.10, the 1–11 and Concorde. It cannot deride the airbus because it has not ordered any, but should it find itself in the position of having to, there will be a very long wait for delivery, as it will be at the bottom of the customers' list.

On page 52 of the annual report of British Airways it states: A substantial proportion of the fleet commitments is payable in US dollars, and approximately 20 per cent. thereof is covered by contracts for forward purchases of US dollars over the next two years at various rates of exchange". Capital expenditure commitments are £950.7 million, which must be getting on for 50 per cent. of our balance of payments deficit for this year. In fact, since writing this down I have discovered that from January to August 1979 our balance of payments deficit was £443 million in US dollars—that is in eight months.

However, on the credit side British Airways has championed Rolls-Royce and has even paid for having that company's engines fitted to 747s. But perhaps to the cynic this could be due to the numerous malfunctions of the Pratt and Whitney JT9Ds which have caused many passengers to be delayed, sometimes for days, thus necessitating British Airways doling out free drinks, meals and hotel rooms. The service is creditable, but at what cost in lost revenue, and transporting spare engines. Page 15 of the annual report devotes four paragraphs to the Trident fiasco, but virtually only two small throw-away sentences on the problems of the 747 and the TriStar.

Lord TREFGARNE

My Lords, can my noble friend tell me what he is talking about when he refers to the "Trident fiasco"?

The Earl of KIMBERLEY

My Lords, certainly. In saying that I refer to the cracks in the wings which put the entire Trident fleet out of service for a certain period of time. Further on on the same page there is a profound statement about the EEC: Until recently British Airways has scarcely been affected by the British membership of the EEC. It is now clear, however, that air transport will be of increasing interest to the Commission, and we have taken steps to ensure that we are kept closely in touch with and influence what is happening in Brussels". About time too, for there are two factors which will affect British Airways after 1980. One is the EEC regulations which will require open tendering from all European countries for equipment, and the second is the new routes within Europe which will be open to independent airlines. I am sure that Her Majesty's Government will give strong backing for British Caledonian and our great entrepreneur, Sir Freddie Laker, in their campaign to extend their routes.

On 23rd October last, in another place, during the Second Reading debate on the Competition Bill, at column 272 in Hansard the Minister for Consumer Affairs, Mrs. Sally Oppenheim, said: But we believe that competition is a potent weapon, both in the fight against inflation and in the establishment of consumer sovereignty". I agree with her. In fact, it could be very desirable for the CAA to alter the licensing obligations, thereby encouraging greater competition which would lower the air fares on British airlines. The announcement or leak that British Airways wants to get rid of 26 unprofitable routes and that four independent airlines are keen to compete for them must only be good.

Reverting to the merger, this produced operating problems of procedure on the flight deck. The European and overseas divisions have been working towards a common operating procedure, but it is still some way from fruition. For instance in the European division TriStar is approved by the CAA for landing in extremely foggy weather whereas the same aeroplane in the overseas division is not. However, as in many ways the merger appears to have been more of a take-over by BOAC, there appears little urgency at the moment to bring the overseas division up to the same standard.

Divisions in the pilot work force at union level seem to be deliberately unresolved by the company for industrial reasons. The matter is further complicated by retaining flight engineers in the overseas division. I believe that there are many progressive airlines which use the European division operating procedures and which have no flight engineers. British Airways co-pilots have morale problems due to the absence of a career structure—for instance, in aircraft expectation. Many co-pilots have been in the same type of aircraft for over 10 years. Other airlines consider this to be a dangerous practice and retrain their co-pilots at five or six year intervals, thus giving added benefit and experience for command. In other words, the basic problem is long haul v. short haul. There is no common seniority system. If a Trident captain wants to transfer to the overseas division, he has to start right at the bottom again.

I now give some praise. British Airways' ground engineers are superb at all levels. They are perhaps the company's real strength. But there seems to be a curious reluctance to pay them the going engineering rate and as a result key men are often lost after a great deal of time and money has been spent on training them. British Airways should perhaps pay more than their competitors, otherwise the engineers vote with their feet. Hundreds left last year over a £3 pay dispute. Disenchantment leads to restrictive practices affecting the flexibility of aircraft. European division engineers will not service an aircraft standing on an overseas division hard standing. Page 20 of the annual report states that: Engineering management is at long last nearly unified". But how long is "at long last"?

Congestion is the bane of all airlines and as such is one of British Airways most serious problems. Flights at peak periods are subject to anything up to three-quarters of an hour airfield delay. This delay is naturally compounded when the aircraft is turned round at the other end for its return journey.

We are still considering a third London airport, but we have two perfectly adequate and good ones at Gatwick and Stansted, but both need two operational runways. Should there be any disagreement, not from your Lordships' House but outside, I would humbly suggest that the person who disagrees obviously never flies with the European division of British Airways at peak times. It is true that air congestion was partially solved by the wide-bodied jumbos on long hauls. But the proliferation of short-haul mini aeroplanes is threatening disruption on a far larger scale. This is why British Airways should rethink its aircraft procurement policy. It seems uncommercial for British Airways to fly three-engined TriStars to Paris when Air France flies two-engined airbuses to London. Is there not supposed to be a worldwide fuel shortage?

Air travel is international. British Airways' thinking tends at best to be national and I cannot even praise its domestic routes and services. British Airways must formulate an international policy if it is to make some sort of order out of the impending chaos resulting from narrow concepts, narrow minds and narrow-bodied aircraft. There is still time before it is too late for British Airways to re-think its forward planning needs. I can only hope that by selling off part of British Airways to the private sector—if anybody will buy it—this may prove to be the catalyst to make the airline fully competitive again in the world market, so that once again we may fly the flag and arrive on time.

7.11 p.m.

Lord HAYTER

My Lords, the noble Lord, Lord Trefgarne, has had a tremendous ear-bashing today in a variety of different contexts, and I hope that I shall be very gentle and not disturb him at all. I am obliged to the noble Earl, Lord Kimberley, for asking this Question, because I rise, although it may not look like it, like a phoenix from the ashes. My little Quango has been disbanded. I was chairman of the Little Neddy which looked after international freight movement, and it would therefore be on my conscience if I did not speak on this Question in the context of air cargo.

That is fair enough because we are talking about the problems of the industry. We are also, in a way, talking about the problems of industry, and the air cargo side has been perhaps not as widely recognised as it ought to be in various circles. For example, last week you may have seen a large article in the Financial Times about the "Civil Aviation Authority's Unenviable Challenge". There was not one word about cargo in it. Yet another article on Monday; "British Aviation Changes Course". Again not one word about cargo. And yet, as these wide-bodied aircraft come into use all over the world, this further subordinates cargo policies to passengers.

I hope you will take it from me that nearly one-fifth of imports into this country by value come in by air, and nearly one-fifth of the exports of this country by value go out by air. So you have a tremendous impetus here for the export and import business of this country. Now all this serves to emphasise British Airways' traditional role as the national carrier, and it speaks for the industry in many contexts, particularly with the International Air Transport Association and with Government. It is therefore all the more important to make sure that cargo is playing its relevant part in their considerations.

I understand that there is not a single director on the board responsible for, or knowledgeable of, air cargo. This seems to me quite astonishing. Secondly, I understand that the board as a whole is rather slow to react to the changing demands of the international air freight industry—and they change very quickly these days. Thirdly, there is a failure to maintain the competitive service standards —and that is a common problem for national airlines. They are rather inclined to rely on their own reputations. Fourthly, how important it is for the board to have genuine consultation at top level with the other major interests in their context: the freight forwarders; the customs; and this computerised cargo-processing system.

However, all is not lost. I am a little more optimistic than the noble Earl who put forward this Question, for at senior cargo management level quite a lot of things are happening. There is the new commercial rating policy; they are consulting more with the bodies that they should be consulting with; and they played a significant part in the development of a project called the freight forwarders bond at Heathrow. It was developed as a result of my Little Neddy. It really is the facility at Heathrow which enables cargo to come in there from the various airlines, he sorted out by the freight forwarders, and then to find its proper destination elsewhere, maybe in Europe. It is so successful that it has been generally agreed that it has to be expanded 200 per cent. But there are many complications, and I cannot quite see, now that my Little Neddy has been disbanded, who is going to come to some of those conclusions. I shall come back to that in a moment.

I shall now plunge into future strategy. It has been said that one could not be satisfied with the British Airways' future strategy about cargo because nobody has ever heard of it. There is a certain element of commercial secrecy behind which they take shelter. But a lot would be gained if we could see, particularly in the new context, the appointment of a cargo product director to the main board. I happen to know that there is a very sizeable and quite expensive research programme going on, and that should be directed by one of the top people in the organisation.

Secondly, one would hope that there would be a strengthening and a stabilising of cargo management, and in particular the establishment of a better cargo career structure so that young men going in would know that their future was reasonably assured in the light of their own ability. These things would provide leadership and confidence in the workforce, and they improve the terminal handling, and as a result both British Airways and the United Kingdom industry as a whole would benefit.

Today's rapid development and the high competition in air cargo requires national strategic planning, and that is where, to the extent that the Government share in the responsibility for British Airways, they must take a part. So I get back to the beginning. We have to meet the problems of the industry in competition with the other airways in Europe. We have to meet the problems of industry to ensure that the goods can flow as freely, as quickly, and as efficiently as possible. It is a pity that my Little Neddy is no longer there to help, because some of these things cannot be done by British Airways alone. Take that freight forwarders bond area. There are endless complications there which I shall just outline in a few words: the unions; the customs; the International Trade Procedures Board; the freight forwarders industry; industry itself as represented by the CBI. All these have to be drawn together if it is going to be a success.

Until there is a change of heart towards air cargo in British Airways as a whole, I think the only possibility of bringing some of these projects to fruition will be the British Overseas Trade Board, for which the Government are in part responsible, together with that famous organisation to me, though maybe not to you, called SITPRO, which stands for the Simplification of International Trade Procedures—vital to all of us in industry mixed up with exports and imports. But it is not only in this area of the freight forwarders bond but in the general furtherance of air cargo expansion against our competitors in Europe, who are very alive to many of these projects, that I hone that British strategy from the British Airways' point of view will become clear, and that the Government will be backing them to the best of their ability.

7.18 p.m.

Lord PONSONBY of SHULBREDE

My Lords, I sometimes feel that we expect perfection of some of our national institutions and that we enjoy attacking the Post Office, British Rail, or British Airways. Perhaps this is because we all have our own personal experiences of where things have gone wrong. The noble Earl, Lord Kimberley, certainly enjoyed himself this afternoon. He raised the important question of whether British Airways' strategy was adequate for meeting the problems facing the industry.

Certainly the major problems which one sees air transport facing in the 1980s and beyond are the continuing demand of the leisure traveller. The tourist industry sees the demand for travel increasing, and that in fact in the course of time the leisure traveller will become more and more important for airways vis-à-vis the business traveller. Another problem in the air transport industry which it is facing acutely at the present time is the question of escalating fuel costs. In the USA they have been up 72 per cent. in the last nine months, with a consequent pressure on the earning capabilities of United States' airlines. We know that during the first nine months of this year profits were down some 50 per cent on last year. These pressures will make British Airways think very carefully about the type of aircraft it flies, the routes it operates and the fare structures it has.

On the question of the type of aircraft, this was dealt with to a considerable extent by the noble Earl, who informed your Lordships that British Airways are going for the Boeing 757, whose operating costs, if powered by the RB 211 engine, British Airways believe will be between 5 and 10 per cent. lower than those of any other comparable aircraft. Lord Kimberley criticised this decision on a number of counts, but perhaps to some extent on the basis that all the other European airlines which had ordered the Airbus could not be wrong. It should be said that at the time the order was placed for the 757s, the Airbus was not available with an RB 211 engine, and that this availability apparently came about only during this summer. On all counts, it was and is a fair decision to have decided to purchase the 757.

The other problem I mentioned was competition for the custom of the leisure traveller. This has led to intensive fares competition, as witnessed by the present applications before the Civil Aviation Authority. Application has been made by Laker Airways to operate 666 routes and, perhaps rather more reasonably, by British Caledonian to operate 20 routes. It is ludicrous to think that Laker actually intend to operate 666 routes in Europe when one considers that the biggest of America's airlines, United, operates only 400 routes throughout the United States. Whatever the outcome of the applications and whether European fares are slashed or not, everything will depend very much on the attitude of the receiving nations, and I understand, to mention only a few, that the Swiss, Germans and French are against any considerable dropping in fares. As an article in the Financial Times pointed out last Friday: If anybody is looking for an early breakthrough in cheaper fares in Western Europe, he is likely to have to wait some time. In the meantime, British Airways, with its partner flag-carriers of other European nations, will continue with its own steady erosion of air fares, offering cuts wherever it can on a bilateral basis". It is well known that British Airways is able to, and does continually, offer an increasing range of special types of lower fare which people can avail themselves of in special situations.

One of the other main prongs of Lord Kimberley's attack on British Airways was criticism of the internal working of the airline, and there was considerable validity in his remarks. Certainly the productivity of British Airways per employee is below that of other comparable world airlines, and this is recognised by British Airways. It could of course be that British Airways, with 60,000 employees and possibly 10,000 too many—Lord Kimberley gave a slightly lower figure—is too big to be able to weld into a single corporate whole. But they are trying to do something about this internally and I understand are currently involved in operation QARP, which stands for Quality and Reliability Plan, which is aimed at motivating the staff to remember that passengers are the reason for the airlines' business. What Lord Kimberley said with regard to middle managers needing more support from the top is also a criticism which I have heard.

It is not right for us this evening to consider whether the decision to merge British European Airways and BOAC was or was not right, but it is certainly the case that the proposal at the time by Sir Ronald Edwards in his report on the British Air Transport Industry in the 'seventies, which proposed a federation, might have been more successful, as then one would have had a situation similar to that which, in a sense, is now crystallising, as mentioned by Lord Kimberley, in that the work of British Airways is breaking down more and more into activities on long and short-haul routes. I doubt whether the other issues about British Airways which we are not discussing this evening—and I would refer to the sale of the shares of British Airways —will affect these issues at all; I think it is largely one for internal management.

The problems which noble Lords have discussed this evening and the problem of freight as raised by the noble Lord, Lord Hayter, are matters of concern, and we are surely all concerned to see that our national airline enjoys the prestige which we would wish it to have. Having flown on airlines other than British airlines, one can understand the point of some of these attacks, but I hope, and I am sure all noble Lords will hope, that the prestige of British airlines can be enhanced. I look forward to hearing the reply of the noble Lord, Lord Trefgarne, and I congratulate him on his stamina this afternoon in having dissolved the ODM, introduced machine readable passports and now perhaps saved British Airways.

7.28 p.m.

Lord TREFGARNE

Two down and one to go, my Lords! The noble Earl, Lord Kimberley, has displayed a commendable sense of timing in raising this Question. We have all had cause recently to cast our eyes both backwards and forwards in relation to British Airways. The look backwards was occasioned by the 60th anniversary of the airline's first regular international scheduled service. It was on 25th August 1919 that a converted bomber left Hounslow for Le Bourget under the flag of Air Transport and Travel Limited, a forerunner of what is now British Airways. The flight took two and a half hours, and it is a measure of the airline's progress when we consider that Concorde takes little more than that to cross the Atlantic. The forward look came with the publication last week of the Government's Civil Aviation Bill, which provides for a major change in the status of our national airline from a nationalised industry to a private sector company in which a proportion of the shares will be held by the general public.

There have been many changes in between these two events, including the various stages of State ownership which culminated in the creation of the British Airways Board in 1972. This was a crucial development designed to fuse together the operations and resources of the erstwhile air corporations and thus provide a single entity offering worldwide services, and to reap the economies to be gained from a large, integrated organisation. The merger was a mammoth task and it took a considerable time to be implemented properly. I take this opportunity to pay tribute to those throughout the airline whose efforts have enabled the merger to be carried through successfully.

Amidst all the changes which have occurred over these last 60 years, British Airways—in whatever form—has shown itself capable of meeting successfully the challenges of a growing, innovative and increasingly competitive industry. A few brief facts will illustrate that success. British Airways' route network is the largest in the world. The airline serves around 180 cities in 80 countries. In 1978–79 it carried nearly 16 million passengers and clocked up 36,000 million revenue passenger kilometres. Cargo and mail amounted to well over 1,000 million tonne kilometres. Total turnover was £1,640 million, on which the profit for the year was £110 million.

As well as operating scheduled air services, the British Airways Group undertakes a wide range of other activities, for example, British Airtours operates in the charter and holiday markets and British Airways Helicopters has established itself firmly in the North Sea offshore market. In addition, there are the highly successful International Aeradio Limited, and numerous other subsidiaries operating in industries related to the airline, such as hotels, holidays, and engine overhaul. It will be obvious from what I have said that British Airways has grown over the years into a large and diverse organisation.

I referred briefly to the constantly changing environment in which British Airways, in common with all airlines, has to operate. Some of these changes have been foreseeable, but others have come quite by surprise. For example, the massive and unforeseen increase in fuel prices in the early 1970s came at a time when the newly created British Airways Board had hardly had time to get on its feet. Although this resulted in two loss-making years in 1974–75 and 1975–76, the airline made an admirable recovery thereafter for which all concerned can take credit. Over the past year or so fuel prices have again caused serious problems, and I will return to this later.

Another example of the changing airline world is the pressure for low fares, about which we have heard an increasing amount over the past couple of years, and which is very much in the news today in this country. British Airways has this factor uppermost in mind in its strategic thinking, and is already closely associated with the trend towards low fares.

My noble friend Lord Kimberley has not spared us the details of the problems which all airlines face in the future, and in this he is quite right. British Airways has been among the first of the world's airlines to address itself squarely to the problems and challenges which lie ahead. Before formulating its present corporate strategy, British Airways set its sights to the mid-'eighties to try to make reasonable assumptions about what the international airline industry would look like then and the sort of service it would have to provide in order to continue to compete successfully. Nineteen Eighty-Six—just after all the old aircraft which do not meet modern noise standards would have to be phased out—was taken as a representative year. British Airways saw continued growth of the market combined with a major increase in the proportion of that market represented by leisure travel, and a fall in the real level of fares, and decided that the only recipe for success was to continue to serve all segments of the market and to grow in order to maintain its total market share.

At the same time, the airline has set itself a financial objective which may be expressed as follows: To generate a cash flow that will pay interest on loans and currently payable tax, pay an appropriate dividend on public dividend capital, and fund an asset replacement programme at current cost and a reasonable proportion of capital expenditure on assets needed for expansion". That objective is a testing one, and is reflected in British Airways' current statutory financial target of an average annual return on net assets of 6 per cent. in real terms.

In order to remain a market leader, weather the future changes in the industry and achieve its financial objective, British Airways has developed a strategic plan to adapt its products and to reduce costs. The main elements in this plan are a redesign of the product range, a rationalisation and complete modernisation of the aircraft fleet and a substantial increase in staff productivity. The first of these items involves a better recognition of the different needs of business and leisure traffic. Business travellers and others paying full fares have increasingly complained that they are not getting a fair deal from the airline in comparison with those travelling on various kinds of dis-counted fares. The new strategy is designed to eliminate these complaints and at the same time to produce an attractive, but simpler, service for leisure passengers which will be financially and competitively successful.

The second element—rationalisation of the fleet—involves a policy which will give British Airways a highly competitive four-type fleet in a few years' time. Future operations will he based mainly on the Boeing 737, the Boeing 757, the Lockheed TriStar, and the Boeing 747. These fleet plans require a very large capital investment programme. In addition, British Airways will of course continue to operate Concorde at the top end of the market. Your Lordships will be aware that the airline are to acquire a sixth British-built Concorde for the supersonic fleet, and it is open to them to make proposals to the Government regarding the seventh such aircraft if they wish. Concorde operations by foreign airlines have been facilitated in conjunction with British Airways, and it is clear that Concorde services by any airline other than British Airways or Air France can be a practical proposition only with extensive support from either of these two main carriers. British Airways is therefore continuing to play its full part in the pioneering of supersonic civil air travel.

The rationalisation of the fleet will have many cost advantages for British Airways and is a major feature in progress towards the low cost targets which the airline has set for itself. The new fleet will be more fuel efficient and quieter than current operations. It will fully meet the new noise regulations due to be applied in the United Kingdom from 1st January 1986. As regards energy consumption, the position is put into stark perspective if I quote British Airways' own estimate that by 1986 the airline's total traffic will have doubled with an increase of only 25 per cent. in fuel consumption.

The right fleet will therefore make a substantial contribution to the success of British Airways' strategy, and I should like to make a brief reference here to an important, related point. Your Lordships House has in the past, and again tonight, heard criticisms that British Airways' fleet plans are too heavily dependent on American aircraft rather than British or European aircraft. I can understand the sentiments of those who express such views, but in the prevailing environment of the civil aviation market it is essential for an airline to be able to choose the aircraft which is best suited to its own particular route pattern. Flying the right aircraft on the right routes can make all the difference between profit and loss, and the Government firmly believe that it is the management of British Airways who are best placed to decide which aircraft will produce the best results on their route network and that they should therefore be free to exercise their own commercial judgment in this respect. British Airways' preferences for certain aircraft types imply no criticism of competing aircraft from a different source, but simply reflect what they consider to be best for their own circumstances. The airline's preference for Rolls-Royce engines which already power its TriStar fleet, part of the 747 fleet, and will power the 757s, is similarly based upon commercial considerations.

Several noble Lords were particularly critical of British Airways' choice of the 757. Again, that choice was a purely commercial decision, based upon the airline's particular requirements. We could no doubt have a very long and inconclusive debate on the merits of that decision, but we are not here to do the management's job. Mr. Ross Stainton, the chairman, has stated recently that the developing fuel crisis emphatically underlines the commercial rightness of their decision to buy this aircraft, and that the airline's calculations show it will burn between 30 and 40 per cent. less fuel per passenger than the Trident 3. He has also pointed out that, because it is smaller than its rivals, the 757 represents flexibility in deployment, which British Airways consider a valuable commercial plus factor in the fiercely competitive environment they expect to face. With respect, I would suggest that there is nobody in your Lordships' House with sufficient knowledge of British Airways and its particular commercial requirements to say that the airline's decision is wrong, and that they should be acquiring an alternative type of aircraft. The best service the Government can render British Airways is to give its management the freedom to exercise its commercial judgment in matters such as this, because they are the people best placed to make those decisions.

Returning to the details of British Airways' overall strategy for the future, the third element I mentioned is the need to increase staff productivity. This is vital. The right product combined with the right aircraft will not be sufficient to ensure the success of the airline's strategy without a significant contribution to cost reduction from better productivity. This is not to say that productivity has stood still in the airline. Over the past 10 years, available tonne kilometres produced per employee has risen from just over 78,000 to almost 135,000. But this trend has to be continually and more rapidly improved if British Airways' costs are to be contained at a level which will enable the airline to continue to compete successfully in the future. The required improvement in productivity is one of the management's priority objectives in British Airways' overall strategy, and particular efforts have been made over the past couple of years to secure the necessary increases, both by normal managerial action throughout the airline and by the linking of increased pay with increased productivity. Steady progress has been made, and the airline's employees at all levels are to be congratulated on this. However, the momentum has to be increased. The need is simply illustrated by British Airways' forecast that by 1986 the doubling of the airline's traffic will be achieved with fewer staff than are currently employed.

A related and important factor is the quality of the airline's service. I have no doubt that many noble Lords could provide examples of individual complaints about flight punctuality, baggage handling, et cetera, and it is no use denying that there are such cases. British Airways are fully aware of this and are making strenuous efforts to improve their performance with a quality and reliability campaign which covers the whole airline. They realise it is no good having the right product at the right price if it cannot be delivered in reliable working order on time.

These, then, are the essential elements of the strategy, but, in formulating it, British Airways recognise that there are a number of external constraints over which they have little or no direct control. These include the speed and manner in which the world moves towards deregulation, the problems of United Kingdom airport capacity, the problems of air traffic control congestion, the position regarding aviation fuel supplies and their desire for freedom to acquire the aircraft of their choice. I have already dealt briefly with the last point, but noble Lords will be aware that over the past months another of the items mentioned —aviation fuel supplies—has had a dramatic impact on all airlines. Fuel price increases over the past year have placed a large, additional and unavoidable burden on airline costs, including those of British Airways. The magnitude was illustrated by Mr. Ross Stainton when, on the publication earlier this year of the airline's 1978–79 report and accounts, he indicated that British Airways' previous forecasts of the future nature of the airline industry had assumed that by 1986 crude oil prices would have risen by 15 to 20 per cent. in real terms. He then went on to say—and I quote: As far as fuel prices are concerned the 1986 in our prediction has already come and gone". British Airways have also suffered recently from another factor over which they have no control—the strength of sterling. While this represents some advantage in respect of the airline's dollar-priced expenditure, such as oil and aircraft, it has precisely the opposite effect on revenues. The proportion of British Airways' revenues earned abroad is approaching two-thirds, and a strong pound means a fall in the sterling value of overseas receipts from ticket sales when they come back across the exchanges. Despite a growth in traffic higher than forecast, these factors are combining to create an extremely difficult year for British Airways, as noble Lords may have read from recent Press accounts. The airline is therefore engaged in a cost-cutting exercise to preserve, so far as possible, the level of profitability necessary for its large investment programme.

One aspect of cost-cutting which has recently received much public attention is the decision to withdraw from a number of United Kingdom domestic routes. I do not propose to go into this question in great detail, because it is a commercial decision by the British Airways Board, and they have fully explained their reasons for it: that is, that the relatively small number of routes in question are loss-making, could not be turned round to make a profit and could not justify the investment in new aircraft to replace the aging Viscounts. Given the competitive climate in which British Airways have to operate, it is essential that they should be free to take and implement decisions such as this without interference. In this particular case your Lordships will have noted that other United Kingdom airlines have applied to take over the routes, and thus the interests of the travelling public should not be adversely affected, It is an imperative for any business to concentrate its resources, and not to fritter them away or under-employ them. It would, however, he wrong for Ministers to dictate to British Airways how that principle should be implemented.

The question of freedom brings me conveniently to another major aspect, without reference to which my answer to the noble Earl would be incomplete. I refer, of course, to the Government's plans to change the status of British Airways from that of a nationalised industry to a private sector company in which the general public holds a proportion of the shares. The Bill which provides the framework for this has been published, and your Lordships will have the opportunity to debate it in due course. The essential policy intention as regards British Airways is to release the airline from the existing régime of Government controls which are applied to any nationalised industry. British Airways are by no means a monopoly, and have to operate on a commercial basis. The Government's proposals recognise this, and, when implemented, will free the airline from controls imposed by the Government on important matters, such as borrowing powers, cash limits and financial targets, and controls of investment. Controls of this nature will be replaced by the disciplines of the commercial and financial markets, which, in the Government's view, is an infinitely preferable arrangement given the airline's particular circumstances, and one which will enable the management to plan ahead without fear of intervention, such as cuts being imposed on financing for its capital investment programme because of the Government's wider public expenditure considerations. Thus, in future, the airline's success will depend entirely on its own efforts, and the Government believe such freedom will be essential for British Airways to face successfully the challenges which lie ahead.

My Lords, I have taken some time to reach the answer to the Question asked by my noble friend Lord Kimberley, but that Question was widely drawn and a proper understanding of the background is almost as important as the answer itself. Like any large organisation, British Airways throw up individual matters which can be criticised, and indeed are. In this repect, they know their weaknesses and are making every effort to improve where necessary. But it is all too easy to concentrate on the particular, and my noble friend's Question requires us to stand back from what I might call day-to-day matters and look at British Airways more broadly, and at the plans they are making for the future. As I have indicated, those plans are based on realistic assumptions which boil down to the simple fact that life for all airlines is going to become more difficult, and only the fittest will survive. British Airways have identified what they need to do, not only to survive but to do so successfully. Although the problems have been increased by recent events largely beyond British Airways' control, their central strategy and determination remain. Nobody pretends that the road ahead is easy or that the mere existence of a plan is enough in itself, but the Government's firm answer to my noble friend's Question is, Yes, we are satisfied that British Airways' strategy can meet the problems facing the industry, and I am sure your Lordships will join me in wishing all those who work in the airline every success in their efforts.