§ 6.5 p.m.
§ Lord Beswick rose to ask Her Majesty's Government when they expect to make a decision about a Government funding of a British component in the Airbus Industrie project and what are the principal factors in their decision-making.547
§ The noble Lord said: My Lords, I am asking this Unstarred Question because I believe that the decision about the A320 will be of great importance to the long-term future of British Aerospace and because it could be quite critical for the less-than-long-term future of Airbus Industrie. I have very much in mind also the wider economic implications for Britain and, as it seems to me, the quite significant political consequences for our role in Europe. Let me deal with that last point first. Over the years, I have tried to argue that European integration would more healthily develop if it was based on constructive industrial co-operation. In the post-war years I used the phrase, "functional federalism". Originally I was thinking of atomic energy for peaceful purposes, but in the 'fifties it became clear that the eventual capital costs of developing a new aircraft meant that we must either get together with others or give up the idea of remaining in the big market.
§ Since then British Aerospace has become a full partner in Airbus Industrie. Most now agree I think that the record of Airbus Industrie to date is one of professional dedication and technical and commercial success. Moreover it emphasises the point that industrial co-operation in Europe flourishes best if it is not under the centralised control of Brussels. But AI are in a business in which you either continue to go forward or begin to curl up and contract. It is now important that AI go forward and expand their family of aircraft, which, on a market analysis, means launching the A320—a civil aircraft size, incidentally, in which Britain has the most experience.
§ If non-participation by Britain meant that the project foundered, then AI would be offering a limited range of products, its confidence and its credibility could falter and the curling-up process would begin. That would be bad for Europe, politically as well as economically. The concept of co-operation would be weakened. On the other hand, if BAe did not (or could not, because of lack of financial support) go forward as a fully-participating partner, then it is possible, or probable, that others would take its place. The wings would be designed and made elsewhere and the United Kingdom in this field and in others would lose influence. This possibility too could have political consequences. After all, political influence is bound up with economic achievement.
§ Having put these wider considerations, let me go on to say that it would all be irrelevant unless the A320 is judged to be a competitive, saleable, economically viable proposition. I know enough of this business to realise that those who are actively engaged in it with day-to-day responsibility are in a much better position than am I to make a judgment. However it does seem established that there will be a demand by the end of this century for some 2,500 to 3,000 aircraft of the size of the A320.
§ The expectation is that 1988 will be the year when certain aircraft will have to be retired and the demands for the new 150-seater will begin to be effective. It is argued therefore that a new aircraft must be available by that date if it is to achieve optimum market penetration. I understand that, as a result of their intensive research and discussions with some 180 airlines, the Airbus Industrie salespeople estimate 548 conservatively a sale of 600 aircraft—that is 600 out of this total of 2,500 to 3,000. That is rather fewer than the 750 of which they were talking a year ago and which some people still think they will achieve. But the costing and financial out-turn has been based on this lower figure.
§ It is for British Aerospace and not for me to argue the detailed commercial case; but what I am asking from this Government this evening is an assurance as firm as is sensible that if the BAe judge the commercial case to be proven, then finance will be forthcoming. Or shall I put it a little differently?—if BAe's estimates are sound and satisfy the Government, then Government funding will be forthcoming. I should add another factor: namely, if the decision is positive then obviously employment prospects at BAe will be brighter and I gather that 4,000 jobs will be involved, in addition maybe to another 1,200 in the supply industries.
§ Looking further ahead, it is my view that in 10 years' time the aircraft manufacturers may well be more dependent for business on the civil side than on military aircraft. That seems to me to make it even more important that the right decisions are taken now on new civil projects. There are those among my political friends who may query the justification of public funding of a project which under the new ownership will mean increased dividends for the absentee BAe shareholders. My answer to that is twofold. First, it will be for the greater good of the greater number if we build on the initial success of British Aerospace; and, secondly, I cannot refrain from saying that this proposed investment in European Aerospace is a much more cost-effective way of promoting European co-operation than subsidising Continental farmers to grow produce that has to be sold at a cut price to Soviet Russia.
§ There are two other matters relevant to my Question, namely, the position of British Airways and of Rolls-Royce. My understanding is that the two French airlines, Air France and Air Inter, have given an undertaking to buy 60 of the A320 aircraft. What a wonderful thing it would be if British Airways could give a similar commitment. In recent years, and until the latest change in management, there has been a British Airways fixation about the alleged superiority of American aircraft. Some have chosen to argue that any inadequacy of the British public sector airline was due to the operation of British aircraft bought under Government direction. I have listened to this kind of story since the days when the Department of Civil Aviation, of which I was a member, argued with the old Ministry of Supply. There was some truth in the operator's complaint, but it was not the whole truth. It is not true, for example, that BEA suffered from the operation of the Viscount. Moreover it seems to me very difficult for British Airways to ignore the fact that they are the only major operator in Europe which do not operate, or have not ordered, an airbus. All the others cannot be entirely wrong.
§ However, leaving the past behind, the fact is that we now have a great chance to bring British interests together. British Airways will have a requirement for an aircraft of the size we are talking about. If they need it before 1988—which I think is conceivable if they have to retire, for reasons of the noise regulations, the 549 Trident aircraft—and 1988 being the A320 availability date, then Airbus Industrie are prepared to lease to them suitable aircraft to fill the gap. One hopes this offer will be received favourably. If a commitment were to be forthcoming from the British as well as from the French flag-carriers, surely that would be decisive for the launching of the A320 150-seater airbus.
§ I add only this about the British Airways situation. On a previous occasion I have referred to the fact that they are now asking for £800 million of taxpayers' money to help write off American debts. If they are promised the money from our pockets and they use it to buy more American aircraft, then I hope that British public opinion will make itself felt.
§ There remains the Rolls-Royce factor. It seems the RJ500—a joint effort of Rolls-Royce, the Japanese and an American company—cannot be available for the 1988 delivery date; but the A320 design would enable the British new technology engine to be fitted into a later production. By all accounts this would be very attractive indeed to many of the world's airline operators. We should then have the acceptable situation of a new engine going into a proven aircraft. But we should also have the eminently pleasing prospect of a British airframe manufacturer, a British aero-engine manufacturer and a British airline all working together: a prospect which we have not been able to relish for many years.
§ I hope the Minister will be able to say that this prospect is pleasing to the British Government. I hope, too, that he will make clear that whatever problems there may be for some aspects, the prospect will not be clouded by any reluctance on the part of Her Majesty's Government to find this initial finance.
§ 6.17 p.m.
§ The Earl of Kinnoull
My Lords, I rise briefly to support the noble Lord, Lord Beswick, in his further prodding of Government on this Airbus 320 project. The noble Lord makes out a powerful and persuasive European case for all the long-term benefits which I believe our airframe industry would enjoy. To describe the noble Lord as a veritable greybeard of aerospace would not, I think, be a warm title or one suited to his dynamic spirit; but it is true to say that no one in this House can equal his combined parliamentary and industrial experience in the aerospace field, and of course he was the chairman of British Aerospace at the very time when negotiations were going on for the 20 per cent. equity interest in Airbus Industrie. As the House will recall, he served on the supervisory board at that time.
I am sure that the House welcomes the noble Lord's Question tonight. Whether he is expecting a more definitive answer than he received following the debate he initiated on 26th April 1982, I am not sure—or perhaps I am sure about that. Of course there has been a good deal of progress since then. As the noble Lord mentioned, there have been the Airbus Industrie marketing survey and also the reactions from other member Governments in the project.
Airbus Industrie has achieved a remarkable success in a relatively short life, despite the handicap of having four Governments interfering with it. It is a tribute to 550 the four industrial partners in Airbus Industrie that the mighty Boeing Company today regard it as a positive threat to their almost monopolistic market. Indeed, the airline customers regard the company as capable of producing and designing a superb and reliable aricraft. Its success has not always been matched in terms of profit for its equity partners, but profit always seems just round the corner in the aerospace industry. However, as I said, it has won an excellent reputation with its two aircraft which are now in production.
It is perhaps worth remembering that, at the time in 1974 when the first A.300B was rolled out, the conditions were very different. There was, first, a seemingly endless growth in the airline business. Secondly, there were three major US airframe companies—Lockheed, McDonnell Douglas and Boeing—all competing for the very market that Airbus Industrie was going into. Interestingly enough, there was a public inquiry going on about the third London airport and today there is still a public inquiry going on about the third London airport, as there will no doubt be for some years to come. The airline business is today in a recession, but I understand it is forecast that it will come out of it within two years.
More interestingly, however, there is now only one US airframe company which is left to compete with Airbus Industrie, and that, of course, is Boeing. So if Airbus Industrie were not in the market today, Boeing would completely dominate the position—a wholly anti-trust position—ready to scoop the pool when airlines move out of the recessionary market and have the confidence to reinvest in new aircraft.
It is perhaps worth making the point, although the noble Lord, Lord Beswick, has already made it, that the decision to embark on the A.320 project and to compete with the Boeing 767 is as critical a commercial judgment for the four equity partners in Airbus Industrie as it is for the Government's releasing the necessary launching aid. The industrial partners, particularly British Aerospace, with its private capital, will have a major penalty to overcome if the venture fails. So it is as much in their interests as the Government's that a decision is taken on commercial grounds.
It is interesting to note that the Airbus marketing campaign, which is going into the likelihood of firm orders, rests on achieving 60 to 70 firm orders from at least three to four major airlines before launching. This is a daunting task when many airlines today are more fearful about the next six months' cash flow than about laying down a commitment for new aircraft over the next five years. I do not know which airlines—the noble Lord mentioned Air France and its internal subsidiary—have taken an interest in the project, and it will be helpful if my noble friend can say what information he has about interested airlines. I support the noble Lord, Lord Beswick, as regards British Airways, to the extent that it would be a most helpful British decision if British Airways decided that this fitted into their category of new aircraft. I am not sure that I wholly agree about the 800 million dollar American debt to which the noble Lord referred, and perhaps we can discuss that on another occasion.
As to the launching aid, it would be helpful if my noble friend could update the position as to where 551 each of the four Governments now stand on the 320 project. For instance, is there to be a joint Ministers' meeting in the next few months to discuss launching aid? As to the United Kingdom's share, what is the likely estimate of what the launching aid will amount to? My noble friend might also confirm that a final decision on the launching aid will embrace the possible valuable spin-off effects which British industry would gain from going ahead. There are obvious spin-off effects for equipment companies and, indeed, for Rolls-Royce. As the noble Lord, Lord Beswick, said, it will be interesting if we can have this information. It is particularly opportune to ask about the Rolls-Royce project and anything that my noble friend says will be of interest.
I hope that he will have an encouraging reply tonight, even if it is not specific. The A.320 project and its success form a vital next step in the European aerospace partnership. The investment is huge and the market potential is equally huge and rewarding. It concerns at least 5,000 British skilled jobs and there could be many more. If the industrial partners—notably British Aerospace—regard it as a commercially viable project, I hope the Government will demonstrate that they, too, believe in our aerospace industry and, indeed, in European industry, by announcing support for a launching aid programme.
§ 6.26 p.m.
§ Lord Ponsonby of Shulbrede
My Lords, as the noble Earl, Lord Kinnoull, said, we are indeed all very grateful to my noble friend Lord Beswick for raising this Question today and for the context in which he has put it. We also appreciate very much the knowledge which he brings to this short debate. We are grateful also to the noble Earl, Lord Kinnoull, who has added his support to the Question. One must be continually concerned about the foreign exchange implictions of a decision of the sort which British Airways has to make shortly. These days it is increasingly difficult to know whether a product is manufactured in the country where one thinks it is manufactured. For example, one can often buy a car with a British mark only to find that it has been made in Germany, or one can buy a television set with a Japanese mark only to find that it has been made in Britain. So we need to look at the situation with regard to the Airbus.
So far as the A.300 and the A.310 are concerned, the British contribution in the form of the wing design and manufacture was of the order of 20 per cent. On the other hand, so far as the A.320 is concerned, the British contribution to the airframe would be of the order of 27 per cent., with a value of 4 million dollars per aircraft. Other equipment would be to the value of 0.7 million dollars per aircraft. If the Rolls-Royce engine were included—if available and as specified—30 per cent. of the value would be worth 1.8 million dollars per aircraft. In addition, there would be other amounts which would add up to 2.3 million dollars per aircraft, making a total of 8.8 million dollars per aircraft as the British contribution to an individual A.320. This would be eight times the British input for a 737–300 aircraft. So there would be a considerable advantage in terms of foreign exchange, if the decision 552 was taken by British Airways to place an order for the A.320.
It would not, however, be right for British Airways to order for just this reason alone. British Airways must be satisfied about the operational efficiency of the aircraft, about its fuel efficiency and about its passenger and cargo features. They must also be satisfied about the general noise level which the aircraft makes and its general economic characteristics. If British Airways are satisfied on all these scores that they would have a better bargain by buying the A.320, it would seem to be advantageous that they should go ahead and place an order in that quarter.
As the noble Lord, Lord Beswick, has said, over the next few years some 200 old aircraft will have to be replaced. DC9s, 737s, 727s, Tridents and 1–11s currently in service will have to be replaced by new aircraft. This situation has been brought about by the fortuitous expansion of the civil aviation industry some 15 or 20 years ago. Therefore, the time for reordering is coming on us very quickly and to a very substantial extent. So it appears that the aircraft industry is heading for a period of growth, not only because of the need to replace these old aircraft but also because, as travel becomes relatively cheaper and more and more people avail themselves of the services offered, more aircraft will be needed.
Vast sums of money are involved in making this decision. I hope that the British Government will be able to show their confidence in the industry by ensuring that the decision is made in a way which is most beneficial for Britain. Under the Industry Act the Government have the ability to make loans to British Aerospace and to Rolls-Royce in order to help them to develop the appropriate engine. This would certainly be a good investment for the Government. Very probably it would be a very much better investment than some of the other investments they have made.
British Aerospace have received no Government subsidy for their contributions to the A.300 and the A.310. Their partners in Airbus Industrie have received loans. These are currently being repaid at the rate of £100 million a year; £260 million has already been repaid by Airbus on the A.300 and the A.310 and complete repayment is expected by 1989. On that score, it seems that this would be a good investment. In addition, as was mentioned by the noble Earl, Lord Kinnoull, and underlined by the noble Lord, Lord Beswick, a considerable number of jobs are involved. I am sure that all noble Lords are very concerned about the creation of new jobs. If the Government and British Airways have faith in Airbus Industrie and wish to show materially that they want this particular industry to succeed, I hope that we shall receive some encouragement this evening from the noble Lord, Lord Lyell.
§ 6.35 p.m.
§ Lord Lyell
My Lords, I am sure that the House wishes me to express the appreciation of us all to the noble Lord, Lord Beswick, for asking this Question. His commitment and distinguished service to the British aerospace industry are well known, are is his great knowledge and experience of that industry. There is no one better qualified either in your 553 Lordships' House or in another place to raise the matter which he has asked about this evening.
The British Government, together with their partner Governments, continue to give support to Airbus Industrie, in which the British stake is represented by the 20 per cent. partnership share of British Aerospace. We are most gratified by the successes—I stress "the successes"—which Airbus Industrie has achieved in establishing a position second only to Boeing as a manufacturer of wide-bodied civil aircraft and also in demonstrating that a European collaborative venture can rival the major United States manufacturers. I hope that the noble Lord, Lord Beswick, will be pleased to receive that encomium from the Government.
I am sure that both the noble Lord, Lord Beswick, and your Lordships appreciate that to sustain and consolidate that position, Airbus Industrie wishes to broaden their product range into what is known as a family of aircraft by developing the A.320 as a replacement for the present generation of narrow bodied, short to medium range jet aircraft. Though first mooted some two years ago, the A.320 project has been delayed by the lack of a suitable engine, but at the end of last year General Electric of the United States and SNECMA of France—the Societé nationale d'Etudes et de Construction des Moteurs d'Aviation—put forward proposals for a derivative engine, to be called the CFM 56–4. This derivative engine might, in the view of the partnership, be suitable for the A.320. In the early months of 1983 the airbus partners refined their design definition for the A.320 in the context of the Franco-United States derivative engine proposal and further soundings were taken of airlines' requirements.
I understand that a few weeks ago Airbus Industrie initiated a more detailed marketing exercise to assess the reaction of selected airlines to an A.320, powered initially by the CFM 56–4 engine, with a potential in-service date of spring 1988. That is shortly under five years from the date on which we are discussing the matter this evening. The results of this marketing exercise, and in particular indications of the airlines' willingness to place launch orders, will be an important element in determining the commercial viability of the entire project,
Until those results are known, it has to remain uncertain how far the world's airlines will be prepared to commit themselves and their funds at the present time to a new aircraft for delivery as from 1988. There is no doubt that airlines see the need for an advanced technology, fuel-efficient aircraft of the size and range of the proposed A.320.
In this context, the Government believe that to maximise the A.320's long-term sales potential it will need a new technology engine such as the 2500 proposed by Rolls-Royce, Pratt and Whitney and their partners. But, of course, financially stretched airlines—many of whom are still suffering badly from the effects of the recession in the air transport industry—will think very carefully about the trade-off between the improved fuel efficiency of a new technology engine and the lower capital cost of the derivative engine—or indeed, of entirely derivative aircraft such as those mentioned by the noble Lord, 554 Lord Ponsonby of Shulbrede; the Boeing 737–300 or the DC.9 Super 80 Series.
Given the uncertainies of a wide range which remain to be resolved, it is not yet possible to say when the Government will be able to make their decision on the question of financial support for British participation in the A.320 project, because further information is awaited from British Aerospace in support of their application for launch aid. It will take some while to digest the results of that marketing exercise.
§ Lord Lyell
My Lords, may I just finish this paragraph? As the private sector concerned, British Aerospace are eligible to apply for launch aid in support of their participation in the A.320 or in any new airbus project—but the Government have no obligation to provide such assistance. Each application has to be assessed on its merits. It is the Government's belief that an aircraft must be built for profit and not for prestige—
§ Lord Lyell
My Lords, if I may just finish, because I have not forgotten the noble Lord, Lord Beswick; if he will remain patient for just five seconds longer, he will have his way. My noble friend Lord Kinnoull—a good Scot—and myself believe that profit is paramount. Above all, the Government believe that the commercial viability of this scheme is paramount. I have to stress—certainly to the noble Lord, Lord Beswick, and to my noble friend, as to all of your Lordships—that in the past substantial Government investment in aerospace programmes has failed to provide a really satisfactory return. I yield to the noble Lord.
§ Lord Beswick
My Lords, the noble Lord, Lord Lyell, said that further information is required. I understand the limitations under which the noble Lord is operating, but can he give any indication as to what that further information is? Can he define it a little more closely?
§ Lord Lyell
I believe, my Lords, that the noble Lord himself will certainly be aware of the information. So far as I am aware, the information we are awaiting is the result of British Aerospace's own more detailed marketing project. The noble Lord mentioned that British Aerospace have spoken to more than 180 airlines. I understand that British Aerospace are coming up with a much more detailed marketing survey very shortly. I believe it is agreed by both British Aerospace and by the Government that, before the Government give a firm commitment to financial aid, the Government and British Aerospace will consider these figures. I am advised also that it is a more precise assessment of the costs of the undertaking and their share of this particular project; that is what I am advised.
I stressed to the noble Lord, Lord Beswick, that many factors will be taken into account in reaching a decision on the provision of launch aid for the A.320. The Government recognise that the future of British 555 Aerospace as a civil aircraft manufacturer is now very closely linked to participation in viable new air industry projects. The valuable opportunities which the A.320 could present to British engine and aircraft equipment manufacturers is also clearly recognised. All these elements will be considered in assessing the case for launch aid, but the principal criterion on which the Government's decision on launch aid for the A.320 will be based is the demonstration by British Aerospace and their airbus partners that the project is commercially viable and offers sound prospects of achieving a satisfactory real rate of return on the investment.
The noble Lord, Lord Beswick, and my noble friend Lord Kinnoull raised the question of launch aid. I must make it clear that there is no fixed amount or percentage of the non-recurring costs of development. The amount or percentage which the Government might be prepared to consider would be the result of negotiation if the project presented by British Aerospace is judged to be commercially viable; that is, it must achieve a minimum of 5 per cent., real rate of return, which is the general Treasury criterion applied in respect of public sector projects. If this hurdle is overcome, then the amount of launch aid will be the minimum judged necessary by the Government, in negotiation with the company, to enable British Aerospace to participate in that particular project.
I was asked by my noble friend Lord Kinnoull about the meetings of the Ministers of the four countries. I am advised that the Ministers of the four participating countries are to meet on 21st July this year to hear the latest information from Airbus Industrie on the progress of their marketing exercise with the CFM56–4 engine. But I should not wish to anticipate what that information will be or in what direction it will point.
My noble friend Lord Kinnoull also raised a detailed point concerning the Rolls-Royce engine. He and the noble Lord, Lord Beswick, will be aware that in March of this year a five-nation agreement to collaborate on the development of an advanced technology engine for short or medium haul aircraft in the 110 to 160-seat range—such as the proposed Airbus A.320 or Boeing 737–400 Series—was signed by Rolls-Royce, Pratt and Whitney, the Japanese Aero Engine Corporation, Motoren-und-Turbinen Union (their West German partners), and Fiat Aviazione of Italy. The approval of Her Majesty's Government is required, and we understand that Rolls-Royce will be seeking launch aid from the Government in respect of that particular project. In this respect, a full business case from Rolls-Royce is awaited. As your Lordships will be aware, there are a number of problems requiring inter-governmental discussion—for example. United States export controls, technology transfer, and possible anti-trust objections—on which informal contacts have begun.
No clear timescale has yet been given for an entry-into-service date for the 2500 engine, but it is generally recognised that development through to certification of a wholly new engine—which we are discussing in this particular case—takes from 18 months to two years longer than with a derivative engine such as the CFM56–4. The likelihood is that it will be late 1989 or even 1990. at the earliest, before this new technology 556 engine can be offered as an alternative power plant for the A.320. However, the later availability of the new technology engine need not necessarily detract from its sales potential over the estimated 20-year production life of an aircraft such as the A.320.
I conclude by suggesting that the prospect of British Aerospace, Rolls-Royce and British Airways supporting and participating in this project—the A.320—would be as the noble Lord, Lord Beswick, said in his opening speech, very pleasant. Indeed, this is a term which, characteristically of the noble Lord, Lord Beswick, is a very modest understatement. Each of the parties, and indeed the Government, have their separate criteria which must individually be satisfied for this situation to be brought about. The conjunction of these elements would, I believe, introduce a new era for British civil aviation and it must be the wish of your Lordships' House that matters should proceed to that conclusion. I am sure that the views expressed by all noble Lords who have spoken this evening will contribute to the fruitful outcome of the present deliberations by all parties to this project in the United Kingdom.