HL Deb 25 July 1985 vol 466 cc1376-84

3.43 p.m.

Viscount Rochdale rose to move, That this House takes note of the report of the European Communities Committee on European Air Transport Policy (7th Report, 1984–85, H.L. 115).

The noble Viscount said: My Lords, I rise to invite your Lordships to take note of the Select Committee's report on European Air Transport Policy. I should like at the outset to say how privileged I was to be chairman of the sub-committee which carried out the inquiry, and to say how valuable and helpful every member of that sub-committee was.

I am afraid that it is a long report that we have produced, but it deals with a long, complex, and important Commission document known as Civil Aviation Memorandum No. 2, which they issued in March, 1984. It is a communication from the Commission to the council with proposals for Progress towards a Community air transport policy. I suspect that none of your Lordships who has cause to travel by air in Europe, except perhaps if you are fortunate enough only to travel on holiday by charter lines, has any doubt about the importance of this subject. It is an importance which seems to bear particular relation to the United Kingdom and Ireland because of our geographical position.

It is significant that during the course of our inquiry the number of references in the press to the subject was great and very critical indeed of available services. That obviously showed us that all was not well. Not well whether from the point of passengers, or from the point—and this is equally important in the longer term—of the development of the whole airline industry in the future in a wider context.

First, may I make it clear what this Memorandum No. 2 is about and what it is not about. It is about scheduled airline services only. It is about these services within the EEC, though obviously they are likely to have some repercussions in other countries outside the Community. In this respect the communication differs from previous draft regulations. It is not about charter air services, though these again can provide an important competitive element on certain routes, and that is valuable.

Our report has six parts. The first is the purely normal, formal introduction; the second is historical and legal; then we go on to criticism of existing system; then a consideration of Memorandum No. 2 in some detail; and finally the Commmittee's conclusions. The historical section is important because it presents how it came about that the present unsatisfactory situation exists. International scheduled air transport policy goes right back to the Chicago Convention of 1944, and is largely governed by bilateral agreements between nations and between their nominated—and too often government-regulated—airlines. That is where the trouble starts; the over-regulated airline services by governments.

I am not going to go into the details of that; but despite the competition clauses in the Treaty of Rome, we found that there was virtually no competition whatever, which resulted in frequent criticism of various aspects of the services provided, and in particular strong criticism of the very high fares, of which your Lordships will be only too aware. These high fares and the related services which go with them are the essence of our report.

With that in mind, and considering that, our attention was almost immediately drawn to the seemingly beneficial effects on fares of the deregulation of airline services in the United States. That dated from 1978. In passing, I would mention that an interesting study on comparative air fares in the United States and Europe was carried out—and is available—by the Civil Aviation Authority.

But we soon realised that if we were going to consider this approach, drastic deregulation as carried out in the United States, then we should not be comparing like with like. We should be trying to apply the medicine for one patient to another patient with quite different circumstances. Therefore, like the Commission, we did not pursue that line of thought further. But we were astonished by what we found, that most member states of Europe did not want competition. They were very well suited as they were with closely regulated bilateral arrangements. They were anxious to save their status symbol, flag-carrying airlines and were not prepared to subject them to the discipline of a competitive environment. They were reluctant therefore to go to court over any infringement of the Treaty of Rome, an attitude which, on the other hand, we found very strongly criticised by some of the witnesses who came before us; and that may be a point of view that will be put to your Lordships during this afternoon's debate.

There were notable exceptions in this attitude from member states. I am glad to be able to say that the most notable of all was the United Kingdom, about which I shall say more later. But the Netherlands, probably West Germany and, as the Inquiry proceeded, we gained the impression that other nations also were beginning to see the light. But if one considers that anti-competition attitude one finds it difficult not to be somewhat cynical and say "So much for the Common Market".

Your Lordships may remember that in 1980 the same Select Committee, though a different subcommittee, produced a report European Air Fares following an earlier inquiry under my noble friend Lord Boyd-Carpenter. The conclusions that that committee came to then, compared with our conclusions, were very much the same. However, despite the fact that four years have gone by little or nothing has happened.

On the other hand, the Commission, all praise to them, are clearly anxious to make progress, to give early relief to the passengers which is so badly needed. We saw very clearly that the Commission found no attraction in the United States-type of deregulation, which they reckoned would be bound to fail if pursued and probably would be counter-productive. They clearly did not favour any head-on attack on the anti-competition lobby.

So we have before us against that thinking the Memorandum No. 2 aimed at achieving the possible rather than going out for the doubtful ideal. Memorandum No. 2 starts off with a carefully argued and long explanatory section which I commend to your Lordships, if you have not already read it. In that it is made absolutely clear that the Commission were under no illusions whatever about the adverse political climate and problems which beset them. We come back to that in our report in almost the last paragraph, paragraph 129.

The memorandum then follows with six annexures of detail; but without going into any detail myself what the Commission seek as a first modest liberating step towards a medium-term objective is to achieve a substantial reduction in Government involvement in bilateral agreements between airlines, leaving the airlines much freer to make their own commercial arrangements between themselves, unfettered by politics.

The Commission then proceed to seek to get the airlines to loosen up their bilateral arrangements between the national airlines of one country and the national airlines of another country in respect of four aspects: first, is market access, making it easier for the independent airlines to play a part; secondly, capacity sharing; thirdly, revenue sharing and fourthly, the fixing of fares: all of which topics can be so easily highly restrictive.

In return for that the Commissions offer a quid pro quo. They offer to give group exemptions under Article 85(3) of the Treaty of Rome for airline bilateral agreements for a period of seven years. It is worth remembering that without those exemptions most of the agreements which exist today would be in breach of the Treaty of Rome and therefore the airlines would be at risk. In other words, the Commission are offering a package deal.

In their memorandum the Commission deal with one or two other points which I shall briefly mention because they are all relative to my main issues. First, they deal with the question of state aids to the airlines. If uncontrolled these state aids could so easily be used to frustrate the Commission's objective. Secondly, they seek to deal with, or to arrange for close investigation of, what seem to be exceptionally high European infrastructure and other costs for airlines. These are outside the control of airlines and therefore are contributions to the high fares which the airlines themselves cannot influence. The particular matters I would mention are high fuel costs compared with those in the United States, and extraordinarily high air traffic control costs. The figures are in the report and I think they will astonish your Lordships when it is seen how abnormal they are. The Commission finally end with a proposed programme on all these various items during the following two years.

In general terms the committee agreed with the Commission, though in a few cases, notably on the question of market access for independent airlines and the length of seven years for the exemptions, we did not think that the Commission were being tough enough. This disturbed us, because towards the end of the inquiry we became aware that the Council of Ministers, when considering what their response to the Commission's document should be, had apparently produced a list of guidelines to go in their reply which had been referred back for internal study within the Council of Ministers. Being internal it was confidential and we could not have proper access to it, but a certain number of points were published or emerged in one way or another. It sounded to us as if these guidelines would have the effect of watering down even the Commission's modest proposals, which in our view would make any idea of exemptions totally unacceptable.

I have missed out a number of points that are also in the report, but I hope other noble Lords will pick them up in the course of the debate. There was the question of safety, whether additional competition and the cutting of corners here and there would have the effect of diminishing safety. We were satisfied that there was no real evidence on this, and no experience from what had happened in the United States with their deregulation. But there is one important point that I must mention; that is the social aspect, the question whether increased competition would have the effect of reducing employment. Understandably to us, this was a matter of considerable concern to the trade unions who gave us both written and oral evidence. But we were inclined to agree with the Commission, that with the very slow rate of change proposed there should be ample opportunity for a smooth adjustment to new situations which would not cause great disruption to employment.

In fact, I would go further than that and suggest that if the object of the whole exercise that the Commission are seeking is achieved, it should make for an expanding European airline industry which would have the effect of helping not only passengers but also all employed and likely to be employed in that industry. There was one further aspect of this which we thought needed further looking into. The trade unions who came before us—and we had a very interesting meeting with them—were clearly upset by the apparent lack of consultation with them, not in this country but in Europe. We felt that this should be looked into and perhaps developed on a wider, shall we say, more European basis. That was one of our suggestions in our report.

I hope that I have said enough to present the background to the problem and our unanimous conclusion that the case for real competition in European scheduled airlines was absolutely overwhelming. At the same time, we were impressed by the fine example set by Her Majesty's Government in seeking to liberalise, first of all their internal airlines (which they have done) and then those associated with certain Community bilateral treaties. This, I think, is certainly a matter for congratulation. As your Lordships will see from the report, new arrangements to liberalise have been made with the Dutch Government and West Germany, and I understand that there may be others in the pipeline. This is surely to the good and I can only urge my noble friend who will reply from the Government Benches to keep it up because it seemed to me that, as Samuel Johnson was reported as saying: "Example is always more efficacious than prėcept".

I believe that if we carry on with our liberalisation we shall achieve more than any amount of talk and paper. Finally, my Lords, may I say that I look forward to what other noble Lords have to say on this matter. I greatly look forward to the maiden speech of my noble friend Lady Hooper, and I also greatly look forward to what my noble friend on the Front Bench will have to say as to the Government's reaction. My Lords, I beg to move.

Moved, That this House takes note of the report of the European Communities Committee on European Air Transport Policy (7th Report, 1984–85, H.L. 115).—(Viscount Rochdale.)

4.4 p.m.

Lord Underhill

My Lords, it is always a pleasure to listen to the noble Viscount, Lord Rochdale, presenting the report of one of your Lordships' Select Committees on European matters. He does it with such lucidity and comprehensiveness in a very short time. Any noble Lord who has read the report will appreciate, I think, the detailed questioning which has given a lot of information on the structure, procedures and economics of the airline industry as well as the committee's actual recommendations. Naturally we would all like to go along with the basic objectives of the European memorandum in the interests of passengers, for flexibility, innovation and co- ordination, including reduced fares; but some of my comments will be of a cautionary and maybe critical nature.

I am pleased that the Commission in their memorandum ruled out any possibility of Europe following the deregulation of the United States, despite all the talk of the free market and competition policy. I am pleased that your Lordships' Select Committee has gone along with saying quite clearly that the United States type of deregulation is inappropriate. All the arguments are set out quite clearly in the Civil Aviation Authority's own document on the deregulation of air transport experienced in the United States, which was published in May last year.

The report shows—and I believe the noble Viscount intimated this—that there are varying views on quite a number of issues. Perhaps I may mention one: paragraph 27 of the report, where the representative of the Department of Transport points out that between 1978 (before the United States deregulation) and 1982 the airlines in the United States carried 8 per cent. more passengers. But then I find that in the TUC memorandum (on page 228) they point out that since 1979 several established United States carriers, such as Continental and Braniff, have gone bankrupt and that in the United States in 1981–82 scheduled services lost 750 million dollars. Also, of 193 commuter airlines which emerged or existed on the United States register in 1978, only 77 remained in 1983.

There is reference on page 71 to the Association of European Airlines' paper, European Air Transport Policy, published in September 1983. This caused me to be reminded of a previous document of the AEA, Civil Aviation in Europe, published in June 1982. I quote the final paragraph of that document: It must be accepted that wholehearted application of free market theory is inappropriate for the scheduled air transport industry. Indeed, the economics of scheduled aviation are incompatible with free market principles". The association argued that the European air transport system provides a delicate balance between competition and co-operation". Perhaps it might be useful at this stage to put forward quite clearly the Labour Party's policy view on aviation in general. I am quoting from the Labour Party's transport policy document adopted only in 1982: We are certainly not opposed to low fares but a fares policy must be consistent with a licensing system which ensures a sensible utilisation of capacity, the maintenance of the necessary network of services, the highest possible safety standards, the development of employment on the basis of satisfactory terms and conditions and which enables investment to take place for future development". It is in the light of all those points we must consider this report and the Commission's memorandum.

One of the Select Committee's conclusions—and this is in paragraph 116—is that Memorandum No. 2 is designed to improve the situation without endangering stability. Quite a number of others who gave evidence to the Select Committee emphasised the importance of this question of stability. Perhaps it might be useful if I quote what a witness of the Civil Aviation Authority said in reply to the chairman. This is in page 21 of the report: We do have to be concerned, however, that it does not create problems which are avoidable and serve no useful purpose. A particular problem we have to be aware of, whenever the Community does move forward, is that it does not act in terms that would produce for the United Kingdom a less liberal result than we already enjoy in practice". I find in the report quite a number of references to what is called "controlled liberalisation". That is almost on a par with the expression "benevolent capitalism". In paragraph 64 your Select Committee states that it sees the Commission's medium-term objective as being a controlled liberalisation in line with the United Kingdom's domestic policies. That attitude is referred to again later, in paragraph 70. The evidence seems to give an indication that the United Kingdom is the only European state with an independent regulatory body with the types of powers that we give to the Civil Aviation Authority.

Your Lordships may recall our debate on the CAA report and the Government's view that there should be no additional powers given to the CAA. That was a line which we on these Benches agreed with. Airlines and other witnesses expressed concern at possible regulatory powers which might be conferred on the Commission, and I note that the Select Committee in its conclusions in paragraph 126, appeared to be somewhat lukewarm about the proposal that the Commission should take an increased role in airline affairs.

Paragraph 43 of the report points out that since the Commission's report Governments have not been prepared to risk losing control over the airlines and handing over that control to the Commission. Paragraph 22 on page 8, dealing with the evidence of the Department of Transport's witness, stressed the type of licensing procedure that must go through our own Civil Aviation Authority system. The view of the Government seemed to be set out in the department's memorandum in paragraphs 2 to 5 on pages 1 and 2. Paragraph 5 in particular says this: Within a liberal regime on these lines we would of course need to maintain our right to decide how many and which of our airlines should serve particular routes. We would need also to retain control over tariffs for traffic commencing in the United Kingdom That is in the Department of Transport's memorandum as reflecting the view of the Government.

In British Airways' memorandum I noticed they said: We are also conscious that we are dealing with scarce resources like airport capacity, and account would need to be taken of constraints of this nature. The noble Viscount emphasised that the report and the memorandum deal mainly with scheduled services. I note that the committee agrees with the Commission that to produce uniform rules would be introducing unnecessary rigidities if they were brought in for scheduled services alone. But there is still concern about this possibility, and I understand that my noble friend Lord Graham may be referring to that aspect in his speech.

Paragraph 54 refers to the member states' working party, which declared that they thought the committee's proposals went much too far. The question of the working party was raised in Questions 773 to 776, which were put to the Rapporteur of the Transport Committee of the European Parliament. I notice that he replied critically that the Commission was assuming that in the area of air transport it would become a supra-national agency.

As I have already mentioned, many witnesses and many bodies expressed some concern about the possibility of the Commission assuming greater regulatory powers. On the other hand, we find in paragraph 90 that the Select Committee expresses disappointment at the modesty of the Commission's proposals. In the light of the policy which my own party adopts, surely the United Kingdom must retain authority over which airlines shall have access to routes to and from the United Kingdom and to which airports they should be used. It was made clear in our debate on airports policy that the problem of access to airports is very important. The CAA, in their own document on competition policy, stressed this aspect in regard to domestic routes—that there would need to be care exercised on the access to different airports.

At the end of the day the airline industry is based on bilateral agreements, which inevitably bring in the involvement of governments. This is one way, through bilateral agreements, not only to achieve those objectives the noble Viscount referred to, but also to promote a better use of regional airports, as was emphasised during our airports debate. I understand that the body representing local authority airports (JACOLA) has asked whether it can meet representatives of the Commission, along with representatives of private airports, to discuss the whole question of access to airports and aircraft capacities.

In paragraph 29 the Select Committee makes clear: So far as international services are concerned, progress towards liberalisation depends heavily on the attitudes of other governments. The Association of European Airways and IATA both questioned whether the adoption of the Commission's limited proposals might have an adverse effect on a worldwide basis: in other words, they could dislocate bilateral agreements. I believe that is a point which requires considerable attention. IATA have said that throughout the world there are more than 2,000 bilateral agreements affecting the aircraft industry.

At the end of the day the aviation industry will remain a regulated industry. The Commission and the memorandum use the term, "acceptance of a controlled liberalisation". It is generally accepted that a major constraint will be the necessity to reach agreement with other governments, either on a bilateral or a multilateral basis. In view of the continuing importance of bilateral agreements we must not weaken the position of our national carrier, whatever else we might do to encourage other airlines in international negotiations.

Inevitably, witnesses referred to the financial position of British Airways, as our national flag carrier. The noble Lord, Lord Bethell, referred in his own evidence to overmanning in various airlines. I think it would be readily agreed that the present position in British Airways has been achieved only by the co-operation of the workforce and union agreements, by which some 20,000 jobs have gone in British Airways.

I was very pleased to hear the noble Viscount emphasise the question of the social provisions of the Treaty, because in previous reports from your Lordships' Select Committee, in which I myself participated, dealing with road transport, it was emphasised time and time again that the Commission seems to regard the social aspects of the Charter as of no consequence. We talk about the competition aspects of the Charter; but the social aspects must also receive the same consideration, and I am very pleased to note that this has been dealt with by your Lordships' Select Committee. In paragraph 124 of its conclusions the Select Committee recommends that there should be effective means of consultation with the trade unions and some formal mechanism.

I have referred to the varying views and read with considerable interest in the report the very well documented memorandum of the noble Lord, Lord Bethell. I am sure that he can and will speak for himself when he takes part in our debate. But his final paragraph on page 43 urges Government action in the European Court of Justice. On the other hand, the Trades Union Congress evidence, and witnesses, as set out in paragraph 58 of the report, expressed the view: 'Aviation should remain a matter of national interest and sovereignty, and this responsibility should not be handed over to the Community or to the ECJ to determine future development or activity.' Finally, we agree with proposals that will bring improvements and benefits to passengers but keep in mind the need to retain stability in the European airline industry. We must also ensure that nothing is done which may detract from our own position worldwide outside Europe. There are also the points which I have made regarding the Labour Party's general policy on the aviation industry.