BA/B.Cal Merger (Hansard, 11 November 1987)

§ Lord Underhill
I beg leave to ask the Question, of which I gave private notice to the noble Viscount the Leader of the House this morning. The Question is in the following terms: To ask Her Majesty's Government whether they will make a Statement on 1372 their decision on the merger of British Airways and British Caledonian.

§ Lord Young of Graffham
My Lords, the Monopolies and Mergers Commission report on the proposed merger between British Airways plc and British Caledonian plc was published at 0900 hrs this morning. The MMC is to be congratulated on completing its report on this complex issue within three months.
The commission indentified some potential benefits from a merger, notably a strengthening of BA's ability to compete worldwide; financial savings and synergy benefits; and the removal of any risk there may be of the enforced liquidation of the British Caledonian Group.
The MMC also identified a number of possible detriments in the merger as it was originally presented to it. These include a reduction in competition; a powerful market position for the merged airline; a potential threat to charter operators at Gatwick; and the possibility that the merged airline might withhold from competitors maintenance and training facilities currently provided by British Caledonian.
In the course of the MMC's inquiry, and in response to the objections of various parties and anxieties expressed by the commission, BA developed its proposals for the merger. The proposals ultimately put forward to the commission by BA included the following: On licences, BA shall within a month of merger return all B.Cal's licences on domestic routes, including the Channel Islands, and B.Cal's licences to operate 10 European routes; other routes currently operated by B.Cal to be submitted to a review by the CAA. Although BA may reapply to the CAA for reissue of licences, it undertakes not to rely on its rights as incumbent in reapplying or to oppose applications from other airlines for licences on the great majority of routes; for example, all domestic routes, all European routes except those to Italy and perhaps Portugal and all routes to the USA and Canada. BA is to withdraw (in the same timescale) all B.Cal's pending appeals against Air Europe licences on eight European routes.
On slots, BA is to surrender a minimum of 5,000 slots at Gatwick. Slots associated with licences returned and not reissued to BA will be surrendered. The MMC estimated that that could release as many as 20,000 of the 35,000 slots presently operated by B.Cal at Gatwick if none of the licences returned is reissued to BA. On airport services, BA to continue to make these available without discrimination to other airlines currently served by B.Cal.
The commission considered that the possible effect of the merger on competition would be reduced very considerably by these proposals, through the return of licences and slots (nearly 20,000 slots at Gatwick if none of the licences to be returned is eventually reissued to British Airways). The position of the merged airline at Gatwick will be modified considerably, and opportunities for the growth and development of other airlines will be correspondingly increased.
1373 After assessing the balance between advantages and detriments of the merger proposals as finally developed, the commission concluded that the merger may be expected not to operate against the public interest. In the absence of an adverse public interest finding by the commission, there are no powers for the Secretary of State for Trade and Industry to take action on the report.
I have made it clear that, in the event of a successful offer by BA and B.Cal, I expect British Airways proposals to be implemented in full. If at any future time concerns arise about the competitive situation in the airline industry, there are powers available under the competition legislation. The Secretary of State for Transport and the Civil Aviation Authority also have powers for the regulation of the civil aviation industry; and if the merger goes ahead the chairman of the Civil Aviation Authority has undertaken to report to my right honourable friend the Secretary of State for Transport in a year about its implementation on the basis proposed.
The Monopolies and Mergers Commission were asked to report on the specific matter of this proposed merger. The implications of the report for civil aviation and airports policy are matters for my right honourable friend the Secretary of State for Transport.

§ Lord Underhill
My Lords, I am grateful to the noble Viscount for allowing this Private Notice Question, and to the Secretary of State for the Statement that he has just made. While it is foolish to claim that I have read all 89 pages of the report—which he said was published only at 9 o'clock this morning—is it not correct that the general nature of the report justifies the insistence that this should have been a matter which should have gone to the Monopolies and Mergers Commission? Am I correct in saying that the 10 conditions laid down are precisely those in the report of the MMC, and that no additional conditions have been put in? Is it not also clear that the Government have no choice but to allow the merger to proceed? Is not the alternative to allow a foreign airline to take over B.Cal? The Chairman of B.Cal has suggested that this might be the case. It may be recalled that I resisted that possibility in the course of our debate on 5th November which dealt with the general question of the proposed merger.
Will not the intended surrender of routes lead to substitutions rather than competition? How will the consumer benefit eventually from the merger? What is the present position with regard to the Government's White Paper on airline competition policy which was published in 1984? Will the Government and the aviation Minister now consider revising their policies and issuing a new document? What assurance can the Secretary of State give other airlines who are in a position to make meaningful bids for the licences which are to be reallocated?
The Secretary of State referred to the possibility of 20,000 slots being available at Gatwick should any of them not be reallocated to BA. But the condition, which I gather has been accepted by BA along with the other nine conditions, is that they will surrender 5,000 slots at Gatwick. Does this not imply that there 1374 is an expectation that BA will be successful in any applications that they may make for some of the routes which they are now having to surrender but for which they will be entitled to make application? What action will the Minister take in the event that British Airways break any of the voluntary undertakings given to the Monopolies and Mergers Commission? I gather that they are voluntary undertakings.
The Secretary of State referred to the statement by the chairman of the Civil Aviation Authority that within a year he will report to the Secretary of State for Transport about the implementation of these proposals. Perhaps I may ask the Secretary of State, if it is not looking too far into the future, what the position will be if the report of the chairman of the Civil Aviation Authority should be unfavourable?

§ Lord Young of Graffham
My Lords, I am grateful to the noble Lord, Lord Underhill. I am happy to confirm that the report of the Monopolies and Mergers Commission showed that my decision to refer the matter in the first place was correct. That is why, having received advice, it was so referred. I am also glad to say that it is only three months and five days since that decision took place, and it is an entry perhaps in the Guinness Book of Records which I hope will be broken in the future.
There were conditions in the report and each and every one of those conditions is contained in the recommendations of the Monopolies and Mergers Commission. I hope that they will be honoured by British Airways. Perhaps I may say at the outset that I do not know whether any bid will go through. The position is that British Airways bid for British Caledonian. It is an offer which obviously had to be welcomed by British Caledonian since British Caledonian is a private company and unquoted. That bid was referred, at which point it lapsed.
It is now open to British Airways to make a fresh bid for British Caledonian. If they make a fresh bid then British Airways have volunteered—and I would expect them to do so—to keep the conditions contained in the Monopolies and Mergers Commission report. If they do not, then it is up to me at that time to consider the position. I cannot decide in advance. It is a matter at which I must look at that time and decide in those circumstances that it could be against the public policy and could engender a full reference to the monopolies commission. A full reference takes a year or two and is a very considerable undertaking. However, I have no reason to believe, if the offer were to go ahead and be satisfactorily concluded, that British Airways would not adhere to it in the full.
The undertakings of British Airways are merely to say that they will surrender the licences within a month, although I expect the services will continue until such time as the CAA determines the position under those licences. The CAA will then invite bids from independents and other bodies. They will consider them—if I can adopt the terminology of the City—with level playing fields. In other words, British Airways will not have any rights as incumbent but will be considered equally with the other independent airlines. It is a matter for the Civil 1375 Aviation Authority then to determine who will have the new licences.
With regard to slots, British Airways have offered unconditionally to give up 5,000 slots at Gatwick. In the event that they do not get any of these licences back, that number will rise to 20,000. To the extent that they get some back, come what may, British Airways are offering to give up 5,000 slots at Gatwick. I hope very much that this is an offer which will be seen by all parties as a way of allowing this merger to proceed, having regard to competition policy generally.
On airline policy, and the 1984 White Paper, that is a matter for my right honourable friend the Secretary of State for Transport. I have little doubt that he will be considering his position in the light of this reference and of what actually happens in the real world should this bid proceed. We should be concerned that there is a real policy of competition in the airline industry. There are many of us who travelled on the shuttle to Scotland some years ago before British Midland decided to operate a competing service. Many of us will remember the remarkable increase in quality of accommodation that occurred after that. Competition is vital to the maintenance of a good economy. I hope that the furtherance of this bid, and the rigid adoption of its conditions, will ensure that we have a competitive airline industry in this country.

§ Baroness Burton of Coventry
My Lords, I regret that we had to have this information by means of a Private Notice Question. In my ignorance, I thought that as the Secretary of State for Trade and Industry was a Member of your Lordships' House we would have benefited to the extent that he would have made a Statement in that capacity to the House.
If I may go on from there, I shall be brief. I want to make only four points, and the noble Lord has referred to one of them. I regret that there are no powers for the Secretary of State for Trade and Industry to take action on the report in the absence of an adverse public interest finding by the commission. I know what the noble Lord, Lord Young, said about the legislation available but I think that most of us would wish that he—

§ Lord Denham
Question!

§ Baroness Burton of Coventry
I am on a question. I am on my first point. I think we should have preferred for the noble Lord, Lord Young, as a Minister, to have had that right. Secondly, I had hoped—

§ Lord Denham
Order. This is a Private Notice Question.

§ Baroness Burton of Coventry
I can make my four points, each in the form of a question if that will satisfy the Chief Whip. Is the Minister aware that I had hoped that the Government would announce a fresh review of airline policy and the structure of the 1376 industry with a view to avoiding anti-competitive consequences possibly arising from the British Airways/British Caledonian link-up? This was not for the commission to recommend, but it was for the Government. I think we should have had much more confidence in it if the Government had felt able to do that.
Thirdly, is the Minister aware that I should now like to move on to the position of charter airlines? Is he aware that for many years I have been saying to the House that my fear is that the charter industry will be driven out of Gatwick, particularly as there is no second runway? Is he also aware that this fear has now been recognised? The question I should like to ask concerning the notice issued today is: can the noble Lord comment on the attitude of British Airways, which says that it will merge the charter activities of British Air Tours with the relatively small charter activities operated by B.Cal under the B.Cal name? Does the Minister feel that there is no chance of the new merged airline in its very strong position having an unfair advantage over the charter airlines already at Gatwick?
Is the Minister aware that there is a wide fear that the position at Gatwick may become a monopoly? Would he not agree that one of the reasons why British Airways offered such a very large sum of money for the assets of British Caledonian was, first, for the routes, and, secondly, for the facilities that it enjoys at Gatwick? I am wondering whether Gatwick will now become a monoply for the new merged airline.
In conclusion, British Airways has put forward proposals to mitigate the fears of concealing a monopoly, and apparently the Government and the Monopolies and Mergers Commission have accepted these. I ask the Minister whether he realises that I should have been much happier had there been a review of the airline industry and the policies of the Government in this connection.

§ Lord Young of Graffham
My Lords, I am grateful to the noble Baroness, Lady Burton. I make one point on whether or not a Statement should have been made to your Lordships' House. There are some 300 to 400 considerations to be made by the Office of Fair Trading of situations that could possibly involve a reference to the MMC each year. There are some 10 to 13—that is, I think, the greatest number—of references each year. This matter is market sensitive. It has long been a convention that on such matters announcements are made before the market opens. I hope that all in your Lordships' House will agree that it would be a matter of some difficulty were such a decision to be announced during the course of trading.
The copy of the Monopolies and Mergers report has been available in the Library since nine o'clock this morning; so there has been a considerable period of time for those wishing to study the actual results. Now I have the opportunity of making a Statement in your Lordships' House this afternoon. Although, during Question Time today, I have dealt with a variety of subjects, I fear I cannot cover a review of airline policy. That is a matter for my right honourable friend the Secretary of State for 1377 Transport. I have little doubt that he will he looking at the position and considering whether a review should, or should not, take place.
I am aware that there are fears about charter traffic at Gatwick. That is one of the matters which the Monopolies and Mergers Commission considered. The commission's view was that the proposals made did not operate against public interests. I am bound by that. It has looked at the matter in considerable detail and since it has said that the entire subject will not operate against the public interest, I fear that I have no powers to alter that decision, even if I disagreed with it. If that is not in some cases considered to be the correct position, then it is the responsibility of those who pass the legislation, for that indeed is the statutory position at the present time.
Finally, concern has been expressed about the slots at Gatwick. It is possible that the 33,500 slots that British Caledonian has at the moment at Gatwick could be reduced either to 13,500 or, at the very worst case, if it got all the licences back, some 28,000. I am told that there are 155,000 slots available at Gatwick Airport; so I do not think that is a monopoly position in itself.

§ Lord Boyd-Carpenter
My Lords, if the merger goes through, can my noble friend tell your Lordships what percentage of the total scheduled service mileage of this country will be operated by the new merged company? In that context, is he aware of the very serious alarm at present in the minds of those who operate the smaller scheduled airlines as to the effect of this merger upon them? Can he give them any indication of the Government's policy which will give them some reassurance?

§ Lord Young of Graffham
My Lords, I cannot answer as to what percentage of, say, domestic flights would be covered by the new merged company in the event that this merger were to go through. That depends very much upon the result of the reapplication to the CAA for licences for all parties concerned—

§ Lord Boyd-Carpenter
I did ask for the maximum, my Lords.

§ Lord Young of Graffham
My Lords, the maximum is the percentage shown in the report which in some cases goes up to 80 per cent. and even higher on individual lines. It is a matter which the Civil Aviation Authority will take into account. What is important is that we have competition and that, I hope, is a matter of which it is fully seized, as will be my right honourable friend the Secretary of State for Transport.

§ Lord Harvey of Prestbury
My Lords, I recognise the difficulties in dealing with a very difficult problem. Can my noble friend give an assurance that the facilities enjoyed at both Heathrow and Gatwick by the smaller airlines will not be prejudiced in any way whatever?

§ Lord Young of Graffham
My Lords, I am grateful, but I cannot give such an assurance. What I can say 1378 is that in accordance with the terms of the MMC report, British Airways will continue with the same facilities that are presently offered by British Caledonian to independent and other airlines without any detriment. I have little doubt that British Airways will follow that through. If it does not, I shall have to consider the situation again.

§ Lord Cledwyn of Penrhos
My Lords, while the unions are generally in favour of this merger, there must be some concern about employment prospects. Can the noble Lord say what effect the merger will have on employment in British Caledonian and other companies and whether there is likely to be any significant redundancy? Secondly, can the noble Lord give an assurance that when the domestic routes of British Caledonian are reallocated there will still be genuine competition on each domestic route?

§ Lord Young of Graffham
Yes, my Lords. As to employment, it is difficult if not impossible at this time to foresee the impact, for we do not yet know whether British Airways will proceed to make an offer. In the event it does go through and in the event that there are ultimately job losses within British Caledonian, I suspect there will be equal job gains within the independent airlines. For, at the end of the day, the same number of routes will undoubtedly be flown and more or less the same number of people will be employed. However, that may well be at different locations. As far as I can tell, what we are seeing here is a determination by the CAA as to who should operate the individual routes.
I cannot imagine that the CAA would not wish to see competition within these routes and I have little doubt that it will endeavour to ensure that competition still prevails. But it may well be that some of these routes are not profitable or could well be flown by British Caledonian for its own purposes; for example, to serve as feeder lines for international flights. It may well be that only British Airways will seek to continue to fly those routes in the future because they may well be loss lines for other independents. That is part of the review the Civil Aviation Authority will be undertaking in the months to come. I have little doubt that all in your Lordships' House will be keeping a close eye on the outcome.

§ Lord Bruce-Gardyne
My Lords, can my noble friend shed light on the European dimension to this? Is it the case that if the merger goes through it would be open to the European Commission to refer it to the European Court and that in theory at least the European Court could require the merger to be unscrambled? Has there been any indication of the view of the European Commission in this context?

§ Lord Young of Graffham
My Lords, what the European Commission decides to do is a matter solely for it, but it is aware of the terms of the merger. It is aware that British Airways will be surrendering British Caledonian's licences to all its European routes. My suspicion is that it will be content with that but it is a matter for the Commission and the Commission only to decide.

§ Lord Harmar-Nicholls
My Lords, is my noble friend aware that his last reply is rather disturbing? He has not been able to deny that the Commission could have power to interfere with something which I thought was a 100 per cent. domestic concern of this country. Is he in a position to clear the misapprehension that I at any rate had from his last answer?

§ Lord Young of Graffham
My Lords, I suspect that air flights between here and European countries are not just a 100 per cent. domestic concern of this country but a matter for the European Commission. The Commission could well take a view on it. Most international airline policy is often conducted on a multilateral basis.