Airbus: Government Investment

HL Deb 21 April 1988 vol 495 cc1662-78

6.15 p.m.

Lord Bruce-Gardyne rose to ask Her Majesty's Government whether they are satisfied that their investment in the Airbus 320, 330 and 340 is a safe investment of taxpayers' money.

The noble Lord said: My Lords, let me begin by apologising to your Lordships and in particular to my noble friend for detaining noble Lords at the end of what has been a fairly strenuous week. I hope that my noble friend will not be detained for too long by the matter which I want to raise briefly this evening. It concerns the financing of the Airbus and its possible implications for British Aerospace, the British participant in the Airbus project.

I start by asking my noble friend whether it is correct, as I am led to understand, that the £250 million subvention from the British taxpayer to enable British Aerospace to participate in the A.320, the shorter range version of the family, is in effect guaranteed for repayment on the basis of firm orders and options already obtained for the A.320.

I think one has to note in parenthesis that even the firmest options have a way of sometimes melting away, as we discovered in the case of Concorde a few years back. Nevertheless, I am led to understand that if one takes the firm orders and options already achieved by the A.320, on that basis alone HMG are due to be repaid the £250 million in full in the early 1990s with some 30 per cent. interest.

There are two questions about that. The first need not detain us long, although I think it is fairly serious. I have also heard it suggested that as part of the deal which has been negotiated between HMG and British Aerospace regarding the acquisition of Austin Rover, HMG have agreed to waive the first £50 million of payment towards recovery of the £250 million launch aid on the A.320 which was not contingent upon sales of the aircraft. I am bound to say to my noble friend that if that is the case I should not have thought that it would make it any easier, to put it mildly, to sell the British Aerospace—Austin Rover deal to the authorities in Brussels.

However, the larger question to which I want to devote the greater part of my comments and questions this evening relates to British Aerospace's ability to fulfil its legal obligations as regards repayment of the launch aid of £250 million towards its participation in the A.320 and the £450 million of launch aid subsequently subscribed by the taxpayer, to enable British Aerospace to participate in the A.320 and the A.340.

It is my understanding—and again my noble friend will correct me if I am wrong—that the profile of repayment on the £250 million launch aid builds up steeply. As I understand it, there is no element of royalty due at all on the British Aerospace contribution to the first 75 A.320s delivered to customers around the world. Thereafter, however, the level of payment builds up very sharply until at some point—and perhaps my noble friend can shed some light on this—between the 76th aeroplane and the 600th, it is due to run at the rate of £1 million repayment to HMG for each plane delivered. After 600 have been delivered the rate, as I understand it, drops to £250,000 per plane.

I submit to your Lordships that this represents a pretty formidable repayment profile in the early 1990s. It is no less formidable when one bears in mind that this is the stage at which the A.330 and the A.340 will be coming on stream and for those two longer-range aircraft there are, so far as I am aware, no certainly identified and firmly secured customers as yet in view.

Furthermore we have to look at the impact that the Airbus programme is already having on the British Aerospace balance sheet. For the year to March 1988 the British Aerospace annual report quantifies a loss of £38 million on deliveries of components to Airbus during that period. In addition there is a £180 million provision for exchange rate losses which British Aerospace calculates will occur or may occur between now and the delivery of components to planes currently on order.

When I dared to make my maiden speech on this subject in a debate on these matters early in 1984, I pointed out that at that time the exchange rate for the dollar stood at 1.40 dollars to the pound and that on that basis the prospects for profitable sales of the Airbus looked encouraging. But I asked what would happen if the dollar were subsequently to go up to 2 dollars to the pound. That may have looked at that time like pretty crazy speculation but unfortunately, or fortunately according to the way one looks at it, that has jolly nearly come to pass. I notice that in the latest report of British Aerospace the chairman, Professor Roland Smith, tells us that the provision of £180 million made to cover prospective exchange rate losses on Airbuses already ordered is based on the presumption that the dollar will "strengthen moderately". Those were the words used. From them I take it that since the exchange rate at the time of the compilation of this report was about 1.80 dollars to the pound, it is British Aerospace's calculation that over the next three to four years the pound exchange rate for the dollar will decline somewhat. That may be true but on the other hand it may not be true. I ask my noble friend what will be the implications for the balance sheet of British Aerospace in the early 1990s when its obligations to meet its repayment schedules to Her Majesty's Government materialise, should the dollar/pound rate happen to go in the opposite direction to the one which Professor Roland Smith is assuming?

The next matter to which I wish to refer is the actual construction of the Airbus Industrie Consortium. In his latest annual report Professor Roland Smith remarked that the implications of decisions taken in earlier years by the company with the support of Her Majesty's Government—those words are very important and I shall return to them in a moment—in the development of the Airbus Consortium were now coming through in the company's accounts. He remarked that the board of British Aerospace was seeking to achieve fundamental changes in the Airbus structure and financing arrangements.

I must say that I do not find that remotely surprising, as your Lordships may consider the relationship between Airbus Industrie and the component partners in the enterprise bizarre, to put it mildly. It is my understanding, and again my noble friend will correct me if I am wrong about this, that each of the partners puts in a bid for the price it expects to get for components that it is delivering to Toulouse for assembly in the planes that are to be ordered. Then a haggle takes place between the partners as to whose price is right. In this way a target price is arrived at for the assembled plane. It is then the duty of Airbus Industrie to go out and sell the plane. If it can sell the plane at the target price, I presume there is no problem. But I ask my noble friend whether he can indicate any single sale which has been made to date at the target price or anything like it.

The truth is of course that sales have been made by Airbus Industrie at vast discounts on the projected target price. So then, as I understand it, the provisional sale agreement is brought back to the partners, who have to decide whether they will scale down pro rata the prices that they have demanded for their components to enable the order to be taken. That seems to me a pretty good recipe for commercial trouble. However, it is also my understanding—and again my noble friend will correct me if I am wrong about this—that British Aerospace, in effect, has with its 20 per cent. of the votes a veto on the acceptance or rejection of any potential order which Airbus Industrie may propose to enter into.

I am not clear that it is entirely appropriate for British Aerospace to complain that Airbus Industrie is accumulating orders which impose the prospect of horrendous losses on the partners in the consortium, although that does seem to be the gravamen of British Aerospace's complaint. Nevertheless I certainly accept that there is much that is unsatisfactory about the construction of the Airbus Industrie Consortium.

We have had the report from the so-called four wise men. It may be helpful to your Lordships if I ask my noble friend whether it would be possible to have a copy of the four wise men's report deposited in the Library because so far we have had only rather limited accounts of what they have suggested to go by. Even so what we have been able to learn about the report does make rather scary reading. It is a picture of jobs being allocated on the basis of nationality, with a particular corner for Professor Franz Josef Strauss, who seems to regard the Airbus Industrie programme as being something akin to an extrapolation of the common agricultural policy—a technique for maintaining for his Bavarian CSU voters the standard of life to which they are accustomed. I must say that that does not seem to me to be a very good way of building an aeroplane.

The four wise men are apparently recommending the appointment of a powerful finance director. No doubt that would help. I notice that the Germans have already laid claim to the job—presumably for one of Herr Franz Josef Strauss's trusties. The four wise men are also suggesting that Airbus Industrie should be turned into a plc—as we would call it—by 1992. That still leaves four pretty crucial years to go before any such evolution would be designed to take place.

The four wise men are further recommending that there should be some kind of credit agency to assist with the achievement of sales, apparently along the lines of the American Export Import Bank. I wonder by whom that would be financed.

I raise a query in passing about what one might call the Boeing dimension. I want to make it quite clear that I am not for a moment arguing that the complaints of Boeing against Airbus Industrie are anything other than the pot calling the kettle black, because I do not believe that they are. Nevertheless I have to ask my noble friend whether in his estimation and judgment it would really be wise for us to face a serious risk—if there were to be a serious risk—of embarking on a war of trade protection across the Atlantic in defence of such a questionable commercial adventure as this. I think that the danger of repercussions has receded because of the weakening of the US dollar but nevertheless it does seem to me that this would be a pretty unsatisfactory casus belli.

Turning briefly to the A.330 and the A.340—the later long range versions—the justification for embarking on those seems essentially to be in order to stop Boeing cross-subsidising its short-range contenders from its virtual monopoly of long-range aircraft; in other words, tackling Boeing's soft underbelly. I understand the thinking behind that strategy. But I wonder whether it is really a strategy calculated to guarantee the security of the return of the £450 million made on behalf of the taxpayer.

Finally, I presume that the essential purpose of our investment of £250 million in the first programme and £450 million in the second programme was to secure jobs in the British aerospace manufacturing industry. It is my understanding that British Aerospace, like its other partners, is increasingly finding it necessary to source components from the Pacific rim, Canada and the United States. I do not criticise them for doing that. It is obviously an essential step towards improving their cost performance. However, is that really why we invested our £250 million and £450 million—to create jobs for the Pacific rim, Canada and the United States?

My right honourable friend the Prime Minister warned us before we embarked on financing those activities that we did not want another Concorde. I do not believe that we have another Concorde on our hands. What worries me is that we might have another RB.211, the aero engine project which the Labour government of the time encouraged Rolls-Royce to embark on for the United States market and which subsequently led to the bankruptcy of Rolls-Royce and its enforced nationalisation. I underline the reference from Professor Roland Smith's report to the involvement of HMG in the project.

I hope that my noble friend and his colleagues make it clear to British Aerospace at all times that the fact that we have made these launch aid provisions does not mean that we are in any sense, as taxpayers, committed to maintaining and sustaining what could prove to be a remarkably dangerous charge on the balance sheet of British Aerospace into the 1990s.

6.35 p.m.

The Earl of Bessborough

My Lords, I am glad that my noble friend Lord Bruce-Gardyne has raised this question. My view of the question is somewhat different from his. To put it briefly, I hope that my noble friend Lord Beaverbrook will be able to answer my noble friend's question with the word "Yes", or at least a qualified "Yes".

Having helped to launch, with my noble friend Lord Rippon of Hexham, the first Airbus, A.300, I hope that the Government will continue to support the later generation of Airbuses which contain many improvements—above all in electronics—on their mother, the original A.300, which is still a most effective and economic aircraft. When we learn that 40,000 people are employed on Airbus developments in the European Community and that soon 30,000 will be employed in Britain alone, I feel that they are eminently worthy of support by the Government, as well as by the aerospace industry.

It was certainly highly creditable that my friend Sir Arnold Hall, then chairman of Hawker Siddeley, was willing to go ahead with building the wings of the Airbus when, in 1968 when I was a shadow aerospace spokesman, the Labour government with Mr. Benn as Minister for Technology turned down any government funding. I am glad that a subsequent Conservative government, in which my noble friend Lord Rippon and I both served, agreed to assist. When I was a Minister in 1970 I was able to fly again to Toulouse to see the first A.300 prototype.

I regret that due to other commitments I was not able to accompany my noble friend Lord King in taking delivery of the A.320 a fortnight ago. I know that that aircraft will be highly successful. I am sure that we shall be getting 130 per cent. return on the A.320 and that we shall get it earlier on 250 aircraft. I have looked at the matter carefully. On 600 aircraft (which I think is a very possible figure and which refers to firm orders) there should be a 170 per cent. return. As your Lordships know, and as my noble friend has said. Airbus Industrie is committed to repaying the Government.

When we look at the A.330 and the A.340, the outlook seems even brighter, with the prospect of some 1,000 aircraft being sold. Moreover, I am glad to learn that British Aerospace should be cutting costs by 30 to 35 per cent. As I think is accurately reported in the press today, that is to be achieved by the twin-engined A.330 and the four-engined long range A.340 having the same wings, thus cutting millions on production costs and making large reductions on fuel bills. As I understand it, 11 airlines, including North-West Orient, will be ordering those aircraft, which I hope will have not only British wings but also, later on, Rolls-Royce RB.211 engines. Despite the problems at the outset which my noble friend has mentioned, that has proved to be a most effective engine.

I have here an interesting document concerning federal funding of Boeing and indeed of McDonnell Douglas. I could go into that in some detail. However, the hour is late. I visit Washington quite regularly—at least once a year—and I have spoken on the telephone with Washington this afternoon. I cannot believe that the kind of modest funding which the Airbus receives can be criticised. It is very modest, in terms of United States federal funding. After all, the Airbus is the only competition in the world for the two American aircraft manufacturers that I have mentioned. I know from my visits to Washington and to Seattle how impressive that government support, given either directly or indirectly through the Department of Defense or NASA, is. In my view, Americans have no grounds for criticising support for Airbus by European governments.

I was interested to read an excellent leading article in Flight International of 16th April about the committee of four wise men, which my noble friend has mentioned and which was commissioned by the main partner governments. Perhaps I may tell my noble friend that that report is available in the Library. It may have come there from another place. However, the Librarian was able to produce a copy.

The wise men were charged with reporting on ways in which the organisation of Airbus Industrie and its accountability might or should be altered and how control over costs could be improved. I have been looking at that report, which is dated April 1988. It is a report whose recommendations I would certainly endorse. I spoke yesterday to Sir Jeffrey Sterling who is the British wise man and, as your Lordships know, chairman of P & O. I also spoke to the secretary of the wise men's committee on this matter.

As I understand it, the trouble is that Airbus Industrie is not an industrial company with the accounting responsibilities that apply to most companies in the world. As your Lordships may know, it is what is called a groupement d'interêt économique, which is little more than a headquarters organisation designed to take care of the interests of the partners. It was originally formed to share the risks involved. Now it seems to me there should be a body or company responsible for working out and agreeing on how to share profits. I agree that the best theoretical solution would be to float the organisation on the market as a pan-European limited company, something like a plc or société anonyme.

I hope that a company or a multi-national corporation of that kind or, as the wise men suggest, at least a holding company with national subsidiaries may be formed not later than 1992 when the Single European Act concerning the single internal market in the European Community comes into effect.

In parenthesis, I should like to say that I was most interested to attend a meeting at Lancaster House with Members not only of your Lordships' House and of another place but also Members of the European Parliament.

It seems to me that no time should be wasted in getting legal advisers and financial directors from the four countries together to set up the kind of corporation or holding company that I have mentioned. I hope that some progress in this direction may be made at the meeting in Hanover towards the end of next month. Perhaps my noble friend Lord Beaverbrook will be able to comment on the prospects.

I think that the new Airbuses have a future. I think that they have been and will be perhaps the greatest international aerospace success story outside the United States and that they will prove to be the only competitors of the various Boeing aircraft. I certainly wish my friends in British Aerospace, Aerospatiale, Messerschmitt, Bolkow and Blohm, and indeed my Spanish friends in CASA, the best of luck with these highly promising aircraft. Speaking personally, I would assure them that these Airbuses are a safe investment of taxpayers' money.

6.45 p.m.

The Earl of Kinnoull

My Lords, I apologise for the discourtesy in not putting my name down for this debate. As my noble friend the Whip in front of me has told me, it is very discourteous. But I am not sure whether it is more discourteous to put one's name down and not turn up than to turn up not having put one's name down. Perhaps the best courtesy is to speak for a short time, and that is what I intend to do.

I am also grateful to my noble friend for raising this very important Question this evening. Like my noble friend Lord Bessborough I take a different stance. Whereas my noble friend seems to be more concerned about the position in which British Aerospace may find itself in the future, I take the view that it is more important in this debate that we look at government support for this truly European project. British Aerospace makes its commercial judgment in the fullness of its knowledge, and I do not wish to comment on the judgment it makes.

The House has many aerospace enthusiasts. I think perhaps the most experienced is my noble friend Lord Bessborough. It was very encouraging to hear from him of his research as to the up-to-date position vis-à-vis Airbus Industrie, and indeed of his continued support which now goes back many years. I add my name to the list of aerospace enthusiasts in this House. It is such a splendid industry for Britain. It has had wonderful achievements in the past. It has a tremendous export record. I think that it is still the third largest industry in the world and certainly the largest in Europe, even if the industries of Germany, France and Spain are taken together.

As we know, the industry is a very large consumer of research and development. The investment it makes takes a tremendously long time to show a return and a profit. We have read a great deal about the imperfections of Airbus Industrie and we know of the four wise men's report. Like other Members, I should be interested if my noble friend can update us on the point which the governments have reached and how soon they will be able to announce a constitutional revamping of Airbus Industrie.

I hope that my noble friend will be able to confirm that the British policy is to continue to regard Airbus Industrie as a long-term and vital European investment. First, it is a truly European project company. Secondly, one must not forget that Airbus Industrie already has a fine record of sales and performance for the airline operators. I think that it is an achievement, particularly in American terms, to find that it is the only real competitive threat to Boeing at the present time in medium and widebodied aircraft. I think that is a tremendous achievement.

I think that it is also an achievement that the US airlines themselves buy the aircraft. I think that it is disappointing that British Airways has only what are in effect the orders to which British Caledonian was already committed before being taken over by British Airways. To be honest, it has not been very supportive.

I pay tribute to the Government for their support of the most recent project in the form of launch aid given to Rolls-Royce and British Aerospace. However, I am sure that my noble friend will recall that there is very deep concern among equipment companies as to how competitive they will be in the bids for the project. I am sure that my noble friend is well aware that the equipment companies' contribution to a modern airliner represents 40 per cent. of the total cost of the aircraft. Therefore they are very important. British equipment companies rely not only on the companies themselves, but also on subcontractors and thousands of skilled people.

The climate of competition for the projects within Europe is becoming unhealthy. It is known that the German and French governments are supporting their equipment industries to the point that bids are so subsidised that British companies will suffer. I hope that my noble friend will be able to indicate that the Government are both aware of the situation and sympathetic to special consideration for equipment companies in order to give them a chance and offer some support for the heavy research and development costs that are often involved in being able to compete in that way. I look forward to hearing my noble friend's reply.

6.50 p.m.

Baroness Seear

My Lords, I too must apologise for not having put down my name before the start of this debate and also for having compounded my offence by coming in a few moments after the noble Lord, Lord Bruce-Gardyne, had risen to his feet. I must say that your Lordships have got through today's programme with almost unprecedented speed. I was extremely surprised to find that we had arrived at this part of today's business quite so soon. I have no claim whatever to be knowledgeable on the subject of the aircraft industry in general or Airbus in particular. I once worked for the ministry for aircraft production but not in a technical capacity, needless to say, and it was a very long time ago.

The noble Lord, Lord Bruce-Gardyne, obviously feels that this is not—to use a rather overworked phrase—value for money so far as concerns the British taxpayer. He also believes it likely that there is a danger of it becoming increasingly poor value for money. Like the noble Earl, Lord Bessborough, I have studied the report of the four wise men, which is conveniently in the Library, and it confirms a number of the criticisms that have been made by the noble Lord, Lord Bruce-Gardyne. Their description of the structure of the organisation—and indeed it is rather difficult to call it a structure because it seems to be a collection of parts which has scarcely been welded into a structure so far—confirms that it is not of an order that is likely to lead to a successful business enterprise. They point out that there is great need for a restructuring of the organisation in far better and more efficient organisational terms and, as the noble Lord said, a need for a strong financial executive, that is to say, a financial director who will pull together the whole financial side.

Unlike the noble Lord, Lord Bruce-Gardyne, despite those pretty trenchant criticisms, the four wise men are optimistic about the future, provided that certain steps which they recommend are taken along the lines of the rectification of the criticisms to which I have referred. They comment on the technological progress and innovation of Airbus and speak favourably about the fact that it is a genuinely European enterprise.

On reading the report of the four wise men it seemed to me that the real criticism of Airbus was that it was not yet sufficiently a truly European enterprise. They believe that the future of Airbus lies in it becoming very much more a genuinely European enterprise. At the present time it is a system of collaboration between a number of basically national companies which in many cases put national interests ahead of the interest of the development of Airbus.

They make the point, which seems to me to be self-evident if one is attempting to develop a really European enterprise, that appointments should not be made on a nationality quota basis but on the basis of finding the best man to do the job. How on earth can any enterprise be successful unless that is the basic principle on which appointments are made? Similarly, as regards the supply of equipment, they note that the efficiency of the equipment that is being introduced should be the primary consideration rather than thinking all the time of national interests in regard to its provision.

I fully realise that such arguments run counter to the thinking of a number of people in this country, and indeed in your Lordships' House, and to the beliefs of some people who nonetheless call themselves Europeans. However, in many ways the present situation and the report of the four wise men are interesting precisely because Airbus seems to be a prototype of the European enterprise of the future. As everyone knows—or does everybody know?—we shall soon be coming up to 1992 and the single European market. If we are to make a success of the single market and reap its benefits, we must hope and expect to develop enterprises of a kind which are genuinely European.

I venture to intervene in the debate this evening despite my lack of technical expertise in this field because from a political point of view I think it important to point out how vital are such genuinely European enterprises. It is enormously important to be able to obtain the benefits of drawing on the skills and knowledge of Europeans as a whole and operating on the basis of Europe as the major market. That is something towards which we must work.

It is very worth while to invest in a concern of this kind despite the present difficulties if it is to be a way in which we can develop one, and then in other spheres two more, of those enterprises which have all the advantages of being genuinely European. It is for that reason above all others that we very much hope that the Government will not take too much notice of the sensible warnings of the noble Lord, Lord Bruce-Gardyne, and of the adverse comments that were made by the four wise men, but will look a little further ahead and see the value of having enterprises on a European scale which are genuinely European.

6.57 p.m.

Lord Underhill

My Lords, I fully appreciate the desire of the noble Earl, Lord Kinnoull, to raise this matter in view of certain criticisms that have been made. It is far better that it should be brought out into the open through parliamentary procedure rather than that criticisms should be made and not receive any effective answer.

Your Lordships may recall the Question that was asked by the noble Earl in this House on 11th April. I was pleased to note that in reply to my supplementary question the Minister who will respond to today's debate said: I can confirm that government support for the Airbus programme is not in question".—[Official Report, 11/4/88; col. 914.] He went on to say that the report to which reference has been made was being reviewed. That was only 10 days ago but I think it would be helpful if the House could be given some indication of how that review is progressing and the Government's views.

My understanding is that the board of Airbus Industrie is quite prepared to consider any revision of structure that may be considered practical and desirable. The House may remember when I asked my supplementary question on 11th April that I also stated that in view of the criticism by the chairman of British Aerospace, the Government must be involved in any discussions that British Aerospace, as one of the partners, might wish to have with Airbus Industrie.

Like other speakers, I was fully in support of the Airbus project right from the start for various reasons on behalf of my own party. We support it, first, because it is a European venture, which I believe is to be encouraged. Secondly, it presents the only possibility of breaking the monopoly of Boeing and McDonnell Douglas, who I understand produce some 84 per cent. of the the world's aeroplanes. Therefore Europe and other countries—and ours in particular—should be involved in that venture.

I am not an expert on company legal matters but my understanding is that Airbus Industrie is not an enterprise in the ordinary way. It is more of an arrangement between four individuals who are partners. Therefore if it can be formed somewhat differently and the partners consider it desirable, so be it.

Reference has been made to the question of launch aid. I do not want to become involved in the arguments and allegations of Boeing on the subject of subsidy and government financing. My understanding from the outset has been that it was absolutely clear that launch aid for the A.320 was neither a grant nor a subsidy. It was a loan which would be repaid in the ordinary commercial way by British Aerospace on certain terms. Today I am given to understand that no fewer than 486 orders and firm options have already been received for the A.320. I gather that this is an almost unparalleled situation with a production of this kind.

Like the noble Baroness, I am not an expert in some of these matters. We accept advice that we receive from people whom we contact to obtain the information. I am given to understand that if no further orders beyond those 486 are obtained, the Government will receive a return of at least 126 per cent. based on those orders alone. If further orders for the A.320 are received, the Government's return will be so much greater.

As is known British Aerospace requested £750 million launch aid for the A.330 and A.340. The Government agreed to give £450 million launch aid. I recall that when the Statement was repeated in your Lordships' House, I asked whether British Aerospace was satisfied that it could do the launch with £450 million aid, and not the £750 million that it originally requested. I was assured that that was the position held by British Aerospace.

From the outset it was made absolutely clear that Airbus Industrie wished to have a complete family of large aeroplanes, and that to do otherwise would not give it the proper type of programme. I am assured that 11 airlines have already placed orders for 145 planes in the A.330 and A.340 programmes. If that is so, it would appear that that will be as successful as the production of the A.320. I am assured that already there are 1,100 orders for all the Airbus programmes with 400 Airbus planes flying in service at the present moment. We should all be very pleased with that development.

The question of employment is very important. Various figures have been mentioned. I gather that when we take into account the expectation of Rolls-Royce engines being used on these two new machines, employment in this country will increase to 50,000 people. That is a very high figure and we therefore have to take it also into consideration.

With the present board, every decision taken must be taken by at least an 81 per cent. majority. In view of the 20 per cent. interest which British Aerospace has, it means that it has a considerable voice in what is decided by the board of Airbus Industrie. We were also assured at the time that the launch aid was considered that over and above the 20 per cent. interest the percentage of workshare falling upon British Aerospace would be 28 per cent. Therefore I believe that we have a successful undertaking here. It is one in which we can all take some pride. I look forward to the Minister answering the criticisms that the noble Lord, Lord Bruce-Gardyne, has properly raised, and to being satisfied that if there are any difficulties with British Aerospace it should come to the Government to discuss the matter, or it should discuss the matter with the board of Airbus Industrie.

7.5 p.m.

Lord Beaverbrook

My Lords, we have had an interesting debate this evening and I am grateful to my noble friend Lord Bruce-Gardyne for providing this opportunity to discuss whether the UK's involvement in the Airbus programmes has been worth while, and whether the provision of launch aid to British Aerospace for its share of the development programmes is a safe investment of taxpayers' money.

The Government agreed in 1984 to provide up to £250 million in launch aid toward British Aerospace's costs for developing the Airbus A.320. This fine aircraft already has 483 orders, options and commitments from 20 airlines, which is more than any other new airliner had received before the date of entry into service. British Airways and Air France have recently taken delivery of their first A.320s, and the aircraft will soon be entering service. The development of the aircraft was carried out on time and within budget and is a great credit to all the partner companies.

The provision of launch aid for the A.320 was the first time that the UK Government have provided financial assistance to British Aerospace for its involvement in Airbus programmes. British Aerospace had previously not received any money from the Government for its involvement in the A.300, the A.310, the A.300–600 and the A.310 improved version. Cumulatively, however, by 1984, when the British Aerospace board needed to take decisions on whether to participate in the A.320, the company's commitment to Airbus programmes was such as to require it to ask the Government to share some of the risk. The Government agreed to do this because civil airliner programmes often stretch over a period of 20 years, at the beginning of which there is a four or five year period when major investment in design and development is occurring before any revenue is received from sale of the aircraft concerned. In addition, British Aerospace had decided to proceed entirely at its own expense with two major new civil airliner programmes, the BAe 146 and the Advance Turbo Prop. Indeed, the agreement reached between the Government and British Aerospace on launch aid for the A.320 required the latter to proceed with development of the ATP at its own expense.

Last May, the Government agreed to provide British Aerospace with up to £450 million in launch aid for the new A.330 and A.340 programmes. The A.330 is a twin-engined medium to long-haul aircraft and the A.340 is a very long-range aircraft.

My noble friend Lord Bessborough is correct when he says that the A.330 and A.340 indeed have a common wing. The press report that he read is accurate on that point. Together these two aircraft will complete the Airbus family of aircraft so that it can compete across the range with Boeing and McDonnell Douglas in all markets except those served by the larger-sized Boeing 747. Total commitments from airlines for these two aircraft already total 145 from 12 customers. These new airliners, which are due to enter service in 1992–93, will help to rationalise existing world air services, enabling airlines to operate with greater efficiency while easing airport congestion. As before, British Aerospace will design and develop the wings required for these new aircraft, building further on the expertise in this area which has enabled them to win a Queen's Award for Technology in the recently announced 1988 awards for their achievement on the A.320.

Some of you will no doubt be be aware that British Aerospace, Airbus Industrie, and their three partner companies in France, Germany and Spain are engaged in detailed discussion with McDonnell Douglas of the United States to see if there is scope for them to collaborate on wide-bodied airliners such as the A.330 and A.340 and the MD.11, and narrow bodied airliners such as the A.320 and MD.90 series. The governments of the Airbus partner countries again affirmed (at their meeting in Madrid on 12th April) their support in principle for such collaborative talks and have wished them a successful outcome. The UK Government welcome this initiative and hope that it will result in proposals for a collaboration on a commercially viable basis. However, this is a matter for the companies, and governments should not seek to impose artificial deadlines on them.

I should mention the current dispute between the United States Government and the governments of the Airbus partner countries supported by the EC Commission. This dispute mainly concerns the interpretation of the rules of the GATT aircraft agreement on government supports for the aircraft industry. The UK Government and their partners are satisfied that the provision of launch aid for Airbus programmes does not breach these rules.

However, we have been willing to discuss with the US Government a possible tightening of the rules in future. For our part, there has been concern about indirect support given by the US to its aircraft manufacturers through agencies such as NASA and the Department of Defense. Some progress towards agreeing new rules on these matters was made at a meeting of Airbus Ministers and Commissioner de Clercq with the US Trade Representative, Mr. Clayton Yeutter, at a meeting at Konstanz in Germany last month. A further meeting of the same participants will be taking place in Paris in mid-May. The UK Government, along with its partners, genuinely desires to bring this dispute to a conclusion and to avoid the dangers both to the European Community and to the United States if it were allowed to escalate into a trade war.

Turning to the precise question posed by my noble friend Lord Bruce-Gardyne, I would not describe launch aid as a safe investment, but it is a necessary and worthwhile use of taxpayers' money. The development of large civil airliner programmes is undoubtedly risky. As I mentioned earlier, large sums of risk capital are needed at the design and development stage, and revenues from sales are not received until several years after a programme is launched. The pay-back period can then extend for 10, 15 or even 20 years. The world market is highly competitive and until recently has been dominated by US companies, notably Boeing.

In all, the risks have been too great for one European company to take on its own, and this is why Airbus Industrie was created. Even so, European companies have all needed support from their governments, the others to a greater extent than BAe. BAe themselves, although they tried both in the case of the A.320 and the A.330/A.340, were not able to find banks or other financial institutions in the private sector willing to share in their risk without a requirement for guarantees from the company itself or from the Government that loans made would be serviced and repaid. This, and the fact that BAe would be financing the production stage on its own, was one of the main justifications for launch aid.

I can confirm that the noble Lord, Lord Underhill, is correct when he says that launch aid itself is fully repayable and the arrangements are designed to provide the Government with a real rate of return on their investment, both in the case of the A.320 and the A.330/A.340. In the case of the A.320, £50 million of the launch aid is repayable in fixed instalments beginning on 1st January 1990.

I would say to my noble friend that it is not the case that the Government have agreed to forgo the repayment of any element of Airbus launch aid. Launch aid is an entirely separate and unlinked issue and has no connection with the arrangements for BAe's purchase of the Rover Group. The rest of launch aid is repayable by means of levies on sales of aircraft. In the case of A.330/A.340, all the launch aid is repayable by levies on sales of aircraft. Recovery of the Government's investment is therefore dependent on the number of aircraft sold. The level of the Government's rate of return and other details about the levy arrangements have to remain commercially confidential.

Detailed studies were carried out by BAe before it submitted its application for launch aid for the A.320 and the A.330/A.340 to satisfy itself that the programmes were viable if government assistance were received. Thereafter, the Government, before deciding to give launch aid, carried out in each case a thorough appraisal of the market forecasts, the technical feasibility, financial viability and the wider economic benefits of the programmes. The subsequent progress of the programmes is also carefully monitored. Having said that, there is no guarantee of success, and much depends on what actually happens in the marketplace.

My noble friend Lord Kinnoull asked me about launch aid for equipment manufacturers. Perhaps I can refer him to the answers from which the noble Lord, Lord Underhill, quoted, when I responded to a Question on this subject in your Lordships' House on April 11th.

Many of your Lordships will be aware that the fall in the value of the US dollar which occurred last year, and which has persisted this year, has created major problems for Airbus Industrie and its partner companies, as the prices of Airbus aircraft, as in the case of other airliners, are denominated in US dollars. British Aerospace recently announced a net loss after tax of £110 million for 1987, following a £320 million provision for losses on civil aircraft sales attributable to the falling dollar. About half of this special provision was due to losses on its Airbus business. If the value of the dollar remains at present levels, these problems will continue. Senior British Aerospace representatives have discussed with my department the effects on the company's Airbus business of the decline in the dollar, and talks are expected to continue. However, there is no easy solution to the company's problems.

One of British Aerospace's main concerns is that Airbus should become more competitive and profitable. That is also the Government's goal. That is why Airbus Ministers and Airbus Industrie and its partner-companies have welcomed the report of the so-called wise men on Airbus organisation which addresses these concerns.

The wise men were asked by Ministers of the four Airbus countries last November to report to them on possible improvements to the management system of Airbus. The UK member of the group was Sir Jeffrey Sterling, Chairman of P&O and special adviser to my noble friend the Secretary of State for Trade and Industry. The report was submitted just before Easter, and the Chancellor of the Duchy of Lancaster attended a meeting of Airbus Ministers in Madrid on 12th April, at which the Ministers approved the principles underlying the report as a basis for future discussion and invited Airbus Industrie and the partner companies to put forward proposals and a precise schedule in order to put the new organisation in place before the end of 1988.

My noble friend Lord Bruce-Gardyne mentioned a press report about the German industry seeking to nominate someone for a new post of finance director of Airbus Industrie. The wise men said that posts should not be awarded to particular nationalities. The new structure for Airbus Industrie and the question of who should fill any top post is a matter for consideration by the presidents of the partner companies in the Airbus consortium. British Aerospace will have a full say in this. I would agree with the noble Baroness, Lady Seear, that it is of paramount importance that the best man is found for the job in question, at whatever level and whatever post in the Airbus organisation.

I would also say to my noble friend Lord Bessborough that at the meeting in Hanover on 5th May Ministers expect to receive proposals from the partner companies on the implementation of the report. The wise men have said that consideration of turning Airbus into a plc should be an option from 1992 onwards.

As my noble friend was able to tell us, copies of the report have been placed in the Library and are available for your Lordships. In the conclusions of the report, the wise men remarked that we should not allow present problems, whether inherent in Airbus or external, to detract from the impact of one of Europe's most important joint ventures, or cast doubts over its future. Deliveries of Airbus aircraft would triple or quadruple over the next few years. Having already won a significant place in the market (15–30 per cent.) and having as a result less need than formerly to achieve sales at the same rate as before, it should be possible to achieve a break-even point over the next five years, particularly for the A.320, provided that the new management structure for Airbus is rapidly implemented, leading to increased competitiveness, substantial reductions in programme costs and increased efficiency. The wise men's final comment, which strikes the note on which I should like to end my speech, is that through Airbus, Europe is now soundly established in commercial aerospace.