§ 11.43 a.m.
§ Lord Strathclyde
My Lords, on behalf of my noble friend Lord Brabazon of Tara, I beg to move that this Bill be now read a second time. As noble Lords are aware, my noble friend is in Lockerbie dealing with the tragedy. That is why I am replacing him this morning. Although this is not my subject I shall do my best to answer all noble Lords' questions as they come up on this piece of legislation.
In contrast to a number of transport measures which have been considered by your Lordships' House in recent years, this Bill is mercifully short and straightforward. It contains a mere two clauses. Its purpose, very simply, is to enable the charges which aircraft operators have to pay for using air navigation services, to be prescribed and paid in units of account, instead of in conventional currencies as at present. 1467 The immediate reason for bringing this Bill before your Lordships is to enable the UK to agree to en route air navigation charges, which are collected by Eurocontrol, to be prescribed and paid in European currency units instead of US dollars as at present. This will bring the UK into line with the other member states of Eurocontrol, which already have such powers, and it will allow the simultaneous changeover throughout the twelve countries concerned to charging in ecus.
I think it may be helpful if I briefly describe the system which is used for charging for air traffic control and other air navigation services when an aircraft flies through the airspace of a Eurocontrol member state. The charging system goes back to a multilateral agreement first signed in 1970. The signatories to the agreement (which was renewed in 1981) now include the nine states which are full members of Eurocontrol (Germany, Belgium, France, Luxembourg, the Netherlands, the Republic of Ireland, Portugal, Greece and the United Kingdom and three associated countries (Spain, Switzerland and Austria).
The effect of the 1981 agreement is that 12 European countries have entrusted Eurocontrol with the task of calculating, billing and collecting charges from airlines in respect of en route navigation services made available by the national air traffic services of the countries concerned. The system is administratively very convenient since an airline simply pays one charge for each flight, even though the flight in question may pass over one or more of the 12 countries which have signed the multilateral agreement.
The calculation of the charges is complex. Broadly speaking, a unit rate of charge is calculated in US dollars for each country by dividing the cost base of the country concerned by the amount of traffic which it is estimated will be using its en route navigation services in the year in question. The cost base consists of the relevant expenditure incurred by the country's national air traffic services organisation, plus the country's share, if any, of Eurocontrol's annual expenditure budget and an administrative charge to cover the cost of collection. The charge made for a flight is calculated by multiplying the unit rate by the aircraft's weight factor and the distance travelled. Since the unit rate varies from country to country, calculations are made by Eurocontrol's central route charges office for each country over which the flight passes and the total for the flight is then worked out. Airlines are billed on a monthly basis.
Having collected the charges from the airlines, Eurocontrol then reimburses to each state its share of the income. Differences between the income received and the actual cost incurred by each country are repaid to, or recovered from, the airlines by reducing or increasing the cost base in the year after the following year.
This Bill is strongly supported by British airlines, who have been pressing us to introduce it. Airlines generate revenue and incur costs in all hard currencies. In an ideal world, the revenue generated and costs incurred in each currency would be closely 1468 related, but in practice this rarely happens, so airlines have to manage cash flows in various currencies and plan their foreign exchange requirements to minimise risk.
European airlines generate much of their revenue and incur most of their non-fuel costs in European currencies, so it has long seemed anachronistic to them that they have to pay in US dollars to overfly European countries, especially as the US dollar can fluctuate widely against the European currencies in which revenue is being generated.
Charges for air navigation services are set in advance. Regulations are laid before Parliament in December each year, and come into force on 1st January. The unit rates are calculated in European currencies (as they are designed to cover costs incurred in those currencies) and then converted into US dollars. It is the dollar amounts which appear in the regulations (although the rates of exchange used to arrive at the dollar values are also quoted). Because of the effects exchange rate fluctuations were having on the system, the airlines requested that unit rates be adjusted monthly, and this change has been implemented. However, it has not entirely overcome the problems caused by the volatility of the US dollar, because the exchange rates used to adjust the unit rates are the average exchange rates for the month immediately prior to that in which the flights were made. The bill is sent to the airlines in the third or fourth week of the month following that in which the flights took place, and is due to be paid within 30 days.
For example, a bill for 1 million dollars for flights made in November last year would have been calculated using the average exchange rates for October; the invoice would have been raised in December, and payment made in January this year. During that time, the dollar-sterling exchange rate moved from US dollars 1662 to £1 to US dollars 1.798 to £1, so a million dollars at October's rate would be worth approximately £602,000, but by January they would be worth only about £556,000, a drop of £46,000.
The charges which made up the I million dollar invoice would be in the currencies of all (or most) Eurocontrol member states, not only sterling, so it is perhaps unfair to equate them all to sterling. However, during the period in question the dollar was declining in value against most European currencies, and I have used the sterling-dollar rates to highlight the effect which the three-month period between calculation of amounts due and actual payment can have, when US dollar exchange rates are fluctuating.
Eurocontrol's purpose is to charge airlines with the cost of providing air navigation services, but if the dollar declines in value airlines are undercharged and if it appreciates they are overcharged. Either way, adjustments have to be made later. It is this uncertainty about the future value of the dollar which causes problems for airlines in managing their cash flows.
As the ecu is based on a basket of European currencies, its exchange rate with each currency in the 1469 basket is relatively stable. During the same October 1987 to January 1988 period which I used in my earlier example, the sterling-ecu exchange rate changed from 1.442 ecu to £l, to 1.441 ecu to £1. That is hardly any change at all and shows a far more stable situation. The use by Eurocontrol of the ecu, in place of the dollar, will lead to far greater stability, as the movement between the ecu and European currencies can confidently be predicted to be far less than that which might occur between European currencies and the US dollar. The result will be that airlines' currency risks will be reduced and it will be easier for them to achieve a closer correlation between currency receipts and disbursements.
To achieve the necessary change in the law, the Bill amends Section 73 of the Civil Aviation Act 1982 by inserting a new subsection 1A. Under Section 73(1) the Secretary of State is empowered to make regulations requiring the payment of air navigation service charges in such currencies as may be prescribed, and the new subsection empowers the Secretary of State to prescribe the charges in units of account defined by reference to more than one currency, and to provide for payment either in units of account or their equivalent in conventional currencies. Charges may thus be prescribed and paid not only in ecus but also in any other suitable unit of account which may come into being in the future.
The other member states of Eurocontrol are waiting for us to make this change in our law. The Eurocontrol Agency has geared itself to make the switch to ecus some two months from the date when the UK's powers come into being. I hope I have said enough to convince your Lordships that this is a very worthwhile measure. I commend it to your Lordships. I beg to move.
Moved, That the Bill be now read a second time.—(Lord Strathclyde.)
§ 11.54 a.m.
§ Lord Underhill
My Lords, the House will be grateful to the noble Lord for explaining the provisions of the Bill. That was necessary for some of us, even though the Bill contains only two clauses. I hope the noble Lord will convey my thanks to his noble friend Lord Brabazon of Tara for so kindly writing to me, and other noble Lords, a few days ago explaining the Bill.
I do not want to say a great deal at this stage. It seems a very commonsense Bill and one that deserves support, if only for the following measures. The other countries of Eurocontrol want us to approve the procedure. It will avoid the possibility of legal challenge in the light of world currencies. Further, the airlines want this change to be implemented as soon as possible. Therefore, I have great pleasure in supporting the Second Reading of this Bill.
§ Lord Tordoff
My Lords, I also thank the noble Lord for the explanations he has given. He has come into this legislation at very short notice, and we are most grateful to him for the excellent way in which he explained the Bill.
We fully support the measures that are being taken. It is a very simple, commonsense Bill. As an 1470 aside, I would say that it seems to us that the Bill puts another reinforcing plank in the platform of having a European currency and this country getting into a European monetary system. One wonders why we are the last country in Europe to have got around to producing this piece of legislation. That is an aside, but nevertheless I think it is an important one.
I am sure that what has been said about this problem applies to a large number of pan-European matters where a European monetary system in which we were fully participating would be a great help to everybody. Having said that, we give our wholehearted welcome to the Bill as it stands.
§ Lord Boyd-Carpenter
My Lords, I congratulate my noble friend Lord Strathclyde on his rapid mastery of a Bill with which yesterday he was no doubt not particularly concerned. I thank him for the clear and helpful explanation which as a result he gave to your Lordships.
I join with the noble Lord, Lord Underhill, in asking my noble friend to convey to my noble friend Lord Brabazon of Tara my thanks for the helpful letter of explanation which he also sent to me. In so doing I express the view, which I know all your Lordships hold, that we much admire the quick move of my noble friend Lord Brabazon to Lockerbie in the light of last night's tragedy. He follows the example of a great name in the aviation world and his action last night fully lives up to that.
On the merits of the Bill, I shall not be led astray by the noble Lord, Lord Tordoff, into opening up the question of a European currency, or we shall be here until Christmas. But 1 wish to say that, on its own merits, there is now an unanswerable case for this Bill. My only surprise is that this is a matter which needs legislation. It is so obviously a matter of sensible administration that it seems a pity that the 1982 Act tied it up in a way that resulted in its having to be untied by legislation.
Plainly the way in which the dollar has behaved in the past few months has created real difficulties for the airlines. My noble friend gave a very good example of the change over a matter of months. It makes sense, surely, to put this right. The ecu seems the sensible way of doing that. I fully support the Bill.
§ 11.58 a.m.
§ Baroness Burton of Coventry
My Lords, I too would like to support the Bill and to thank the Minister for introducing it to us in such a clear way. I also wish to thank the noble Lord, Lord Brabazon, as everyone else has done, for the helpful remarks that he sent to most of us concerning the Bill. I was aware that the United Kingdom was one of the 12 European countries to have entrusted to Eurocontrol, as the Minister told us, the detailed task of calculating, billing and collecting en route charges.
As most of us know, these services are provided almost entirely by the national authorities. In the UK's case that is the National Air Traffic Services. But I had not realised that, since the inception of Eurocontrol, the en route charges have been set in US dollars. I see now, having learnt that, that the fluctuation of the dollar in relation to the value of 1471 European currencies has made it very difficult to pitch the unit charges at a level which covers costs without overcharging or undercharging the airlines. I believe the Minister mentioned that to us.
I believe the Minister also told us that in November 1986 Eurocontrol decided that the charges should be set and collected in European currency units. When that was done, the UK made it clear on that occasion that legislation would be required before the change could be implemented. What I did not know, until I obtained the information from the noble Lord, Lord Brabazon, was that the United Kingdom was alone in not having the necessary powers but that the infrastructure now exists for the change to be made, subject to the agreement of Parliament.
I hope that the House will expedite the new charging arrangements. From what has been said today I should have thought that the Minister could be sure that the matter will pass through very speedily. I am glad to support the Bill.
§ 12 noon
§ Lord Strathclyde
My Lords, I am extremely grateful for the reception given by noble Lords to the Bill on its Second Reading. I am especially grateful to those who have taken the time to give some thought to the reason for the Bill and the financial implications of changing from dollars to ecus. I shall of course convey the thanks of noble Lords to my noble friend Lord Brabazon of Tara for the information he has provided over the past few days.
I am grateful for the congratulations of my noble friend Lord Boyd-Carpenter today. I agree with him that we shall not be drawn into a grand discussion with the noble Lord, Lord Tordoff, on European monetary union. I should also like to confirm to the noble Baroness, Lady Burton of Coventry, that Eurocontrol charges have been in dollars ever since its inception and that that is one of the reasons for making the change today.
Finally I should like to thank the noble Lord, Lord Underhill, for his speech. Our thoughts are with my noble friend Lord Brabazon of Tara in Lockerbie. We hope that he will he able to return as soon as possible. I hope that everything that I have said answers the questions raised by your Lordships. I therefore ask your Lordships to give the Bill a Second Reading.
§ Lord Mayhew
My Lords, before the noble Lord sits down I wonder whether he will answer the question of my noble friend Lord Tordoff as to why, as he mentioned in his introductory remarks, other European countries have been waiting for us to act? Why are we last?
§ Lord Strathclyde
My Lords, I am not sure why we are the last European country to enact this piece of legislation. I suggest to the noble Lord that somebody has to be last and that in this particular case it was ourselves.
On Question, Bill read a second time, and committed to a Committee of the whole House.