Aviation Liberalisation in Europe

HL Deb 14 June 1995 vol 564 cc1830-57

5.30 p.m.

Lord Brabazon of Tara rose to call attention to the current state of aviation liberalisation in the European Union, and in particular to the competence of the European Commission in negotiating aviation agreements with third countries; and to move for Papers.

The noble Lord said: My Lords, I am pleased to be able to introduce this debate today. It is some little while since we have debated aviation in this House and there are a number of developments taking place at the moment which I believe make this debate timely.

I would first of all like to reflect on why aviation is so important to us in this country. Aviation is a great British success story. In British Airways we have one of the world's most successful major airlines and one of the few that is profitable. That was not achieved easily and great credit is due to my noble friend Lord King, under whose leadership the airline was turned round from near bankruptcy to a successful privatisation and now to a world leader. But we also have a number of smaller airlines that have done much to improve customer choice and service. I am thinking in particular of British Midland, Virgin Atlantic, Air UK, in the charter market Britannia, and many others.

At this point I should perhaps declare a non-interest in that I am a director of a small airline in the Channel Islands. But as the Channel Islands are not part of the EU, nor with a fleet of Trislanders and a Shorts 360 is the airline thinking of starting transatlantic services, it is not covered by the terms of today's debate.

All the airlines I have mentioned are operating successfully in the private sector, and it is the presence of these competitors to BA that has done so much to bring fares down and improve service to the people who we should be most concerned about, the passengers, whether business or leisure travellers. That is, after all, the main purpose of liberalisation. Incidentally, for proof of that one need look no further than the enormous improvements on our own domestic routes, such as Glasgow and Edinburgh, since competition was allowed in the early 1980s.

Our geographical position in Europe makes us probably more dependent on air travel than any other major European country and is one of the reasons why we have the busiest airports in Europe. In 1990, about 15 million business journeys took place through our airports, and that figure is expected to double by the turn of the century. The majority of those will be to and from Europe, where we have more than 60 per cent. of our trade. In 1990—I am afraid I do not have any more up-to-date figures—UK companies spent some £6.4 billion, or 1.3 per cent. of UK GDP, on air fares. This proves the need for our Government, and our European partners, to do what they can to create the conditions for a more liberal market and better value for money for the business passenger, and hence for the process of liberalisation that has been going on for some 10 years to continue.

It was indeed some 10 years ago that I first stood at the Dispatch Box answering questions on the subject, mainly from the late Lady Burton of Coventry. We should pay tribute to her persistence and vigour in keeping the House informed, and the Government up to the mark, on the progress, or lack of it, that we were making. I should also pay tribute to my noble friend Lord Bethell, who I am delighted is taking part in this debate, for all that he did to further the cause.

This country led the way in liberalisation, and because we felt the Community was moving too slowly we negotiated our own liberal bilateral agreements with like-minded countries such as the Netherlands in advance of the Community as a whole. Aviation agreements had previously been conducted on a purely bilateral basis, largely modelled on the 1946 Bermuda agreement between the UK and the United States. These air service agreements gave the right to fly between two countries, and the three main elements were capacity, designation of airlines and fares.

Typically, the first of these, capacity—in other words, the number of flights between the two countries—was shared 50:50 by the airlines of the two countries. Designation covered the airlines allowed to operate on the route, and was usually only one from each country. The third element, fares, had to be agreed by the governments or aeronautical authorities of both countries. It will therefore be self-evident that until these rigid restrictions could be broken down there could be no real competition and hence no downward pressure on fares. So the process of liberalisation began in Europe. The noble Lord, Lord Clinton-Davis, will remember this well as he was commissioner with responsibility at the time. I pay tribute to him for his efforts against sometimes great resistance from certain quarters.

In gradual steps capacity was broken down from 50:50 to 60:40 and then unlimited. Countries were allowed to designate more than one airline on a route, and the system of double-approval of fares was changed to one of double-disapproval; in other words, where both countries had to disallow a proposed fare before it could be stopped, so one country could not stop a lower fare on its own. I hope noble Lords, and in particular the noble Lord, Lord Clinton-Davis, will forgive me if I may have perhaps rather over-simplified what are very complicated issues.

But if we were to have a true common market—I am a great believer in the European common market—then we had to move to a position where any European airline could operate freely on any route in the EC, whether between countries other than one in which the airline was registered or even with another country—cabotage. In other words, a British airline should be allowed to operate not only between London and Paris but between Paris and Frankfurt and between Frankfurt and Berlin. These and other matters were the subject of the second and third packages, the last of which came into force on 1st January 1993. No doubt my noble friend the Minister will be able to bring us up to date on the progress of that stage.

I said earlier that the main purpose of all this was to bring down fares and improve service for the passenger, so let us see what has happened on a typical route, London to Paris. Since 1990 this has been transformed into one of the most competitive routes in Europe, with six airlines flying from four London airports battling for 4 million passengers a year against 2.8 million in 1990. Before British Midland's entry in 1990, the cheapest business class tariff with BA and Air France was £240. Now British Midland offers a Eurobudget fare at £205 and another airline offers one at £192. That represents a very worthwhile saving, particularly in view of inflation in the intervening years. Now contrast that with Air France fares on three other big routes with fewer competitors: Paris to Rome, okay a bit further, but £820; Paris to Frankfurt at £452; and Paris to Amsterdam at £403. Economy fares have also tumbled, with fares as low as £77 return being offered on this route. In other words, as we all know, competition works.

Incidentally, it is also good for UK plc; where there are two British airlines on a route, the overall share of the market held by British airlines has on the whole risen dramatically, sometimes by nearly 20 per cent.

So I believe liberalisation in Europe is working well and has the potential to work even better. But, sadly, there is one particularly big black cloud up there in the sky, and I refer to the issue of state subsidy. Since 1991 some European airlines have been allowed to receive about £6.8 billion of state aid. State aid is illegal under Article 92.1 of the treaty if it has the potential to distort competition between member states. But so far the Commission has shown little stomach to tackle the issue, although it has said it must stop. Our Government are taking the Commission to the European Court over the Air France case. I wonder whether my noble friend the Minister can tell us how that is getting on.

The new Commissioner, Mr. Kinnock, will shortly have to pass his first big test as I understand there are three cases currently before him. There are new applications from Air France and Iberia and a breach of conditions by Aer Lingus. The acid test is whether Mr. Kinnock will stick to the words of his predecessor that there should be no more subsidies or whether he will cave in under pressure from the governments involved. I hope the message will go out to him from all sides of this House that he should stand firm.

In 1993 the Commission set up a so-called comité des sages to study the problems of the European airline industry and to draw up an action plan for the future. Financial losses, amounting to some 2 billion dollars in 1992 alone had led some to suggest that liberalisation should be delayed or even reversed. The comité's highly commendable report was surprisingly unequivocal. Liberalisation of the internal market as now defined by community law should be fully implemented in the marketplace and all remaining obstacles to fair competition should be removed". It goes on to say, state subsidy, ownership and control and other competition-distorting factors still prevent the system from operating on even terms". That is clear enough. State aid has the potential to kill off the new market regime, even before it has got fully under way. Free from pressures to adapt to changing circumstances, state aided airlines can simply undercut their competitors to maintain or even expand their market share and eventually to drive them out of the market altogether. But restructuring is possible without state aid. As I said earlier, British Airways did it in 1981, became profitable in 1983 and has been ever since. More recently Lufthansa restructured, moving from 80 per cent. state owned to 40 per cent., all done by raising money in conventional capital markets. It is painful but it can be done, and must be done if good airlines are not to be driven out by the bad, leaving the passenger with no competition and rising fares.

One must question whether every country in Europe needs a national flag carrier if we are in a truly Common Market. I believe this question will have to be faced before very long, and the answer will be pretty unpalatable to some. So the Commission still has a lot of work to do in Europe, which makes me wonder why it should now be distracting us, and itself, by trying to stop individual countries negotiating aviation agreements with third countries, in particular the United States. This issue is particularly timely as I understand that it is to be discussed at the Transport Council next week.

Let us look at the background to the issue with the USA. Europe/North America is the biggest intercontinental air transport market in the world. The UK/USA market is easily the largest, with almost as many passengers as the next three, US/Germany, US/France and US/Holland, put together. These four markets account for three-quarters of all Europe/US passengers. So UK/US is about 37 per cent. of the grand total, and of this British airlines have just over half the market. So our airlines have nearly 20 per cent. of the total Europe/US market. For this reason negotiations with the US are of critical importance to our industry, and they have been going on more or less continuously for many years now. Indeed a mini-deal was concluded only last week which I hope my noble friend will tell us about. The final part of that deal was that the two governments should begin work immediately on the next stage of negotiations with the aim of opening up further opportunities, and so we go on.

There are a number of fundamental issues that have to be resolved if the EU is ultimately to conduct these negotiations. Sir Colin Marshall, Chairman of BA, summed them up in a speech he made earlier this year: This raises some very profound questions for commerce and industry, not least here in Britain. What policies will the Commission pursue, on behalf of the European industry? What mechanisms would be set up for involving member states and airlines in the process of negotiation? How will the Commission ensure that aviation matters continue to be dealt with on their merits rather than become involved in broader issues of international trade? Would the Commission self-evidently do a better job for the industry and the consumer than the national government?". I say that the answer is no. These negotiations are extremely complicated and highly technical and there simply is no one in the Commission with the expertise to handle them. I was much involved in the negotiations following the collapse of PanAm and TWA and the transfer of their routes to United and American. The Americans started by thinking it would be a straightforward transfer and were somewhat taken aback when we ventured to suggest that there was a price to be paid. I believe that we got a good deal for this country and although BA criticised us at the time, the US Government were even more strongly criticised by their airlines, so I think we got it just about right. So I am pleased that Sir Colin went on to say: The department of Transport has set a very high standard. If the EU were to negotiate, as a whole, with the USA, what would there be to stop a new route to London by American or United being traded for rights into the USA for say TAP, Iberia or Olympic? The situation would be wholly untenable. Collective EU bargaining cannot, I suggest, be achieved until hard and fast rules are established to govern the way the Commission would undertake such responsibilities and, especially, how it would allocate concessions and resolve disputes".

The important point to make—I am not sure that the Commission has grasped this—is that these negotiations are commercial, not political. I shall give just one example. The revenue which can be generated by the right to operate a daily Boeing 747 flight from Heathrow to New York is over 100 million dollars a year.

At Question Time on 22nd May my noble and learned friend Lord Hailsham asked what was meant by open skies. The US version simply removes some of the barriers to free trade—actually the ones that it does not like. True open skies would mean a genuine unified market involving free access to markets within the area, the ability to set up or acquire a business in any part of the area without restrictions on nationality of ownership or control, freedom as to the movement of capital and many other issues. One day there may be a role for the Commission to negotiate that, but in the meantime I end with a quote from the Financial Times leader of 7th June: The EU's first priority should be to enforce real competition and effective disciplines on state aids in the airline industry. These are the issues on which Brussels genuinely needs to assert its authority over member states. Once Mr. Kinnock has shown he is up to that task, it may be appropriate for the EU to discuss his ambitions to play a bigger international role. Meanwhile, he should stop gazing wistfully at transatlantic skies and concentrate on those closer to home".

I say "Hear, hear" to that. I beg to move for Papers.

5.47 p.m.

Lord Desai

My Lords, we are grateful to the noble Lord, Lord Brabazon of Tara, for introducing this important topic. The noble Lord is knowledgeable about this question and one might even think that his family has a family monopoly having practically invented civil aviation themselves.

The two aspects of the noble Lord's Motion are joined together in a slightly different way from the way he argued. I completely agree with him that it is important that liberalisation and competition be introduced in the entire EU aviation market. It would be good for Her Majesty's Government to make strong representations on this issue and not allow any of the usual sorts of excuses to be used. We have seen that happening in the steel industry. British Steel is the most efficient producer but quotas have been proposed whereby both efficient and inefficient companies take the same cut in output. We are quite right to reject that. I hope that eventually when the steel industry negotiations are finished it will be recognised that the lead, low-cost companies do not have to sacrifice their output in favour of high-cost companies. I would not propose the same thing for health or housing but I have no problem with that as regards aviation, steel or coal. In those areas market rules must be applied rigorously.

I believe there will be much resistance, trading off and "log rolling" about this matter. But be it in the Council of Ministers, be it in the meeting of transport Ministers or be it in the inter-governmental conference, we must make it quite clear that we regard the European Union as a single market which was negotiated eight years ago. It is about time we had a proper single market established in every industry that one can think of. Civil aviation is an important industry in that regard.

The UK has the advantage of being the most efficient country as regards this industry we are discussing and it has borne the costs of making adjustments already. Therefore it is time that we pressed other nations to do that too. It is clear that Mr. Kinnock, the EU commissioner for transport, will have to be very tough on Spain, France and other countries which want to continue state aid to their airlines.

I agree with the noble Lord when he says that there is no reason for every nation state to have its own flag carrier. There is no logic in that. As technological change occurs in the industry and more and more people want to fly we shall see a great many mergers and combinations. State airlines will not be well equipped to withstand that kind of competition. Therefore, it is in the interests of the European Community to press liberalisation and show a competitive front.

When it comes to the second question we may have differences. I do not see a distinction either in time or concept between negotiations with the United States and the liberalisation of airlines. As we know to our cost, when it comes to international negotiations, say with France, even within an EU framework we have to do it both at the intergovernmental level and also within the Community framework.

In bargaining with the United States we are confronted with an unequal opposite number. The United States has a much larger aviation industry, although the UK has the second largest industry. The US has six out of 10 air carriers and two-thirds of business, measured either in miles or in numbers of flights. Therefore, there is a very large competitor with whom we have to negotiate and, while it is true that individual airlines such as British Airways and Virgin are large companies and efficient bargainers, it may still be to the advantage of European airlines as a group not to allow the Americans to divide and rule. They may start, as they already have, negotiating with smaller countries. That may erode the advantage that we might be able to negotiate. For example, if the US starts by negotiating with Austria, Portugal or Greece it may be able to gain the advantage of intermediate stops—the so-called fifth freedom—which might be to the disadvantage of the UK.

In negotiations in the Uruguay Round of GATT the principle followed by the Community was that the European Commissioner—Sir Leon Brittan—negotiated on behalf of all countries. That proved tremendously advantageous, especially in the final stages when a lot of pressure was placed on Community countries by the United States both individually and collectively.

Bilateral negotiations take place all the time, and the relative strength of the two partners comes into play. Even the EU aviation industry as a whole, much less that of the UK on its own, will not measure up to the American aviation industry. The American industry is much larger than that of any single European country.

Therefore, there is a genuine dilemma. I respect what the noble Lord said. He believes that bilateral negotiations are a better bet, and perhaps a quicker bet. I wonder whether it is not better for the EU to negotiate on behalf of all European air carriers and secure advantages for Europe as a whole which will not be to the disadvantage of any one country.

I gather from reading such information as has been issued by the Commission that if, when the EU has negotiated an agreement with the US, any individual country has a better agreement that country will not lose out. That is an important principle. The EU has promised that if any air carrier has a better deal from the US than the EU has secured it will not have to give up the freedom that it has achieved. That is a no-lose situation. We are not likely to lose as a result.

Other noble Lords may know more about that and may go into detail. It is not a party matter. It is partly a matter of technical knowledge. However, if it is true that such a no-loss situation exists, we should think carefully whether we should not approach this on two fronts and try to pursue the advantage of a multilateral strategy as far as we can in order to fend off any attempt by the United States to play off one European carrier against another.

Therefore, inasmuch as during the GATT negotiations that principle worked—and I dare say that in matters of international trade and commodities life is no more competitive in Europe or within the United States, or between the two, than in civil aviation—it was a good principle to rely on the combined negotiating strength of 12 (now 15) countries. That produced an advantage.

I believe that I am correct in saying that to the extent that individual countries can offer negotiating teams to strengthen the Commission's own negotiating team that would be welcomed.

I do not want to continue for too long. I want only to say that the multilateral strategy will have advantages and no disadvantages. The multilateral strategy will have to be pursued at the same time as the liberalisation of civil aviation within the EU. I do not see any conflict. Some noble Lords may argue—and I should like to hear the argument—that in pursuing a multilateral bargaining strategy some countries may want derogation or concessions to preserve their subsidies. We have to reject that path. The elimination of state subsidies has to be a priority. I regard multilateral negotiations as a second option, and we should pursue both strategies.

Perhaps the noble Viscount who will reply from the Dispatch Box can answer a question for me. In legal terms the Community has competence in this matter. There may be some peculiar legal problems, because I am told that under a judgment of the European Court the EU has competence which overrides the competence of individual countries. I should be grateful if the noble Viscount could clarify that point for me without causing too much riot on his Back Benches, either here or in the other place. If that is the case, that is another problem: how do we pursue the bilateral advantages which the UK may gain while keeping within the law that we have agreed to?

5.58 p.m.

Baroness O'Cathain

My Lords, I thank my noble friend Lord Brabazon of Tara for raising this matter. At the outset, I must declare an interest. I am a director of British Airways. In fact, I began my career in an airline nearly 40 years ago, and I have had an abiding interest in the airline industry all that time.

I refer back to that era because, however illiberal air transport seems to be in the European Union today, there have been many positive developments. The illiberal nature of the air transport sector has already been described by my noble friend. He spoke of the carving up of routes, pooled routes and so on, and referred to a cartel by any other name. Sadly, the pace of development in terms of liberalisation has been slowing down and now seems to have come to a full stop.

It is important that this debate should not degenerate into another series of carping criticisms of the European Union. I would much prefer that we came up with some ideas as to how to help the Commission to achieve liberalisation, because at present it appears to be at an impasse.

The nub of the problem, which has already been eloquently stated by my noble friend Lord Brabazon, is the unacceptable existence of huge state subsidies to national airlines. Those are condoned by the Commission. It really is ludicrous. On the one hand there are demands for cheaper air fares, greater customer service, and so on; and on the other European Union member states are propping up their failed airlines.

Most of what I had planned to say has already been said by my noble friend Lord Brabazon, but in the interests of making sure that the message gets home I shall quickly go through the points, underlining how important it is that we do everything in our power to ensure that free and fair competition is achieved.

The concept of a national airline being seen as a national status symbol has been with us since air transport became more widespread; and it still persists. In the airline business, I remember it being said over 30 years ago, "As soon as the new flag is raised at the ceremony marking independence, the new national airline takes off on its inaugural flight". Some of the countries where this happened have such great needs for resources to cope with their economic and social deprivation that they really cannot afford highly expensive and relatively huge investment in a national airline, but they have made it. That is not necessarily the case in Europe, but the status symbol of a national flag carrying airline persists. Within the European Union there are several countries which support airlines which by no stretch of the imagination could be called efficient or economic. Nor indeed are they giving good service to their customers, despite the heavy load of state aid.

All the market research, all the customer research, which one reads regarding favourite airlines indicates an inverse relationship between those which receive massive state aid and customer esteem for those airlines.

The most recent example of state aid is probably the most blatant to date. Iberia, the Spanish airline, was bailed out to the tune of about £750 million three years ago. The EC gave its approval, but the restructuring package which it was insisted should be put in place at the time of that approval, still has 18 months to run and Iberia is back again with the begging bowl—this time for £660 million. British Airways has stated that it will take the European Commission to the European Court if the Commission approves the latest package, which was arranged, of course, on the basis that airlines find it difficult to exist because of the problems facing them in a highly competitive, unstable and recessionary European situation.

As my noble friend said, since 1991, over £6 billion has been approved by the European Commission. While that level of subsidy is being continued, there is no hope of further liberalisation. State aids must be outlawed before we can even think about allowing the European Commission to negotiate for member states as a whole. To use an overused phrase—it is wholly inappropriate for this debate, but I cannot think of a better one—we must have a level playing field. The phrase, "level skies", I fear, does not mean anything. Although the noble Lord, Lord Desai said—and I was relieved that subsequently he conceded that state aids would have to go—that we were unlikely to lose if the European Commission negotiates for everyone, that cannot be possible.

The European Commission could never be even-handed in the circumstances, while on the one hand approving state aid to airlines, and on the other seeking to negotiate multilateral agreements. We must resist any move to transfer responsibility for aviation agreements from national governments to Brussels while that situation persists.

We recognise that there are genuine problems with airlines and that if there were no state aids there could be quite substantial unemployment problems. Unemployment is the greatest pan-European anxiety. We think that it is purely a British problem: it is not. There are high levels of unemployment in the European Union generally. But there is little honesty around. Those airlines which have slimmed down and concentrated on customer service, and which rank with the best in the world, are at a considerable competitive disadvantage.

The airline business is tough, but all business is tough. However, I have to say that not as many other businesses are as badly affected by events such as the Gulf War. That is the peg on which Iberia is hanging its new approach. Any major international upset is reflected instantly in passenger numbers and cargo loads. The airlines which are now either benefiting from or appealing for state aids quote international incidents as justification for support. I simply ask the question: how have British Midland, BA, KLM and Lufthansa managed, despite the recession and incidents such as the Gulf War, to continue to operate efficiently and to provide an excellent and essential service?

There is no free competition in the airline industry in the European Union at present. We need free competition in the airline industry in the European Union. We must press the Commission to strengthen its backbone and resist ever more applications for approval of state aids to airlines in member states. Until that is achieved, Britain must "go it alone" and work out its own aviation agreements.

6.5 p.m.

Lord Bethell

My Lords, like the previous speaker I must declare an interest in that I have been the founder of a consumer organisation known as the Freedom of the Skies Campaign which for some 15 years has worked to bring down the costs of European air travel. One must remember that in the early 1980s there was a straitjacket around the whole body of European air travel called the International Air Transport Association. When it ruled the roost, it decided how many prawns there should be in a prawn cocktail; and the cheapest route to London from Copenhagen was via New York. Happily, as previous speakers have pointed out, those days are past. We now have a better regime of fare structures.

However, there is plenty of room for improvement. I support my noble friends Lord Brabazon of Tara and Lady O'Cathain for the constructive proposals that they made regarding state subsidies. Indeed, it is a scandal that those state subsidies have been allowed to proceed.

In the early 1980s I sought to outlaw the pooling arrangements and other restrictive practices of the national airlines by taking them to the courts: first, to the European Court of Justice under Article 173; and then to the High Court in this country for violation of Articles 95 and 96 of the Treaty of Rome. I was not able to succeed in the Luxembourg court because my case was considered not to be admissible, and in the British courts because of the high cost of litigation. Millions of pounds would probably have had to be made available if the matter had been fought to its ultimate conclusion. However, I hope that through the great efforts exerted by the British Government over a period of 15 years some achievements have been made; and perhaps our organisation has contributed a little to them.

I wonder only—perhaps the Minister would like to comment on this—whether there has been a sea change in the Government's attitude to litigation regarding state aids and other restrictive practices. We know that action is being taken against state aids to Air France. Have the Government contemplated taking the Commission to the European Court of Justice for failure to act by putting a stop to those measures?

As has been pointed out by my noble friend who introduced the debate, there are now many airlines on some European routes. He mentioned the Paris route. Perhaps I may mention the Dutch and Irish routes, and pay tribute to the airlines which pioneered the reduction of fares on flights to the Netherlands and Ireland. British Midland is one of the few airlines which was able to survive the period of recession without going under. Other airlines,—British Caledonian, Air Europe and the sadly-lamented Air Laker were unable to survive and were gobbled up (if that is the right expression) by British Airways. In particular one remembers its merger with British Caledonian.

On the routes to Dublin, other Irish destinations and Amsterdam there is certainly a variety of fares available. Nevertheless, for some bizarre reason, it still costs £205 to fly one way by British Airways from Brussels to London. That is the cheapest economy fare one way, from Brussels to London. The cheapest fare from London to Brussels—exactly the same route—is not £205 but £145. Such are the incomprehensible complications of European air travel.

While there has been progress, I fear that there is still not sufficient diversity in the business. There is not enough competition to bring air fares down to the level which they would reach if they were a truly functioning free market, a common market right across the continent.

The fact seems to be that in Britain we lead the struggle for a free market. As has been pointed out, we are the country that most needs reasonably priced air travel. With very few exceptions our business people and our visitors to the continent have to fly. Of course, there is a change now that the Channel Tunnel is available, but by and large we have to fly because of the barrier of the Channel between us and our markets. In this arena British Airways is still far and away the biggest beast in the jungle. The other day I read that British Airways still controls 90 per cent. of British scheduled flights to the continent of Europe. I wonder whether the Minister will be able to confirm that when he winds up.

British Midland and the Irish airline, Ryan Air, are the only two airlines able seriously to compete with British Airways. They do not have many routes at their disposal and are not able to provide the range of services that the big British airline still dominates. I do not know quite how the Government should tackle the problem. They may care to consider whether British Airways remains within the bounds of Article 96 of the treaty that prevents one enterprise from dominating a route. However, it would be desirable if more British airlines and continental airlines were available to cover this important market. We have made great progress in liberalising the market but the Government or the Commission can only take a horse to the water, they cannot make it drink. They cannot make an airline charge cheap fares if the airline feels that it will go bankrupt if it does and as so many airlines have done during the recent difficult years.

I hope that the Government will also look at the privileges still enjoyed by the large airlines in this country and on the continent. The automatic appearance of a great airline, for example, on a computer reservation system is a factor that encourages many travellers to take the big airline rather than the cheaper, modest-sized airline. It is the large airline that is offered to most travellers who consult travel agencies, and privileges are offered by the large airlines to travel agents' employees.

It is also suggested that the big airlines, including BA, enjoy privileges at the big airports of the Community. Therefore, they have a great advantage in that respect. But there is no excuse for the state subsidies that are applied not to British airlines but to those across the Channel, as has been pointed out by my noble friend Lady O'Cathain and others. There is no reason why we should tolerate the continuance of state subsidies paid year after year to Air France, Iberia and other airlines. I am glad to see the noble Lord, Lord Clinton-Davis, nodding, I am sure he will have much to say about it in a few moments.

It may be that a government wish to subsidise their social policy, their regional policy, to reduce their unemployment or even to contribute to their defence. But that should not be at the expense of the taxpayer or the fare-paying traveller. It should come out of the budgets under those headings. Hidden subsidies such as the training of pilots should also be considered and outlawed.

I hope that the Government will look at all those ways in which the Commission is failing in its task to protect the interests of the European air traveller. If I may say so, it very much strengthens the view recently put forward by Mr. Douglas Hurd that the Commission ought to concentrate on improving its own performance in the areas where it has a clear duty and responsibility, rather than venturing into new pastures and new arenas where its competence has yet to be proved. I hope that Mr. Kinnock will be able to make progress in the area where his predecessors have failed. If he cannot, I hope that the Government will press the Commission as a whole to do so, if necessary by taking the matter to the European Court of Justice.

Lord Monson

My Lords, before the noble Lord, Lord Bethell, sits down, perhaps I may ask a question. Will he acknowledge that cheap scheduled air fares between London and Switzerland are available? The fact that Switzerland is not in the EU may have something to do with that.

Lord Bethell

My Lords, the noble Lord has a point. Another point to be made is that Swissair is one of the few airlines in Europe to be entirely privately owned.

6.18 p.m.

Lord Mountevans

My Lords, I share the pleasure of joining in thanking my noble friend Lord Brabazon for giving us this opportunity to debate our airline industry in a European and transatlantic context. His exposition of the main issues was excellent. My only regret is that his speech and those that followed have left me with little to do but agree with the sentiments expressed. I hope, however, that I can add my little mite to the debate.

Let me start by mentioning two airline ticket stubs in my possession—each of them kept because they were major steps in my life. The first is a Delta economy excursion ticket from Knoxville, Tennessee, to London via Atlanta and a PanAm code share. The date was December 1969 and the fare 414 US dollars. Despite it being a restricted fare, despite Gulf wars, oil shocks, inflation and exchange rate variations, that fare is now available and is in fact slightly lower. Airlines have made a great deal of progress in reducing fares in the 25 years since I bought that ticket, especially the professional heavyweights like Delta. My other ticket is a 1973 British European Airways ticket stub—which dates the story a little—from Heathrow to Stockholm at £144. With the restrictions slightly changed, it is still available at a slightly lower rate even now.

I feel that both transatlantic and European liberalisation is an achievement for which we, the consumers, should be grateful to all those governments, commissioners and airlines who have influenced the scene. I have no doubt that the airline product is a better value one, in most instances more readily available than ever before.

But it is not only the fares and flights—the most customer visible elements—which we should consider. We should not overlook the success of BAA plc; or of the major local authority airports in the country. They too have made a big contribution to both customer satisfaction and to our export earning, as has the CAA, especially through the air traffic control system. As my noble friend Lord Brabazon reminded us—and my noble friend Lord Caithness gave us the details during Question Time on 22nd May—British carriers dominate the Europe to North America traffic. But many of those European and American passengers who choose, for whatever reason, a foreign airline, contribute to our earnings because of our unique position at the eastern end of the great circle route and our ATC input.

Mention of the great circle reminds me that, as I speak, there are a number of European airbuses, and indeed quite a large number of Rolls-Royce engines, flying the great circle route. So there is a fourth pillar to the aviation industry. We must take care of all of them, and not think simply in terms of airlines. If European or transatlantic liberalisation goes wrong, all four will suffer.

However, that is not to say that everything is perfect if one looks at Europe. I would not dream of saying that. As several noble Lords have said, if we cannot absolutely eliminate state subsidy to national carriers, it must be controlled. Like others who have spoken tonight, I admire Sir Michael Bishop's achievements at British Midland. I admire him the more when I recall that on two major routes, London to Paris and London to Dublin, British Midland competes with Air France and Aer Lingus. In spite of the conclusions of the comité des sages—my noble friend Lord Brabazon summarised those conclusions—these airlines have access to a bottomless fund, an illegal fund under EC rules, of bail-out state subsidies. Air France competes with British carriers on price, and with Aer Lingus on price; but its advertisements are also dominated by frequency, reliability and quality of service.

That is not the whole story. If as a result of what can only be called commercial incompetence, either Air France or Aer Lingus moves towards failure, it simply receives more state subsidy from its state owners. It then receives a subsidy for the last time, and then it receives another load of subsidy from what might be called the "last chance subsidy saloon".

My noble friend Lady O'Cathain mentioned Iberia and how it got into trouble in 1992, pleading the Gulf War in aid. I believe I am right in saying that in 1992 Spain had the Olympics; it had Expo in Seville; and Madrid was the European capital of culture. If you have three golden carrots of that sort which fill your planes I find it very difficult to see how you can go wrong. Even more ironic in the Iberian context is that I gather it is now going to court, and one of the petitioners is TAP, which is not totally innocent in the subsidy field either, as I recall.

Such subsidies distort competition and, just as importantly, discriminate against not only our own carriers but other foreign private-owned carriers. The liberalised European regime, if it continues to tolerate subsidies and discriminate against private enterprise, must get its act together. It must get together the regulation, the control and the monitoring of those subsidies.

State aid should, as Air UK reminded me, be once-off; be wisely used; and be thoroughly monitored by Brussels. I hope that in winding up this debate all Front Bench Speakers will remind Commissioner Kinnock that abuse of state aid should be his first priority. I am sure that my noble friend Lord Goschen will do so. And in so doing, I hope that he will confirm that subsidy is the biggest threat to fair and equal competition.

I turn to the transatlantic—or perhaps we should widen it and call it the third party—negotiating position that Brussels is exploring. Like my noble friend Lord Brabazon, I find this unacceptable in the short term, though like my noble friend I take on board Sir Colin Marshall's Brancker Memorial Lecture remarks, and especially those regarding hard-and-fast rules governing the Commission's conduct of such responsibilities should they ever arise; the allocation of concessions; and the resolution of disputes. I might say that much of that also applies to the European scene. Such rules seem to me a very, very long way away. They seem to me so far away that one might eventually have very nearly global open skies—in which case, both the Brussels role and the present bilateral role seem to fall away. But until then, and in the short term, I very much hope that the Government will fight to preserve the present bilateral status. I also hope that in so doing, they have the support of the parties opposite.

I should like to make two final points. They are outside the strict terms of the Motion and also outside the responsibilities of my noble friend Lord Goschen. Nonetheless, I hope that he will ensure that airport departure tax is never looked upon as a levy to be increased at will. I also hope that carriers' liability—medieval, as my noble friend Lord King once called it—will be equably enforced on all airlines, and indeed maritime carriers. One must be concerned that diplomatic judgments are allowed to override the level playing fields for which so many of us have looked in other contexts this evening.

6.25 p.m.

Baroness Thomas of Walliswood

My Lords, I recognise that this evening I am once again an amateur in a Chamber full of professionals, or at least experts, in this matter. I shall try to be brief and confine myself to three major points. The first has not been touched upon by anybody in this debate. I introduce it with a certain amount of fear. On the other hand, everything that has been said, and all the briefings that I was sent and have obtained, assume that air traffic will inexorably and continuously increase and that that is a desirable and indeed major objective of the whole liberalisation policy. In that context I do not feel that I can let the environmental point go entirely unmentioned.

I draw the attention of the House briefly to two particular recommendations from the Royal Commission on Environmental Pollution, one of which was that increased competition within the European Community should be accompanied by a full assessment of the environmental implications. The other is that the UK Government's policies should be to encourage transfer from air to rail, particularly for domestic or near European journeys, and the upgrading of rail links to main airports to discourage air feeder services.

I shall not say that all the suggestions that the Royal Commission (it made seven recommendations in relation to air policy) should be adopted. They may not all be feasible. I am not scientifically equipped to determine that. But in the light of government commitment to sustainable development, do the Government share the broad approach that the demand for air transport cannot he satisfied for ever without very severe damage to our environment? I draw noble Lords' attention again to the Royal Commission report, which states in paragraph 5.39: An unquestioning attitude towards future growth in air travel, and an acceptance that the projected demand for additional services and facilities must be met, is incompatible with the aim of sustainable development". All my remarks should be read within those constraints. Like the noble Lord, Lord Desai, for example, I am not in the least opposed to liberalisation, provided that standards of safety and so on can be maintained, and that the entire burden of that liberalisation is not entirely borne by the employees in the various companies. Also, I believe that my party is in general committed to a competitive approach, to a competition-oriented approach, to industrial policy; and more particularly to ensuring that private monopolies do not succeed state monopolies. I believe that that point was raised by the noble Lord, Lord Bethell.

The second point that I wish to address is the competence of the Commission. As I understand it, the Commission's certainty of its own competence stems from the implementation of the single market. In respect of air transport—as people have said to me, transport always seems to lag behind other industries in this sort of respect—the implementation of the single market should be completed by 1997. That completion would involve such things as full cabotage, which was an issue addressed by the noble Lord, Lord Brabazon of Tara; and the possibility of mergers between other companies and open access to routes and airports, which were points raised by the noble Lord, Lord Bethell, in particular with reference to the smaller airlines. Presumably completion of that process would lead to the cheaper fares to which the noble Lord, Lord Brabazon, referred and which probably we would all like to see. The noble Lord, Lord Bethell, has been a doughty campaigner in that regard.

It is out of the involvement with the single market that the Commission draws its claim for competence and also as a result of its existing role as a negotiator, for example, with and within GATT, on international affairs. It is so confident that it has declared its intention to take out legal proceedings against Belgium, Denmark, Luxembourg, Austria, Sweden and Finland because they have initiated open-skies deals with the United States.

How, therefore, do the Government justify their opposition to the Commission's competence when confronted by that level of certainty? Is the Government's opposition temporary, pending either completion of the single market or some other event? Does the Government's scepticism about Community competence extend to an unwillingness to allow it to operate in such a way as to facilitate a more integrated air traffic control system, for example? That is becoming increasingly more urgent because of the growth of air traffic, and the airlines themselves very much want to ensure that it takes place. What reaction will the Minister have to what I thought was the suggestion of the noble Lord, Lord Brabazon, that the Commission could be competent in international negotiations at some point at which sufficient rules about competence have been agreed between the member states? Will it be part of the Government's policy to attempt to agree such rules?

At one point, the noble Lord, Lord Brabazon, seemed to suggest that the UK should seek routes within continental Europe but should fear the trade-off which might result if the Commission takes on international negotiations. For example, in obtaining a benefit from the United States, it might be willing to grant a particular form of access into the United Kingdom. I found that an interesting way of looking at the situation from someone who is in favour of liberalisation. Presumably "liberalisation" means that our own routes and internal national markets should be as open as everybody else's. I should like to hear what the Minister has to say in response to that and look forward to his reply.

Finally, there is the point raised by the noble Lord, Lord Desai, about the relative advantage to be obtained—my reference to the speech of the noble Lord, Lord Brabazon, leads on to this point—by negotiating as a single country or as a group of countries in this matter. I shall not repeat all that the noble Lord said, but there is a problem with the comparative strength of the international countries in that respect with the very strong United States' presence in aviation worldwide. The United States already has certain concessions in our markets which it has been not very willing to give to us in return.

I should like to know, when we are negotiating for open-skies, whether we are indeed looking for the cabotage—that is to say, the ability to fly from (for the sake of argument) Washington to Seattle, as well as into Washington or into Seattle, and in fact even independently of those, which is what "full cabotage" in fact means. Would we, in fact, be able to negotiate that level of agreement and opening of the US markets unless we are willing to grant a level of European freedom in compensation?

As I say, the question of liberalisation cuts both ways. Indeed, has not the United States indicated its concept of its own powers by virtually announcing its intention to pick off the smaller countries—in fact, those that are currently facing action by the Community—before concluding negotiations with the UK?

In response to another point raised, will the Government reassure the airline industry about the method of international negotiation that is normally undertaken by the Commission? If we take as an example the GATT negotiations, the Commission officials who do the negotiating are nearly always accompanied by not merely national representatives but also by industry representatives. The Commission does not exclude either of those two important parties when it is dealing on behalf of the Community as a whole.

I have asked a number of questions. I hope that I shall receive some answers. Meanwhile, I thank the noble Lord, Lord Brabazon of Tara, for initiating this debate.

6.36 p.m.

Lord Clinton-Davis

My Lords, first, I wish to declare two interests. One is that I am the current president of the British Airline Pilots Association, though I must add immediately that my views do not coincide in several major respects with those of the association. So, whether I shall be asked to continue as president remains to be seen. I get on with the association very well. My second interest is that, I was a commissioner in this area. I am grateful to the noble Lord, Lord Brabazon, for what he said about the efforts that I and my colleagues in the Commission made between 1985 and 1989 to get the first steps going. I had that interest and I shall reflect a little about that in a moment and about the chronology of events which have taken place.

As others have done, I should like to congratulate the noble, Lord Brabazon, who has ministerial experience in this field, on initiating the debate and on raising a number of salient issues. As he said, the debate is timely because it enables us to review progress in liberalisation and to consider the position of the bilateral agreement which has recently been struck with the United States. So far as that agreement is concerned, the debate enables us to look at the more fundamental long-term objectives. It also enables us to consider the rationale underlying the draft mandate which has been submitted by the Commission to the Council and which, I understand, is to be debated before the Council of Ministers next week. The Commission claims that it has exclusive competence to conduct air service negotiations with third countries and with the United States in particular on behalf of the European Union. I should like to look at that matter in some greater depth in a moment.

Perhaps I may consider these matters in the order in which I have just stated them. It follows the line taken by the noble Lord, Lord Brabazon. So far as concerns progress in liberalisation, the first steps, to which I have alluded, were agreed in 1986 but did not come into operation until 1987, because there was the problem over Gibraltar which held things up for a year. The noble Lord, Lord Brabazon, will remember that only too well. Incidentally, I want to thank him for all the support that he and his Government gave to the Commission at that time. It was not full progress of course but simply the first vital steps in creating a common market in air transport.

In the European Parliament, I was very often pressed by the noble Lord, Lord Bethell, who wanted to go much further than I thought was practical at the time. That was the dispute between us. We were doing it on a step-by-step basis—which I thought was the only basis upon which one could proceed—but having regard to the enormous frenzied opposition that he will recall was evoked from a number of member states, even to go so far as we were proposing was too far for many of them. Eventually they saw the light, albeit in a limited way, and we were able to proceed with the first stage.

Then we had the second and third packages, which were agreed in 1993 and allowed European airlines to operate under a single air licence, enabling them to fly between any European Union country. That is to be further developed in 1997 when airlines will be at liberty to operate domestic services in other member states. That is real progress, as the noble Lord, Lord Brabazon, indicated. At the same time—this goes back before my time as commissioner, though it was developed in those four years also—regional air services have been developing and will continue to progress. And all that is to be welcomed.

However, as the noble Lord rightly said, a heavy item appears on the debit side. I refer to the recent sanctioning by the previous Commission of state aids to Air France and, on a lesser scale, to Aer Lingus, Sabena, TAP and Olympic Airways. Earlier in 1992 the first tranche of state aid to Iberia was approved and it is now requesting a further tranche.

I have said previously in this House and elsewhere that it was wrong of the Comité des Sages, to which the noble Lord made reference earlier—he said he approved of the report, which was helpful in many respects—to contemplate further "once-and-for-all" provisions of state aid (the "last chance saloon" doctrine) even if they were to be subject to substantial conditions. That situation has happened before, but the requests did not stop. I do not believe that they will stop in the future.

My view is that there should be no more chances. But let us not underestimate the task that now faces Commissioner Kinnock. First, we have the framework operating under the guidelines of the Comité des Sages; we then have the decision of the previous Commission—that was an unfortunate precedent and to some extent the commissioner may be imprisoned by it. I hope that that is not so and that when he reflects upon these matters, while we have a great deal of sympathy with his personal situation and that of the present Commission, he will in fact decide that there is to be no more sanctioning of state aid. There may be special circumstances, but they are narrow in their limitation and that must be the prevailing doctrine.

There is no question but that such aid distorts competition; it confers unfair competitive advantages which have not been earned, and that is the point. It was therefore damaging in the extreme when the Commission took its position in the latter part of 1994. I understand the pressures that were imposed upon President Delors. He wanted to be a candidate at the time and it was difficult in those circumstances to turn down Air France. In those specific circumstances the whole thing should have been put into touch until the new Commission took over. That would have been easier. I am glad that the Government as well as BA are challenging the position of Air France state aid. I wish them well in that litigation.

We come now to the agreement with the United States. That agreement, which was recently negotiated, is very modest, as the Government will concede. Further discussions are to take place shortly which will elaborate on that position. It must be viewed against the changes in our air services relationship with the United States since 1977, when we reviewed the Bermuda agreement. I was aviation Minister at that time, a position later occupied by the noble Lord, Lord Brabazon. The results of the negotiation have rankled with the United States authorities ever since. It ended the substantial dominance which had been enjoyed by the United States airlines on the Atlantic routes, which we found plainly unacceptable, and provided instead a framework enabling competition to take place on broadly equal terms.

That is the background. Even against the latest deal, which is quite modest, the United States appears to be dissatisfied with the outcome. It believes that United States carriers were not given sufficient opportunities to serve London and beyond, but it must not assume that the overall benefits from the negotiations can be only one-way—the United States way. I wish our negotiators well in those further discussions.

Then I come to the question of the Commission's draft mandate. I am pleased that this debate has not taken on the tone of a principled opposition, as some have said in relation to the Commission's proposals. The test for those few of us on these Benches is: what is best for Europe and for British aviation in particular? A pragmatic approach, which I encapsulated in that one sentence, is shared by British airlines—by British Airways in particular—and by the Civil Aviation Authority. Neither we nor they see this in simplistic Thatcherite terms—always saying "No, no, no" to anything to do with Brussels, almost regardless of the issue. We do not see this as a belligerent attempt by the Commission to extend its competence. The Commission entertains the view that a mandate along the lines it suggested, perhaps amended in part by the member states, would be in the best interests of European Union aviation, as stated by the noble Baroness, Lady Thomas, a moment ago. I do not necessarily agree with that conclusion, though it is a perfectly respectable argument. It has some logic in law because the legal position of the Commission is based on the case law of the European Court of Justice in the judgment of AETR in 1971, confirmed by an opinion in November 1994, according to which, In particular, each time the Community, with a view to implementing a common policy envisaged by the Treaty, adopts provisions laying down common rules, whatever form these may take, the Member States no longer have the right, acting individually or even collectively, to undertake obligations with third countries which affect those rules". However, though I am advised that the Commission rests its case on that, I am not convinced that it will be as easy as that. It would be a travesty to suggest that the Commission is bereft of acceptable arguments in favour of its stance. Perhaps I should briefly outline them and touch on my major reservations.

First, member states ceded to the Commission in 1986 not dissimilar powers in relation to shipping. The Minister at the time will recall that. I know that because I negotiated the agreement and even the Government of the day acceded to that proposition. Of course, while the parallel is relevant in legal terms, there are major differences in practice between aviation and shipping. Secondly, over many years the Commission negotiated at the GATT on behalf of member states and again the United Kingdom concurred in that position.

Thirdly, the Commission believes that although it is preferable for the issues affecting the mandate to be resolved by diplomatic agreement, it believes that it has the legal right, which may have to be tested in the courts, to negotiate air service agreements on behalf of the Union as a whole. As I say, it is prepared to litigate on this point.

Fourthly, the Commission believes that the bilateral agreements which have been concluded by Belgium, Denmark, Luxembourg, Austria and Finland—and also Switzerland although that country is not within the Union—as well as the United Kingdom, damage the solidarity of the European Union and affront the liberalisation policy which has been pursued. It sees the smaller countries as being "picked off" by the United States, with little being granted in return, and is in conflict, it argues, with the more substantial gains which could be procured on a multilateral basis.

I am not sure where I am as regards the number of points, but I believe that this is the fifth. The Commission rejects the view that it does not have the resources available to undertake the role of negotiator for the reasons that were given by the noble Baroness a moment or two ago. It says that it had that experience in any event in dealing with the former EFTA countries and eastern and central Europe.

The Commission also says that its draft mandate extends to all major issues involving concessions to be made by the United States on cabotage in the United States; relaxing conditions of ownership by United States airlines, mirroring the European Union's own conditions which would enable a foreign airline to acquire up to 49 per cent. of a national airline; pushing for the real opening of the United States internal market and removing all United States discrimination concerning the computer reservation system; and that it will aim at establishing a real "open skies" agreement. If the agreement is less than the one reached by existing bilateral arrangements, then the more liberal agreement will be left untouched.

On the allocation of routes the Commission says that is not all that difficult, but I am not so sure about that. The Commission claims that there has been considerable movement in its favour in the debate on the part of Germany, France, Spain and Denmark and poses the question: if that is so, why is the United Kingdom so hesitant?

Perhaps I may now briefly turn to the position which I, on behalf of my party, adopt here. Essentially, it is for the Commission to satisfy us that a multilateral system for negotiating air service agreements, now or in the near future, will have positive effects for this country, its airlines and the European Union more generally.

British Airways is Europe's largest and most successful carrier. It is not opposed in principle to the initiative undertaken by the Commission; but not unnaturally, it is concerned about its own North Atlantic routes, which contribute about 40 per cent. towards its operating profits. It is entitled to fight to ensure that evident benefits will result from any change of the regime.

British Airways accepts that the deals being struck by the United States with the smaller countries might be objectionable in that they include fifth freedom rights and provisions concerning computer reservation systems which might well be prejudicial. It concedes that if a unified market for the North Atlantic is to be established, which would also cover the domestic markets of the United States and Europe, which it would welcome, it would be for the Commission alone to negotiate such an agreement on behalf of the member states.

But we believe, as it does, that any such agreement must be seen to be beneficial for the industry and that the rules of competition are fair and seen to be fair; that the mechanics for ensuring and enforcing this situation must be firmly in place and that until these points can be agreed the bilateral system has to continue.

Consequently, I believe that it is for the Commission to demonstrate that all the main barriers to free trade, not just those which the United States industry cannot accept, are removed. There must be free access to all markets within the area without limits on capacity and prices. There must be complete freedom for the movement of capital and common rights of establishment without discrimination so far as citizens of the free trade area are concerned. There must be common competition rules and methods of enforcement. There must be rapid and effective sanctions against predatory behaviour. In determining any mandate the Commission's priorities must be very clearly set out, and they are not clearly set out at present.

Equally, the Commission must assert how it will resolve major variations of commercial practice and enforcement in relation to competition. We have to remember the United States anti-trust laws, including the vexed questions of triple damages suits and claims for extra-territorial jurisdiction. They are very different from our own approach to competition law.

The Commission must resolve its approach to the use in the United States of Chapter 11 to sustain airlines which are in or close to a state of bankruptcy—which is not a million miles away, in my view, from the whole question of state aid. The Commission must also resolve once and for all that further state aid to European Union airlines is out. Major practical problems arise in negotiating for 18 European Union airlines operating to the United States, all of whose interests, together with those of airports, regions and cities, have to be reconciled, especially as regards the allocation of routes. After all, airlines have invested very heavily in these routes. That is a matter to which the Commission must pay proper attention. I believe that we are well within time so far as concerns this debate.

The issue, as I have said before, is what is best for Britain and the European Union. I am not opposed in principle to what the European Commission is seeking to do. It has to prove that there is a strong and immediate case for it, but I do not believe that it has yet done that.

6.56 p.m.

The Parliamentary Under-Secretary of State, Department of Transport (Viscount Goschen)

My Lords, this has been an exceptionally well-informed and topical debate. I thank my noble friend Lord Brabazon for initiating it and for his forceful opening speech.

The debate has happily concentrated on the real world of the airline industry rather than on the more traditional dogma which can sometimes be associated with a debate with a European angle. Indeed, with some surprise I found myself in agreement with the noble Lord, Lord Clinton-Davis, in much of what he said on the subject. I welcome his condemnation of state aid as being anti-competitive, of which more later.

My noble friend Lord Brabazon is right: the airline industry is big business. What is more, the United Kingdom companies are world leaders in this extremely valuable field. The number of air travellers using our airports totals nearly 124 million a year. It also provides, through direct employment, some 60,000 jobs in the United Kingdom and many more in the supporting service industries. Historically, air transport has been characterised by over-regulation and by complex barriers to trade. The Government's policy has been for some time to encourage full liberalisation, which we have achieved now in the United Kingdom. The benefits of this are self-evident. More competition leads to more frequencies and better services at more competitive prices. That is good for the consumer and good for the industry, as well as being good for the country as whole.

As a result of our competition policy, our airlines are in an excellent position to take advantage of the opportunities offered in Europe by the single market and elsewhere in the world. We have a relatively large number of airlines in this country—a rather surprising figure of around 50—all of which operate in the private sector, none of which receives state subsidy and most of which operate international, scheduled or chartered passenger services. That has been achieved without sacrificing our commitment to ensuring that the highest standards of safety and security are maintained.

I also believe that the environmental considerations raised by the noble Baroness, Lady Thomas, are extremely important, but I do not believe that our aims of liberalisation conflict with our policies of minimising the environmental consequences of transport. I should mention also that the noble Baroness sprayed a fair number of questions at me in the course of her remarks, most of which concern the very real issues which surround this subject. I hope that at the end of my remarks she will be satisfied that I have addressed the key issues which she indicated.

Progress towards liberalisation of the international air transport market has been most notable within the European Community. The Third Aviation Package, which came into effect on 1st January 1993, introduces uniform criteria for operator licensing and removes restrictions on cross-border investment. Member states are no longer able to favour national flag carriers in issuing route licences and access to routes within the Community and subsequently throughout the European economic area, which has also been opened up.

The third package also ensures that carriers are now free to set fares according to their commercial judgment. That subject was developed by my noble friend Lord Bethell, who went on to point out that, although fares might not he regulated, it is up the commercial airline concerned to set the fare which it considers appropriate. That series of measures has resulted in reduced fares on a number of key EEA routes, including London to Paris and London to Amsterdam. My noble friend gave us some helpful examples of the movement in fare levels on the London to Paris route. The only remaining restrictions, which relate to the provision of domestic cabotage within other member states, will be removed in April 1997.

The rules now applying in Europe established the framework within which we and other member states are required to operate. It is, however, equally essential that all member states follow the rules and that the Commission is prepared to act to enforce them wherever necessary so that the benefits of that liberal framework are fully realised. That is why we have fought so long and hard to secure access for our carriers to Orly airport in Paris. I am pleased to say that a number of UK airlines have now successfully established services on the London-Orly route, opening up a new route for air passengers, who can now choose between two airports in Paris rather than being obliged to fly into Charles de Gaulle.

It is clear that there is still plenty more to do. For instance, it is essential that ground handling should no longer be operated on a monopoly basis, as is the case at many European airports. We have therefore welcomed the Commission's proposals for a framework directive and hope that negotiations on this matter can be completed as soon as possible.

My noble friend Lord Brabazon referred to a black cloud in the rosy picture. That black cloud was the issue of state aid. My noble friend Lady O'Cathain and a number of other noble Lords concentrated on the difficulties and inequalities which the high levels of state aid have meant. It is now particularly important that the Commission grasps the nettle of state aid to national airlines. State aid is one of the most serious impediments to realising the full benefits of the single market. It removes the incentive for state-owned airlines to become efficient and consequently results in a bad deal for passengers. UK airlines have had to face the pain of restructuring without state help but still have to compete with inefficient airlines supported by state subsidies.

Despite that, the Commission has so far approved the six applications it has received from member states since 1991 for restructuring aid for their ailing flag carriers. This amounts to approval of £5.3 billion of state aid which has been allowed to distort competition within the single market, nearly half of which went to one airline, Air France. This is our reason for challenging the Commission's decision to allow £2.4 billion of state aid to Air France. We are also giving our full backing to the legal challenge made by a number of European airlines, including British Airways, British Midland and Air UK. I can advise my noble friend Lord Brabazon, who asked about the state of play with regard to those challenges, that the Government's case has been stayed pending the outcome of the airlines' cases, which we understand may begin later this year.

A further test for the Commissión's policy will be the Spanish Government's second application for state aid for Iberia. It was a key condition of Iberia's previous state aid injection, which the Commission approved in 1992, that the airlines should receive no more aid during the current restructuring period. It is essential that the Commission upholds its earlier decision. I cannot emphasise too strongly that failure to tackle the issue of state aid continues to threaten the single market in air transport and calls into question the Commission's ambitions to negotiate external air services agreements.

The UK has an excellent record of negotiating liberal arrangements with states outside the Community and in recent years has successfully negotiated more liberal arrangements with, among others, South Africa, New Zealand, Singapore and a number of central and eastern European states.

That brings me to the issue of competence, to which the noble Lord, Lord Desai, addressed himself. It was investigated also by the noble Baroness, Lady Thomas. Under Community law, as the European Court of Justice confirmed in its Opinion on the GATT agreement last year, competence for external relations in transport is shared between the Community and member states. Therefore, member states remain free to negotiate air service agreements with third countries, provided that their negotiations will not affect the Community rules or alter their scope.

There are some circumstances where the European Commission may legitimately negotiate air service agreements with third countries on behalf of the Community, but it may do so only on the basis of a mandate which has been approved by the Council of Ministers. Indeed, there are such circumstances in which the UK has supported and continues to support Community level negotiations; for example, in extending the second and third air transport packages to Norway and Sweden, and more recently in agreeing a mandate for Community negotiations to extend the benefits of the third package to Switzerland. Such Community-level negotiations are legitimate because they involve other European countries adopting internal EC rules. The negotiations with Switzerland are now under way.

However, in other areas, most notably with regard to the United States of America, we are not convinced that Community negotiations would be in the best interests of member states; nor that they would achieve a better result for our airlines and passengers than continuing negotiations at national level. The Commission has recently proposed a draft mandate for negotiations with the US. However, this is little more than a wish list and lacks a thorough analysis of the potential advantages and disadvantages for the European Community and its industry, consumers and regions. It fails to address the key question of whether negotiations on this basis could realistically—that is the key word in the entire debate— achieve a better result. In the absence of that analysis, we do not believe that the mandate can provide an adequate basis for further discussion.

Also, on a practical level it would be extremely difficult to secure agreement on a mandate for negotiations with the US which would reflect the divergent interests of the 15 member states, their airlines and regional interests. It is important to put that into context when considering the practical difficulties. It took nearly two years for the member states to agree a mandate for Community-level negotiations with Switzerland which was based almost entirely on extending existing Community legislation on the single market in air transport to Switzerland and where the practical and economic complexities are not nearly as great as those relating to the United States.

From our considerable experience of such highly complex bilateral negotiations, it is clear that it is not an easy matter to reconcile the often conflicting interests of the individual airlines involved, the consumer interest and the interests of regional airports. At Community level, the difficulties would be multiplied many times over. It is also clear that there is little consensus among the member states on the policy to be adopted on air transport relations with the United States—whether protectionist or seeking liberalisation. For the Commission to secure a mandate which satisfies those members who favour a fully liberal agreement and those who advocate a more protectionist stance must be unrealistic. And, unlike the creation of the single market within Europe, there is no treaty obligation which obliges member states to liberalise air services relations with the US.

The European Commission has now announced its intention to pursue action against the six member states which have initialled so-called "open-skies" agreements with the United States. The Commission also wrote to the UK about our bilateral negotiations with the United States. I firmly believe that it is in our best interests that we continue to negotiate air service agreements bilaterally with the US. We have the necessary powers to do so and nothing in our on-going negotiations with the US conflicts in any way with our obligations under the Treaty of Rome.

The North American market is the biggest long haul market from Europe, with some 30 million passengers each year. It is especially important for the UK, which accounts for nearly 40 per cent. of the total traffic—ahead of both Germany (with 18 per cent.) and France (12 per cent.). It is extremely important in commercial terms for UK airlines.

We have heard expressed this evening that BA feels that last year routes to the Americas contributed some 40 per cent. to its operating profits. In any case, we believe that national governments are best placed to identify what is in the interests of industry and consumers, to identify a strategy and realistically to carry out the negotiations. The Commission has failed to produce any evidence to suggest that that is not the case. The Government will therefore continue to resist the Commission's claims to exclusive competence in this area and its attempts to take over responsibility from the member states.

I believe that the Government are in the best position to negotiate our air service agreements with the US. As we have heard, as recently as 5th June we signed an agreement with the US which provides new opportunities for both the UK and US airlines. The deal allows BA to offer more services from Heathrow to Philadelphia, and allows UK airlines the opportunity to carry some US government traffic, which until now has not been open to UK airlines. Those are the so-called "fly American" provisions. It also moves further towards liberalising code-sharing arrangements between the UK and the US, as well as allowing a second US airline on the Chicago-Heathrow route.

We have also swept away many obstacles to the ability of both countries to benefit from the unilateral offer which my right honourable friend the Secretary of State made in October last year to open up transatlantic services to all UK regional airports, including Stansted and Luton. That should result in an increase in transatlantic services, and we have recently seen a new service on the Birmingham-Chicago route.

The process of liberalisation must not stop here. Work will start on the next stage of negotiations with the aim of opening up further opportunities for transatlantic traffic very soon.

The agreement signed on 5th June will ensure that passengers will be able to benefit from a greater frequency of transatlantic service and wider choice, bringing with it the prospect of more competitive fares. We have not abandoned the goal of wider liberalisation with the United States, but in view of the difficulties which noble Lords have highlighted during the course of the debate we feel that it is best to proceed on an incremental basis by focusing on specific issues and by trying to secure a balanced agreement which can be built upon and which meets the needs of our airlines and passengers.

In conclusion, therefore, I believe it remains in the UK's interests to negotiate bilaterally with the US. A significant proportion of transatlantic traffic (as we have heard, some 40 per cent.) is accounted for by the UK. We have a strong negotiating position, and I firmly believe that it is within our rights to continue such negotiations with the goal of achieving further liberalisation.

7.15 p.m.

Lord Brabazon of Tara

My Lords, I am most grateful to all noble Lords who have taken part in the debate. I hope noble Lords found it interesting. It has been well informed. It may not have had many speakers but all those who spoke did so with a great knowledge of the subject. I should like to thank especially my noble friend the Minister for the care and attention that he gave to his reply.

We have had a degree of unanimity—it is rare in this House for it to be so strong—on the issue of state subsidies. I hope that Commissioner Kinnock, if he has an opportunity, will be able to read the debate. I doubt if he will. The noble Lord, Lord Clinton-Davis, might use his good offices as a former Commissioner and as a colleague in the Labour Party to draw it to his attention. If he manages to resist the calls for state subsidy, he will at least know that he has the wholehearted support of the House of Lords, for what that is worth.

On the other issue which was the subject of the debate—negotiations with the United States—slightly more balanced views were expressed. I said that I did not rule out for ever the possibility of that happening. The approach of the noble Lord, Lord Clinton-Davis, was similar. He might like to get there a bit quicker than I would, but nevertheless there was a certain degree of agreement within the House. As I said, I am grateful to my noble friend the Minister for having given such a detailed response on that point.

A number of other issues were raised. It is not the custom for me to answer in detail, much as I might like to. The noble Baroness, Lady Thomas, made the point that I was in favour of cabotage within Europe, which I am, and that is part of the third package. She asked why I find it difficult to accept that another European airline might be given a right to the US in exchange for an American airline being given a right to London. Those two things at the moment—I say "at the moment"—are different issues. There might be a case for that one day, but not right now.

The noble Baroness also mentioned the environment. My noble friend the Minister made the point that I would have made. I do not consider liberalisation, in itself, poses a threat to the environment in any way. Air travel, whatever the Royal Commission on Environmental Protection might like, is, by all forecasts, set to grow, and to keep on growing. While I agree entirely with the noble Baroness that we would like to see more cross-Channel traffic through the tunnel, I believe—I may be wrong— that the last figures I recall hearing were that the total capacity for passenger trains through the tunnel accounts for about one year's anticipated growth in air travel. So I am afraid that it will not make an enormous impact.

I should like again to thank all those noble Lords who took part in the debate, and I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.