Airline Competition: ECC Report

HL Deb 09 March 1999 vol 598 cc131-72

3.23 p.m.

Lord Geddes rose to move, That this House take note of the Report of the European Communities Committee on Airline Competition (32nd Report, Session 1997–98, HL Paper 156).

The noble Lord said: My Lords, this inquiry into airline competition was carried out by Sub-Committee B of the European Communities Select Committee of your Lordships' House. The inquiry was prompted by the revival of the 1989 Commission proposal to extend the powers of the Commission to apply the EC competition rules, particularly Articles 85 and 86, to airline services between the European Union and third countries.

The sub-committee took evidence over the period May to July of last year, our report was published in November of last year and the Government replied, very comprehensively if I may say so, in a letter dated 22nd February of this year. I say "very comprehensively" because it was exactly that, but there are one or two items of the Government's reply on which I should like some answers. However, I should emphasise to your Lordships that the reply of 22nd February has not been discussed by Sub-Committee B, so any views that I express today are personal views and not those collectively of the sub-committee.

We were superbly advised throughout our inquiry by Dr. George Williams of Cranfield University. Perhaps I may express the committee's very real appreciation to him. We also had the excellent services of Miss Kate Ball as the Clerk to the sub-committee. Sadly, we do not have those any longer. She has been, I think it would be correct to say, promoted to the Public Bill Office, but I should also like to express our appreciation to her for the way, as a very new Clerk in your Lordships' House, she assisted in that inquiry.

The committee heard 10 sessions of oral evidence over the period I have described, including from the Competition Commissioner, Karel van Miert, and from Glenda Jackson MP, the Minister of State at the DETR. We also took evidence from five separate airlines— British Midland, Delta, Lufthansa, Virgin Atlantic and British Airways: they are put in strict chronological order. However, we did not—the report emphasises this and I wish to do so again—receive any reply to an invitation for evidence from Air France. It simply did not have the courtesy to bother to reply in any shape or form. That becomes quite indicative in a subsequent part of the report, to which I will refer.

Currently, competition rules with regard to airlines are applied by both the Commission and member states. If this was not your Lordships' House, I might describe it as a "something" muddle. The Commission's, proposal has three parts. First, it would give the Commission sole power to apply competition rules to flights between the European Union and third countries. Secondly, it would provide for consultation between European Union and third countries in cases of dispute. Thirdly, it would give the Commission further powers to grant block exemptions for certain activities by airlines.

In paragraph 2.1 of the Government's response the Government appear to be stating that block exemptions are given to agreements and practices which promote competition in the consumer interest. But I must say—I should be grateful if the Minister could comment on this—that my interpretation of Article 85 of the treaty is rather different from that of Dr. John Reid in that, as I read it, Article 85 states that, exemptions may be given to a category of agreements between undertakings which does not … afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question". We are getting into a slightly legalistic jungle here, but that is a very different interpretation from the one we received from the Government.

As the Government rightly point out in the third paragraph of the introduction of the reply of 22nd February, the committee found itself obliged to go much wider than the original narrow European brief in that—this is a truism—the airline industry is truly global and is characterised by a whole battery of alliances, which we summarise in appendix 3 to the report. Those alliances are in themselves potentially anti-competitive.

The thrust of our report—and we say it at least twice in bold type in our conclusions—is that consumer interest should be paramount in regulating airline competition. We found, and this is why we had to go wider than the apparently narrow initial brief, that much of the distortion in competition comes from the European Union/US airline market. That is the nub of the whole airline industry of the world.

In particular, we found the restrictions on ownership on either side of the Atlantic to be seriously anti-competitive, with the US not allowing more than a 25 per cent. non-US ownership interest; within the EU the equivalent figure is 49.9 per cent. Although we realise that it is perhaps some distance away, we recommend that as soon as possible those two restrictions should be lifted.

We emphasise, and I anticipate that this may evoke considerable opposition from one or two speakers in this debate, that responsibility for competition should lie at the highest practical level. In the context of the European Union that is with the Commission. Having heard very good evidence, we came to the conclusion that the Commission is better placed than member states to apply rules effectively and consistently. We also reached the unanimous decision that the committee would give less special treatment to member states' airlines than national governments have done or continue to do.

Historically, airlines have been accorded special treatment. There are very good reasons why that should have been so, not least strategic reasons. But we could not bring ourselves to say that that situation was any longer justified. The industry has moved on. In our opinion there is no further reason for such special treatment. Indeed, our report goes further, in stating that the industry should be treated like any other industry, ending current anti-competitive practices. We appreciated that that could possibly mean the demise of a number of what have previously been termed "national" airlines. However, we concluded that the necessity for such national airlines no longer stood up. If some of the smaller airlines have to go to the wall, so be it. We were of the firm conclusion that, while initially that might hurt or appear to hurt the airline industry within the United Kingdom, the airline industry in this country is by far the most "deregularised", if I may use that awful word, and therefore best equipped to take advantage of such deregularisation.

We then moved into the deep, thick jungle of "slots". The more we looked into the matter, the more complex it became. First and foremost, to our amazement, we could not find a single witness who could tell us who owned slots—being the right to take off from and land at an airport at a designated time. We even asked the Minister directly: "Who owns slots?"—to which he equally directly replied, "I have no idea". The same answer came from all the witnesses. We did, however, go deeper into what are known as "grandfather rights", which have grown historically. As I understand it, if Imperial Airways happened to have the right to take off at 0930 from what we now call Heathrow, the airline kept that slot in perpetuity. It did not matter whether that 0930 flight was originally destined for Paris, and the destination subsequently became Singapore, and after that Dallas; that 0930 slot remained with Imperial Airways, BOAC and now British Airways. My noble friend Lady O'Cathain may choose to comment on that.

We came to the firm conclusion that airlines that held grandfather rights had significant anti-competitive power over potential competitors. We were of the firm belief that no airline should be allowed to dominate at any particular airport. The Government have commented on that in their reply. They state that at the hub airports—specifically mention Heathrow and Gatwick—on causes the domination. We challenge that statement. We accept that it is partly due to congestion, but state that it is also caused by the stranglehold of grandfather rights.

As I have said, we did not like the linking of slots to routes. We wanted the two to be separated, so that if an airline dropped a route it therefore lost the slot. But so far as Brussels is concerned, we pressed strongly in our report for a reform of the slot allocation system. I underline that by pointing out that the system was due for revision in July 1997 and that that review has not yet seen the light of day.

In the long term, the committee supported an open and competitive bidding system for slots. I hope that speakers in the debate will comment on that. The question of slots is a very difficult one. We have produced an opinion; other members of this House may well put forward other opinions.

I am delighted that the speakers in this debate include five members, other than myself, of Sub-Committee B and two further members who have joined the sub-committee since our inquiry. From a list that effectively contains 15 speakers, that is extremely good representation.

I shall not bore your Lordships by attempting to go through the entire report. I hope that all present have read it. In conclusion, I wish to repeat the highlighted start to Conclusion 116. The committee states, shortly and to the point, The needs of the consumer should be paramount". We believe that most strongly. We want competition rules to bring that about. I beg to move.

Moved, That this House take note of the report of the European Communities Committee on Airline Competition (32nd Report, Session 1997–98, HL Paper 156). —(Lord Geddes.)

3.37 p.m.

Lord Borrie

My Lords, the great value of this report is that it lays bare, in the clearest and most concise way that I have yet seen, the ways in which airlines, and the Governments that protect them, can operate against the public interest. The report goes much wider than the narrow matter of the proposed European Union regulations regarding air services between the European Union and third counties. I feel absolutely free to praise the merits of the report. Although I am a member of the Select Committee on the European Communities, I am not and was not a member of Sub-Committee B which produced the report and clearly was so ably chaired by the noble Lord, Lord Geddes.

At present, most governments in the developed world, not only in the European Union, are active in promoting competition between the providers of goods and services as the best way of ensuring that the public enjoy lower prices, a better quality of service and greater choice. But as this report so rightly concludes, the way in which this one particular industry, the airline industry, operates does not achieve those objectives.

For much too long national governments, though not all, within the European Union and elsewhere have promoted, protected and cosseted their own national so-called flag carriers, their own particular national "champions". As the noble Lord, Lord Geddes, indicated, some of those national airlines are not necessarily viable but are simply state-supported totems of national vanity, distorting competition. As a result, the consumers and, of course, taxpayers are disadvantaged. As the report rightly says, from the point of view of the public and the consumers' interests in competitive prices and quality of service the, maintenance of national airlines is irrelevant". Airlines get special treatment in the national and European Union competition policies and, in my view and as the report indicates, it is time that that changed. There are so many ways in which an established airline is immunised and protected from competition. Take the system of taking off and landing slots at airports, to which the noble Lord, Lord Geddes, referred. It has become increasingly anti-competitive as demands for slots has increasingly outstripped supply at Europe's congested airports. The system of so-called "grandfather rights" and the way airlines can switch slots between routes give the established airlines powerful weapons against any upstart new entrant competitor.

As the noble Lord, Lord Geddes, said, the sub-committee had a problem in trying to discover who owned slots at airports. It is amazing that no one, not even the Government nor the European Commission, could answer that question. I was interested in British Airways' response. It rather cleverly said: "It's a metaphysical question", which probably cannot be answered. Perhaps I am being too cynical, and the next speaker will probably think I am in saying that it might be in the interests of British Airways that it is all so uncertain.

Most of the recommendations of the report follow naturally from its analysis. As it says, any continuance of the block exemptions granted by the European Union competition rules should be strictly justified—if they are to continue—in the interests of consumers and the promotion of competition. Normal competitive conditions should be the objective for further development of the airline industry and we should aim for an open and competitive slot allocation system. Again, I agree entirely with the noble Lord, Lord Geddes, and the report.

I suppose it also follows naturally from the report's analysis that the European Union Commission should apply the competition rules and it would apply them more effectively and consistently than member states have done to date.

However, I have one little quibble with the report. Perhaps I may remind your Lordships of the de Havilland merger case in 1991 when certain individual European commissioners seemed to cast their votes in that case more according to the national interests of their own countries than in accordance with the European Union's competition rules. I do not, therefore, share the report's dismissal in paragraph 112 of the idea of an independent European Union competition authority, perhaps on the lines of the German federal cartel office or the Bundeskartelamt.

Of course, it is a pity that the proposals of this excellent report seem to stand no chance whatever of acceptance by member states. In its response to the report, the United Kingdom—and I hope that the Minister will not think me too unkind in saying this—offers warm words about supporting in principle that normal competition law should apply to international scheduled aviation. The report states that at paragraph 8. But the Government emphasise several times in their response the strength of the traditional system of bilateral agreements and seem anxious to preserve the role of the individual member states. I should like to think—and the Government have a chance to consider this further and at greater leisure—that there will be greater support from the Government for the report's proposals in practice and not just in principle.

3.45 p.m.

Baroness O'Cathain

My Lords, I am delighted that the House has been given the opportunity to debate the report of the Select Committee. At the outset I have two declarations of interest to make. I am now a member of Sub-Committee B of the Select Committee, but was not a member at the time of the committee's deliberations, nor when it published its report. The second declaration seems superfluous as it has already been alluded to by the first two speakers: namely, I am a director of British Airways.

I welcome this wide-ranging and comprehensive report and see it as encapsulating three very positive points: first, the strong emphasis on the fact that the customer comes first. That was better put by the committee in Recommendation 12 in that, The needs of the consumer should be paramount". My noble friend Lord Geddes stated that recommendation twice. The second positive point is the assertion that there should be no long-term special deals for airlines. Thirdly, there is the recognition that Europe is now central to aviation policy.

While I agree with many of the recommendations made by the committee, there are three areas which I feel need further elaboration or explanation to make it even more valuable to the non-technical but very interested reader. I hope that some brief comments from me might help in that regard.

First, I am somewhat disconcerted by the implication in the first recommendation that, a good deal for the consumer", embodies as its first criterion the need, to offer the consumer lower prices". Frankly, as a marketing person I have always asserted that the offer should be "good value for money". Good value for money does not always imply lower prices. I am sure that we have all experienced occasions in our lives when we wish we had spent a little more on particular goods or services which would have resulted in better overall value. A cheap washing machine that breaks down every year or so is not exactly good value for money compared with one which cost more initially but is reliable and offers greater flexibility.

So it is with all consumer goods and services. Air transport is no exception. It is the customer's choice whether he or she flies with a "no frills" airline with no meal on board and offering only one flight a day or prefers the more expensive option with greater flexibility of schedules and a higher level of cabin service.

Just as an aside, noble Lords have probably noticed that I referred to the "customer", but the report refers to the "consumer". I have always differentiated between the words "consumer" and "customer", believing that the word "consumer" indicates the whole market but the word "customer" indicates specific individuals within that market. Some airlines try to make the consumer feel like a customer; that is, people who are individuals with individual needs and wants. That is also the choice which the passenger makes. It is competition at its most detailed level.

The second point I wish to make is that I feel that there could be some misunderstanding in the nomenclature used in describing airlines as "national" airlines. Over the years, rather as the noble Lord, Lord Borrie, suggested, that adjective has come to be used as shorthand for "state-financed and operated airline". We have no such airlines based in the UK, although my noble friend Lord Geddes said that if national airlines were forced to become regular, some British airlines would suffer. In my understanding of the terminology, they would not suffer because we do not have any British national airlines. What we have are airlines which have, if you like, British nationality. But we must not confuse them with the state-owned and operated airlines like Air France or Aer Lingus, to name but two of those located closest to this country.

The United Kingdom is particularly fortunate in having a very successful civil aviation industry. We have only approximately 4 per cent. of world GDP and some 5 per cent. of world trade, but we have a 9 per cent. share of the international aviation industry. Just a word of warning: any attempts to dismantle the UK industry would create a disproportionate disadvantage to UK airlines compared with their competitors in Europe.

The third and final area I would comment upon relates to the committee's recommendations on slots— Recommendations 15 to 23 inclusive. In my whole career in the civil aviation sector—as a young, innocent and raw economist in my first job, which happened to be with an airline, and many years later as a director of British Airways—it always seemed to me that the most complex area one deals with is slots. It is very complex and there is greater misunderstanding about this than about any other issue in the sector.

What are slots? Why do we have slots? Why does no other sector of industry have slots? Should slots be tradeable? Slots, as has already been said, are a direct result of congestion or the inability to provide sufficient airport space to accommodate the traffic required to satisfy consumer and customer demand. Slots are a problem world-wide but in some countries the problem is much more pressing than in others. In the US, for example, slots seriously come into play only in the highly congested airports of New York and Chicago. But the US, of course, has vast tracts of land in which airports can be accommodated and a huge market composed of people who take a flight to go from A to B within the country as the best way of gobbling up the miles.

It is all so different in European countries and in particular in the UK. Congestion in the UK is due to government restrictions on expansion of airports. To define slots as national assets when government policy has constrained the infrastructure is tantamount to confiscating airlines' business and would be utterly wrong.

An airline using slots is analogous to a train using a track. The train company undertakes to provide a service and in the provision of that service it has to use a track. It negotiates the use of the track for certain times of the day and publishes its timetable. Passengers get to know the times of the trains and the company provides the services to them. If, however, experience shows that traffic from London to Plymouth has fallen off and that traffic from London to Bristol has taken off, the train company, in the interests of providing a service to all its passengers, will negotiate to run extra trains on the one line and to curtail services on the other. A similar situation exists with airline slots. This flexibility is required by the airline in order to provide services to its passengers.

The right to a slot was initially protected by conventions contained in the scheduling guides published by the International Air Transport Association, LATA. Slots are ranked according to priorities: regular scheduled services are in category 1, for example, and category 3 is air taxis or people with small private planes—or even large planes. This convention has been adopted by and large by EC Regulation 95/93, which is now enforceable as law in the UK, with the rights granted by it recognised and enforceable in UK courts. The regulation confers rights and UK airlines are entitled to use and deal with those rights in accordance with that regulation and with the general law.

The very structure of this situation has given stability to airlines to plan their schedules and to engage in fleet planning, leading in turn to huge advance orders for aircraft, which coincidentally help UK companies such as Rolls Royce or the joint UK-French consortium of Airbus. Without the security of the slots it is doubtful whether any serious long-term planning could be undertaken. Would the customer benefit? I very much doubt it.

Investment by airlines, persistent, determined and long-term commitment to route development, all depend on the security of slots; but slots should never be tied to specific frequency levels on specific routes. Here I disagree with my noble friend, Lord Geddes, because I believe that does not take into account changing patterns of market demand. We all know how fashion changes for holidays to various regions or countries. Similarly, economic developments in other countries could seriously affect demand for travel to those countries. There has been a recent example with the economic downturn in the Far East. It would be insane to suggest that, if an airline had X number of slots allocated only to a Far East route and Y number to a thriving route in Europe, it could not reschedule some of the Far East slots to provide for the extra supply to the European destinations. That would not be serving the customer and would be economic madness. Distorting market forces is not the best policy to adopt.

New routes are tested out and existing routes are given more or fewer frequencies, as economic factors drive changing market dynamics. Change is healthy and ensures that supply is put where the demand is, and we all know that demand is always changing. Tie slots to routes and we consciously distort those market forces. In my view, slots are as important as brands and I think we would agree that governments do not have the right to interfere with brands. Until the necessary infrastructure is in place to satisfy consumer demand, airlines will inevitably want to build up slot banks at airports.

A great deal of misunderstanding also exists with regard to the selling of slots. As slots are assets why cannot they be sold? They have a value based on the investment made in them and, like any other asset with an investment content, they should be tradable. Trade in slots does go on. Only last month I read of a part-exchange deal undertaken by a large British airline with a small airline. It involved swapping several less desirable slots for prime time ones and "parting with £2.5 million"—according to the Sunday Times of 21st February. It is naïve to think that this can or should be stopped.

The airline business is very competitive, nationally and internationally. Indeed, the UK airline industry is as competitive as any sector I know. The customer gets good value based on his or her preferences. It is a success story and has evolved strongly over many years. It is unsubsidised and, directly or indirectly, employs hundreds of thousands of people. The committee's report tends to disregard that and concentrates on what it sees as anti-competitive practices writ large. Believe me, those who strive to provide the best service to the customer do not see it that way, and I hope that I have given some grounds to consider that things may be different from what the report suggests.

3.56 p.m.

Lord Bridges

My Lords, I am glad to take part in this important debate. I should begin by explaining that I was a member of the Select Committee which approved this report, although I have since retired from the Select Committee on the expiry of my term. I then made it clear that I did not wholly agree with the conclusions of the report and would explain my reasons when the report was presented to the House. I do so now, except on the subject of slots, where I believe the noble Lord, Lord Geddes, has made a very strong case for suggesting that this matter needs to be looked at afresh. I must also admire the metaphysical skills which the noble Baroness, Lady O'Cathain, has just demonstrated to us.

I have been considerably involved in international civil aviation in the past, particularly as Minister (Commercial) in the British Embassy in Washington for the four years 1976 to 1979, which covered the period of the renegotiation of our bilateral civil aviation treaty with the United States, and I was a member of the British negotiating team led by Mr. Patrick Shovelton. I also had some continuing responsibility for civil aviation as the Deputy Secretary (Economic) at the Foreign Office for the three years following, 1979 to 1982.

In approaching this subject it is worth observing that our role in international civil aviation is very significant. This is partly for reasons of geography. We are, as it were, the Clapham Junction of international air travel. We also have a good record for air safety. What matters, however, is the geographical hub and the wide range of destinations to distant continents which are available in London. Thus I recall that when U Thant was Secretary-General of the United Nations and wished to revisit his native Burma he found it easiest to cross the Atlantic, to spend a night in an hotel at Heathrow and to take a direct flight to Rangoon the next day. Even 30 years on, when so much has changed in civil aviation, it is still the case that travellers in the eastern United States will locate the widest choice of flights to destinations in Africa, the Middle East and south Asia by travelling via London; and converse journeys produce the same result.

This explains the telling statistic in the report just quoted by the noble Baroness, that although we have only 4 per cent. of world GDP we have 8 per cent. of world aviation output. This share has been won by a combination of geography, competitive efficiency and dependability. There are many operators who want to gain market share, both in Europe and elsewhere, which would be at our expense.

My first concern, therefore, is that although the Commission's proposal is designed to improve the effectiveness of its competition policy—which is clearly a laudable objective—the main result I would expect to see from the proposals, at least in the short term, would be a reduction in our share of the market. The Commission may well be in agreement with that supposition. However, although the Commission is not concerned with that, it concerns us.

My next reason for doubting the conclusions of the report relates to the Commission's competition policy. That is the legal base for its initiative. The Commission's record in the area of competition policy does not exactly inspire confidence. In the past the Commission has been regrettably weak in taking action to curb state subsidies, notably over steel but also over state-owned airlines such as Air France and Sabena. I do not find its claim to be acting in the interests of the aviation consumer convincing. If that is its prime concern there are some other areas in which it can use its existing powers to help consumers.

For example, there is the ridiculous IATA rule that discounted fares are available only if the passenger stays over a Saturday night. The ostensible reason for this rule is to encourage tourism. Instead, it boosts airline revenues by millions of euros every year at the expense of the consumer. There is also the current method of off-loading block airline seats to tourist agencies and bucket shops and charging premium prices to those who have to travel for business or urgent family reasons. This means that those who have to travel subsidise those who do not and are going on holiday. That has always seemed to me to be very unfair. If the Commission can act in those areas it will help the consumer. It already has power to act if it chooses to do so.

It is clear that the Commission wants to assume these fresh powers in order to conclude new aviation agreements, in particular with the United States, that are binding on other member states. It is evident from its public activities that the Commission is sympathetic to the US desire for what the Americans call an open skies agreement. But this is a one-way street, as the Americans want the freedom to earn money in our skies without opening their own. They want the right to fly from a US airport to intermediate stops in Europe, with traffic rights here to an ultimate destination elsewhere in Europe or further afield. That one-sided arrangement prevailed under the first bilateral agreement, Bermuda I.

At that time Pan American had a fleet of small jets stationed in London which transported passengers arriving on its transatlantic flights to other destinations in Europe. In effect, Pan Am ran a European travel service. That right was removed under Bermuda II, and the Americans now want it back in spades to cover Europe as a whole without conceding reciprocal rights in the USA. Until the Commission shows signs that it will stand up for European rights—it has not done so up until now—I do not believe that we should concede the authority that it seeks for specific reasons of its own relating to the extension of its authority and competence. I therefore support the position of Her Majesty's Government and British Airways on this question.

The time may well come when it is appropriate to confer on the Commission the authority that it now seeks. The situation may change fundamentally if, for example, a second generation of supersonic airliners with a long intercontinental range—a successor to Concorde—were developed. That could significantly change the way in which civil aviation operates globally. Further, the improvement in the competitive position in Europe may endow the Commission with a broader attitude, which I believe that it lacks at the moment, and the experience and skill that enhance the position of the consumer and the Commission's own public standing. Attitudes may also change in the United States. As a result of deregulation in the US air ticket prices have risen and the choice of alternative routes has declined.

I recall a conversation in Washington in the 1970s that I had with Professor Fred Kahn of Ithaca, New York State, who had been brought in to advise the Carter Administration about deregulation of the aviation industry. He was a fascinating man and was the architect of deregulation in the United States. He had a bright and active mind and was a brilliantly clever advocate of his thesis. I was puzzled about where all this would lead. I invited him to lunch and asked him the following question, "But, Fred, if your policy actually works, surely the President of the United States could not allow Pan Am to file for bankruptcy?". Professor Kahn paused and replied, "He sure ought to". Yet, unbelievably, that was more or less what happened a few years later. Even in the separate world of aviation things may change in an unexpected way and facilitate desirable overall objectives in ways that we cannot predict.

For this reason I end, rather surprisingly, with a quotation from St. Augustine of Hippo who wrote in his celebrated Confessions, when speaking of his desire for chastity and abstinence: Yes, Lord, but do not give it yet". My Lords, I rest my case.

4.5 p.m.

Lord Skelmersdale

My Lords, I shall not follow the noble Lord, Lord Bridges, entirely down the line to which he has diverted us in this debate. I begin by congratulating the chairman, my noble friend Lord Geddes, for getting a slot for this debate even at this late stage some three months after the publication of the report. In his speech my noble friend gave a masterly and concise introduction to this debate. Among the many points that he made, which have also been made by other noble Lords, was that the airline industry was different from any other. The airline industry is different in all kinds of ways: it is different because a firm in this country cannot take over another airline; it is different because of what I call a pseudo-cartel into which the thorny subject of competition inevitably comes; and it is different because of the regulatory regime that is applied. One cannot just buy or rent an aircraft, find two airports at different ends of the route one wants to fly and launch one's service. All kinds of hurdles have to be jumped.

The first hurdle is a bilateral agreement. The agreement may be extant or perhaps a new one is needed. In either event one must apply to one's own government for this purpose. That government may well own their own state airline or, in other cases, give preference to their former, now privatised, state airline. In another context, an example of this may be that Ministers and parliamentarians in this country are encouraged to fly by BA when on government or parliamentary business. Noble Lords may not regard that as a very competitive attitude.

However, having obtained permission from both governments under the bilateral agreement one then needs space at an airport at each end of the route. Alas, it may not be the airport that one wants to fly to because international airports are limited. Therefore, one may well have to find a local airline to transport the passengers to where they wish to go. In the jargon, one needs a code-sharing agreement. Lastly, one needs passengers. That is the only part of the operation over which one has complete control. At every previous stage one finds obstacles in one's way. The whole procedure up to the final stage is potentially anti-competitive.

Over the past five years the intra-EU industry has become substantially deregulated, bringing with it benefits to the consumer. An instance of this is the journey that I made with my family to Malaga over the new year. I was offered ticket prices from £69 to £400 depending on when I wanted to fly and with which airline. It is interesting to note that in some cases the earlier I booked the more expensive it would be. I can tell my noble friend Lady O'Cathain that I decided for myself which produced value for money. Incidentally, that was neither the lowest nor the highest priced tickets. It would not have been so easy had I wanted to fly to Bangkok or Bogota. I would not have had the range of options, although the Commission believes—probably rightly—that if a major trading block of nations became involved in the negotiations it would have more clout than national governments acting on their own to negotiate a better deal for passengers.

As the committee state in paragraph 3, it is certain that the policy should be to introduce normal competitive conditions and that this can be done effectively only at the highest practical level. I understand the criticism that has been made in this respect. Nonetheless, it is quite clear that we could have achieved a far better deal had we acted in blocks rather than as individual countries. It is for the Commission to ensure that third country deregulation is achieved fairly between member states, with strict application to such things as dominant positions of individual airlines, mergers and state aids. Code sharing—it is, after all, only a way of getting round the current ownership regulations and rules—should be negotiated away in the longer term. That cannot be done by national governments acting on their own. Nor, I believe, can we achieve a sensible, reciprocal agreement on slot allocations.

When all is said and done, if slots are freed up at the European end, and remain restricted in, say, America— my noble friend mentioned Chicago—or China (I accept that that is more unlikely), nothing much is achieved. However, slot allocation is an intra-European problem too and the Commission could and should do something about that first, and quickly. The most pernicious part is the so-called grandfather right. If one gains a slot on one route and decides that that route is uneconomic, one can keep that slot and use it to fly to another destination, provided one can find a slot at the other end. The result may well be that one freezes a competitor off the replacement route. That is anti-competitive in anyone's book.

I should like to see a scheme where such slots go into a pool and are reallocated. That could be for a monetary consideration. However, that method is far from ideal as the larger airlines potentially would be able to outbid the smaller ones. A fairer scheme would be for the relinquished slots to go into a hat, rather like the allocation of the monthly short debates in your Lordships' House. New routes would exist but not necessarily operated by the same airline. Airlines would hate that method. Indeed, it is more than possible that the BA/American Airlines deal foundered on the Commission's insistence that slots would have to be relinquished as a condition of allowing the deal to proceed. However, I must not be drawn into a conspiracy theory.

I turn from the particular to the general. What is without doubt is that a Commission ruling must occur if only because of an alarming admission by the Government in their original explanatory memorandum. Page 101 of the report refers to it. The explanatory memorandum stated that allowing the Commission greater enforcement powers would fetter the Government's power—I stress that—to conclude bilaterals which, often include requirements which limit competition, such as limiting the number of airlines operating and the airports served. Those may not be compatible with the competition rules in Article 85 and 86 of the treaty".; Like the noble Lord, Lord Bridges, I rest my case.

4.12 p.m.

Lord Thomas of Macclesfield

My Lords, I, too, as a member of the Select Committee on airlines, do not propose to repeat what has been said by my colleagues. I wish only to underline their comments.

The DTI issued recently an excellent White Paper on competition. As chairman of the Regional Development Agency of England's North-West, I am well aware how important the issue is as we look towards the 21st century.

Much of the evidence before the inquiry demonstrated a very protected industry—a system aided and abetted by previous governments since the Second World War and now part of the culture within Whitehall. As the report states, that culture is entirely historical in terms of defence of the realm, opening up trade routes and national prestige. A previous government were enlightened in their decision to privatise British Airways. Seemingly, no one told Whitehall, and British Airways continues to enjoy comfort and support as though it were still a public sector vehicle. Worse still, the effect on regional or provincial airports is serious for the following reasons. (I refer to paragraph 121 of the report.) First, a thriving regional airport is the most effective economic driver for the development of the region. Secondly, at present British Airways effectively controls slots at Heathrow and Gatwick. Is it appropriate that a private sector company should control the development of regional airports and determine the economic opportunities for English regions without reference to government? That is what it effectively does.

The noble Baroness, Lady O'Cathain, spoke eloquently. Clearly, slots were the key issue for British Airways. I am not surprised because that is how it controls its competitive position. However, the rabbit is out of the bag. When British Airways attempted to negotiate some arrangements with American Airlines, the European Commission required both airlines to give up slots if they wished to achieve those arrangements. They did not do so because they did not wish to give up the slot. The airlines would not only have to give up transatlantic slots; their preference would be to give up regional slots. I can understand British Airways arguing that point, but it was not in the national interest, nor in the interest of the development of our English regions.

Thirdly, the effect on regional or provincial airports is serious because British Airways can, and some believe that it does, effectively block the international flights to regional airports because they affect its competitive position.

Fourthly, business passengers are being forced to fly to Heathrow or Gatwick to catch their international flights, when they could easily fly from one of our leading regional airports. Do we not have enough congestion already in London? At least one third, if not 50 per cent., of our business travellers could fly from a regional airport if allowed to do so.

This is a wonderful opportunity for my right honourable friend in the DTI to practise what we preach: that is, real competition and the transformation of our regional economies; and to stop British Airways and Whitehall (one could not tell the difference in the evidence between the two groups) hiding behind negotiations with the United States of America or the proposed authority of the European Union.

4.16 p.m.

Lord Haslam

My Lords, I, too, wish to express my thanks to my noble friend Lord Geddes for the commendable way in which he steered us through this complex competitive situation which surrounds the airline industry.

With the exception of the newly emerging small airlines, primarily operating from developing airports, competition in the mainstream airline industry is still constrained, particularly in relation to first-class and business fares, which have continued to rise despite sharp falls in fuel costs.

It is argued that the airline industry is unique. It is claimed to be still very new and too complex internationally to behave like other industries. However, industries such as telecommunications and computers are newer and equally international but clearly in competitive terms they are now responding like other global industries. It is highly significant that the US, which has the toughest reputation of any country for anti-trust legislation, and in particular for its vigorous application, has been willing to link uniquely its so-called open skies agreements with anti-trust immunity for international airline activities, which appears to underline that it is acceptable for the industry to pursue anti-competitive actions with relative impunity.

Having been exposed in my career to European and national regulatory authorities in such industries as chemicals, synthetic fibres, plastics, sugar and steel, I have seen dawn raids and company and personal fines for price collusion and price fixing. Regrettably, there has been little or no evidence of such activity in relation to the airline industry.

Another related worrying feature is the perception that there are still unhealthy continuing sweetheart relationships between some European governments and their respective national airlines. The growing development, too, of major alliances between airlines linked to code sharing clearly reinforces anti-competitive activities, and unfortunately this trend seems to be accelerating and widening.

Another major inhibiting factor to genuine competition, already referred to by a number of my colleagues, to genuine competition surrounds slot allocations at major European airports. For example, prior to 1982, British Airways controlled slot allocations at key UK airports. We were told, however, that Chinese walls were established between the airline operators and the slot allocators. I bow to no one in my admiration for the splendid role my noble friend Lord King played in building British Airways. If I had been in his shoes, I know I would have found these Chinese walls extremely frustrating!

Nevertheless, British Airways acquired a dominating number of "grandfather slots" in those early days which have proved anomalous and anti-competitive. Slots are now controlled by the Airport Co-ordinator Limited, owned by a consortium of 11 airlines. Even this appears not entirely unbiased in that it is still very difficult for emerging airlines to gain access to major airports. However, this approach compares well with Germany and Spain, where I believe the national airlines even now still control slot allocations.

I fully support our committee's recommendation that airline regulation, predominantly at the member state level, should not continue—as I have already indicated, that has not been very effective—and that hence it should become the European Commission's responsibility. Nevertheless, it must be accepted that a team of experts will quickly need to be assembled if the Commission is to deal effectively with the wide range of existing and emerging problems without protracted delays.

Such a change could produce a desirable improvement, but it will certainly not be the ultimate solution if the airline industry is to behave globally like other industries, which must be the final objective. The greatest stumbling block is the current ownership and control restrictions, primarily in the US and European Union. These restrictions prevent non-US carriers from acquiring more than 25 per cent. of a US airline, and, conversely, in the EU non-EU carriers cannot acquire more than 49 per cent. of an EU airline. If these restrictions were to be removed, it would provide the opportunity for airlines on a global scale to merge rather than rely on the ever-growing proliferation of alliances, which are very poor alternatives and which should then be phased out.

Recognising the vested interests involved, these fundamental changes will undoubtedly involve protracted negotiations and will clearly not happen overnight. However, once this long-term objective is established, the airline industry will be able to begin the process of restructuring and reshaping itself to behave like other global industries and thereby meet the needs of its wide range of consumers by providing lower prices, higher quality of service and greater choice.

4.23 p.m.

Lord Montague of Oxford

My Lords, I joined Sub-Committee B at the beginning of this year, so I was not a member of this inquiry. However, by chance, when I was chairman of the National Consumer Council in the late 1980s it carried out a similar inquiry. It was therefore natural that I should re-read its report and compare it with that of the Select Committee.

It is an encouraging experience. Of course there are a lot of problems and challenges ahead, also some very serious threats, but so there were nearly 15 years ago. We overcame many of those and with open minds and determination I have no doubt that we shall do the same again. Indeed, within Europe we are moving towards internal liberalisation, just as is the United States within America.

One major disappointment, however, must be the lack of an open skies agreement between our country and the United States. Some European Union countries do have agreements with the US.

Having been the beneficiary of a great deal of deregulation, it is ironic that we have been negotiating with America for very many years. We need to be reminded that the major hurdle lies with America, where its domestic market is virtually closed to external competition. Restrictions, as we have heard, on foreign ownership of airlines and an important example of an old-fashioned concept. Competitive fares and good service are what matter to consumers, not which flag is on the outside of the aircraft. Indeed, one wonders whether the role of government in the airline industry should go beyond ensuring safety and competition. All kinds of industries are consolidating internationally and, frankly, it is a little naive that governments should remain determined to promote their national carriers in the air.

There are some things that we can do now internally to show that we are not merely paying lip service to the benefit of competition. For example, why cannot we declare open skies to UK regional airports? There is spare capacity at airports such as Manchester and it is quite improper that opportunities to grow new routes from the regions, and the considerable number of jobs which that creates, appear so far to have been sacrificed to the interests of our national carriers and the national airports.

As we have heard and know, one of the great problems is now slots. The growth in passenger movements is remorseless and it is an issue that we continue to shirk in the name of history and the past. I refer to "grandfather" rights. They were appropriate in the past, but just as every other aspect of air travel is market oriented, so should be slots. In my opinion, these should become a market, based on 10-year leases, with leaseholders having the right to trade them during that period. This should be carried out as a phased reform so as to provide reasonable protection to the airlines, which currently seem to believe that they possess the slots in perpetuity. The income from this market activity should come to the state, which has spent and continues to spend substantial sums of money on aviation matters.

There are also some further short-term steps which should be taken while we untangle history. For example, there are nearly 4, 000 all-cargo aircraft using Heathrow airport annually, and it would seem sensible that these should be required to be routed to alternative airports, as should the non-scheduled private flights, including those which are chartered. I commend that for consideration.

I also wonder whether slots should be destination-specific, subject to seasonal and demand considerations, as against airline-specific, which they are at present. The deregulation which we have enjoyed during the past two decades has already been extremely beneficial in assisting into being the European Consortia Airbus Industries, which has broken Boeing's de facto monopoly and caused the price of the production of aeroplanes to be competitive and to keep this cost low.

Not all of our current problems arise from the past. The recent passenger tax, which I do not believe to be wrong in principle, has been implemented without sufficient thought to the totality of its outcome. I would remind the House that it is £10 on flights within the European Union and £20 on flights outside the Union. Therefore, Zurich, for example, is outside the Union and a £20 figure applies. Yet the lowest single easyJet fare from Luton to Zurich is £19. It can hardly be logical to have a tax which is greater than 100 per cent. of cost. I recognise that that is an anomaly, but it demonstrates dramatically how much wiser it could be to have a tax calculated as a percentage and not as a flat rate.

Furthermore, the tax is of a once-applicable nature, although it is on a return flight basis, but only one-third of passengers going on the very cheapest flights decide on their return airline or flight. So it means that those who are in that category have to pay the return tax twice. The anomaly which the flat rate tax produces can be seen in the latest British Airways return cut-price flight to New York. The cost of that flight is £143 and the tax is £51, which is nearly 40 per cent. That is clearly an unreasonable amount.

Finally, I turn to the new young airlines winch are playing such an important part in bringing down prices and helping consumers. Their influence is such that established airlines are having to be price competitive, which is very healthy. But some airlines which have got up to tricks in the past may be trying to damage unfairly their new young rivals.

When an existing airline starts what it claims to be a new airline offering price-competitive seats, it is extremely important that that competition is fair and not subsidised. We need to have totally transparent accounting in such situations so that we can be assured that there is no cross-subsidy by virtue of some of the expense of the parent not being charged to the subsidiary.

As I stated earlier, great steps have been made in improving air travel for passengers. We must be determined to ensure that none of that momentum is lost.

4.31 p.m.

Lord Lyell

My Lords, looking at the list of distinguished speakers, there are only two who are not members of the committee or not what I would describe as real transport experts. One of them has just sat down, but we heard a notable speech from the noble Lord, Lord Montague, to which I shall refer later. However, as one of the amateurs dipping his toes into this unbelievably complicated subject of fares and slots I should say first how grateful I am to my noble friend Lord Geddes and, above all, to his committee for producing this fascinating report.

Secondly, I should declare an interest as one of that favoured group referred to by my noble friend Lord Geddes; namely, the consumer. My noble friend Lady O'Cathain would describe me as a customer and she is absolutely right in that. I shall speak as a customer.

My noble friend Lord Skelmersdale will attest to the fact that between 1984 and 1989 I made in the region of 1, 150 flights. That was just within the United Kingdom and was sometimes with the airline for which my noble friend Lady O'Cathain has spoken and sometimes with other airlines. Currently I am one of the more frequent flyers in your Lordships' House since once or twice a week I fly to my home airport of Edinburgh, usually travelling from Heathrow. Perhaps I may give just one example of how airline competition, which is the main thrust of our discussion this afternoon, has improved, certainly in the 28 years that I have been coming to your Lordships' House. Just before coming into the Chamber I examined the A-Z of air timetables. I found that on any week-day morning there are seven flights leaving Edinburgh Airport for London Heathrow, London Gatwick, London Stansted, Luton Airport and London City Airport. There are seven flights leaving between 6.30 and 8 a. m. in the morning and seven in the reverse direction. I have not been able to check the figures, but in 1971 there would have been two or three at the most in each direction. In addition to that, there are three trains leaving Edinburgh between 6 and 7 a. m. Each of those provides competition. It seems to me that, in the air, the customer is certainly king.

I declare an interest in that occasionally I fly the Atlantic, but that is normally only on parliamentary business. Once a year, with other Members of your Lordships' House and the other place, I fly to Zurich, which was mentioned by the noble Lord, Lord Montague. We do not necessarily fly to Mulhouse-Basle where one is flying to what I understand is technically Switzerland. However, one may obtain very valuable 50 per cent. discounts since that airport is considered to be within the European Union. But we fly to Zurich and I shall have more to say about that later.

I am particularly taken by paragraphs 103 and 116 of the report. I see that my noble friend Lady Seccombe is in her place. She also flies to Zurich with us. Paragraph 116 refers to competition providing a very good deal for the consumer. As my noble friend Lord Skelmersdale pointed out, occasionally the consumer may be wearing different hats at different times of the year. Occasionally one may be flying on a business flight and, occasionally, one flies with the family on a holiday flight. Indeed, those different aspects of the customer or consumer are catered for with increasing helpfulness by competition within the airlines.

My noble friend Lord Geddes spelt out the problem of slots, which are particularly crucial in the United Kingdom thanks to our geography; but they are affected also by environmental aspects as is shown in the ongoing inquiry in relation to the fifth terminal at Heathrow.

I was fascinated by the discussions on the ownership of those slots. Indeed, I refer your Lordships also to paragraph 391 on page 100 in the evidence of the Minister and paragraph 418 on page 110, which was evidence given by the managing director of ACL. There are wonderful, disparate arguments as to who owns slots and who would control them. I found enormous encouragement in paragraph 415 as to the precise breakdown of the slots. I shall read that carefully as I sit in the aeroplane at Heathrow or Edinburgh being told that there is a 45-minute delay. I appreciated that in particular.

I was extremely interested in the proposals made by the noble Lord, Lord Montague, in relation to trading in slots. I have often read of that in my daily reading of the Financial Times which, perhaps among others, has some views on that complicated subject. I ask your Lordships to glance at paragraph 3.3 of the memorandum and the evidence which was given by Sir Michael Bishop of British Midland Airways Ltd, pointing out the enormous difficulty and importance of the various airports, and in particular competition, and allowing airlines to fly in the slots and the timing of that. Reference was made to the three major airports in Europe—Charles de Gaulle, Frankfurt and London Heathrow. But of particular interest to me was paragraph 2.3 of the evidence given by that airline which referred to a flight which is extremely well-known to my noble friends Lady Seccombe, Lord Geddes and myself when we fly to and from Zurich. Your Lordships will see from the evidence that that is apparently the sixth busiest air route in Europe and yet, according to one piece of evidence which is to be found at paragraph 27 on page 10, that has been turned into what has been called a duopoly.

I am careful in declaring an interest because when my noble friends come skiing with us once a year we are made to take part in a little ski race and we put on sexy little bibs. What do we find on them? It is Swissair. Therefore, I must be careful and I hope that they may forgive me in the year 2000. However, I hope that your Lordships will glance at the bottom of page three, which has a table detailing the cheapest available flexible business flights on some of those routes. What happens when there is competition? There was competition on the London to Zurich route. Your Lordships will see that in the three years from 1995 to 1997 the business fare went from £202 to £308. Evidently there were three airlines flying from London to Zurich. Now there are only two.

Thanks to a young lady in our transport office, whom I call "Kind Katie", I was advised this morning that the cheapest return business fare from London to Zurich is £464. That is not lira, not drachma, not Swiss francs but pounds sterling. That may be an extreme example, but it is a fairly tough, hard-hitting example of what can happen if some arms of competition are removed.

I am particularly pleased to see that I am to be followed by my noble friend Lord Mountevans. He is quoted in evidence as saying on 20th May last year that air travel prices have fallen so steeply that what once was the privilege of the few has become the facility of the many. I enjoyed his eloquent words then, as I do when I fly around the United Kingdom, wearing different hats, sometimes of necessity at peak times—travelling between your Lordships' House and home—and sometimes on a recreational or holiday flight.

I conclude by thanking my noble friend for the superb way in which he has set out the conclusions of his committee. I am not 100 per cent. sure that such views are a long-term solution, or that the Commission should have the final decision, but in the jungle of fares and slots I know that my noble friend and his colleagues will be my guide on any problems that I may have in the air or on the ground. I am most grateful to them for that.

4.41 p.m.

Lord Gladwyn

My Lords, long ago, in the mid-1960s, I was involved in international affairs on behalf of BOAC, dealing with bilateral treaties. So I suppose that my speech in today's debate could be described as the grandfather slot. It is true that, as a hereditary Peer, my slot tenure is precarious. But I suppose that Virgin Atlantic may consider British Airways itself to be a hereditary airline. After all, it is the heir of corporate generations with imperial origins.

The Select Committee, chaired by the noble Lord, Lord Geddes, has produced a most remarkable report which is extremely instructive. It focuses on two proposals concerning the role of the European Union Commission, which are supported by the committee. They would grant the Commission greater authority in regulating extra-EU air services. Those are generally seen as a further stage towards an ultimate goal, the replacement of national bilateral treaties with treaties negotiated by the Commission itself. The recent legal actions initiated by the Commission show an earnest of its intent to proceed in this direction. Several member states seem to be wavering from their previous opposition to such a development, especially if the terms of their existing US bilaterals can be preserved.

It must be the case that the EU would have greater clout if dealing directly with the US. Even then, with the US being the hive of global aviation, with an internal market many times larger than that of the EU and producing the greater part of the transatlantic traffic, it would never be a contest of equals. However, on several matters the Commission might expect success, one being the fly-America policy for all US government carriage and another the method of agency commissions.

Yet another matter is the issue of wet-leasing. That particularly affects the air cargo market. Air cargo is, in many ways, the Cinderella of air transport. Its interests often come at the bottom of the bilateral negotiating stance. The British air cargo industry is by far the largest in Europe, accounting for 70 per cent. of the business. Because the wet-leased operations almost always touch US points, the present rules prevent airlines of the British Cargo Alliance from competing in the global market with giant US cargo operators such as Atlas. In the world of air cargo, the trade is already going the way of shipping, with globalised freedom to trade.

Naturally, a European Union bilateral would enable all EU airlines to participate, which would be a great step forward. However, it is hard to believe that the US would ever drop domestic ownership restrictions in totality, although I suppose it might lower them to the minimal majority ownership which at present pertains in the EU. The committee points the finger at both the US and the EU for having them at all, but, so far as I know, no other developed country in the world outside these two areas has opened its domestic routes to foreign owners.

The committee's report emphasises that the prime criterion in the regulation of airline competition must be the needs of the consumer rather than the protection of the airlines. We would all agree with that. However, in the context of this debate, the customers whose needs we should be considering are those who want to make use specifically of UK points, in others words, our own actual and potential customers.

Of the total transatlantic passenger traffic, the UK share still stands at the surprisingly high level of 40 per cent. There is a danger that EU-negotiated treaties could have the effect of diminishing that share, as even Virgin Atlantic concedes. Traffic at present transitting UK points would tend to deviate to direct flights to continental points. Elsewhere in the world, if the EU were eventually to negotiate treaties with countries that do not accept open skies, the allocation of rights to specified EU points could further act against the total UK global share.

Dealing with the barriers to competition, the first identified by the committee is the system of airline alliances which have become such a dominant factor on the transatlantic routes. These enable US carriers to enjoy immunity from US anti-trust laws and so partake in collaboration on tariffs, timings, capacity allocations as well as code-sharing and so on. That would never have been permitted in my day, although it was commonplace on long-haul routes to destinations other than the US. On third and fourth freedom sectors those alliances tend to restrict direct competition. On the other hand, they tend to enhance competition on fifth and sixth freedom sectors by offering alternative routings.

Here again, surely we have to distinguish between our own customers and those of Europe as a whole. Faced with the realities of those alliances, and especially the Star Alliance built around Lufthansa in Europe, how can we reasonably expect to maintain our share unless British Airways can form its Oneworld Alliance with American Airlines as part of a renegotiated UK/US bilateral?

The second barrier is the method of slot allocation at saturated airports, particularly at Heathrow and Gatwick, but increasingly elsewhere. I understand the logic that has brought the committee to recommend a slot system which would be regulated by government, rather than self-regulated by airlines. All the same, there is a certain contradiction in a system which envisages de jure free competition in the air, but at the same time imposes strict de facto control of it on the ground.

I appreciate the great apprehension of the major airlines, particularly British Airways, that they will be fatally penalised by such a system in favour of new entrants when, at the same time, they are battling with so many existing competitors, large and small. Much would depend on how closely the new authority made the decisions. To link slots to routes would be draconian. I note that in the US, although the FAO governs slots, in practice it is left very much to the airlines to trade in them. Surely that would be the best way to proceed. As to the ownership of the slots, I feel that even the noble Baroness, Lady O'Cathain, would agree that the airlines who possess them can be described as tenants rather than owners. Perhaps the noble Baroness will remain in the Chamber until our debate on regulated tenancies, in which I shall speak.

The needs of the consumer must be paramount in airline competition. That is the message of the report. If that implies the provision of ever more convenient services at ever more attractive tariffs, there must be a qualification. The air transport industry will have to accept increasing concerns about environmental issues. These may well predicate future inhibition in airport construction and reduction in atmospheric pollution, and thus tend to restrict the capacity within which airlines are able to compete.

Generally, I cannot see that political considerations could ever be totally eliminated from air transport, even from bilaterals negotiated directly by the Commission. When it comes to the crunch, the Commission would be subject to heavy pressure among its members. Even if it was trying to protect the best interests of the EU as a whole, the interests of the airline consumer might sometimes have to take second place to some other interests, not necessarily those of aviation.

From all this I conclude that EU bilaterals are a desirable aim for the future, but that until and unless they are agreed by the Council of Ministers, it is better not to grant the Commission the greater regulatory powers it is seeking because of the duality that would impose on an extraordinarily complex issue, as is already apparent from the powers that it has already acquired.

4.50 p.m.

Lord Mountevans

My Lords, as I listened to the debate, I wondered what a noble Lord of 30 years ago would have thought if he had participated in a debate on aviation, as it then was, with IATA to no small extent controlling the frequencies, the fares, the sharing of revenue between two airlines which are flying in a common pool, and even controlling air mail. If one could look back that far and then consider what has been said today, one would realise how very far we have come and what great progress we have made in the past 25 or 30 years.

I, too, congratulate my noble friend Lord Geddes, his colleagues, advisers and officials on a most interesting report. The evidence and conclusions give much food for thought, but, in this context, I am not yet persuaded to eat from the proffered European menu.

I share the belief that we have one of the world's most successful airline industries. Several previous speakers have given us the figures which confirm that. It is an industry which we owe to the policies of the previous government and to those, our entrepreneurs, who seized their opportunity.

Sir Michael Bishop has quoted me, just as my noble friend Lord Lyell has just quoted me. When I made those remarks last May I had several points in mind. I had in mind the fact that in spite of inflation, politics, taxes and many other extraneous interferences, air travel has become genuinely more accessible. Indeed, for many of us, air travel is good value. As my noble friend Lady O'Cathain said, it is important that we judge not the cost but whether we are getting value for money.

Thinking further, I can see some of the reasons for that. We have had liberalisation and thus we have had lower fares and seat-only charters. Low-cost airlines are now emerging. We have vastly increased efficiency and greatly increased yield maximisation, with the airlines responding to the commercial reality that a seat that earns perhaps £150 is a far better proposition to them than a seat that earns nothing because an empty airline seat is one of the most wasteful commodities. We have also had technological change, with bigger and more efficient aircraft. Most important of all—I have already mentioned this—we have had the entrepreneurial skill which has capitalised on all those developments.

However, although our aviation industry is faced also with restraints, I feel that Britain's aviation industry has mastered many of them in what is almost a world-leading way. We may have lost the old empire, but we have done a lot to develop an empire in the air.

I find it interesting—I am sure that other noble Lords will find it similarly interesting—that KLM has seen fit to buy British in the form of what is now KLM-UK. More interesting still, I find it enchanting that a Greek shipping magnet, Mr. Iannanis, can choose to set up a low-cost airline here and can, as he announced last week, begin to extend his low-cost operations so that they are no longer Britain-centric. He is now setting up a base in Geneva and flying to other parts of Europe.

Looking at this from the consumer's point of view, I must admit that I was concerned 20 years ago that privatisation and liberalisation would restrict freedom of choice. At that time, there was considerable American and Australian evidence that choice would die. Of course, one would have a choice, but only in the rush hour when serious money was to be made. How wrong I was. Then, there were two airlines linking London and Stockholm perhaps four times a day and pooling much of the revenue; now, there are five or six airlines, with more than a dozen flights, and numberless fares tailored to suit both the operator's need to make a profit and the consumer's pursuit of value for money.

I have to ask myself if European—by which I mean Brussels—involvement would build on that success. I am not persuaded. Does a Eurocrat live in the profit-led commercial world? I doubt it. Our UK experience shows that civil servants can add value if, as gamekeepers, they turn poachers. The evidence given by Mr. David Holmes to the committee proves that, as does in another context John Welsly's contribution to the history of the railways in recent years. But I see no such personalities emerging from Brussels; rather I see penny packet interference in the railways and an attempt to gain irrelevant influence in aviation.

For Brussels to put itself forward as a serious influence in the latter industry beggars belief when one looks at the state aid which has been mentioned by many previous speakers. To date, Brussels has permitted specific aid to national carriers of perhaps £6 billion-plus. If I broadened the definitions—and why should I not, as Brussels keeps moving the goal posts, as we remember in the context of Air France last year?—I could generate a figure of perhaps £8 billion, which is a year's turnover for British Airways. What kind of a level playing field is that?

Looking further, I see Brussels becoming involved in the British Airways/American Airlines association and in other global alliances whereby airlines seek to enhance their strengths, their service to consumers, and thus their viability. I also see Brussels seeking to interfere in slot allocation.

None of those interferences gives me any cause for optimism; rather, I would like to see Brussels concentrating on its existing remit by levelling the European playing field. To quote Bob Ayling of British Airways: Freedom of the skies means nothing unless the frontiers of the state pull back from this [aviation] industry". He was speaking of Europe, but he could have been referring to Brussels, the soi-disant umbrella organisation of European nations, or some of them. When Brussels has sorted out the internal market and levelled the playing field, it could start looking beyond. However, in looking beyond Europe, it must demonstrate its ability to add value not only for airlines and for nations but in particular for customers or consumers.

Banana wars are topical. On present evidence, I feel that European interference in aviation matters beyond the existing jurisdiction could be the biggest banana of all.

4.57 p.m.

Lord Berkeley

My Lords, as a member of Sub-Committee B of the Select Committee of the European Communities, which participated in the inquiry, I welcome the evidence and congratulate the noble Lord, Lord Geddes, not only on chairing the committee with a light hand but on the committee managing to reach a unanimous decision. As has been said, the evidence is absolutely fascinating. The whole report concentrates on medium-term issues. Nothing can be done this year, but I submit that many of recommendations need tackling now.

I should like to refer briefly to competition and the benefits for the customer because I believe that attention to the customer's needs has often been sadly lacking. Both throughout the evidence given to the committee and in this debate, competition is seen as a good thing because it reduces uncompetitive practices and is seen to lower fares and provide a better service. Many noble Lords have given examples. In theory, we already have open access and competition in Europe. Indeed, there have been some wonderful stories, including that from British Midland, about lower fares, but the last time that I tried to go to Vienna, the cheapest ticket that I could find cost £550 return; and if I wanted to change the return flight I would have to upgrade to club class. The noble Lord, Lord Mountevans, quite rightly said that air travel used to be the privilege of a few. However, if one is paying £550 and one is not able to change the return flight, I suggest that that does not make it very accessible to most of the people who would want to buy such a ticket.

I am pleased that the Government agree with the general view that competition is a good thing and that airlines should be treated "as any other industry"—that appears in paragraph 8 of their response—using UK and European competition law together. One of the criteria or constraints that the committee spent much time discussing, and which many speakers have mentioned this afternoon, is slots. The noble Lord, Lord Haslam, said that ACL was owned by British Airways until 1982. In fact, if the noble Lord looks at the evidence he will see that the year was in fact 1992. So, up to seven years ago British Airways controlled the slot allocating organisation at our major airports. The company is now owned by 11 airlines.

I was interested in the criteria that ACL used in allocating slots. On page 105 of the committee's report, many different primary criteria are listed. I shall not mention all of them, but the first one is, "Historical precedence". We then get: Schedule change, New Entrants, Introduction of Year-Round services, Effective period of Operation [and] Joint Operations". We then move on to the secondary criteria. The: first is, "Size and Type of Market Served", the second "Competitive requirements", and the third, World-wide scheduling constraints e.g., curfews", The penultimate refers to, Needs of the travelling public". I do not think that I need say more. As many speakers have said, that is what needs changing; indeed, it needs changing fast.

The noble Lord, Lord Gladwyn, talked about the problem of predicting and providing. I am not persuaded that the UK's economic position would be adversely affected if we did not go ahead with continuing to predict and provide for time immemorial. As the Government say in their response, the constraints in capacity in the south east will stop us predicting and providing pretty soon.

I think that there is an argument for making airlines pay tax on their fuel because, after all, motorists do. Indeed, it all contributes to emissions in the same way. I believe that the revision of the European directive 95/93 on slot allocation on a European basis is urgently required. I suggest that that should include the removal of "grandfather rights" when you want to move routes. I believe that to be very important.

I turn now to the ownership restrictions which, again, have been mentioned by a number of speakers in the debate. The report recommends that all ownership restrictions should be removed as quickly as possible. I accept that the UK Government have made some progress in the matter. However, as has already been said, the 49 per cent. restriction in the EU and the 25 per cent. restriction in the US is a severe barrier. Very helpfully for those of us who are amateurs in transport, this report defines the eight freedoms of the air in paragraph 44 on page 12. Members of the committee started off thinking that there were only five, but then, when we received more evidence, we discovered that there were in fact eight. Surely the objective must be that all countries allow all eight freedoms of the air to be applied to flying to or from their countries.

The Commission has to sort out the continuing subsidies of certain EU airlines. I agree that the "bailing out" which has been going on has to stop. However, as the noble Lord, Lord Gladwyn, said, US protectionism goes rather further. He mentioned the "fly-America policy". I did not know whether that would be helpful. I understand that this requires all US personnel, post, mail, "government carriage", freight, and so on, to fly in US airlines to and from the United States. If Britain or the EU had the same legislation, nothing would fly between here and the US without changing planes in Iceland, Greenland or somewhere else. It is a farcical situation. I believe that we should negotiate across the Atlantic, as in so many other matters, from a position of strength. The EU has the greater capability of doing this in the long term, if it is given the tools to do it. As has been mentioned, the British Cargo Airline Alliance estimates that British airlines are probably losing £200 million worth of business a year because of the present situation.

I believe that the concept of British and "other" airlines is becoming very much out of date in this international situation. As the noble Lord, Lord Mountevans, said, there is no reason why any airline which lands here and brings in benefit to the country should not base its maintenance, its administration and, indeed, anything else here if it makes money. That is the key to the matter.

I conclude that the European Commission is better able in the long run to negotiate agreements with third party countries. I believe that it should be permitted to do so. It is more of an equal size compared with the US, which is one of the major markets but not the only one. There is always a risk of other countries playing individual member states off against one another. The Government say that they are in favour of a more liberal regime, so I hope that they will move forward to encourage other member states to agree with them. I also hope that the recommendation that the Commission should negotiate as one body in a robust way with third countries, especially with the US, will be supported. The target should be full and open access with no ownership restrictions, and that should apply equally on both sides of the Atlantic.

5.6 p.m.

Lord Methuen

My Lords, I, too, should like to thank the noble Lord, Lord Geddes, for introducing this debate on the Airline Competition report. It is always a pleasure to take part in these inquiries by Sub-Committee B, which the noble Lord so ably chairs. From these Benches we are in general agreement with the thrust of the report. We think it sensible that the responsibility for anti-competition regulation should be transferred to the Commission. It is a matter of international trade as well as competition and, therefore, falls naturally within the remit of the Commission. We also believe that the Commission will have more clout in negotiating international deals, as mentioned by the noble Lord, Lord Skelmersdale.

Many of the present conditions in the airlines come about due to the historic tradition of a national flag-carrying airline, supported by government subsidies. Though this may have been a good thing historically on grounds of security, finance and air safety, it is not now true. Other speakers commented on the fact that certain state airlines are still subsidised and mentioned the committee's inability to gain evidence from one of those in particular.

I find it amazing—as indeed we say in the report—that in these days of global international companies there are, almost uniquely, such severe restrictions on the foreign ownership of airlines: 25 per cent. in the US and 49.9 per cent. for non-EU holdings in EU airlines. The result has been the alliances which have proliferated between international airlines. Whether those alliances are always of benefit to the customer is a very moot point. I wonder to what extent they will actually last because there has certainly been an indication of a relatively short life for some of them.

Our report highlights our concerns about putting the customer first. But there are numerous aspects to that, depending on who the customer is. The needs of a business traveller, a tourist or holidaymaker or, indeed, a backpacker are quite different. The business traveller is probably the least price sensitive, but is driven by the constraints of time and comfort. He may well be influenced by frequent flyer programmes if he has any influence over the booking of his flight, though that would probably be done for him by his company. The backpacker is concerned with getting the cheapest possible flight and will put up with awkward schedules and dates to gain that advantage.

Another impediment which has not been mentioned so far in the debate is the design of computerised reservations systems. There are some 10 major systems shared by the various airlines. Those systems offer the ticketing agent a series of computer screens showing the various airlines and their flight offerings. Research shows that about 80 per cent. of flights are chosen from the first screen displayed, to the detriment of those airlines appearing on later screens. The agent may well have a financial incentive in selling flights on those earlier screens. Hence it is essential for any new airline entering the market to be able to counter that problem, perhaps with the system having some degree of randomness designed into it as regards what appears on the first screen. Eighteen months ago the Commission proposed a code of conduct for these systems to tackle those problems.

A further factor mentioned by the noble Lord, Lord Bridges, which affects ticket sales, is the load factor of the aircraft. As I understand it, after a certain proportion of the seats have been sold and the flight date approaches, the remaining seats may be sold at marginal cost as all the fixed overheads of the flight will have been met.

I wish to comment on the vexed question of airport slots. As our inquiry progressed we became more and more embroiled in this subject. The question of who owned the slots was uppermost in our minds. I wish to quote from a recent Consumers Association report on airline competition which has already been mentioned. The USA rule allowing slot trading states, Slots do not represent a property right but an operating privilege subject to absolute FAA control. Slots may be withdrawn at any time to fulfil the Department's operational needs". A Conservative transport Minister in the previous government said, No airline has a legal right to a … slot. Rather airlines have permission to use a slot and this must be subject to the public interest". It is interesting to compare this situation with the use of slots on the railways. Perhaps we should also consider the goodwill involved in this matter, although we accept that this is a far less tangible factor. This would seem to me to indicate a dubious case for the holding of grandfather rights for slots. As has already been said, the airport co-ordination committees which allocate these slots are made up of the incumbent airlines. One cannot help but think that they will tend to distribute largely in their own interest, and hence those co-ordination committees should be seen to be truly independent. As regards bidding for slots, as has already been said, I am concerned that if an auction is held, the wealthiest airlines will outbid the new starters. There does not seem to be any magic formula to solve the slot allocation problem. I shall await the outcome of the Commission's revised slot allocation procedure with interest.

Finally, I wish to discuss regional air services. The operational value of a slot to the incumbent airline is dependent on the route. We must resist attempts to separate regional and international services to different airports. Both Heathrow and Gatwick should operate as hubs for the convenience of the customer. As the noble Lord, Lord Thomas of Macclesfield, said, we should have more regional hubs with both international and regional traffic. That would alleviate some of the environmental considerations mentioned by the noble Lord, Lord Gladwyn.

The noble Lord, Lord Berkeley, mentioned tax on fuel. I cannot help feeling that that would merely result in airlines buying fuel at the place in Europe with the lowest tax load, obviously having regard to safety considerations. However, we generally support this report and I have found this a most interesting debate.

5.13 p.m.

Lord Brabazon of Tara

My Lords, I begin, as usual, by declaring an interest as a director of a small airline in the Channel Islands, which so far as I am aware is completely unaffected by any of the recommendations in the report or any of the proposals put forward by the Commission. However, I shall wait to see whether that is the case.

This debate brings back happy memories for me of being a member of Sub-Committee B, latterly under the able chairmanship of my noble friend Lord Geddes. I join other noble Lords in congratulating him on his introduction to the debate this afternoon. The debate also brings back happy memories of my time as Minister for aviation for four-and-a-half years between 1987 and 1992. I am glad to see that some of the issues that were around then are still around now!

I believe it is important to look closely at the situation we are now in, and how we got there, before we consider any changes to it. As has been made clear in the report and indeed in the debate this afternoon, civil aviation is something we in this country are particularly good at. It is one of the jewels in the crown. British Airways in its evidence points out that the UK has 1 per cent. of the world's population, 4 per cent. of the world's GDP and 8 per cent. of world output of air transport services. We have 40 per cent. of the total US/Europe air transport market. I understand that as UK airlines have over half of that, that means our airlines have nearly a quarter of the world's busiest intercontinental market. Heathrow is the world's busiest international airport, Gatwick is high up the list, as is Manchester, and Stansted is growing fast, as are many of the other regional airports. Employment in aviation and related sectors is enormous and growing.

Aviation is one of this country's great success stories and we should therefore be very, very careful before we agree to any proposals that may affect our position. One has only to look at the current threats to the position of the City with talk of withholding taxes, and to the art market by other proposals emanating from Brussels to know that we have to be on our guard.

So, how did we get to this pre-eminent position? We did so because the government throughout the 1980s and 1990s pursued a policy of encouraging competition that has been of great benefit to the consumer and to the industry itself. First, we allowed competition on domestic routes. We then privatised British Airways. We were impatient at the proposals for liberalisation coming from Brussels, so we began negotiating liberal bilateral agreements with other like-minded European governments such as Holland until the rest of Europe caught up. It is interesting, but not at all surprising, that those countries that pursued liberal policies now have the most successful airlines, while those countries that were eventually dragged kicking and screaming to liberalisation have the least successful, in some cases near bankrupt, airlines. The biggest threat to competition recently has been state subsidies to just those airlines. One hopes that this is now over, but I cannot help mentioning that it was the commissioner who would now like to expand his empire with these proposals who was responsible in a previous role for allowing these subsidies to go on for much longer than they should have done. The report is incidentally strangely silent on the issue of state subsidy.

The effects of competition on fares can be clearly seen in the figures provided by British Midland in its evidence. It clearly shows that when there are three or more airlines on a route, fares fall. Take Frankfurt to Heathrow for example: between 1986 and 1992 fares rose by 61 per cent. When British Midland came on the route as the third airline in 1992, they fell by 12 per cent. between then and 1997. Where there has not been a third airline on a route, fares have gone on going up, by as much as 46 per cent. in the example of Munich given by British Midland. However, I believe that just looking at fares can be misleading. As airports such as Heathrow get busier and busier, there is likely to be an increasing premium charged for the convenience of travelling from the most popular airports, particularly at peak times. What is important for the passenger is that there is a choice of price at all levels. Zurich seems to be a classic case mentioned this afternoon by a number of noble Lords. I, too, shall mention it. My wife came back from Zurich only last Friday on a scheduled Easyjet flight to Luton for just 46 Swiss francs, or just over £20, which I think is a remarkable fare. Easyjet is now of course patronised by distinguished members of the present Government and they must be pleased with it, although I gather, like my wife, they only fly one way on the airline.

I congratulate the low cost carriers such as Easyjet, Debonair, Ryanair and British Airways' Go on what they are doing for the passenger. I thought Mr. van Miert was somewhat dismissive in his evidence of the low cost carriers. He may be right about the rest of Europe but in this country they are thriving. It is vital that the competition authorities keep a watchful and benevolent eye on their activities, or rather on the activities of their larger rivals.

So we have arrived at a fairly good situation in this country. In my view the role of government in this is to facilitate competition when they can, for example by negotiating liberal bilaterals, and otherwise generally regulating with a fairly light touch. Government should certainly not get involved with those activities that are properly the role of commercial airlines or airports and on the whole should let market forces play their full part.

Turning to some of the recommendations in the report, I note that there are no fewer than nine dealing with the old chestnut of slots. It has been a subject which has occupied nearly every speaker in the debate. It is worth remembering that slots only have a value when there are not enough of them to go around. This is obvious, but sometimes it seems to be forgotten in some of the wilder comments about the alleged iniquities of the present system. They are also only part of the equation when it comes to operating a route. There is the enormous cost of buying or leasing an aircraft, ground handling, ticketing sales, marketing and so on. An incumbent with all these things already in place is bound to have an advantage over a newcomer in all these areas long before slots become an issue. That is true of any business.

Since time immemorial, the way to deal with an excessive demand over supply, and where supply cannot easily be increased, has been to have an open market. I believe that the time has now come for that with slots. It is time to get away from the pretence that slots do not get bought and sold and to legitimise this trade. The report is somewhat scathing of grandfather rights and seems to believe that slots should and could change hands more easily. I believe, to some extent, that that ignores the enormous investment that airlines have put into their routes. It is also true that even though slots are hard to come by at Heathrow, there are airlines that were newcomers a few years ago which have, with patience and determination, managed to build up the necessary portfolio of slots to operate the routes that they wish. Obviously they would have wished to do this quicker. A legitimate trade in slots would facilitate this, but even under the present system it is possible.

If there were a market in slots, the issue of ownership would arise. As the report points out—and noble Lords have referred to this—no one seems to know who, if anyone, owns them at the moment. The reason for this is quite straightforward: it is because when the majority of slots came into use they had no value because supply was sufficient, and so the issue of ownership did not arise. In my view, on the old premise that possession is nine-tenths of the law, the user should own the slot. It is, after all, the airlines that have built up the business at the airport to the point where the slots have acquired any value. If new slots were created, by either the airport operator or air traffic control, they could be sold on the market, with the proceeds going to whoever created the extra capacity. Another advantage of a market in slots might be that an existing operator who really did not have to operate at the peak could transfer to a less valuable time of the day, or even transfer his service to another, less busy, airport.

If one believes, as I do, that the operation of market forces has been one of the main factors in the success of British aviation, then one would have to disagree with two of the recommendations in the report. The first is the proposal to allocate slots specifically to regional air services. During my time as Minister, I think it was British Midland which transferred its Liverpool- Heathrow service to a European destination. If I remember right, this was not done just to release the slot; it was done because the Liverpool route was losing money and the aircraft could be better employed on the European route. The decision naturally caused some concern locally, but I do not believe that there are many who would now argue that the decision was not the best one for UK plc overall.

It is also everyone's wish to expand direct overseas routes from regional airports, and Manchester has in particular been most successful at this. It is, after all, only a few miles from Liverpool. It is also common policy to encourage better surface transport, particularly rail, not least for environmental reasons. It is much better for UK plc to allow market forces to transfer a 50-seat commuter aircraft from the regions to a jumbo with 400 passengers from Tokyo, while improving rail links in this country, with, for example, a westbound rail connection at Heathrow. But that is perhaps a subject for tomorrow's debate rather than today's.

Another recommendation I cannot agree with is the linking of slots with routes and requiring an airline wishing to transfer a slot to a different route to put it in a pool to be reallocated. That would almost certainly result in a complete freeze on all movement. What airline is going to risk a transfer if it might lose the slot to a competitor and end up with a 100 million US dollar aircraft idle on the ground? Surely it is precisely because airlines have been able to make their own commercial decisions in these matters that we have the success that we now have. The report is also silent about who, in both these matters, should actually decide these things. Are we going to have a whole new bureaucracy developing—no doubt subject to political interference—which will decide which regions should be served and which should not, and whether airline A is better than airline B to serve a certain destination? That would be a return to the type of licensing which we spent so many painful years negotiating to end in Europe. Much better to leave these things to those who really understand them—that is the airlines—which have to live with their commercial decisions day in, day out.

I am also somewhat concerned by what appears to be a proposal in paragraph 129 to nationalise the ownership of slots. I am sure that given half a chance the Government would like to get their hands on some more money from the travelling public—and I have no doubt that while I have been listening to the debate they have already done so in another place this afternoon. But I am glad that the Minister at least was very clear that the Government do not own slots.

Turning now to the negotiation of bilaterals with third countries, I note that the report concludes that, although the proposals do not provide the Commission with the mandate, most witnesses accepted that the proposals would have the effect of increasing, at least de facto, the Commission's competence to act on such issues. This is another subject that gives me some concern: because of our very strong position in aviation in Europe we have potentially the most to lose. As witnesses have said, if the Commission is unable to negotiate a truly liberal and unrestricted deal with a third country—and that will, I feel, generally be the case—then there will be winners and losers in Europe. For example, it would not be much use to British aviation if an American airline was given an extra route to this country in exchange for, say, a Greek airline getting an extra route to the States from Athens.

The Air Transport Users Council in its evidence said, at paragraph 17 on page 30: The UK is an extremely powerful player in the world aviation scene and, with most third countries, is likely to be able to negotiate an Air Service Agreement that is beneficial to UK industry, the economy and consumers. While the Community is likely to be in an even stronger negotiating position, any benefits that it wins will be spread more evenly among Community Member States and there is no guarantee that the net outcome for UK consumers would be better". Curiously it goes on to say in the next paragraphs that despite this it still favours the Community being involved in aviation relations with third countries. I believe that the Community making agreements with Switzerland and central and eastern European countries should be as far as we go at the moment. I also dispute the assertion made by some witnesses that the Commission is likely to be in a stronger negotiating position with, for example, the United States than this country is on its own. Where is the evidence for this? It certainly does not seem to be happening with bananas at the moment.

The committee rightly stresses the importance of ownership and control as the real issue affecting airline competition world-wide, particularly in the European Community and the United States, and that removing ownership and control restrictions is a vital step towards a truly competitive global airline industry. I agree with that, but I would go further. I have already referred to the sorry saga of state subsidy, but while we still have state owned airlines operating in Europe there is always the danger of state subsidy. Those airlines also have an advantage over their private sector competitors in that the state is standing behind their borrowings, etc. Ideally I would like to see all European airlines in the private sector so that they compete on equal terms and all have to stand on their own two feet.

I appreciate that this ambition may take some: time to achieve, as will, I fear, the wish of the committee that we negotiate with the US on relaxing and eventually removing ownership and control restrictions on US airlines. If my memory serves me right, this is not an issue we can negotiate anyway with the United States Government as it is a matter for Congress, which shows no inclination to change the law. Meanwhile in Europe we have to accept that some airlines—some so-called national flag carriers—may not survive the new competitive market, and that will be painful for some. Incidentally, while we do want to see ownership and control restrictions lifted, we do not want to see the emergence of flags of convenience, given their history in the maritime world.

In conclusion, I thank the committee for its report. I am conscious that in the time available to me I have not covered all the issues. I shall leave code sharing for another day. I also note that the Commission's proposals have met with little support from member stales and were not taken up when we held the presidency in the first half of last year. I wonder whether the Minister can let us know the present position so far as these proposals are concerned.

I also note that Sir Michael Bishop, in his evidence, spoke of the learning curve and said that the point in the process by which the Commission should take over all responsibility is a long way away. It could be, he said, five, 10, 15 or even 20 years away, and that the proposals the Commission would like to see enacted are very premature for the airline industry.

Any student of airline competition in this country, or indeed in Europe as a whole, will recognise that Sir Michael and British Midland have done more for competition than almost anyone else, so his words deserve particular attention; and I would certainly not disagree with them.

5.30 p.m.

Lord Whitty

My Lords, I thank the Select Committee, and the noble Lord, Lord Geddes, in particular, for a cogent report. This is not the most accessible area of policy within my department and I have gone through a fairly rapid learning curve myself in preparation for the debate. I congratulate the committee on illuminating some of these areas in relation to both aviation policy and competition policy. I have the dual task of putting on the record the Government's response to the Select Committee report and of touching on as many of your Lordships' comments as I can in the process.

Perhaps I may start by focusing on the specific Commission proposals which originally prompted the Select Committee report. Clearly, the Select Committee has understandably and helpfully gone much wider than that. The committee's inquiry was prompted by the European Commission's proposals to amend regulations which apply the Community's competition rules to aviation. In brief, the Commission's proposals would extend the scope of the two regulations to cover services outside the EU. At present they apply only to intra-EU services. In the interests of simplification, I shall use the term "EU" although in some cases it would be more strictly accurate to refer to the EEA.

As far as concerns the political status of the original proposals and in response to the question asked by the noble Lord, Lord Brabazon, I should say that there has been no progress on these proposals in that they were not supported by member states. They were not considered during the Luxembourg, UK or Austrian presidencies and, at present at least, we have no indication that the German presidency is likely to table them for discussion. Nevertheless, they raise some important issues.

As to the present situation, the noble Lord, Lord Geddes, referred to a "something" muddle and others have been even less polite. However, there is a certain clarity about the present position. The Commission already has sole competence for applying the EC competition rules to airline services within the Community. As the example given by my noble friend Lord Berkeley of the flight to Vienna indicates, there is still some way to go in that area. Outside the Community, competence is shared between the Commission and the member states under the transitional arrangements in Articles 88 and 89 of the EC treaty. On cases affecting extra-EU routes, member states have the sole power to grant exemptions under Article 85.3. But even there the Commission has a power of investigation and it may authorise member states to take measures to end any infringements it finds. An example of this shared competence is the continuing investigation into the proposed British Airways- American Airlines alliance which is being conducted both in London and in Brussels.

The full effect of the Commission's proposals would be to confer full powers of investigation and enforcement on the Commission, including the sole power to grant exemptions. As a result, the Commission would investigate and rule on all significant aviation competition cases regardless of what market was concerned. The member state most closely involved would therefore lose its locus except for participation in an advisory committee in which all the other member states would also participate.

The Government believe that competence for the application of the Community's competition rules to aviation should move in parallel with competence to negotiate traffic rights. That is actually what has happened historically. The two regulations were originally adopted when a single aviation market in Europe began to emerge and their scope was extended to cover domestic services when such internal services were opened to competition. The principle of parallelism has also applied in dealing with third countries. The Commission has already obtained a mandate to extend the single market to 10 central and eastern European countries. As part of this process it will assume responsibility for applying the EC competition rules on service to these countries. This is entirely logical. The same will apply when the EU-Switzerland aviation agreement is concluded.

There is a clear logic in that parallelism, as a number of noble Lords have implied. However, the Commission's proposals would break that link. As noble Lords have said, for a long time the Commission has tried to persuade member states that it should negotiate on their behalf with third countries. In reality, we are principally talking about the United States. The Council of the member states has declined to give the Commission that mandate.

The UK has been one of the member states resisting the Commission's request because in our view we can best serve the interests of the UK and of the UK aviation industry by negotiating with the US on our own account. Since member states retain the right to negotiate bilaterals with third countries, there is therefore no case for giving the Commission at this stage exclusive competence to apply the competition rules on routes outside the Community. If and when the Commission obtains a mandate and concludes a Community-level agreement with the US, the case for extending competition rules would be much stronger. The Government do not rule out that situation in the longer term. However, we do not believe that it is applicable at this stage. In other words, like the noble Lord, Lord Bridges, we adopt the St Augustine position on this matter. We need to think long term but for the moment we stick to the traditional position, which is supported by many other member states.

If we adopted the regulations as they stand they would extend Community competence into the area of external aviation relations. They include provisions which would mean that bilateral talks would be subject to oversight by the Commission. In effect, the Commission would be achieving some degree of negotiating authority, indirect and secondary though it may be, by the back door when we have not been prepared to grant that by the front door. That is the view of other member states—not just of the UK—and would include some of those member states which have been more sympathetic than us to such a mandate. The committee concluded that it would not support the Commission in negotiating bilateral agreements without a political mandate from the Council of Ministers. The Government very much endorse that view.

Perhaps I may look in a little more detail at the whole question of the EC-US negotiations. The noble Lord, Lord Brabazon, said, probably in relation to this, that things have not changed much since his time as an aviation Minister. The noble Lord, Lord Bridges, referred to occasions some time ago when the UK-US negotiations were going on. Although the noble Lord, Lord Mountevans, is correct to say that there have been massive changes in the aviation industry, some principles do not change. It has been our aim for some considerable time to liberalise the UK-US aviation market. The question is whether bilateral or Community-level negotiations are most likely to achieve those aims.

As things stand, we believe that the UK has the chance in the near future to conclude a liberal bilateral agreement with the US, one which delivers the consumer benefits and preserves a framework of fair competition, balance and commercial opportunities for airlines in both countries. By contrast, whatever the theoretical or long-term benefits, a Community-level agreement would take some considerable time to achieve. One reason why several EU member states have so far declined to give the permission a mandate is that there is no agreement on the form that that mandate would take. While some countries, like ourselves, would support a liberal mandate, others would not be ready for their carriers to compete freely in business with the US and other EU airlines.

I agree with what several noble Lords have said that the US's own record is not exactly lily-white in these circumstances. The US has not pursued the pure milk of free competition in relation to aviation and in relation to the protection of their own airlines in regard to slots, landing rights, open skies and ownership. The Commission's present proposal, however, would envisage a dual process in which some countries would negotiate their own transitional arrangements with the US whereas the Commission would negotiate a long-term agreement. Whatever the long-term situation, that would seem impractical and would weaken member states' negotiating position. For example, in our own self-interest, the UK might have to hand over to the Commission our prime negotiating power—namely, access to Heathrow and Gatwick—for the purchase of restrictions or safeguards that would benefit other EU countries. Moreover, throwing our weight behind Community level action would not guarantee an acceptably liberal agreement. In these circumstances we prefer to continue to pursue actively our bilateral negotiations with the US.

I wish to make one further point in relation to competition. I mentioned the scrutiny of the BA/American Airlines alliance. At present, both the Commission and the member states have a role in applying competition laws on extra EU routes. I shall not attempt to deny that the current arrangements are potentially cumbersome. A one-stop shop would remove the need for co-ordination between two sets of competition authorities and the possibility of conflicting decisions. It might also reduce administrative burdens on undertakings seeking competition clearance. I certainly do not question the Commission's ability to take independent consistent decisions. But for as long as member states continue to negotiate bilateral arrangements with third countries they have an important role to play, and their role must be safeguarded. Their knowledge and understanding of the relevant markets are crucial for robust analysis leading to defensible competition decisions that are fair to all parties concerned.

I now turn to the wider questions of airline competition which the Select Committee addressed. It is clear, as the noble Lord, Lord Skelmersdale, and others indicated, that airlines are different from other areas to which competition rules apply. It is also true, as the noble Baroness, Lady O'Cathain, indicated, that lower prices are not the only measure of the benefits to the consumer. As the noble Lord, Lord Methuen, indicated, there are in any case different kinds of consumer. It is also the case that consumer benefit is not the only interest that the Government have to pursue. There are environmental and planning considerations which also have their role to play.

In the EU, the UK has played a leading role in the establishment and development of the single European aviation market. Outside the EU, we are now seeking to liberalise our arrangements with other countries. However, we are inevitably constrained in some cases by the speed with which our bilateral partners are prepared to open markets. Last year, the CAA published a major report on the first five years of the single aviation market in Europe. While acknowledging that there was substantial room for improvement, the CAA concluded that on many routes competition had led to substantial price reductions for business as well as for leisure travellers. A number of major EU airlines have been privatised. Even among those that have not, there seems to be a growing recognition that a more commercial approach is needed. Those are benefits.

On the global front, major airlines are increasingly seeking to compete more effectively by forming alliances so as to reduce costs and be able to offer improved network services to passengers. As part of that process major airlines develop services at their "hub" airports, and operate an extensive range and frequency of services. Effective competition between airlines may take place nowadays, either head-to-head on specific routes or between alliances offering competing indirect services out of different hubs.

A number of noble Lords referred to the strong competitive position of the UK aviation sector. BA is obviously our major carrier, competing effectively with the largest airlines worldwide. But, uniquely in the EU, the UK is fortunate to have a substantial number of successful competitor airlines operating in the short haul markets, such as British Midland, and in the long haul markets such as Virgin. We also have an energetic and innovative low-cost airline sector, as the noble Lord, Lord Brabazon, and others have said. We will continue to seek to open aviation markets wherever possible, to promote the interests of consumers and at the same time to maximise commercial opportunities for all UK airlines.

At this point perhaps I should respond briefly to the committee's points in relation to block exemptions. The committee was concerned that the continuance or any immunity of block exemptions from competition law should be strictly justified and in the interests of the consumer. The Government fully agree with the committee that any continuance of those block exemptions should be strictly justified in the interests of the consumer and the promotion of competition. The Government therefore support the Commission in its moves to withdraw block exemptions where they are no longer justified.

The other aspect of competition is the ownership and control of airlines. There are anti-competitive situations on both sides of the Atlantic. The Government agree in principle with the committee that the airline industry should ultimately be subject to the same competitive conditions as other industries. We agree that the traditional restrictions on ownership and control of airlines hinder the development of competition. Although within the EU national ownership restrictions have been broken down, as Community carriers may be owned by nationals of any member state, at the wider international level such changes can only be addressed on a reciprocal basis. We in the UK urge all our bilateral partners to adopt more liberal arrangements. However, progress can be achieved only by consent. That will mean that the break-down of ownership restrictions is likely to take some considerable time. Nevertheless, some bilateral agreements have been reached with other states.

I now move tentatively into the area of slots—the "thick jungle" referred to by the noble Lord, Lord Geddes. The availability of take-off and landing slots and their related services is an important constraint on airline competition at any airport where demand is greater than supply. That applies particularly in the UK at Heathrow and Gatwick, where there are virtually no free slots at peak times. The process for allocating slots at congested airports is prescribed by European regulations.

The committee expressed concerns over the current system of slot allocation and a number of noble Lords have repeated those concerns today. This is a pretty complex area. On the one hand, grandfather rights have their benefits. They enable airlines to plan ahead and to invest in route development with confidence. However, the time may well have come to question whether that is outweighed by the anti-competitive effect at congested airports.

It has been suggested that slots should be auctioned or traded between airlines as a means of supporting competition. Others believe that that would tend to favour the larger carriers with the greatest financial clout. Clearly there is an element of truth in that. Much would depend upon the overall package and the constraints that governments in the EU placed on the ability of airlines to buy and sell or acquire slots in that way. The Government believe that further consideration needs to be given to the implications of different regimes before they can reach a view on the desirability or otherwise of introducing some form of market mechanism into the slot allocation process.

A recommendation of the committee was that the Government should consider allocating a number of slots at major airports to maintain regional air services. The UK has already made proposals to the Commission that priority in the allocation of slots not claimed under historic precedence should be given to airlines that wish to use the slots for services to regional airports. The House will know that the Government are committed to developing regional airports and have made substantial moves to provide open access to all regional airports to bilateral partners on a reciprocal basis, and have relaxed controls, for example, on local authority owned airport borrowing powers so that we can develop airports such as Manchester and elsewhere.

My noble friend Lord Montague raised a separate question, although it has some bearing on the competition area. It relates to air passenger duty. I am not aware of what has gone on in another place while we have been here. However, the situation prior to today was clear. The aviation industry is subject to relatively little indirect tax. The fuel used in international air travel is free of excise duty, unlike the fuel used in other modes of transport. As my noble friend Lord Berkeley implied, this is a slightly bizarre situation. Nevertheless, air passenger duty helps to offset that lack of taxation on aviation fuel and therefore broadens the national tax base.

In supporting APD, the Government do not believe that it indicates a disproportionate burden on air transport, nor do we believe that it is unfair to passengers. APD is payable on all departures from UK airports. It is different if we are travelling to EU or EEA countries where the APD is levied at £10 or £20 for other destinations. There is therefore a distinction between Zurich and Geneva in that passengers at Geneva, as at Basel, can disembark in France. Therefore, the EU/EEA rules apply, whereas in Zurich one is wholly in Switzerland and does not have the choice.

A number of other issues were raised in the course of the debate. Those matters raised by the committee give rise to serious questions in relation to the immediate period of competition policy in the UK and at EU level. They also raise issues of what the long-term position should be throughout the EU. As several noble Lords said, central to it is the fact that the aviation industry is one of which the UK can be proud. It is an industry whose development over recent years has put it in a position of considerable strength. We should make no changes which reduce that strength. We agree with the committee that airlines in the UK are well placed to cope with the challenges of the future. As noble Lords said, the increased competition has brought benefits to consumers and to Britain as a whole, as well as to British-based airlines.

There are existing restrictions which we need to change and dismantle. We shall look at ways in which to do so, but it will not happen overnight. We are committed to further liberalisation but we must be realistic that it will be harder to establish liberalisation more broadly than in the EU with countries with which we have less in common and many of which have national carriers to defend.

The European Commission will rightly continue to exercise an important role in regulating airline competition. But as my honourable friend Glenda Jackson explained in her evidence to the committee, we believe that those particular proposals from the Commission which gave rise to the report are premature. The Government, like the committee, cannot support proposals to extend the Commission's power to apply competition rules at this stage to extra EU services while member states continue to negotiate bilaterally with third countries. But we agree with many of the recommendations contained in the committee's report. I am grateful to the committee and to your Lordships for your contributions this afternoon. I have no doubt that the debate will continue.

5.53 p.m.

Lord Geddes

My Lords, following the correct statement by my noble friend Lord Brabazon, I too should have declared an interest and now do so as a non-executive director and very small shareholder in two small regional airports, one at Biggin Hill and one at Southend. I hasten to add that we have no slot problems at either airport so I cannot conceive that there is any conflict of interest, but I apologise to the House for not mentioning it at the beginning.

It would be invidious for me to try to comment on all noble Lords' speeches, other than to thank them most sincerely. The debate can best be summed up by my noble friend Lord Brabazon who succeeded in speaking from my own Front Bench for three minutes longer than I did in introducing the debate. That must show some degree of the interest that the subject provoked. If I may be a little naughty, I hope it may also show that on this side of the House we do not always speak with the same voice. So to say that we are all of one political persuasion in the broader context is not correct.

I thank most sincerely all noble Lords who have spoken, not least the Minister. His was an interesting and comprehensive reply which I wish to read at leisure and perhaps pick up points with him, if appropriate. I also specifically thank the noble Lord, Lord Berkeley, who sat in for me in Sub-Committee B on a number of occasions at the end of last year when I was unable to chair it. I was and still am extremely grateful to him for taking that role on his shoulders.

I can best sum up the position on which the committee found themselves unanimous by quoting from three paragraphs of our conclusions. Perversely, I start with paragraph 132 where we said that: Airlines have been afforded special treatment in the European Community's competition policy for historical reasons. We believe that these reasons are just that—historic. While we fully recognise the importance of safety standards and controls in the airline industry these should not inhibit the creation of a more competitive airline industry worldwide". I then, curiously, go backwards to paragraph 131: The true negative effects on competition within the European Community do not come from geographical Europe but from distorted competition between the European Community and other large airline markets, notably the United States". Finally, I go back to paragraph 106 where we said—and we had no doubt at all, despite the wide spread of theoretical political opinion within the committee— We consider that the responsibility for regulation of airline competition should lie at the highest practical international level. In the case of these proposals, this means the European Commission". We stated that. We believed that. I commend the report to the House.

On Question, Motion agreed to.