Aviation (EUC Report)

HL Deb 08 December 2003 vol 655 cc565-92

4 p.m.

Lord Woolmer of Leeds

rose to move, That this House takes note of the report of the European Union on "Open Skies" or Open Markets? The Effect of the European Court of Justice (ECJ) Judgments on Aviation Relations Between the European Union (EU) and the United States of America (USA) (17th Report, Session 2002-03, HL Paper 92).

The noble Lord said: My Lords, in introducing this debate I remind your Lordships that the committee also published a supplementary report in July 2002, which I shall refer to during the course of my remarks.

I would like, first, to thank my fellow members of sub-committee B for their support, hard work and contributions during this inquiry. I know they will join me in expressing our deep appreciation and thanks to our specialist adviser, Professor Rigas Doganis, and congratulating him on his recent appointment as a non-executive director of South African Airways. I am sure, too, that members of the committee will join me in conveying our warmest thanks to our Clerk, Patrick Wogan, who continues to be a tower of strength and an inexhaustible source of wisdom and sage advice.

On behalf of the committee, I also want to record our thanks to all those who have given us written evidence and those who additionally have appeared before us. We were most grateful to the many people who shared their views with us during our visit to Washington, and special thanks are due to staff of the British Embassy there for their usual unfailing efficiency in arranging the visit and for their advice and hospitality.

Finally, but not least, I thank the Government for their positive response at the end of July to our report and for their congratulations to the committee on the thoroughness of its investigation.

Before I turn to the committee's reports. I will summarise the background to and the events that occasioned them. International air services have been heavily over-regulated, with restrictions on market forces and the pressures of competition, since the Chicago Convention of 1944. This reaffirmed nation state sovereignty over air space and led, in turn, to a vast network of intergovernmental bilateral air service agreements—ASAs—between countries. European Union member states today operate some 1,500 ASAs, with the UK alone operating 149. The main elements of air service agreements are set out on page 9 of our report of April 2003.

International airlines were often seen as national flag carriers, and for much of the time since 1944 they have been protected by these air service agreements, state subsidies and other protectionist measures. For example, in the United States, foreign ownership of voting stock of domestic airlines is limited to 24.9 per cent. The USA prevents, by law, the right of foreign airlines to establish new airlines in that country and also, by law, gives preference to domestically owned airlines for government-related passenger and cargo travel, whether within or outside the United States— the so-called "Fly America" and "Civil Reserve Air Fleet" policies.

Air service agreements between the United States and European Union member states have so far been based on ASAs between the USA and individual member states. In all those air service agreements there has been a nationality clause that requires carriers obtaining their operating licences within a community state to be majority-owned and substantially controlled by that state or its nationals.

Eleven of the present 15 member states have agreed some common conditions with the United States, generally known as "Open Skies" agreements. Under these, there is no restraint on access to the market and no capacity restrictions. Airlines of either country have the right to pick up traffic in the other country and carry it to a third country, the so-called "fifth freedom". But open skies agreements do not give rights to airlines of either country to operate domestic air services in the partner countries—that is, there are no cabotage rights.

The consequence of the latter two conditions combined is that United States airlines can land in any of the 11 "Open Skies" partner countries in Europe, pick up passengers and fly on to another of those EU countries. However, a European Union-based airline landing in the United States cannot pick up passengers and fly to another destination within the United States. The result collectively for the European Union is an unbalanced deal, skewed heavily in favour of United States airlines.

The United Kingdom is one of the four member states which has not signed an "Open Skies" agreement. Our agreement, known as Bermuda 2, has different restrictions for Heathrow and Gatwick, while there are no restrictions on services from other UK airports to anywhere in the United States. However, the same conditions apply to cabotage with the same unbalanced outcome. A very brief summary of "Open Skies" and Bermuda 2 and of the restrictions imposed on air services between the United States and the European Union are provided on page 11 of our report.

Heathrow is the airport of choice for a majority of transatlantic air travellers but is facing major constraints arising from terminal and runway capacity. Bermuda 2 currently limits services to and from the US and Heathrow to two designated airlines from each country. This limit and the system of allocating slots at Heathrow pose important policy issues in UK relations with the Commission in the period ahead.

The result of all this regulation and restriction has not been stronger airlines and robust financial performance. International airlines collectively have made net losses over the past 60 years and have collectively appeared notoriously inefficient. Many famous names have disappeared. Consumer choice of airlines, airports, routes, fares and service levels has been—and, in many cases around the world, remains—severely restricted. Competition by the provision of alternative routes across the Atlantic and heavy state subsidies in the US have kept air fares lower on this sector than on most international routes. In my view, competition needs boosting and subsidies need to be reduced.

In contrast, while international aviation has been bedevilled by regulation and restriction, huge changes have taken place in the United States and in Europe in internal markets for aviation services. The United States took the lead with deregulation in 1978. The European Union followed, slowly at first in 1987, but decisively in 1992. The result in both the United States and the European Union has been a transformation of competition, with the emergence of low-cost airlines, lower fares, increased choice for consumers and large increases in air travel. For the EU and the US, domestic and international air travel could hardly be more different.

It is against this background that the European Court of Justice made its rulings on certain issues on 5th November 2002, the Commission responded in November that year and again on 26th February this year, and our committee established its inquiry into the future of European aviation relations with the United States and other states.

The European Court of Justice ruled on two quite different issues brought to it by the Commission. First, it held that member states have the right to conclude bilateral air service agreements, except where they deal with certain matters such as air fares within the European Union, which are the preserve of the Commission—that is, where there is exclusive Community competence.

Secondly, the Court held that nationality clauses in all bilateral air service agreements, including those of the United States, infringe Article 43 of the treaty on the right of establishment. In other words, they are discriminatory between airlines of member states.

On 9th November the Commission called upon member states to revoke their aviation agreements with the United States and to give the Commission a mandate to negotiate all aspects of the agreements. This position was modified in a second communication published in February this year, when it sought to distinguish between the need to address the infringements that flowed from the European Court of Justice judgments and the pursuit of a wider mandate aimed at negotiating full ASAs with the United States. The aim of this wider mandate, which goes beyond the current extent of Community competence, would be the creation of a fully liberalised aviation area comprising the United States and the European Union, going further than existing "Open Skies" agreements. This is known as the transatlantic common aviation area or the open aviation area.

Our committee examined these issues and concluded that greater liberalisation would bring significant economic benefits. With respect to the ECJ judgments in November, we recommended that member states give the Commission a limited mandate to negotiate with the United States to bring bilateral ASAs with the United States into conformity with Community law. We felt that any amendments to ASAs should be uniform across member states and take place at the same time.

On a broader issue, we recommended that member states should give the Commission a wider mandate to negotiate agreements with the United States, in order to achieve full liberalisation between and within the two blocs. The evidence from witnesses was almost unanimous in support of that position. In our view, the European Union, supported by member states, will carry more weight in negotiation than would individual member states by themselves.

The two objectives of a wider mandate must be parity and comprehensiveness: parity in outcome for member states and their airlines, compared to the United States; and comprehensive in the sense that full liberalisation must be the aim, not partial liberalisation, on the basis of "Open Skies". A comprehensive agreement would address matters such as air traffic rights; fifth freedom and cabotage rights; the "Fly America" and civil reserve air fleet policies; crucially, restrictions on foreign ownership of capital in the United States and European Union airlines, and the right of establishment; the operation and compatibility of competition and anti-trust policies in the two blocs; state aids to airlines; and safety and security issues.

We envisage a number of benefits stemming from that approach. There are too many airlines, internationally, propped up by regulatory and other forms of protectionism. Full liberalisation will open the door to airline consolidation and, where appropriate, to a widening of the airline alliance systems. Costs can be reduced by rationalisation and by open and unfettered competition. International air passengers can be offered many of the benefits that domestic and short-haul passengers now experience following deregulation in the United States and the European Union.

We therefore further recommended that it would not be in the European Union's interest, or in this country's national interest, to negotiate anything short of a fully liberalised aviation market between the two blocs. There are many forces of resistance to full liberalisation in the United States, and the presidential election year ahead may bring caution rather than action for radical change.

Following our report, the Transport Council agreed in June to give the Commission two mandates: to negotiate an air service agreement with the United States on behalf of the community, covering both the limited and wider mandates to which I referred; and, secondly, to negotiate on specific community issues with other third countries. We invited the Minister to give oral evidence to the committee, because the text of the two mandates was not available to the committee on grounds of confidentiality. Answers given by officials in the course of the oral evidence, and in supplementary evidence to us contained in Appendix 3 of our supplementary report, confirmed that the mandate to negotiate an open aviation agreement covers the matters that we wished to see in that agreement and that the Government's objectives were met.

We concluded that the Council's mandates to the Commission appear to be acceptable to UK interests, provided that safeguards are introduced into the negotiations for an open aviation area to prevent phased negotiations from breaking down and leaving this country in a worse position than it enjoys under existing bilateral arrangements. In evidence, the Department of Transport told us that its, expectation is that current arrangements under Bermuda … are expected to remain in place until an agreement is sorted out by the Commission". Nevertheless, the committee remains concerned that phased negotiations might conclude with the final goal unrealised. Given the time that it will take to negotiate a fully liberalised open aviation agreement with the United States, the danger to UK interests would continue throughout the period. When pressed on the point, an official from the department said: What I have been urging on European colleagues is not to rush into phases, and the dangers of that, because in some ways it is very difficult to get a balanced agreement". We therefore recommend that the Government consider carefully before moving to a form of "Open Skies" regime, or any other interim measure, as part of a phased negotiation with the United States.

Since the committee reported, time and events have moved on, so I shall raise a number of points with my noble friend the Minister. It is reported in the press that a proposed revision to the bilateral air service agreement with Hong Kong is to open up the London—New York route to Cathay. Can the Minister say whether that proposal requires the agreement of the United States under Bermuda 2 and, if not, why not? Is Cathay regarded as a foreign-owned airline for purposes of the nationality clause or the intended wider EU ownership clause? Can Virgin share air traffic rights with Cathay under Bermuda 2? Will the Minister confirm that approval is required by the Commission, and can he update noble Lords on the state of any discussions in that regard? Which other countries have been approached by the UK to update an air service agreement? How is the Commission monitoring bilateral negotiations by individual member states on third parties?

Our report drew attention to the significance of slots, especially at Heathrow, and to the consequences of any attempt to open up Heathrow air traffic rights to more airlines from Europe and the United States. The Commission intends to tackle the issue of trading in slots. When does my noble friend expect that proposal to come forward? Can the Minister inform the House what happened to the suggestion in relation to the swaps of junk slots at the Transport Council last week?

Turning to the matter of EU negotiations, can the Minister confirm that the second round of negotiations takes place this week? What is the main purpose of that second round of negotiations? What preliminary assessment have the Government made of likely progress towards a fully liberalised agreement?

Finally, can the Minister say how a liberalised access to Heathrow for other US and EU airlines, whether under a phased arrangement or with full liberalisation, can be made a reality without damaging existing air traffic rights, given the major constraints upon terminal and runway capacities at Heathrow?

Those are important matters for our aviation industry and for air passengers, whether at leisure or on business. I look forward to the rest of the debate, and to the Minister's reply. I beg to move.

Moved, That this House takes note of the report of the European Union on "Open Skies" or Open Markets? The Effect of the European Court of Justice (ECJ) Judgments on Aviation Relations Between the European Union (EU) and the United States of America (USA) (17th Report, Session 2002-03, HL Paper 92).— (Lord Woolmer of Leeds.)

4.16 p.m.

Lord Clinton-Davis

My Lords, first, I should like to declare several interests. I am the president of BALPA—the British Air Line Pilots Association— and I was the Minister for Aviation, inter alia, from 1974 to 1979, which is rather a long time ago. I was also commissioner for transport in the European Commission from 1985 to 1989.

I congratulate my noble friend and the members of the committee on their consideration of a highly complicated issue, on which there are serious differences of approach, especially between the European Union and the United States of America. Unfortunately, that has long been the case.

The essential question that confronts us today is how best to resolve that contentious matter in relation to the travelling public in particular? I am glad that the Select Committee has concluded that aviation should not be excluded from the Commission's competence. That was the view that I took in the mid-1980s, when I negotiated the matter on behalf of the European Union. Fifteen years have passed since then.

The judgment of the European Court of Justice on aviation relations between the European Union and the United States is highly complex, too, but it is also enormously significant. There is complete clarity about the basic issue; namely, the need to bring air service agreements into conformity with Community law. The Select Committee is right to emphasise the question of how that can best be achieved. The European Court of Justice has condemned certain aspects of the current air service agreements. However, it has also restated—I think, appropriately—that member states have the right to conclude bilateral agreements, as we have done.

The Select Committee asserts that air service agreements should be negotiated differently from in the past, although it concludes, again, in my view, rightly, that complete competence regarding air service agreements will eventually—I do not believe that this will take too long—be that of the Commission in its entirety. I share the view of the Select Committee that it is essential to show respect for the judgments of the European Court of Justice in this as in other areas.

As the Select Committee concluded, it is right that initially the Commission should take over the task of negotiating air service agreements with the United States. The Select Committee is right to stress that the issues underlined in paragraph 103 will take time to resolve. I shall not bore the House with a recital of what paragraph 103 is about as noble Lords can refer to it. The Select Committee opined that the Government should ensure that in its new mandate the Commission should work inter alia for an ability to acquire a share of United States airlines to wet lease to American clients for all-cargo operations to obtain internal United States cabotage rights, although, as the chairman asserted, that is bound to take time.

The Select Committee also expressed the opinion that subsidies which are paid to certain airlines, including those in the United States, are wrong, and that, indeed, they contribute ultimately to the decline of such airlines. I unreservedly support that conclusion. In that regard all sorts of excuses are deployed. The fact is that such subsidies, whether hidden or overt, are unacceptable, and clearly in any negotiations we should say so.

I turn to a certain demand of the Select Committee from which I depart, although the demand in question relates to a negotiating stance rather than anything else. I have formed the view that we should be consistent throughout, and that that is not altogether mirrored in the Select Committee's recommendations. I consider, for example, that the Select Committee's views—as reflected in paragraph 108—are likely to earn a riposte from the United States that its motives are questionable. Far better, in my submission, to assert from the outset the ultimate objectives that we seek to obtain. I remain sceptical about the advice that is tendered in paragraph 108. I appreciate that that signals a departure from the negotiating stance generally deployed, but we are not exactly starting from scratch! We know, and they know, what is being considered. It is not a matter of conjecture at all. We are not dealing with amateurs on either side. It is entirely feasible that they know what our ultimate objectives are. Therefore, I contend that they should be stated.

I wish to mention several specific points that are germane to the backcloth of negotiation. Today I received a briefing note from British Airways. It supports the mandate that has been given to the European Commission to negotiate with the United States. As I say, I applaud that view. British Airways contends that, a fully liberalised agreement or Transatlantic Common Aviation Area between the EU and the US". is desirable. That was stated by my noble friend Lord Woolmer today. British Airways also contends that: The removal of restrictions including the limits on ownership and control, cabotage, routing rights, cargo and wet leasing", is desirable, as I said. That is absolutely essential, and we should say so right from the beginning. British Airways states that we should accelerate, the liberalisation of the global aviation industry". There should be no room whatever for doubt in that regard.

Of course, what we say now will be highly relevant to our negotiations with other bilateral partners such as Japan, India, Russia and so on. Consistency is the order of the day. I applaud the view that BA has advanced; namely, that we should argue for a full liberalisation package. We should avoid the temptation of securing what it has described as an "early win". As I have said over and over again, it is vitally important that we should be entirely consistent in our arguments.

When we talk about liberalisation it is vitally important that the EU, or at least the 10 new member states, should understand that there must be a similarity of standards for crew members. Part and parcel of liberalisation is that we should start to ensure that the EU has a consistent position. Varying standards are not acceptable vis-á-vis our negotiating position. There must be no serious distortion of such standards.

The issue of security applies to the point that I have just made. It is unhelpful, to say the least, for varying standards- sometimes abysmal standards—to apply. Once again, as with the issue of crewing, there is a place for regulation. The EU should have a common policy on security. Good security is vital, especially in this day and age. There is of course a great deal to be regretted about that. Nevertheless, it is essential that we should observe high-security standards so far as European Union airlines are concerned.

My criticism of the Select Committee's report does not in any way diminish its primary concerns. I end as I began, by congratulating my noble friend and the other members of the Select Committee, who performed such excellent work.

4.31 p.m.

Baroness O'Cathain

My Lords, before I make a small contribution, I must declare an interest as a director of British Airways. However, my reading of the report was not really done with my British Airways hat on. I welcome the report wholeheartedly. It is a great piece of work, but I am not surprised, as it is in the good tradition of that sub-committee of the European Union Committee. I have had first-hand experience of its good work, not under the chairmanship of the noble Lord, Lord Woolmer, but under that of the noble Lord, Lord Brooke, and my noble friend Lord Geddes. It has always worked at the issues in a most detailed way and produced very good reports.

This report is really first class. For example, it includes an excellent glossary of terms. The aviation sector seems to have more jargon on an industry-specific basis than any other with which I have been associated. I love the graphic illustration about the freedoms of the air, although it made me spend about 15 minutes trying to work out who owned the aeroplanes and what they were. For noble Lords who want to know all about fifth freedoms and all the other freedoms, page 44 is excellent. I would go so far as to say that the report is probably essential reading for those beyond this House interested in the economics and operations of the aviation sector.

In his speech, the noble Lord, Lord Woolmer, gave us a great history of the network of ASAs—air service agreements—the ownership restrictions in the US, and the "Fly America" policy. I was going to deal with all those, but I shall no longer do so, because he did much better by them than I would have done. He also made the very interesting point that 11 of the 15 current EU members subscribe to "Open Skies", which of course does not include the UK. All that is under Bermuda 2, but that is very well described in the report.

The four major recommendations of the report are dealt with in detail. The questioning of the excellent witnesses by the members of the committee is well worth reading. As an interested insider, to me most of the major recommendations seem absolutely right. Having said that, giving the European Commission a "limited mandate" in recommendation (a) implies that there will be strict scrutiny—even monitoring—that the negotiation is done within the agreed limits, and that no one has a rush of blood to the head and sells UK aviation down the river. That is not really an apposite metaphor for dealing with aviation, but I am sure that my gist is accepted by the House.

Recommendation (b), the wider mandate to renegotiate the air service agreements, states, that Member States should give the Commission a wider mandate to renegotiate ASAs with the United States of America initially, and subsequently with major aviation powers such as Russia and Japan in order to achieve full liberalisation in aviation". That is not only a first-class recommendation, but a very exciting one. If it is done correctly and properly, it means that we will have a global market in aviation. Total liberalisation is really what is needed. It is interesting that the evidence received by the committee was almost unanimous in that regard.

Full liberalisation would have a positive impact on the future of aviation because it is good for consumers, good for strong and efficiently run airlines, and extremely good for competition. The strong UK airlines are not afraid of competition; if they were, they would have given up years ago. I am sure that they all agree that in the ideal world there would be an "open aviation area". That is the term that we should go for, as "Open Skies" has become muddled because of the restrictions that pervade in other countries dealing with so-called "Open Skies" arrangements.

That open aviation area would preferably be throughout the world. Globalisation is so patchy— Coca-Cola can be, and is, traded throughout the world; McDonalds and Scotch whisky are found throughout the world; the products of Procter & Gamble and Unilever are traded by the dozen throughout the world. It is absolutely stupid that airlines cannot trade throughout the world.

When we talk of an "Open Skies" policy, however, it has to be "Open Skies" for all. There can be no sheltering behind quotas, tariffs or non-tariff barriers to trade. We are all slightly sceptical about the concept of open markets. We do not need to have very long memories to recall the US steel situation—it goes back only a week—or state aid to continental European airlines, not to mention the US Government's subsidies to their airlines, totalling over 9 billion dollars since September 2001.

The open aviation area would be quite different from the "Open Skies" model that exists in the US. In that, although the US airlines are seen to be deregulated—and they are, within their own territory—the conditions of free markets do not apply in so far as there are strong ownership and control measures in force. That is not what we think of as being a single market. Free markets are not the norm. We have to be sure that the OAA is a free market, with true liberalisation.

It is essential that we are not conned into partial liberalisation, which is little more than a cosmetic. The Commission must ensure that it avoids further opening of Europe to US airlines while restrictions on the operation of UK and other European airlines in the United States remain. If the United States gets what it wants in terms of greater access to the European markets too early, there will be no incentive to create a true single market. If the United States is able to get "Open Skies" throughout the European Union, it could well retreat behind the barricades and ensure that the stringent ownership regulations remain, keeping the ownership of US airlines in the hands of US citizens.

To sum up, UK airlines are very much in favour of competition. With full competition, the strongest will survive, and everyone should agree that the UK airlines have shown just how they can survive, unsubsidised, in the most testing time for world aviation since the industry began. I think that the noble Lord, Lord Woolmer, briefly referred to the fact that all the profits of all the airlines in the world since the beginning of air travel—in effect since 1945, although I know that it began before then—were wiped out in the past three years. That is ridiculous. If airlines have not got the guts to survive during that, they will not have the ability to survive beyond.

Inevitably consolidation will occur and some national flag-carrying airlines will not survive. There is a chance, however, that even they might grow up and face the cold winds of competition. British Airways, with only about 40 per cent of traffic at its hub— Heathrow—compared to Lufthansa with nearly 65 per cent and Delta at about 75 per cent at their respective hubs of Frankfurt and Atlanta, is certainly used to competition. More than that, it has battled ferociously to remain competitive in the past three years when it has been subjected to market catastrophe following market catastrophe.

Those who are anti-consolidation should remember that deregulation within the US resulted in increased services, lower fares, robust competition and innovative enterprise. The development of no-frills airlines and low-cost airlines was a direct result of deregulation. We have deregulation within Europe—and the development of the low-cost and the no-frills airlines has followed the same pattern as the United States with marvellous results and benefits for customers. We now need deregulation between the two blocs. Then, as the report says, we should move on to Russia and Japan. Deregulation has enabled the strong UK airlines—Virgin, BMI and BA— to compete on a truly global basis. We cannot wait.

4.41 p.m.

Baroness Cohen of Pimlico

My Lords, I had the honour of being a member of Sub-Committee B, so ably chaired by the noble Lord, Lord Woolmer. I pay tribute to his efforts to bring clarity to what at first felt like an appallingly complicated situation. Once we had heard enough witnesses and our brains had settled down it became possible to reduce the appalling complications— no doubt by way of gross over-simplification—to one or two clear facts. The evidence revealed that the EU countries, and doubtless others all over the world, enjoy a totally one-sided situation in relation to the US. The words "Open Skies" to describe the agreements is extremely clever. They leave the general reader or auditor with the impression that the agreements open the skies to air traffic. They open the skies above Europe to United States' traffic, but not the skies above the United States to European traffic.

That happens when a large trading power negotiates with smaller trading powers. We could see a golden opportunity for the European Union to exercise its weight and negotiate a better balanced deal. It is the opportunity for the European Union to confound any Eurosceptic present and do a deal which would truly open the skies over the USA ultimately to the mutual benefit of two large trading powers—even if the USA does not quite see it that way at the moment. Against that background, the problem that became increasingly evident was over how the EU could enter the negotiations and bring them to a successful conclusion so that we would have a fully liberalised aviation market.

The first question—that of entering negotiations at all—has been answered. The Transport Council agreed in Lisbon in June that the EU should have a mandate to negotiate with the USA to achieve an open aviation area. However, the remaining and far more difficult problem is how to persuade the US Government and the aviation interests that stand behind them to abandon those bilateral agreements, which they know to be highly advantageous to them, in favour of a wider agreement which they do not know to be highly advantageous—although we believe that it would be in the end.

The European Court judged that the nationality clause—which in a bilateral agreement provides that only the airlines of the country with which the US is doing the deal may have any rights—now becomes illegal and that the clause must provide that all community airlines have the same rights. The EU made a spirited bid to force the pace, and at first called for all parties to renounce rather than to repair the bilateral agreement. Under pressure the EU resiled from that position as it became clear that that would not be practical. However, the problem remains: even if one has a mandate to negotiate, it takes two to tango. How can the USA be persuaded to go to the table to negotiate a full, open aviation area when it has perfectly good bilateral agreements which, with some modification, can be brought into line with the judgment of the European Court? I believe the answer was provided almost unanimously by the witnesses to the inquiry. All were united, wherever they came from, whichever nationality they were, on the vital importance of Heathrow to US and European airlines alike.

A large part of US and European traffic routes through Heathrow and any carrier that does not do so would like to. If there is a bargaining chip that will bring the United States quickly to the table—against a background of great difficulty in that country, where airlines are not doing well and unions utterly oppose anything that might involve US jobs going to Europe it is the possibility of gaining slots at Heathrow. Everyone wanted more of them.

That led me to think about that great national asset, Heathrow Airport, and the contribution it could make to the UK aviation industry against the background of the current consideration of airport policy. That was a timely thought, as I understand that a White Paper is due soon. Rumour—or, as the current parlance has it, background briefing—leads me to believe that planning consent will not in the foreseeable future be given for a second runway at Heathrow and traffic will be directed instead to a second runway at Stansted.

That is not the same thing, as I need hardly remind your Lordships. Airlines want to interline at Heathrow, to be able to put their passengers down and have them taken away either by themselves or someone else. And passengers, almost without exception, want to fly into Heathrow and will take some considerable persuading that Stansted is also a London airport.

I speak against a background of no interest in the sense that I live in Cambridge and it is mildly in the interests of those who live in Cambridge that Stansted Airport becomes larger—except for the fact that access by the M11 is poor. If anything, my interests would lie in enlarging Stansted, but I believe that that would be wrong for the country. In the context of these negotiations, nothing could be more helpful to the future of the whole of our aviation industry than to have an enlarged Heathrow. More runway capacity there would persuade the country with which we do the most trade—the United States of America—to the table. It would also be helpful in dealing with other countries.

For that reason, I found myself straying from the proper considerations of the committee and on to that point. When he responds, I ask my noble friend the Minister to offer any comment he can on the future of Heathrow Airport.

4.47 p.m.

Lord Bridges

My Lords, it is more than 10 years since we previously debated these difficult issues in the House. On the last occasion, the main problem was whether we should voluntarily cede the right to negotiate on civil aviation to the European Commission. My opinion at that time, which was shared by a number of noble Lords and perhaps by the Government, was that we should not do so yet.

The tables have now been turned by the Commission's decision to refer the matter to the European Court of Justice and by the Court's decision, which basically gives the Commission what it wants. Further resistance on our part would be pointless—indeed, counterproductive—but we are left with a number of complicated issues which are the subject of the committee's excellent report. I do not propose to enter into the essential details, on which I do not dissent from the committee in the main, but I would like instead to concentrate on some of the larger transportation issues which should be kept firmly in mind. The principle theme for me is the nature and objective of our international air transport policies.

We should not forget that we have a significant natural transport environment because of our geographical position. For several centuries, the British Isles were a focal point in international trade as the junction between long-distance merchant shipping and the regional transport network in Europe. Thus, British-registered and often British-owned vessels transported cargoes across the oceans of the world and broke bulk in the Port of London, whence the cargo would be distributed to the continental ports adjacent to the main markets. After 1945, we lost that valuable business for a variety of reasons, partly because of the loss of much of our merchant fleet during the war and also, regrettably, because of our failure to modernise and mechanise our traditional port facilities.

However, at about the same time, international civil aviation took off in a spectacular way, particularly with regard to transatlantic flights. Because of the rather limited range of aircraft at the time, it made a great deal of sense for the new airport at Heathrow to be the European hub. the decision to build Heathrow having been taken as the war ended.

A long period of successful operation began and still continues. Consequently, it was necessary to build a network of connecting flights from Heathrow to other European destinations in particular. That was taken up by, then, BEA and also by US airlines, the latter developing the habit of stationing subsidiary fleets of aeroplanes in London—all American owned, registered and crewed—to feed the stream of traffic.

It reached the point where the US airlines were, in effect, colonising Heathrow at the expense of our national airlines—a sort of de facto fifth freedom. We sought to correct that situation by negotiations but, then, as now, the US Administration were under heavy political pressure and were unable to modify their position. That led us to give notice of the termination of our bilateral agreement with the United States—Bermuda 1. At that point, I was the Commercial Minister at the Washington Embassy and, for much of the time, civil aviation was topic number one on my worry list. Like Professor Denza, I took part in the final all-night negotiations at Shell Mex House which led to Bermuda 2. Never was dawn more welcome.

I am sure that the Select Committee is right to support the Government's line that we should encourage the Commission to negotiate a successor agreement with the United States on behalf of member states. We really have no alternative. We should, of course, avoid any unnecessary animosity or recrimination, which would be quite pointless—indeed, counter-productive. But I do not believe that it would be inappropriate to point out, in a friendly but measured way, that the Commission will be responsible for a national British asset which we have built up over the years with the expenditure of much effort, treasure, skill and aviation expertise. We shall be looking to the Commission to manage that asset in the interests of the wider Community member states and ourselves. That is particularly the case in relation to our own asset—the largest whose control the Commission has acquired in this field.

We need not perhaps say so but the suspicion lingers in the mind that some members of the Commission may have been more interested in acquiring control of the asset than in its careful management. Indeed, looking after the relationship between our Government and the Commission requires careful handling in our aviation affairs in UKREP. No doubt, appropriate dispositions will be made by the Government.

The other related difficulty is quite different; namely, the growing discussion about the role of civil aviation which seems to be taking place in our country. The issue of noise has always been sensitive, as occasional interventions in this House have often illustrated. But a new dimension seems to be emerging—something which, at times, approaches hostility to the further growth of the activity of aviation as such.

That was illustrated in a speech on the Address made in this House last week by the noble Lord, Lord Beaumont. Noble Lords may like to know that last night I mentioned to the noble Lord, Lord Beaumont, that I would be referring to the remarks that he made on that occasion. He told me that he was grateful for the traditional courtesy but that he did not expect to be here himself. However, it appears that the Green Party would like to see civil aviation taxed more heavily with a view to its restraint and possibly diminution. It should be understood that, as I am sure many noble Lords are aware, the taxation of aviation fuel is prohibited under the Warsaw and Chicago Conventions. If an aviation fuel tax were to be imposed, it would require alteration of those treaties and their renegotiation would indeed be difficult. It would be a Pandora's box or perhaps a can of worms, whichever metaphor your Lordships prefer. If imposed as a national measure, it would, in any case, be ineffective for short-haul flights as British-based aircraft would simply refuel elsewhere in Europe.

Also, the ever-ingenious Treasury has found a way round that difficulty by imposing a levy or tax on the sale of passenger tickets. Noble Lords may remember the cries of dismay which greeted that tax. Evidently, a further increase would not be very popular. Therefore, I am concerned by the appeal which the Green Party is making to public opinion. It seems not to understand the substantial advantages to be gained from having a prosperous and well run aviation sector.

It also reminds me of a remark made by Freddie Laker at a lunch held in his honour at the International Civil Aviation Club in Washington DC in the late 1970s. Laker's commercial skills were much admired, and feared, in the United Sates. His particular target on that occasion was Trans World Airlines—TWA. I cannot remember why he was having an argument with TWA. However, TWA had already been obliged to scale down its expectations and operations for financial reasons and, in due course, that led to the closure of the airline. Laker referred jokingly to TWA as "Teeny Weeny Airlines", which provoked a laugh. He next modified his description of TWA as "Try Walking Across". That is perhaps the answer to the Green Party.

We, the public, living in these islands, cannot do without a successful commercial aviation sector. I hope that the Government will bear that in mind, both in relation to the role of the EC and, of course, also in the context of airport policy—a subject which we shall no doubt have to debate in the not-too-distant future. On this subject, the noble Baroness, Lady Cohen, made some very pertinent remarks.

4.56 p.m.

Lord Fearn

My Lords, it is now more than a year since the European Court of Justice ruled that the UK and seven other EU members had broken European Community law by including nationality in the bilateral agreements with the US. The judgment stated that that was a case of discrimination. Excluding air carriers of other member states from the benefit of national treatment in the host member states is forbidden by the Community rules on the right of establishment.

Following that ruling, a package of measures has been passed, including a mandate for the European Commission to begin negotiations with the United States on a new "transatlantic common aviation area". That would grant to EU carriers access to all EU-US routes, no matter what their nationality. Those members would also provide opportunities for UK carriers in other Community markets and increase competition generally, allowing such additional opportunities in the UK-US aviation market. However, the UK-US market is already one of the largest and most competitive in the world, and the benefits may be more visible elsewhere in Europe.

Consumers have benefited—there is no doubt about that—since the creation of single markets within the US and the EU, leading to substantial consumer benefits in the shape of increased services, lower fares, good competition and new enterprises. The same can be expected in an EU-US single market, leading to a growing market with overall benefits. One of the main benefits will be the removal of restrictions, including the limits on ownership and control, routing rights, cargo and wet leasing, thus accelerating the liberalisation of the global aviation industry and maximising competition.

I want to emphasise and endorse a point made already—one reason that I rose to speak in this debate. It is vital that the European Union negotiates a full liberalisation package with the US and avoids the temptation to secure quick-fix decisions. That would risk a partial liberalisation whereby concessions from the US, such as an increase in foreign ownership rights in US companies, could be traded for the greater prize of increased access to Heathrow for American airlines. Such a result would be imbalanced and favour the US, which would then see no impetus whatever for pursuing a full liberalisation agenda. That must be watched very closely, and I am sure that the Minister has taken it to heart because four speakers have mentioned it thus far.

As a member of the committee, I say in closing that our chairman thanked everyone but we want to thank him for chairing the committee so well and for getting through what we decided was a rather difficult subject.

5 p.m.

Lord Shutt of Greetland

My Lords, in rising to start the wind-up of the debate I speak also as a member of Sub-Committee B. It seems to me that this report is somewhat dated. It was published on 8th April 2003, now eight months ago, and much evidence was taken before that.

At the time I thought that this issue was. complicated and I still take that view. Waiting at a desolate spot on the east coast mainline today between 12.30 pm and 1.55 pm I thought about what further complications there would be if the air transport industry had to deal with track and tarmac—apart from tarmac at airports—and mused about who would be responsible for mid-Atlantic signalling.

Although some of the report is dated, the early part concerned who should negotiate. Much time was spent on the question of who would have the competence to negotiate. That was decided on 5th June, shortly after we produced the report, when the European Council gave the negotiating rights to the Commission. As has been mentioned by several noble Lords, the European Union is about the whole business of trying to negotiate an issue which includes Europe but also goes beyond it.

We are now in the early part of December. One assumes that the Commission started its work shortly after 5th June. Can the Minister tell the House, six months on, how these negotiations are progressing? Can he give the House a "state of the nation" position on the issue? I am sure that Her Majesty's Government will not have been short of advice to the negotiators.

The reason for the need to negotiate is the nationality clause for air transport, which infringes Article 32 of the European treaty. We learnt much about the substantial freedom for air operators within the European Union, but from the European Union to the USA and elsewhere is something of a closed shop.

All our evidence led us in the direction of greater liberalisation of air transport markets from the European Union to the United States and beyond. We heard evidence from the Brattle Group, and it is clear that that group of independent people decided that such liberalisation would benefit both the European Union and the United States. There is a perception that negotiation with the United States can be difficult because they appear to have a one-sided agreement on cabotage, which European Union air operators do not have. Also to be considered are the issues of wet leasing; ownership and control; and a subsidy regime. However, the independent Brattle Group states that this will be of benefit to the United States and the European Union.

All six speakers so far in our reasonably short debate tonight have been broadly supportive of the report. The noble Lord, Lord Woolmer of Leeds, clearly stated the committee's position on the report and highlighted those issues which required highlighting. As my noble friend Lord Fearn indicated, the noble Lord, Lord Woolmer, did a first-class job in chairing the committee. It is interesting that two of the people who have been involved professionally—the noble Lord, Lord Clinton-Davis, and the noble Baroness, Lady O'Cathain—are supportive of the report. The noble Baroness indicated that the report should be given to people who need to read up on the industry. That is one of the aspects to be considered with a group of assorted people such as the members of Sub-Committee B, who were all on different learning paths and had to get up to speed. It was essential that we understood the issues on which we were endeavouring to reach a conclusion. The pictogram was a useful aid in explaining matters.

I took note of the point raised by the noble Baroness, Lady Cohen, about Heathrow, which may be where one chooses to set off from. I take a different view. I have walked up and down steps of aeroplanes at Heathrow, Gatwick and Stansted. On only one occasion when I was subsequently travelling to this place were any of those airports selected by choice. It has been the case that that is where the air operators choose to operate from, not that I was desperate to use those airports. More thought needs to be given to the use of airports outside London. It is not as if Heathrow is just as one steps off the train at King's Cross. There is a little further to travel, which is not necessarily easy.

The noble Lord, Lord Bridges, referred to the environment. Sub-Committee B was set up to consider matters of competition and commerce. At the time, although I did not necessarily agree with the points attributed to the noble Lord, Lord Beaumont of Whitley, I felt that there was not an opportunity for us to consider issues other than competition and commerce. There is no question that environmental issues must be taken into account—I do not think they were in Sub-Committee B—because air pollution and the whole business of global warming are very important.

In summary, I am delighted that there has been so much support for the report. I hope that negotiations go well so that the industry can work in a liberalised way on what is referred to these days as a level playing field.

5.8 p.m.

Viscount Astor

My Lords, I start by congratulating the noble Lord, Lord Woolmer, and his committee on the report, which is a very good piece of work. It is enormously helpful to those of us who have not necessarily followed in such detail the extraordinarily complicated aspects of these issues, and makes them seem much simpler. That was demonstrated today by all noble Lords who have spoken in the debate largely supporting in principle many of its recommendations.

The past two years have been difficult for the airline industry. In America, airlines have lost more money in the past two years than they made in the previous 25 years. In Europe, airlines have lost equal amounts of money—some perhaps more, and, indeed, some have been made bankrupt. Massive state subsidies have gone into airlines, sometimes obviously or at times rather less obviously. We have a greater development of a two-tier market—as it were—in the airline industry, comprising the main carriers and what one might call the "cut price" carriers.

So the airline industry has gone through an enormously challenging and difficult period. It is remarkable that so many of the good ones have emerged looking so well. But it has been a difficult time and I am sure that in some areas that difficulty continues.

The noble Lord, Lord Woolmer, asked the Minister a number of detailed questions. I want to concentrate on three areas of principle that I hope the noble Lord will consider. The report concluded that, it makes more sense for Member States to concede a mandate to the Commission to deal with the amendments to ASAs to take account of the ECJ judgments". It argued that the most persuasive argument in favour of a mandate was, that changes can be brought about uniformly and at the same time". The main question to ask regarding that is: what about bilateral agreements? Do the Government see a continuing need to negotiate bilateral agreements or do they favour handing the negotiation to the EU? That seems to be the most crucial question facing the Government.

There are different views of course. The Commission—I thought somewhat extraordinarily— demanded that member states denounce some existing agreements with the United States as a prelude to any negotiation. That would put the industry in a certain state of turmoil and none of us would know exactly what we were doing. The noble Lord, Lord Bridges, pointed out that these agreements have been put together over many years. I think that my noble friend Lady O'Cathain would agree with that.

Interestingly, the director of the Office of International Aviation at the US Department of Transportation said that such a move would be, an enormous mistake at the very beginning of the process … It would slow progress. We hope this will not be the case, and we strongly recommend against it". Do the Government agree with that sentiment? Where do they stand on the matter?

When this reaction came out the Guardian, for example, reported that Britain had, flatly rejected a demand from the European Commission to scrap its bilateral air transport agreement … A spokeswoman from the Department of Transport said: 'To ask us to tear up long-standing deals with the United States would result in a bad deal for passengers.' Do the Government stand by that? Is it bilateral, is it EU, or is it a combination? How do the Government see the issue going forward? Obviously, if the deal is bilateral it has to fall within the various EU rules. But that will be very complicated and will run the risk that other member states might rush to make bilateral deals that favour them that would not necessarily favour us. So how will the Government deal with that aspect? How do they think they will take the issue forward? What principles will guide their negotiation in the future? I think we must know.

Secondly, the report also said that it had looked at the wider issue of a second mandate for the Commission for renegotiation with other countries. It noted those countries as, "Russia, Japan and others". It concluded in favour of arguments for a Commission mandate. Do the Government agree with that? Is this something that could happen at the same time, or does it follow on previous agreements? How do the Government consider the matter?

Going back to the EU, a case can be made that France rather jumped the gun on us when it managed to conclude agreement with the US some months ago, while it was still able to do so before the court judgment. That indeed may have helped them to the detriment of our case. I do not know whether the Government have a view on what happened.

There will be more consolidation, alliances, code-sharing and booking agreements, and so on, in the airline industry. That will all be part of the EU negotiations. Do the Government agree that code-sharing is a matter for the industry, subject to any various rules there might be, or do they have a role in dealing with it?

Perhaps the noble Lord will address the point outlined by the noble Baroness, Lady Cohen, about Heathrow. The report said that, the ultimate benefits that would flow from a fully liberalised Trans-Atlantic Common Aviation Area could outweigh the potential disadvantages of widening access to Heathrow". It would be interesting to hear the Government's view on that issue.

We are all in favour of greater liberalisation of the air transport market. We believe that our non-state funded, independent airline companies can compete. That will be good for Britain and for this country. It must be right that that could be done through a transatlantic common aviation area agreement rather than with the US/EU "Open Skies" agreement. It seems to me that that would not remove the distortions that currently favour US airlines.

The benefits of a more liberalised market will not be realised until state subsidies of airlines are ruled out. How will the Government do that? What is their view on handing negotiations to Europe for our airlines, which are private companies and funded by the shareholders, while the EU will be negotiating on behalf of state-funded airlines? Is it possible to reach a final point in negotiations when such state funding exists?

We recognise the contribution that aviation makes to the economy and employment of this country. However, we also want to see a more level playing field between the different modes of transport, such as rail and road, particularly within Europe, and greater scope for regional airports with access to routes without the need to pass through Heathrow—to alleviate some of that problem.

There must be a strategy to balance the interests of the environment and the growth of aviation. I take note of the point made by the noble Lord, Lord Shutt, that the environmental aspects were not really covered in the committee's remit. Perhaps the committee might look at that in the future. This is an important issue. I look forward to the Minister's reply.

5.18 p.m.

Lord Davies of Oldham

My Lords, I begin by congratulating my noble friend Lord Woolmer and his committee on the thoroughness, wisdom and good sense of the two reports they have produced. I do not say that because they did not take enormous, exceptional or serious issue with the Government's position; I say it because of how they managed to distil the key issues of a very complex situation and to frame their recommendations so precisely and pertinently to the advantage of all others.

The debate and the work of the committee that prompted it are very timely. We are at a crossroads in the development of civil aviation worldwide. The events in Europe of the past 12 months, including the opening of negotiations at Community level with the United States, could indeed be a watershed. They offer us an opportunity to move away from the outdated regulatory structure, which currently hampers the development and restructuring of the global air transport sector.

I was grateful to the noble Lord, Lord Bridges, for putting the debate into some historical context, which I think is necessary and shall seek to reinforce. I might in passing say that his contribution on the issue with regard to taxation of aviation fuel was pertinent. It may look as though that was a footnote to the debate, but we know that there is great public interest in the issue. As the noble Lord said, the issue has been raised recently at Question Time, and, indeed, the noble Lord, Lord Shutt, indicated his interest in this aspect.

The noble Lord, Lord Bridges, identified just what an extremely complex international situation we are in with regard to air transport. No easy flick of the switch or arbitrary decision by a British government on taxation or meeting of costs by airlines can be readily made without, first, potentially doing enormous damage to our industry and our airlines. Secondly, such a proposal is part of an international provision and we must approach it in the international context. That is why, as the report so readily identifies with regard to negotiations with the United States, we cannot produce flip solutions. We need to employ the kind of careful consideration that the committee has given to the issues.

Historically, international civil aviation has been governed by a regulatory regime devised towards the end of the Second World War, which reflected the preoccupations of the time. The Chicago Convention, the basis of the ground rules for more than 50 years, tends to view civil aviation as an arm of state policy. We all recognise that that still obtains in certain respects, but that times need rapidly to change—and are doing so. Under the old system, governments negotiated traffic rights on behalf of "their" airlines. An airline may offer a service only if permitted to by the two countries involved. That has led to a complex web of bilateral agreements between sovereign states providing—often in fine detail—which airlines may fly where, how often, and under what conditions.

The noble Viscount, Lord Astor, was right to focus on the question of bilaterals, because it is part of the general, complex position. The European Court of Justice confirmed that member states may continue to negotiate bilaterally, subject to conditions. The Commission received a mandate to negotiate with the US; it would need a mandate to negotiate with any other country. We would agree to a mandate only if there were added value through Community negotiations. That is the Government's principled position, on which I think that the noble Viscount sought to probe me.

Practically, the Commission could not handle all aviation negotiations. We have more than 150 bilaterals and the Commission is not going to take on the vast range of those issues. There will therefore continue to be much bilateral negotiation for many years. I therefore reassure the noble Viscount that the Government are fully cognisant of the significance of bilaterals while, at the same time, meeting the main thrust of the report—and, indeed, of all who have spoken in the debate—that the Commission has a role to play in advancing negotiations with the United States. That role was strongly advocated by my noble friend Lord Clinton-Davis. But he will recognise that his emphatic contribution as regards that role builds on a broad position taken in the report, which envisages the development of a significant role.

Lord Clinton-Davis

My Lords, I am most grateful to my noble friend for giving way. For a long time, the Commission was denied any role in aviation. That position advanced in the 1980s, but not satisfactorily. Does my noble friend agree that on the essential issues, the Commission has rather more thrust than individual nations?

Lord Davies of Oldham

My Lords, under the chairmanship of my noble friend, that is the issue to which the committee's report directs its attention. As I shall seek to explain, we respect the committee's report. The Government's position is to seek ways in which the Commission can effectively advance the cause on behalf of all European countries in relation to the United States. But we have areas of distinct reservation. When I come to answer my noble friend's particular questions in a few moments, I hope to provide reassurance about just how seriously we are addressing the areas in which it is not a question of giving a blank cheque to the Commission. We have a proper reserve position that we must safeguard in our national interest.

As the House will recognise, since the Chicago Convention has been breaking down, great changes have occurred in the aviation industry. US deregulation occurred in the 1970s, sweeping away, for US carriers at least, restrictions on routing, frequencies and pricing. The US aviation scene is now radically different. Famous names such as Pan Am have gone, but others have arisen to take their place, including a new breed of no-frills carriers, about which we now know a good deal in Europe. Few commentators would dispute that American consumers have benefited substantially from deregulation in lower fares and greater choice.

In the mid-1980s, the European Community began to move in that direction. With 12 different countries involved, the process was inevitably slower than in the united nation state of the United States and a series of phases towards such liberalisation was necessary. But by 1992, the so-called "third package" of liberalisation had brought about a revolution in European air transport.

Any airline that could meet the standards laid down— I reassure the noble Baroness, Lady O'Cathain, that there are European safety standards that must be met for airlines to take advantage of the position—could be a Community carrier entitled to operate freely within the Community. Constraints on capacity and pricing disappeared, subject to the operation of EU competition law. Over the intervening period, common rules to ensure standards of safety to which the noble Baroness rightly drew attention—security, environmental protection and consumer protection—have been agreed Europe-wide.

The creation of the European single market was considered by many at the time as a leap in the dark, but it has been more than justified by events. To take just one aspect, it is inconceivable that the no-frills sector could have flourished in Europe without the commercial freedoms ushered in by the third package. In the UK alone, the no-frills sector has expanded from carrying fewer than 8 million passengers a year in 1998 to 35 million four years later and a projected 47 million in the current year. That is extraordinary growth.

We have debates and Questions in the House about the consequences of that extension of airline capacity and the pressures that it brings on our people in all sorts of ways. But let us make no bones about the impact. Where less expensive flights have been made available, our people have voted with their feet by their purchases. Although the Government's aviation policy is not to "predict and provide", it would be ludicrous if we did not make provision with regard to what is clearly a significantly expanding demand—although I hasten to add to my noble friend Lady Cohen that she will not take me too far into the issue of additional runways now.

As I promised the House, we are now a matter of weeks—dare I say days; I will say days—from the long-awaited White Paper on airports in the south-east. It is certainly worth more than my tenuous link to the department for me to start to leak any information about the White Paper at this stage. I am sure that Members of the House have not participated in this debate in the hope that I would engage in one of my more injudicious moves. I shall resist that temptation.

Viscount Astor

My Lords, may I congratulate the Minister on being one of the few leak-proof Ministers in his Government?

Lord Davies of Oldham

My Lords, I hope that that is on the record and that it will stand me in good stead for at least another 24 hours.

The measure of the success of these liberalising reforms is that the 15 countries of the EU, with 10 more about to join, a further three to be included in the European Economic Agreement plus Switzerland with its own agreement with the EU, will comprise 30 countries in a common European aviation area. Therefore the two major markets in world aviation, Europe and the United States, are now liberalised.

The talks currently in progress between the EU and the US could result in these two markets being joined together to form a single, huge open aviation area, within which airlines from either side of the Atlantic could freely offer services to consumers. This would be a great prize.

Why have the EU/US talks opened this year? As the report clearly identified, the European Commission has long wanted to negotiate with the US on behalf of the member states. During the 1990s, the US succeeded in signing so-called "Open Skies" bilateral deals with several EU member states. I say "so-called", because those agreements did not allow EU airlines access to traffic behind gateways in the United States. The most salient point to have come from the report, and one that has been voiced by all speakers in the debate, is that of the danger of achieving an agreement which does not reflect like with like. That is why the Government are grateful that the report points out why we do need to negotiate with considerable care. Very significant interests are at stake.

European airlines are disadvantaged when compared with their US competitors, which could pick up or set down traffic elsewhere in Europe. The Commission argued that the US was picking off EU member states one by one so that, in the end, US carriers would be able to operate across the EU while Community carriers would be restricted to their national corridors. There was also a substantial imbalance between the small number of US carriers and the much greater number of EU carriers operating across the Atlantic, with adverse implications for the efficiency of those EU carriers.

For several years, member states approached the Commission's request for a mandate cautiously because they had achieved a long series of bilateral positions that needed to be safeguarded. The UK moved into the field early and quickly established its position. We believed that we would be better able to secure benefits for UK consumers and commercial opportunities for UK airlines if we controlled the scope and direction of negotiations with the United States. Some other member states opposed a mandate for different reasons.

However, in June 1996, transport Ministers authorised the Commission to hold exploratory talks with the US, limited to regulatory matters, the so-called "soft rights" mandate. The Commission held two rounds of talks with the US, but it soon became clear that the US saw no point in further discussion in the absence of authority for the Commission to discuss "hard rights", such as traffic rights, capacity and fares. That is why the Commission turned to the courts to seek a capacity for a mandate.

The European Court of Justice rejected the Commission's most fundamental claim by ruling that member states are indeed entitled to continue negotiating bilateral air service agreements with third countries. That repeats the reassurance I gave earlier to the noble Viscount, Lord Astor. But it laid down certain conditions. The Court held that there are certain issues on which member states should not negotiate because they are subject to Community law. Most significantly, it ruled that bilateral agreements are illegal if they give advantages to national carriers compared with other Community carriers established in the home country. Since traditional Chicago-type agreements nearly all have clauses which treat home-owned carriers preferentially, there are now a large number of bilateral agreements which need to be revised, I hasten to add, with care.

The European Commission initially took an uncompromising view of the Court's ruling, arguing that the eight member states should activate provisions for denouncing their bilaterals with the US. It requested all member states to refrain from taking on new commitments with third countries. But member states did not accept the Commission's interpretation of the ruling and maintained solidarity by insisting that the question of a mandate be determined as part of a package addressing a number of other issues raised by the Court judgment, affecting all bilaterals rather than only those with the United States.

Months of hard negotiation have resulted in the position outlined in the report. The Commission received a mandate to negotiate a comprehensive agreement with the US on a transatlantic open aviation area. The Commission also received a limited, so-called "horizontal" mandate to negotiate with any third country on how to bring member states' bilaterals with that third country into compliance with Community law. Lastly, the Council agreed the outlines of a regulation establishing a framework within which member states may continue to negotiate bilaterally, subject to a reasonable degree of oversight at Community level.

The UK played an active part in hammering out this composite deal. In our view, it illustrates the principle of subsidiarity which should be applied. The Commission may negotiate on behalf of member states where it can add most value, but member states are free to work on their own account on issues best dealt with at national state level. The Government believe that this deal provides a suitable institutional framework and balance of responsibilities for member states and the Commission to co-operate in liberalising air transport services between Europe and the rest of the world.

The US mandate envisages an ambitious, comprehensive and fully liberalised agreement between the EU and the US, capable of being extended to include other like-minded countries. This would be a new form of aviation agreement, creating open access for licensed carriers throughout an open aviation area, under an agreed regulatory framework. As such, it would denote a radical departure from the traditional form of bilateral agreements based on a mercantilist exchange of traffic rights, which was defined earlier in the debate by the noble Lord, Lord Bridges.

The backbone of such an agreement would be a relaxation of airline ownership and control rules. EU interests should be able to own and control airlines based in the US, and vice versa. This would help the industry to restructure itself by means of acquisitions and mergers, as happens in other sectors. It would allow the free flow of capital and management expertise throughout the open aviation area.

However, like the committee—and we are grateful that this was emphasised—the Government have been conscious of the risk that the Commission might be tempted to seek to score a quick result at the expense of genuine liberalisation, opting for a US-style "Open Skies" deal without holding out for the more fundamental changes which would equalise the relationship between the two areas in the way I outlined earlier. Such an agreement would not promote fundamental change. On the contrary, it could act as a drag on liberalisation for many years. The Commission's mandate does envisage the possibility of the staged negotiation of an open aviation area, but it requires that any agreement should include from the outset certain key features, including market access, ownership and control.

To ensure that these benefits are achieved, member states have insisted that, if it were proposed that some elements of an agreement should be implemented before others in any staged approach, there should be secure mechanisms to ensure progression to subsequent stages. I am pleased to say that so far there have been no worrying signs in the negotiations on this score. The Commission has stuck effectively and strictly to its mandate. The noble Lord, Lord Shutt, invited me to introduce a "state of the nation" address about the negotiations at this point. I can scarcely do so given the constraints of time and their complex nature. However, I shall do my best to give an outline of them, thus also responding to the request put by my noble friend Lord Woolmer.

EU/US negotiations commenced on 1st October and the second round is taking place this week. The opening talks were essentially exploratory and various streams of technical work were identified. We have no reason to believe that the Commission is not as keen as the UK to achieve full liberalisation of the transatlantic aviation market. We shall, if necessary, use the UK's membership of the Special Committee, along with all other means at our disposal, to ensure that the Commission continues to work to this end.

My noble friend also asked about the position of other countries. Looking ahead, it is too early to say when the Commission might receive mandates to negotiate with other countries. Our criteria for assessing any requests will remain whether there is added value in negotiating at Community level, and how effective the Commission has been with the US. It could be that like-minded countries such as Australia, New Zealand and Singapore, or countries which border the EU in wider Europe or north Africa, would be the most promising candidates.

My noble friend Lord Woolmer addressed to me a series of quite specific questions, a number of which I hope he will feel that I have answered during the main thrust of my response. However, I shall turn briefly to his queries. He asked whether agreements were needed under Bermuda 2 as regards Hong Kong. The answer to that is no; they are allowed under the US/Hong Kong bilateral negotiations. Do we regard Cathay as foreign-owned? Yes, we do. Can Virgin share rights with Cathay? No. it cannot do so. Is Commission approval required? Yes, at the insistence of Hong Kong. It is too early to say what is the Commission's view, but that is the position that has been adopted by Hong Kong.

My noble friend's second question concerned whether we were engaging in a great number of bilaterals. We are involved in 14 at present, nine of which are Community designation agreed. My noble friend asked how the Commission was monitoring those negotiations. As I have indicated, it has a mandate to monitor them with care. Which countries has the Commission approached to commence negotiations on its horizontal mandate? We have a limited report to make on that now. I made a brief reference to that in my earlier comments.

As to the complex and difficult question of slots—I am conscious that I have already spoken for longer than I should—the Commission's proposal on this was rejected at the Council. The possibility of slot trading by means of joint exchange was safeguarded. So we are protecting our position in that crucial area.

Will the Commission stick to full liberalisation as a goal? That is the most fundamental question of all and it is one to which we are committed as a broad principle. The noble Lord asked me to emphasise particularly our broad principles. How can liberalised access to Heathrow for other US and EU airlines be made a reality without damaging existing air traffic rights? There are real difficulties in regard to this issue. We have clear and important interests to safeguard. That is why secondary slot trading is so important.

I have spoken at great length in response to this very intensive, detailed and effective report. I congratulate the committee on its work under the effective chairmanship of my noble friend.

5.41 p.m.

Lord Woolmer of Leeds

My Lords, I hope your Lordships' agree that this has been a wide-ranging and useful debate. On behalf of my committee, I thank noble Lords for their kind and generous comments about the report. We shall continue to keep a close eye on what I suspect will be long negotiations. We shall not lose sight of them. We shall keep a close eye on the operations of the Commission and the way in which it takes forward our ultimate aim of comprehensive liberalisation.

On Question, Motion agreed to.