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European Airlines: State Aid

Volume 569: debated on Wednesday 14 February 1996

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3.11 p.m.

Whether they consider that the European Commission should approve further state aid for European airlines.

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

My Lords, no. The Government strongly oppose state aid in aviation. By distorting competition it is bad for consumers and damaging to United Kingdom carriers.

My Lords, I am grateful to my noble friend for that reply. But is not the latest decision by the Commission to allow a further tranche of state aid to Iberia almost enough to drive one to despair? Is it not the case that when Iberia was last allowed state aid some four years ago it was strictly on the condition that that was to be the last time, and now it has been allowed another £440 million? Further, if, as is claimed, the Spanish Government are acting only as any private investor would in the circumstances, does my noble friend agree that a private investor would inject cash only if he could see a return on his money in a reasonable time? Can he ensure that the Commission provides proof that that is the case or, better still, finds a bank to put up the money?

My Lords, I quite agree with my noble friend. He is right to be disappointed by the Commission's decision. It flies in the face of everything that we are trying to do to establish a single market for aviation within the Community. This is the second huge payment to Iberia in four years. About £670 million was approved in 1992 by the Commission with the express condition that no further aid was given for the duration of the restructuring programme. Therefore, it is extremely difficult to see how the current situation fits in with that. It is also extremely difficult to see how the Spanish Government can be acting according to the market investor principle, particularly as Iberia has been losing money for a great deal of time. In those circumstances it is difficult to see how the Government are working as a commercial investor.

My Lords, the noble Viscount has indicated the Government's disapproval of the subsidy approved by the Commission to be granted to Spain in respect of Iberia. In those circumstances, can the Minister say why the British Government, as a member of, the Council of Ministers, did not invoke the procedures outlined in Article 3(2) of the treaty which makes specific provision for the Council to be able to object to any proposition of this kind? Why did not the Government take action before, or if they did not know that, why did they not?

My Lords, the noble Lord has the advantage of me as regards paragraphs and probably subparagraphs of the treaty. Our resolve has been shown as regards state aid by action in the Air France case, where about £2.4 billion is due to be injected into that airline. We have taken legal action. We have joined in supporting airlines who have also taken legal action on that case. We could not possibly take any action before we knew what was happening. We are examining the judgment very carefully and in the light of that we shall make any further decision on the action to be taken.

My Lords, can my noble friend say what action the Government are taking to prevent a repetition of this folly?

My Lords, all such injections or possible injections of state aid are considered by the Commission on an individual basis. As I said before, our resolve on this matter is demonstrated by our action as regards Air France. It is an enormous injection of cash into an ailing airline. We thoroughly disapprove of the Iberia decision. It seems very perverse in view of the publicly stated policy of the Commission on this issue. We shall continue to oppose state aid for airlines, but we shall look at each case on its merits.

My Lords, we have enough time to hear both speakers. Perhaps the Cross Benches may be heard before the noble Lord, Lord Mackie of Benshie.

My Lords, is the Minister aware that Air France has already had in subsidies from the Commission twice as much as the net value assets of British Airways, the most profitable airline in the world? Why should it not now be allowed for British Airways, or for any other enterprising and non-loss-making concern, to buy Air France and Iberia as obviously they are both hopelessly badly run?

My Lords, I certainly would not take issue on the great strength of British Airways and its achievements since privatisation. It has shown to other airlines in the Community that it is possible to run an extremely profitable airline very well and to expand the services provided to consumers. We agree with the points put forward by the noble Lord, Lord Wyatt. Airlines should be able to stand on their own two feet and it has been shown that that is possible. We thoroughly oppose state aid in aviation.

My Lords, how does the noble Viscount equate his indignation at this gross breach of the private theory of investment with the fact that his Government are paying subsidies to people all over the place to run the railways?

My Lords, if there were no subsidies to the railways they would not run. They are different from airlines in their ability to generate income and cover their costs. It is clear that a good railway system has always been subsidised and will always be subsidised. There are socially necessary services involved. It is also equally clear that airlines can provide the services that their consumers want on a profitable basis. That is essentially the difference.

My Lords, can my noble friend say whether the Commission is also approving subsidies to European shipbuilding yards?

My Lords, shipping has a different regime. There is considerable anxiety among British shipowners and shipbuilders on the state subsidy regime within Europe. The United Kingdom Government have pressed for more transparency in their accounts so that it is possible to see whether this state aid is legal or illegal. That is the crucial matter that we must determine.

My Lords, I agree in principle with opposing such financial assistance, but did not Commissioner Kinnock apply far more stringent conditions to this particular financial assistance than was the case on the last occasion? If that is .the case, why will the Minister not tell us so, instead of trying to give the impression that the money was handed out with no conditions at all attached?

My Lords, the important point is that conditions were attached last time, and look what happened. Despite the very strong conditions that were imposed last time that there would be no further state aid within the period of restructuring, the Spanish Government have returned and requested further state aid to inject into the restructuring of Iberia. It is true that Commissioner Kinnock attempted to impose strong conditions to the judgment, but we have only to see what has happened in the past. We do not believe that state aid should be injected into these airlines, conditions or no conditions.

My Lords, does the Minister agree that when he was Commissioner for Competition Sir Leon Brittan approved the first tranche of aid to Iberia? Does he also agree that so much was Sir Leon driven to despair on this occasion that he supported the view of Neil Kinnock, which in fact was the unanimous view of the whole Commission? Will the Minister explain to the House that even though he is so dismissive of the market investor principle in this case, the Government have sought to apply that principle in relation to aid to a number of railway companies under privatisation, with regard to a £80 million package to help to finance the new Jaguar plant at Castle Bromwich and with regard to a £61 million application for support for a Northern Ireland textile plant? Does he also recall in relation to all this that the Government, with a somewhat forked tongue in the circumstances, sought to apply for illicit state aids for British Aerospace and Rover?

My Lords, I entirely reject everything that the noble Lord says. It is clear that the noble Lord finds himself in difficulties in addressing this decision by the Commission. I believe that he thinks that airlines should stand on their own two feet and should not have injections of capital, so he has sought to turn the Question to other areas. The essential point is that state aid must not be allowed in areas which distort competition. We have tried to create a single market in aviation throughout the Community. There is direct competition between airlines which provide a similar service. If there is that direct competition, we must ensure that airlines are not subsidised. How can British Airways, for example, and other United Kingdom carriers be expected to compete on an equal basis with loss-making airlines which have enormous sums of capital injected into them whenever they start failing?

My Lords, we have only 30 minutes for Questions. I think that we should move on to the next Question.