CITY AND SUBURBAN
Lord King hangs a pretty label on a privatised franchise
CHRISTOPHER FILDES
British Caledonian has a toehold on the London-Nice route, and this has stirred British Airways into providing pretty labels (`The Riviera Route') for its passengers, and questioning them when they come back through Heathrow. A market- research lady questioned me, running down the list on her clipboard — 'Mark between nought and ten: did they make You feel special?' — and finally asked if I had a suggestion for improving the service. Yes, I said: radical reform of the fare structure. She looked stiffly at me. That, she said, is not service.
If Lord King of British Airways gets his wish she should have no further trouble. British Airways will absorb BCal and go back to splitting the route with Air France. It will, presumably, like other European routes, be a pooled route, where the two Partners charge identical fares and put the revenue into a common pot, allocating it later. We are left to hope that they printed Plenty of the pretty labels. Routes are the bargaining counters and the prize in this takeover. Routes are a scheduled airline's assets. To the passenger or first-time investor an airline may look an imposing, solid business, with many mil- lions of dollars' worth of high-technology assets bumbling through the skies in its livery. Those assets are likely to be leased or mortgaged. Specialist bankers and fi- nance companies bridge the gap between the aircraft's maker or owner and the airline, which in effect wants to have finished paying for it before it goes out of service. Its chance of doing that depends on its routes.
BCal's routes have scuppered its chances. At the last major share-out BCal lost and British Airways won. This was the attempt three years ago to bring BCal in on some of British Airways' best routes. Lord King kicked and shouted and threatened resignation. He could well say, then and now, that he has a much better hearing in 10 Downing Street than officials or even ministers. He had been dealt the ace, and played it. He was running a state-owned business under orders to take it to market: should public policy help that, or hinder it? We could see at the time of the flotation what this makes British Airways. It is a franchise operation — like a burger bar or a Body Shop. Its major assets, its routes, are franchised to it as an act of political patronage. The same goes for its successor on the privatisation runway, British Air- ports Authority. Did the new investors in these hyped-up companies, now unwrap- ping their penny packets of BAA shares, think they were investing in air travel? BAA's major asset is an anomalous tax concession, on which are built its duty- free, high-margin shops. Handling aircraft is the price it pays for these assets — and even then it handles those aircraft because of the patronage decision in allocating routes. Manchester Airport, a growth busi- ness in an area the Government wants to help, cannot get airlines who want to fly there, because of the policy which concen- trates them in the BAA airports in the south-east.
The airline and the airports can stand beside British Gas and, most conspicuous- ly, Telecom as examples of a privatised franchise. Gas and Telecom's domination of their markets has been written into the law of the land. Competitors will be prosecuted. Efficiency is left to depend on price regulation (more likely, to this Gov- ernment's usual economic thinking, to achieve the opposite) and to the monitor- ing agencies (Telecom's has written to the papers giving its telephone number, which Directory Inquiries had been unable to find).
To remedy those mistakes might seem to break faith with a whole generation of new investors who bought shares in the franch- ised businesses and may well have voted for the Government which let them do it. This is the hard case which Lord King now thrusts upon the Government for decision. He says in effect: I have just enabled you to sell your shares to my shareholders; now will you back us — or face the consequ- ences?
It is easy to see (and the stock market, marking the shares up, at once saw) what is in this for the shareholders. As for BCal's shareholders, they are in not much of a position to argue. Lord King has forborne to argue, at least in public, from BCal's necessity. Instead he says that this merger is necessary to make an airline which can take on the world.
That is not what we were told when the world's supposedly favourite airline and leading international carrier was coming to market, and it rings like the arguments used by Ernest Saunders to justify taking over Distillers, but it has found uncritical supporters. Lord King has his claque, as Mr Saunders had, and not for nothing is the Aviation Correspondent of Private Eye called P. R. Hack. It is an argument which deserves to be tested. For a start, it could be tested against the conclusion of David Sawers's new analysis, Competition in the Air (IEA, £3.50): 'The costs of airlines do not appear to fall as their size increases, so that simple economies of scale cannot justify the merger movement.'
His work examines the internal air routes of North America and Europe theirs to some degree 'de-regulated', ours still firmly cartelised, pooled and carved up. He compares Europe's busiest air route, London-Paris, with the comparable service between New York and Washing- ton: 'The European fare is roughly double the US fare for a less frequent and less convenient service which ought to be cheaper.' Why, Mr Sawers asks, do Europe's airlines have costs so much high- er than those of North America? His finding is devastating: 'The picture is of an industry which charges high fares to cover high costs, which permit it to earn high profits.'
The proper place to test all this is in front of the Monopolies and Mergers Commis- sion. The more evidence is published, the more the debate becomes public, the bet- ter. That debate must consider how, in a competitive air travel market, ought routes to be allocated? How far do we need to allocate them at all? We used to think it necessary for lorries and coaches — and how those markets have grown since! Should we require public applications, with full statements of policy, as with the television franchises? Should we put the routes out to tender? Why should these crucial assets, the foundation of an airline's business, be given away?
Beyond this lies the wider debate on how to avoid privatising a franchise — how not to graft the vices of a private monopoly onto the vices of a public monopoly. Lord King must not be allowed to bounce that question into being decided by default.
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