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S T A N D I N G C O M M I T T E E O F T Y N W A L D O N E C O N O M I C P O L I C Y R E V I E W

B I N G V E A Y N T I N V A A L M Y C H I O N E A A S C R U T A G H E Y P O L A S E E Y N T A R M A Y N A G H

OPEN SKIES POLICY

HANSARD

Douglas, Thursday, 25th April 2013

PP82/13 EPRC-OS, No. 2/12-13

All published Official Reports can be found on the Tynwald website www.tynwald.org.im/Official Papers/Hansards/Please select a year:

Published by the Office of the Clerk of Tynwald, Legislative Buildings, Finch Road, Douglas, , IM1 3PW. © High Court of Tynwald, 2013 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

Members Present:

Chairman: Mr L I Singer, MHK Mr D M W Butt, MLC

Clerks: Mr R I S Phillips

Business Transacted Page

Procedural ...... 21

Evidence of Mr Noel Hayes, Chairman and Mr David Buck, Managing Director, ...... 21

The Committee adjourned at 3.18 p.m.

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Standing Committee of Tynwald on Economic Policy Review

Open Skies policy

The Committee sat in public at 2.30 p.m. in the Legislative Council Chamber, Legislative Buildings, Douglas

[MR SINGER in the Chair]

Procedural

The Chairman (Mr L I Singer MHK): Good afternoon, everybody, and welcome to this inquiry. The Standing Committee today is taking evidence on Open Skies from Mr Noel Hayes, who is Chairman, and Mr David Buck, the Managing Director of Citywing. It was our intention to 5 be taking evidence from and easyJet today, but for reasons beyond their control, they could not appear today, but they will be appearing here on 15th May. If I can introduce Mr Butt MLC, member of this Committee and our Clerk, Mr Roger Phillips. The other member of this Committee is Howard Quayle MHK, but he is a member of the Department of Infrastructure, and as they have a direct input into this inquiry, he stepped aside. He 10 is not taking part in this. Can I ask that Members and everybody ensure that their mobile phones are turned off; and to the witnesses, and also to us as well, not to talk over each other, because of the sound recording. The remit of this inquiry is:

15 ‘That the Economic Committee should examine whether – (a) the current ‘Open Skies’ policy is, in the light of changing circumstances, still in the best interests of the Isle of Man in preserving and encouraging an adequate, frequent and long-term network of scheduled air services between the Island and major business and social destinations; and (b) the determination of the Island’s civil aviation policy should properly be in the remit of the Department of 20 Economic Development, with the operation and management of the Airport the responsibility of the Department of Infrastructure; and report to Tynwald…’

The original date was given as April 2013, but as I explained to Tynwald at the last meeting, 25 this is an inquiry in which we are taking a lot of evidence. There is a lot to do, so we will not be reporting until later in the year. We have already taken evidence from the Department of Infrastructure and the Department of Economic Development. When we get to the end of taking evidence, we will probably be speaking to those two Departments again, who will be aware of the evidence that has been given. 30

EVIDENCE OF MR N HAYES AND MR D BUCK

35 Q67. The Chairman: So if I can welcome you, Mr Hayes and Mr Buck. Could we start off – if you could explain to the Committee your background within the industry and how you have come to be in positions you are now. Mr Buck.

40 Mr Buck: My name is David Buck. I originally came into the industry in 1983, working from Her Majesty’s Air Force. When I left the Air Force in 1989, I joined the civil aviation side of flying. I worked for a company in the UK called Air UK. They were subsequently bought out by KLM UK and I worked there, mainly at the base level, from an operational point of view, working my way up to schedule delivery manager within the company, before moving to the Isle of Man to 45 take up a position with Manx . ______21 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

From the position, bought that company out, and with the rearrangement within the department I eventually became operations manager for British Airways City Express. I had to move my department from the Isle of Man over to and then took the actual decision myself that I would not move with the company. I left that company and 50 joined EuroManx as a director of ground operations, and when EuroManx sadly demised, Noel kindly came along and offered me a position working for a company called FLM Aviation who were operating on behalf of . After that, I joined Manx2 and subsequently have risen to the position of Managing Director of Citywing. 55 The Chairman: Thank you.

Mr Hayes: Well, whereas David has been in aviation man and boy, I confess I am a relatively new joiner to the aviation industry. My background is in City and finance. 60 Fifteen years ago, I was living on the island of Alderney, and at that time, we had a monopoly service provider to the island of Alderney, a monopoly air service. I was in the retail business at that stage, and the only way to get proper supplies of freight to my retail business was to set up a competing with the monopoly carrier. That monopoly carrier was a company , which is owned by the States of Guernsey. So I set up, 15 years ago, my own airline company, 65 called Rockhopper, which then changed its name to . About six years ago now, I sold my controlling stake in the company to my partner in Guernsey, but the last thing I did for Blue Islands was to set up a link between the and the Isle of Man. So six years ago I appeared in the Isle of Man, for the first time in my life, to set up an air link, found that I actually quite liked the place and was persuaded by the Department 70 of Trade and Industry and the Airport that there was a niche for a small operator of 19-seat aircraft, because there were a number of destinations that needed to be served from the Isle of Man that were not served. So we set up Manx2 and built the business up over the last six years, and the management then did a management buy-out of the business just before Christmas. I am now the Chairman of the 75 business and still keep an active interest and active involvement in the business, but David and the team manage the business on a day-to-day basis.

Q68. The Chairman: Thank you very much Can I just ask you whether you have got any views on section (b) of our remit, which is 80 whether the civil aviation policy is better within the Department of Economic Development and the operation within the Department of Infrastructure? Does it actually make any difference to you, as an airline?

Mr Hayes: I think – to not answer your question! – what we would probably say is the one 85 thing I feel very strongly is the commercial aspect of the Island’s air links, probably its sea links and also tourism, need to be in the same place. I think the absolutely crucial thing is that tourism and airline route development are in the same place under the same overall head. Otherwise, you could have the Airport trying to persuade an airline, for example, to open up a new route from the Island to Amsterdam, and you could have Tourism having made a policy decision on where they 90 are going to be spending their advertising for the next 12 months and none of it is focused on spending it in Amsterdam, so you could have them operating in two completely divergent directions. We have seen examples of this ourselves, where Tourism’s idea of where money should be spent is different from where we are working with the Airport on new route development. So I feel 95 very strongly that tourism development should be in the same place as the commercial side of airline route development. Do I think that the people who are responsible for looking after the number of passengers going through the Airport need to be in the same place as the people looking after the tarmac and the buildings? I think the answer is no. There are lots of examples where one team of people look 100 after the buildings and the infrastructure and a completely separate team look after the commercial side, so I would see no problem separating those two, if that was the desired route; but I do very strongly feel that the commercial side and tourism need to be much closer than they have been historically.

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105 Q69. Mr Butt: So you are aware, then, that Tourism is in with the Department of Economic Development now. (Mr Hayes: Indeed.) So from what you have said, you would rather that the management of the air industry was in within that Department, to tie in to –

Mr Hayes: Yes, providing they are given status within the Department and given adequate 110 funding. I think, since the Department of Tourism was abolished and has been moved within the Department of Economic Development, the loss of ministerial and departmental status has made an impact on the importance of the Tourism Department within the Isle of Man. I think that, although the net result of that has not been seen yet, partly because of what is happening at the current time with the excess capacity on the Island, I believe there is a railway 115 crash that is waiting to happen on some of the numbers for the Island’s tourism industry, and unless there is proper funding allocated and sufficient importance given to airline route development and tourism – as an important either subsection within the Department or as a separate Department – there is a problem in the wings that is waiting to happen.

120 The Chairman: Thank you.

Mr Buck: There is not much I can add to that, actually. We have a view shared.

Q70. The Chairman: Okay, thank you very much. 125 So, if we can just look generally, we have received your evidence, which is interesting and is full of information. What are your general comments on the current Government policy of having the Open Skies arrangement? Do you think there have been any fundamental changes in the passenger transport market since there was the last review, which was 11 years ago?

130 Mr Buck: For me, one of the biggest changes that has happened in the market was the ability for the Isle of Man to attract another carrier. We are in the situation now where the UK is mainly dominated by three or four carriers, whereas before there were lots of small other operators around that are no longer here and available to bring to the Isle of Man and are attracted to the Isle of Man as a workable business for them. 135 The Chairman: No regional operators, you mean?

Mr Buck: Yes. So from our point of view, that is the very substantial change that there is. It is fine having the Open Skies and having a lot of players in the market that wish to come and operate 140 from the Isle of Man; but when there are only a few, actually, if one of those players that is already on the Isle of Man decides to move, the Isle of Man finds itself in a very difficult position to actually attract another one in. The loss of City was a case in point, really, because we, talking amongst ourselves and within the aviation industry, could not really come up with many players that you could actually 145 attract to the Isle of Man to operate it, and we were very fortunate that British Airways came in, but if British Airways had not, then I would suggest that there would not have been any other.

Q71. The Chairman: But that was under the Open Skies policy.

150 Mr Buck: That was under Open Skies, but what I was saying is therefore there are not many players there; whereas in 2002, when the Open Skies policy was originally drawn up, actually there were maybe another 10 players that you could have drawn in and said, ‘Actually, can you bid to operate this?’ or ‘This route is available – can you please come in and give a proposal?’

155 Q72. The Chairman: Does it make a difference that maybe 11 years ago, the numbers were increasing, of passengers, whereas now, do you find that they are they decreasing, the number of passengers?

Mr Hayes: I think at the current time the passenger numbers seem to be stable, at best, in terms 160 of passenger numbers coming to the Island. Again, I think we are seeing, for the Island’s air passenger market, a little bit of a halcyon period at the moment, because the Island is benefiting from significant overcapacity coming onto the Island. On both the route and Gatwick route, we have Flybe and easyJet both providing competing services.

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165 All the evidence, going back over any period of time, shows that on no route have two operators ever co-existed for a protracted period of time, and I would put it to the Committee that there is a car crash waiting to happen. At some stage, one of the operators on Liverpool and Gatwick is very likely to withdraw from that route. I cannot tell you which of the two operators; I cannot tell you when. But I can tell you, in my honest opinion, at some stage over the next two 170 years, one of those operators will withdraw, and depending which one –

Q73. The Chairman: So they are both waiting for the other to blink?

Mr Hayes: I think they are both waiting for the other to blink. I think it is also possible that the 175 Isle of Man is perhaps caught up in a larger political game, because clearly, from a corporate objective, both easyJet and Flybe are public companies, they both have their own public company objectives and the Isle of Man is a very small part of their business but may be being used as a pawn within that business.

180 Q74. Mr Butt: Could I refer to your submission that we had some weeks ago. It seems to be generally supportive of Open Skies, but you do have some reservations. I wonder, could you perhaps tell us those reservations for the benefit of this inquiry?

Mr Hayes: I think Open Skies and lack of Government control is generally beneficial. I came 185 from operating in the Channel Islands, as I mentioned, and down there I spent 10 years, on most occasions, fighting against the Guernsey Transport Board to get a route licence to operate routes in and out of Alderney and out of Guernsey and . It was a very difficult period, and I think the problem was the way they operated Closed Skies down there made the route licensing proposition very difficult for new entrants. 190 I do not think in the Isle of Man that we should go with the route of Guernsey and effectively go from Open Skies to Closed Skies, because I think there is a halfway house. My own view would be that we need, effectively, a presumption of Open Skies, but the Isle of Man at the same time does need a safety policy. If I could give you what is probably an absurd example, but nonetheless one that would make 195 the point – because of the lack of barriers to entry occasioned by Open Skies, an airline such as, for example, Ryanair, could appear here tomorrow, could announce to the Island that, on 1st May, they are going to start a twice-daily service to , Liverpool and Gatwick, and they will only run that from May through to September, and they will stop it in September. That would do enormous damage to the other airlines operating into the Island. You would 200 probably see some withdrawal of airlines operating into the Island, but Ryanair could quite openly, publicly and properly do that as a business policy. They could cherry-pick quite openly, and they could withdraw at two weeks’ notice, if they chose to, and there is absolutely nothing in the current legislation or the way the Isle of Man operates that gives, as far as I am aware, any opportunity for anybody in Government to even call them and say, ‘Could you please explain what 205 you are doing? We have a view on this.’ The view on this is, ‘Come on down, help yourself, do what you want to our market.’

Q75. Mr Butt: How would you see a halfway-house policy operating, then?

210 Mr Hayes: I think there should be a presumption that a licence will be issued to anybody who wants to come and operate a route. However, I think, above that presumption that normally a licence would be issued, there should be an overriding clause which basically says words to the effect of ‘unless it is against the national interest’. So I think it would have to be something fairly significant and something which could be seen manifestly either was going to damage, was likely 215 to damage or needed looking into as to whether or not it was going to damage the national interest of the Island. At the moment, there is absolutely no safety net or safety policy which prevents the Island’s air routes being dictated completely by the private sector and outside the control of Government. I think the Island, in the past, has been blinded by simple arguments which say, ‘Open Skies 220 work throughout Europe; therefore, we are part of Europe, we should have the same.’ There is one absolutely fundamental difference, which is if, just in the UK alone, you want to go from any one city to another major city – from London to Manchester, for example – you have got a choice of at least four ways of getting there: you can drive, you can fly, you can get on the train or you can get on a public bus service. If we want to get to Manchester, we do not have that choice. Our air links 225 are effectively of the same importance as an emergency service, to any island community, and I ______24 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

think that has been demonstrated by the attitude they take down in Guernsey, where although I said I had great problems with the Guernsey Transport Board and their licensing system, down in Guernsey they view their air links as sufficiently important that they bought their own airline. Again, it is not something I would recommend as a way for the Isle of Man to go, buying our 230 own airline, but it does show where an island community of the same size as the Isle of Man places enormous importance on their air links. Here, our laissez-faire attitude, I think, has potentially the seeds for major disaster in prospect. As I said, I think there is a railway crash waiting to happen at the current time with a significant overcapacity on two of the three major routes onto the Island. 235 Q76. The Chairman: We have been talking about these routes, Gatwick, Manchester, Liverpool – I think they could be termed lifeline routes, really. Do you think there is a case for licensing on those routes, but not on the other routes? I know you are not involved in those major routes. 240 Mr Butt: Except , maybe. Belfast is another –

The Chairman: Well, would you call Belfast a lifeline route?

245 Mr Hayes: I think if one were going down the route of granting route licences, it would probably simplify matters if every route were subject to a route licence; but as I say, I think the presumption should be that nine times out of ten the route licence would be granted and that somebody applying for a route licence to the Isle of Man should be able to assume that if they are applying for a route licence for normal commercial purposes, and they are doing it on a basis 250 which is not going to materially affect the transport links of the Isle of Man, it would be granted. But there are some special cases and I think the lifeline routes which you have mentioned are ones that should be called in. In normal circumstances, I probably would not have added Liverpool to the list, but at the current time, because of the significance of patient transfer – which again is something which 255 other island communities and people in the UK and Scotland and throughout Europe do not need to worry about – clearly it is very important to the Isle of Man that the link to Liverpool is maintained with sufficient frequency. Again, I would cite that as an example of national interest, where the Isle of Man has a different consideration to that of the rest of Europe.

260 Q77. The Chairman: What effect would it have, licensing, on your particular airline? What difference would it make to where we have got Open Skies, if there was licensing? How would it affect your Citywing?

Mr Buck: It would not actually affect us at all, because as long as we are granted the licence 265 through the concepts or the rules and regulations that have been put forward, then in effect it will not affect us at all. Again, it would not affect anybody else coming to the Island with a viable proper business that was right and just for the Island. But again, it just gives you the right to choose who does and who does not come to the Isle of Man, and whether it is in the best interests of the people, or not. 270 Q78. The Chairman: If you take, say, your route, obviously you need a certain number of passengers to... If somebody else was going to open a Blackpool route… and I think we have had competition on Blackpool, haven’t we, before?

275 Mr Hayes: Competition might be from Flybe.

The Chairman: And as you were saying, when you had two airlines on one had to go – but that would affect you, wouldn’t it, if someone else came?

280 Mr Buck: Yes.

Mr Hayes: It would indeed. I think if another 19-seat operator came along and started up in competition with us, we would see that as fair competition. That is what we are in business to do.

285 The Chairman: Right, okay.

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Mr Hayes: But the one thing which I did advance further in the paper was effectively… a second phase which went beyond the route licensing was then to do with the charging, because the other problem that we have within Open Skies and the Airport charging is that, the way the 290 Island’s air links and air routes are managed at the current time, there is no incentive for long-term investment. At the moment, the whole of the Island’s air structure has been turned into a short-term air structure, where the airlines change every few months or every few years, the routes are now changing around, and the reason is because there is effectively no security of tenure. I think that is 295 the other issue which needs to be addressed. I do not think it needs to be addressed through licensing; it could be addressed through commercial charges, but there is no incentive for us, for example, to invest massively in building up the Island’s air links between here and Blackpool, because tomorrow somebody else could come along and compete with that. So if that is addressed, either through the licensing system or through commercial charging, it 300 would give us an incentive to invest in long-term route development. At the moment, everything is completely short term because there is no security of tenure on any route. I think if one looks at the Steam Packet, as I understand it, the whole real reason for the ‘closed seas’, as opposed to Open Skies, was to encourage that long-term investment by the Steam Packet, as opposed to always looking at the short term. We seem to have this dichotomy between the 305 policy on the seas and the policy in the skies.

Q79. The Chairman: There is a lot greater investment, though, to put into the sea, isn’t there, than into an air route?

310 Mr Hayes: I guess people like easyJet would probably claim that one jet costs about as much as the Ben my Chree.

Q80. Mr Butt: You have almost answered my question there. You had the scenario of Rynair coming in for the summer and then going away again in September, security of tenure. How would 315 you have a charging regime or a fees regime that would make people want to stay longer? How would you tie them into that – for yourselves even, not just Ryanair?

Mr Hayes: Indeed. I think, to the existing established operators, you would have a set level of charging; but for somebody who wanted to come in and start a completely new route – for 320 example, from the Isle of Man to Amsterdam – they would go onto the standard discounted level of charges. If they wanted to come in in competition with an existing operator, I would suggest they had to pay a different level of charges which reflected the fact that the existing operator had made a major investment in developing a route. So you would put a new incomer at a competitive 325 disadvantage to the existing operator.

Mr Butt: So Open Skies, but a different rate of fee for those who had come in later on.

Mr Hayes: Yes, indeed. 330 Q81. Mr Butt: Could I ask, Mr Buck, you have worked in Manx Airlines, EuroManx, British Airways and now here. You have got a lot of experience of the Isle of Man in the trade. What is your view on the future of Open Skies?

335 Mr Buck: I am basically going to concur with what my colleague, Mr Hayes, has said, that Open Skies is there and it can be good, but I think there does have to be light touch regulation to ensure that those who are already operating on the routes actually feel comfortable that they can invest in their business going forward for the Isle of Man and know that there is going to be a business there in years to come that is going to be of value to them, so their investment actually 340 pays back for them.

Q82. The Chairman: Is that not a contradiction? You are saying then that you need that licensing and that surety in order to invest in the route, when someone who comes in on the route… you are saying well, yes, you are happy to have that competition. 345 Mr Buck: Well, this is again where it comes in with the pricing structure. As long as there is a pricing structure that benefits those already operating on the routes as they are now, then in ______26 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

essence, competition can still come, but… They are looking to basically benefit from what you have built up, but we think you should be rewarded for actually investing in the Isle of Man and its 350 business, and therefore having some structure that benefits those that have actually taken the time to do that.

Q83. Mr Butt: So you are talking about a light touch structure, which we have not got now – there is no light touch, as such. 355 Mr Buck: There is nothing at the moment that benefits those who have invested. So for example, if we want to spend £100,000 on marketing our Blackpool route, as an example, we could then build the numbers up, which is very good for the Isle of Man, and then the problem we have is our numbers look so good that another operator comes in. All this investment we have put 360 in, we might have a two- or three-year plan, but actually, at the end of year 3 when we get our investment back, somebody just comes in with a larger aircraft, takes all the passengers, and we cannot compete with them because the size of our aircraft obviously dictates what we are going to need to get back, and therefore our pricing structure will be a little bit different from what you would have on a larger aircraft. Therefore, all that good work we have put in and the investment, 365 we do not get any reward for. That would be the same with Flybe, or whoever.

Q84. The Chairman: If you had this surety, would you, as an airline, be looking at expanding your routes? If you had surety…?

370 Mr Hayes: It would certainly affect our planning, our medium and longer-term planning, and I confess at the current time we are not really looking at any new routes off the Isle of Man because of the significant overcapacity and the instability which is in the marketplace. The other thing which Open Skies does create is enormous instability, and I think anybody in business knows that instability is a negative as far as investment is concerned. 375 I would just clarify what we are not advocating is the creation of a whole series of cosy monopolies on each route, because I think monopolies are vulnerable to being exploited by the private sector. So I think hence why we brought in the second phase of a modest premium benefit for existing operators, which still leaves them subject to competition and stops them creating a monopoly which they are going to exploit for ever and a day. 380 Q85. Mr Butt: Can I ask about the routes you had to and other places, which you have discontinued now. What was the reason for that? Was it just capacity?

Mr Hayes: The reason that we really had to stop the route to Oxford… When we announced 385 the route and started selling the route, at the time, the London City route had been stopped so there was no London City route, and easyJet, at that stage, were not operating on Gatwick. The route started very strongly, the initial sales met our expectations, but fairly quickly after we started the route, London City restarted and then the competition came in on Gatwick. As I think the current Airport statistics do show very clearly, the Isle of Man passenger market is a very mobile 390 passenger market, and so although people might typically live only 10 miles from , if they can fly from Gatwick for half the price, they will drive to Gatwick. Just to give another classic example, at the moment a lot of people who would naturally have been flying, from Birmingham, for example, to the Isle of Man are now driving either north to Liverpool or south to Gatwick because of the cheap fares from Gatwick and from Liverpool. I put 395 it that there is this enormous distortion in the market taking place because of the two current price wars on Liverpool and Gatwick. It is not something which will be maintained. But certainly as far as our Oxford route is concerned, we went from having very good passenger bookings and a very strong start to a significant erosion because of new routes starting up and migration of the natural passenger base that was prepared to drive longer. 400 I think in the aviation market what we have found is that, by and large, people who book airline tickets look at the cost of the airline ticket as the cost of their journey. Very seldom do they take into account the add-ons, such as car parking at the airport and, more importantly, the cost of driving from home to the airport. Often they are in company cars, where the company is picking up the petrol bill, so they do not factor that cost in and they will cheerfully drive a hundred extra 405 miles to save £5 on a ticket. It is a nonsense, but that is what happens in the marketplace.

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Q86. Mr Butt: Can I ask about your company in the Isle of Man. We would like to encourage investment in the Isle of Man and in employment here as well. What sort of structure have you got here for local employment? 410 Mr Buck: We have basically got a small company with 10 Isle of Man based workers at the moment, depending on how we take the company forward and whether we are in a position to expand. At the moment, we are a relatively new company and therefore it would not be prudent for us 415 to expand. However, we do have plans in the future, in which case, once we do expand, then we would expect to expand numbers as well.

Mr Hayes: I think what I would add, sir, is that what we do also insist, though, is that our operators who operate our flights for us do base their aircraft in the Island. That is really a very 420 material factor, and it is our –

Mr Butt: So they overnight planes here.

Mr Hayes: They overnight planes here. We have, normally, 10 pilots on the Island at any one 425 time for our operators, all of whom are taking accommodation, all of whom are spending money in the hotels and restaurants. They have maintenance engineers who are based on the Island, who look after and maintain the aircraft; and also, although we do not own them, we are the exclusive customer for our handling agent, Rendezvous Handling, which again employs a number of people on the Island. So, although our own team is only 10, the subcontract employment directly from our 430 business is very significant.

Q87. Mr Butt: So the maintenance and the engineers, they are subcontracted, are they?

Mr Hayes: Yes. 435 Q88. The Chairman: How many planes do you have?

Mr Buck: There are three based on the Island.

440 Q89. Mr Butt: On the Belfast route, have you any competition on that route?

Mr Hayes: Not at the present time.

Mr Buck: Not direct competition, no. 445 Mr Hayes: We did have in the past. We had competition from both EuroManx (Mr Buck: And Flybe.) and Flybe at one time, and prior to that a small company called BNWA. So we had three previous companies competing with us on that route.

450 Q90. Mr Butt: Is that a sustainable, successful route, Belfast, for you?

Mr Hayes: Yes, it is. But again, it does… If I was re-asked the question, which is would we be investing more, if we had security of tenure on that route, the answer is yes. All the time, we do have in the back of our mind that another airline could turn up tomorrow and start competing with 455 us on a very successful route, and so it does tend to make our investment decisions on promoting a route investment decisions which we know will give us a fairly immediate payback, rather than something which will pay back two or three years down the road.

Mr Butt: Okay, thank you. 460 Q91. The Clerk: Quite a lot of the evidence that the Committee has been given has compared Jersey and Guernsey. How useful, in fact, is it to compare those two jurisdictions with the Isle of Man, given the differences, but of course the similarities in terms of size of each of the jurisdictions? Are they useful comparators or less useful comparators, do you think? 465 Mr Hayes: I think probably Guernsey is a more useful comparator. Jersey is larger, and I think the other difference from Jersey is Jersey is still viewed as a tourist destination. It is still very ______28 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

actively promoted, and chances are if you said to the average Englishman, ‘Do you fancy a week in Jersey?’ they would probably bite your hand off and say yes. Trying to sell the Isle of Man to 470 the average Englishman… although we know and love it, your average Englishman would probably say, ‘Why do I want to go to the Isle of Man?’; whereas Jersey is sold and therefore has a very good and strong natural tourist business to keep it fed and to create a lot more volume. Guernsey is, I think, a more similar size to the Isle of Man and it does not have quite such a strong tourism message which has gone out, so I think yes, that is a useful comparison – but as 475 also are the Scottish highlands and islands, which are something which I would probably say the Committee might just want to look at and to see how the UK government has treated its smaller communities there, because the British government keeps very quiet about it but the British government has a problem with its smaller islands, the Scottish islands. They deal with that through the public service obligation (PSO) route, where effectively they subsidise airlines to fly 480 into their offshore islands. Guernsey effectively has done the same, only they have not had public service obligations; they have bought their own airline. Instead, they subsidise the airline by spending, last I saw, between £1½ million and £2 million a year, supporting their airline to operate the routes that no other commercial airline wants to come along and operate. The same with a lot of the Scottish 485 islands: routes are operated which would not be stand-alone routes. You could easily argue, for example, that our routes from the Isle of Man to or Oxford, which we are no longer operating in the UK, would have been maintained… Had the Isle of Man been Scotland, for example, the UK government may well have declared those as PSO routes and put them out to public service tender, because they regarded them as essential lifelines. So the UK 490 government does have a very strong policy on lifeline routes, and we in fact, for the British government or the Welsh government, do operate a lifeline route, as they see it, from to the Isle of . So we receive a subsidy every year from the British government for operating that route for them, because they view that as an absolutely essential lifeline link. The Isle of Man is fortunate in that it does not have to pay any PSO subsidies to any operators 495 to maintain the current route network, but I would put it that if the market continues the way it is going at the moment, then the number of routes which are likely to be serviced from the Island is likely to continue to decline further.

Q92. The Chairman: So are you saying that you do not see…? Is that also because of lack of 500 passenger growth? How do you see passenger growth in the future?

Mr Hayes: At the moment, I can see no reason why passenger numbers should start to grow again. I think a lot of research has been done, particularly in the States, and the evidence seems to be that the rate of passenger growth grows at about double the rate of GNP growth. If that is the 505 case, there has been disconnect there over the last couple of years because we have seen little growth in passenger numbers, while the economy, I believe, is still claimed to be growing, according to the GNP figures. But I think, while over the long term one can see some modest growth in passenger numbers, unless there is some change in the Island’s economy or some change in the attitude to tourism, there is no reason to believe that passenger numbers should 510 suddenly start to escalate again. The problem that the Island has is that it is just as cheap to go to any number of European destinations, particularly to European destinations with better weather, for the same price as flying to the Isle of Man, so the Isle of Man is undoubtedly quite a difficult sell for us to the tourism market. Nonetheless, we try very hard to do that and we have been successful in a number of 515 areas. It is an area where the Government still needs to focus a lot of spending to make sure that tourism market is maintained, but it is going to be a very difficult sell to keep the tourism market maintained at current levels – unless a number of new businesses are encouraged which are going to be employment intensive. Again, I cannot see why the business community is going to suddenly start increasing numbers. 520 From what we have seen of recent high-growth businesses, such as e-gaming, they are not employment intensive; they are capital intensive.

Q93. Mr Butt: Could I ask about… We have had evidence from the two Departments concerned and Mrs Reynolds that basically they want to continue with the Open Skies policy. Do 525 you get a chance to speaker to the Departments and Mrs Reynolds; and if you do, what sort of conversations have you had? Have you expressed your concerns to them?

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Mr Hayes: Yes, indeed. We have a regular and healthy dialogue with the Airport, and I guess I would probably talk to Ann Reynolds once a month, or once every couple of months. At that level 530 there is a very good day-to-day relationship. Admittedly, most of our dialogue is to do with day- to-day operational issues, but we do talk to them about route development. I am conscious that Department’s policy has been Open Skies and continues to be Open Skies. I have always given them my view. They are aware of my view, I am aware of theirs and we agree to disagree.

535 Q94. Mr Butt: But your idea of incentives to make the long-term investment: are they receptive to that at all?

Mr Hayes: I think the answer is, from what I understand, they are currently looking at a step in that direction, because I believe they are also conscious of the need to… I think they have recently, 540 since easyJet started on Gatwick, become concerned about the loss of frequency. I think when easyJet came onto the Liverpool route, the Island and the Airport were not really concerned at all. They viewed that as healthy competition. The Liverpool market had declined over a number of years. The passenger numbers, I believe, in the best year had been about 330,000 passengers a year. They had been allowed to decline to something well under 200,000 passengers 545 a year. I think it was felt that it was a commodity route, it was a leisure route, it was very healthy to introduce new competition on that route, and I think the Airport was singularly unconcerned at that stage. When, all of a sudden, easyJet made noises about going onto the Gatwick route, I detected a notable change in attitude within, I think, the Department, and possible within Government as a 550 whole. All of a sudden, they could see probably the most fundamental lifeline route for the Island being threatened in the frequency argument coming up for question. I think the maths is simple: one easyJet plane carries twice the number of passengers of one Flybe aircraft. If Flybe are typically serving the Island four times a day, then the simple maths tells you that easyJet could probably carry that number of passengers flying only twice a day. The 555 maths of operating aircraft also tell you that, in the long term, easyJet would always be able to offer slightly cheaper tickets than Flybe because of the economies of scale of operating 150-seat jet aircraft, rather than a 78-seat turboprop aircraft. The question for a community like the Isle of Man is are they prepared to pay a small premium to maintain the frequency of four flights a day, rather than slightly cheaper fares and only have 560 two flights a day?

Q95. The Chairman: You may not be able to answer this, but we have got an extra flight, the easyJet flight, but the loadings are quite low, I think, compared to the normal loadings, and obviously the loadings on Flybe are reduced. So, in your opinion, is anybody on the Liverpool 565 route or the Gatwick route actually making a profit?

Mr Buck: From our own estimations, we believe potentially they may not be; or if they are, then they are just breaking margin or just above. But we believe that they may not be making a profit. 570 Q96. The Chairman: Just one point to actually mention: Leeds... and I used to use that route, as I was telling you. Were the passengers who used to use Leeds… are they the ones you are talking about driving to Manchester or Liverpool?

575 Mr Hayes: They are driving to Liverpool, yes. I think if you look at the makeup of the Airport passenger numbers for the last three years, the total passenger numbers, in fact it has gone up slightly; but if you then bring in the Steam Packet numbers, you will see that the Steam Packet numbers to the northwest almost exactly make up for the difference. 580 But all that is happening is that the same number of deckchairs are there; they have just been shuffled around. There are a few more using the airlines and they are coming from different airports, but if you did a postcode sample of where people are actually coming from, I would be 99% certain that it is the same people coming from exactly the same locations: they are just driving to different points of embarkation. 585 Q97. Mr Butt: Could I ask a technical question about the 19-seat aircraft? I have some thought that there was some sort of aircraft passenger tax, per person, over a certain size, and now it is going to affect you as well. Is that right? ______30 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

590 Mr Hayes: There is a duty which was introduced by the UK government, which did not used to apply to aircraft of under 20 seats, which the UK government is now applying to all aircraft above 5.7 tonnes. Our aircraft are now in the above 5.7 tonne category, so we have been brought into this tax. It is a tax-gathering plan by the UK government.

595 Q98. Mr Butt: So it is not at the hand of the Isle of Man authorities; it is the English?

Mr Buck: It is the UK government, yes.

Mr Hayes: It is English, yes. So for every flight departing from a UK airport, we pay £13 per 600 passenger tax to the UK government.

Q99. Mr Butt: And the Isle of Man have no say in that at all?

Mr Hayes: No. I believe they made noises to the UK Treasury from the Isle of Man Treasury, 605 but the UK Treasury advised them to go forth and…

Q100. Mr Butt: So how do you cover that? Do you put the fares up, or have you…?

Mr Hayes: A combination of higher fares, pressure on our own margins, and also, at the 610 moment, through additional marketing to try and attract greater volume to get it back that way. But at the end of the day, part of it will be passed on to the consumer – it has to be.

Q101. The Chairman: I have got one final question, really – it is a bit wide open, the question: what action do you think that the Isle of Man Government can take to encourage growth 615 in order to maintain passenger services? What should they be doing? Is there anything they can do?

Mr Hayes: What action should it be taking? I think it needs to make a much greater investment in route development and tourism development. Clearly, it goes without saying they must continue 620 to support the business community and try and grow the business segment; but that, I know, is something which is fundamental. I think where the Government’s eye perhaps has gone off the ball is they do not apply enough importance to the tourism sector and the importance of tourism. If one looks at the breakdown of their own numbers, the tourism and the visiting friends and relatives market is a very, very major 625 contributor, both to the loadings on all of the aircraft coming to the Island, to the loadings on the Steam Packet, and then, when people get here, to their spend within the visitor economy. I think what is happening at the moment is the spend by the Government on the tourism sector is declining, resources going into that sector are declining, but it is being masked. It is being masked by the fact that fares have gone down very significantly in real terms on the Liverpool and 630 the Gatwick routes. Therefore, there are people who probably would not be flying as often who are flying on those routes, and there are probably new people flying on those routes who have been attracted by the current very cheap fares. My honest opinion is the dual capacity, or the dual operation of both of these routes will stop. It is almost certain that it will stop. The question which I do not think has really been properly 635 addressed by Government, and I am pleased the Committee is addressing it, is what happens when the music stops? The music will stop, and one of the operators will say, ‘Thank you and goodnight, we are not going to keep losing money on this. We are going to go off and do something else.’ What happens then? I think the cutback in tourism spend will mean that the Isle of Man is then faced with a cliff, to 640 try and get its passenger numbers back to the level that they were previously. In the meantime, it will lose routes like the Leeds route, because the passenger flows are being distorted.

Q102. Mr Butt: Just one question on the patient transfer you mentioned – patient transfer to Liverpool. You did the service for a couple of years to Chester, which I was a beneficiary of, and I 645 thought it was an excellent service. If one of the major players were to pull out, say Flybe were to pull out, could you resource that route, if it was necessary? Have you applied for the latest contract?

Mr Hayes: We crewed the contract for six months for the Government and then they handed 650 the contract to Flybe. ______31 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

I think we would be happy to talk to the Government about a long-term contract; but again, as we said on various other issues, part of the problem in aviation is that everything is so short-term, but the investment numbers are very material. I think that Government does need to focus on long- term investment in the Island’s infrastructure and their routes. 655 As far as a Liverpool contract is concerned, with a proper long-term contact in place, we would be delighted to talk to them, but that would need to be the basis of it.

Q103. Mr Butt: That is one of our lifeline services, really, (Mr Hayes: Absolutely.) apart from the main routes to the UK. 660 Mr Hayes: I think we have seen from easyJet’s timetable on the Liverpool route that they are happy to fly on the peak days – the Mondays, the Fridays, the Sundays – where all of us in the aviation business can fill our planes on Monday mornings, Friday evenings and Sunday evenings. It is a no-brainer. 665 What the Island still needs, though, and what patient transfers needs, is a twice-a-day service every day of the week, because people want to go to hospital on Tuesdays and Wednesdays, not just on Friday evenings and Sunday evenings.

Mr Butt: Thank you. 670 The Chairman: Thank you.

Q104. The Clerk: I am just going to revert to Jersey and Guernsey, just to make it quite clear: there are quite a lot of services, more services between Jersey and the Channel Islands generally 675 and international destinations, and the prices are quite low. Is any of that down to a difference in government policy in the Channel Islands as opposed to here, or is it just the market?

Mr Hayes: There is a very different policy between the two islands. Guernsey is effectively Closed Skies, and Jersey’s policy has migrated and changed over the times but is much closer to 680 Open Skies. I think it is the much stronger tourism element which is a very significant factor. I think, historically, Jersey also had the benefit of a longer and stronger runway, so they were able to get the larger aircraft in and therefore get the economies of scale. The Isle of Man now has that benefit, in that since the runway – or the change in safety area, as I believe they phrase it – it is a lot easier for easyJet to operate in with a larger jet aircraft, and without doubt the Island will 685 have this choice, it does have this choice, on do you want jet services coming here, because a jet service, full, is always going to be cheaper than a couple of turboprop services going out. But what you cannot do is have both a frequent turboprop service and a jet service coming in together. The Jersey market was big enough that you could actually get jet services operating on large jets to London, and they had got both the economies of scale in terms of lower fares and they were 690 able to maintain frequency. So, for example, I think Jersey to Gatwick, there are six or eight frequencies a day.

Mr Buck: It is about six, I think.

695 Q105. The Clerk: Is that all the way through the year? Obviously, if it is tourism, it is presumably seasonal.

Mr Hayes: It is seasonal, but the core frequency is maintained throughout the year. They then do bring in seasonal routes as well, in the same way as the Isle of Man does with its 700 route and its route. Jersey does have a seasonal peak as well, but the core services on their lifeline routes, as they see them, which I believe in their case are effectively the London route and the Southampton route, are maintained with very strong frequencies throughout the year.

Q106. Mr Butt: Can I just ask one more question? 705 Just to sum up, in a way, you are saying there is no real passenger growth, you have no plans a the moment to expand your services; but if there was more security of tenure over some routes, would you be more inclined to expand your services?

Mr Hayes: Yes, absolutely. 710 As a business, I think it is fair to say that we are actively looking to expand our business off the Island, because of the problems of lack of security of tenure and because of the train crash that we ______32 EPRC-OS/12-13 TYNWALD STANDING COMMITTEE, THURSDAY, 25th APRIL 2013

see happening at some stage in the future. So, at the moment, there is absolutely no incentive for us to be investing in further route development on the Island and we are having to look at our resources elsewhere at the present time, which is not something that we wanted to do, but is 715 something which we feel that we have been forced to do by the current scenario.

Mr Butt: Okay, thank you.

Q107. The Chairman: Thank you very much. 720 Is there anything, before we finish or close, that you want to add, that you feel you want to say – anything we have not touched on?

Mr Buck: No, I do not think we have got anything else.

725 Mr Hayes: No, your questions have been very thorough, thank you.

The Chairman: Mr Buck, Mr Hayes, thank you very much for attending. The meeting is now closed.

730 Mr Hayes and Mr Buck: Thank you.

The Committee adjourned at 3.18 p.m.

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