Select Committee on Defence Minutes of Evidence

Examination of witnesses (Questions 50 - 59)



  40. And classified information, and that will be out of our hands.
  (Mr Hill) Yes.

  (In the absence of the Chairman, Mr Jimmy Hood was called to the Chair)

Mr Hancock

  41. Can I just ask some questions relating to what you said in answer to the Chairman about the site itself at St Athan. What would be the probable use of that site if you were to leave it?
  (Mr Hill) We do not own the site.

  42. There must be speculation.
  (Mr Hill) If you want a personal view, it is extremely well found in terms of barrack blocks and mess accommodation. It is one of the best sites in the Ministry of Defence and the Army is frequently looking at opportunities for putting their troops into good accommodation. I have no idea whether they would have an interest in St Athan but that is one of the issues that is being addressed by the Defence Estates Chief Executive.

  43. Are you under any pressure from the MoD to leave the site?
  (Mr Hill) Not at all.

  44. Can I draw your attention to the points that have been made about Cardiff Airport and the proposals there. The Welsh Development Agency have made it clear that they want to see that airport developed as a centre for aircraft maintenance and what have you. If you were to move on to that site obviously there would be a lot of commercial work available there because of what that draws in and a lot of that would be related to the engine maintenance. My question for obvious reasons, because I have got constituents working at Fleetlands, is what are the implications for Fleetlands of the Welsh Development Agency's ambitions taking off and you moving there? Are you absolutely convinced that the long-term engine side of your business remains at Fleetlands for the long-term, or do you have another plan which in the long-term will draw that also to a centralised unit at Cardiff?
  (Mr Hill) There is huge investment in the Fleetlands facility. In terms of comparison with St Athan, the building, the facilities, the engine test capability there, it is absolutely unique and substantial. That is why the business case said that it would take 17 years to get a payback if you transfer that work out of Fleetlands to another site. The converse is moving from St Athan into Fleetlands where you get a payback within two years. What we are intending to do, and I do not know whether you are aware, is we are just starting the build of the universal test rig at Fleetlands and that enables us to repair and overhaul a number of new engine types. Therefore, we have an absolute commitment to Fleetlands for the long-term as our engine repair and overhaul centre. We do believe that once we get it shaped right we will attract significant business in from the marketplace and we are working on that with partners.

  45. Does that mean you would wish, as an organisation, to retain the whole of your current estate at Fleetlands?
  (Mr Hill) At the moment there is no plan to change the use of the real estate at Fleetlands. We have significant rotary maintenance there on a number of types. We are actively bidding for business to actually grow the amount of rotary wing business at Fleetlands. We have excellent facilities there with aircraft jigs which are buried in the concrete which would take a lot of money to transfer. As far as we are concerned, we are in the process of shaping Fleetlands for the long-term. Avionics was taken out with a fair amount of pain but that has now significantly reduced the overhead at Sealand and that is working well. Fleetlands remains the rotary on-aircraft maintenance centre and also engine repair and overhaul, so no change.

  Mr Hancock: That is good news.

  Mr Hood: We have had a change of shift as you can see. Our Chairman, Mr George, has gone to Buckingham Palace to get sworn in as a Privy Councillor this morning, so that is the reason why he had to leave. He is rather delighted that he is being sworn in as a Privy Councillor, it is a great honour for him and it is an honour for us as Committee Members having him as our Chairman. Mr Viggers?

Mr Viggers

  46. Thank you. I would just like to explain that the reason I have been absent for the last hour or two is that I have been present at a meeting of the Speaker's Commission which has to take priority over a parliamentary committee. I am very sorry that I was not here, particularly as the subject which is currently under discussion is Fleetlands, which is in my constituency. For reasons which I do not fully understand, the rumour mill at Fleetlands seems to be much more effective than the rumour mills in most other locations. I am very pleased to hear you confirm that the embedded nature of the equipment at Fleetlands, the fact that expensive equipment has been installed there that cannot readily be transferred, and the quality of the skills of the workforce is such that you foresee a positive future for Fleetlands. Whilst one can never say never in business Fleetlands is as secure as any establishment of its type can reasonably be?
  (Mr Hill) Yes, that is the case.

  Mr Viggers: Thank you.

Mr Hood

  47. How much will it cost to implement and how much will it subsequently save by moving engine repair to Fleetlands?
  (Mr Hill) I do not have the business case in front of me right at the moment. Have we got that available? In terms of net present value it gives a payback in less than two years.

  48. Will staff be made redundant from the move to Fleetlands?
  (Mr Hill) As far as the Engine Co-location Study is concerned, we have offered either relocation for anybody who wishes to go to Fleetlands, and so far ten people have opted for that, a number of others are going to take a bus trip there to have a look at the area and the facilities shortly, and the balance we have offered employment in the Aircraft Business Unit at St Athan, so there is no need for a single person to be made redundant as a result of engine co-location. Some people, however, may opt to take voluntary redundancy but there will be no compulsory redundancies whatsoever in this transformation. We have given each individual the opportunity to state their preference and we hope to give every individual exactly what they want.

  49. The Chairman explained in opening this session that he was starting with questions that he wanted to personally cover before he went. We will now go back to the first question and I will afford you the opportunity to tell us what are the critical factors driving the move to trading fund status for DARA?
  (Mr Rutherford) Do you want the answer to the engines co-location question?

  50. Yes.
  (Mr Rutherford) The engines co-location has a cost of £2.4 million and it generates savings of the order of £1.8 million from the year 2003/04 onwards, i.e. annualised savings £1.8 million a year.

  51. Thank you.
  (Mr Hill) The benefits of trading fund are a significantly greater discipline compared with an on-Vote agency, significant increased transparency of prices, a very much closer and direct relationship between customer and supplier, which there is not on the vote system. We will at last, as an Agency, have the freedom to invest profits into the business, to be able to provide facilities, upgrade facilities for the long-term. We come off the system of annuality which has an artificiality that does not help when you are looking at capital projects. There will be a much sharper performance focus and that will be matched by new key targets which will measure our performance much more robustly. Very importantly, we will have pay and grading freedoms within Treasury limits which will enable us to recruit and retain, hopefully, high quality people by paying market rates of pay, something that we have not been able to do within the constraints of the central MoD system. Also important is the access to wider markets. We will be free to invest in those, or bid into those. Also, as a trading fund, we will be able to enter into joint venture arrangements with industrial partners.

  52. Could you share with us your assessment of the workload available to the aviation repair market in, say, five or ten years compared with the current position?
  (Mr Hill) Our estimate of our particular business within the DLO is around about £600 million a year (spares exclusive). If you include spares it is about £1.15 billion a year. As far as the DARA is concerned, we believe that we will be able to target successfully around about half of that business. As you are aware, we are moving into becoming a spares inclusive organisation which is very important for the future. That will take some years to put in place but we do expect to achieve that as far as we can take it by 2005, in which case the overall value of the business will increase.

  53. Are there differences in the reducing workload trend between the different sectors in the market: avionics, engines, airframes and transmissions?
  (Mr Hill) Yes, there are. Generally there is a reducing MoD market-place as far as DARA's business is concerned and that is brought about by the reduced number of aircraft at front-line and they will be progressively replaced by more able and more reliable airframes like Eurofighter, Joint Strike Fighter, which will probably come in much smaller numbers compared to what we have been used to. If you look at the reliability of avionics that is significantly improving and as new systems come into place the number of arisings will fall. As far as engine reliability is concerned, again, and this is good news for the taxpayer as well as the MoD, reliability is significantly improving and if you take the RTM322 it is twice as reliable as was predicted and its predictions were twice as reliable as any engines that we have got currently in service. So the number of arisings will fall. The challenge for DARA will be to get a bigger slice of the market-place that is available through being competitive.

  54. What is the current situation on the supply side of the aviation repair market? Who are your competitors?
  (Mr Hill) We have a range of major competitors. The original equipment manufacturers all have capacity in their factories, BAE on systems, Rolls-Royce on engines, FR Aviation, they are all competitors for our aircraft business. As far as the avionics companies are concerned, there are about 56 companies in that arena and all of them are seeking additional work, so there is a fair amount of competition there. There is growing competition in the mechanical component repair and overhaul market-place with a number of new entrants in recent years. So we have got to be on our metal on our mechanical components front if we are really going to challenge the market-place. On engines there are the major players like Rolls. They have problems in terms of filling their factories with work as the MoD work has declined so they are as interested in our business as we are.

  55. If there is extensive repair capacity in the industry, why does the MoD stay in the business?
  (Mr Hill) The MoD in the form of DARA provides a competitive alternative to monopoly suppliers. We have a unique position in terms of access to intellectual property rights and we are able to exploit that to the full. We are a competitive alternative to industry. We provide an important intelligent customer role to the IPTS in the event of industrial dispute. We can surge in times of tension and war, and we have a unique capability to take on work because of our size, the skills of the workforce and our capacity.
  (Mr Oughton) Chairman, I think I should make the point from the wider Defence Logistics Organisation perspective that it is important to us as a customer to have that choice of supply, not just from the DARA but from suppliers out in the private sector. In terms of getting better value for money for us and achieving our objective of driving down costs it is extremely important that we retain the choice of having some in-house capacity as well as relying on external suppliers.

  56. What is DARA's prognosis for the Agency if it were not converted to a trading fund?
  (Mr Hill) We have a serious problem then because we have been driving very hard as an organisation against a very challenging programme that was laid down by Ministers to achieve trading fund as quickly as possible. We are absolutely on track for 1st April this year. Any delay would lead to a loss of impetus and would have an impact on morale. More importantly perhaps, for the wider MoD we would have great difficulty in achieving the DLO 20% savings which are predicated by having the freedoms that trading fund offers, especially access to wider markets and the ability to enter into joint venture arrangements. Being a trading fund also gives us much greater negotiating power with industry to get the right partnering agreements in place, and those are building at the moment, and, very importantly too, we have negotiated a three-year protected order book to allow time to restructure the Agency with the integrated project teams and so that after that period we will be ready to go into competition. It is almost certain that the IPTs who are seeking best value for money would be highly reluctant to extend that three-year period if we were not to go to a trading fund on 1st April this year.

Mr Gapes

  57. As you get ready for 1st April what potential new markets have you identified for DARA?
  (Mr Hill) There are a number of opportunities within Europe where we have the capability. Some nations have no interest in maintaining third-line organisations, they have a different policy to the United Kingdom. We are already working as a sub-contractor to Boeing doing work for the Dutch Air Force and we would hope to expand on that. Last year we were very successful in recovering a Chinook fleet both in the United Kingdom and in Holland when they were grounded worldwide with transmission failure problems. We are also looking at opportunities to work through NAMSA, the NATO Material Support Agency based in Luxembourg. That is a contracting organisation. We have had a number of visits to them and they are interested in our repair and overhaul capability and marketing that on our behalf into Europe. Through partnering arrangements too, particularly with organisations like GE Honeywell, Rolls-Royce and Agusta-Westland we hope that we will be able to jointly with them get into wider markets because of the unique capabilities we have in the Agency.

  58. What about the current markets which you have, how do you feel about them, and are any of those particularly under threat in the next few years?
  (Mr Hill) I think the IPTs, quite rightly, with the Smart Procurement initiative, are seeking to get best value for money, so they are going to be putting more and more pressure on DARA and on industry collectively to deliver faster turn round times at lower cost. I think that there are opportunities if we can get our business processes right for us to be able to capture a larger share but it is going to be more competitive.

  59. You mentioned just now in answer to my earlier question partnership arrangements; could you go into some more detail on that. Which have you actually arranged and which have you got aspirations for?
  (Mr Hill) The benchmark as far as we are concerned is our partnering arrangement that we have had in place for several years now with Hamilton Sundstrand, formerly Claverham, formerly Fairy Hydraulics (they have been taken over a few times) and that is to deliver a service particularly on the Tornado taileron actuator which is a highly complex product, and we have been successfully partnering with them whereby they provide us with all the spares and the technical support directly so we do not need to go to any integrated project team for that, and we are now jointly contracting in terms of availability. If we go back a few years the taileron actuator kept (because of its problems of reliability) more than 14 aircraft on the ground every day awaiting that particular spare. We now collectively guarantee to deliver a taileron actuator within 24 hours to any Tornado unit. We have successfully had that in place for the last two years. Because of the success with that we are now working with Hamilton Sundstrand on a range of other hydraulic components and Lynx components are already in place and contracted for and we are looking now at Jaguar and Harrier. That is a very successful benchmark we are working on. The next one in terms of progress is we have signed up a partnering agreement with Rolls-Royce and what we are looking at with them is to jointly deliver total package support ultimately moving up the level towards power by the hour arrangements. We are working with BAE Systems on a wide front. We have partnering projects with Agusta-Westland and we are in the final stages of a three-year negotiation with them for blade to blade partnering which covers the entire transmission system of the Sea King and Lynx helicopter. Transmissions systems represent by value 50% of the cost of a helicopter so they are a very important cost driver. Again what we are planning to do is cut the umbilicals with IPTs and for all spares and technical support to be driven directly from Agusta-Westland into the Agency. Work share within that arrangement will depend upon performance. If we improve our performance above the capability of Agusta-Westland the work will come to DARA and vice versa, if we do not do it as well as them the work will go the other way.

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