Examination of Witnesses (Questions 1-19)
MR CHRIS GIBSON-SMITH AND MR RICHARD EVERITT
WEDNESDAY 1 MAY 2002
Chairman: Good afternoon, gentlemen. I am delighted to see you here this afternoon.
Members of the Committee to declare an interest: Rail, Maritime and Transport Trade Union.
Mr Donohoe: Member of the Transport & General Workers Union.
Miss McIntosh: Interest in BA, BAE, and my husband works for an American airline company.
Chris Grayling: My old company, Burson Marstellar, from which I have resigned, has done work for NATS, though I never have.
1. Gentlemen, do you have any statement you would like to make?
(Mr Gibson-Smith) Yes, I have a short statement, Madam Chairman, if I may. When we come to discussion I will broadly handle Board and structural questions and Richard will handle operations and finances. We welcome the Committee's ongoing interest in NATS and its development. I would just like to make a few remarks which shape our experience and let you see where we are. Clearly, the past six months have been hugely difficult for the entire aviation industry. None of us foresaw the possibility of 11 September's tragic events, nor did we foresee the downturn in traffic that followed that. So we have seen business plans torn up, we have seen thousands of jobs lost, and we have seen large numbers of aircraft grounded. What has been NATS's experience? We were established six to seven weeks before the World Trade Centre was attacked, and the collapse in demand for our services clearly hit us very hard. What we have been engaged in is a programme of carefully targeted cost savings and very active management of our cash. That has allowed us to continue operating from our existing resources in a safe and efficient manner. We have brought Swanwick into operational service as planned. We have reiterated our commitment to a two-centre strategy, including the new Scottish centre. We have unveiled a new ten-year investment plan which will put $1 billion into new air traffic systems, broadly give us a 50 per cent increase in capacity, another 1 million flights a year; it is targeted at reducing delays by 40 per cent, and is also targeted at further improvements in safety. 11 September taught all of us, I think, lessons about risks, and we have been deeply engaged on that subject. Our ongoing discussions with our shareholders and lenders should lead to a strengthening of our financial structure and to further improvements in NATS's ability to provide its primary objective, which is a safe, efficient air traffic service. Finally, as regards our experience of the NATS PPP itself, I think we have demonstrated that the structure, with the strong support of all our stakeholders, and that includes unions and staff, has the resilience to maintain the UK's air traffic services under conditions of extreme adversity and it has demonstrated the flexibility to adapt as these same conditions demand change.
2. That is quite interesting, Mr Gibson-Smith, in which case I would like to ask you one or two questions, just to get some things on the record. Could you tell me whether the firm EDS and NATS have reached an agreement out of court on the case that EDS was bringing against National Air Traffic Services?
(Mr Gibson-Smith) Yes, we have.
3. What effect has that had upon your immediate working?
(Mr Gibson-Smith) It has had no effect at all, except to relieve us of the burden of servicing the court case.
4. Has it cost you a great deal more money than you expected?
(Mr Gibson-Smith) It has actually ended up costing us what we forecast it would.
5. When you talk about your staffand we will undoubtedly come to that later, because we want to know a bit about the shortages of staffcould I before we get to that ask you whether one or two of the points that were made in a letter by Sir Roy McNulty to Mr Griffins, who is the Director-General, Civil Aviation, last June, have been addressed by NATS? The burden of the correspondenceand I would be interested in knowing whether in fact this is true or notwas that Sir Roy was very concerned that some of the financing that was being put upon you would ensure that there was a gearing, a level of debt, far above that which he thought was in the interests of NATS. Are you aware of that correspondence and have you had any reply?
(Mr Gibson-Smith) I only joined NATS at the beginning of September, so it is some time before.
6. But presumably you would know, Mr Gibson-Smith, if a company that you were joining was so highly geared that it was facing a level of debt almost unprecedented compared with comparable companies.
(Mr Gibson-Smith) Before I joined I looked at the financial structure in some detail. There is no doubt that NATS is more highly geared than is usual for an infrastructure project. I understand that at the time those decisions were made it was because of the confidence in the future of the service and that there was a balance between the perceived risksand they were thought about, again, I understand, in some detailand the gearing finally chosen. My personal judgment was that there was sufficient flexibility in the system to warrant me taking it on.
7. So when the letter says, for example, that it would be impossible to work and to achieve the objective the business must restructure, invest and be managed, and the success of the PPP will be judged against whether these things happen in practice, not against a specific level of proceeds, you would think that that had all now been achieved?
(Mr Gibson-Smith) I would prefer not to comment on correspondence between Sir Roy and the Department, but I can say that we are simply actively managing the company.
8. Yes, but, Mr Gibson-Smith, with the greatest respect, Sir Roy McNulty was not, presumably, writing in a personal capacity; he was writing on NATS headed notepaper and he was talking about the capital structure of NATS and the Government's PPP objectives. He was saying that he thought the gearing was far too high, and he also said, "It seems clear that the financial structure as currently envisaged will not work." Were you aware of that when you took over?
(Mr Gibson-Smith) No, I was not aware of that when I took over.
9. No-one saw fit to discuss with you the capital structure of the company you were going to be involved in?
(Mr Gibson-Smith) As I said, I myself thought fit to examine the capital structure. I recognised it as tight, but my judgement wasand I would not have taken the role otherwisethat it was manageable.
10. When Sir Roy says, "The financial plan should not require cuts in staff numbers on a scale which could put at risk the delivery of a safe and effective service," would you agree with that?
(Mr Gibson-Smith) I think safety is the service's first priority, without exception.
11. When he says, "The structure must afford adequate financial headroom to cope with the uncertainties," you would say that that headroom existed?
(Mr Gibson-Smith) When I joined the headroom existed.
12. Does it exist now?
(Mr Gibson-Smith) We are in the process of discussions with lenders, regulators and shareholders to ensure that it does exist.
13. We will want to question you about that, because surely the Government will have to alter its holdings in order to ensure that it still retains the same percentage of control, will it not?
(Mr Gibson-Smith) That is correct.
14. What suggestions have been made to you by Her Majesty's Government on those grounds?
(Mr Gibson-Smith) The Government have been very clear and actually very stable in their discussions with us. They have said, "We have created the PPP as in effect a joint venture company. We would like to maintain our relationship with you as a shareholder, but we recognise that we would honour all the duties of a shareholder, which include ongoing support of the company as necessary."
15. Would you say that again, Mr Gibson-Smith.
(Mr Gibson-Smith) That the Government wished us to deal with them in their role as shareholder in the company.
16. Were they suggesting that their percentage of shareholding would alter?
(Mr Gibson-Smith) I do not believe they have ever suggested that.
17. What assurances could you give this Committee that the cost savings you have had to make are not going to affect the maintenance and support of your core activities?
(Mr Gibson-Smith) First, safety is our overwhelming priority. It is essential they do not. May I bring Richard in to answer your question.
(Mr Everitt) Yes, we have carefully gone through the cost savings that we have identified in our business plan, and this has been an exercise which has taken nearly six months to complete.
18. Is that the business plan that Mr Gibson-Smith said you had to tear up or the one that you did after it?
(Mr Everitt) No, it is the business plan which we submitted to our regulator, as we were required to do under the licence under which we operate. It was submitted just before the end of March this year. So it was developed in the context of the traffic downturn, and our assessment of what traffic would be over the next ten years. It is a ten-year plan, as we were required to produce. It contains an investment component of over £1 billion in the system to modernise the system. Yes, it does contain staff reductions in support areas and in the engineering areas, and indeed in the assistants area.
19. Assistants being defined as what, Mr Everitt?
(Mr Everitt) Air traffic control assistants. Much of that reduction would be dependent on new technologies, and therefore the investments that we are going to make, but also in terms of consolidating our operations in two centres, with our support operations, including our technical centre, also in one location. Currently there are five.