Examination of Witnesses (Questions 20-39)
MR CHRIS GIBSON-SMITH AND MR RICHARD EVERITT
WEDNESDAY 1 MAY 2002
20. How many air traffic controllers will you have by 2006?
(Mr Everitt) Our plan is to increase the number of air traffic controllers. We will be training 130-140 a year. That was a key objective. Historically we trained 120. We maintain the objective of increasing the numbers in training, and that will work through to a steady increase year on year throughout that plan.
21. How many will you have though as opposed to how many you will be training?
(Mr Everitt) I do not have the precise number. It is just over 2,000 and I think it grows to about 2,200 in five years' time.
22. It is 2,000 now, are you telling us?
(Mr Everitt) Just under 2,000 now, yes, total controllers. We have about 1,900 and it will grow to about 2,200 in five years. I would like to give you precise numbers on that, but it does show a growth year on year.
Chairman: We would like that in writing, because we have raised it with you before.
23. Mr Gibson-Smith, obviously the big event from your point of view financially in the past few months has been 11 September. You are probably aware that the Civil Aviation Authority is reported to have warned the Government before the PPP was done of its concerns about the ability of the business plan to withstand a major shock, whether it is 11 September or a Gulf war type shock. What can you say about the work that was done, if any, prior to 11 September to prepare for the potential of a major shock of that kind, and what have you done since to prepare for any possible future eventuality of that kind?
(Mr Gibson-Smith) My understanding is that the original structure and plan was tested in the extreme against a Gulf War scenario, which was the most extreme example they had, and the financial ratios withstood that test. I think what 11 September has done is produce a new standard of risk for the industry, and it is clearly outwith the bounds that were contemplated in the middle of last year. It is a point of choice of policy really as to how far you go in the design of the structure of the company. My own view and judgment is that in extremis you should not be designing to cope with that in the structure of the company. This is too unusual and too exceptional. But what you must be clear on is that you have a flexible and resilient structure that has thought about such extremes and is capable of responding. That is the critical thing, in my view.
24. How far can you sensibly go? Clearly, the impact of 11 September combined with the downturn in North Atlantic traffic has had a significant adverse effect on your plan financially to the extent you have had the discussions you have had in recent weeks with the Government. Looking to the future, are there lessons you can learnlet us assume not a situation as extreme as 11 September but another major incidentand have you been able to make preparations at least to be fairly certain that you would not have to go back to the Government except in extremis of that kind?
(Mr Gibson-Smith) We have tested new boundaries to what we call our downside scenario: how low could the traffic get in the event of another terrorist incident? Those additional, much more stringent tests that all stakeholdersHMG, the Airline Group and the lendershave all agreed are the centre of our thinking for design of the new financial structure so that it should be more resilient. That is a core plank of our own response to 11 September.
25. The figures for passengers, of course, are rising almost as quickly as they did after the Gulf War, are they not?
(Mr Gibson-Smith) No. In fact, the pattern has been different. Richard will have the details.
(Mr Everitt) I think the important thing to remember for us is that we earn our money from aeroplanes flying, not numbers of passengers. We showed in our submission our forecast for how we thought traffic would recover over the course of the next few years. We identified a base case in October. That involved our flights being down about five per cent over the winter months just gone compared with the previous year, and we were about right on that, but our charging units were down about 10 per cent, primarily because we lost so much traffic on the North Atlantic. So while the increase in passengers is welcome, as a business, we are dependent on both numbers of aircraft and size of aircraft and distance flown in our air space.
26. I quite understand that. Mr Gibson-Smith was making the point to Mr Grayling that you used the Gulf War scenario as a way of calculating the effect on the company of extreme and unforeseen circumstances. Can you assure us that there has been a radical difference in the way that the company is coping with what happened on 11 September and that the scenario is very clearly identifiably different?
(Mr Everitt) We are looking at a scenario which is identifiably different from the scenario that occurred during the Gulf War. In other words, we think the number of flights will take longer to rebuild than it did after the Gulf War, as I think you will see from our submission. We think this year, for example, our flights will grow by no more than two per cent. They will be down in the summer and up in the winter, because we had a very poor winter, obviously, this year. In other words, we are expecting very little growth in our income this year. Then we would expect to see a pick-up through the latter part of the winter of next year running into the summer of 2003, and that is certainly quite a lot longer than the pick-up that occurred after the Gulf War. Once the Gulf War was over, things came back quite quickly.
27. Have you looked at the possible differences of reaction that passengers might have today given the experience of 11 September, in the sense that you saw with the incident in Milan a couple of weeks ago that the international media went bananas, immediately fearing that it was a terrorist incident. It is conceivable today that the impact of another incident, even if it was not as severe as 11 September, might be very dramatic and have an adverse effect on passenger traffic levels.
(Mr Everitt) That is precisely why we are trying to build a financial structure for the company which is robust to a more significant downturn than what perhaps the industry conventionally used, which was the Gulf War downturn.
28. With hindsightI appreciate it was before your time in the companygiven the comments that the Civil Aviation Authority made about the initial business plan, do you actually think the work done in the first place was robust enough given what we have experienced since?
(Mr Gibson-Smith) I repeat, certainly the financial structure was tight, but I do not believe it is proper to attempt to build into a regulatorily controlled system extreme contingencies. I genuinely believe as a policy decision it is better to handle that flexibly if it shows up. To repeat what Richard has said, what we are now designing is a financial structure which will be more robust than the first one.
29. There have been recent reports that the banks have suggested that they might not give you an additional loan, and that they are examining whether or not you can pay back the first one that you received.
(Mr Gibson-Smith) We do not know the source of the constant comment about the banks in the newspapers. It is not our experience. The lenders are extremely open and extremely supportive. What they want to see is NATS functioning and working, and that is overwhelmingly their priority, and we are in constant discussion with them.
30. Is there any truth in the fact that the business plan that you have indicated already, about the £1 billion, is dependent on increasing fees?
(Mr Gibson-Smith) Naturally, increases in fees are a component of what NATS needs for the future, otherwise we would not apply for them.
31. Is it right that the request that has been made to the CAA will not be met in full?
(Mr Gibson-Smith) We have made the request based on a deeply thoughtful response to the events of 11 September. We believe that request sits within the regulatory framework, but the conditions are unprecedented. My expectation is that we will reach a satisfactory conclusion to our discussions with the CAA.
32. The Airline Group's strategic vision for NATS envisaged drawing upon the air traffic management and technology expertise of your partners, the Irish Aviation Authority and BT. In what ways have you deployed these skills and what operational and financial benefits have resulted?
(Mr Everitt) We have worked, I suppose, historically well with the Irish, and indeed, we have recently signed a letter of intent agreed by both our boards that we will work closely together. That is at the moment a letter of intent, and we will seek to identify areas where we can work to the mutual advantage of both organisations. That underpins the approach that we have agreed with the IAA. I think in terms of BT, there are a number of issues that we have at the moment, such as renewing our communication system, where BT are a bidder.
33. What pressures has the delay in opening up the Scottish centre had on the control system?
(Mr Everitt) We thought very carefully about the delay in the Scottish centre. Remember, we completed the installation of a new radar processing system in the Scottish centre in November. That was successfully installed at a cost of around £7 million. That, we believe, will enable us to handle all traffic in Scotland adequately and safely until we open the new Scottish centre in 2008-09.
34. Is it true that you made an announcement today that Prestwick will control 70 per cent of al UK air traffic?
(Mr Everitt) That is right. We have to be careful there. It will control 70 per cent of the air space in the UK, not 70 per cent of the traffic.
35. What would it be in terms of air traffic?
(Mr Everitt) In air traffic terms, if we took just the FIRthat is, the flight information regions, Scotland and London, excluding the ocean, and remember, the ocean is a big part of the Scottish operationI think it would be around 30 per cent, when we move Manchester there. So we would balance roughly 30-70, perhaps slightly more.
36. You closed the building of the centre in Prestwick at the point where piles were driven into the ground. When will you lay the first bricks? When will we be in a position to see you order the equipment that is required?
(Mr Everitt) We are in the process of identifying the future system platform for NATS, which will encompass the Scottish centre, the Terminal Control from London, which will move down to Swanwick, and also the military operation, which will move to Swanwick. That is a process which is now well under way. On the basis of the identification of the system that we are going to use for the futureand I am determined that we will get as much commonality as we possibly can between our various operationswe can then build the plan back from an opening date of 2008-09, and that will determine when we start building further works on the site. That is all ready to go. We have completed the design. The next package is the structural steel work. I checked with the project managers yesterday, and the structural steel package can be implemented at pretty short notice. So we are ready to move that as soon as I am satisfied and I have satisfied the Board that we have a coherent project for that centre. What I do not want to do is build a building which sits there doing nothing for a year or two. I do not think that is in anyone's interests.
37. When is it that you are moving your headquarters to Southampton?
(Mr Everitt) We will be moving progressively to Southampton, not just our headquarters; that is actually quite small. The big thing that we are going to move to Southampton is our technical centre, and we will start that from May/June next year.
38. You have already had a couple of problems at Southampton recently, have you not?
(Mr Everitt) Overall, I think it has gone surprisingly well. We are delighted with the way Swanwick has operated. Yes, we had a problem with the headsets early on, and we resolved that in pretty short order. We identified what the problem was and we were able to replace the relevant part of the headset, and of course, we have also had the issue over the screens and the design of the screens. I am pleased to say that I think we have worked very constructively with the trade unions on that issue. We have a working group that has identified how we might improve those font sizes. We have got down to two options. We will start prototyping those in the middle of May, and then there will be an installation programme. That will take time, of course, because we have to get clearance from our safety regulator. But I must stress that at no time was there an aviation safety issue in relation to those fonts.
39. No, because the controllers presumably would not allow any great safety problem to arise.
(Mr Everitt) No, and nor would I.