Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by the Department for Transport, Local Government and the Regions (NAT 2)


  1.  On 27 March 2001 the Government announced that the Airline Group (AG), a consortium of seven airlines, had been chosen as the Government's strategic partner in the public-private partnership (PPP) which it proposed to establish for National Air Traffic Services (NATS). The transaction was completed on 26 July 2001. AG acquired 46 per cent of the shares in NATS. The Government retained 49 per cent of the shares, and 5 per cent were put into an employee share trust. The PPP arrangements arising from AG's proposal contained a borrowing facility made available to NATS by four banks.

  2.  The attack on the World Trade Centre on 11 September 2001 led to a downturn in air traffic, particularly on transatlantic routes. This had a serious impact on NATS' revenues, which are directly dependent on traffic volumes. They are also dependent on distance flown in NATS-managed airspace, which includes the whole of the UK plus the north-east North Atlantic. Prior to 11 September transatlantic flights, which typically travel the length of the UK as well as flying through our oceanic airspace, had accounted for 44 per cent of NATS' revenues.

  3.  The extent of the revenue problem depends on assumptions about the rate of recovery in air traffic. NATS has developed revised demand forecasts and agreed them with its shareholders and lenders. Based on these revised forecasts, NATS calculated that it would need to increase prices over the period to 2005, as well as taking action to cut costs, in order to make good the forecast revenue shortfall. The significance of 2005 is that it marks the end of the first five-year period of charge control for NATS, during which NATS' maximum charges have already been set.


  4.  NATS' management, the Government and AG as shareholders, the Civil Aviation Authority (CAA) as economic regulator and the four lending banks all recognise the need to restore NATS' financial position in the light of the loss of revenue. All parties have acknowledged the need to work together and contribute to a long-term solution.

  5.  Two key actions have been taken by NATS to address the situation:

    —  The company has revised its business plan to reflect the impact of 11 September. In particular, it has taken measures to reduce its costs which, broadly, will save £200 million in the first charging period.

    —  The company has also addressed the question of its prices. NATS is not at liberty simply to increase its charges to offset lost revenues, as its counterparts throughout Europe have done. The latter have increased prices by an average of 12 per cent for 2002, whereas NATS, operating within its price cap, has marginally reduced its prices in cash terms to meet the requirement for a year on year change 3 per cent below inflation. NATS has now applied to the CAA for a review of the charge cap which has been set for the years 2003 to 2005, to take account of the exceptional circumstances created by the attacks on 11 September. The CAA, in accordance with the role established for it under the Transport Act 2000, will act as an independent regulator in carrying out the review.

  6.  The cost cutting measures have already been implemented. But the CAA can only announce the conclusions of its review of the price cap after due consideration and consultation. NATS and its shareholders are also considering other means of strengthening the balance sheet. Even under the reduced budget, taking account of the cost cutting measures, which has been approved by the shareholders, NATS would be unable to sustain its operations until the completion of those processes without adequate borrowing facilities being available.

  7.  The Government and the banks have therefore agreed to make available to NATS a short-term working capital facility. The facility is for a maximum of £60 million, to be provided equally by the banks and the Government, repayable not later than 30 September 2002. Each party will lend on the same, fully commercial terms. It should be noted that without the PPP in place, the Government would have borne the full cost of the loan facility, rather than sharing it equally with the private sector.


  8.  The UK Government has an international obligation under the Chicago Convention to ensure the provision of air traffic control services in the airspace for which it has responsibility. There are compelling economic reasons why the continuation of adequate services is a high priority. And, as a paramount requirement, in exercising his functions under the Transport Act 2000 the Secretary of State must ensure that a high standard of safety is maintained in the provision of those services. The actions taken and envisaged in relation to NATS' financial situation are intended to ensure that those obligations can all be met.

  9.  The Government will take no actions which it believes might compromise safety. The Transport Act provides for the maintenance of safe services in the event of financial failure by a company providing services under the Act. If necessary the Government would activate those provisions. It does not, however, wish to do so; neither does it expect to need to do so.

  10.  The Government notes that, despite the difficulties which followed 11 September, NATS' New En Route Control Centre at Swanwick opened on 27 January 2002, in accordance with the timetable set some 18 months earlier.


  11.  The two-centre strategy requires NATS to develop the proposed New Scottish Centre at Prestwick in addition to the Swanwick centre.

  12.  As part of its response to the events of 11 September, NATS re-assessed the capital investment programme put foward by AG in its bid. The Company was in any case contractually obliged to re-visit the programme in the course of preparing a business plan after the completion of the PPP. In the circumstances, it had to take account both of its own changed financial prospects and of changes in demand for its services.

  13.  NATS concluded that it would be prudent to defer the New Scottish Centre, probably by 18 months to two years. The precise length of the deferral would depend on trends in traffic volumes as they emerged, but broadly the new centre would come into operation by 2009 instead of 2007 as required by the terms of the PPP. AG sought a corresponding amendment to those terms and the Government agreed.

  14.  The delay is temporary, and work has not ceased. Site preparations and piling work have already been carried out. NATS is engaged with suppliers in evaluating systems, and expects to commence the competitive selection process during 2002.

  15.  The capacity of the present Scottish and Oceanic Area Control Centre at Prestwick will be sufficient to meet forecast traffic demand in the meantime. The technology is in place to introduce new control sectors if necessary and existing equipment is being upgraded, with the installation of a new radar processing system. Safety will not be affected. The Government would not have agreed to the proposed delay had there been any prospect of safety being jeopardised.

9 April 2002

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