Memorandum by Prospect (NATS 7)
Both Prospect and this Select Committee threw
doubts on the financial basis on which the NATS Public Private
Partnership was founded. The events of 2001 with the downturn
in traffic starting from the beginning of the year and accelerating
after 11 September showed that this basis was precarious to say
the least. The price paid for NATS actually meant that the debt
that had to be serviced was doubled. With the downturn followed
by the events of 11 September, this became almost impossible to
In the longer term the Economic Regulator, had
set a formula for income that meant a reduction in charges year
on year over five years.
The reaction of the banks seemed to be to simply
withhold the drawndown of further funds with the consequent lack
The problems facing NATS, with the expected
income stream prior to 11 September and PPP, were already difficult
as NATS had to ensure investment accelerated to build capacity
ahead of the predicted growth whilst reducing the debt and bringing
the cost base down.
The problem is that the income stream has been
markedly reduced but the objectives still remain the same.
Capacity increases are still urgently required
as air traffic keeps relentlessly increasing. The problem for
NATS is that the increase in traffic has not meant an increase
in income commensurate with it.
Prospect has supported the aim of NATS in trying
to reduce the cost base most of which will be by reducing staff
numbers. As long as there is a convincing rationale for the strategy
that they adopt Prospect will continue with their support. The
caveat must be that the money must be available before any cost
based reductions are started. With the first tranche of redundancies
in 2002 the banks proved to be very difficult when called upon
to release the capital required. Not only does this cause a loss
of confidence among the staff it puts severe strains on industrial
It was unfortunate that NATS decided to run
down the Business Development Unit when it was expected that there
would be an expansion in this area. For NATS to become more predatory
and acquisitive to make use of the freedoms given them in the
non-regulated areas needs investment. If NATS is to reduce the
debt burden new profitable avenues must be explored.
We do not believe that the banks have behaved
in a helpful way with their attitude towards the investment stream
after 11 September. They are acting in a strictly commercial manner
that we have always suggested was too inflexible for NATS. Once
it was clear that there had not been a total loss of confidence
in aviation and NATS have proved itself able to control their
costs very stringently a long term view should have been taken
and continued with investment that may reduce the cost base and
the investment that would increase the capacity of the air traffic
system. The danger in not expanding the capacity as the traffic
levels continue to rise is that delays will increase to such a
level that operators could be forced to move out of the UK. There
could be a loss of the Oceanic Control Area because a failure
to invest would mean that new improved systems would fail to materialise.
Other providers would be able to offer a better and cheaper service
and the contract could be lost.
With the continued drive towards economics of
scale together with the desire to shorten delays, alliances between
air traffic providers have been seen as one way forward. There
is however a need to invest in order to make the savings forecast.
Other providers, mainly with state backing, will be able to achieve
such alliances and earnings leaving NATS to fend for itself.
It is also not clear what the role of regulatory
bodies is in this context. Will they, and indeed the EU, see competition
issues in any such agreements.
The emphasis by the Economic Regulator (ERG)
on cost reduction is short sighted and is possibly the greatest
threat to the development of a safe and ever expanding ATC system
in the UK.
There is considerable uncertainty and agitation
amongst NATS staff as to whether ERG works in supporting NATS
business, particularly it's pursuit of the two centre strategy,
the requirement for which has been re-affirmed since PPP.
There is every danger that NATS will not retain
a pre-eminent position in European ATC, reducing the ability for
alliances or partnerships, or to act flexibly as a business, because
of a difficult balance sheet.
Because of the overwhelming pressure to reduce
it's cost base NATS is pursuing a strategy of purchasing equipment
on a "commercial off the shelf" (COTS) basis, and at
the same time reducing it's own R&D base. This is an attempt
to switch development costs to manufacturers. We have to question
how successful this strategy will be. The UK has problems that
are overall unique to provision of air traffic services. It has
the busiest most complicated Terminal Manoeuvring Area (TMA) in
Europe. The UK is also unique in controlling the transatlantic/European
air traffic boundary. It is doubtful whether any manufacturer
will produce systems that may require UK solutions.
Ultimately who will invest to ensure that UK
skills knowledge and jobs are retained with the UK? Are the Government
content to allow NATS financial situation to be a major factor
in the loss of those skills and jobs?
To be frank, if the Government approval of PPP
is not to be a failure, it has to be sure "market" economics
are not the over-riding priority. Rather, that the practicalities
of UK skill and employment retention, and the need for investment,
will allow a more flexible and co-operative approach.
The sale price of NATS was over inflated for
many reasons. The Government must consider ways of reducing the
29 April 2002