Examination of witnesses (Questions 50
WEDNESDAY 14 FEBRUARY 2001
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)
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?
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.
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
(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
(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
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
(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
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.