Examination of Witnesses (Questions 100-119)
SIR ROY MCNULTY AND MR DOUG ANDREW
WEDNESDAY 1 MAY 2002
100. So the answer is no.
(Mr Andrew) It is a yes and a no.
101. Let us try and agree on which bit is yes and which bit is no.
(Mr Andrew) We are using CAA staff to do the bulk of the work, including writing the draft papers.
102. That means no, you do not have an independent analysis.
(Mr Andrew) We supplement that with a range of external contractors helping us in a number of areas.
103. Contractors to whom you give the terms of reference and you lay down the answers that you want, like all good employers of contractors.
(Mr Andrew) No, Madam Chairman, we do not lay down the answers we want from them. We want high-quality analysis in a range of areas, and I think we are getting that, but it is being fed into the CAA team producing the draft response which, as Sir Roy says, will be going to the CAA Board for its consideration.
104. That is fair enough. Sir Roy, you will remember that the public-private process was supposed to introduce increasingly competitive charges.
(Sir Roy McNulty) Yes.
105. You will be bearing that in mind when you consider this whole question?
(Sir Roy McNulty) Very much so, and the criteria which are set down in the Transport Act require us to do that. The issues of cost efficiency are among the things we must consider. The interests of the users, the travelling public are also issues we must consider, and those are definitely in our minds.
106. Supposing you did find it in your hearts to give such an increase, and then the traffic came back not only faster than was expected, but possibly even in greater volumes. Would you then in any way have the machinery to ask for that increase back or to reconsider what you had given?
(Sir Roy McNulty) That is again one of the issues we are applying our minds to at the moment.
107. How long are you likely to be applying your minds, your excellent, clear minds?
(Sir Roy McNulty) We appreciate your comments very much, but we will be applying our minds actively on this until the CAA Board meeting in about the third week of this month, assuming the Board reaches a decision at that time. Shortly after that we will publish for consultation the conclusions we have reached.
108. Can you explain to me very simply the principles on which these charges are based: how far it is on the overhead costs and how far it is on the individual costs? Is there a simple way of explaining the charges?
(Mr Andrew) The charge that NATS can levy at the moment is set by the price cap specified in the licence, established by the government as part of the PPP. NATS cannot go any higher than that number and NATS is currently levying that number. The government decided on that cap rather than ourselves, although the CAA did give some advice originally about what that cap ought to be.
109. What about flexibility within that? Presumably you do not have to be at the top of the cap, do you?
(Mr Andrew) Absolutely right. NATS cannot go above that cap but they can go below.
110. Can you explain to me the principles on which you decide that on some you go up to the cap and on some you go lower?
(Mr Andrew) It is entirely a decision for NATS to make.
111. I understand that but can you explain the principles?
(Mr Andrew) To be blunt, they are a statutory monopoly. They would want usually to use that full number. There is not much judgment call. They would say, "Yes, we are allowed to levy that charge and we will levy that charge", which as Richard Everitt said before was a reduction on the previous year's charge.
112. You cannot really tell me how the charges are based, whether on the amount of effort used on the particular flight or a contribution to the overheads?
(Mr Andrew) The cap is set in the licence. NATS then can price anywhere up to that. As a PPP, it is usual that it will be priced at the cap and that is what they have done.
113. Sir Roy, is it the case that the Civil Aviation Authority, prior to the completion of the NATS PPP, recommended to the government that the Airline Group was not sufficiently strong to withstand a major shock of the kind perhaps in the Gulf War or 11 September?
(Sir Roy McNulty) As you are probably aware, I only arrived at the CAA in September and I think it would be better that Mr Andrew replies.
(Mr Andrew) When the CAA had visibility of the proposed financial structure of the PPP, we did raise with the government our concerns that the financial structure proposed gave very high levels of debt in relation to the economic value of the business and as such, particularly in a situation where NATS had quite an ambitious capital expenditure programme to meet demand, this looked to be inconsistent and it meant it was quite exposed to adverse shocks happening.
114. Was it your sense that the government did anything as a result of your representation?
(Mr Andrew) The sense that I got was our advice was somewhat late in the process, although we gave it as soon as we saw the financial structure. There were some changes made to the initial financial structure between the first sight we had and the final one that was agreed, although that mainly seemed to reflect some weakening of the demand position that was obvious around May/June last year.
115. Is it your view, now that we have been through the PPP process and we have had the shock of 11 September and the aftermath of it, that NATS is now reorganising and refinancing itself in a way that would provide a degree of solidity that, in your opinion, was not there prior to the PPP and, if not, what are you saying to the government about it?
(Sir Roy McNulty) At the moment, we are not saying anything to the government. When we have reviewed this price application and considered all the factors that relate to NATS's financial situation, we may well have something to say about it.
116. Sir Roy, did you ever get an answer to this letter that you sent to the Department? This is what you said: "It seems clear the financial structure as currently envisaged will not work and significant changes are required." You laid down the requirements that you had already made clear that the structure must permit long term investment; financial plans; planning should not require cuts in staff numbers that might put delivery at risk; the structure must afford adequate financial headroom. All of these things have not really changed, have they? Did you ever get an adequate reply to that letter?
(Sir Roy McNulty) We got a reply. I am not sure it fully met the points that we were making.
117. Does that mean no?
(Sir Roy McNulty) As Mr Andrew mentioned, between about the time that I wrote the letter which, from memory, I would place at around May
118. No. 11 June. The next one was 15 June 2001.
(Sir Roy McNulty) There was a change in the financial structure. From memory, I think the amount of debt was reduced by about £100 million compared to the structure we had been looking at, at the time those letters were written. The government made it clear that it was their prerogative in the end to decide on the deal with the bidders and I accepted that. I accept also that these things are to an extent a matter of judgment and they proceeded accordingly.
119. You do not seem quite so impressed in the second letter that you wrote. In fact, for you it is really quite plain.
(Sir Roy McNulty) It must be a mistake then!