Select Committee on Transport, Local Government and the Regions Eighteenth Report


(a)The seriousness of NATS' financial situation is due to the reduction in air traffic that followed the 11 September terrorist attacks and the company's dependence on north Atlantic traffic. The financial structure created by the PPP inflated the company's difficulties. The Government failed to give due weight to the concerns expressed by both NATS and the CAA about the high debt levels imposed on the company. The Government failed to heed the warnings about the impact the financial structure would have on the viability of the company in the event of a downside demand shock. The weaknesses of the financial structure suggest a failure of due diligence at the time of the sale of NATS, when traffic was already declining and there were already moves towards the use of smaller aircraft (paragraph 11).
(b)We repeat our predecessor Committee's recommendations to the Government to consider alternative funding models for NATS, contained in their Reports into the Future of National Air Traffic Services and the Proposed Public-Private Partnership for National Air Traffic Services Limited (paragraph 15).
(c)NATS' financial structure left it extremely vulnerable to a reduction in demand. The air transport industry has a history of cyclical levels of demand and sensitivity to external events. The terrorist attacks of 11 September were unprecedented, and the consequential downturn in air traffic was more severe than those following previous downside demand shocks. The reduction in demand was not outside the bounds that NATS should have been able to withstand and should have been considered within its contingency planning. The impact of a 'downside demand shock' should have been assessed as part of the due diligence during the PPP sale process (paragraph 26).
(d)NATS charges were supposed to reduce, not increase, under the PPP. The arguments advanced so far will probably do little to persuade the CAA that an increase in charges is warranted (paragraph 30).
(e)The Government must provide greater detail about the implications of BAA becoming an investor in NATS alongside the Airline Group. None of our witnesses was able to offer an informative opinion on those implications. It was not clear whether the additional investment would significantly improve NATS' financial position (paragraph 34).
(f)The Government must ensure that BAA's involvement in NATS is, and is seen to be, transparent, especially if charges of a quid pro quo for BAA's capacity expansion plans in return for investing in NATS are to be avoided (paragraph 35).
(g)At the time of the PPP, the Airline Group was acceptable as a bidder for NATS ownership only because of its inherent aviation interests. The Government should ensure that any further attempts to secure capital do not dilute the aviation expertise and stake in NATS (paragraph 36).
(h)The reduction in engineering staff seems misplaced given the probability of teething problems with the new systems at Swanwick. Engineering skills will be essential for NATS to develop and expand. Experience has shown that loss of engineering expertise is not easy to recover (paragraph 42).
(i)We are not convinced that NATS' systems are sufficiently robust to enable it to reduce the numbers of safety-critical staff. Air traffic control assistants are vital to the safe operation of air traffic control, and it is incredible that NATS intends to reduce their number so soon after moving into a new, highly complex operating environment. It is essential that NATS and the CAA clearly demonstrate a substantially greater level of robustness in computer equipment at Swanwick before embarking on the planned reductions (paragraph 44).
(j)NATS must balance its need to reduce costs with its future development. The opportunities for NATS to sell its expertise to others and develop new sources of income should not be missed for short-term financial savings (paragraph 45).
(k)We welcome the statements of commitment to the Prestwick centre, but, given the financial considerations and the inauspicious precedent set at Swanwick, we find it highly unlikely that it will be operational until well after the new intended completion date in 2009 (paragraph 48).
(l)NATS' capital investment programme is critical. A failure to deliver the improvements in capacity will have dire consequences for the aviation industry and the United Kingdom economy. The capital programme is an essential plank in the company's business plan that would allow a rationalisation of operations into fewer sites (paragraph 49).
(m)If NATS' business plan is to succeed, the company must demonstrate that its computer systems are robust and will increase the productivity of its controllers. The Committee is not convinced that the systems at Swanwick have shown either the necessary robustness or the productivity required (paragraph 51).
(n)The Committee recommends that the Government reconsider the exemption from compensation. NATS is supposed to benefit from the private sector pressures introduced by the PPP. It should be subject to the pressures of financial penalties in situations where it has failed to deliver its services to its customers (paragraph 52).
(o)The Committee doubts that a financially vulnerable NATS would be able to play an appropriately significant role in a more centralised European air traffic control service (paragraph 53).
(p)At present, NATS is far from capable of meeting the challenges of the long term future of air traffic control services in the United Kingdom. The cost-cutting and penny-pinching mentality foisted on NATS merely to survive will leave it ill-equipped to compete with the new satellite-based air traffic control service provision being developed in Europe and North America (paragraph 54).
(q)We expect the Department to publish details of its full contingency recovery plan in the event of a complete failure of NATS finances (paragraph 55).
(r)We were told that the PPP and the introduction of private sector management would deliver a more efficient air traffic control service. We have seen little evidence of those efficiencies or the improvements in NATS' management. NATS' business plan is crucial to its survival. We are not convinced that it will deliver improvements (paragraph 56).
(s)The Committee's previous conclusions about long term funding and alternative ownership models remain valid. NATS provides an essential service that must be run safely and efficiently. The PPP was not appropriate and should be reviewed before it does terminal damage to United Kingdom's aviation industry and vital national interests (paragraph 57).

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