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

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 service.

  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 of investment.

  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 relations.

  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 debt.

Iain Findlay

29 April 2002

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