WEDNESDAY 1 MAY 2002
Mrs Gwyneth Dunwoody, in the Chair
Examination of Witnesses
MR DAVID JAMIESON, a Member of the House, Parliamentary Under-Secretary of State, Aviation, MR ROY GRIFFINS, Director General, Civil Aviation, and MR IAN McBRAYNE, Divisional Manager, Civil Aviation Division, examined.
(Mr Jamieson) I am David Jamieson, Parliamentary Under-Secretary of State for Transport.
(Mr Griffins) Roy Griffins, director general of civil aviation at the DTLR.
(Mr McBrayne) Ian McBrayne, head of the civil aviation division.
(Mr Jamieson) If I may. I am very pleased that we have been called before your Committee and we very much welcome the inquire that you are undertaking. I know the Members of the Committee, like us, were very shocked by the attacks on the World Trade Centre on 11 September last year. These events had very wide ranging, severe repercussions across the aviation world and NATS unfortunately did not escape the harmful effects of these. With NATS's income dependent on traffic volumes and in particular on transatlantic traffic, the resultant exceptionally sharp downturn in the number of flights had a serious impact on the company's revenues and these events did occur just a few weeks after the public/private partnership was created for NATS on 26 July last year. Once the financial consequences of 11 September became clear, all the parties involved realised there was a need to cooperate with a view to devising a strategy that would secure NATS's long term future. NATS management, the government, the Airline Group as shareholders, the Civil Aviation Authority as economic regulator and the four lending banks have all played a part in working towards that solution. On a short term basis, a loan facility has been agreed for a maximum of £60 million up to 30 September 2002. £30 million is being provided by the government and the other £30 million by the four lending banks. Each party is lending on the same commercial terms. The loan facility was announced to the House on 20 March. As yet, NATS have not called upon that loan. A number of measures are envisaged for the longer term. The company is taking steps to reduce its internal costs which will result in savings of £200 million up to 2005. It has also applied to the Civil Aviation Authority for review of the charge cap which has been set for the years 2003 to 2005, to take account of the unprecedented events of 11 September. NATS is not at liberty to increase its charges to offset lost revenues as its European counterparts have indeed done by an average of 12 per cent for 2002. The CAA as an independent regulator is currently in the process of considering NATS's application for review. NATS and its shareholders are also looking at other ways of strengthening the balance sheet. I am sure the Committee will have no doubt noted, notwithstanding the difficulties following 11 September, the new, en route centre at Swanwick. It commenced operation successfully on 27 January this year and this is the first element of the two centre strategy for air traffic control in the United Kingdom. The other is the proposed new Scottish centre at Prestwick and although NATS has found it necessary to defer the operational date of the Scottish centre by some 18 months to two years from the original target date of 2007, existing facilities have been upgraded to ensure that the capacity will be sufficient to meet needs in the meantime. The government believes that the measures that have been taken, together with further measures which are still under discussion, will provide NATS with a sound financial basis for the future and I hope I can provide the Committee, with my officials, with some further assistance in your inquiry.
(Mr Jamieson) The government has had to react in the most appropriate circumstances to this particular company and the circumstances this company found itself in. This company is a partnership between ourselves and the Airline Group and the employees. We had to find the most appropriate way of reacting to the circumstances. It would have been, in any other circumstance, that the loans from the banks would have been available to the company, but the circumstances changed very rapidly in September and we have reacted accordingly, as a responsible shareholder. The money has been matched by the other major shareholder, the Airline Group, through the banks.
(Mr Jamieson) I have no indication of that. I do not know if NATS themselves have given that indication.
(Mr Jamieson) My Department at the time entered into very long, careful and detailed negotiations on these matters and we were mindful of the position of the banks at the time. These matters would have been considered when we made our £30 million offer.
(Mr Griffins) I cannot recall the exact terms of my written replies to Sir Roy.
(Mr Griffins) In general, they were letters which, in the circumstances, would have come from a prudent chairman of an organisation as advised by his lawyers.
(Mr Griffins) I think I would have explained, though I cannot recall the letter precisely, to Sir Roy, that we were in a competitive context; that the government took seriously everything he said and reacted. There were similar letters at the time which have also been reported from Sir Roy's predecessor as chairman of the Civil Aviation Authority.
(Mr Griffins) And indeed from Mr Andrew to me, making the same points. The government reacted. There were some adjustments made.
(Mr Griffins) The gearing was reduced.
(Mr Griffins) By £100 million.
(Mr Griffins) We can check the transcript but I do not think he said that it was not satisfactory. With hindsight, nobody would say it was ideal. Nobody expected the unprecedented events of 11 September.
(Mr Griffins) The structure was working -- and we will never know whether it would have worked perfectly -- up until the unforeseen and unprecedented events of 11 September.
Chris Grayling: Was that not the whole point, if the Civil Aviation Authority's warning was that the business plan could not withstand a major shock? They did not identify what the major shock was but the example of the Gulf War was being used; we had the experience of 11 September. There was a whole variety of different scenarios that could have had a dramatic impact on the business, but surely the core point was that the Civil Aviation Authority said to you, "This business plan will not withstand a major shock". Lo and behold, three months later there was a major shock and it does not withstand it. It does suggest they were right and you were wrong, does it not?
(Mr Griffins) I can say that. I can also contend that the 11 September events and the impact of those events on the air transport industry are unprecedented and, notwithstanding the concerns expressed in both sets of correspondence, both parties supported the PPP and acquiesced in the PPP at that moment.
(Mr Griffins) As I sat at the back hearing Sir Roy a few moments ago, I think he said he accepted that it was not his decision at the time, that the government as shareholder had the right to choose the basis for the sale. The government did so, I would contend, in a way that the structure as formulated then is being put to the ultimate test at the moment and, even at this moment, with the collaboration of the five parties involved, is surviving and is working.
(Mr Griffins) I would claim that 11 September was not foreseen by anyone; that it is the most severe impact that the air transport industry has ever felt economically. I heard the Gulf War mentioned. This is worse than the Gulf War. Nobody expected the events of 11 September.
Andrew Bennett: Presumably we could have copies of your reply, since we have half the correspondence?
(Mr Griffins) Yes.
(Mr Jamieson) We have to remember there was a decline going on in the airline industry at that time. Normal fluctuations which could have been quite dramatic I think were anticipated. What we are saying is that the very special, unusual circumstances of 11 September I do not think could have been anticipated by anybody. What happened then was the whole system went into shock and what Mr Griffins is saying is that what has happened since is that the company has survived, even though it was only six weeks old at the time. The investment we wanted in Swanwick has carried out. I know they have had to hold back the investment for a while in the new Scottish centre but they have operated very successfully in the meantime. Although we have made the loan facility available of £60 million between ourselves and the banks, they have not drawn down that loan facility. Even though the circumstances that came about were totally unexpected, it has survived in that period with the potential of a modicum of help from the banks and ourselves.
(Mr McBrayne) What was unprecedented for NATS in 11 September was the impact on transatlantic traffic. You have heard from earlier witnesses that transatlantic traffic is a very major component of NATS's business and its revenues because of the way that the charges are calculated: as I understand it, something like 44 per cent of NATS's revenues prior to 11 September. That was a stronger effect on NATS in terms of money coming in than at the time of the Gulf War, even though what you say about downturn in traffic overall may be correct.
(Mr Griffins) I would in no way deny your cleverness.
(Mr Griffins) It was my impression -- and I had better check my impression -- that the economic impact on the air transport industry, particularly the transatlantic sector, has been deeper and looks like being longer lasting ----
(Mr Griffins) It would be a good idea for us to let you have some graphs on this matter.
(Mr Jamieson) I think that is right. I did make the point that there had been a fall already in the traffic but the trend was known about at the time when the PPP deal was struck. All the partners involved in it would have been aware of the situation of the traffic at that time. That was built into the equation. The extra impact of 11 September just was not anticipated so soon after the event. To some extent, although the Gulf War was a blow to the industry, there was a certain amount of anticipation before the Gulf War, because the Gulf War was developing over a period of time. There was no lead in time to what happened on 11 September. I fully understand why you are asking the questions that you are and these are the right questions. They are questions that we have been asking as well in the Department. The other question that we are posing to ourselves is what would have happened had things been as they were previously? What would have happened to NATS then and how would it have survived in these circumstances? What would have been required, almost certainly, would be a very substantial amount of government funding to have helped NATS in its previous incarnation through a period of difficulty; or we could have seen, as we have seen through the rest of Europe, certainly the larger players in Europe, very substantial increases to the airlines. That has not happened in the case of NATS. Even the increases they have asked for are quite modest.
(Mr Jamieson) I accept that, Chairman. If there were another catastrophic event, if there were some terrorist event, something of an entirely different nature, any part of any government department or any private company could find itself in a position with unexpected events with which it had to deal. We certainly hope that that will not happen. We have a lot of contingency planning. You will understand that I cannot in a public arena go through that here. We are planning so that these things do not affect us in the way that this particular event did. However, we would have to act appropriately in the event of some other disaster, just as every other country in the world would be in the same position.
(Mr Jamieson) The situation with Railtrack is very substantially different to the situation with NATS. Railtrack was privatised the way it was in the 1990s. Some say it was a botched privatisation, but it was a wholly private company and that company ran into very serious difficulties of management, of managing projects, and it ran into financial difficulties with huge cost overruns. We have a very different circumstance with NATS. It is very true to say that the management is a good management. The Government has maintained a very substantial interest. We are still the largest single shareholder in the company. We have a large interest in that, and there are no indications with the way that NATS is running at the moment that it is running downhill, as Railtrack clearly was last year. The parallels are not the same. If there were a serious crisis, notwithstanding what has happened in recent months, then there is provision within the Transport Act to deal with that.
(Mr Jamieson) We have to. Our responsibility in government is always to make sure that the fail-safe option is there because, just like Railtrack where we could not allow the whole of the railway system to come to a standstill, we could not allow the whole of the airlines and the air system in the country to come to a standstill. The 2000 Act had built into it a provision for those very extreme circumstances. I think it is true to say that before we got to that point the various players - ourselves, the airline group, the company and CAA - together as a partnership all have an interest of course in making sure that the company does operate successfully and it does have a successful future. We are a very long way before we would be facing a comparison to Railtrack.
(Mr Jamieson) We have to be. There is provision for that. The preparation was made within the Act and in those circumstances, which we certainly hope will not arise, then we would have to take the appropriate action at the time. As I say, we are a long way from these circumstances and we see no circumstances at the moment in which that would come about.
(Mr Jamieson) We are where we are now with the PPP.
(Mr Jamieson) We are where we are.
(Mr Jamieson) We are having to deal with the situation as it is. The situation is that we have a PPP, which in my view is working. It has shown itself to be robust. We have new private management which has improved the company.
(Mr Jamieson) They have made very substantial reductions in the cost of running the company.
(Mr Jamieson) They will if they are to carry out their future plans in the business plan. Part of their business plan is to regain some of the money that they have lost in recent months through 11 September.
(Mr Jamieson) I think they can use it as an argument.
(Mr Jamieson) I dare say they can use it. That is a matter for them.
(Mr Jamieson) They are recruiting new air traffic controllers. The Swanwick centre is working very well and the system is operating very efficiently.
(Mr Jamieson) We have a role as a Department and as a shareholder in monitoring the activity. I have spoken to the Government directors who have fed back information to me about the operations of the company. We have some good people there as directors including, I might say, one person who was very sceptical originally about the operation of PPP who has reported back very positive things to us. Of course, we look as well at the way the system is operating. The direct customers of course are the airlines and to my knowledge they, too, have not raised any complaints with us about the way in which NATS is operating.
(Mr Jamieson) That is my understanding. There have been some difficulties but the difficulties were with the old system at West Drayton. They were not with the new Swanwick computers. The glitch that happened was with the old system and the problem was very brief.
(Mr Jamieson) I understand that the systems that have been built in at Swanwick are capable of doing the things they said they were going to do in the first instance. I would be interested to know if any of parties can bring to me evidence that it is otherwise. I certainly have not seen any evidence. I do not know if my officials have. If that has been presented to the Committee, of course we would be very interested.
(Mr Jamieson) If that were not the case ---
(Mr Griffin) It is no secret that Swanwick was late and well over budget. One of the planks of the rationale for the PPP was to bring in improved project management within NATS and bringing Swanwick through to completion successfully is a demonstration that at least that much has worked. I do not think I can expect the present management of NATS to answer for the full delivery of a project the specification of which they had no responsibility for.
Chairman: I see; no connection with the firm next door.
(Mr Griffin) The start and the finish of the Swanwick project has lasted through a considerable number of Governments.
(Mr Griffin) However, it is up, it is working, and at the moment it appears to be successful. It is something that is pleasing.
(Mr Griffin) It is there, it is working, it is late, it is over budget but it appears to be delivering what NATS under current management expected it to deliver. If NATS under current management are disappointed they have not said so to us as the Government and the 49 per cent shareholder.
(Mr Griffin) I am sorry, I was striving to be truthful!
Andrew Bennett: Of course, not to avoid answering the question!
Chairman: We get the idea; there is no connection with the firm next door. Miss McIntosh?
(Mr Jamieson) The answer to that is yes. The CAA have a procedure to go through, they have consultation to do, but we have no choice, we have no part in that decision.
(Mr McBrayne) Yes.
(Mr Jamieson) Yes.
(Mr Griffin) Yes.
Miss McIntosh: It is like University Challenge, is it not!
Chairman: We got a yes from all three witnesses. Let that be recorded.
Miss McIntosh: Bearing in mind that it has been a difficult year - and effectively NATS have reduced the charges that they might otherwise have charged as compared to the rest of Europe who put a whacking great 12 per cent on- and bearing in mind that it is a very difficult environment in which we find ourselves because there is a lot of uncertainty post 11 September, would you consider that a part of the air passenger tax which is levied on every passenger could be somehow ploughed back into the airline business?
Chairman: I am sure Miss McIntosh would want you to know that she has a lively interest in the airline industry.
(Mr Jamieson) Chairman, I am in some difficulty here because this is ultimately a question, of course, for the Treasury.
Andrew Bennett: They do not like coming to talk to us.
Chairman: They do not like coming to this Committee.
(Mr Jamieson) We might but it would be a very small contributor to the difficulties. The amounts involved are really very small indeed. It is something that we could do. We have had some requests to look at it.
(Mr Jamieson) We have had some requests but I have to say the pressure has not been very heavy and most of the airlines are saying the difference would be marginal.
(Mr Griffin) May I respond to that?
(Mr Griffin) We are. This relates to a previous point raised by Mrs McIntosh.
Miss McIntosh: It is Miss McIntosh, it is Mrs Harvey, who is married to the airline executive.
(Mr Griffin) I will just answer the question. It pertains to the slight downturn which was beginning to emerge. The PPP was announced at the end of March and it was finalised towards the end of July. During that period of time the downturn was starting to become clear. There were negotiations with the airline group at that moment taking account of that downturn, which also took account of the concerns mentioned in the letters from Sir Roy McNulty to me, the letters from Doug Andrew and indeed from Sir Malcolm Field of the CAA. The consequent reduction of 100 million and the strengthening of the financial structure at that time was to take into account that downturn. Then 11 September happened. I heard Sir Roy McNulty say to you that it was quite likely that the CAA in its response to the NATS' application with regard to the price cap would address the question of the financial structure and may even make suggestions, proposals, recommendations, fine. The CAA is one of the five parties whom the Minister indicated -
Chairman: It is the regulator,
(Mr Griffin) It is the wholly independent regulator and I heard my Minister confirm that only five minutes ago. It is one of five parties working on this problem.
(Mr Griffin) The two shareholders - the government and the airline group - NATS, the company itself, and the lending banks. If that solution which emerges from those five parties playing their different roles produces a stronger financial structure, that is to say a better debt:equity ratio, provided that the Government does not become a controlling shareholder, it would regard that as a good thing and has given strong indications that it will match (but can only match) equity injection.
Chairman: But it would expect to maintain the same percentage of shareholding without becoming the controlling shareholder so are you assuring us, Mr Griffin ---
Miss McIntosh: Could he just finish his sentence.
Chairman: "A strong indication"; does that mean they will match it?
(Mr Griffin) My syntax will be bad but the thought process is all going to the same point. I do not think I can sit here to guarantee that but I can say there is a very strong likelihood (depending on the amounts) that the Government will match such new equity as will come in and therefore leave the company with a stronger financial structure emerging from this solution than it had going into the problem.
(Mr Griffin) Are you talking about growth patterns of the air traffic control service provision or the aviation industry as a generality?
Mr Donohoe: Both if you want to.
(Mr Griffin) Yes and the demand for air services, according to the Department's forecasts, which I can let you have but I cannot quote off the top of my head, are certainly growing.
(Mr Griffin) If there is a growth of seven per cent per annum.
(Mr McBrayne) That would be in keeping with the growth pattern we have seen over the last few years. I think it assumes that there is a recovery from 11 September, albeit over time.
(Mr McBrayne) We believe and hope that is correct.
(Mr McBrayne) This may be a minor point in your thesis but the last point is not quite correct. There has been a significant amount of capital expenditure of an on-going maintenance kind. There has not been substantial expenditure on new projects.
(Mr Jamieson) There is every confidence that the centre will be built. We have an absolute determination that it should be built. NATS have made that very clear and the financial planning and the projections that are involved in that financial planning demonstrate that that is the case. We know it is 18 months to two years late.
(Mr Jamieson) I accept that that growth may take place in the next few years.
(Mr Jamieson) It is the extent to which that growth takes place that is still difficult to predict.
(Mr Griffin) Some comfort for those concerned about Prestwick should have been derived from NATS' announcement as recently as this weekend and the Government's confirmation that the two-centre strategy is a requirement. It was a requirement set out in the contract with our strategic partner. Also in response to Mr Donohoe, to sign up to the kind of growth he has indicated, to sign up to the concept that that will definitely eventuate goes against a lot of your line of questioning as a Committee previously. If you are claiming that NATS as a company needed to be more robust just in case there were other impacts similar to the very severe impact which followed 11 September, I do not think we are in a position simply to breathe out and say, "That was a blip, it is all growth from now on".
(Mr Jamieson) Yes indeed.
Mr Campbell: Are you content with NATS' current operating costs?
Chairman: I think one of you perhaps ought to answer.
(Mr Griffin) We have set a system of economic regulation in place. The costs are being controlled through that system of economic regulation and customers at the moment appear to be getting, certainly in terms of increases in the current year, a better deal than customers elsewhere in Europe.
(Mr Griffin) The Government is not a customer of NATS nor is the Government the day-to-day operator of NATS so the Government is not incurring those costs nor is it contributing to covering those costs.
Chairman: It is however a shareholder and most shareholders have a view on how the companies in which they hold 49 per cent of the shares are performing.
(Mr Jamieson) What Mr Griffin is saying is that it is up to the airlines who are the direct customers of NATS to be on that spectrum somewhere. What we can say is that NATS have made very substantial efficiencies. Looking at the circumstances they are in, the increases that they are seeking are very, very modest in comparison to the increases that have already been imposed in a number of other countries. As a comparator that is very helpful to us.
(Mr Griffin) Not on the operating costs. Can I echo my Minister and offer a gratuitous compliment to the NATS management. In a perverse way the test of 11 September has brought out an exemplary reaction on the part of the new NATS management.
Chairman: Now I suspect Mr Griffin you are getting into slightly controversial areas. I do not think Mr Campbell has had his answer. Mr Bennett?
Andrew Bennett: Is a 21 per cent cut in staff numbers a good idea at NATS?
(Mr Jamieson) The company have to operate in a commercial way and the company have to operate in the circumstances in which they find themselves. What they are doing is they are increasing the number of people at the sharp end of air traffic control.
(Mr Jamieson) If that is appropriate. What we have to make sure is that the system is safe.
(Mr Jamieson) What we are satisfied with is what is happening is safe and the CAA have an absolute role in making sure that happens. We as responsible government and as the shareholder have to be absolutely assured of that. If we felt that any of the cuts in staff were impinging upon the safety of the airlines we would certainly have a very strong view about that.
(Mr Jamieson) That is the question we all have to ask because we think the PPP has delivered this because it has brought in private management and it has brought in systems that have allowed these efficiencies to take place so, yes, that is a good question for the Committee to ask. I think we have to ask the question could those efficiencies have been made under the system that existed five years ago.
(Mr Jamieson) Mr Bennett is quite right in indicating that there have been changes over the years. There are still changes taking place now. What NATS have done is look at further automation of certain of their processes and there have been certain efficiencies they have brought about. The underlying thing on which we have to be assured is that they can carry out the existing operations safely and they can meet future projections of any increase or decrease in air traffic and that they can do that safely and the air system can operate. Those are the things we have to secure.
(Mr Jamieson) One of my criteria was that NATS has to respond to any future need, any increase or decrease there may be in airline traffic and in its business plan it has submitted it has to demonstrate that it is capable of meeting this.
(Mr Griffin) I think the answer is yes. It is less likely to be a dinosaur in its present state than it might have been otherwise.
(Mr Jamieson) Thank you, Chairman, it has been a pleasure appearing before your Committee.