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The Public Private Partnership for National Air Traffic Services Ltd

Sir John Bourn, head of the National Audit Office, reported today that the public private partnership for NATS contains many positive elements. But the financial position of the Company will need strengthening to enable it to make further vital investment to expand the capacity of Air Traffic Control.

In its study of the PPP for NATS, the NAO found that the strengths of the PPP include provision for continuing high standards of safety and for national security, and also for accountability to Government and the public interest. There are also safeguards to prevent NATS discriminating in favour of its shareholders. And the taxpayer raised some £800 million from the sale of a 46 per cent stake in NATS to the Airline Group, a consortium of seven UK-based airlines.

But the high proceeds were partly achieved by increasing the level of NATS’ bank debt. NATS’ new financial structure, with increased indebtedness to banks and comparatively little equity from investors, makes the organisation vulnerable to downturns in traffic, such as that which followed September 11th 2001. The Department and their advisers had decided, mainly on the basis of financial projections that assumed constant growth in NATS’ traffic and income, that the financial structure of the PPP would be sufficiently robust to cope with short-term reductions in traffic levels. The down-turn following September 11th, however, has been so severe that there is still a risk that NATS will not be able to fund and deliver its investment plan. Investment is essential to cope with future growth in air traffic, and thereby prevent increasing delays to flights.

It would have been impossible for the Department to have predicted the events of September 11th and the effects on air traffic. Nevertheless, there have been other significant downturns of traffic in the past 30 years, which were not modelled by the Department or its advisers when testing the proposed financial structure of NATS.

In its present form NATS is still vulnerable to further traffic downturns. Its prices are capped by its independent economic regulator, the Civil Aviation Authority. Because of the severe downturn in air traffic, NATS has been inhibited from using its long term loans by the terms of this borrowing, and its ability to invest is therefore severely restricted. NATS is now trying to bring an additional equity partner into the PPP, and if it is successful, it will be much better placed to survive future shocks and to drawdown on its long-term loans for investment. But strengthening the position of the company will require positive and complementary responses from many parties, including investors, banks and the independent economic regulator.

"The deal has been set up well to provide safety and accountability. But the financial position of the company will need strengthening by the parties involved to enable it to make further investment in air traffic control, one of the Government’s main objectives for the Partnership."

Sir John

Notes for Editors

  1. National Air Traffic Services Ltd (NATS) is the company which holds a monopoly over the management of controlled airspace over the United Kingdom and, with its Irish counterpart, the North East Atlantic. It also provides air traffic control at most of the large airports around the country. The costs of its services are met by charges to users, mainly airlines. Until the Public Private Partnership (PPP) it was owned by the Civil Aviation Authority, which remains its regulator. Civil Aviation policy is the responsibility of the Department for Transport, formerly the Department of Transport, Local Government and the Regions).
  2. The Public Private Partnership for NATS was signed in July 2001 between the Secretary of State for Transport, and the Airline Group. The Airline Group comprises British Airways, Virgin Atlantic, British Midland, Airtours, Monarch, Britannia and Easyjet.
  3. There have been three occasions in the past 30 years when air traffic has experienced significant downturns – 1973-1976, 1979-1983 and 1991. Only the last of these was used to evaluate the financial risks to NATS.
  4. Press notices and reports are available from the date of publication on the NAO website at Hard copies can be obtained from The Stationery Office on 0845 702 3474.<
  5. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office employing some 750 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

PN: 51/02