Back in Control

Under CEO Paul Barron, UK NATS has a new commercial focus.

By Anne Paylor
UK
Air Transport World, September 2005, p.48     Buy this issue

For more than a year, Paul Barron, CEO of the UK's National Air Traffic Services, has been talking and listening hard-to more than 5,000 staff members, but not to the media. Now he feels ready to talk about the stronger, leaner, more robust organization over which he presides.

In only his second major interview since taking over in June 2004, Barron tells ATW that the NATS he is in charge of today is a very different animal from the one he came to fresh from restructuring Alstom's UK business. "NATS has fantastic people," he says. "They are among the best in the world at what they do. But when I arrived, this was a business that did not know how to do business. It did not have the in-depth commercial understanding that I am used to seeing. So I spent the first three months visiting every unit, holding barstool sessions with staff, and I came away with a strong understanding of what I thought was missing."

At the same time, he was honing his management team and working with them to create what he describes as "a vision for the future of the business"-targets against which to measure progress in March 2007. These 21 targets, or Destinations as they are known, clearly identify the framework for where the company is going and where it hopes to be in two years. "They are very clear; there's no wriggling away from them," Barron says. The aim is to "engage the workforce" and "liberate and inspire" people through leadership to "raise the bar."

The changes, he believes, are beginning to be reflected in performance. After requiring a financial bailout to stay in business during the post-9/11 traffic downturn (see box, p. 52), NATS last year made a profit for the first time since its July 2001 transformation into a Public Private Partnership. Delays are down, safety is up and infrastructure is being upgraded, while the workforce has been trimmed from 5,521 as of March 31, 2002 to 5,061 as of last March 31.

"A year on, we have had the best year's performance in the record of the company on every front," Barron says. In the financial year ended March 31, NATS handled more than 2.2 million aircraft, up 4.8% on the previous year and a new record. At the same time, the average delay per flight attributable to NATS fell to 20.9 sec. "Two years ago, we measured delay in minutes," he notes, attributing much of the improvement to "Swanwick settling down."

Safety has also improved. In 2004, there were no airproxes attributable to NATS where the safety of the aircraft was compromised. "That won't be sustained, and indeed hasn't been sustained through the financial year," he acknowledges. However, since privatization there have been no airprox incidents attributable to NATS where there was an actual risk of collision. Despite its "best year of safety on record," Barron insists the company is "working hard to make that a permanent feature and that's going to take an immense amount of effort."

Return to Profit

On the financial side, NATS made its first profit in 2004, earning ﾣ69 million before tax after losing ﾣ115 million in the previous two years, and posted its first-ever dividend. "It's not huge, but symbolically it is enormous," he says. Gearing is down from 117% at the time of the PPP to 70% today and he notes that NATS "has just improved its credit rating with Moody's and we are hopeful within the next 12 months of becoming an A-rated company." The company's airline investors-British Airways, bmi, Virgin Atlantic, Britannia, Monarch, easyJet and Airtours with a total 42% stake-express confidence in the new direction. "Like the rest of the industry, NATS has faced significant challenges, but it is now in better shape and in a better position than at any time since privatization. Its financial performance has been impressive and we are fully supportive of the Destinations strategy," a spokesperson for the Airline Group told this magazine.

Others, however, are not satisfied that the entity has lived up to the promise of the PPP. Although generally supportive, IATA warns that "the UK currently has the highest of the proposed charges for 2006 among all the 32 Eurocontrol members." This contrasts with a drop in the UK unit rate of 0.3% per year during 2001-05 compared with an average unit rate increase for the 32 Eurocontrol members of 2% yearly over the same period.

The European Low Fares Airline Assn. believes that economic regulation is not working. ELFAA Secretary General Jan Skeels says, "The service has improved, but the rate we pay for it has not. The first estimates for 2006 suggest that NATS will once again be the most expensive service provider in Europe. Does privatization mean you have to pay more?" Peter Sherrard, head of communications with Ryanair, tells ATW that "NATS is expensive and inefficient compared to its European counterparts and the situation is worsening rather than improving." He wants the UK to end what he calls an "inefficient monopoly and [open] air traffic control to competitive tender."

Barron acknowledges that "The airlines think we are far too expensive; they want to keep the pressure on and rightly challenge our costs." But he claims that "it is impossible to measure us against our European counterparts . . . our airspace does not compare." He continues, "No one else in Europe borrows several hundred million to run their business, has a regulator, has to absorb the cost of that regulation, has to pay for the buildings and land, etc. There are things we have to do because we are privatized that government-subsidized organizations do not. The regulator believes we are competitive with the rest of Europe. We know that we are among the best at what we do. So if our charge rate is the highest, it probably reflects what the real costs are. However, our target is not to be highest and to get that rate down successively year after year."

Another bone of contention with non-Airline Group users is a volume risk-sharing arrangement implemented following the 9/11 traffic drop that halved NATS' share of volume risk from 100% to 50% with airlines assuming the other 50%. If traffic volumes fall below a certain level, NATS is not expected to assume the full risk but can adjust its charges accordingly to cover its costs. The UK CAA argues that "while users would generally prefer not to manage this volatility themselves," more volume risk on NATS' en route business was "likely to be associated with a higher cost of capital and therefore higher charges for users."

Risk Without Reward

Noting that "None of our members are members of the Airline Group," Skeels contends that "some of the airlines are forced to take the risk without getting any reward. The Airline Group airlines share in that risk, but in return they also share any reward."

In response to airline demands, CAA is proposing tough financial controls for NATS' second five-year Charge Period from 2006 to 2010. The proposals call for real reductions in its Eurocontrol en route unit revenues averaging 3.4% per year, for a cumulative reduction over the five years of around 15%. CAA proposes to leave the price cap for the oceanic business broadly unchanged at 4% below the retail price index. Group Director-Economic Regulation Harry Bush says the proposals would generate "significant real price reductions" for users. At the same time, enhanced financial incentives, which include increasing the maximum delay penalty from around ﾣ10 million currently to ﾣ24 million, would spur efforts to reduce delays. The agency acknowledges the proposals "represent a significant management challenge for NATS" but "makes no apology for setting stretching targets."

IATA, whose DG and CEO Giovanni Bisignani sits on the NATS board, believes the proposals "are achievable for a privatized air navigation service provider and will enable NATS to maintain its financial robustness and service quality." NATS, meanwhile, has decided to accept the CAA proposals subject to several outstanding issues being addressed, and CAA expects to publish a formal consultation on the license modifications this month.

Concerns about the requirements notwithstanding, Barron aims to position his organization to take advantage of opportunities he sees arising from the transition to the Single European Sky. With that in mind, NATS and the Irish Aviation Authority since 2002 have been pursuing a course of closer cooperation and collaboration that most recently led to a study of the feasibility of establishing a Functional Airspace Block in Irish/UK airspace.

The study concluded that an FAB would offer flexibility in airspace management, cost savings through rationalization of resources and service benefits through more streamlined operations. It recommended a three-center, high-level en route strategy based on Shannon, Prestwick and Swanwick; an integrated charging regime across the whole airspace; joint airspace management with a new Atlantic interface system managed from Shannon, and transferring control of the Dublin TMA to Prestwick. The Solar Alliance, which conducted the study, said the level of cooperation that already exists between the two air traffic services providers means that the FAB potentially could be operational as early as 2008. "We are pursuing this at a speed that means it could be the first FAB in Europe under the SES initiative," Barron says.

Alliance Minded

Alliances are very much on the NATS agenda. It is part of a three-nation partnership to develop a flight data processing system common to the UK, Germany (DFS) and Spain (AENA). The Interoperability Through European Collaboration project has received E16 million of funding from the EC and should contribute to the convergence of systems and concepts in line with the SES. NATS initially committed ﾣ4 million to participate in ITEC's system design phase.

The organization also is working with AENA on adapting the Spanish ATC system SACTA for use in the UK. SACTA is in service at AENA's five ATC centers across Spain. NATS plans to launch operations at the new Prestwick Center using the SACTA system in 2009 and then extend it to Swanwick. SACTA would provide the platform for ITEC, paving the way for development of a cohesive pan-European system.

Meanwhile, NATS has registered an interest in being a shareholder when DFS is privatized, probably next year. "We are not planning to make a bid in our own right, but we would be a strong strategic partner for anyone interested in taking a shareholding in DFS," Barron says.

Further afield, NATS and Nav Canada are working on joint development of the latter's Gander Automated Air Traffic System for use at the Oceanic Area Control Center at Prestwick. The Shanwick AATS will replace the UK's current Oceanic Flight Data Processing System. In addition, NATS is beginning rollout of a paperless Electronic Flight Progress System for towers developed by Nav Canada. The first system has gone operational at Stansted and will be followed by installations at the Gatwick and Heathrow towers.

"We've had a phenomenal year, but that's just the beginning because I believe that NATS is in a unique position in Europe," Barron sums up. "We are a big player in terms of the amount of traffic and airspace we deal with, and we have some of the most complex airspace in Europe. In addition, NATS is independent, financially robust and has a good relationship with its banking partners."

Too Much Debt

The 9/11 terrorist attacks virtually wiped out a key source of NATS revenue-high-yield transatlantic traffic-only months after the company was transformed from a government entity to a so-called Public Private Partnership. It also highlighted a critical weakness of the PPP structure: NATS was so heavily weighed down with debt that it was completely exposed when the downturn hit.

The Airline Group, a consortium of seven leading UK airlines selected by the government to be its private sector strategic partner in the PPP, essentially acquired the company for a small amount of cash but assumed its mountain of debt-in excess of ﾣ700 million. Following 9/11, the airlines were themselves so hard hit that they were unable or unwilling to invest more money in NATS.

A "composite solution" was put in place to tide the company over the worst of the crisis. The solution relaxed the regulatory economic controls placed on NATS by CAA on condition that it restructure its finances. This involved deferment of a massive investment program, ﾣ200 million worth of cost savings over four years, a ﾣ60 million line of credit from the government and banks, and a new equity partner in the form of airport operator BAA, which purchased a 4% stake for ﾣ65 million that was matched by ﾣ65 million from the government. The Airline Group remains the government's strategic partner with a 42% shareholding and NATS employees hold 5%, leaving the government with 49% plus a golden share.

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