Nats rescue threatened by Ryanair

No-frills airline Ryanair is preparing to challenge the Government's bailout of the cash-strapped National Air Traffic Services in the courts.

Europe's second-largest budget operator, headed by Michael O'Leary, is to meet the Civil Aviation Authority (CAA) on Wednesday to spell out the grounds for a legal challenge under European competition law.

The rescue of Nats, which was part-privatised in March 2001, involves a £60m cash injection by airports operator BAA to be matched pound-for-pound by the Government. On top of this, the CAA has agreed to allow Nats to increase the charges it levies on the airlines.

Nats is 46 per cent owned by the Airline Group, whose shareholders include BA, Virgin Atlantic, easyJet and BMI.

In a letter sent to the CAA, seen by The Independent on Sunday, Ryanair says: "This is not only unfair but is, on the face of it, illegal."

Dated 28 November, the letter adds that the airlines which are not shareholders in Nats "are being discriminated against because we will not receive any return on this forced investment, whereas the Airline Group and other shareholders will". The letter concludes that unless the bailout is abandoned then legal action is likely.

Jim Callaghan, Ryanair's head of regulatory affairs, said: "The proposals have to be challenged in order for things to be fair and equitable. We'll get no financial return for the 8 per cent increase in fees and the forced investment we are expected to make in Nats."

Mr Callaghan refused to reveal details of the legal action. However, it is understood Ryanair believes that Nats' rescue infringes Article 86(2) of the European Union Treaty, covering competition.

Mr Callaghan also criticised others for not taking up the issue. "The airlines which are not shareholders in the Airline Group have not been vocal. I think that this is because so many of them have links with the shareholders of Airline Group. In my opinion, it's all stitched up through co-sharing agreements between the airlines," he said.

The CAA is due to make a final ruling on Nats' bailout before Christmas. It is understood that unless the rescue is abandoned – or amended to introduce stricter performance targets on Nats – then Ryanair will launch legal action early in the new year. Asked how serious the threat of legal action was, Mr Callaghan said: "We don't raise these things lightly."

News of the challenge will dismay Nats. After a tortuous year of negotiations with its banks, government ministers and the regulator, Nats' chief executive, Richard Everitt, had hoped that the turmoil was almost over.

CAA's last ruling on Nats in October, still subject to final consultation, gave the green light to a rise in charges. This triggered new cash from BAA and the Government.

The ruling came after a bust-up within the CAA. Its director of economic regulation, Doug Andrew, thought Nats should not be bailed out and resigned from the CAA's adjudicating panel.

The cash injection is critical to the survival of Nats, which was thrown into crisis following the terrorist attacks of 11 September 2001. The sudden drop in air travel exposed flaws in Nats' business plan, which did not sufficiently factor in a possible fall in passenger numbers.

The perilous state of the service was revealed in a report prepared by Nats and sent to the CAA this summer. It warned that unless the rescue package was approved by the regulator then "there is a very strong prospect of Nats' return to the public sector".

The news of possible legal action over Nats will also trouble the Government, which is facing criticism over the rescue of nuclear generator British Energy. It is also under fire for the indemnities offered to bidders in the London Underground sell-off.

If the rescue of Nats starts to unravel then the Government will face fresh questions over the use of private companies to run public services.