Watchdog quits over air traffic control deal

The air industry's chief financial regulator has washed his hands of a rescue plan for Britain's part-privatised air traffic control service that involves a £65m handout from taxpayers.

In protest at the deal, Doug Andrew resigned yesterday from a panel at the Civil Aviation Authority (CAA) which drew up the proposed package aimed at saving National Air Traffic Services (Nats) from bankruptcy.

Mr Andrew, head of economic regulation at the CAA, was overruled by the two remaining members of the panel, Sir Roy McNulty, chairman of the authority and former head of Nats, and a non-executive director of the CAA.

Sir Roy, when asked if he had come under pressure from ministers to save the air traffic control service from administration, said that such a suggestion was "absolutely and completely untrue".

Mr Andrew argued long and hard against the proposals on the basis that private companies and their banks should be prepared to "take the rough with the smooth" when they buy into privatised organisations.

In a statement agreed by Sir Roy and Mr Andrew it was made clear that the chief financial regulator believed that an application by Nats which involved increased charges on airlines should have been rejected. Writing in a consultation document, Mr Andrew declared that investors, not customers, should bear the risk. "It is not appropriate for regulators in the normal course of events to provide insurance against financial distress or to expose customers to the impact of risk."

In May, the CAA refused to relax its regulatory framework to allow an increase in the fees, despite the slump in air travel after 11 September.

The compromise proposals from the authority, which will go out for consultation over the next 28 days, will result in fees some 8 per cent higher in 2005 than they would have been. The authority pointed out that Nats wanted prices to be 25 per cent higher than the existing cap. From 2006 there could be an additional contribution from airlines, seven of which bought 46 per cent of Nats' shares when they were sold last year.

As part of the package the Government plans to match an investment of £65m from the airports operator BAA, and the air traffic control organisation will be expected to reduce the ratio of frontline debt to the value of its assets. Under the proposed financial regime airlines will be expected to bear a greater degree of risk between 2003 and 2005 and the authority will consider whether that should continue beyond that date. Loan repayments should also be rescheduled over longer periods and Nats should be given access to "alternative sources of finance".

The proposals make it clear that air traffic control should have sufficient funds to withstand "shocks". The authority warned ministers before the public-private partnership was signed that the proposed financial structure might not be able to withstand major trauma. Six weeks after the semi-privatised body was born, two planes were flown into the World Trade Centre in New York, causing a prolonged and severe downturn in air travel.

Sir Roy insisted that the CAA had been "thorough, fair and independent". He described the increased charges to airlines as a "moderate user contribution".

Chris Gibson-Smith, chairman of Nats, said the new proposals would allow the company to recover from the sharp fall in revenue, protect the company from further shocks and unlock a £1bn modernisation programme.

"What is encouraging about today's announcement is the CAA's acceptance of the impact the events of 11 September continue to have on our business. Despite this, and in contrast to the rest of Europe, we have reduced our en route charges and this package means that we will continue to do so."