Civil Aviation Auth.

CAA Announces NATS' Proposals

Civil Aviation Authority
24 May 2005

News Release

24 May 2005


The Civil Aviation Authority has today published its firm proposals for the
regulatory price controls of National Air Traffic Services (NATS), which will
come into force from January 2006.

The proposed price caps cover NATS (En route) plc's (NERL's) Eurocontrol and
Oceanic businesses for the five years beginning 1 January 2006 and 1 April 2006
respectively.  They flow from the CAA's statutory duties under the Transport Act
2000 which encompass the interests of users, efficiency, economy and
financeability, but all subject to maintaining a high standard of safety.

Publication of today's proposals follows consideration of responses to the CAA's
initial price control proposals published in November of last year.

The CAA's proposals for the Eurocontrol business provide for real reductions in
NERL's unit revenues averaging 3.4 per cent per annum over the period 2006-10.
The cumulative reduction over the five years is around 15 per cent, with a first
year reduction of some 4 per cent followed by average reductions of around 3 per
cent each year.

The main change since the CAA's initial proposals (which were equivalent to an
average 4.8 per cent annual reduction) is that, following a review by NERL of
its capital programme and a more realistic profiling of spend, the CAA is
proposing to allow for all of NERL's estimated capital spend rather than the 80
per cent it notionally allowed in November.  This explains 1 per cent of the
difference between the 4.8 per cent average reduction in November and the 3.4
per cent proposed now.   The remainder of the difference is explained by a
number of small adjustments, including to the operating cost allowance, to the
profile of regulatory depreciation and an increase of 0.25 per cent in NERL's
cost of capital (now proposed at 6.75 per cent) to take full account of
ancillary debt costs.

The CAA proposes to strengthen the current financial incentives on NERL's
service quality. Compared to its initial proposals it proposes to modify the
average delay at which no bonuses or penalties apply from 32 to 45 seconds per
flight, which better reflects the assumptions underlying NATS' 2004 Business
Plan.  The overall effect of the CAA's proposals is to increase the maximum
penalty under the scheme from around £10 million currently to £24 million
(compared to £27 million under the CAA's initial proposals).

The CAA proposes to leave the price cap for the Oceanic business broadly
unchanged at RPI-4 per cent.

Dr Harry Bush, CAA Group Director, Economic Regulation, said:

'The CAA's objective is a safe and efficient NATS.  Our proposals deliver
significant real price reductions to users throughout the next five years whilst
enhancing the incentives to reduce delays. At the same time they provide NATS
with the resources for its investment in modernising the UK's air traffic system
to the long term benefit of all airlines and passengers using UK airspace.

'These proposals represent a significant management challenge for NATS as the
company seeks to improve efficiency and delay performance while changing
operating systems and relocating staff. The CAA makes no apology for setting
stretching targets as part of a balanced approach which includes: maintaining
the crucial volume-sharing arrangements agreed in 2003; recognising fully a
number of costs over which NATS has limited control; and proposing additional
transparency to users and encouragement to improve NATS' procurement and project
management systems.

'The CAA believes that these proposals strike a reasonable balance between NATS
and users but one which requires NATS significantly to improve its performance,
as its new management team fully intend'.

A key purpose of today's document is to invite NATS to indicate whether it can
accept the CAA's firm proposals.  If NATS does not confirm that it is prepared
to accept these proposals by Friday, 29 July, the CAA would expect to make a
reference to the Competition Commission to investigate and to make
recommendations as to what the price controls should be.

If NATS is prepared to accept the proposals, the CAA expects to publish a formal
consultation on the licence modifications in September 2005.

The paper can be found at in the 'Economic' section, click on '

For further information contact Chris Mason on: 0207 453 6026.

Notes to Editors

1. The CAA's revised review timetable, which takes into account comments from
the airlines, is:

29 July 2005           Deadline for receipt of responses to firm proposals
September 2005         Publish formal licence modification
October 2005           Deadline for comments
December 2005          Modify licence
January 2006           New Eurocontrol price cap takes effect
April 2006             New Oceanic price cap takes effect.

2.  Today's paper covers the main price control, which applies to charges levied
by NERL's Eurocontrol business, which ceases on 31 December 2005, and the
control on charges levied by NERL's Oceanic business, which expires on 31 March
2006.  The Eurocontrol business provides air traffic services to aircraft using
controlled UK airspace.  In 2004, the Eurocontrol business served around 2
million flights.

3.  The Oceanic business is a much smaller business than the Eurocontrol
business. It provides air traffic control services for the North Eastern area of
the Atlantic.  In 2003/04, the Oceanic business served 340,000 flights.

4.  As its starting point, the CAA has taken the objectives set out in the
Transport Act 2000.  Subject to maintaining a high standard of safety, these
are: to further the interests of users; to promote efficiency and economy by
NERL; to secure that NERL will not find it unduly difficult to finance its
activities; to take account of the UK's international obligations. The CAA must
also impose the minimum restrictions consistent with the exercise of its duties.
It has also sought to follow Better Regulation Task Force Principles, namely
that regulation should be proportionate, accountable, consistent, transparent,
and targeted.

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