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Tuesday 30 November, 2004

Civil Aviation Auth.

CAA Announcement

Civil Aviation Authority
30 November 2004

News Release

30 November 2004


Today the Civil Aviation Authority (CAA) published for consultation its initial
proposals for the price caps for NATS (En route) plc's (NERL's) Eurocontrol and
Oceanic businesses for the control periods beginning 1 January 2006 and 1 April
2006 respectively.  Firm proposals will be published for further consultation in
May 2005.

The CAA's proposals flow from its statutory duties under the Transport Act 2000
which encompass the interests of users, efficiency and economy and
financeability but all subject to maintaining a high standard of safety.

The CAA's package of proposals is intended to

•    provide NATS with continued regulatory certainty by maintaining the key 
     planks of the regulatory framework, including particularly the volume
     sharing arrangement agreed in 2003;

•    reduce unnecessary and avoidable risk, for instance through removing
     aircraft weight, which is unrelated to the costs NATS incurs, from the
     determinants of NATS revenue (this will not affect the charging regime 
     mandated by Eurocontrol);

•    incentivise investment through a cost of capital which recognises the
     realities of NATS' business and, in particular, is grounded in the actual 
     debt costs that NATS is projected to pay;

•    incentivise operational efficiency recognising that, while there are
     opportunities for cost reduction, the evidence produced by this review 
     suggests that NATS' operating cost performance is more comparable to its 
     European counterparts than previous studies have suggested.

A key element of this package is the price cap on the Eurocontrol business where
it is proposed that the average maximum allowed revenue in 2006 is set at the
equivalent of 58.1p/km, which represents a 7.8% reduction on the equivalent
allowance in 2005.  This is set to reduce to 51p/km by the end of CP2 as shown
in the following table.

Implied maximum unit allowance (p/km, 2003/04 prices)

                                    2005         2006         2007         2008         2009         2010
CAA's projection                    63.1         58.1         56.4         54.5         52.7         51.0
Year on year change                             -7.8%        -3.0%        -3.3%        -3.3%        -3.3%

For NATS' Oceanic business, the CAA's initial proposals are for a reduction in
prices of 4.06% in 2006/07, following by annual reductions of 4%.

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

     'Over recent years NATS has improved its cost and service quality 
     performance. Today's proposals build on this progress by continuing to 
     incentivise delay improvement and cost reduction - to the benefit of 
     airline users and their passengers.  They also provide NATS with regulatory 
     certainty by endorsing key aspects of the regulatory framework, notably the 
     volume sharing arrangement introduced in 2003.

     'A key challenge for NATS over the next control period to 2011 will be
     implementation of ambitious investment plans.  The CAA's recommendations on 
     the cost of capital and the framework for capital spending are intended to
     incentivise NATS to get on with the job.  But it is important it is done
     efficiently.  The CAA has therefore challenged NATS to review its capital
     spending plans to ensure that they are robust and achievable.  It will also 
     be working with NATS on a number of initiatives to improve the efficiency 
     of capital spending and transparency to users.

     'Today's price control proposals represent a stretching target for NATS but 
     one that has to be seen in the context of the contribution to it that will 
     be made by continuing traffic growth.  They are also but one part of an 
     overall package intended to provide NATS with the certainty it needs to 
     deliver long term improvements and investment, the incentives to improve 
     performance, and an overall platform for future development.  For users 
     this should deliver better service at a lower cost, and greater 
     transparency about future plans and performance.'

Publication of the CAA's proposals follows the consideration of responses from
the aviation industry to the CAA's March consultation document on its approach
to the review.  At the request of the airlines, the CAA has extended its
proposed timetable for the review.  The CAA's firm proposals will now be
published in May (previously March) 2005 and the final decision will be made by
the end of December (previously October) 2005.

The CAA has asked for comments on its initial proposals by 28 February 2005.
The paper can be found at in the 'Economic' section.

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:

November 2004   Publication of a consultation paper setting out the CAA's
                initial conclusions on the policy issues together with an 
                indicative price control regime.

May 2005        Publication of a consultation paper setting out the CAA's more 
                developed conclusions including a draft specification of the 
                price control conditions.

September 2005  Publication of a formal proposal under section 11 of the
                Transport Act to modify licence conditions.

December 2005   Publication of the CAA's final decision.

January 2006    New Eurocontrol price cap takes effect.

April 2006      New Oceanic price cap takes effect.

2.  The consultation 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.  The current price controls were initially set by the then Department for the
Environment, Transport and the Regions and took effect from 1 January 2001.
Following the financial downturn in the aviation industry and the effects of
September 11, 2001, and the significant and unanticipated reduction in traffic
(particularly transatlantic) volumes, NATS applied to the CAA in February 2002
for an increase in its charges.  After a revised application and an extensive
CAA consultation the CAA published a revised cap in October 2002 of RPI-2 for
the period 2003-05.  In March 2003 a package of measures was put in place to
secure the financial future of NATS, which included £130 million in capital from
the Government and BAA.  The overall package came to be known as the Composite

5.  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.

                      This information is provided by RNS
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