6 Operating costs and efficiency by tzv97744

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									6            Operating costs and efficiency




Contents
                                                                                                                                                     Page

Introduction............................................................................................................................................. 122
Current operating expenditure ................................................................................................................ 122
Performance during Q3........................................................................................................................... 122
   Trends in employee costs.................................................................................................................... 128
     Employee numbers.......................................................................................................................... 128
     Employee costs ............................................................................................................................... 128
     Basic rates of pay ............................................................................................................................ 129
     Earnings .......................................................................................................................................... 130
     Pension costs................................................................................................................................... 130
     Shift working .................................................................................................................................. 130
     Overtime pay and controls .............................................................................................................. 130
     Absence........................................................................................................................................... 131
     Labour turnover .............................................................................................................................. 131
     Industrial relations .......................................................................................................................... 132
   Trends in other costs ........................................................................................................................... 132
     Premises .......................................................................................................................................... 133
     Supplies and services ...................................................................................................................... 134
     Transport and plant ......................................................................................................................... 134
     Establishment costs......................................................................................................................... 135
     RHS contracts ................................................................................................................................. 136
Cost reduction strategy ........................................................................................................................... 136
   1997 to 2001 ....................................................................................................................................... 136
   The LEK Strategy Review .................................................................................................................. 138
   2001 to 2002 ....................................................................................................................................... 139
   Current position .................................................................................................................................. 140
Projected operating expenditure for Q4 .................................................................................................. 140
   Employee cost projections .................................................................................................................. 141
   Strategy for further cost reductions..................................................................................................... 142
     Security ........................................................................................................................................... 142
     Engineering..................................................................................................................................... 142
     Car parks ......................................................................................................................................... 143
   Other operating expenditure................................................................................................................ 143
     Premises .......................................................................................................................................... 143
     Supplies and services ...................................................................................................................... 144
     Transport and plant ......................................................................................................................... 144
     Establishment costs......................................................................................................................... 144
     RHS contracts ................................................................................................................................. 145
Restructuring costs.................................................................................................................................. 145




                                                                           121
Introduction
    6.1. This chapter examines Manchester’s cash operating expenditure (that is, operating expenditure
other than depreciation). It begins by examining its actual costs for Q3 (other than sales development,
which is covered in detail in Chapter 7) and compares them with the projections made at the time of the
1997 MMC report. It then goes on to examine its strategy to reduce employee costs, the single largest
item of operating expenditure, and its proposals for Q4. Finally, it considers restructuring costs arising
from the change programme that Manchester has embarked upon.


    6.2. The CAA’s first submission to the CC included no reference to the levels of manpower numbers
or costs necessary for the efficient running of Manchester Airport. The document expressed the belief
that ‘owners (whether private or public sector) are better placed than regulators to address inefficiency
and can do so via contracts which offer their managers improved incentives or via appointing a new
management team, as has been recently seen at Manchester’ (see paragraph 6.39). We nevertheless
decided that a detailed review of Manchester’s costs was a necessary part of our inquiry in order to
recommend the level of the price cap.



Current operating expenditure
    6.3. The operating expenditure for the entity defined in paragraph 2.71 (that is, MA plus MAAS
(including RHS) plus MAD plus motor transport) in 2001/02 was £240.1 million, including £19.9 million
extraordinary costs of restructuring (see paragraph 6.98). Of this, total employee expenditure (excluding
restructuring costs, and excluding a £1.175 million credit for employee costs that it had capitalized) was
£64.0 million, 38.7 per cent of cash operating costs. Other cash operating expenditure was £102.4 million
and depreciation amounted to £55.0 million. A breakdown of total operating expenditure is shown in
Table 6.1.



Performance during Q3
  6.4. MA’s forecasts (excluding depreciation) of cash expenditure for the years 1998/99 to 2002/03,
made at the time of the 1997 MMC review, are shown alongside the actual out-turn expenditure at
Appendix 6.1.


    6.5. Comparison of projected and out-turn figures is made difficult by MAG’s restructuring. Table
6.2 shows the variances of actual from forecast in Q3 for the entity defined in paragraph 2.71. Some esti-
mates have had to be made where organizational units changed. The totals for each year are shown in
percentage terms as well as absolute terms. The variances are calculated with respect to Manchester’s
projections, not those determined by the MMC. The latter reduced sales development to £6 million a year
and included further efficiency gains of 1.5 per cent on manpower costs and 1 per cent on other cash
costs.


    6.6. Variances in estimation increased over the period. For 1998/99, projected and actual were
almost identical. By 2002/03, there was an underspend of £23.5 million (12.9 per cent). Overall, there
were overspends in the first three years of Q3 and underspends for the last two. Employee costs followed
the overall pattern but costs for premises (except in 1998/99) and establishment were below forecast in
every year of the quinquennium. Premises and employee costs (excluding extraordinary restructuring
costs of £19.9 million for 2001/02 and £8.2 million for 2002/03) showed increasing shortfall below fore-
cast in the later years. Offsetting this were overspends on supplies and services, in particular on NATS
(related to R2 opening), hire of services and equipment leasing. Manchester told us that borrowing
restrictions placed on it, but since lifted, led it to seek an alternative to capital investment where possible
and so it turned to increased leasing of equipment. However, the single largest variance was in the sales
development element of establishment costs. Manchester had planned to spend £71.3 million over the
quinquennium, but the CAA (upon MMC recommendations) allowed only £30 million to be offset


                                                     122
against aeronautical charges, and this is broadly what Manchester spent (see Chapter 7 for further
details). In fact, the underspend on sales and development was greater than the overall underspend, so the
total spending on the other categories was above forecast. We discuss variances against forecast and
trends through Q3 in more detail in the following sections, by cost category, starting from para-
graph 6.20.


TABLE 6.1 Summary of Manchester's operating expenditure in 2001/02 (out-turn prices)

                                                    Percentage of    Percentage of
                                           £m        total costs      cash costs
Employee costs
MA employee costs*                        52.4           23.8              31.7
RHS employee costs                        11.6            5.3               7.0
Employee cost capitalization              –1.2           –0.5              –0.7
 Total employee costs                     62.8           28.5              38.0

Non-employee costs
Premises:
 Fuel, light, cleaning and water          11.9            5.4               7.2
 Rates                                    13.9            6.3               8.4
 Land rental                               9.1            4.2               5.5
 Other                                     3.1            1.4               1.9
  Total premises                          38.1           17.3              23.1

Supplies and services:
 Greater Manchester Police (GMP)           7.6            3.5               4.6
 NATS                                      7.7            3.5               4.6
 Hire of services                          4.5            2.0               2.7
 Leasing of equipment                     11.4            5.2               6.9
 Other                                     3.8            1.7               2.3
  Total supplies and services             35.1           15.9              21.2

Transport and plant:
 Maintenance—vehicles                      0.6             0.3              0.4
 Maintenance—plant and equipment           3.2             1.4              1.9
 Other                                     1.6             0.7              1.0
  Total transport and plant                5.4             2.4              3.3

Establishment:
 Insurance                                 1.4            0.6               0.8
 Sales development                         5.8            2.6               3.5
 Additional market support                 -              -                 -
 Other†                                   16.5            7.5              10.0
   Total establishment                    23.7           10.8              14.3

Total non-manpower costs                 102.4           46.5              62.0

Total cash operating costs               165.2           75.0            100.0

Depreciation                              55.0           25.0

Total operating costs*                   220.2          100.0
Extraordinary costs                       19.9            8.3
 Total costs                             240.1

 Source: Manchester.


 *Including MAAS, MAD and motor transport but excluding RHS.
 †Includes publicity, sponsorship, travel and subsistence, printing and stationery, telecommunications, training and
miscellaneous costs.




                                                       123
TABLE 6.2 MA’s variance in cash operating expenditure* throughout Q3 (actual less forecast, out-turn prices)

                                                                                                        £ million

                                                                                                Q3 variance by
                                                                                                 cost line as a
                                                                                    Q3 total    percentage of
                          1998/99      1999/00    2000/01      2001/02   2002/03†   variance   cost line forecast
Employee
 Total employee             –0.5          3.1       4.4          –0.8     –14.1       –7.4           –2.6

Premises
Fuel, light, cleaning
 and water                   0.2         –0.3      –0.3           0.2      –1.1       –1.3          –2.4
Rates                        0.9          0.4      –0.6          –0.7       1.0        1.0           1.6
Land rental                  2.2          0.1       1.4          –2.5      –4.0       –2.8          –5.9
Other                       –1.1         –1.7      –2.0          –2.9      –4.5      –12.2         –47.8
 Total premises              2.2         –1.5      –1.5          –5.9      –8.6      –15.3          –8.0

Supplies and services
GMP                           -           0.2      –0.6          –0.7      –0.7       –1.8          –4.6
NATs                          -          –0.1       0.2           2.0       1.9        4.0          14.7
Hire of services             3.6          3.3       1.5           1.1       1.9       11.4          68.7
Leasing of equipment         4.7          5.7      10.7           8.2       5.8       35.1         230.9
Other                       –0.5         –0.4        -           –2.9      –5.5       –9.3         –40.6
 Total supplies and
  services                   7.8          8.7      11.8           7.7       3.4       39.4           32.6

Transport and plant
Maintenance vehicles        –0.5         –0.1        -           –0.3      –0.2       –1.1         –25.0
Maintenance—plant
  and equipment               -            -       –0.1            -       –3.3       –3.4         –22.5
Other                       –0.1          1.2      –0.2          –0.2      10.3       11.0         118.3
 Total transport and
  plant                     –0.6          1.1      –0.3          –0.5       6.8        6.5           22.6

Establishment
Insurance                    -           –0.2      –0.2          –0.1       2.3        2.0          32.8
Sales development           –9.2         –5.1     –12.4          –7.6      –7.4      –41.7         –58.5
Additional market
   support                    -            -         -             -         -          -            -
Other                        2.1          1.8       0.6           3.5      –4.1        3.9           6.2
  Total establishment       –7.1         –3.5     –12.0          –4.0      –9.2      –35.8         –25.5

RHS contracts               –1.2         –1.3      –1.4          –1.6      –1.8       –7.3        –100.0
 Total                       0.6          6.6       1.0          –5.1     –23.5      –20.4          –2.6

Total variance as a %
  of forecast                0.4          4.7       0.6          –3.0     –12.9       –2.6

  Source: MA.


  *Excluding extraordinary restructuring costs.
  †Projected.



    6.7. Two specific causes of variance need to be taken into account. First, the financial model results
were expressed in out-turn prices and hence relied on Manchester’s assumption for RPI inflation.
Second, the model projected costs on the basis of assumed changes in passenger numbers. To the extent
that forecasts of either the RPI or passenger numbers turned out to be inaccurate, out-turn costs would be
expected to vary from projected costs.


    6.8. First, we consider the effects of inflation. In preparing its forecast for Q3, Manchester used a
financial model which calculated costs at out-turn prices based on a constant RPI inflation rate of 4 per
cent. The result of applying actual RPI inflation rather than a fixed 4 per cent to its forecasts is shown in
Table 6.3.




                                                         124
TABLE 6.3 MA’s 1997 forecast of cash operating expenditure corrected to out-turn prices using actual RPI

                                                                                                                              £ million
                                                                                     Forecast

                                       1998/99         1999/2000            2000/01           2001/02          2002/03        Total Q3
Employee
 Total employee                             52.2             54.1             57.1              60.3             63.9            287.5

Premises
Fuel, light, cleaning and water              9.5              9.8             10.4              11.0             11.6             52.3
Rates                                       10.0             10.2             11.9              13.6             13.8             59.6
Land rental                                  8.0              7.8              7.7              10.9             10.7             45.1
Other                                        4.0              4.0              4.5               5.6              6.0             24.1
 Total premises                             31.5             31.8             34.5              41.0             42.2            181.0

Supplies and services
GMP                                          6.7              6.8              7.6               7.7              7.9             36.7
NATS                                         4.9              5.0              5.1               5.3              5.4             25.8
Hire of services                             3.3              3.0              3.1               3.2              3.2             15.7
Leasing of equipment                         2.8              2.8              2.9               3.0              3.0             14.4
Other                                        2.7              2.9              3.0               6.3              6.7             21.5
 Total supplies and services                20.3             20.5             21.7              25.5             26.2            114.2

Transport and plant
Maintenance of vehicles                      0.8              0.8              0.9               0.8              0.9               4.2
Maintenance of plant and
 equipment                                   2.6              2.7              2.9               3.0              3.2              14.3
Other                                        1.6              1.6              1.7               1.8              1.9               8.6
 Total transport and plant                   4.9              5.1              5.4               5.6              6.0              27.1

Establishment
Insurance                                    1.0              1.1              1.1               1.2              1.4               5.8
Sales development                           15.8              9.2             17.4              12.5             12.8              67.7
Additional market support
Other                                       11.6             11.9             11.5              12.1             12.6             59.8
  Total establishment expenditure           28.4             22.2             30.1              25.8             26.9            133.3

RHS contract                                 1.2              1.3              1.3               1.5              1.7               6.9

 Total cash operating expenditure          138.5           135.0            150.1             159.6             166.8            750.0

 Source: CC calculations based on information supplied by Manchester.




    6.9. A comparison of Table 6.3 with the forecast figures in Appendix 6.1 is shown in Table 6.4. This
reveals a widening percentage difference throughout Q3 between the corrected out-turn forecast and
Manchester’s 1997 forecast, with the difference increasing by an average amount of around 1.6 per cent
a year, reflecting lower out-turn inflation. The general effect is to reduce the underspends and increase
the overspends.

TABLE 6.4 Corrections to forecast operating expenditure due to difference in inflation* (out-turn prices)

                                                                                                                        £ million

                                  1998/99          1999/00          2000/01          2001/02           2002/03          Q3 total

Employee costs                      –0.8            –2.1             –2.8              –4.5             –5.8            –16.1
Premises costs                      –0.5            –1.3             –1.7              –3.0             –3.9            –10.4
Supplies and services               –0.3            –0.8             –1.1              –1.9             –2.2             –6.3
Transport and plant                 –0.2            –0.2             –0.4              –0.4             –0.5             –1.6
Establishment costs                 –0.4            –0.9             –1.5              –1.9             –2.5             –7.2
RHS contract                         0.0             0.0             –0.1              –0.1             –0.2             –0.4
  Total operating costs             –2.2            –5.3             –7.6             –11.8            –15.1            –42.0

Correction as a percentage
 of the original forecast           –1.6            –3.8             –4.8              –6.9             –8.3              –5.3

 Source: Manchester


 *Negative numbers indicate that forecast expenditure would have been lower if out-turn inflation had been used.



                                                              125
    6.10. We turn now to passenger numbers. Manchester assumed that some elements of costs would
vary directly with passenger numbers, while others would change relatively little or not at all as passen-
ger numbers changed. The latter elements implied economies of scale, in that costs per passenger were
assumed to decrease as the number of passengers increased. Manchester had assumed that passenger
numbers would increase by an average of 6.1 per cent a year over Q3. In the event, passenger throughput
exceeded its forecasts until the latter part of 2001, when following 11 September passenger numbers
immediately reduced to the extent that its revised 2002/03 forecast was 12 per cent below the one made
in 1997.

    6.11. The financial model used by Manchester for forecasting for Q3 dealt with economies of scale
by applying a series of elasticities relating changes in certain costs to changes in passenger numbers or,
in some cases, to staff numbers. These elasticities expressed the extent to which a particular element of
cost was fixed or varied with passenger numbers (for example, an elasticity of 0.5 meant that a given
percentage increase in passenger numbers was assumed to cause half that percentage increase in the ele-
ment of cost; an elasticity of 1.0 meant that the costs would vary directly with passenger numbers,
whereas a zero elasticity meant that the cost would remain fixed in real terms whatever the passenger
numbers). For example, an elasticity of 0.8 was fixed for security and baggage handling costs and 0.2 for
the costs of other categories of staff.

   6.12. During Q3, passenger numbers increased by 19.93 per cent to 19.07 million in 2001/02, com-
pared with a forecast growth of 22.16 per cent to 19.4 million. While Manchester achieved passenger
volumes close to those it had forecast, it acknowledged that it had lost market share and that its rate of
growth had been one of the lowest in the UK over the period at 4.6 per cent a year.

    6.13. In order to see the effects of variances in passenger numbers on the operating expenditure fore-
casts for Q3, we applied Manchester’s own estimated elasticities to each set of passenger numbers and
calculated the difference. The results are shown in Table 6.5.

TABLE 6.5 Forecast operating expenditure corrected for actual passenger numbers*
                                                                                                      £ million
                                 Percentage
                                   of costs
                                  which are    Elasticity
                                    elastic     applied       1998/99   1999/00   2000/01   2001/02   2002/03

Passengers–actual (m)                                          17.41     17.47     18.63     19.07      18.25
Passengers–forecast (m)                                        16.20     16.90     17.80     19.40      20.80
% actual passengers over
 forecast                                                      +7.5      +3.4      +4.7      –1.7      –12.3

Forecast costs and corrections
at out-turn prices
Total employee costs                100           0.3†         53.0      56.2      59.9      64.8       69.7
Correction                                                      1.2       0.6       0.8      –0.3       –2.6

Total premises expenditure           40           0.5          32.0      33.1      36.2      44.1       46.0
Correction                                                      0.5       0.2       0.3      –0.2       –1.1

Total supplies and services          10           1.0          20.6      21.3      22.8      27.4       28.6
Correction                                                      0.2       0.1       0.1       0.0       –0.4

Total transport and plant            90           0.5           5.1       5.3       5.8        6.0       6.6
Correction                                                      0.2       0.1       0.1        0.0      –0.4

Total establishment                  20           0.3          28.8      23.1      31.6      27.7       29.3
Correction                                                      0.1       0.0       0.1       0.0       –0.2

Total RHS contract                                              1.2       1.3       1.4        1.6       1.8
Correction                                                      0.0       0.0       0.0        0.0      –0.1

Total operating expenditure
 excluding depreciation                                       140.6     140.4     157.6     171.7      182.0
Total correction                                                2.1       1.0       1.5      –0.6       –4.7

 Source: CC analysis.


  *Negative signs indicate that forecast expenditure would have been lower if out-turn passenger numbers had been
used.
  †0.3 was the weighted average of 0.8 for security and baggage handling, and 0.2 for other staff.


                                                        126
    6.14. Underestimates in passenger numbers in years 1998/99 to 2000/01 lead to positive corrections
to expenditure; that is, we would expect costs to be higher because of the additional passenger costs. For
2001/02, passenger numbers were below forecast, and are also expected to be below forecast for
2002/03. Correspondingly, the cost corrections are negative, reducing the original forecast expenditure.

    6.15. The combined effect of the different out-turn for the RPI and passenger numbers on
Manchester’s forecasts is summarized in Table 6.6. This shows that, even after adjusting for actual infla-
tion and passenger numbers, there were significant residual variances under employee, supplies and ser-
vices and establishment cost headings.
TABLE 6.6 Variances between forecast and out-turn operating expenditure not due to variances in inflation or
          passenger numbers* (out-turn prices)
                                                                                                  £ million

                                        1998/99      1999/00      2000/01        2001/02    2002/03    Q3 total

Forecast operating expenditure            140.6        140.4        157.6          171.7     182.0       792.3
Variance due to inflation                  –2.2         –5.3         –7.6          –11.6     –15.1       –41.8
Variance due to passenger numbers           2.2          1.0          1.5           –0.6      –4.7        –0.6
Corrected forecast                        140.6        136.1        151.4          159.5     162.2       749.8
Actual operating expenditure              141.1        146.7        158.7          166.4     158.5       771.4
Residual variance                           0.5         10.6          7.3            6.9      –3.7        21.6

Due to:
 Employee costs                            –0.9          4.6          6.4            4.0       –5.8        8.3
 Premises costs                             2.1         –0.5         -0.2           –2.7       –3.6       –4.9
 Supplies and services                      7.8          9.3         12.8            9.7        6.0       45.6
 Transport and plant                       –0.5          1.1          0.1           –0.3        7.6        8.0
 Establishment costs                       –6.8         –2.6        –10.6           –2.2       –6.5      –28.7
 RHS contract                              –1.2         –1.3         –1.3           –1.5       –1.5       –6.8
  Total                                     0.5         10.6          7.3            6.9       –3.7       21.6

 Source: CC calculations based on information supplied by Manchester.


 *Negative numbers indicate that out-turn expenditure was lower than forecast.

    6.16. The variance in employee costs was mainly due to cost savings from the restructuring in
2002/03, and to substitution of employees by contractors in earlier years (for example, the outsourcing of
part of the IT function). The variance in supplies and services costs was due to greater use of equipment
leasing (see paragraph 6.6). The difference for establishment costs was primarily in sales development,
where the CAA and the MMC disallowed the additional funds requested by Manchester. Manchester
subsequently decided not to allocate its own funds, but to spend only the allowed amount (see paragraph
6.6).

   6.17. Table 6.7 shows the values of Table 6.6 adjusted to constant 2001/02 prices.
TABLE 6.7 Variances between forecast and out-turn operating expenditure not due to variances in inflation
          or passenger numbers* at constant 2001/02 prices
                                                                                               £ million

                                        1998/99      1999/00      2000/01        2001/02   2002/03    Q3 total

Forecast operating expenditure            149.3       146.8         159.9         171.7     177.6      805.3
Variance due to inflation                  –2.3        –5.5          –7.7         –11.6     –14.7      –41.9
Variance due to passenger numbers           2.3         1.0           1.5          –0.6      –4.6       –0.3
Corrected forecast                        149.3       142.3         153.7         159.5     158.3      763.0
Actual operating expenditure              149.9       153.4         161.1         166.4     154.6      785.4
Residual variance                           0.6        11.1           7.4           6.9      –3.6       22.4

Due to:
 Employee costs                            –1.0          4.8          6.5           4.0      –5.7        8.7
 Premises costs                             2.2         –0.5         -0.2          –2.7      –3.5       –4.7
 Supplies and services                      8.3          9.7         13.0           9.7       5.9       46.6
 Transport and plant                       –0.5          1.2          0.1          –0.3       7.4        7.8
 Establishment costs                       –7.2         –2.7        –10.8          –2.2      –6.3      –29.2
 RHS contract                              –1.3         –1.4         –1.3          –1.5      –1.5       –6.9
  Total                                     0.6         11.1          7.4           6.9      –3.6       22.4

 Source: CC calculations based on information supplied by Manchester.


 *Negative numbers indicate that out-turn expenditure was lower than forecast.



                                                       127
    6.18. Table 6.8 shows costs per passenger for 1998/99 to 2002/03, compared with Manchester’s
forecast at the time of the 1997 MMC report, both at out-turn prices and constant 1996/97 prices. Its
actual costs per passenger at out-turn prices were below forecast for each year of Q3 by between 8 and
13 per cent. However, in real terms, costs per passenger were expected to be higher in 2002/03 than fore-
cast.


TABLE 6.8 Actual and forecast cash costs per passenger for Q3
                                                                                   £

                   1998/99       1999/00          2000/01       2001/02      2002/03

Out-turn prices
Actual                    7.56     7.75            7.83           8.01        8.05*
Forecast                  8.67     8.30            8.85           8.85        8.75

1996/97 prices
Actual                    7.16     7.16            7.07           7.06        6.93*
Forecast                  8.02     7.38            7.56           7.28        6.91

 Source: CC calculation based on information supplied by Manchester.


 *Projected.




Trends in employee costs

Employee numbers

    6.19. Table 6.9 compares Manchester’s 1997 forecasts for staff numbers employed at the airport
(including RHS) and out-turns. It indicates that for the Q3 period actual numbers of employees were, on
average, 2.7 per cent above those forecast. Further details are given in Appendix 6.2.


TABLE 6.9 Projections versus out-turns

                                      1997/98         1998/99      1999/00     2000/01   2001/02

Number of staff (FTE*)—projected          2,145        2,178         2,238      2,292     2,388
Number of staff (FTE)—actual              2,105        2,237         2,422      2,369     2,420
Difference (%)                             –1.9         +2.7          +8.2       +3.4      +1.3

 Source: Manchester.


 *Full-time equivalent.




Employee costs

   6.20. Total employee costs at Manchester in 2001/02 (including RHS and capitalized labour)
amounted to £64.0 million in 2001/02, with an average cost per employee of £26,446. If RHS is
excluded, there were 1,733 staff and a total cost of £52.4 million, an average of £30,237. Employee costs
during Q3 are shown in Table 6.10. The largest element in employee costs (excluding RHS) is security,
and security costs are also shown in Table 6.10. In 2001/02, security costs were 29 per cent of employee
costs (excluding RHS), although security staff were 40 per cent of the total number of employees. (See
Appendix 6.2 for details.)




                                                            128
TABLE 6.10 Employee costs and security staff costs (out-turn prices)

                                                                                          £ million

                                  1997/98        1998/99      1999/00       2000/01       2001/02

Employee costs*                    47.0           43.8             49.8      53.5             52.4
Security staff costs               15.2           15.3             16.3      17.2             15.1
Security costs as % of staff
 costs                             36.2           33.3             33.3      32.7             28.8

 Source: CC analysis based on data provided by Manchester.


 *Exluding RHS.




    6.21. In 1997, Manchester projected employee costs to rise in real terms from £56.3 million to
£68.0 million in 2002/03. Appendix 6.1 shows that employee costs increased by £9.5 million between
1998/99 and 2000/01 but have since fallen. Manchester attributed the majority of the increases in staff
costs in the early part of Q3 to R2, implementation of a government directive to increase the level of
hand-baggage searches, which has resulted in the need to employ additional security staffing, and
replacement of contractors with employees in the design and construction function.


   6.22. Manchester told us that decisions as to whether functions should be carried out in-house or by
contractors are determined as part of a continuous resource review process. Its approach to managing
contractor relationships is typically based on agreed services and tasks with built-in review periods and
an evaluation process that includes detailed service agreements specifying quantity and quality of work
and timetabled milestones. Apart from the costs of policing and air traffic control services, the largest
contract is for cleaning.


    6.23. Table 6.11 shows employee costs per passenger and security staff per passenger over Q3.


TABLE 6.11 Employee costs and security costs per passenger
                                                                                              £

                         1997/98      1998/99      1999/00    2000/01     2001/02     2002/03
Employee costs per
passenger
Actual                     2.96           2.51       2.85          2.87    2.90        2.87*
Projected                  2.96           3.23       3.27          3.33    3.36        3.34

Security staff costs
per passenger
Actual                     0.95           0.88       0.93          0.92    0.79        0.83
Projected                  0.87           0.88       0.88          0.89    0.88        0.89

 Source: CC analysis based on information supplied by Manchester.


 *Budget.




Basic rates of pay

    6.24. Pay and other conditions of employment at the airport have historically been in the upper quar-
tile of the market. Manchester attributed this to the local authority ethos that it had inherited in 1986
which took some time to evolve into a commercial operation. At the time of the last inquiry, it told the
MMC that it was starting to address market pay issues in parts of the organization. Manchester said that
it had in the first instance sought to stop the situation getting worse and had then turned to introducing
the concept of market pay based on benchmarking. Manchester’s cost reduction strategy is discussed in
paragraph 6.53 et seq.


                                                             129
Earnings

    6.25. Average weekly pay costs in 2001/02 at Manchester (including RHS) were 32 per cent higher
than the median weekly earnings in the North-West, and close to the upper quartile, according to data
from the New Earnings Survey1 (see Appendix 6.2 for further details). Having regard to the remote loca-
tion of the airport, its 24-hour operation and the skills mix needed, pay costs are likely to be higher than
the median for the area. However, even allowing an extra 10 per cent for these factors, pay costs at
Manchester were 20 per cent higher than median earnings across all industries in the area.



Pension costs

   6.26. Manchester pays contributions under the Local Government Pension Scheme. It told us that
pension costs amounted to the following percentages of total employee costs: 1998/99—7.4 per cent;
1999/2000—8.9 per cent; 2000/01—10.3 per cent; 2001/02—11.7 per cent; 2002/03—13.2 per cent;
2003/04—13.2 per cent; 2004/05—13.2 per cent (the numbers for 2003/04 and 2004/05 are forecasts).



Shift working

   6.27. In its report in 1997, the MMC noted that Manchester had said that it had ‘flexible contracts of
employment and rostering arrangements which were the envy of every major airport in the UK’.
Manchester told us that that was true at the time but that it had since lost the cooperation of some staff
and trade unions following the introduction of market pay and other changes in the fire service.


    6.28. Approximately 75 per cent of employees are shift workers. The majority of these are within
security, engineering, fire service, car parks and airfield operations. Security staff had been employed on
13 different shift rosters, which Manchester told us were inefficient and expensive. As part of a cost
reduction strategy (which is described in more detail in paragraph 6.53 et seq), a new three-shift system
was introduced which was intended to provide cover when it was most needed. Manchester told us that
the new rosters provided adequate cover with a substantially reduced number of paid hours. When T3
opened, Manchester recruited new security staff on revised rosters. It told us that initially the rostering
arrangements in T3 raised efficiency by allowing staffing levels to be much better matched to passenger
throughput. It also told us that these improved rostering arrangements were extended to other terminals
from spring 2002. Manchester said that it had not specifically quantified the benefit in this case, [
                                      Details omitted. See note on page iv.                               ].
It estimated that the new rostering across the airport resulted in around 205,000 hours being saved. At an
average security guard cost of £8 per hour (2002/03 pay levels plus 25 per cent on costs), this equated to
an airport-wide saving of approximately £1.64 million. T3 and Airfield (being around 40 per cent of the
security business) would equate to a saving of about £656,000.



Overtime pay and controls

    6.29. At the time of the last review, Manchester told us that a major drive to control overtime had
reduced it from 8.7 per cent of working time in 1992/93 to less than 2 per cent in budget in 1997/98. It
did not think that there were further gains to be made. In 2000/01, overtime amounted to £1.28 million or
2.4 per cent of employee costs. Annualized hours had been introduced to eliminate overtime in
engineering and car parks and subsequently were introduced in the fire service.


    6.30. Manchester told us that overtime was allocated and controlled by line managers, each of whom
had an overtime budget. Overtime is monitored within the financial monitoring reports. Table 6.12 shows
that overtime working has been minimal across all employee groups, including security staff. This table
excludes RHS employees.

 1
     New Earnings Survey 2001.


                                                    130
TABLE 6.12 Overtime

                                     1997/98        1998/99          1999/00    2000/01   2001/02
(a) All staff
Number of staff (FTE)                  1,686          1,673             1,781   1,803      1,733
Average basic weekly hours              37.5           37.3              37.5    37.8       37.9
Average overtime hours per
 week                                     1.0           1.7               1.0      1.0       0.4
Average overtime pay per
 week (£)                               9.09          19.17             14.08   13.67       4.94

(b) Security staff
Number of staff (FTE)                    635            633               704     682        696
Average basic weekly hours              37.9           38.0              38.0    38.0       38.0
Average overtime hours per
 week                                     1.3           2.8               1.6      1.6       0.3
Average overtime pay per
 week (£)                              11.60          37.92             20.84   22.55       3.67

 Source: Manchester.




    6.31. These figures are well below the national average. The New Earnings Survey (NES) showed
that employees who worked overtime did so for an average of 9.2 hours (manuals), 5.9 hours (non-
manuals), and 8.1 hours (all). In the whole economy, average overtime hours were 4.6 for manual
workers, 1.1 for non-manuals and 2.6 for all male adult workers.


Absence

    6.32. Manchester told us that absence featured in budgets, was monitored on a monthly basis and
that reductions were targeted. There had, for example, been a target to reduce absence levels in security
from 6 to 4 per cent over the previous three years.

    6.33. Manchester provided us with data showing absence rates over the past five years. An analysis
of this is in Tables 6 and 7 of Appendix 6.2. These show that absence varies significantly between differ-
ent business areas. However, the overall absence rate of 5.9 per cent in 2001/02 equated to 13.6 days per
employee. This compares to an average of 3.1 per cent or 7.1 working days per employee for industry as
a whole reported in the CBI survey for 2001.1 Manchester said that these figures were misleading, as it
had a higher proportion of manual workers than the CBI ‘all employment’ figures. It said that its absence
was only marginally higher than the ‘all airport’ figure of 12.1 days.

    6.34. Manchester’s sick pay arrangements vary according to an employee’s length of service. The
current policy pays allowances ranging from four weeks’ full pay and four weeks’ half pay for
employees with more than six months’ service, but less than one year’s service, to 26 weeks’ full pay and
26 weeks’ half pay for those with more than six years’ service. The new terms and conditions introduced
for security staff included revised arrangements for sick pay.

    6.35. Table 8 in Appendix 6.2 shows that the total cost of absence to Manchester could be as much
as £2.7 million (excluding RHS). If absence were reduced to the median level for industry as a whole in
2000, there would have been a saving of £1.3 million. This figure excludes on-costs such as sick pay,
replacement labour, overtime, employer’s National Insurance contributions, pension contributions,
reduced performance and administration, which would double the cost. As noted in paragraph 6.33,
Manchester argued that these figures were misleading. We noted that absence data for March 2002
shows that absence levels among security staff and fire service staff had increased to 14 per cent and
10 per cent respectively. These equate to 32.2 days and 23 days lost respectively per employee per year.


Labour turnover

    6.36. Manchester told us that, with the exception of the redundancy programme in 2001/02, staff
turnover remains relatively low at around 3 per cent. This compares with an average of 16.5 per cent in

 1
     Counting the costs 2002 absence and labour turnover survey, CBI.


                                                               131
the North-West and a national average of 17.9 per cent in 2000, according to the latest CBI survey.
Details of labour turnover are given in Table 9 of Appendix 6.2. This shows that staff turnover varies
widely in different business units and between staff groups.


    6.37. We noted that turnover among fire service employees increased substantially following the
introduction of new terms and conditions although it was still below the national average. We were told
by the Transport and General Workers’ Union (T&G) that a compensation package for the security staff
who accepted the new contracts was to be phased in over the next 12 months and that their morale was
extremely low.



Industrial relations

   6.38. At the time of the last review, Manchester indicated that good progress had been made in
industrial relations, to such an extent that it expected a single table collective bargaining agreement
involving all trade unions to be signed soon. At that time, it reported that there had been no serious dis-
putes for several years.


    6.39. In Q3, Manchester introduced a number of changes (see paragraph 6.53 et seq). These pro-
voked considerable opposition and resulted in deterioration in industrial relations. There has been con-
siderable opposition to some of the changes, including industrial action by T&G members, mainly
security staff, spread over 29 days and totalling some 249 hours. MA said that the working time lost as a
result of this action was approximately 50,000 man-hours. Manchester told us that it had not paid for the
strikers’ time, but it had borne contingency plan costs. There were reported incidents during our inquiry
of harassment against managers and staff working through the strike, and there had been at an earlier
time an example of intimidation by some of the longer-serving staff in the fire service towards new staff.
Manchester told us that it had dismissed staff, including union officials, for such misconduct.


    6.40. The T&G said that the way in which Manchester had introduced changes had damaged indus-
trial relations and operational efficiency. It said that a situation had been created in which demarcation
existed for the first time. We were told that there was no cross-over of staff between those in T3 and
longer-serving employees in T1 and T2. Manchester confirmed that there was no cross-over of security
guards (between those in T3 and longer-serving employees in T1 and T2), but stated that there was cross-
over at supervisory and management level. However, Manchester did not believe that this had resulted in
any great loss of productivity.


    6.41. Manchester told us that some of the disagreements over the past five years had led to ballots
for industrial action. However, the dispute with the T&G was the first dispute since 1989 to involve offi-
cial industrial action at the airport.


   6.42. We were told that collective bargaining arrangements had yet to be agreed for MAAS. MA had
achieved what was, in effect, a ‘no-strike agreement’ for all staff in the fire service, by inserting a term of
employment into individual contracts of employment, which provided that any disputes be referred to
binding arbitration and legally binding arbitration for collective disputes.



Trends in other costs
    6.43. We next look at the trends over Q3 for each of the other main cost categories: premises, sup-
plies and services, transport and plant, establishment and the RHS contract.1 During Q3 non-manpower
costs as projected for 2002/03 will have risen in real terms by 6.9 per cent, whilst passenger throughput
is projected to have grown by 4.8 per cent. Trends over both Q3 and Q4 for the main cost categories are
shown (at constant 2001/02 prices) in Figure 6.1.



 1
     In this section, RHS is treated as being outside the regulated entity.


                                                                    132
                                                                              FIGURE 6.1

  MA’s actual operating costs (non-manpower) for Q3, and projections for Q4 at
                               constant 2001/02 prices

               45.0

               40.0

               35.0

               30.0
                                                                                                                                      Establishment
   £ million




               25.0                                                                                                                   Premises
               20.0                                                                                                                   Supplies & services
                                                                                                                                      Transport & plant
               15.0

               10.0

                5.0

                0.0
                      1998/99

                                1999/00

                                          2000/01

                                                    2001/02

                                                              2002/03

                                                                        2003/04

                                                                                  2004/05

                                                                                            2005/06

                                                                                                       2006/07

                                                                                                                 2007/08
                Source: Manchester’s financial model.




Premises

    6.44. At constant 2001/02 prices Manchester’s Q3 forecast for the premises cost category was
£194.3 mi llion, increasing over the period from £34.0 million in 1998/99 to £44.9 million in 2002/03, an
increase of 32 per cent (see Appendix 6.1). Manchester’s actual expenditure for premises during Q3 is
set out in Table 6.13.


TABLE 6.13 Actual premises costs for Q3, at constant 2001/02 prices
                                                                                                                                                     £ million

                                                                                                                                                  Q3 variance
                                                                                                                                                     from
                                          1998/99             1999/00             2000/01             2001/02              2002/03*    Q3 total    forecast

Total fuel, light,
 cleaning and water                        10.4               10.4                 10.8                11.9                  11.3        54.8      –1.3
Rates                                      11.8               11.5                 12.1                13.9                  15.7        65.0       1.1
Fixed rent                                 10.9                3.9                  3.8                 3.7                   3.6        25.9      –2.5†
Variable rent                               0.0                4.6                  5.9                 5.5                   3.9        19.9        -
Other                                       3.1                2.6                  2.7                 3.1                   2.0        13.6     –12.3
 Total premises                            36.3               33.0                 35.2                38.1                  36.5       179.3     –15.0

 Source: Manchester.


  *2002/03 costs are budget costs, not actual.
  †In 1997 when the Q3 forecast was made there was fixed rent only, as the variable formula had not yet been negoti-
ated, so the variance is for fixed and variable rent combined.


   6.45. In 2001/02 premises costs (excluding depreciation) were £38.2 million, 23.1 per cent of total
cash costs. This chiefly comprised fuel, light, cleaning and water (£12.0 million), rates (£13.9 million),
and land rental (£9.2 million). Other costs of £3.1 million included maintenance of buildings, hangars,


                                                                                     133
roads and runways. Since 1999/2000, premises costs have risen by around 18 per cent, primarily in the
areas of business rates. Manchester told us that this was due to the opening of R2 and the effects of the
2000 National Rates Revaluation.

    6.46. During Q3, the basis on which Manchester pays rental on the land it occupies was changed by
negotiation with the landlord, Manchester City Council, which holds the site in trust on behalf of the
local authorities who are also shareholders (see paragraph 6.46). Part of the rental charge became directly
related to turnover through commercial incomes. The downturn in passenger traffic since 11 September
has been reflected in reductions in the variable rental element. There have been corresponding effects on
Manchester’s retail and commercial revenues. We asked our consultants to examine the new arrange-
ments. In brief, they felt that the current head rent payable was in line with market value, and that the
rental adjustment mechanism was appropriate. They further commented that they felt the new method of
rental evaluation, split into its fixed and variable elements, dealt with the problem of trying to ascribe a
rational basis for calculating rental for what was essentially a bespoke and unusual property asset. They
concluded that there was no evidence to suggest that the local authority shareholders earned an excessive
dividend in the form of enhanced rental income.



Supplies and services

    6.47. At constant 2001/02 prices Manchester’s Q3 forecast for the supplies and services cost cate-
gory was £122.6 million, increasing over the period from £21.9 million in 1998/99 to £27.9 million in
2002/03 (see Appendix 6.1), an increase of 27 per cent. Actual expenditure is shown in Table 6.14. The
main items were payments to GMP of £7.7 million for services required under the Aviation and Security
Act 1982 and to NATS (whose ten-year contract is currently being renegotiated) of £7.6 million. The
NATS charges increased significantly in 2001/02 as a direct consequence of additional traffic control
associated with the opening of R2. Costs of bought-in services fluctuated substantially during Q3—parti-
cularly IT costs, Manchester said—and accounted for the main increase in supplies and services costs in
the last year of Q3. With the exception of 2000/01 and 2001/02, equipment leasing costs have been
relatively stable. Manchester told us that it had decided to lease rather than purchase much of the opera-
ting equipment used in T3 in order to minimize borrowings in the face of debt covenants.

TABLE 6.14 Actual supplies and services costs for Q3, at constant 2001/02 prices
                                                                                                    £ million

                                                                                                 Q3 variance
                                                                                                    from
                               1998/99      1999/00    2000/01   2001/02   2002/03*   Q3 total    forecast

GMP                               7.2            7.6     7.5       7.6       7.7       37.7         –1.8
NATS                              5.3            5.3     5.7       7.7       7.6       31.6          3.9
Total hire of services            7.3            6.7     4.9       4.5       5.3       28.7         11.8
Total leasing of equipment        8.0            9.0    13.9      11.4       8.9       51.1         35.6
Other                             2.3            2.7     3.1       3.8       1.8       13.9         –9.2
 Total supplies and services     30.2           31.4    35.1      35.1      31.2      163.0         40.4

 Source: Manchester.


 *2002/03 costs are budget costs, not actual.




Transport and plant

    6.48. At constant 2001/02 prices, Manchester’s Q3 forecast for the transport and plant cost category
was £29.3 million, increasing over the period from £5.4 million in 1998/99 to £6.4 million in 2002/03
(18.5 per cent) (see Appendix 6.1). Actual expenditure is shown in Table 6.15. In 2001/02 the cost of
transport and plant was £5.5 million, and the figure was relatively constant over Q3 until 2002/03, when
car parks external, engineering external and RHS external costs were incorporated. The increase in other
costs in 1999/2000 related to the loss on the disposal of a fixed asset.




                                                       134
TABLE 6.15 Actual transport and plant costs for Q3, at constant 2001/02 prices
                                                                                                             £ million

                                                                                                         Q3 variance
                                                                                                            from
                              1998/99        1999/00      2000/01     2001/02      2002/03*   Q3 total    forecast

Maintenance of vehicles         0.3            0.7          0.9         0.6           0.8       3.3          –1.2
Maintenance of plant and
 equipment                      2.8            2.9          2.9         3.2           0.2      12.0          –3.3
Other                           1.7            3.0          1.7         1.6          12.1      20.3          10.8
 Total transport and plant      4.8            6.7          5.6         5.4          13.1      35.6           6.3

 Source: Manchester.


 *2002/03 costs are budget costs, not actual.



Establishment costs

    6.49. At constant 2001/02 prices, Manchester’s Q3 forecast for the establishment cost category was
£143.1 million (including £72.7 million for sales development), decreasing over the period from
£30.6 million in 1998/99 to £28.6 million in 2002/03 (a decrease of 6.5 per cent) (see Appendix 6.1).
Actual expenditure is shown in Table 6.16. The largest single element was for sales development expen-
diture, which had averaged £6 million a year over Q3 (around £40 million of the forecast amount had
been disallowed by the CAA and the MMC from the airport charges calculations, and was not spent by
Manchester). This, together with the additional marketing support, is discussed in detail in Chapter 7.
Overall establishment costs have remained fairly constant during Q3, although within the cost category
miscellaneous and other costs have fluctuated significantly by year. Manchester told us that this was the
result of money spent in 1998/99 on bidding for the 2002 Commonwealth Games, costs of defending T2
Part 1 claims (1999/2000), and regulatory review expenditure during 2001/02.

TABLE 6.16 Actual establishment costs for Q3, at constant 2001/02 prices
                                                                                                            £ million

                                                                                                         Q3 variance
                                                                                                            from
                                  1998/99       1999/00     2000/01    2001/02     2002/03*   Q3 total    forecast

Sales development                      7.3        4.7          6.0         5.8        5.9      29.5        –42.5
Additional market support               -          -            -           -         0.6       0.6          0.6
Strategic marketing                    0.3        0.4          0.3         0.3        0.2       1.6          0.2
Commercial marketing                   0.3        0.8          0.8         0.8        0.4       3.0          1.0
Publicity                              2.2        2.4          2.1         2.1        2.0      10.9         –1.1
Local community sponsorship             -         0.2          0.3          -         0.2       0.8           †
Sponsorship of the arts                 -         0.7          0.5         0.5        0.4       2.1           †
Insurance                              1.0        1.0          1.0         1.4        3.7       8.1           1.9
Miscellaneous                          5.3        6.1          2.1         3.8        3.6      20.9           †
Other                                  6.6        4.2          6.8         8.9        2.6      29.1           †
  Total establishment                 23.0       20.5         19.9        23.7       19.6     106.7        –36.4

 Source: Manchester.


 *2002/03 costs are budget costs, not actual.
 †information was not available to calculate the variances for these individual cost lines.

    6.50. Manchester told us that insurance costs had increased dramatically following 11 September. It
said that there had been significant increases in premiums relating to property (increased from £216,000
to £1.25 million despite cover being reduced), airport operators cover (increased from £450,000 to
£943,000) and a new charge for war and terrorism cover (£877,000) which had previously been provided
free of charge. Manchester commented further that maximum property cover under its new policy was
capped at £300 million whereas it had previously been insured for full replacement cost. It said that its
insurance brokers had indicated that insurance providing the required level of flow was not available at
lower cost, and that the situation was unlikely to improve for some time. We spoke with other airport
operators who confirmed similar levels of increases in insurance costs post-11 September.

   6.51. Miscellaneous costs include charges on Manchester by MAG. Manchester told us that the
charges were split between group employee recharges, economic regulation recharges and group loan


                                                           135
administration charges. Regulation costs are recovered in full from Manchester by MAG. Manchester
told us that its share of the employee and loan administration recharges was approximately 15 per cent of
the total cost to MAG. The other cost category includes elements such as telecommunications, printing
and stationery, travel and subsistence, training, airfield licence costs, bad debts and financial adjust-
ments.


RHS contracts

    6.52. The regulated entity as we have defined it (see paragraph 2.71) includes RHS, so we have
included RHS costs. However, RHS charges appear as transfer costs in the MAAS accounts. Most RHS
costs are recovered by direct charges to airlines. For completeness, we show here, at constant 2001/02
prices, Manchester’s Q3 forecast for RHS contracts. This was forecast at £7.3 million over the five years
increasing over the period from £1.2 million in 1998/99 to £1.8 million in 2002/03, an increase of 50 per
cent (see Appendix 6.1). The actual costs are given in Table 6.17, which shows that the costs attributed
to RHS increased by 56 per cent in real terms over Q3 (see paragraph 6.6).

TABLE 6.17 Actual expenditure for RHS contract for Q3, at constant 2001/02 prices
                                                                                          £ million

                                                                                       Q3 variance
                 1998/99      1999/00     2000/01    2001/02   2002/03*    Q3 total   from forecast

RHS contract        2.3         3.3            3.4     3.6       3.6        16.2          –7.4

 Source: Manchester.


 *2002/03 costs are budget costs not actual.



Cost reduction strategy

1997 to 2001
    6.53. Manchester had recognized at the time of the 1997 MMC inquiry that its pay rates and terms
and conditions of employment were high in relation to the local market. It had just embarked on a series
of business reviews of key operational departments. A review of Manchester’s security business in
1997/98, for example, had revealed a wide range of pay levels (averaging from £18,700 a year for days
and £22,500 for nights) for security guards, which were well above the average rates paid at other air-
ports (£17,350) and local market rates (£8,000 to £10,800). It also identified that additional savings could
be made by redesigning existing rosters. Following the reviews, the motor transport function was set up
as a separate business unit, the car-park operation was restructured, and some day-to-day IT only support
was outsourced.

    6.54. The opening of T3 in September 1997 provided Manchester with the opportunity to staff the
terminal with employees whose terms and conditions of employment resulted from market testing against
comparisons at Gatwick Airport. New starter rates were initially introduced in security, engineering and
for staff on the information desks.

    6.55. In February 1998, Manchester set up a wholly-owned subsidiary, Manchester Airport
Employment Services, the function of which was to employ staff on information desks in T3 on market
tested terms and conditions of employment. These were transferred back to MA later in 1998 and
Manchester Airport Employment Services is currently dormant.

    6.56. In March 1998, Manchester’s board resolved to apply market rates of pay throughout its work-
force, and to enhance productivity by introducing more efficient working structures and practices and by
making greater use of technology. All business managers were given the task of benchmarking pay rates
against national and regional data in order to identify potential for savings in employee costs and
Manchester engaged KPMG to assist it in benchmarking security activities.

   6.57. Manchester decided that the importance of business continuity meant that substantial change of
pay and conditions for its various groups of staff could not be introduced unless the fire service could be


                                                     136
relied upon to work without disruption. It therefore addressed this area first. After talks with the unions
broke down in December 1998, Manchester decided to recruit a new workforce on different terms and
conditions of service from those applying to its existing fire service employees.

    6.58. Manchester used a wholly-owned subsidiary, Airport Management Consultancy, to recruit staff
for its fire service. A new watch was recruited on lower pay, a longer working week, annualized hours
and an agreement that any dispute would be resolved by binding arbitration. The rank of Divisional
Officer was removed from the management structure, which led to a reduction of six posts. We were told
that, as a result of the changes introduced to the terms and conditions for new starters in the fire service,
it had been possible to increase staffing to the required level to cover R2 at no additional overall cost.

    6.59. Manchester told us that it subsequently became necessary to increase the rates of pay for fire
officers above the levels originally projected in order to attract candidates of sufficient calibre. It said
that this upward pay pressure was created by the need to balance the introduction of market pay rates
with the imperative to maintain a safe and continuous level of service. The removal of contractual and
other, regular overtime proved to be a significant disincentive in the recruitment process. Manchester’s
benchmarking of fire officers’ pay against other airports is shown in Table 6.18.

TABLE 6.18 Comparisons of fire officers’ pay

                                             Station officer                             Sub officer

                                   Annual salary          Hourly rate          Annual salary          Hourly rate
                                Minimum Maximum      Minimum     Maximum   Minimum    Maximum    Minimum Maximum

Manchester Airport (new rate)    34,238   37,125       13.30      14.42     32,642     34,913          12.68   13.57
Gatwick Airport                  28,801   32,471       12.36      14.12     25,846     28,644          10.94   12.28
Heathrow Airport                 29,519   32,999       12.70      14.37     26,294     29,231          11.16   12.56
Stansted Airport                 28,618   32,118       12.27      13.95     25,425     28,317          10.74   12.13
East Midlands Airport            39,023   39,023       17.58      17.58     28,333     29,855          12.76   13.45

                                           Leading firefighter                           Firefighter

Manchester Airport (new rate)    30,074   31,752       11.68     12.33      14,106     25,110          6.44     9.75
Gatwick Airport                  23,274   25,342        9.71     10.70      19,662     23,065          7.98     9.61
Heathrow Airport                 24,037   25,825       10.08     10.93      21,653     23,740          8.93     9.93
Stansted Airport                 23,139   25,061        9.65     10.57      19,118     22,853          7.72     9.51
East Midlands Airport            25,922   27,303       11.68     12.30      21,531     25,406          9.70    11.44

 Source: Manchester.




    6.60. Manchester decided to use its strategy for the fire service as a template to introduce market pay
rates for new starters in other specific groups while existing employees retained their old rates of pay on
a protected basis. Manchester had already set up Ringway Handling Limited, in November 1998, as a
vehicle to employ baggage-handling staff for RHS. This followed the introduction of competition in bag-
gage handling in T1 and T2 and implementation of a European Directive. All baggage handlers are
employed on market-related rates of pay.

    6.61. Three further wholly-owned subsidiary companies were set up in 2001 as part of the restruc-
turing of the group: MAAS, MAD and MAV. The intention was that these subsidiary companies would
take on, in effect, the role of third party contracted suppliers of labour and/or expertise to Manchester and
to other airports in MAG. Initial arrangements have been put in place to these companies without any
tendering process. However, it is intended that the internal trading process should be conducted at arm’s
length and be based on market rates and practices. Manchester’s business strategy, which it began to
implement in June 2001, is that the subsidiary companies should be in a position to compete for the con-
tracts in the future, within three to five years. However, Manchester has made no commitment to keep to
this timescale and no assumptions have been made about further related cost savings in the business plan.

    6.62. MAAS was initially set up to recruit security staff directly on to what Manchester described as
new starter rates but which were, in reality, new pay scales derived from a benchmarking process (as
described in paragraph 6.56). MAAS was also to be the employer of existing staff who agreed to transfer
from Manchester on accepting new contracts embodying lower rates of pay and revised terms and con-
ditions. Since February 2002, MAAS has provided aviation security services to T3 and the airfield and


                                                          137
gate security checks. In March 2002, RHS became a subsidiary of MAAS. At the time of our inquiry,
MAAS had also taken over responsibility from MA for providing various services essential to the air-
port’s operation, including security, the fire service, engineering and car parks, although some of the
security staff were still employed by Manchester (see paragraph 6.70).

    6.63. Manchester had assessed the market price of these services and said that the cost would be
determined by the scope and standard of services procured as well as the operational and commercial
efficiencies of the MAAS operation. MAAS would be reimbursed on the basis of payment of a market
price for an agreed number of hours worked. Manchester told us that MAAS would provide services at a
competitive price, even if this meant incurring losses (for example, in providing security services) and
that these losses would ultimately be borne by MAG rather than Manchester. We understand that
Manchester will continue to seek prices for these services that are the best that can be procured in a
competitive marketplace.



The LEK Strategy Review
    6.64. As Manchester’s initial strategy for cost reduction did not provide the savings needed for the
company to reduce its charges sufficiently, in 2001 it commissioned LEK Ltd management consultants to
undertake a review of its business and, as part of this, LEK carried out a wider benchmarking study. The
LEK review analysed operating costs and efficiency in the major cost areas, including security,
engineering, car parks and the fire service, and compared these with market prices. This provided an
assessment of how Manchester’s operating costs compared with other airports in the UK and revealed
that its operating costs per passenger were around 30 per cent above market levels, as shown in Figure
6.2. The review identified the extent to which there was further scope for operating cost reductions, and
Manchester has used this as the basis for MAG’s business plan for the period from 2002/03. This
includes a programme of action intended to reduce costs in the security, engineering and car parks func-
tions.

                                                       FIGURE 6.2

           Operating costs (excluding depreciation) per terminal passenger
                                 (financial year 2001)

                          Bournemouth
                           Humberside

                                                                                     Key:
                 12                                                                  1. Belfast City
                                                                                     2. Leeds/Bradford
                                                                                     3. East Midlands
                               Bristol                                               4. Liverpool
                 10                                                                  5. Newcastle
                                                                                     6. Belfast International
                                                                                     7. Luton
                              Cardiff
                  8       1
                          2     3                                     Manchester
                          4         5         Birmingham
                                    6    7                 Stansted
                  6                                                        'Market' level
                                                                                                          Gatwick
                                Aberdeen
                                             Glasgow
                                         Edinburgh

                  4


                  2


                  0
                      0               5         10        15         20          25         30                  35
                                    Total terminal passengers (million) for financial year 2001

           Source: Manchester’s business strategy document.


                                                              138
2001 to 2002
    6.65. In this phase of cost reduction, Manchester first turned its focus on existing security staff in T1
and T2, this being the single biggest and most costly group of staff employed. Manchester attempted to
negotiate changes to pay and conditions with the trade union. These included introducing market pay
rates, which were 40 per cent below the old rates, and new rosters. However, security staff resisted the
changes (see paragraph 6.39) and Manchester deviated from its fire service template to give security staff
the option of accepting lesser terms of employment with a ‘buy-out’ payment of £10,000 or face dis-
missal.

    6.66. In March 2002, when some 390 existing staff had indicated their intention to reject the com-
pany’s offer, Manchester increased the buyout offer to individuals from £10,000 to £20,000, irrespective
of length of service, £5,000 of which was to be payable after 12 months’ satisfactory service. It offered
an extra 10 per cent on pay rates, taking the new rates to 30 per cent below the old rates, rather than
40 per cent below as originally proposed. It also decided to retain elements of the former employment
packages such as provision for paid sick leave and pensions to enhance recruitment and retention.
Following a lengthy period of official industrial action, 345 of the existing security staff eventually
accepted the new terms and conditions while 245 left, the majority of these voluntarily. However, some
18 staff were dismissed after failing to accept revisions to their contracts and to their working practices
and MA was facing a number of complaints to employment tribunals.

    6.67. Manchester acknowledged that the new pay rates remained in the upper quartile for security
staff in the local area, but told us that this category included jobs such as nightwatchmen and nightclub
bouncers which were not comparable with its own security staff. It said that it now paid market rates for
aviation security. Manchester’s comparison of the new rates of pay with those of other airports and local
rates is shown in the Table 6.19. The figures for Gatwick and Heathrow would be expected to be higher
as wages generally are higher in the South-East (on average, 24 per cent higher in the Gatwick area than
in the North-West, according to the NES).

TABLE 6.19 Comparison of security officers’ pay

                              Basic pay         Basic number                           Include
                              £ per year          of hours      Average hourly rate    shift pay
                        Minimum       Maximum                  Minimum    Maximum
Security officer
Manchester Airport       12,945       14,022         42          5.91        6.40        Yes
Gatwick Airport          14,681       15,619         40          7.04        7.52        No
Heathrow Airport         14,794       16,558         40          7.09        7.93        No
Non-aviation industry    10,690       18,951                     4.20        9.31
Local average            13,650       14,150                     6.10        6.37
                                                                                                   Number
                                                                                                   of posts
Security supervisor
Manchester Airport       15,346       16,234         42          7.00        7.41        Yes         30
Gatwick Airport          16,018       18,401         40          7.68        8.82        No          35

 Source: Manchester.




    6.68. We tested Manchester’s claim, by looking at NES figures. The NES gives details of average
weekly earnings broken into component parts. By deducting the amounts shown for overtime, shift pay
and payment by results etc, a figure is reached that in broad terms represents pay for a basic working
week. The data in the NES shows that the basic pay for manual workers in Greater Manchester in
2001/02 was 4.9 per cent lower than the national average. The data also showed that nationally, the pay
of security guards was £285.30 per week. Combining these gives a benchmark of basic pay of £14,100 a
year for Greater Manchester, supporting Manchester’s contention.

    6.69. The T&G suggested to us that the new pay rates for security staff would not be high enough to
staff of the right calibre for such a specialized environment. BA told us that while it had not noticed any
deterioration in the standard of service in T3 since market pay rates were introduced, it had not seen any
improvements either. Neither had it seen any proposals from Manchester to reduce charges to users in
line with the savings the airport had made from the reductions in its cost base resulting from lowering the
rates of pay of the security personnel.


                                                    139
    6.70. Manchester considered the potential transfer of employees into the new group companies. To
date, the only staff transfers have been from MA plc to MAV (the T3 and airfield security staff were
directly employed into MAAS and were not transferred). Manchester said that it would revisit this issue.


    6.71. As a result of the LEK review, Manchester also reviewed employment within what is now MA.
In autumn 2001 it gave notice of its intention to declare 65 redundancies, compulsory if necessary,
among the 400 staff. In the event, the reduction was achieved through voluntary severance, but approxi-
mately 50 per cent of the staff that left did so on early retirement terms, which was an expensive option
for Manchester. This affected the assumption of a one-year payback period to recoup the costs of the
exercise, as that had allowed for a proportion of compulsory redundancies. Manchester told us that the
number of managers had been reduced by 30 per cent and that, by applying market rates of pay to all new
staff, the pay of all staff grades in the airport division had been reduced by 10 per cent.



Current position
   6.72. Manchester told us that, through reducing employee numbers and the security restructuring, its
cost reduction strategy had, within the first half of 2002/03, led to cost savings of £12.7 million a year.
Further projected employee cost savings are described in paragraph 6.83 et seq.


    6.73. Some 60 per cent of fire service employees were now on new terms and conditions and there
was a full interchange between employees, with each of the four watches containing a mixture of staff on
both old and new terms and conditions. Manchester anticipated that, due to natural wastage, all fire-
fighters would be on the new terms and conditions by 2004.



Projected operating expenditure for Q4
    6.74. For its financial planning for Q4, Manchester used a model which calculated future operating
expenditure on the basis of elasticities, as described in paragraph 6.13. At the beginning of our inquiry,
because of the uncertainties in the market following the terrorist attacks of 11 September 2001, it had not
finalized its plans for Q4. It supplied us with its first draft in May 2002. In September 2002, near the end
of our inquiry, it revised its projections. For our examination of Manchester’s projected operating expen-
diture, we used model CAA12. Manchester assumed RPI inflation of 2.5 per cent for the years 2003/04
and 2004/05, 2.4 per cent for 2005/06, and 2.3 per cent thereafter.


    6.75. Manchester told us that it had rebuilt its financial model so that the forecast manpower costs
reflected the replacement of existing staff members with new, and fewer, employees who would be
employed at less cost. It was reviewing the extent to which the financial model was robust in the rate at
which it expected lower staff costs to displace the higher ones in the model. The model applies one-third
of the percentage increase in forecast passenger numbers to the previous year’s employee costs, ie an
elasticity of 0.33, as opposed to the differential elasticities used in the previous reviews (see paragraph
6.13). As indicated in Table 6.5, the weighted average of the individual elasticities in 1997 was 0.3 so the
change did not have a material impact on the projections.


   6.76. Table 6.20 shows Manchester’s cash operating expenditure forecast for the years 2002/03 to
2007/08 at constant 2001/02 prices. Further details are given in Appendix 6.3. It should be noted that the
employee costs include RHS.


    6.77. Overall, cash operating costs (excluding depreciation) are forecast to increase by 5.7 per cent
over Q4. Employee costs are forecast to increase by 9 per cent. Supplies and services costs are forecast to
reduce by 11 per cent over Q4, whilst establishment costs are projected to rise by 24 per cent. Other cost
categories remain at relatively constant levels.


                                                    140
TABLE 6.20 Manchester’s projected cash operating expenditure for Q4 at constant 2001/02 prices*

                                                                                                                                 £ million

                          Actual             Budget          Forecast        Forecast        Forecast        Forecast        Forecast
                         2001/02             2002/03         2003/04         2004/05         2005/06         2006/07         2007/08

Employee costs              64.0              54.3            54.2            54.8            55.9            57.4                59.1
Premises                    38.1              36.5            35.3            35.1            35.4            36.4                36.8
Supplies and services       31.6              31.3            27.4            26.0            25.4            24.5                24.3
Transport and plant          5.4              13.0            12.6            12.2            12.3            12.4                12.5
Establishment               20.0              19.6            21.7            24.1            26.7            27.0                27.0
 Total cash operating
  expenditure            165.2               154.6           151.1           152.2           155.7           157.6               159.7

 Source: Manchester.


 *Manchester assumed that inflation rates were used to deflate 2003–2008 forecasts to 2001/02 prices.

   6.78. Table 6.21 shows Manchester’s projected cash costs per passenger.

TABLE 6.21 MA’s projected cash costs per passenger for Q4 at 2001/02 prices
                                                                                                                                  £ million

                          Actual             Budget          Forecast         Forecast        Forecast        Forecast           Forecast
                         2001/02             2002/03         2003/04          2004/05         2005/06         2006/07            2007/08

Employee                    3.36              2.98             2.83             2.72            2.63            2.54                2.45
Premises                    2.00              2.00             1.84             1.74            1.67            1.61                1.53
Supplies and services       1.85              1.71             1.43             1.29            1.20            1.08                1.01
Transport and plant         0.28              0.71             0.66             0.60            0.58            0.55                0.52
Establishment               1.24              1.07             1.13             1.19            1.26            1.19                1.12
 Total cash costs           8.73              8.48             7.90             7.55            7.33            6.97                6.62

  Source: Manchester.




   6.79. We now consider the major cost headings in turn.


Employee cost projections
    6.80. Manchester’s projections for employee costs in Q4, as given in CAA12, are shown in Table
6.22. These figures exclude Group staff, as they are not part of the regulated entity. These are based on
the assumption that wages will increase in real terms by 2 per cent a year, whereas earlier projections did
not include any increase in wages in real terms. Manchester told us that this assumption was adopted
because the majority of staff were now on market pay rates. As wages in the economy generally tend to
increase by about 2 per cent a year in real terms, this was the appropriate assumption for MA staff. We
noted, however, that the staff numbers were largely determined by the elasticities so there was no cor-
responding increase in real productivity, other than in engineering, car parks and motor transport (see
paragraphs 6.85 to 6.87). The revised assumption represents an increase of nearly £19 million in
employee cost over the five-year period, compared with Manchester’s original projections.

TABLE 6.22 Projected employee numbers and costs, 2001/02 prices

                                                                  Years ending March

                               2002/03           2003/04         2004/05         2005/06         2006/07         2007/08

Total number of employees          2,252             2,260           2,272           2,288           2,319           2,361
Total employee costs (£m)           54.1              54.2            54.8            55.7            57.3            59.6

Totals include RHS:
 Number of employees                   751             762        775          788          805                        827
 Employee costs (£m)               [                     Figures omitted. See note on page iv.                               ]

 Source: Manchester.




                                                                  141
    6.81. Manchester’s detailed projections of employee numbers and costs by business area between
2002/03 and 2007/08 are shown in Tables 2 and 3 in Appendix 6.2. Following a 6 per cent reduction in
employee numbers from 2,420 to 2,265 between 2001/02 and 2002/03, numbers are expected to grow by
108 to 2,373 over the next five years, as passenger numbers grow. Most of the growth is expected to take
place in RHS. After a reduction from 696 to 491 security staff between 2001/02 and 2002/03, figures are
projected to rise to 538 during Q4, whilst the numbers employed in the engineering area are expected to
remain constant at 189 and the number of employees in the fire service is expected to fall from 133
to 113.

    6.82. Table 6.23 gives details of projected staff costs per passenger (excluding RHS and restruc-
turing costs) over Q4.

TABLE 6.23 Passengers and staff costs per passenger, actual and projected, 2001/02 prices

                                                 Forecast

                    2002/03    2003/04     2004/05         2005/06   2006/07    2007/08

Passengers (m)      18.30       19.14       20.17          21.24     22.64       24.11
Staff costs* (£m)   42.1        42.0        42.3           42.8      44.0        45.3
Staff costs* per
 passenger             2.30      2.19        2.10            2.02      1.94       1.88

 Source: Manchester.


 *Excluding RHS.




Strategy for further cost reductions
    6.83. In March 2002, employee cost levels were estimated by Manchester to be still some 30 per
cent above ‘market’ levels. Its business plan of March 2002 sought to achieve a further reduction in
employee costs of £16.3 million between 2001/02 and 2004/05; and proposed that the increase in pas-
senger numbers over Q4 be handled with no increase in the real wage bill. This was to be achieved by
reduced pay costs, improved productivity and reduced staff numbers engaged in the services provided by
MAAS. Business managers in each of the other service areas were tasked with providing the framework
for appropriate cost comparability and targets. Most of the reduction was to be achieved within the
remainder of Q3. In the October 2002 plan (CAA12), Manchester expected a modest increase in man-
power numbers and a more significant increase in the wage bill as a result of real wage increases. Apart
from the completion of the reorganization in security, the main further reductions were planned for the
engineering and car-park functions.



Security

    6.84. Manchester told us that it had reduced employee costs for security by £9.3 million a year over
the past year through the introduction of new pay, terms and conditions and more efficient rosters. It
estimated that the changes would lead to improved productivity and reduce the hourly cost of security
from £25 to £10.80. It said that the enhanced buyout offer for security staff entailed a two-year payback
period and that these costs were taken into account in the first two years of the business plan, ie from
2002/03 to 2003/04. Restructuring costs are considered further in paragraph 6.88.



Engineering

    6.85. Engineering staff costs in 2001/02 were £6.9 million. The LEK strategy review noted that the
majority of engineers were rostered during the day in contrast to the night-focused work schedules. It had
been Manchester’s intention that engineers on the night shift would do planned maintenance, but this had
not proved possible due to the need to take machinery out of action for longer than originally estimated.
Engineers were on annualized hours and were rostered on a 24-hour basis, working 12-hour shifts, but, as


                                                     142
a result of the LEK review, Manchester was reviewing the engineering function and expected to reduce
employee costs by £[ ] million by the end of the 2004/05. This is to be achieved through improvements
in productivity and changes to pay and conditions, to which Manchester will seek to gain the voluntary
agreement of the workforce.



Car parks

   6.86. MAAS operates the on-site long- and short-stay car parks under a concession agreement
granted by MA. MAAS was developing plans for implementation by the end of 2002, which included
new pay, terms and conditions and rostering arrangements. Manchester expected these changes to reduce
employee costs by £[ ] million by the end of 2002/03.

    6.87. Manchester expected to reduce employee costs in the motor transport area by £[ ] million by
the end of 2003/04. It told us that consideration was being given to the profitability of the business, and
that reductions had been identified to improve productivity in certain areas.



Other operating expenditure
    6.88. We next turn to the non-manpower elements of Manchester’s cash operating expenditure fore-
casts. (Further details of these items can be found in Appendix 6.3.)

   6.89. A graphical representation of Manchester’s Q4 non-manpower cost projections is shown in
Figure 6.1 alongside Q3 results.



Premises

   6.90. Table 6.24 shows Manchester’s projections of Q4 premises costs at constant 2001/02 prices.
Overall premises cash costs are projected to fall in real terms from £180.4 million for Q3 to
£178.9 million for Q4, a 0.8 per cent decline.

TABLE 6.24 Forecast premises costs for Q4, at constant 2001/02 prices
                                                                                    £ million

                        2003/04   2004/05      2005/06     2006/07      2007/08     Q4 total
Fuel, light, cleaning
 and water                9.9        9.7         10.1        10.6         11.1        51.3
Rates                    15.9       15.8         15.8        15.6         15.4        78.5
Fixed rent                3.5        3.5          3.4         3.9          3.8        18.1
Variable rent             4.2        4.4          4.5         4.7          4.8        22.7
Other                     1.6        1.6          1.6         1.7          1.7         8.3
 Total premises          35.3       35.1         35.4        36.4         36.8       178.9

  Source: Manchester.




    6.91. Manchester projected its Q4 premises costs to remain relatively stable, in real terms, rising
only 3.8 per cent during the period. There is an increase in the fixed rental element taking effect from
2006/07, resulting from an upward-only five-yearly rent review. As noted in paragraph 6.46, our consult-
ants did not see anything amiss in the new arrangements.

   6.92. Manchester assumed that rates, rent and certain minor costs were independent of passenger
numbers. Fuel, light, cleaning and water were projected to increase with an elasticity of 0.25.

    6.93. Other expenditure, which is not forecast to increase in real terms, refers to maintenance of
building, hangars, roads and runways, rechargeable services, special works, and furniture and fittings.


                                                   143
Supplies and services

    6.94. Table 6.25 shows Manchester’s projections of supplies and services costs at 2001/02 prices.
Overall costs are projected to fall in real terms from £156.3 million for Q3 to £127.5 million for Q4, an
18 per cent decrease. Manchester assumed that the costs of NATS, GMP, hire of services and equipment
leasing are independent of passenger numbers. Manchester told us that the increase in hire of services
costs results from its move toward a group structure approach to its business and the consequence of
making MA Developments consultants of the regulated entity. Equipment leasing costs are planned to
reduce from £3.9 million to £1.3 million reflecting Manchester’s policy of taking the least-cost solution,
this having changed since barriers to funding were lifted. Other costs include materials for airfield main-
tenance, protective clothing, and equipment purchases and provision for sound insulation grants.

TABLE 6.25 Forecast supplies and services costs for Q4, at constant 2001/02 prices
                                                                                               £ million

                                2003/04      2004/05       2005/06       2006/07    2007/08    Q4 total

GMP                                7.7           7.7            7.8         7.8       7.8        38.9
NATS                               7.6           7.5            7.5         7.5       7.5        37.5
Hire of services                   6.1           6.0            5.9         5.9       5.8        29.6
Leasing of equipment               3.9           3.0            2.6         1.6       1.3        12.4
Other                              2.1           1.7            1.7         1.7       1.8         9.1
 Total supplies and services      27.4          26.0           25.4        24.5      24.3       127.5

 Source: Manchester.




Transport and plant

    6.95. Table 6.26 shows Manchester’s projections of transport and plant costs at 2001/02 prices.
Overall costs are projected to rise in real terms from £26.5 million for Q3 to £61.9 million for Q4, a
134 per cent increase. The cost of maintaining vehicles is projected to double after 2001/02, thereafter
stabilizing through Q4. Manchester told us that the cost of maintaining RHS vehicles had been consoli-
dated into RHS operating expenses and consequently passed on to airlines through baggage contracts.
Under the new group structure, costs associated with the maintenance of the baggage fleet have been
reclassified and now appear in the maintenance of vehicles category shown in Table 6.26. Plant main-
tenance expenditure remains constant throughout Q3 and Q4.

TABLE 6.26 Forecast transport and plant costs for Q4, at constant 2001/02 prices
                                                                                                £ million

                                 2003/04       2004/05         2005/06    2006/07    2007/08    Q4 total

Maintenance of vehicles             0.8           0.8            0.8          0.8       0.8         4.1
Maintenance of plant and
 equipment                          0.1           0.1            0.1          0.1      0.1         0.7
Other*                             11.6          11.3           11.4         11.4     11.5        57.2
 Total transport and plant         12.6          12.2           12.3         12.4     12.5        61.9

 Source: Manchester.


 *Other costs include car parks external, engineering external and RHS external.




Establishment costs

   6.96. Table 6.27 shows Manchester’s projections of establishment costs at 2001/02 prices. Overall
costs are projected to rise in real terms from £103.4 million for Q3 to £126.5 million for Q4, a 22 per
cent increase. This is primarily as a result of Manchester’s proposal to introduce an additional market
support fund to assist airlines in growing passenger numbers. This is discussed in detail in Chapter 7.
Insurance costs continue to rise above the rate of inflation and are discussed in paragraph 6.50.


                                                         144
TABLE 6.27 Forecast establishment costs for Q4, at constant 2001/02 prices
                                                                                                           £ million

                               2003/04       2004/05       2005/06           2006/07       2007/08         Q4 total

Sales development                6.8           6.8               6.8           6.8           6.8             34.0
Additional market support        2.2           5.5               7.9           7.6           7.2             30.4
Strategic marketing              0.2           0.2               0.2           0.2           0.2              1.1
Commercial marketing             0.4           0.4               0.4           0.4           0.5              2.2
Publicity                        2.1           2.1               2.2           2.3           2.4             11.0
Local community
 sponsorship                     0.2           0.2            0.2              0.2           0.2              1.2
Sponsorship of the arts          0.4           0.4            0.4              0.4           0.4              2.0
Insurance                        3.9           4.1            4.3              4.6           4.9             21.7
Miscellaneous                    1.5           1.5            1.4              1.7           3.5              9.5
Other                            4.0           2.9            2.9              2.8           0.9             13.5
  Total establishment           21.7          24.1           26.7             27.0          27.0            126.5

 Source: Manchester.




RHS contracts

    6.97. As for Q3 (see paragraph 6.52), we give, in Table 6.87, Manchester’s projections of RHS con-
tract costs at 2001/02 prices. In our modelling, we included actual RHS costs, rather than charges.

TABLE 6.28 Forecast RHS contract costs for Q4, at constant 2001/02 prices
                                                                                               £ million

                     2003/04       2004/05       2005/06          2006/07        2007/08       Q4 total

RHS contract           3.5             3.5           3.5               3.5           3.5           17.6

 Source: Manchester.




Restructuring costs
    6.98. The expected cost savings described in paragraph 6.83 et seq exclude restructuring costs (the
one-off cost of redundancies, voluntary early retirements and ‘buyout’ packages incurred in imple-
menting the changes). Total restructuring costs are now estimated to be £31.1 million overall
(£19.9 million in 2001/02, with a further £[ ] million in 2002/03 and £[ ] million in 2003/04).
Additional costs may arise from employment tribunal claims being pursued against Manchester (see
paragraph 6.66). Manchester has indicated that it does not foresee any major impact arising from these
on the cost estimates.

    6.99. The largest element of the restructuring costs is the security change programme. The total cost
of this is estimated to be £18.8 million, the majority of which comprised the cost of introducing new
terms and conditions for existing staff (£10.3 million) and payments to those who left (£8.1 million). The
initial estimated overall costs had increased, as Manchester increased both the original ‘buyout’ offer by
£10,000 and the rate of pay by 10 per cent. The anticipated payback period had been extended from one
year, and was now slightly over two years.




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