bmi response - NATS (En Route) PLC price control review for CP3: CAA Consultation Feb 2010 Index Section Description Page 4 SCOPE OF PRICE 2 CONTROL 5 STRUCTURE OF PRICE 5 CONTROL 6 - 7 - 8 SERVICE QUALITY AND 8 ENVIRONMENTAL PERFORMANCE 9 CAA SCRUTINY OF 12 OPERATING COSTS 10 CAA SCRUTINY OF 15 PENSION COSTS 11 CAA SCRUTINY OF 18 CAPITAL EXPENDITURE 12 REGULATORY ASSET 25 BASE AND DEPRECIATION 13 COST OF CAPITAL 25 ANNEX B: SERVICE QUALITY AND 27 ENVIRONMENTAL PERFORMANCE 4. SCOPE OF PRICE CONTROL 4.40 Do consultees agree that the scope of the London Approach service within NERL’s licence should be expanded to include Luton and London City airports? For the reasons elicited by the CAA in the consultation document, we agree that the approach costs for LTN & LCY should be brought within the remit of NERL’s licence. 4.41 Do consultees have views on how the London Approach service should be regulated and charged for in CP3? Of the options the CAA has proposed, option 2 proposes to make London Approach charging cost reflective based on Single European Skies legislation. bmi’s position is that we can only support this if this was implemented simultaneously across Europe. Currently this is not the case, and indeed certain countries and ANSP providers are heading in the other direction, in contravention of the Airport Directive. In 2008 all Dutch LVNL approach costs were transferred into en- route charges from terminal navigation costs. This is the case with other European hubs. Moreover, by NATS unilaterally applying approach charge increases with no reciprocal contra benefit for those London carriers flying over other countries’ airspace, it actually works against one of the aims of the European Airports Directive - namely to achieve a level playing field. We consider unilateral implementation is not justifiable. To implement this proposal unilaterally (which NERL would be moving towards with no commitment to reduction in future years when traffic increases) would disadvantage London based carriers against their European counterparts. Consequently we cannot accept this as reasonable in a competitive environment and consider it to be commercially unfair. We note the CAA’s point that London Approach is a hybrid of en-route and terminal navigation costs, and that this does not sit neatly within the European Charging Directive’s remit. For these reasons maintaining the current position (option 3) would maintain the level planning field and allow for the hybrid nature of the costs. 4.63. Do consultees agree that the Eurocontrol price control for CP3 should be set on the basis of all the costs that NERL reasonably incurs in providing the range of services that it is obliged to provide under its air traffic services licence? Farnborough LARS and ATSOCAS We have no objection to capital spend, that contributes towards the protection of Commercial & General Aviation (GA) aircraft, being included in the CP3 Baseline Business Plan (examples of this in CP2 were the Farnborough LARS and ATSOCAS) so long as those parties such as GA that are in receipt of increased utility from this capital spend (through increased safety of its members), paying their fair share towards such capital. In the absence of this, GA free rides, obtaining benefits without paying costs, which leads to both parties enjoying the benefits, but only one party paying the costs. We would consequently recommend that any income from GA should be made available to reduce the capital spend, and to reduce the capex plan in CP3 (see response to question 4.64). 4.64. Do consultees agree that the CAA has identified the relevant policy and practical issues bearing on the issue of charging? Are there any other factors the CAA should take into account? General Aviation (GA) GA benefits from positive externalities The CAA states in the consultation document that: ‘the design and extent of controlled airspace are driven by the requirements of commercial operators, it is reasonable they should meet the associated costs, even when others may need to use these services’ What stems from this though is that GA enjoys an immense positive externality from controlled airspace in terms of improved safety which commercial aviation pays for. Economics dictates that the consequence of one party in receipt of utility and receiving a positive externality that it has not paid for, is that it will over- consume that service, or in this case, do nothing to reduce its infringements, which bear cost to another party. GA has no incentive to change its behaviour. Duty of Care There is a duty of care on both sides to avoid potential for collision. Currently Commercial Aviation is meeting its duty of care – NERL has spent £0.4m on Farnborough LARS in 2007 and £4.7m on ATSOCAS management in 2009 (funded through airline charges). This cost has been incurred to address increasing incidents of potential GA collisions which are a function of GA’s sporadic use of transponders. Those transponders that are turned on are often non-mode S transponders which do not provide altitude position. As a result GA is compounding the externality (requirement for controlled airspace), and not meeting its duty of care obligation - GA must pay for its share of the externality it is creating. Potential Benefits of providing incentives to GA • Improved safety for both GA & commercial aviation by reducing the probability of a collision • Reduction of re-routing required when infringements occur. This brings the following benefits: Environmental (through reduced fuel emissions) Financial (through reduced fuel consumption) Passenger experience (through reduced delay) All of these stem from more direct routings as airspace does not have to be cleared when infringers are spotted. This brings a reduced cost burden on the operator which then represents a smaller cost that has to be passed through to the passenger. European Law EU legislation supports the case for GA to pay its fair share. It mandates the charging to GA through EU regulation 550/2004 Article 15 3(b): "Exemption of certain users, especially light aircraft and State aircraft, may be permitted, provided that the cost of such exemption is not passed on to other users" This is unequivocal – consequently GA should incur its fair share of costs in accordance with the EU’s regulations on the provision of air navigation services. Potential Solutions The options available to change GA’s behaviour include: • A monetary payment contributing a fair share towards the capital cost of safety systems • Make compulsory the carrying and turning on of transponders in UK airspace/parts of UK airspace (Transponder Mandatory Zones) The optimal solution would be to implement both. Conclusion bmi recommends that CAA considers charging GA in order to provide the benefits outlined above. In the absence of this, we would support the creation of more Transponder Mandatory Zones. 5. STRUCTURE OF PRICE CONTROL 5.16 Do consultees agree that, should the IR set the first review period for SES II to run to the end of 2014, the price control for both Eurocontrol and Oceanic services for CP3 should be four, rather than five years? We agree that CP3 should run for four, rather than five, years for the reasons outlined in your consultation documentation. 5.22 The CAA invites comments on whether the volume risk sharing allocation for CP2 should be continued in CP3 Volume Risk Sharing The volume risk sharing mechanism allows NERL to transfer risk to the airlines, in the absence of which, it would itself bear. If the mechanism didn’t exist, the regulatory return demanded by shareholders would increase. However, this issue should be taken into account when calculating the cost of capital and there is no evidence that this has been done. Reduced risk should result in a reduced cost of capital. The crux of the matter is to ensure that the traffic forecasts are as accurate as possible, and that the capex & opex cost required for this level of traffic is appropriate. Provided this is the case, and provided that some appropriate adjustment is made to the cost of capital, we would support the retention of the Volume Risk Sharing Mechanism for CP3. Asymmetrical nature of the mechanism Regarding the asymmetrical nature of the mechanism, its justification on the basis that additional revenues would not be sufficient to cover the additional costs incurred is fallacious for the following reason. NERL’s capacity is geared towards the two daily traffic peaks, and this capacity has not declined even at the height of the current economic turbulence. Airlines have only reduced middle of the day and late night activity in the face of the downturn in economic activity. And the airports do not have the capacity to extend peak activity. It follows that if any extraordinary increase in traffic does occur, it would primarily occur during the parts of the day currently not served. NERL’s cost base is two-thirds fixed and so any extraordinary increase in traffic would not increase NERL’s costs to anywhere near the increase in revenues. A symmetrical volume sharing mechanism in which the benefits of any upside are shared with the airlines would reduce the potential benefit to NERL but would not impact the overall risk and therefore the cost of capital. We believe that this a more equitable approach. For these reasons we would recommend a move to a symmetrical volume sharing structure. 5.38 The CAA invites comments on the treatment of Government charging schemes (G factor) For CP3 We would agree with the CAA’s proposal to remove UK government revenue from the price control as this would encourage NERL to generate revenues from this source in regard to state aircraft. Given that the revenue involved is relatively immaterial in the total settlement, this represents an opportunity for NERL to take advantage of economic charging for this sector, and any extra revenues generated would flow back into the single till in CP4. Note, however, that given bmi’s response to question 4.64 that General Aviation should, under European law, bear some of the costs for providing its own safety, this revenue would also be classed as ancillary revenue, and would form part of the Single Till in reducing the net revenue requirement and the amount levied to airlines. It is desirable to remove the G factor from the price control to incentivise NERL to generate income from it in CP3, which would fall into the single till in CP4. However, given that the general aviation point is predicated upon the same bit of EC legislation, we make the point that we would not want GA income to follow the same principle on the grounds that income from GA is material, unlike that from the Government. 5.54 Has the CAA correctly identified the issues and options for the treatment of bad debts? Treatment of bad debt allowance in CP2 The treatment of the CP2 bad debt allowance, as currently proposed by the CAA, permits NERL to write off CP2 bad debts of £3.6m against the CP2 settlement allowance of £6m but to chase payment and hence retain any difference between the two. In the event of retrieving the debt, which appears possible , NERL can retain the cash recouped, which would act as an incentive to maintain the current process.. We do not agree with this approach for the following reasons: • NERL has very little control over its debt management due to this function lying with Eurocontrol. So providing NERL with an incentive has little, if no impact, at all. Effectively £2.4m of airline money has been handed over with nothing in return. • We would propose returning to airlines whatever remains from the CP2 allowance for bad debts. This would allow NERL to continue to have risk-free bad debt provision, hence permitting an advantageous downwards effect on the WACC as shareholders would not require as much in return. The CP3 pass-through proposal has been designed with this in mind. Treatment of bad debt allowance in CP3 We concur with the proposed treatment of the bad debt provision in CP3, to pass through the exact cost of the bad debt provision to users, for the same reasons we are recommending this treatment, ex-post, for CP2. Level of bad debt allowance in CP3 Regarding the level of bad debt allowance in CP3, we would concur that the level of bad debts have been far lower in CP2 than forecast, and as the CAA proposes to do, that this should be reflected in CP3. However, it is also worthy of note that we are at the nadir of the economic cycle, and although airline balance sheets are weak, that the weakest and most marginal airlines have collapsed with those that remain much stronger. Airline overcapacity has also been addressed by this, and reduces the likelihood of a bad debt level to the extent seen in CP2. We would ask the CAA to consider making a reduction in the bad debt provision. To the extent that this is not done, it is another factor reducing risk which should be reflected in the cost of capital.. 5.60 The CAA invites comments on whether there should be a pass- through of any unanticipated additional spectrum costs in the course of CP3. bmi will be responding under separate cover to OffCom re the introduction of Spectrum costs. The airline industry has spent significant sums in investing in 8.33 khz spacing, and sees the introduction of this proposal as just an additional tax measure. Due to the nature and manner of spectrum usage we are fully equipped to take advantage of such spectrum, however, we neither control the allocation, or are able to drive forward further efficiencies, unlike the GA community, and as such do not believe that here should be any pass- through of any anticipated or unanticipated spectrum costs. We believe that the CAA can play its part in the effective allocation of Spectrum in the U.K. without the need for incentivised pricing. 5.66 Are consultees content with the broad scope and extent of NERL’s involvement in the SESAR Joint Undertaking? We are content with the broad scope and extent of NERL’s involvement in the SESAR Joint Undertaking as long as such involvement is transparent to the Operators, and is subject to rigorous cost/benefit analysis. See also our comments in 5.67, and 5.68 5.67 Do consultees consider that there should not be a cost plus mechanism for over-runs on cost in the SESAR packages for CP3? We concur with the CAA’s approach in permitting the RPI– X mechanism to provide the regulatory rigour to keep these costs under control. Any excess costs of the SJU should be borne by NERL given that the remit of the SJU is reasonably well known and as the control period will only be 4 years. 5.68 Do consultees consider that there should be a mechanism to reduce the RAB (and future changes) by 90% of the proceeds from any IPR that is then transferred by NERL to the SESAR Joint Undertaking? We concur with the approach that the RAB should be written down by 90% of the value of the IPR rights, and that it is correct not to permit a 100% write down to provide an incentive for NERL to engage in selling the products they have designed. 8. SERVICE QUALITY AND ENVIRONMENTAL PERFORMANCE 8.28 The CAA invites views on how, depending on the freedom the CAA has, it should deal with any requirement within SESII for incentivisation of delay. Should any SES II metric be in addition to, or substitute for, part of the scheme proposed following CCWG. bmi has taken a leading role in discussions on metrics for CP3, and further comments will follow under this section in response to individual questions, and as such these responses should be viewed holistically. We believe that any SES II metric should be in addition to the scheme proposed following CCWG. We believe that current NATS proposals (not withstanding further comments below) are mature, and as such are more specific in meeting the needs of the customer, and we would not want to see these diluted, rather they can be complemented. Therefore, we support the CAA’s comments from the February 2009 Policy Update that “it was not its intention to dilute the prospective array of incentives on NERL in order to achieve ‘lowest common denominator’ alignment with what might be required under the SES II Performance Framework.” 8.31 The CAA invites views on the measurement of ATFM delay in general and on the appropriate source of data for the metrics for CP3. bmi understand the case for using CFMU data, as in effect there should be no difference between the figures produced, and are therefore in alignment with SES II. We believe that there are a number of issues with ATFM delay reporting, and there may be more benefit in remaining with NATS reporting to maintain consistency, and the range of more detailed reports available through NATS. Further, the current plan for SES II does not appear to make any allowance for tactical measures used in the management of delays. The CCWG working group put intense pressure on NATS regarding the use and reporting of Tactical measures, which will not be captured by the CFMU. The NATS proposed metrics terms T1 T2 T3 are designed to incentivise the application and performance of regulated delay. Throughout the CP3 consultation Operators have expressed concerns with regards to the current application of non-regulated tactical tools (such as MDIs, ADIs, ARDS, miles in trail and scenarios). At present these tools are utilized according to a set of criteria contained within the MATS part 2. Despite these tools having been in use for several years, they have only just begun to be recorded in a robust manner that will enable data analysis of the application by reason and duration. Because the delay they cause is localized to the airfield in the form of start up delay or extended taxi time, this delay data is not captured for official reporting. It therefore does not contribute to the total NATS attributable delay figure reported by NATS, and we are concerned that no process may exist to capture their application with respect to highlighting weaknesses in the network. The airline operators recognize that tactical tools can be useful and depending on the circumstances an appropriate option instead of regulation. Importantly the airline operators seek to distinguish between the use of these tools to manage late notice short term issues specific to a stand alone airfield and issues relating to airspace capacity (NATS and Non-NATS attributable). However, the use of tactical tools can, and does lead to a lower level of delay reported as NATS Attributable through the current regime, and we believe that further action need to be taken to ensure that wrong behaviours are not being incentivised as a result i.e. an increased use of tactical measures to alleviate the allocation of regulated delays. Therefore, we would seek the implementation of a metric measuring the impact of such tactical delays. To suggest that NERL have not had the time or means to develop measurement tools is a fallacy, as this subject has been under discussion for some considerable time. 8.33 Do consultees consider that it is reasonable to retain the same amount of money at risk in CP3 as in CP2 to encourage appropriate performance? We believe that it is reasonable to retain the same amount of money; however, this is dependent on the target regimes being set at a challenging level, unlike the basic measure through CP2. This was set a level which effectively guaranteed NERL bonuses on an annual basis – the target being set at 45 seconds per flight, whereas the reported outturn was 20-23 seconds in the first part of CP2 to 5.5 seconds in 2009. The CAA has stated that to a considerable degree the latter is explained by the reduction in traffic. It is interesting to note that at recent meetings including the OPA NERL have stated that it is not just traffic reductions which have helped to improve the outturn. We believe that the introduction of new technology such as the long awaited iFACTS should show further improvements particularly set against current traffic levels, which are not expected to recover to 2007 levels until 2013, and we would seek reassurance that such improvements are factored into any targets set for CP3. 8.37 Do consultees consider that the amount at risk should be equal for each of the three delay metrics T1, T2, T3 and potentially any SESII metric if it is additional to these? Firstly, this question automatically assumes that there will only be 3 delay metrics, we will argue this under our response to B38. However, assuming four delay metrics we would expect to see a sliding scale of bonuses, and penalties along the following lines:- Achievement of 1 Term = 20% Bonus, and possible 80% penalty Achievement of 2 Terms = 45% Bonus, and possible 55% penalty Achievement of 3 Terms = 70% Bonus, and possible 30% penalty Achievement of 4 Terms = 100% Bonus and 0 penalty This method provides a clear direction to manage all areas of the incentivisation program. 8.46 Do consultees consider the illustrative par values put forward during CCWG to be a reasonable basis for the service quality scheme in CP3? bmi’s responses in previous SIPs have highlighted the unrealistic nature of the delay target under CP2, and the non-incentivisation or measurement of the impact of Tactical Measures which may lead to driving the wrong behaviours causes serious concern about the setting of delay target values for CP3. In line with the earlier comments and NERL's statement that “formal proposals for Par values will be set out during 2010 as part of the CAA consultation in conjunction with the latest traffic forecasts and CAPEX and operating efficiency assumptions”, we would need to see the detailed assumptions and workings associated with any par value proposals prior to final responses in order to full assess the realistic nature of such proposals, and fully understand the methodology used in reaching the proposed targets, including the impact of capacity enhancers such as iFACTS during the CP3 period. Par Value Modulation bmi accept the principle of par value modulation; however, believe that there are flaws in the current proposed level of modulation. 1. The par value range quoted during the CCWG process, for example T1, and contained in NATS documentation as an illustrative table, gives a par value range (or dead zone) of between plus or minus 12.5 to 16.67%. This automatically gives a contingent allowance for certain levels of traffic variation over a significant range – up to 33% in the example quoted, and is seen as far too loose a measure, particularly if the regulator were to adopt a lenient target regime. 2. The modulation itself allows for further leeway in the scope of target measurement. In the NERL Delay Elasticity – Further Information requested by Customers at CCWG3 Sub-group meeting Reference: Action MSG98 Dated: 15 September 2009 document NERL have attempted to show the non-linear relationship in demand analysis with the highest r2 factor being exhibited by the Polynomial curve, and thus confirming that the shapes of the curves indicate that a steeper slope for the Par value modulation above base traffic growth is appropriate. We would not argue with this statement. However, the Par Value figures of +6.6 and -3.1 have been changed by NERL to figures of +8 and -4, due to, in their words, “a cautious approach”. This is a theme that is consistent throughout the CP3 process with NERL's cautious approach applying layer upon layer of safeguards to ensure that in probability terms NERL are highly unlikely to pay a penalty, and highly likely to receive a bonus. In this case with a combination of loose par value ranges and cautious par modulation. Further it should be noted that the figures are based on a 2007 Daily Traffic versus delays benchmark. At CCWG6 the NERL September Traffic Forecasts showed that flights peaked in 2007, and are not expected to return to this level until the end of 2012 into 2013. Coupled with a backdrop of increasing capacity for which the customers are being asked to pay significant amounts – for example – iFACTS is quoted as delivering an estimated 12% increase in overall LACC capacity during the period 2011-2016. EFD provides a 5% increase in capacity in TC Capacity from winter 2010/11. While we are aware that the level of delay increases as the capacity ceiling is reached we believe that the low levels of traffic forecast coupled with the capacity enhancements planned, mean that the benchmark used for CP3 is incorrect. Once again we would reiterate that any bonus/penalty mechanism must be based on realistic assumptions and these must be transparent to the operators. Par Value Range The customers would reiterate the statements made throughout this document, and captured in the CCWG process that while we agree with the principle of Par Value Ranges, the par value and the range must be set at realistic levels, unlike the average delay per flight target set for CP2. NATS has stated that “Firm proposals for Par Values cannot be set out before the terms of the price control (particularly related to Capex & Operating Efficiencies) and the final traffic forecast are known.” Therefore we must ensure that there is sufficient time within the process to analyse, understand, and agree the final Par Value Ranges proposed. Further, the mechanism must allow for challenges in this area supported by clear reasoning. 8.53 The CAA invites views on the proposal that some performance incentive (equivalent to two months of the 2012 allocation should be retained for the period of the Olympics. bmi agree with the CAA proposal as outline in paragraph 8.52 8.55 The CAA invites views on the relative benefits and risks of adverse consequences of introducing horizontal flight efficiency metric alone. bmi believe that an incentivised Environment/CO2 metric must be in place for CP3. This requirement is based on a number of factors, namely:- 1) The imposition of the Emissions Trading Scheme on the airline community ,which will have a major impact on airline costs, and 2) The impact NATS can have on Environmental efficiency through the effective use of the airspace, and by definition, the measurement of efficiency. As such we have had to invest significantly to provide data for ETS within a relatively small timescale, and it is simply unacceptable for NATS to argue that they will not be in a position to provide a meaningful measure in the timescale for CP3. However, we agree that the metric should not be based on horizontal flight efficiency alone, although this may for part of the SESII KPI process, as it does not reflect on the significant issues associated with Vertical Efficiency, and would therefore support the introduction of a combined, or combination of metrics. 8.59 The CAA invites comments on the scope for introducing a robust incentive mechanism for flight efficiency either from the beginning or during the course of CP3. We re-iterate our comments that an incentivised Environment/CO2 metric must be in place for CP3 as per our comments in 8.55. However, we recognise that such metrics must be robust and drive the right behaviour, and as such would be prepared to delay implementation during the course of CP3, as long as there were sufficient guarantees of a workable metric and associated roadmap timescales. 9. CAA SCRUTINY OF OPERATING COSTS 9.57 The CAA invites views on the preliminary assessment that available efficiencies relating to operating costs may already be captured in NERL’s plan See reply to 9.58. 9.58 Do consultees have suggestions for additional evidence on operating cost efficiency that should be considered? Employment & Back-Office Costs The concerns arising from the benchmarking studies highlight areas for review, and a business operating in a commercial environment would seek to address these areas to derive maximum benefit for customers and shareholders. We consider that the best forecasts of these planned efficiencies should be incorporated into the business plan: • Weekend ATCO manning Reductions in ATCO manning at the weekend at both Prestwick and Swanwick control centres (as has occurred at Manchester) We would note that this is also the case with night manning in which reductions have been made, but we believe there are further opportunities to reduce cost in this area without impacting service delivery. This appears not to have been highlighted in the consultant’s report. • Sickness Pay Adjustment of sickness pay to something more akin to that expected in the private sector. As levels of sickness are well below the average, this measure would not be expected to yield much, but is more about ensuring that potential liabilities are controlled. • Annual Entitlement We understand that it is unlikely that existing contracts can be amended , but for new entrants annual leave entitlement should be realigned to the market level. Savings in this area will be minimal given NERL’s downsizing, but nevertheless productivity of future staff can be increased by this measure. • IS costs LECG identified potential IS savings that could be introduced in CP3. We look forward to their inclusion in the CAA’s May 2010 report. • Facilities Management savings Savings of £2m are potentially available although LECG stated that realisation of these is not under NERL management control. We would like NERL to investigate how to unlock these savings and bring them to fruition, and for this to be incorporated in the CAA’s price proposal in May 2010. 2% Efficiency target not sufficient Private companies are currently engaged in superhuman efforts to reduce their costs. This involves hard decisions, including by way of example, restructurings, headcount reductions and restructuring of pension provisions. This is a direct response to the recession and unprecedented and challenging economic times. NERL’s proposed 2% reduction in operating costs is not of a magnitude comparable with what is happening elsewhere in the economy and is yet another example of their very risk averse approach. NERL has reacted differently to that of an archetypal private sector company We would contest the conclusion being drawn from the work by Helios and IDS of that there is little or no scope for amendments to salary levels. The evidence examined by the consultants naturally looked at historical evidence against the market average. The key salient point to make here is that the UK economy has seen marked salary adjustments (ranging from pay cuts, wage freezes or hourly reductions with less pay) since 2008. This has been a major contributory factor in keeping UK unemployment at 2.5m, rather than its projected 3m. Hence the market average used by IDS as a comparator has fallen in 2008 and 2009, yet we do not see equivalent evidence of pay reductions/freezes within NERL’s business plan. We would question whether NERL has reduced its salaries in real terms in line with non-air traffic related firms in the private sector. If the benchmarking was rerun for 2008 and 2009, it may show NERL in a worse light. bmi proposal NERL have proposed a 2% efficiency measure. It would be more beneficial to split the operating cost targeted efficiency reductions into two: • An efficiency target aimed at those opex costs over which NERL has a greater degree of control, of say 10%. • An efficiency target aimed at those opex costs where NERL has less control, or where there is less scope for reduction, for example ATCO controller pay, of say 2%. In this way, NERL is differentially targeted into removing cost from parts of the business, allowing more cost to be removed from those parts of the business where that opportunity exists. Pension problem bmi recognises NERL have downsized their operation, and propose to continue to do so throughout CP3, and we welcome the cost efficiencies emanating from this. However this good work is being outweighed by the pension cost increases which form part of the top level operating costs, and underlines the critical imperative of reducing pension liability (see our comments on this later). 9.66 The CAA invites views on the relationship between operating costs and traffic growth We would make the point that when NERL discuss reducing operating costs, they state that although overall traffic has fallen, the traffic at the daily peaks has not fallen, and as NERL have to cater for activity at the peaks, they would be unable to reduce operating costs. However, when it is proposed to reduce the capital spend programme, an alternative rationale is put forward that the any reduction is very risky as the ability to respond to any increased demand would be limited. Given that the majority of traffic increase would not be in the peaks (as airlines have not reduced peak traffic activity), a substantial part of any traffic increase would come from existing capacity, and this rationale should be questioned. As can be seen these two arguments stand in contradiction to one another. Either opex can be reduced in line with traffic, or the capital plan can be reduced to reflect that any traffic increase will not occur at the peaks – hence the risk that NERL attribute to traffic growth and the ability to respond to it is not there. This contradiction lies at the heart of the NERL concept of headroom – with opex, NERL state no headroom exists as the capacity is restrained by the daily peaks, but with capex the daily peaks are not mentioned, and NERL state they cannot risk decreasing the LTIP further without damaging capability to provide for any above-baseline increase in traffic (the daily peaks means increases in traffic above the baseline would be provided out of non-daily peak capacity). We would ask the CAA in their deliberations with NERL to ascertain the veracity of the peak daily rationale and to reflect the outcome in either a reduced capex plan or reduced opex costs in the pricing proposals in May 2010. 9.76 The CAA invites views on the appropriate treatment of additional opex items, including contingency Redundancy and relocation It is entirely reasonable that having engaged in cost cutting, that any one off associated costs are included within the price control. Opex contingency We are concerned that we should not allow NERL a risk free approach to cost cutting. Affording a level of contingency in the plan for the non achievement of efficiencies sends the wrong message to NERL, at best acting as a buffer for non-performance, at worst acting as a disincentive to push ahead with the efficiencies should they prove more difficult to achieve. We recognise the need for a type of fund to deal with costs that are non- controllable by NERL such as insurance and business rates as quoted, but would suggest the following: • Reduction of the contingency to remove the disincentive effect • Automatic reconciliation within the SIP process so that airlines are made aware of drawdown of the remaining fund, and to provide airlines with justifications • CAA to engage in post-ante checks on whether the use of contingency has been ‘fit for purpose’ We would encourage the CAA to ascertain the exact nature of why the contingency has increased from CP2’s £21m to CP3’s £70m. We see no reason for an increase of this magnitude. 9.81 The CAA invites views in principle on whether it would be appropriate to include a RIM in CP3 We are in principle in agreement with the RIM, however it is not clear to bmi what is included in the RIM in CP2 (as we are still a reasonable way from its completion). This is something which could be highlighted in the SIP process. As NERL is already incentivised to reduce opex to the level stipulated in the settlement, if NERL did not manage to generate these savings in the last 2-3 years of a control period, then it would bear the cost in that control period, but the airlines would then have a higher base opex cost at the start of the following control period. We would not want a case whereby NERL receive a RIM reward through engaging in cost saving initiatives they would have engaged in anyway. However we would support further efforts to examine whether this has worked in CP2 and look forward to the outcome of the CAA’s review in May 2010. 10. CAA SCRUTINY OF PENSION COSTS 10.36 Has the CAA correctly identified the issues on the design of the end-of-period true up mechanism? See response to question 10.37. 10.37 The CAA invites views on the extent to which NERL’s response to rising pension costs has been appropriate given the constraints Have NERL have done as much as they can? NERL has implemented a limited number of measures to contain the pension liability including the cap on future pensionable pay increases, the introduction of SMART pensions and the closure of the Defined Benefit scheme to new entrants. bmi welcomes these actions. We would however assert that in spite of these measures, NERL has not done enough to limit the risks and costs of its pension liabilities. We make the following points regarding NERL’s inactivity on this point: • PPP Obligations Maintaining the DB pension scheme in its current format is putting an unsustainable burden on airlines as illustrated by the increase in the unit rate by £6.13 over CP3. On the other hand, the rush of private sector companies closing their DB schemes is indicative of enterprises reducing risks & liabilities to manageable levels. NERL cites the obligations outlined in the ‘Trust Deed & Rules’ which commit the Airline Group to DB salary provision. In order to ensure that the cost and quality of air traffic services is optimised, we ask the CAA to review, with a view to changing the obligations imposed under the PPP scheme. Such structural change, whilst immensely difficult, must be addressed if the industry is not to be competitively disadvantaged. We note the UK Treasury has sought advice on whether it is under a legal obligation to fund in its entirety its own public sector pension commitments. As the government is looking at the ability of being able to fund its own liabilities, the same is required here. We are not recommending that prior funding is questioned, simply that future funding of the pension scheme for existing members be reconsidered. NERL has already made small changes to the terms and conditions of the PPP, and so the precedent has already been set. • Final Salary Scheme produces sub-optimal market outcome The cost of the final salary scheme adds £6.13 to the unit rate in CP3. Airlines will find it more costly to operate in UK airspace and price elasticity of demand dictates demand will reduce. If improved safety or quality of service was received in return for this price increase, then demand would not be curtailed as the airlines would be receiving a different, improved product for the increased price. However, the final salary scheme does not do this, simply adding cost to the same service. Ceteris paribus, demand for its services will fall. In fact, the refusal to consider other pension options undermines, to a greater or lesser extent, NERL achieving all 8 of its key strategic targets outlined in its business plan. This is not in the interests of the vast majority of NERL’s stakeholders, namely the airlines, the passengers, and the shareholders. • Impact on Investment Grade Issuer Credit Rating A key condition of NERL’s licence relates to NERL’s obligation as licensee to use ‘all reasonable endeavours to maintain at all times an investment grade issuer credit rating’. Allowing any element of risk or cost to have an uncontrollable impact on demand, such as is happening with pension costs puts NERL at odds with the terms of its licence. Current investors/prospective investors will see NERL’s cost base as having a detrimental impact on returns, and would either demand a higher return, which would itself have an adverse impact on demand, or simply avail of higher returns elsewhere. • Standard commercial organisation reaction to risk As pension costs are a material part of the operating costs of NERL, the question the CAA asks of operating costs should be addressed in this context. ‘Whether NERL’s planned operating cost reductions are consistent with those which an efficient and economic company would propose’ When this question is targeted at pension costs we would point to the various measures taken by commercial enterprises to reduce their pension liabilities: Closure of DB schemes to new entrants SMART pensions Increased employee contributions Reduced rate of accrual Closure of final salary schemes to existing members We would expect NERL to react in a similar commercial manner. NERL has implemented the top two measures, but not the others, and here it differs from the reactions of the archetypal private sector company. To ensure convergence, regulation should seek to replicate competitive market conditions. • Potential Options Option 1: RPI less X mechanism We would concur that shareholders are likely to demand a higher return and that the extra cost will be borne by users either through increased user charges, or a higher cost of capital. Option 2: 90/10 Pass-through mechanism We concur that shareholders are highly likely to request a higher rate of return in view of increased cost/lower profits from this mechanism. Options 3 & 4 Option 4 provides a little more incentive for NERL to drive down on actuarial assumptions as it will have to meet any adverse cash flow implication vis-à-vis option 3. However any potential adverse cash flow situation would again be met by shareholders demanding a higher cost of capital, negating any value for money benefit for users. All 4 options support bmi’s request to limit the source of the risk rather than discussing how the burden should be allocated to customers. In the absence of a willingness to re-examine the uncontrollable nature of the pension problem, we would expect a fundamental review of how the £6.13 increase in the unit rate attributable to the final salary pension scheme in CP3 can be removed elsewhere from NERL’s proposals. 10.49 Do consultees agree with the CAA’s preliminary assessment that NERL’s pension costs have been reasonably incurred? Efficient Management of Pension Scheme Assets The proposed ‘stewardship test’ to initiate a process whereby the regulator is assured of NERL’s pension scheme assets being efficiently managed, whilst better than nothing, does not address the main problem of risk of the liability growing uncontrollably in size. bmi believes that airlines should not pay more for pensions in CP3 than we did/are doing in CP2. If pension liabilities increase in the future (for example in the forthcoming December pensions review), then it is NERL’s responsibility to manage those increases and take corrective action. We would point to the number of commercial pension schemes that have closed and in comparison NERL was very slow to close its own scheme to new entrants. bmi closed its DB scheme to new entrants in 2001, Barclays Bank in 1997, Lloyds TSB in 2003. Looking at other regulated entities, BAA closed its scheme in 2007, so NATS were even late in comparison to its peers in the regulated sector. 10.55 The CAA invites views at a general level on the most appropriate profiling of deficit repair programmes bmi would propose a 15 year deficit recovery plan for its existing deficit on the basis that NERL is a monopoly and enjoys, to a level, guaranteed income, which ensures that it will recover this money at a certain point in time. 11. CAA SCRUTINY OF CAPITAL EXPENDITURE 11.48 The CAA invites views on whether NERL’s capex performance in CP2 has been undertaken in an efficient & economic manner. Additional £33m capital spend over and above that awarded in CP2 Regulatory policy allows for an ex post adjustment mechanism which permits the full un-depreciated cost of investment to be recovered if it’s greater than projected spend. We would make the following points: • Clear requirement for a governance process / improved SIP process The additional £33m investment is not something that we were aware of, and to us highlights a weakness in the SIP process concerning governance that we will expand on in section 11.58. bmi has never consented to additional spend over and above that in CP2. On learning of this in the consultation material, we have asked the question of NERL, and have learnt that this was communicated in SIP2010, slides 40-45 inclusive. However, for such an important issue, this is surely not enough. To emphasise this point, the additional capex over and above that awarded in the regulatory settlement is outlined as: • RPI This is allowed for in the regulatory structure • £3.4m SESAR early enablers On this subject bmi’s position to NERL was made clear at the time: ‘We must stress that the current economic climate has placed a tremendous burden on the airline industry, and that we would not expect to see any cost increases as a result of the implementation of the early deliverables as these are due for implementation within the current CP2 regime i.e. prior to 2010.’ We assume that approval of this must have been made on a majority basis, although we were not made aware of the result or the process through which the outcome was reached! This is a clear failure of governance and consultation and needs to be addressed • Additional capex required to deliver the LTIP This refers to slide 83 in SIP2007, however our SIP2007 documentation only goes up to slide 73. Logica themselves highlight the difficulty in tracking changes in the SIP process. This is something that could be factored into Logica’s proposals in 11.58 for improving the SIP process during CP3 (see below). We question whether this investment should be allowed into the RAB, on the basis that it was not made clear to bmi that this required additional funds, and a proper consultation process was not followed. A much improved and transparent SIP process is urgently required. • iFACTS spending The IFACTS programme is clearly out of control and we would have expected a new cost/benefit study to have been undertaken before we agreed to proceed. • Risk & Contingency/ Savings made in other areas NERL’s justification of the capex increase over and above that permitted in the CP2 settlement, is that it is due to changes in the operating environment, service priorities and procurement strategy. But we would have reasonably expected that these factors would have been covered by the project specific risk and contingency provision, or certainly in the general company wide risk & contingency fund. We respectfully suggest that NERL should be expected to fund the overspend from their own resources. 11.58 The CAA invites views on whether Logica’s proposal for enhanced capex reporting is likely to be beneficial in practice including whether any modifications to the proposal would further improve this approach We welcome the approach as set out by Logica as it clearly represents an improvement on the current SIP process. However the proposals would be considerably improved if Logica’s proposals were augmented by the following: • Business Cases Alongside the capex plan, airlines would like to see sight of the business cases for each project. NERL already have a few project business cases on its website, however these are restricted to a select few and have not included subsequent amendments. The detail provided on the website for these business cases is at an appropriate level of granularity which, at around 2 pages, allows ample opportunity to present project justification, i.e. • Financial benefits - NPV • Safety benefits • Operational/Service benefits • Asset replacement benefits • Capacity benefits • Change Control Process required Any changes to capex plans would have a change in business case presented to NERL’s board. We would concur with Logica’s finding that changes in capex plans are difficult to track, and provision of amendments to business cases would ameliorate this. Compulsory provision of business cases of projects above a certain value would improve transparency and consultation. • Governance Process required A much needed improvement is for airline approval for changes in capex to cover both operational and finance issues. Currently NERL communication is for these approvals to be operationally approved – NERL ask whether operationally airlines want a certain capability, and airlines’ operational departments usually concur with this. However this does not imply an overall business approval by the airlines. The absence of business cases is indicative of the lack of robustness in this part of the process, alongside the issue outlined in the first bullet point of our response to section 11.48 relating to whether additional investments were covered by existing regulatory awarded funds. • SIP committee Referring to our comments in reply to section 11.48 there is a clear urgent need for the SIP Committee to put forward the business cases (as outlined above) and to justify these to the finance and operational departments of airlines. • Transparency of how NERL brings together differing opinions The process through which NERL decide on how to proceed when confronted with a difference of airline opinion is currently not transparent. We note that other regulated entities in similar positions seek to attain consensus and that this process is transparent. • Justification for drawdown from risk and contingency provision See comments to question 11.59 pertaining to ‘further comments on risk and contingency’ below. 11.59 Do consultees consider that NERL’s November 2009 Business Plan sets out an appropriate capital investment plan and cost for CP3? Our comments on NERL’s capex plan are as follows: Risk averse capex plan due to reduced traffic NERL asserts its revised CP3 Business Plan has a higher degree of risk attached to it due to airline requests during CCWG for a reduction in the capex plan. However, due to the generous headroom in traffic capacity afforded by the collapse in traffic in 2008 and 2009 (and a forecast which only sees 2007 levels being reached by c. 2013), there is a considerable degree of freedom for NERL to react to increased demand without increased investment. This can be illustrated by a contradiction in NERL’s response (paragraph 9.44) in that NERL assert they cannot reduce their operating or capex costs anymore than they have done as this is constrained by the limit of the twice daily peaks which have remained largely unchanged since the advent of the downturn. The converse then is also true, that an increase in traffic would happen outside of the peaks, and this would consequently not provide capacity problems for NERL as the their existing capability is geared towards capacity at the two daily peaks. However NERL state that the capex plan is risky because of the inability to react to a sudden increase in traffic. By NERL’s own logic there is sufficient existing capacity to render the capex plan relatively risk averse,. SESAR linkage to NERL capex plan – capex plan is risk averse There is a realistic chance of slippage to the SESAR timetable. This is partly driven by other European ANSPs having fallen behind in their own schedule for SESAR compliance. As a consequence NERL has a reducing need to adhere to the existing SESAR timetable. In terms of the investment programme this would imply a delay. By its own admission, NERL states this is a risk to the delivery of its capex programme. A relaxation in the SESAR deadline will help in reducing the resource required, and hence for the amount required in the capex plan – this would shift to CP4. Level of Risk & Contingency provision (1) Risk & contingency is at a level which affords a degree of comfort we do not have in the airline industry. Some sustainment projects (for example Information Solutions) have risk & contingency percentages in excess of 10% which is very generous and very risk averse. As a result we would question Logica’s conclusion that NERL’s revised business case has too low a risk and contingency provision. We suspect their conclusion stems from their analysis of the iFACTS programme which Logica had concluded was under-budgeted due an under-estimation of project complexities. Consequently it is recommending a much higher risk & contingency provision for similar software projects for CP3. However, in coming to this conclusion, several points have been missed: 1) Complexity only part of the reason for iFACTS overrunning Complexity was only part of the reason for the overrunning and late delivery of iFACTS. There were other substantive reasons including: Early user acceptance testing led to various improvements/changes in the scope of the project – we were not explicitly made aware of the cost impact of these specific changes. Scope creep – examples include processor upgrades and changes to failure modes. A lack of proper budget planning – for example ATSA redundancy costs & ATCO training costs were not included in the original scope. We would not expect that these would be repeated. 2) Much improved NERL project delivery management process NERL’s project delivery management process is now much improved in comparison to CP2. It cites 33 out of its 34 CP2 projects are now on track. In addition the supplier management process NERL has put in place will also contribute to de-risking projects, something not at their disposal in CP2. To the extent that iFACTS was badly budgeted, NERL have now safeguarded through its much improved project management capability against the probability of an error of the same magnitude happening in future. 3) Capex plan represents ‘a significant challenge’ Logica asserts the capex plan will present a very significant challenge for NERL, and infers that their risk and contingency needs to rise as a result. bmi would counter that a significant challenge represents exactly what airline customers want – value for money from capital investment. A very significant challenge itself is a sign of planned efficient capital investment. If it didn’t represent a challenge to NERL, this would raise concerns around NERL’s capital efficiency. 4) Practice in peer regulated industries We would point to other regulated industries having cost efficiency targets built in to their capital investment programmes as a way of locking in efficiency. These locked in targets are challenging but ensure the customer receives efficient capital investment. It is an idea that could be considered in the CAA’s capex considerations. 5) Reduced control period removes later relatively unknown costs The control period has been reduced from five years to four, and consequently the fifth year of more undefined costs has been removed. It would be reasonable to expect a consequent substantial reduction in the amount for risk & contingency. Level of Risk & Contingency provision (2) We would like to highlight the extent of some of the provisions being presented in the business case. Project complexity is being cited as the reason for the high level of risk and contingency within most projects within CP3 of which NATS Common Workstation is one such example. Project complexity is tackled by appropriate resourcing of development time, usually through contractors. The table below demonstrates how the size of the provision translates into contractor man days. Impact of risk and contingency on consultancy man-hours £ Comments Total project cost 130,000,000 Per original draft business plan Project Risk 19,000,000 Per original draft business plan Project cost less risk 111,000,000 Risk provision 17.1% CP3 risk per annum 9,500,000 CP3 risk per day 38,000 Assumes 250 working days in the year, and that contractors do not work weekends People working full time on NATS 38 Assumes a contractor Common Workstation per day daily rate of £1,000 per day This assumes that should NERL require to drawdown from the contingency fund, the contingency would allow for 38 contractors to work every working day for two years at a rate of £1,000 per day. If they worked every day (i.e. including weekends), this would be reduced to 26 contractors per day working flat out. This also assumes that the risk & contingency would need to be used from day one, which is also highly unlikely, and so would increase the number yet more. We conclude that the risk and contingency provisions are very risk averse. They are either too high or the cost of capital should be reduced to account for the risk averse nature of the business. Risk and contingency ring-fencing We propose the risk and contingency be ring-fenced, and that as and when NERL draw down from it, that the rationale for this be justified & demonstrated to the airlines as part of the improved SIP capex process outlined by Logica (see response to section 11.58 above). As part of this we would expect staged milestones, so that as projects progress further to completion, the risk & contingency provision would reduce as project variables would decline in uncertainty. At these staged milestones we would expect any re-planning, de-scoping or scope creep to be brought to the fore and highlighted as being reasons for drawdown from the risk provision. Essentially we are asking for a very transparent risk and contingency provision to be effectively communicated, and for airlines to approve drawdown. IS Provision During the CCWG process it was elicited that a large swathe of the capital programme is integrated, and a change to one part of the programme would necessitate by default changes to other parts of the programme. However, one programme stood in relative isolation – the IS Solutions programme. In the investment sub-group an action requested from NERL was to look at potential savings from this project. Certainly the £1.5m annual efficiency from a £30m capital investment would not yield a positive NPV as it would take 20 years for this to occur – yet the average life of IT assets is something in the region of 3-4 years. The project IS solutions was provision of state of the art, server in the sky IT provision. Airlines contended that either by using existing IT infrastructure that would continue to do the job, or by moving the timescale to the right, could yield savings. Its standalone nature would facilitate this. The reduction of the capex plan from £650m to £637m is due to pension accounting adjustments, so there has been no adjustment to the IS solutions project. We would like this project to be justified, and any savings returned to the plan. 12. REGULATORY ASSET BASE AND DEPRECIATION 12.13 The CAA invites views on the depreciation lives used by NERL in its depreciation calculation and the CAA’s initial assessment, if the depreciation charge is appropriate, that NERL’s method is reasonable. bmi considers the depreciation lives appropriate, and therefore the method reasonable. 13. COST OF CAPITAL 13.10 Do consultees agree that the CAA should continue to use a pre- tax, real cost of capital where the uplift for tax is based on an effective rate? Yes 13.15 Do consultees consider that it is appropriate for the CAA to continue with its approach of using CAPM as the primary tool to estimate the cost of equity with high level cross checks to other methods as appropriate? Yes 13.19 Has the CAA identified reasons for, and issues around, testing financeability? As long as the CAA ensures that cost of capital assumptions link in with the metrics required for maintaining an investment grade credit rating, all issues have been covered. Given that NERL has a guarantee of cost recovery for a majority of its costs, we do not see the maintenance of the investment grade credit rating being a problem. 13.29 Has Europe Economics identified all material considerations for the cost of capital? See response to question 13.29. 13.44 The CAA invites views on the cost of capital and the CAA’s initial reflections of the cost of capital Reduced cost of equity We would expect, for a number of reasons, that the equity beta element be significantly lower, reflecting in a lower cost of capital, due the following: • Demand risk reduced Volume sharing arrangement provides additional security to NERL. • Capex risk reduced Any capex overspends are paid for by the airlines. Yes we have recommended that the capex overspend in CP2 not be added to the RAB, but improved communication in the SIP process would preclude this from happening in CP3, and hence there would be no impact on the cost of capital in CP3. • Risk averse business plan The completely risk averse nature of the NERL business plan transfers risk to the airlines from NERL. • Opex risk reduced due pass-through mechanisms This is reduced due two pass-through mechanisms: 1) The proposed CP3 pension pass-through mechanism hands the risk in its entirety to airlines of the single most uncontrollable element of opex (or that NERL refuses to control). The remaining part of opex is declining and represents 2) The bad debt allowance pass through reduces the operating cost risk to NERL yet further. All these pass-through arrangements ensure that airlines take the risk, and we would expect to see a reduced beta feeding into a reduced WACC to reflect these factors. • Opex cost a reducing element of total revenue Taking the pension element out of opex cost, as a percentage of NERL revenue, it is predicted to fall from c.64% in CP2 to c.49% in CP3. The pricing proposals moves a substantive degree of risk away from NERL in all areas of its business – on the demand side, and in its cost base, ensuring risk is parked with the airlines. Consequently we would expect the cost of equity element of the WACC to be low. Effective rate of taxation We would ask the CAA to examine the marked increase in the effective rate of taxation from 11% to 35%. This has been explained through capital allowances being higher than depreciation in CP2 and vice versa in CP3. We believe this needs validation as PWC’s derivation of the CP2 11.1% shows a wildly fluctuating tax charge with a 27% tax rate in 06/07, followed by 2 years of a negative tax charges with a large 44% tax charge at the very end of CP2. These fluctuations do not, at a first glance anyway, appear to agree with depreciation being greater than capital allowances. We would ask the CAA to validate the explanation and the numbers. 13.45 Should the CAA estimate the value of the tax uplift in pre-tax WACC approach in a way that makes the monetary tax allowance the same as if the CAA took a post-tax WACC approach and explicitly included a tax allowance? They should both reach the same value and so we are indifferent. ANNEX B: SERVICE QUALITY AND ENVIRONMENTAL PERFORMANCE B24 Do consultees consider it is appropriate not to exclude NERL equipment failures, which cause the T3 thresholds to be reached from the T2 measure? bmi believe it is appropriate not to exclude NERL equipment failures, which cause the T3 thresholds to be reached from the T2 measure. B38 Do consultees agree that there may not be further merit in having a T4 delay measure in addition to the T1, T2, and T3 metrics? At CCWG 3 NERL set out its proposals for three delay terms to be incentivised from the start of CP3, and the development of Environment Metrics for future incentivisation. These were discussed at CCWG3 and CCWG5, and at two sub-groups, and as a result NERL reviewed and updated its position. This response sets out bmi’s view of the appropriateness of the delay metrics suggested, and any requirements for inclusion in the term as part of CP3. There is some concern that unrealistic targets as set out in CP2 are treated by NATS as a method of extracting further bonus payments from the operators, and do not necessarily reflect the impact NERL have had on their customers. Delay Metrics NERL set out proposals for three delay terms as follows:- T1 – Average Delay – expressed as the “Average Delay per Flight”. NERL state that T1 retains a high-level single measure of overall NERL performance (needed for a strategic view and for future consistency with SES II performance regime), and bmi have no issue with accepting this as a measure subject to certain conditions as discussed below. bmi feel that on its own this term is too simplistic, and does not adequately reflect the level of delays experienced by those flights that are subject to NERL attributable delay. In other words it is diluted by out of area traffic which is not, and cannot be, subjected to NERL attributable delay. For example, in a static traffic, capacity, and delay situation, a change in the balance between out of area traffic and in area traffic will lead to an overall reduction of “Average Delay per Flight”. In order to rectify this situation the airline community proposed the T4 term, defined as the Average Delay per Delayable Flight. We believe that this term eliminates the dilution of overall delay by out of area traffic and possible distortions to give a more realistic view of the impact of NERL attributable ATFM delay on those carriers that are impacted. In its own paper – CP3 Service Quality Performance Metrics – Delay Performance – Summary of NERL Position – NERL has shown how out of area traffic grew year on year between 2006 and 2008. NERL has also stated in the same paper that “it would be neutral to its use alongside the other 3 metrics, although NERL does not consider it adds any value beyond T1 and T2.” In view of its neutrality, and the strong requirement from airlines for the inclusion of T4, and the apparent parallels between the two measures bmi would like to see both measures included in the T1 Term i.e. the new T1 Term would become 1a – Average Delay per Flight, and 1b – Average Delay per Delayable Flight. The payment of any bonus or penalty has been outlined in earlier responses. T2 – Impact Score NERL set out this impact score as “the sum of weighted NERL NATS Attributable planned pre-departure ATFM Delays divided by the count of all NERL chargeable flights” Further, the Impact Term also sets out exclusions – delays caused by NERL equipment causes (cause code TE82 which reach the T3 thresholds.) In principle bmi support the inclusion of the Impact term, but not the exclusions, but with one modification, and certain conditions. The Impact term is an attempt to drive appropriate behaviours, and give NERL a clear focus on what is important to the customer i.e. a higher weighting applied to early morning, or long delay flights – that is those that have maximum impact on the customer. However, the impact of such NERL attributable delays is felt exclusively by the ‘in-area traffic’, and has no impact on ‘out of area traffic’, and as such the definition of the term should be modified to show the level of impact on those it affects. Therefore, the term should be defined as:- Impact Score = Sum of Weighted NERL NATS Attributable planned pre-departure ATFM delays The count of all NERL Delayable Flights This provides a true impact score. Therefore, this definition of the T2 impact score would be accepted by bmi. T3 Variability Score bmi accepts the principle of T3, although our comments in previous sections on the need for a realistic target still stand. However, there are some concerns with the Exclusions, as follows:- NERL states that “Delays associated with temporary capacity reductions during the bedding down period following implementation of service enhancing investments and operational changes. These would be expected to be limited and relate to a relatively small number of events, e.g. 1-2 per year. The specific durations and impact would be set in the implementation plan following consultation with customers. The exemption does not include any service impacts prior to implementation.” The concerns here are that NERL may be conservative in its implementation plan impact analysis and that as the final arbiter of delay attribution, may be able to offset normal delay measures. Secondly, what mechanism is in place to ensure that a) the consultation on impact is effective, and b) in the event of a non-agreement between the stakeholders on the impact what is the reconciliation method? Further NERL states “it is proposed that the Variability term also exclude recovery periods from abnormal situations that are not attributable to NERL, e.g. 9/11, other ANSP technical problems or strikes, due to their potential to cause temporary imbalances in capacity and demand leading to excess delays.” While we understand the mitigation for ‘force majeure’ circumstances such as 9/11, the exclusion of other ANSP technical problems or strikes is problematical in that the definition is subjective. NATS would effectively be the arbiter of whether such a problem is material or not. Therefore, there would be no transparency to the customer, and no method of determining when such measures had been excluded, and as such this is not acceptable.
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