NATS: No take off
The UK's largest PPP deal to date is on hold. NATS' £1.45 billion
was due to launch syndication in the first week of October.
However, in light of recent crises in the aviation industry, lead
arrangers Abbey National, Bank of America, Barclays Capital and
Halifax have decided to delay.
The deal has been the subject of considerable controversy since its inception. During the government's winning 1997 election campaign, it pledged that the National Air Traffic System (NATS) would not be up for sale. In a policy u-turn, however, it now claims that partial privatisation is the best route to improving efficiency and capacity. Not everyone has been convinced. Opponents voice concerns that commercial interests could compromise safety, pointing to failings of the privatised rail industry.
Proponents insist that such parallels are not valid. Unlike the rail network, the air space is only being partially privatised ? 46% passed to the winning bidder on 27 July 2001. Adjusted voting rights give it operational control. The government has retained 49% and the remaining 5% is held by an employee trust. Although it is majority owned by the private sector, the public remains the single largest shareholder. The government is represented on the board through three non-executive partnership directors.
Industry worker unions were appeased somewhat when the government announced in March that The Airline Group (TAG) had won the tender. Strike action had been threatened if the decision had swung in favour of the main competitor, Nimbus, a Serco-led consortium.
TAG is made up of seven airlines; British Airways, Virgin Atlantic, Virgin, British Midlands, Britannia, Monarch, easyJet and Airtours. The major attraction for unions is that TAG has pledged to run NATS on a not-for-profit basis. Since it is comprised of airlines, TAG will benefit commercially simply by improving the system. Although this is clearly a benefit and has appeased many workers, a source involved in the deal believes that it would have been too awkward for the government to award the tender on the basis of anything other than best price.
The final price tag, negotiated some months ago, was £800 million. However, completion of the deal was delayed until July 27 after a discovery that NATS' 2001 revenues were £15 million short of projections. With an annual turnover of £500 million, NATS had been expected to grow by around 6% a year. This figure currently stands at only 3%. Explanations include US economic downturn and tourists avoiding the UK over the summer because of foot-and-mouth. In light of this, TAG demanded a discount. An agreement was reached whereby the consortium paid £765 million up front, with the balance deferred.
If investor confidence in the aviation industry was shaky over the summer, it has plummeted to an all time low following the New York crashes on September 11. It is the reverberations of this that are holding back general syndication. Given that some 40% of NATS business depends on transatlantic flights, the effects of a US slow down would be felt hard.
?It is too soon to say whether we are facing a long term downturn,? says one insider. ?Obviously, if that is the case, this deal becomes a far less attractive investment.? But indications suggest that people do not think this. The strength of the world economy and the airline industry are interlinked, but there has been a steady growth in global aircraft volume in recent decades. The current dip is not likely to affect this general trend. Rumour has it that syndication could be held off until January, when forecasts will be easier to predict.
Initial interest from bankers was certainly alleged to be very strong. So much so, in fact, that lead arrangers abandoned plans for a senior syndication, stating that they will raise the whole amount in one stage. It is fully underwritten already and the fact that four major institutions are willing to take on a deal of this size should inspire a level of confidence. Helios, as technical adviser to the banks, carried out independent forecasting of air traffic volumes.
The loan takes the form of one 20-year term loan. It has been stated that pricing is well in excess of any prior PFI/PPP deals. However, this is put down to the size and scale of the deal, rather than any real risks. ?High margins are always needed to close benchmark projects,? points out one banker. If investor confidence in aviation does not improve, it is possible that syndicating banks might demand that margins are pushed even higher. It is believed that the deal is based on an asset base model, stipulating that charges to airlines will increase if capacity drops. This should provide comfort for potential lenders.
The £1.45 billion covers £800 million for acquisition, with the remainder to be invested in NATS over a 10 year period. A key component is a pledge to get the much delayed control centre at Shadwick on its feet. The £700 million facility will take over en-route traffic. It is currently five years behind schedule and more than £200 million over budget but NATS has set a January 27 2002 deadline for making it operational. Half of each employee's allocation of shares is being held back until this is fulfilled.
Opponents and proponents alike will watch this project closely. It is a first of its kind in a number of respects. Many other European countries could follow suit in partial privatisation of air traffic if it proves to be a success. It is the nature of the partnership that could become a template for projects of all size and nature, though. The fact that the government retains a considerable stake softens the blow of privatisation. But the aspect that may appeal to public conscience most is that the private consortium is not directly making a profit from the investment. It is only by genuinely improving the service that they stand to gain.
The deal has been the subject of considerable controversy since its inception. During the government's winning 1997 election campaign, it pledged that the National Air Traffic System (NATS) would not be up for sale. In a policy u-turn, however, it now claims that partial privatisation is the best route to improving efficiency and capacity. Not everyone has been convinced. Opponents voice concerns that commercial interests could compromise safety, pointing to failings of the privatised rail industry.
Proponents insist that such parallels are not valid. Unlike the rail network, the air space is only being partially privatised ? 46% passed to the winning bidder on 27 July 2001. Adjusted voting rights give it operational control. The government has retained 49% and the remaining 5% is held by an employee trust. Although it is majority owned by the private sector, the public remains the single largest shareholder. The government is represented on the board through three non-executive partnership directors.
Industry worker unions were appeased somewhat when the government announced in March that The Airline Group (TAG) had won the tender. Strike action had been threatened if the decision had swung in favour of the main competitor, Nimbus, a Serco-led consortium.
TAG is made up of seven airlines; British Airways, Virgin Atlantic, Virgin, British Midlands, Britannia, Monarch, easyJet and Airtours. The major attraction for unions is that TAG has pledged to run NATS on a not-for-profit basis. Since it is comprised of airlines, TAG will benefit commercially simply by improving the system. Although this is clearly a benefit and has appeased many workers, a source involved in the deal believes that it would have been too awkward for the government to award the tender on the basis of anything other than best price.
The final price tag, negotiated some months ago, was £800 million. However, completion of the deal was delayed until July 27 after a discovery that NATS' 2001 revenues were £15 million short of projections. With an annual turnover of £500 million, NATS had been expected to grow by around 6% a year. This figure currently stands at only 3%. Explanations include US economic downturn and tourists avoiding the UK over the summer because of foot-and-mouth. In light of this, TAG demanded a discount. An agreement was reached whereby the consortium paid £765 million up front, with the balance deferred.
If investor confidence in the aviation industry was shaky over the summer, it has plummeted to an all time low following the New York crashes on September 11. It is the reverberations of this that are holding back general syndication. Given that some 40% of NATS business depends on transatlantic flights, the effects of a US slow down would be felt hard.
?It is too soon to say whether we are facing a long term downturn,? says one insider. ?Obviously, if that is the case, this deal becomes a far less attractive investment.? But indications suggest that people do not think this. The strength of the world economy and the airline industry are interlinked, but there has been a steady growth in global aircraft volume in recent decades. The current dip is not likely to affect this general trend. Rumour has it that syndication could be held off until January, when forecasts will be easier to predict.
Initial interest from bankers was certainly alleged to be very strong. So much so, in fact, that lead arrangers abandoned plans for a senior syndication, stating that they will raise the whole amount in one stage. It is fully underwritten already and the fact that four major institutions are willing to take on a deal of this size should inspire a level of confidence. Helios, as technical adviser to the banks, carried out independent forecasting of air traffic volumes.
The loan takes the form of one 20-year term loan. It has been stated that pricing is well in excess of any prior PFI/PPP deals. However, this is put down to the size and scale of the deal, rather than any real risks. ?High margins are always needed to close benchmark projects,? points out one banker. If investor confidence in aviation does not improve, it is possible that syndicating banks might demand that margins are pushed even higher. It is believed that the deal is based on an asset base model, stipulating that charges to airlines will increase if capacity drops. This should provide comfort for potential lenders.
The £1.45 billion covers £800 million for acquisition, with the remainder to be invested in NATS over a 10 year period. A key component is a pledge to get the much delayed control centre at Shadwick on its feet. The £700 million facility will take over en-route traffic. It is currently five years behind schedule and more than £200 million over budget but NATS has set a January 27 2002 deadline for making it operational. Half of each employee's allocation of shares is being held back until this is fulfilled.
Opponents and proponents alike will watch this project closely. It is a first of its kind in a number of respects. Many other European countries could follow suit in partial privatisation of air traffic if it proves to be a success. It is the nature of the partnership that could become a template for projects of all size and nature, though. The fact that the government retains a considerable stake softens the blow of privatisation. But the aspect that may appeal to public conscience most is that the private consortium is not directly making a profit from the investment. It is only by genuinely improving the service that they stand to gain.
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