NATS obtains its income by charging airlines that fly through UK airspace. The (internationally agreed) formula is based on weight and distance flown. (Examples: 747 from Heathrow to New York will pay NATS around £550, but a 737 from Luton to Paris will pay about £100.)
The rate of charge did not always cover the full cost - in the 1970s the organisation lost £100 million in one year alone, but the Thatcher Govt imposed full cost recovery from the early 1980s.
Pre-PPP, the only source of investment funds (for new radars, Swanwick Centre etc) was the Public Sector Borrowing Requirement (PSBR), so NATS had to fight with schools, hospitals, roads etc even though all our borrowing had to be repaid with interest! Funding decisions were always slow - even refusals (i.e for the New Scottish Centre) took up to five years!
In the 1990s, NATS was forced into two PFI developments - for NSC and a new Flight Data Processing System. Both these came to nothing and NATS had to pay substantial sums (of £55m and £40m respectively) to the contractors, even though it had received nothing.
In the run-up to the PPP, the CAA was given powers to control NATS charges. With forecasts showing strong continuous growth, CAA imposed an RPI-x price cap that required significant reductions each year for five years (to be offset by economies of scale...).
The Govt received £765m from the Airline Group for its share of NATS, but it had allowed the Group to borrow £700 million of that, so immediately on being PPP'd, NATS was saddled with this debt and its interest payments.
Because the charging formula is weight & distance biased, NATS derived significant income from transatlantic flights (including overflights to/from Europe and Scandinavia). 14% of flights generated over 40% of income.
The collapse of traffic (especially transatlantic) after 9/11 left NATS facing an estimated £230m revenue shortfall over four years, and the banks froze a promised £1bn of investment funding.
The financial restructuring. CAA was persuaded (by March 2003) to relax the price cap to RPI-2, (from -4 to -5) and the existing bank debt was restructured to reduce interest payments.
Also in March 2003, the Govt gave back £65m, and BAA plc bought a 4% share in NATS from the Airline Group for a further £65m.
To restore the investment funding, NATS launched a £600m bond issue in August and a £346m loan facility in October. Financial restructuring now completed.
