Air traffic system faces crisis over bar on price rises

Britain's air traffic system is facing financial meltdown because the industry's regulator plans to refuse to allow the partly privatised company that runs it to increase its charges to airlines.

Tomorrow, the Civil Aviation Authority (CAA) will register strong opposition to higher prices to cope with the slump in air travel after 11 September and that will raise the prospect that the banks will, once again, threaten to force the company, National Air Traffic Services (Nats), into administration.

The Secretary of State for Transport, Stephen Byers, will be anxious to avoid a "Railtrack of the skies", especially as the sale of 46 per cent of shares to airlines has been the only major privatisation since Labour came to power in 1997.

But Mr Byers was warned by the CAA that the financial structure of Nats was insufficiently robust to withstand a major shock. The terror attacks in the United States came within weeks of the sale.

The crisis facing Nats comes after last Friday's highly disruptive computer crash at its new £623m complex at Swanwick, which caused scores of flight cancellations and delays of up to seven hours.

Critics believe that Nats' fragility and inability to invest in the best equipment helped to cause the electronic glitch – the third in two months.

Industry sources said yesterday that the CAA's refusal to countenance higher fees for using British airspace was based on its conviction that the private sector should be expected to bear its fair share of risks when it buys into a state-owned organisation.

Mr Byers has already agreed to a £30m emergency loan for Nats and negotiations are under way on a deal under which the airports operator, the British Airports Authority (BAA), buys into the air traffic control system for £50m – a figure to be matched by the Government.

After the authority's announcement tomorrow, Mr Byers will try to negotiate a compromise, but industry sources believe that could take some time, during which the future of the air traffic system will remain in doubt.

Instead of reducing charges under the regulatory regime agreed as part of the Public Private Partnership, Nats wants to increase them. The fees were supposed to reduce by the Retail Price Index (RPI) minus 4 per cent next year and minus 5 per cent in both 2004 and 2005.

However, the company now wants the CAA to allow a rise equal to the RPI plus 4 per cent in 2003, plus 3 per cent in 2004 and 2 per cent in 2005. It is estimated that the increases would raise charges by £200m over the next five years.

Senior managers at Nats say the events of 11 September could not have been foreseen, although critics contend that the impact of the Gulf War was similar and there should have been a financial cushion to deal with such an eventuality.

In the immediate aftermath of 11 September, air travel slumped by up to 40 per cent on the transatlantic routes that make up 44 per cent of the company's revenue. Income has fallen by about 10 per cent over the North Atlantic.

The seven British airlines which bought part of Nats originally forecast a £60m profit in the year to March, whereas the company actually suffered a loss of £80m.

When The Independent revealed that the authority had misgivings about the financial plan, Mr Byers said he could find no such statement from the CAA. However, the Transport minister, David Jameson, and a senior official at the Department of Transport recently told MPs that such advice was given to the Government.