Will National Air Traffic Services become the Railtrack of the skies?

Critics of the part-privatisation of Britain's air traffic control system might be forgiven for feeling a touch of schadenfreude.

They declared last summer, when 46 per cent of the shares were sold off to the private sector, that it would turn out to be a "Railtrack of the skies". Last night, in financial terms, National Air Traffic Services was starting to bear a passing resemblance to the benighted rail infrastructure company in its pre-administration days.

The banks backing the seven airlines which bought the £750m worth of shares have decided that without a large and immediate subvention from the taxpayer, NATS cannot pay its way.

Senior directors at the financial institutions point out the slump in demand for air travel since 11 September has meant the figures do not add up and that the airlines paid too much for the shares.

Industry sources, however, point out that the Government was warned that the business plan and financial structure envisaged by the airlines was insufficiently robust. In particular, it is understood the Civil Aviation Authority, the regulatory body, warned that the new organisation might not be able to survive any major setbacks. Doubtless the authority had in mind an airport disaster or deep recession. What happened instead were the atrocities on 11 September, leaving the financial outlook looking distinctly fragile.

The financial institutions behind the airlines now believe a review of the situation by the Civil Aviation Authority cannot be conducted quickly enough to ensure the organisation survives as a viable independent operation. The banks want money now, not the promise of aid months ahead.

Last November NATS warned it was heading for a £50m loss instead of a previously predicted £60m profit. That situation may now be worse. Apart from the reduced volume of traffic, the use of smaller aircraft since the terrorist attacks has hit NATS particularly hard. – the company is partly paid by tonnage.

The new company's parlous financial state led to its decision to suspend the construction of a new control centre at Prestwick, Strathclyde. Construction has been delayed while Nats reviews its £1bn investment programme

Management has also embarked on a 20 per cent reduction in support and management staff. The air traffic controllers' union Prospect, which originally opposed the sell-off, eventually endorsed the airline group's bid because it was on a "not-for-commercial-return" basis. Now the union believes the Government has to meet the demands of the banks so that the organisation can remain viable.

Iain Findlay, national aviation officer for Prospect, points out that the Government took £750m for the shares bought by the airlines and had a responsibility to help.

Directors of the airlines, including British Airways and Virgin, are arguing that they may have bid too much for their stake, pointing out that the growth in air traffic, predicted when they tabled their bid last year, now looks hopelessly optimistic.

While the Government held on to 49 per cent of the shares, another five per cent was granted to employees who must now be wondering whether they have any value.

Aviation was already undergoing a recession in demand before 11 September. Foot-and- mouth resulted in far fewer visitors to Britain, especially from America, and the US recession has also taken its toll. There was a five per cent decline in passenger traffic in the first part of last year and by May 2001 the number of visitors coming to Britain had slumped by 10 per cent.

News of the organisation's financial difficulties emerged at a critical time for the industry. Yesterday control systems were coping for the first time with a halving of the vertical separation between aircraft to 1,000 feet. And on Sunday the much-delayed £623m air traffic control centre at Swanwick, Hampshire, takes over from the old complex at West Drayton near Heathrow. NATS does not have the financial clout to deal with any major hitch which may result from the use of the new system.