Shareholder Executive

NATS

Purpose

NATS provides air traffic services in UK and Oceanic air space and at 15 major UK airports and Gibraltar, as well as related operational, consultancy and training services in Europe and beyond.

Legal Status and Ownership

NATS Holdings Ltd is the holding company for NATS Group. It owns NATS Ltd, which in turn owns two operating subsidiaries: NATS (En-Route) plc (NERL) and NATS (Services) Ltd (NSL). The Airline Group Ltd, a consortium of seven airlines, has the majority of voting rights and 41.9% of the shares of NATS Holdings Ltd. The Secretary of State for Transport owns 48.9%, BAA plc 4.2%; and NATS Employee Sharetrust Ltd 5%.

Description of Rights

The government retains a limited number of rights to protect its investment in NATS, including:

• appointment of three non-executive (or partnership) directors
• veto over the Airline Group's nomination for the chair
• reserved rights relating to material changes in the business activity, capital structure and ownership
• a Special Share to give voting control in relation to certain matters.

Government's objectives

Maintaining (and where appropriate enhancing), NATS' safety performance and culture, to provide over the longterm a risk-adjusted commercial return to NATS' shareholders through:

• efficiently and cost effectively providing air traffic services that meet the reasonable requirements of customers in terms of reliability, capacity and delay
• investing efficiently and cost effectively in appropriate air traffic control (ATC) infrastructure to be able to deliver those services
• pursuing strategic commercial growth opportunities in the UK and overseas ATC markets.

Financial Performance

£m	2009	2008	2007
Turnover	767	743	701
Operating Profit	185	157	140
Profit/(Loss) for the year	95	49	69
Net Cash flow1	50	(47)	19
Net Operating Assets	1,091	1,069	1,019
RONA	17.0%	14.7%	13.8%
Shareholders' Funds	363	666	475
Dividends2	-	2	3

Dividend policy

The dividend policy is at the discretion of the Board and is informed by in year profitability and the requirement to maintain an investment grade credit rating within NERL.

Performance targets

Targets for NATS are based on service metrics, financial performance, progress against key project milestones, and customer satisfaction.These targets are designed to achieve the right balance between meeting customer requirements at an efficient level of cost, and providing adequate shareholder returns – all at manageable risk.

Notes

¹ This is the increase/(decrease) in cash and cash equivalents during the year.
² Represent dividends paid.

Commentary

NATS again delivered a strong set of results despite the very difficult market backdrop. During the year, NERL handled 2.4m flights, which was a decrease of 4.4% on the previous year (the decline accelerating in the second half which was down 9.2%). Air-traffic related delay was reduced from 26.8 seconds per flight to 19.3 seconds with the number of flights experiencing no NATS attributable delay rising to 98.2% (2007-08: 97.5%). NSL (the unregulated business) also had a successful year with the renegotiation of contracts at Manchester, London City, Cardiff and Gibraltar airports. NATS continues to maintain its safety performance and last year there was no incident attributable to NATS where the safety of the aircraft was considered to be compromised.

On the financial side, NATS Group turnover increased by £24.8m (3.3%) to £767.3m. Operating profit before exceptional items increased by £27.8m to £185.2m. There were a number of significant exceptional items during the year including the sale of the former Heathrow Control Tower (£43.5m gain), costs for relocating staff to Prestwick and ongoing staff moves to Swanwick (£26m), and redundancy (£25.9m).Taking these into account, operating profit after exceptional items increased by £42.4m to £176.8m.

Given the strong financial position of the Group, the Board decided to distribute to shareholders a dividend from Group companies equivalent to the proceeds from the Heathrow Control Tower sale.The distribution was accompanied by a decision to increase payments to the pension scheme in view of the current scheme deficit.

The current economic downturn places NATS and its customers under pressure to reduce costs. During the year, NATS addressed the future cost and risk of the Group’s final salary pension scheme through a series of reforms. In addition, NERL has committed to cut £45m (15%) from its previously planned cost base and NSL has announced a £10m cost saving plan. NERL also remains on track to complete next year the opening of the new Prestwick facility which will contribute greatly to the overall efficiency of NATS.