Official Report 518KB pdf
The third item on the agenda is to hear evidence once again from the Cabinet Secretary for Infrastructure, Investment and Cities, this time on Prestwick airport. The cabinet secretary offered the update when she previously gave evidence on the matter, in March this year.
I again welcome Nicola Sturgeon. I also welcome Sharon Fairweather, who is director of finance at Transport Scotland; John Nicholls, who is director of aviation, maritime, freight and canals at Transport Scotland; and John Scott MSP and James Kelly MSP, who are attending for the item.
Cabinet secretary, would you like to make an opening statement?
I would, convener. I should say at the outset that, with your permission, my opening statement will be a little bit longer than would normally be the case in committee sessions, but I am anxious to cover a number of salient points before we go to questions and answers.
As members will appreciate, since we acquired Prestwick airport, we have undertaken a substantial amount of work to review the long-term development options to return it to profitability. I want to give the committee an update on that work and an overview of some of the proposed changes that are required to take the airport forward.
As members will appreciate, further work is under way and on-going. I will certainly be very happy to discuss with the committee an appropriate arrangement for regular updates, because the committee will obviously continue to have a very close interest in developments at the airport.
I am accompanied by Sharon Fairweather and John Nicholls, who are part of the senior management team at Transport Scotland and, more pertinently for today’s purposes, board members of TS Prestwick HoldCo Ltd, which is the company that we established for the purpose of acquiring the airport.
As I have indicated—I should stress this point straight away—although we have received an extensive report from Romain Py, who is the senior adviser whom we appointed to do the work, there is still further work to do before we can make certain further decisions on the way forward. However, there are a number of practical steps that we can take immediately, and I want to update the committee on those.
As colleagues will be aware, the Government acquired the airport to prevent its closure. At that time, the choice that we faced was that stark. It is a fairly confident assumption that, had we not acquired the airport, it would not be open now. The airport will now operate as a public corporation on a commercial basis and at arm’s length from the Scottish Government. That is important, and we may come back to the significance of that point in further discussions later on.
The Scottish Government is making an investment in the airport, which will be in the form of loan funding, and we require to generate a long-term return for taxpayers’ money. That is the first important point to stress. The airport will be run on a commercial basis.
As I have already said, to assist us in that process, our senior adviser undertook a three-month review of the long-term strategic options for future business development and the repositioning of the airport. He also looked at the options for ownership and the optimum operating structure that is required to take the airport forward. All the work that the adviser has undertaken is what we would expect any commercial business to undertake as part of its on-going business planning activities.
That work delivered a stage 2 business plan, which builds on the earlier work that was prepared to inform the decision to acquire the airport and sets out the commercial opportunities that are available to the airport over the next few years. I will give an overview of some of the key messages that came out of that report.
Glasgow Prestwick airport is described as a non-typical airport, which means that its success is not predicated on passenger traffic or any one business area alone. That means that there are opportunities to capitalise on its other assets and related businesses, such as freight; maintenance, repair and overhaul; fixed-base operations; and property. Ensuring that we work to improve the position across all those different strands of the airport’s business will be important to the airport’s long-term success. We will look to make steady improvements across all the airport’s business activities.
As I have previously advised the committee—this bears repetition—there is no quick-fix solution for Prestwick. A sustained effort will be required over a number of years and, crucially, across more than just one of the airport’s areas of activity.
I turn to patronage issues. The business plan confirms that the airport can be returned to profit, although that will be challenging—I have often said that before—and the repositioning that will be required to achieve that will take long-term investment. The business plan includes an assessment of the reduced Ryanair schedule for summer 2014, which was not known at the time of acquisition, but it does not take account of the final position for the 2014-15 winter schedule, as that is not yet known.
Members will be aware that airlines generally work to two seasons and regularly change capacity and frequency across their entire networks. Given the highly competitive nature of the aviation market not just in the United Kingdom but across the whole of Europe, we cannot assume that there will be no further reduction in the short term. That means that the impact of any further changes in the passenger market will need to be closely monitored on an on-going basis, as it is difficult to predict patronage levels too far into the future.
On route development, as I have already mentioned, Prestwick does not rely solely on passenger traffic to generate revenue. Indeed, it is worth pointing out that the revenue that comes directly from aviation—passenger, freight and other aviation services—represents less than half of the airport’s total revenue. However, passenger route development will clearly remain an important part of the business.
As committee members will be aware, recent changes in the European Commission guidance on support to regional airports might provide an opportunity to develop routes at airports in Scotland, as long as support does not impact on neighbouring airports. As members are aware, our team Scotland approach is geared towards ensuring that we support airports’ ambitions fairly and without detriment to existing services. I have asked officials to do some additional work on how Prestwick may be able to benefit from the revised guidelines, and I am happy to update the committee further on that in due course.
Based on current traffic projections, we do not anticipate the airport becoming profitable and cash positive for several years. Investment by the Scottish Government will be required until then, which will be in the form of loan funding, as I said earlier.
Much of that expenditure will require detailed analysis and will be supported by a robust business case prior to the necessary funding being committed. It is envisaged that the repositioning capital expenditure—which I will say a bit more about shortly—will include a range of projects to improve the airport facilities and the overall passenger experience; for example, refurbishment of the duty free area and improvements to the visual appearance of the existing terminal building.
As regards funding requirements, when I spoke to the committee in March, I indicated that the airport had received £5 million in funding support up to that point. I should point out that £4.5 million of that was spent in the 2013-14 financial year. The latest position is that, since acquisition, we have provided £5.5 million in the form of loan funding.
I also indicated in March that we intended to provide repositioning capital for this financial year and I can confirm that that will be £2.4 million, which is broadly—not quite, but broadly—as confirmed in March. As I have indicated already, that money will be associated with improvements to the terminal building, a refit of the duty free area and other changes to improve the passenger experience. Our current projections are that in the 2014-15 financial year we will be required to provide an additional £3 million in operating support.
As members know—as everybody knows—part of the problem is that there has been historical underinvestment in the fabric of the airport. We now have a much more detailed assessment of the backlog of essential maintenance that we require to undertake in the short term to ensure that the airport remains operational and we are projecting costs of approximately £4.3 million in the current year. In addition to the total investment, the cost of Romain Py’s work has been approximately £100,000.
As I have said already, some work remains to be done before we can properly complete the stage 2 business planning process. Part of that work will be to assess the likely impact on business of the reduction—and, indeed, eventual abolition—of air passenger duty. There is no doubt that mitigation of APD at Prestwick would be enormously beneficial in relation to trying to increase passenger growth. I have asked for some further modelling work to be undertaken around that. It is probable that the results of that modelling will have a material impact on potential future growth of the business and I will provide the committee with a further update when that modelling is completed.
Of course, that work is in addition to the detailed economic analysis that is relevant to all Scotland’s airports, which will be developed when control of APD comes to Scotland—as I hope that it will in the not-too-distant future.
As regards our plans for the future corporate governance of the airport, we intend to establish a two-tier board structure, with a holding company board being responsible for the long-term strategy for developing the airport and an operations company board empowering management to deliver the strategy. That is what will give form to the arms-length relationship to Government that I spoke about earlier.
I can confirm that a non-executive chair, who will chair both boards, and a number of non-executive directors will now be recruited. Those directors will oversee the operation of the airport, support the senior management team to implement the repositioning of the airport, and provide appropriate corporate governance of all its activities.
The senior management team is being restructured and that will be confirmed on completion of discussions with the various existing members of the team. The executive directors will be tasked with delivering the business plan, maintaining a lean cost base, and developing the commercial opportunities of the airport.
I will now address the issue of branding and the name of the airport. It is an issue that has been raised with me by a large number of people and I know that it is the subject of much interest. As somebody who hails from Ayrshire, I recognise the strength of feeling over the issue of the airport’s name and I welcome the engagement that our senior adviser has had with the Robert Burns World Federation.
11:30We have considered the issue very carefully, but on balance I have concluded that there are strong commercial reasons to retain the Glasgow Prestwick airport name rather than to rename the airport. We need to keep it in mind that, although changing the name would undoubtedly be a welcome move locally, we need to promote and market Glasgow Prestwick airport to airlines and passengers across the world. Glasgow and Prestwick are both strong names, as you would expect from an airport that has been operating for such a long time, and we do not want to risk creating confusion that would make it more difficult to grow the business.
However, the importance of recognising Robert Burns is not lost on anybody and we will commission work to develop a Burns-related theme for the terminal and to consider other ways in which the rich legacy of Burns can contribute to the promotion and marketing of the airport. We will consider how best to involve the local community and local Burns groups in taking that forward.
In conclusion, I am conscious that there is a great deal of interest in Prestwick airport’s future and a genuine desire, both in Ayrshire and more widely, to see the airport succeed. To reflect that interest, and to mark the start of what we all hope will be a renaissance for the business, we intend to publish a document that sets out a strategic vision for the long-term future of the airport, including our plans for investment, for business development and for the optimum operating structure required to take the airport forward. I have already alluded to much of the content of that strategic vision. The document will also contain the main findings of the additional work I have commissioned, which I referred to earlier.
Colleagues will appreciate that, as I said, the airport will be operating commercially, so much of the work that has been done is commercially sensitive and, if it was all released, that would hinder Prestwick’s ability to grow its business. Nevertheless, given the high degree of interest and the significant public funding involved, we will operate on the basis of being as open and transparent as possible—as I hope my rather extensive comments have demonstrated.
My apologies for the length of time that it has taken to give that overview, but I thought it important to give an overview across the key areas that I want to cover today. I am happy to answer questions.
Thank you very much, cabinet secretary. Adam Ingram will start the questioning.
Can you detail Romain Py’s key findings and his recommendations in relation to the future viability of the airport? Can you summarise those for us? I know that you have covered a lot of ground in your opening remarks, but can you distil for us the recommendations in relation to the commercial viability of the airport?
I will do my best to summarise them as basically as I can.
The key message of Romain Py’s work is that we should seek to take advantage of the diversity of what the airport currently does and what it potentially has to offer. As I said in my opening remarks, it is described as a non-typical airport. That means that its success is not predicated on only one area of its business activity: passenger traffic. I said in my opening remarks that when you look at the airport’s various revenue streams, the direct revenue from aviation—passenger freight and the other aviation activities that are associated with Prestwick airport—is half of the revenue. Of course, other revenue streams such as retail and car parking have a link to the aviation revenue, but that statistic helps to put things in context. The key message is that there is no quick fix and we should not take a single-pronged approach. We should look to make steady improvements across all the airport’s business activities.
We cannot assume as we go forward—particularly when it comes to the passenger market—that the improvements will always be linear, because there may be reductions as well as increases. However, over the medium to long term we have to aim to make steady improvements across passenger traffic and freight and we must look to enhance the maintenance, repair and overhaul business—the fixed-base operations that are at the airport. As we have discussed previously, the airport has a large property portfolio and a number of things have to be done to try to increase its worth and value to the airport.
Some of the initial capital investment plans that we will implement are designed to have some quick wins around revenue increase. Money that will be spent on refitting the duty-free area is designed to increase the retail income from the airport. Changes to car parking are designed to try to increase the car parking. Efforts will also be made to ensure that the airport’s cost base is as low as possible while providing a high-quality service.
The overall message is that there are a number of different areas of activity for the airport and they are all as important as each other as we take the plans forward.
We know that the aerospace park is being designated as an enterprise area. Will the airport be included in that? Is that one option for trying to encourage further economic activity?
I said that the land around the airport is part of its value. We need to ensure that plans are in place not to have vacant land or properties, that we encourage business and that we try to grow the maintenance, repair and overhaul base at the airport.
One of the reasons why Prestwick is considered to be strategically important is the aerospace cluster. As you well know from your local knowledge, the aerospace cluster is not directly dependent on the airport, but there is no doubt that having an operational airport next to it helps to make it attractive.
The clear message is that we must consider not only the passenger traffic but the broader span of activities in which the airport has historically been engaged and look to grow all those activities in the time to come.
One inference from what you are saying is that the scope for increasing passenger traffic might be limited, given the need that you expressed to develop other types of activity at the airport. Prestwick has been dependent for many years on Ryanair for its passenger traffic. Do we have any commitment from Ryanair or have you any concerns about how to develop the airport’s passenger traffic?
Prestwick operates in a passenger market that is highly competitive, not only in the UK context but across Europe. As I said in my opening remarks, trying to grow the passenger business at Prestwick—trying to encourage new routes, new airlines and growth in passenger numbers—is, of course, a part of that, but we should not see it as the only strand. I stress deliberately the importance of looking at the airport in the round. The business plan factors in the changes to the Ryanair schedule for the summer this year but the winter schedules have not yet been finalised.
We will need to keep all that under continual consideration because of the nature of the market in which we are working. Equally, we will have to ensure that we do everything we can to take advantage of opportunities. That is why I refer to the additional work that I asked to be done on the changed European Commission guidelines on route development so that the management team that will operate the airport is able to take advantage of all opportunities that exist.
You also highlighted the need, perhaps, to rebrand Prestwick airport. As a local elected representative, I am obviously disappointed that you have chosen not to rebrand it as Robert Burns international airport. As my colleague John Scott also knows, that was considered for a good many years. We could never persuade Infratil, the previous owners, to go down that road largely because of the notion of Prestwick as a feeder to Glasgow—it was marketed internationally as a Glasgow airport. I presume that Romain Py’s recommendation is to confirm that approach.
The recommendation is not to rename the airport but to continue with the Glasgow Prestwick name. As I said, I am not at all blind to the local strength of feeling around what the airport should be called—I probably had more emails and letters on that point than on any other point once we acquired the airport—but you need to bring a pretty hard-headed analysis to these kinds of things. We are talking about an airport that has to stand on its own two feet, commercially—that is the objective. It has to win business and sell itself. One of the great advantages that Prestwick airport has is that, without being complacent about it, we can take for granted the local support for the facility. If you were trying to market it locally and win local support, calling it Robert Burns international might be the thing to do, but we have to market it and win support for it in a much broader international context, and changing the name risks confusion. Obviously, Robert Burns is a strong and powerful international brand, but not everyone will know of his connections with Prestwick. We need to make a clear statement of where the airport is and where it is positioned in Scotland. Sticking with the current name is the way to do that. I have been persuaded of that argument. It is not the sentimental approach, but it is the hard-headed and pragmatic thing to do.
I would not underplay what I am saying about there being a serious determination to use the Robert Burns branding as part of the marketing strategy. Romain Py had good input from the Robert Burns World Federation around how that could be taken forward, and we want to commission some work on how that can be put into practice.
Clearly, rebranding the airport is going to cost some money in terms of marketing and refurbishment. You mentioned a series of figures for money going into the airport in the current year. Can you give me global totals for the current financial year and the previous one?
In the previous financial year, the support was £4.5 million. This year, the operational support will be £4 million. The previous time I appeared before the committee, I said that we had given £5 million. Some £4.5 million of that was for the previous financial year, and the remaining £0.5 million and an additional £0.5 million that has been given since then will be added to the projection of another £3 million in operating support for this financial year. That is the total.
I have split capital investment into two strands. Everybody knows about the backlog of maintenance that has not been done at the airport. We are projecting costs of £4.3 million this year to try to bring some of that backlog of maintenance up to scratch. Some of it is very basic and is about ensuring that the airport can remain operational, but following on from that there is the need to invest capital in trying to reposition the airport. That involves the £2.4 million that I spoke about, which will be spent on things such as improving the appearance of the airport, including some work on the branding and theming that I mentioned. With regard to the duty-free area, the fact is that the people who are going through Prestwick airport are probably not spending as much in the airport as they would spend if the offer was more attractive—that is, if there was a better positioned duty-free area. Therefore, we will spend money on changing that with a view to that becoming an increasing revenue stream.
I do not know whether anyone round the table has travelled through Prestwick airport recently. I have, and I can tell you that it needs general improvements to make the passenger experience a better one if we are trying to encourage passengers to fly from there. The £2.4 million is very much about that work, which is intended to deliver improvements that will have a knock-on effect in terms of the revenue position of the airport in years to come.
Is the additional work that you have commissioned from Romain Py or from a broader body of people?
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There will be an input from Romain Py, but my officials in Transport Scotland and the Scottish Government will also make key input. We need to keep flight schedules and passenger numbers under review. As I have said, we cannot assume that we are not going to see reductions in both, although obviously we want to see increases. I have also stressed repeatedly that our ability to grow passenger numbers at the airport—and I know that other Scottish airports think similarly—would be improved if we had the ability to do something about APD.
The whole picture has to be kept under review. I have asked for some specific work to be done on APD and what the modelling would show if we were able to do something about that, as well as further work around route development options. My officials in Transport Scotland and the Government will be centrally involved in that work.
I understand there are commercial confidentiality issues to consider, but in your opening remarks you mentioned something about the publication of future plans. Can you confirm that for us?
As soon as we are able to, we intend to publish a strategic vision for the airport that will incorporate as much of the information from the work that Romain Py has done as we are able to incorporate.
I am going to be pretty unapologetic on this point. The airport will be expected to operate commercially. The situation is different from that of the Highlands and Islands airports that are openly subsidised by the Government. The Government’s investment in Prestwick airport will be on a different basis. It will be in the form of loan funding that will be expected to generate a long-term return on taxpayers’ investment. We cannot expect Prestwick airport to run successfully on a commercial basis if we are expected to put into the public domain information that other commercial airports would not put into the public domain. As the owners of the airport, we will be as open and transparent as possible, but we are not going to hinder the airport’s ability to do the job that we are asking it to do.
A strategic vision will be published and it will incorporate as much information as possible, but the contents of some of the work that is being done is commercially confidential and to put it into the public domain would be to hinder the airport’s ability to do the work that it will be expected to do in the years to come.
Thank you.
I have a supplementary question to Adam Ingram’s question about the area surrounding the airport, and the enterprise zone. Is the cabinet secretary aware of work being carried out by Scottish Enterprise to encourage Scottish companies to relocate to Prestwick airport and the surrounding area? Is the Scottish Government supporting those activities?
The Scottish Government wants to work with our agencies to ensure that the work on the enterprise zone that predates our acquisition of Prestwick airport is successful. The aerospace cluster around the airport is important, and it is important that Scottish Enterprise, with appropriate support from the Scottish Government, works for that success. However, to go back to a point that I made earlier, it is not the only strand of what we need to do to make Prestwick a success. There are other issues around the property portfolio of Prestwick, if I can call it that. It might be that the management team thinks that there are decisions to be made about disposal of some property to bring in a capital asset. There might be issues around vacant property and whether there needs to be a strategy to fill that property. The aerospace cluster and the work around that is important, but there is also a wider issue about the airport property.
It is important to support Prestwick and its viability into the future, but concern has been expressed in my region, where a company in Lanarkshire has been encouraged to relocate to Prestwick. There is a worry that the need to support Prestwick will have an impact on non-domestic rates for the local authority and on local jobs in Lanarkshire. That should be taken into account when Scottish Enterprise is encouraging companies to relocate.
I am not aware of the company that you are talking about, but I am more than happy to have a conversation based on the specifics if you want to provide me with details afterwards.
Scottish Enterprise is there to help the Scottish economy to grow in the best possible way by engaging with companies in their best interests. Although the Scottish Government owns Glasgow Prestwick airport, when it comes to the airport’s business—aviation and associated business at the airport—it is not for the Scottish Government to favour Prestwick over Glasgow, Edinburgh or any other airport. That is why the arm’s-length operation of the airport vis-à-vis the Government is so important. The airport will be operating commercially. If it is going to win business, it will have to do so on merit. The arrangements for the Government funding and the long-term return on taxpayers’ investment are a key part of that.
We all want Prestwick to succeed, but it will succeed in the long term if it is able to make a success on that commercial basis and not because people are doing it favours along the way. That is the key point that must be stressed.
When the cabinet secretary was talking about the various streams of funding that will go into the airport, I tried to add them up, but I got lost at one point when I realised that we were talking about the same numbers that we talked about earlier. Are you able to put a simple figure on the total amount of Government money that will be put into Prestwick in the current financial year?
In the current financial year, it will be around £11 million, with £4.5 million in the previous financial year. The £5.5 million figure is £500,000 more than the £5 million that I mentioned at the previous meeting. There is £2.4 million of repositioning capital for some of the early works that are designed to raise revenue streams. There is £3 million of further operating support in this financial year, and £4.3 million of backlog capital maintenance in this financial year. As I mentioned, £4.5 million of the total was in the last financial year. In total, broadly speaking, it is £15 million, with £4.5 million in the previous financial year and the remainder this year.
Regarding the work that has been done by Romain Py, the minister has already explained at some length that it will largely not be published, for reasons of commercial sensitivity. Can you tell me anything that will help me to better understand the nature of the commercial sensitivity that prevents you from publishing much of it?
When it comes to what the airport might be planning to do to grow its business in a particular area—be that freight, passenger services or anything else—and regarding how it is going to engage with other businesses, airlines and so on, some of that is obviously commercially confidential.
I stress that our starting point is not to not publish information. I am a politician, and my starting point, as I try to make it easier for me to sit and answer questions from the committee, is to have as much of the information as possible in the public domain. We will publish a document that does that. There is a degree of commercial confidentiality with regard to some of the detailed financial projections, which are predicated on what will happen if the airport succeeds in one particular line of its business or another, and it would hinder the management team at Prestwick if all that was in the public domain.
If we were operating Prestwick similarly to how our Highlands and Islands airports operate—that is, on an openly subsidised basis—it would be different, but we are expecting the airport to run commercially, on the same basis as Glasgow airport. Therefore, Prestwick airport needs to be able to operate on the same commercial basis.
I hear what you say about running the airport on a commercial basis. We have spoken before about the long-term plan to return the airport to private ownership. Is that still your intention?
Yes. The airport is not currently up for sale. We are in it at this stage for the long term; our objective is to secure a return on the public investment in the airport in the long term, and then to market the airport for sale on the basis of the turnaround that happens. We have not set a date for that. There are too many variables at this stage, so it would not be sensible for me to sit here and give even a guesstimate date for when it might be possible to do that. We are clear that this is a long-term investment. However, I agree that a return to the private sector remains the end-point objective of the exercise.
I was clear with the Parliament when I announced the acquisition of Prestwick airport that we were not taking it over as any kind of ideological move and that we were not relishing taking it into public ownership but that we were doing it because the only alternative was for the airport to close. We want a situation whereby taxpayers get a return on their investment and the airport goes back into the private sector. I think that everybody would want to see that happen, but there are a number of variables along the way that will determine the timescale for that. It would be simply wrong for me to sit here and try to guess at this stage what that will be.
In terms of the timescale, would it be fair to say that returning the airport to the private sector is now a long-term ambition?
I have used the term “long term” and it will be several years, but I am not going to try to narrow it down any further than that.
Thank you.
Taxpayers seeing a return on the loan investment is predicated on the airport coming back into profitability. Our ability as parliamentarians to scrutinise whether the investment is wise is predicated on our understanding the work that Romain Py has done. Will even a redacted form of the report be published to allow us to scrutinise the spending and assess whether the public purse will ever see any of that back?
In order for us to make the investment in a way that is consistent with state aid rules and the market economy investor principle, we have to plan a return on the investment. As a parliamentarian, I absolutely understand the importance of proper scrutiny of the use of taxpayers’ money. That is why I am sitting here and have gone through in some detail the public investment that will be made this year, and why I have said that we will translate into a published document as much of Romain Py’s work as we can without hindering commercial confidentiality and the airport’s ability to operate commercially.
On future projections, some of them depend on work that we still require to do. Some of the work that I have talked about today will require knowledge of our early success in building some of the revenue streams and reducing the cost base of the airport.
Your ability as parliamentarians and committee members and the ability of the Parliament as a whole to scrutinise the investment is very important. That is why I said at the outset of my opening remarks that I am keen to come to an arrangement with the committee that sees a regular reporting mechanism between me and the committee so that you can scrutinise that on an on-going and forward-planned basis.
Do you want to come in on that point, John?
Not on that point, but on several other points, if I may.
In that case, I will take you at the end if the points have not already been covered.
I want to clarify a number of points with you, cabinet secretary, if I may. The first relates to funding and a number of the funding requirements. Am I right in thinking that you said that all the funding will be in the form of formal loan funding?
Yes.
Good. I just wanted to clarify that. So, essential maintenance, operating support and changes to the building to improve the passenger experience will all be done through loan funding.
All the funding that we put into Prestwick airport, apart from the money that we had to spend to buy the airport—we bought it for £1, but the due diligence work that we did is seen as a kind of sunk investment that does not come back—will be on the basis of loan funding. The terms of the repayment schedule for that and the terms under which it is repaid take us into the discussion about the inability at this stage to say what the timing will be, because that is predicated on the success of the business planning for building the different revenue streams of the airport.
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That is clear. Thank you. I also want to ask you about the governance arrangements. When you appeared before the committee on 19 March, you said that TS Prestwick HoldCo Ltd had been established to enable the transfer of ownership to take place and that the interim measure would involve three board members, who would be senior Transport Scotland officials. You said that you would then take advice on what the permanent governance arrangements should be. Have you had time to decide what the future looks like in that regard?
I outlined that in summary in my opening remarks. You may recall that when I gave evidence to the committee previously—I think that the Official Report will bear me out on this—I suggested that we might decide to get an outside operating company in to run the airport. The recommendation that has come from the work that has been done is that that is probably not the best route to go down, as having an outsourced management team on a priced contract would not necessarily give us the clear incentive, energy and drive that we will need from a management team. Obviously, the arrangements are kept under review, but we have decided not to go down that road.
We will set up a two-board structure—on a first reading, that sounds a bit bureaucratic, but there are sound reasons for it. There will be a strategic board, which will be the key conduit for the Government to effectively influence the airport’s strategic direction and will enable us to ensure that we safeguard public investment, and it will set the overall strategic plan for the airport. The second board will be the day-to-day operational board, which will be important in establishing an arm’s-length relationship. As the owner, the Government of course has an interest in the strategic direction of the airport, but it is not for the Government to be directly involved in day-to-day operations and trying to win business.
As I have said, we will recruit a non-executive chair for both boards, and each board will have non-executive members. The senior management team will be on the operational board as well.
Just to ensure that I have understood you correctly, is it the case that the senior officials from Transport Scotland will sit on the strategic board?
They will not—Transport Scotland officials will probably sit in an observer capacity, but we will recruit non-executive members to sit on that board. They will be appointed by ministers to represent the Government’s interests, and Transport Scotland will attend board meetings on an observer basis.
The intention is that, on the operational company board, there will—as the cabinet secretary described—be a non-executive chairperson who will be independently appointed, supported by non-executive directors. Transport Scotland officials might then attend in an observer capacity.
For the holding company, on the strategic board, there will again be a non-executive chairman, independently appointed, who will be the same person who sits on the operational company board. At present, we envisage that the other directors of the holding company will be representatives of the Scottish ministers, but that is for review.
I am trying to tease out, with regard to the announcement in March, what is permanent and what is interim. Can you shed any light on that?
The current board, with which John Nicholls and Sharon Fairweather are involved, is overseeing the whole airport operation at present. That will, in a sense, cease to operate in its current form and will be replaced by the dual board structure that I have described.
The strategic board will, similarly to the current board, have Government interests directly represented on it to focus on the strategic direction of the airport, but the operational board will in effect decide on the day-to-day operations and the particular business opportunities that the airport wants to pursue. The current arrangements will in effect split into those two separate strands.
I was not being deliberately obtuse—I am just trying to understand the situation. You have now set it out in a way that even I can understand, so I thank you very much.
I have one final question. When you appeared before the committee in March, I asked about the potential that might exist for developing Prestwick—albeit that there are funding constraints, given that international development is not currently within the competency of this Parliament—as a centre for international disaster relief. That idea was suggested by a constituent of mine, Alan McKinney. Could Prestwick play a role in providing humanitarian assistance and overseas aid? Have you discussed that or had the chance to consider it? Can you update us in that respect?
It has been recommended in the work that has been done as something that we can follow up and pursue. Prestwick certainly has the necessary infrastructure to enable it to become a hub for European emergency disaster relief programmes.
As you are probably aware from your constituent, the European Commission Humanitarian Aid Office is looking at where those types of services operate from. I cannot say that it is a definite area of potential for Prestwick, but it has been identified as a point that we should follow up directly with the relevant European bodies, and we will do that.
Will you update the committee on that in writing?
I will update the committee as soon as we have any material progress in that regard.
Cabinet secretary, you spoke about passenger numbers in response to a question from my colleague Adam Ingram. Will you update us on the freight figures and the prospects for the future in that respect?
There has been a steady but fairly hefty decline in freight tonnage at Prestwick from around 40,000 tonnes in 2003 to around 10,000 tonnes in 2013.
There was quite a substantial increase in freight in April and May of this year, but I do not want to overstate that increase, as it took place over a two-month period and the trend may not be borne out in the annual figures. Nevertheless, the increase over those two months was quite substantial compared with the same period last year. At this stage, therefore, there are some reasons for optimism about the freight business, but that comes with a healthy caveat.
That brings me to a wider question. Perhaps I should declare an interest, because one of my businesses supplies industrial coatings throughout Scotland; you will understand why I am declaring that when I pose my question.
As important as flights and freight are to Prestwick, my main concern is for the vibrancy and wellbeing of the very good industrial businesses that operate in and around Prestwick airport. On the radio this morning, I heard someone who I think was from the Glasgow Chamber of Commerce raise questions about Prestwick, although it was a recording from a few months ago, so it was not up to date.
My understanding is that Prestwick’s industrial delivery chain operates throughout central Scotland, so the situation with the airport can impact adversely or favourably on businesses. I am wondering about engagement with the business community, in particular with the local people who do very good industrial work—I am sure that John Scott can elaborate on that. How does the situation with the airport impact on the wider industrial business community?
I got the idea that the gentleman whom I heard on the radio was trying to protect Glasgow airport. I cannot remember the exact term that you used, but you spoke about special status for Prestwick airport because of its significance in terms of what it delivers for the wider community, rather than from the point of view of the flights in and out of it.
I did not hear the radio interview that you are talking about, so I will not respond on that issue in case I get it hopelessly wrong.
On your comment about Glasgow, that is where the arm’s-length relationship with Prestwick becomes very important. I want to see all our airports succeed. I am a Glasgow MSP, so I want to see Glasgow succeed. Although all our airports operate in a very competitive market, it is not for the Scottish Government to pick one airport over another. We operate a team Scotland approach in encouraging airlines to come to Scotland. It is for the airlines to make a commercial decision about which airport to go to. Our airports have to put forward their best case; it is not and it will not be for us to have a situation in which Prestwick is favoured in that part of the process. I hope that, as more airlines and more routes come to Scotland, all our airports will be the beneficiaries of our approach.
On your general point about the importance of Prestwick airport to the local economy, that is a point that I, too, made when I announced the Government’s decision to acquire the airport. Its contribution to GVA locally and nationally is quite significant. It has very strong support in the local business community; indeed, I think that the Ayrshire Chamber of Commerce and Industry has a base and a presence in the airport.
Since we acquired the airport, I have been extremely impressed by the number of offers of assistance and expressions of willingness to engage and be part of the process of finding the route back to success for the airport that we have had from local businesses and organisations. That might not automatically translate into business for the airport, but it is a fortunate position for the airport to be in. Indeed, one of its strengths is that it has such strong support in the immediate community that it serves. Some of the points that you make underline that.
I want to go beyond that. I know well how important the airport is to the local community. That is a given; I am sure that local businesses will be very aware of that.
My business, which my son now runs—I no longer run it; I am here all the time—supplies industrial outlets that are nowhere near Prestwick that, somewhere down the line, may well be supplying Prestwick. Rather than simply being a place to fly in and out of, Prestwick is very important on an industrial basis to the wider business and industrial community in Scotland. I do not think that many people know that, except those who supply Prestwick.
My headquarters is in Bishopbriggs, which is quite close to Glasgow. We are well away from Prestwick, but I and many other people may well be supplying Prestwick indirectly—as I think my business is doing—or directly, from much further afield. We are talking about extremely important businesses. The impact goes much wider than the Prestwick area. I do not think that a lot of people are aware of that or of the good work that is being done to make Prestwick in its entirety viable.
That is a fair point. When I made the statement to Parliament about the acquisition of the airport—I may have the details somewhere in front of me, but I do not have them immediately to hand—I made the point that, as well as making a big contribution to the local economy, the airport impacts on the wider economy. That was one of the underlying reasons behind our decision to acquire the airport rather than sit back and watch it close, which would have happened last year had we not bought it.
Thanks very much.
I want to ask about freight more generally. According to the table in our paper, overall freight carriage declined from 40,000 tonnes in 2002 to 10,000 tonnes in 2012. Is that a result of the recession? Do we have any idea why there has been such a rapid decline in air freight? Is that freight now being taken by rail?
12:15
It will be a combination of all those things. It stands to reason that the economic recession that we have just been through has had an impact on businesses and therefore will have had an impact on freight. Obviously, rail is a factor in that. One of the many interesting things about aviation that I have been learning is that there has been a change in the way in which freight is transported. The trend is now more towards carrying freight in the cargo holds of passenger aeroplanes rather than in specific freight aeroplanes. A range of factors have contributed to the situation, and you are right to point out the overall reduction in freight. Obviously, we hope that freight will increase and that Prestwick will be competitive in the market.
I do not want to overstate this but, as I have said, there has been a substantial increase in two months of this year compared with the same period last year, which might be down to economic recovery factors. It is far too early to say that that represents a longer-term trend; nevertheless, I am always in the market for signs of good news, so we should take encouragement from that.
I have a specific question on what is being done to improve passenger numbers. The new route that was launched last month between Glasgow Prestwick and Ireland West Airport Knock is welcome, but the vast majority of travel out of Glasgow Prestwick is with low-cost airlines, which are more likely to suffer from financial pressures. Business travel accounts for only about 8 per cent of passengers at Prestwick, whereas the figure for Glasgow and Edinburgh airports is around 30 per cent. What is being done to introduce new routes and increase passenger numbers at Prestwick?
As I said, the restructured management team that will be in place will have the specific responsibility of developing the business overall. Part of that—I stress that it is part of it, for the reasons that I spoke about earlier—will be to seek to increase passenger numbers, which in turn will help to increase income from car parking, retail and other services that the airport provides.
As you said, most of the airport’s business is based on low-cost airlines, although the accurate way to describe it is low-cost airline, in the singular. The management team has to work closely with that customer of the airport and with other potential customers. I will not say anything other than that we have to appreciate how challenging that is. We cannot predict that everything will go in one direction. We might see reductions as well as, I hope, increases over the longer term. The marketplace is competitive. That is one of the many objectives that the management team has to focus hard on as it tries to return the airport to profitability.
I have mentioned APD a couple of times, because it is really important. I am heartened that there is growing agreement that we need to have control of APD in Scotland. I cannot overstate the importance to Prestwick’s success in attracting greater passenger numbers in the medium to long term of our having the ability to do something about the crippling rates of APD. That is really important—certainly, APD is a significant constraint in relation to Ryanair. That is why it is important that we get the ability to do something about it.
I was hoping for a more specific answer on exactly what is being done to encourage new routes and additional passengers.
Will there be any announcements on new routes in the near future?
I cannot say, although I wish that I was able to do so. I am not the one who is negotiating with airlines—that is part of the job of the management team in getting out there and growing the business of the airport across all its business streams. However, I cannot predict whether and when such announcements will happen.
Before the Scottish ministers purchased Glasgow Prestwick airport, the railway station there was the only one in Scotland to be in private ownership. What plans—if any—do you have for the ownership and development of the station?
The station is owned and operated by Prestwick Aviation Holdings. You are right to say that the station is the only independently owned and operated railway station in the whole of Scotland. Glasgow Prestwick is the only Scottish airport to have a direct rail link. Like the airport, the station is not up for sale.
The work that Romain Py did identifies a significant need for a major upgrade to the railway station and to the skywalk—those who are familiar with the airport will know it—that links the station to the airport, in order to improve the facilities generally and to improve the customer experience. The estimated capital cost of doing that work, which is £4.75 million, is not included in the capital programme for the airport for a specific technical reason, which is to do with the unique way in which rail projects are funded. The cost of the project would be recovered through an increase in the regulated access charges that the train companies pay for using the station.
Discussions need to take place with the rail industry to assess the viability and affordability of taking the project forward and the likely timescales for that. There is no doubt that being able to significantly improve the railway station would be beneficial to the capital picture at the airport.
Does John Scott, as the local member, have any questions?
I thank the Deputy First Minister for her statement, and I welcome her announcement that Prestwick will remain an arm’s-length operation and her desire ultimately to return it to the private sector after a period.
I also welcome the £4.5 million in loan funding that was invested in the past financial year and the promise of £10.5 million this year, which, if I have understood the figures correctly, makes a total of £15 million. What will be the financial need in the next financial year and thereafter? Do you have a budget and a projection of capital investment and revenue for 2015-16 and 2016-17? I have other questions, which I will ask in a moment.
I cannot give precise projections for financial years beyond this year. One reason why I am keen to have a regular reporting arrangement with the committee is to ensure that, as the ability to make projections becomes more settled, I can keep the committee updated.
As you will appreciate, we need to take into account a number of variables. We need to do further work on the work that led to the stage 2 business plan; we need to keep passenger numbers and flight schedules under review; and we need to assess the success of some of the initiatives to increase revenue at the airport and keep the cost base as low as possible.
Broadly speaking, we expect expenditure on backlog capital maintenance to peak this year and next year. That is understandable, given that the backlog maintenance has been left for a while. Operating costs will depend more on the success of implementing the business plan for the airport. The more successful the plan’s implementation, the more quickly the requirement to provide operating costs support will decline over the years. As I have said, I will regularly update the committee as our ability to make projections becomes more definite.
We are all aware of the airport’s strategic value in financial terms—indeed, Gil Paterson referred to that—and its strategic value to Scotland plc, if you like, given that, as has happened in winters past, it remains open while other airports close because of frost or snow. In that regard, it has a strategic value to the UK. It also has a military value, because of the close connections for military aircraft from America. Is there any way that a value can be attached to that and a price extracted from those who benefit from it? As I understand it, they have hitherto paid for individual incidents that required the use of Prestwick airport but not for it to be open in readiness for such incidents.
The short answer is yes. The management team will want to look closely at trying to leverage a financial benefit for the position that the airport is in. As you have rightly pointed out, it is a diversion base for weather and other incidents for the whole of the UK. Part of its big advantage is the length of its runway and the fact that it tends not to be affected by wind and other weather. It is a stable airport.
There is work to be done to maximise and formalise the airport’s role in such aspects and to determine whether a financial benefit can be leveraged. I cannot say more at this stage other than to acknowledge that the management team will look to take that work forward.
That is fine.
On corporate governance structures, will South Ayrshire Council be represented on the strategic board, the day-to-day running board or both? Do you have a view on or a plan for that? I know that the council is keen to be represented.
I have said before but it is worth saying again that all three Ayrshire councils—particularly South Ayrshire Council, because of its close proximity to the airport—have been incredibly helpful to us, and I put on record my thanks to them. We want to continue to include the councils very much in our thinking and planning for the airport’s future. There is, for example, potential for South Ayrshire Council to help with some good development, but further work is being done on that.
We still need to discuss what form that inclusion will take and how it will manifest itself in the corporate governance structure, but I am keen to find some way of harnessing what not only the council but the business community and Ayrshire College have to offer. That might sit alongside the corporate governance board structure. In any case, the expressions of support from all of those bodies and the desire to help have been breathtaking, and that is a big advantage. I am keen that we find, somewhere in that structure, a formal mechanism to ensure that everybody who has a desire for Prestwick to succeed and who, perhaps, has something to bring to the table to help us get there has a voice and is able to have that voice heard.
I should say that I would be very happy to discuss with you, as the constituency MSP—
And Adam Ingram.
And, indeed, Adam Ingram. Interestingly, I think that the runway is in one of your constituencies and the terminal building is in the other.
That is correct.
That sometimes makes it hard to work out who the constituency MSP for the airport is. I am happy to discuss with both of you the best way of harnessing that local interest.
I think that the dividing line might be the white line down the middle of the runway. We might each have half of it.
I do not want the two of you ever to have a fight over it in the middle of the runway.
I do not intend to. By and large, we speak with one voice on this matter.
On the subject of the airport’s name, which Adam Ingram has already raised, I welcome your decision to retain it as Glasgow Prestwick airport. However, with regard to marketing—I think that you described it as the sentimentality of the matter—I suggest a strapline such as “Gateway to Robert Burns country”. The airport would still be known as Glasgow Prestwick airport for aviation reasons—which are, of course, the most important of all with regard to why it should continue with that name.
As an Ayrshire girl, I must stress that I was not using sentimentality in a pejorative way.
I am sorry—I did not mean it like that.
I not only understand but share a lot of the sentiment around this issue, but I think it right to put that to one side for commercial reasons. As I have said, we are going to commission some work on how we might give the airport a Burns theme, and I think that ideas such as the one that you have highlighted might well come into play.
12:30
I want to make two points. First of all, when the issue arose, there was clearly cross-party support in Parliament for the Government to move forward in an attempt to save jobs and support the economy. However, given the magnitude of the investment that has been outlined, it is perhaps surprising that we have had only this update to the committee rather than a statement to Parliament.
Leaving that aside, I just want to understand where we are with the numbers. I understand that, in 2012-13, losses were running at £800,000 a month and the liabilities at the end of the year were £16 million. Is that still the case?
First, I am perfectly happy to make a statement to Parliament on the issue. I am here today because I offered to come back to the committee on it, and the committee accepted the offer. I am fully cognisant of the importance of making statements to Parliament, but I suspect that we have probably had a longer and more detailed discussion on the issue around this table than we would have had after a statement to Parliament. I therefore do not think that it is fair to say that doing it this way has actually reduced the amount of scrutiny that I have been subjected to—on the contrary. However, I am more than happy to make a statement to Parliament.
There was, indeed, cross-party support for the Government’s action, and I hope that we can continue that. I have never made any bones about how challenging this process would be, nor have I made any pretence that we can make any guarantee about any particular aspect of the airport’s array of business activities. However, I have made it very clear that when we were faced with a stark choice of acquiring the airport or watching it close, we decided that acquiring it was the right thing to do. I hope that the support for that can continue through what will undoubtedly be ups and downs.
I am sitting here in good faith because I want us to be able to return Prestwick airport to profitability, ensure that it can stand on its own feet without Government support and ensure that the taxpayer gets a return on the support that has to be given in the interim. We will have ups and downs and setbacks along the way, but I hope that we will also make some progress. I also hope that we can all put aside our party-political differences and recognise that we are trying to achieve an objective that I think we all agree with, which is to see Prestwick airport survive.
As for your specific question about the losses, I think that when Mark Griffin previously asked a question along the same lines, Sharon Fairweather—to whom I will hand over in a second—was able to give information about some of the figures that were used being partly associated with the write-off of assets and suchlike. The best way to look at this as far as Government investment is concerned is through the figures that I have given today for the investment in this financial year, as they represent the taxpayer contribution to the airport’s on-going operation. However, Sharon Fairweather will amplify on how the figure for losses is made up.
The one point that I would make is that when we took over the airport we did not inherit the debt. Because Infratil cleared its intercompany debt when we acquired the airport, we started, if you like, with a clean slate. The debt that is building up is basically the loan funding that we are putting into the airport, which the committee has been made aware of.
As the accounts for 2013-14 are being prepared at the moment, we will be in a better position in a few months’ time to make people aware of the figures coming out of them. We will need to make a split between those up to the point of acquisition and those beyond that point in November. Once the accounts have been audited by our auditors KPMG, we will be able to issue information on them.
They will be there for the committee to scrutinise and ask questions on, as it sees fit.
Are you able to say whether losses are still running at £800,000 a month? Has the £16 million in liabilities been completely written off?
I would want to see the breakdown of the numbers that you are quoting for the write-off to be able to confirm that. However, as I have said, our position was that all the Infratil intercompany debt was written off on acquisition.
I will come back to you on the running figure for the losses since we acquired the airport. From our perspective, the losses up to the point of acquisition are less relevant because we were not funding them.
With regard to our projections at this stage for this financial year, the operating support is as I have set out. As I told members in my update, there is £1 million available—that is the money that we had previously given and which was not spent in the last financial year—and a further £3 million for the remainder of this financial year, which we project will be required for the operating support of the airport.
I appreciate your comment about the moneys going forward. I am just trying to understand what the starting position is.
As Sharon Fairweather has said, we did not inherit any of Infratil’s debt. I am not trying to be vague about any of this—
I understand that.
You will appreciate that, as far as questions about the losses are concerned, the figures will be influenced by passenger numbers, the number of bottles of perfume that passengers buy in duty free every month and so on. When we publish the 2013-14 accounts, you will be able to see the financial position from the point of acquisition, and that will also be the case for this year when those accounts are published. However, what is important from the taxpayers’ perspective is the information that I am giving today about what the operational support from taxpayers—albeit in the form of loan funding—will be to keep the airport operational.
I understand that, but if the business is going to become an on-going concern, we need to understand what the losses are just now in order to know what has to be done to recover that position. We also need to know what the liabilities are, as they will obviously be involved in anything that the public corporation has taken on.
I repeat that I agree with all of you. This is about how we best report to, and are subject to scrutiny by, Parliament. I have said before that it would be good to have a regular cycle in which I can share this information as fully as possible with the committee. However, with regard to the liabilities—in other words, the debt of the airport—all the Government investment at the moment is in the form of loan funding. That is the debt of the airport. As we did not inherit the previous debt when we acquired the airport, the debt position is the funding that I have outlined today.
Okay. You have talked about £15 million of funding and an additional £5 million that is required for the railway station. I understand what you have said about how that is funded. Given your comment that returning the enterprise to a cash-positive position will take several years, further investment will clearly be required. In your update to the committee, you talked about producing a vision. When will that be produced? I think that what you are talking about needs to be more specific than just a vision; it needs to have the main components of a business plan to allow us to understand not just the initial investment but what further investment is required, when it will be required and what plans are in place to return the airport to profitability.
I have described it as a vision document, but that is not to suggest that it will not contain detailed information. It will be as full as possible. I have already answered this question to some extent in response to one of John Scott’s questions. I have given very full information today on the investment that will be required this financial year. There will come a point when we will need to project and share with the committee future estimates of investment, but I am sure that you understand that a number of variables are associated with that.
Capital investment is easier to predict because we have a detailed sense of the backlog maintenance position. That is why I have said that we expect this year and the next to be the peak years in terms of capital. However, the requirement for operating support will depend on the success of the business plan and the speed of its implementation. This is an obvious point, but the more successful the management team is in growing the different strands of the airport’s business, the less operational support the Scottish Government is going to be required to put in.
I can look ahead in this financial year, as I have just done, and I can make the projection that I have made but, if anything were to happen that substantially changed that, I would expect to come back to the committee. As for future financial years, it all depends, to some extent, on our assessment at a later stage of the success of the early implementation of the business plan.
I am simply making it clear that I want to be in a position to share information with the committee as fully and as timeously as I possibly can. All that I am asking from the committee in return is that members understand the variables at play in making some of the projections.
When will your publication be made available?
As I have said—indeed, I have gone into some detail on it—I have asked for further work to be done around the stage 2 business plan. I hope to be in a position to publish that document within the next couple of months, when that work is completed.
I wish to raise a small question of clarification. With regard to the £4.75 million that you have said is required for the skywalk and the station, you said that the work will be funded through regulated access charges from the rail company. Do you mean Network Rail, First ScotRail or the new franchise holder? Are you able to give us a bit more information on that?
To be clear, I said that that is how it would be funded; I did not say that there was an agreement to fund it on that basis. We need to have discussions about it. You will appreciate that we are in the midst of refranchising the ScotRail franchise, and clearly that will have implications. However, as ScotRail pays access charges to access the airport, we would be talking about ScotRail, not Network Rail. There would have to be discussions about an agreement to use and increase those access charges to pay for the capital refurbishment of the station over time.
In addition, as you will be aware, there is a commercial arrangement between ScotRail and the airport on discounted fares for flights, depending on the stage of development of different routes. That would be a matter for discussion on commercial grounds in the fullness of time between whoever is the new franchise holder and Glasgow Prestwick.
Can you put the investment in context and tell us whether a figure has been put on the cost to the economy and the area of not taking over and investing in the airport?
I am sure that I could dig out such a figure, but I cannot remember it. When I made my initial statement to Parliament, I gave the economic benefit figures for the airport to both the local economy and the wider Scottish economy.
Do not misunderstand me: we are making a significant investment in the airport not just to deliver a return for the taxpayer but because lots of jobs directly and indirectly depend on it and because it makes for some of the reasons highlighted by Gil Paterson, who I see is no longer here, a significant impact on the local economy. There is no doubt that the closure of the airport would have had a significant impact on the local economy, and I think that the desire to avoid that situation merits the action that the Government is taking.
I thank the cabinet secretary and her officials very much for their evidence. As agreed earlier, we will now move into private session.
12:43 Meeting continued in private until 12:50.Previous
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