Rural Economy and Connectivity Committee

Meeting date: Wednesday, October 7, 2020

Official Report 710KB pdf

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Glasgow Prestwick Airport

Good morning. Welcome to the 25th meeting in 2020 of the Rural Economy and Connectivity Committee. The meeting will be conducted in a hybrid format, with some of our members and all our witnesses participating remotely.

Under agenda item 1, the committee will take evidence on Glasgow Prestwick airport from a panel from the Scottish Government. I welcome Michael Matheson, Cabinet Secretary for Transport, Infrastructure and Connectivity; and Frances Pacitti, director of aviation, maritime, freight and canals.

I ask any members who wish to declare an interest to do so now. As no one wishes to declare an interest, I invite the cabinet secretary to make a short opening statement. [Interruption.] We cannot hear you, cabinet secretary. You are muted.

Can you hear me now?

Yes, we can.

At the beginning of the year, good progress was being made towards concluding the process to return Prestwick airport to the private sector. The process that we carried out attracted interest from credible investors with aviation experience and proposals for taking forward the business. A preferred bidder was selected, and detailed discussions and negotiations continued towards finalising a deal.

That process was paused at the request of the preferred bidder when the impact of Covid on the aviation sector globally began to materialise. Clearly, that global impact continues to be felt across the aviation industry, and the preferred bidder has advised that it is unable to meet the commitments that are needed to maintain preferred bidder status at this time. It has, however, asked to be consulted and given the opportunity to participate in any future sale process.

Although that is disappointing, it is completely understandable. All businesses in the aviation sector are having to take difficult decisions to respond to the collapse in demand for travel and to ensure that they are well placed to survive the winter after a dreadful summer.

The team at Prestwick is considering further options for the business in light of that development as well as the on-going challenges for the industry more generally. It remains confident that Prestwick has a role to play in the Scottish aviation sector, and there has recently been strong performance across its niche areas of the aviation market, as demonstrated over the past year.

The withdrawal of the preferred bidder means that the Prestwick team can engage with other interested parties, which it was unable to do while the previous sale process was live. That engagement is now under way.

The committee will be aware that Prestwick reported an underlying operating profit of £3 million for the year to 31 March 2020. Revenue increased by 46 per cent to £36 million. The underlying principles of the airport’s performance were based on the development of new revenue opportunities, coupled with measures to control costs and operational efficiencies.

Clearly, the global impact of Covid-19 will be a factor in financial performance this year, but we should welcome the significant progress that has been made to improve the performance of the business. That is down to the significant efforts of the team at Prestwick and the board to promote Prestwick’s strengths and flexibility and to win new business in a competitive environment.

Although the decision by the preferred bidder not to purchase the business at this stage is disappointing, it presents an opportunity to re-engage with other interested parties and engage with new ones. In addition, the airport management team will continue to consider all potential business opportunities to maximise the use of the asset of the airport and to build on the significant progress that has already been made.

I know about some questions that members have, and I suspect there will be more. Mike Rumbles will go first.

Good morning, cabinet secretary. You said that it was “disappointing” and “understandable” that the preferred bidder has pulled out, and I totally agree with that. It is disappointing but, due to the Covid problems that are being faced by everyone in the aviation industry, it is perfectly understandable.

You also said that discussions are under way with other interested parties. I am not going to ask who they are, but I would like to know whether we are talking about one interested party or several.

It is more than one interested party.

Thank you.

If the process proceeds to a sale—I imagine that that will not happen until the end of the Covid-19 crisis, which is still a long way off—will the Scottish taxpayers get their money back? To date, how much of Scottish taxpayers’ money has been invested in Prestwick?

I cannot give you a timescale, for the very reasons that you have referred to around the uncertainty in the aviation industry because of Covid-19. Obviously, that had an impact on the sale process that Prestwick was undertaking with the initial preferred bidder. However, it would be fair to say that, as I mentioned, more than one interested party has been in touch with Prestwick to express an interest in the airport.

Any timescale is dependent on what happens with the discussions that are being taken forward at the moment and the intentions of those who are now engaged with Prestwick. It will also partly depend on their existing business arrangements, but a level of interest has been clearly indicated, and Prestwick is now pursuing that.

On the overall costs of the loans that have been made available to Prestwick, the member will be aware that they are taken forward on a commercial basis, given that the airport operates at arm’s length to the Scottish Government. To date, the loans amount to £43.4 million.

On the return on taxpayers’ money, the member will recognise that Prestwick is a significant employer in the Ayrshire economy, not just directly, with around 300 jobs at the site, but also indirectly, with more than 1,000 jobs in the aerospace businesses that are clustered around and depend on Prestwick. It is important to recognise that the investment that has been made by the Scottish Government in Prestwick helps to sustain not only the airport as an aviation facility as well as employment at the airport, but the aerospace sector, which is an important sector in the Scottish economy. Any agreement with a purchaser of the airport will be dependent on the negotiations at the time.

Before we go on, I observe that eight people want to ask questions. We cannot have questions and answers taking so long. If we have three-and-a-half-minute answers, we will be well into lunch time before we get through this session. I remind members and the cabinet secretary to keep questions and answers short.

The cabinet secretary has just outlined what a valuable asset the airport is. It must be worth at least £43.3 million, and I hope that he keeps that in mind when the sale eventually goes through.

That was more of an observation than a question.

I tried not to ask a question because of the time.

We will move on to the next question.

Good morning, cabinet secretary. As you said, the most recent annual accounts for Prestwick showed a profit of £3 million, although that profit did not come from passengers, which is a part of the business that is still significantly loss making. Can you comment on the Government’s understanding of the airport’s current position? Is the airport making a profit this financial year?

I cannot give the committee that up-to-date information. Obviously, business has been affected by the downturn in the aviation sector. The business is still operating and trying to meet some of those challenges, but given that there is still a significant way to go, I cannot tell the committee where the business will be at the end of the financial year. However, I anticipate that the current situation will have an impact on the business. We will have a clearer picture of that as we move towards the end of the financial year.

Given that the company made a profit, might it be in a position to start paying back some of the loans?

At present, we are trying to support the business to ensure that it is able to continue in a sustainable way. Although the business made a profit in the previous financial year, it is likely to have to use some of that in this financial year, given the downturn in the aviation sector. It has not yet started to repay the loans.

When the sale of Prestwick was first announced, I made the point that it was important that any deal included the repayment of the loans. Will you give us an assurance that you will not take a cut-price deal and write off those loans, simply to wash your hands of the airport? If needs be, will you continue to run the airport under public ownership?

I will not start to open up the approach that we will take to the sale of the airport if it proceeds. The member can be absolutely assured that we will take an approach that is in the best interests of taxpayers in Scotland and the workforce of Prestwick airport, which is important to the Ayrshire economy. We will work to ensure that we get the best return for taxpayers if any sale proceeds.

Unlike some others, I have always supported Prestwick and said that it is the jewel in Scotland’s crown. We should help it as much as possible. It is good to see the turnaround, which is mainly due to freight and fuel sales and has very little to do with passengers, and because of that I do not think that there will be much effect from Covid-19.

If I remember correctly, no funding was allocated to Glasgow Prestwick in the last budget round. How will that affect the airport’s finances due to Covid-19? If Prestwick needs further support—and I would support it if it did—will you give it?

At present, the airport does not require direct financial support. However, I am conscious that, just like the rest of the aviation sector, it is going through extreme challenges. Passenger services have been seriously impacted, but the wider aviation industry has also been impacted, including freight and maintenance—a big part of what Prestwick airport provides is an overhaul and maintenance facility, where planes come in for an overhaul—which have seen significant downturns.

The member can be assured that we remain committed to Prestwick airport, which is a critical part of the Ayrshire economy. We are not prepared to allow the airport just to close, given the significant impact that that would have on those it directly and indirectly employs. We are committed to supporting the airport in the future.

I support you in that, cabinet secretary. Thank you.

That was another statement.

09:15  

The Scottish Government already owns airports. Why would it seek to dispose of one that attracts the interest of credible investors? Why would it not retain the airport in its portfolio?

We made it clear when we purchased Prestwick airport that our intention was for it to return to the private sector. Our intervention was to help to sustain the airport given its importance to the aerospace cluster in the Ayrshire economy. The portfolio of airports that the Scottish Government owns largely help to support island and regional connectivity in Scotland, but Prestwick airport does not have that role. That is why we believe that Prestwick would be best served by being back in the private sector.

I do not accept that position—if there is money to be made, it should be made by the public sector.

Would you rule out the sale of the facility to the military and further military use of that location?

Yes—we have no plans to sell the airport to the military.

What about further use of the facility by the military?

You will be aware that Prestwick airport has provided refuelling stops for the military since the 1930s, and it continues to do so. That will continue to be a part of the niche market that Prestwick airport serves. It has been doing that for a significant period of time, and I do not see that changing.

Okay, thank you; I will take that as a no.

Cabinet secretary, you mentioned new operational opportunities in your opening statement. Could you expand on that? We have talked before about air freight being much more expensive than other forms of freight movement, but given that Brexit is looming, do you think that Prestwick airport is in a position to readily and quickly take more freight if that becomes necessary due to blockages at the channel ports?

The airport management team is looking to expand some of the niche markets that the airport is already in, such as freight, which Maureen Watt mentioned. There has clearly been a recovery in freight over the past couple of months, which the airport wants to capitalise on if it can. That is an area where it wants to continue to see growth.

There is capacity at Prestwick airport to deal with an expansion of freight demand if that becomes necessary. I know that there have been concerns around the potential for disruption at the short straits at Dover as part of Brexit, and there has been some interest in and consideration given to whether additional freight provision at Prestwick could help to bypass some of those delays. That was previously factored into our contingency planning and it would be part of our planning going forward in case of any disruption at the Dover straits. To a large extent, that would have to operate on a commercial basis, and Maureen Watt correctly points out that air freight is significantly more expensive than freight by road or rail. However, if demand for freight increases, Prestwick certainly has greater capacity.

Perfect, Maureen. Peter Chapman is next, followed by me, unless anyone else on the committee wants to ask questions.

Cabinet secretary, you mentioned the 300 jobs at Prestwick airport; unfortunately, we know that the privately owned aviation industry is shedding jobs at a rapid rate. Is that now happening at Prestwick and if not, why not, given that the taxpayer will eventually pick up the tab for any losses?

I am not sure whether that was a demand to have folk laid off at Prestwick. That is not the approach that we want to take.

Approaches have been taken previously by the management team at Prestwick to try to generate greater efficiencies in the operation of the site. Those involved a voluntary redundancy programme. However, it is clear that Prestwick is experiencing the same types of pressure as other businesses. The team is trying to manage that as best it can. I certainly do not think that we should demand that assets such as Prestwick airport start laying off staff unnecessarily. That is certainly not the approach of the management team at Prestwick.

Across the world, the aviation industry is laying off staff. I am not saying that staff should be laid off unnecessarily. However, if it is necessary—unfortunate as that may be—will that step be taken? That is what I am asking. Things have to reflect the marketplace, and I would argue that Prestwick is no different in that respect.

The management team is trying to manage the business as effectively as it can. It is also trying to maximise areas in which it can grow or sustain the business. That is the primary focus. It recognises that there are financial challenges, given the downturn in the sector, and is working hard to address them. Equally, I think that we should try to help support the business as best we can, given its critical role in the Ayrshire economy.

However, you will be aware that some of the businesses that are associated with Prestwick airport have already had to lay off staff as a result of the downturn in the aerospace industry, as well as in the aviation industry. Some jobs have gone from businesses that are associated with the airport. That is reflective of the downturn in the sector overall.

Does Peter Chapman have any further questions?

No; that is fine.

I will change the order of questioning, because Emma Harper would like to ask a question next.

Actually, my question has been answered by the cabinet secretary, so I do not need to ask it now.

That is perfect; we can therefore go back to the original order, unless there are any other questions from committee members.

I have a couple of questions, cabinet secretary. In the past, annually, when the airport has been struggling to make the headway in the market that it wants to, it has had to borrow about £7 million a year in order to keep running. Is that the sort of figure that you anticipate it might require this year?

I cannot give you a figure of that nature. As things stand, the business is operating within its own financial provisions, rather than having to draw down any financial support from the Scottish Government.

That would be expected, given the £3 million profit and the fact that we are only halfway through the year. However, things may get tougher towards the end of the year.

Will you clarify the £3 million profit that was made last year? How much of that came from fuel trading? In the past, the majority of profit has come from fuel trading.

You asked me something similar when I appeared before the committee—just last month, I think.

I was therefore sure that you would have the answer today, cabinet secretary.

I am conscious that Glasgow Prestwick Airport has written to the committee on the matter, setting out the level of information that it can provide on that.

I take it from that that you do not have the answer.

Did you get the response from Glasgow Prestwick Airport, which I asked it to send to you?

I did, and I am asking you the question, cabinet secretary. You will have had that response as well. However, let us not go down that route if we do not want to.

I have two further questions. First, will you confirm that Prestwick airport is continuing to pay interest on the loans that the Government has given it, on the basis that those are commercial loans?

First, I will go back to your previous question, convener. I have a copy of the letter here, in which the business sets out the level of sales in relation to fuel. The letter states:

“Whilst passenger numbers have reduced again this has more than been made up with non-scheduled and other aviation activities in the group and the business has benefited from increased fuel sales with volumes up 85% year on year at 36 million litres and cargo volumes remaining strong at 14 thousand tonnes.”

That is the level of information that can be provided, given the commercial sensitivity of the overall business balance in the company’s accounts. The letter in which that information was provided to the committee is dated 11 September.

Thank you. At this stage, I am happy to wait for the accounts to be published that will declare the fuel trading figure. I return to the question on interest. Is Prestwick airport paying interest on the loans that the Scottish Government made to it?

If you do not mind, I ask Frances Pacitti to address that directly.

Good morning, convener. Yes, interest continues to accrue on the loans that have been made available to the airport. The repayment of interest is deferred, alongside the principal sum.

So the interest is just added to the original sum of the loan.

Yes.

Okay. I will let Mike Rumbles come in before I ask one further question.

On that point, I asked earlier how much is owed. Does the £43.4 million include or exclude the deferred interest?

I will double-check that, because I do not want to give any inaccurate information. However, my understanding is that the £43.4 million represents the entire sum that is due by the airport.

Okay. Richard Lyle wants to come in before I ask my final question.

Cabinet secretary, are you appalled by the negativity of some members with regard to the support that we are giving to an excellent airport in an area that needs employment? What is your view of the negativity of some questions that you are getting?

Cabinet secretary, I will of course allow you to answer that, then I will come back at the end.

I am conscious that some people did not support or welcome our intervention at Prestwick back in 2013 and that some people remain sceptical about it. I find that rather surprising, given the demands that we have faced from all the political parties to take action to help support the aviation sector. Prestwick is an aviation facility that we have been supporting for the past seven years and which sustains, as I said, more than 1,000 jobs in the Ayrshire economy and aerospace industry.

Clearly, there is a desire by some to make political hay out of this. However, the reality is that the Scottish Government is committed to Prestwick and we will continue to do the right thing by it, despite some of the negativity that has been expressed about our actions.

Thank you. If those comments were directed at me, which I suspect they were, I make the observation that it is absolutely right that we question the whole issue of finances.

I have a final question for you, cabinet secretary. I understand the importance of Prestwick airport and all the relevant businesses around the airport. I was pleased to see, when the committee visited Prestwick airport, the interaction between those businesses and the airport. Can you confirm that when you are negotiating the sale of Prestwick airport, the aim is to sell Prestwick with the long-term ambition of keeping it as an airport? There are rumours flying around that it was being sold off to developers for non-airport types of trade—that is, housing and business development. I just want to understand whether that was what you were trying to do when you were negotiating the sale of the airport.

First, my comments were not directed at you, convener, but were a general response to Mr Lyle’s question. However, I am surprised at your question, because you will recall that the sales criteria that were published for businesses interested in purchasing the Prestwick site were clear about it remaining an aviation facility.

Perfect—that is what I wanted to ascertain. It is just that, without knowledge of who might be bidding for the airport, we do not know what their ultimate objectives might be; people’s businesses can change direction.

Cabinet secretary, that completes our questions on Prestwick airport.