Rural Economy and Connectivity Committee

Meeting date: Wednesday, May 17, 2017

Official Report 521KB pdf

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Prestwick Airport

Item 2 is an update on the progress of Glasgow Prestwick airport and its financial management. I welcome from Glasgow Prestwick Airport Ltd: Andrew Miller, chair; Ron Smith, chief executive; and Derek Banks, finance and commercial director. Mr Miller, would you like to make a brief opening statement?

Thank you, convener. I will keep it short.

I am the chairman of TS Holdings Ltd and the chair of the operating board of Prestwick airport. To my right is Mr Ron Smith, who as you said is the CEO; and to my left is Mr Derek Banks, the finance and commercial director. This is our first appearance in front of a Scottish Parliament committee, and I am pleased with the timing, as it coincides with the launch of our five-year plan for the years 2017 to 2022. The plan sets out the action that we are already taking to turn the business around to become a privately owned but profitable and sustainable airport for generations to come.

The document is based on a considerable amount of analysis and hard work, and it articulates the significant amount of work that is already under way. The plan is credible and we feel comfortable that we can deliver it. At the heart of our strategic plan is the determination not only to see the airport return to private ownership, but to create and drive a long-term sustainable business for generations to come that will play a wider role in the Ayrshire economy and the Scottish economy in general.

The airport employs more than 300 people. At Prestwick, we facilitate a 24-hour, 365-day operation, and we support a further 4,500 jobs in the region, a large proportion of which are high value in terms of average salary and the gross value added that is created. In 2014, Audit Scotland reported that the airport contributed £61.1 million to the Scottish economy. Our strategic plan maps out how we can build on that significant contribution and increase employment opportunities in the region, as well as how we can help the Scottish economy in the areas of tourism, exports and the aviation industry in general. We face a number of challenges, including the major reduction in passenger numbers from 1.1 million to 624,000 in 2014. There was also a lack of significant investment by the previous owners, but we are working to address the underspend of capital.

Since joining the board, I have been focused on bringing together a team with the knowledge, expertise and experience to ensure that good governance and processes are in place and that our resources are used effectively to harness the goodwill of stakeholders and drive the business forward. It should be noted that, under the board’s direction, the executive team has exceeded expectations on budgets each year for the past two years. Although the financial accounts as of 31 March 2017 are unaudited, they will show that we have achieved a substantial reduction in our operating losses. The turnaround will be challenging and will take time, but it has started and we are moving in the right direction.

We operate in a dynamic and highly competitive environment. There are further unknowns ahead for us, such as Brexit and the outcome of air passenger tax discussions, but we have taken those into consideration in our plans and we believe that our strategic plan is measured and resilient.

Glasgow Prestwick airport has a phenomenal amount of potential. We have a clear plan and we strongly believe that we offer excellent value to potential investors. We have the most diverse service offering of any airport in Scotland, including passenger operations, fixed-base operations, large-scale and specialist cargo operations, aviation emergency receipt and in the future—I hope—access to space flight. We also offer a number of unique advantages. We are the only airport in Scotland with two runways, one of which is the longest in the country and allows us to handle aircraft of any size. We have abundant land—more than 850 acres—and the ability to adapt our operations quickly to the future. Moreover, we are the only airport that is accessible by rail directly to the door, which provides easily affordable and sustainable access to air travel. That also makes us the only airport to get fuel delivered by rail directly from the refinery, which provides national aviation resilience.

We operate 24/7 and we have capacity available, which ensures that Scotland has no constraints on its ability to connect with the global market. We operate the airport on a commercial basis at arm’s length from the Government, but we are cognisant of the fact that the lender is the public purse, and the level of transparency and accountability that comes with that is critical to us.

We welcome your questions and we will endeavour to provide as much information as possible.

Thank you very much, Andrew. The committee has quite a few questions on a variety of subjects, and members might well move around your whole remit.

John Mason will start off the questioning.

Thank you very much for your opening statement. Can you give us an overview of the airport’s performance since the Scottish ministers bought it two years ago and a feel for how it has done? You said that the losses are less than they used to be but, as an accountant, I do not like to hear about any losses. So the airport is still making losses, but what about passengers and freight over the past two years?

Performance over the past couple of years has been better than forecast, although there are still significant losses. Part of the issue is the impairment of assets as we spend throughout the year.

If you will bear with me, I will try to explain the concept of impairment. Normally, one would depreciate an asset over its life, which can range from three years to 40 years, depending on what the asset is, but we have to write that off within the year. That accounts for roughly £4 million a year, which exacerbates the apparent losses. It is quite difficult to make comparisons, although we can do that by using the adjusted EBITDA—or earnings before interest, taxes, depreciation and amortisation—which looks at the operating losses. Although the operating losses have not come down significantly, they have been progressing in a downward direction over the past couple of years.

Is the most positive thing that has happened the fact that we are making less of a loss than we used to?

Because of the challenging environment that we are in, we will always find it difficult, and we are looking at everything that we can do to reduce costs and to increase income. Over the past three years, military income has increased by 37 per cent, and the occupancy of our property has increased from 58 per cent a few years ago to 95 per cent. When it comes to cargo, we are still struggling; we have maintained the levels of cargo, but they are not improving.

Over every income stream, we are slowly progressing. We experienced a drop in passenger numbers from 1.1 million to 624,000, but that figure increased to 678,000 last year and we are projecting a figure of about 710,000 for this year.

Some of my colleagues will ask more detailed questions about cargo and passenger numbers and so on. For now, though, can you explain the board situation? I understand that there are two boards. How does that arrangement work? Who does what?

I will answer that question, if I may. The two boards were created to keep the shareholder at arm’s length because of EU and state-aid rules. The Scottish Government followed the model that was used when the Welsh Government took ownership of Cardiff airport. Some good work was done there, and the Scottish Government decided to follow that in order to keep the business at arm’s length. The holding company represents the shareholder, which is the Scottish Government. Ron Smith and I are on the board, along with two civil servants, and it deals with the business’s long-term strategic direction and makes sure that it is adhering to the financial plans.

At the operating level, we have all the functions covered as a normal board. The non-executive directors have the correct experience, and I chair both boards. There is a compliance issue from an EU and state-aid perspective, which is why we have the two-board arrangement.

That leads neatly on to Peter Chapman’s question.

Good morning, gentlemen. My question is about the new strategic plan. Why was a new plan required, given that one had been published as recently as late 2014? How do the two documents differ?

That is a very good question. It is worth noting that, with the tremendous reduction in passenger numbers, which fell very quickly at around that time, we all realised that it was necessary to take a far more realistic view of the numbers and to go into a reset position that would give us a realistic base. It was the view of the non-executive and executive teams that we should take a new, realistic forward look at all aspects of growth and that all our revenue streams should be attacked. We wanted to set a new strategy that was geared heavily towards winning more business across all our revenue streams. The new team put together a new, highly realistic plan with a highly refined focus on what was achievable and with a view to driving the revenue streams to get us into profitability for the long term.

So the new strategic plan is a more realistic document. Was it driven by the drop in freight tonnage, passenger numbers and the number of aircraft movements?

The original plan included a figure of 1.1 million passengers, which was the running rate at the beginning of 2014. When I joined the business on 1 December that year, the running rate was roughly 620,000 passengers, so we had to reset the business from the point of view of both future thinking and cost control. As Ron Smith said, it was a case of reset.

I assume, then, that the question that I ought to have asked was about the progress that was made in meeting the goals in the original strategic plan. The answer is that those goals were not being met at all—in other words, things were moving in the wrong direction.

Absolutely. If I were to characterise the situation, I would say that the patient was bleeding and we had to stabilise it. The reset was to stabilise the business, given the change in economic factors driving the falling numbers.

10:45  

You have been saying how difficult things are. In one of our papers, it says,

“The capital plan does not include the cost of replacing the existing primary radar, which must be done within the next five years.”

How much is that likely to cost, and how are you proposing to finance it, if it is something vital that needs to be done in a fairly short time scale?

We have actually started the implementation of the radar; the tower has been built and the equipment has been tested. The work has primarily been funded by the wind farm development funds, in recognition of which we have to maintain the radar for 25 years. If anything goes wrong with it, we have to maintain, repair or replace it. It is being funded by wind farms.

So you are well on the way to replacing that.

I think that it will be operational later this year.

I am sorry—I am a bit confused. Can you clarify whether the money is coming from a community wind farm fund or from a wind farm that you own?

It is coming from wind farm developers.

So it is a development fund that wind farmers have paid into.

Yes.

Wind farms come with a risk, because of the old technology used in radar. The turning blades stop the radar tracking aircraft—

I am sorry, but I wonder whether we can get an indication of how much that funding was. I think that people would want to know how much was contributed.

Are you talking about the contribution itself or the cost of the radar?

The cost of the radar.

I believe that the cost of the radar was about £3.2 million.

There has been a series of senior staff changes at the airport since 2014. Will that have a positive or a negative effect on performance and on returning to profitability by 2022-23?

You must consider that when I joined the business, there were early questions about the 2014 plan numbers and performance. We had to make some changes at the senior level to put the right people in the right slots. Some of the people concerned had contracts from the previous owner, and we had to fulfil the legal obligations within those contracts.

If the convener will allow me, I will set the scene before I ask my questions. I live in Motherwell and I have travelled to Prestwick airport on several occasions to pick up relations. The journey time, roads and rail were excellent, as was the airport. The only problem was, when I arrived at 10.30, I was the only person there, apart from the staff, as I waited for my relations. Other people arrived at about 11 o’clock. I got there very early because of the excellent road and rail travel.

I remember flying out of your airport a number of years ago to go to America. Why has such an excellent airport lost so much business from airlines? I think that there are only a few flights a day—one flight at night, three or four flights during the day—going to Prestwick. It is a national scandal that an airport as good as yours, with all those excellent things going for it, is not as vibrant as Glasgow airport. I was at Glasgow airport on Sunday, taking my son to fly out somewhere, and it was bursting at the seams.

When was the last time a new scheduled passenger airline chose to operate from Prestwick airport? Why has it proven to be so difficult to get people to come there? It is a fantastic airport. Why is it so difficult to get airlines to come to your airport?

I would like to take that question, please. It is a good one; in fact, it has been at the root of my thought process since joining the business. In the good old days, at its maximum, the airport was classified by the Civil Aviation Authority as a small airport. Even in its heyday, when there were 2.4 million passengers, it was regarded as a small airport.

We have lost some business because of some of the airlines’ strategic plans. Some have wanted to move—Ryanair is a good example of that. You need to keep in mind that it is the largest people mover in Europe these days and as part of its evolution, it sees itself in many cases as challenging and wanting to be alongside the major airlines.

We have worked hard with Ryanair, certainly in the past few years, to stop any further erosion of their passenger numbers and, in fact, to start to build up passenger numbers. We have had some success in doing that, as Derek Banks has alluded to, but that is not the end of the story. We are working hard with a raft of airlines where we have identified that we can offer something unique on capacity, time slots, ease of access to Glasgow and the rest of the south-west of Scotland and even into areas in the north of England, such as the lake district.

That is our approach. We are looking at airlines and routes that do not exist in Scotland—or certainly in the west of Scotland—to try to offer that uniqueness that we can handle and to give the capacity and the excellent service levels that people would expect from us.

A lot of the problem comes from the history. The days of British Airways, the transatlantic link, Wardair Canada and the passengers that you referred to that were going to the US and Canada are no longer with us. There is a new generation of operators and low cost is the dominant factor in airline development.

We know that it takes about 18 to 36 months to get a passenger airline committed to a route, and an awful lot of work in between times to massage that across the line; that is exactly what we are doing. We have a number of strong possibilities for new routes and airlines and that is exactly what we are following up on. Our plan takes a conservative but realistic view of how much of that business we expect to land.

How confident are you of securing new airlines and how important is that in meeting the objectives of the strategic plan? At the end of the day, Ryanair only flies to Barcelona.

No, it does not.

Does it have other routes? Are there other routes that you can open up for the airlines? How often are you sitting down to talk to airlines and convincing them to come to Prestwick? It is an excellent airport—I compliment you on that—but we have to get our finger out and get something done about it.

If you read my foreword to the strategic plan, you will see that the first thing that I identified when I took on the role was that not enough effort was being put into winning new business. I made major changes to the organisation’s structure to bring in specialists on passenger and route development, cargo and freight development and fixed-base operations and military business. We now have people managing those revenue streams and attracting new business; they are the lifeblood of the airport and are the biggest part of the strategic plan.

Page 25 of the strategic plan shows all the destinations that we fly to. We have one or two exclusive destinations that we serve from Glasgow Prestwick. We are making progress. We are far closer to and alongside Ryanair than we have possibly ever been. We are also very close with a number of other airlines on new routes.

Sadly, because of the strong commercial restraints put on us by the negotiations, it would be unwise of me to give any further details on who we are talking to. Indeed, the easiest way to lose a new route would be for such information to enter the public domain. That could scare the airline or, perhaps, the shareholders, many of whom are public limited companies, because the release of that information could affect their stock values.

I would be delighted to come back to the committee to give further details when we can. We could certainly give the full details of the successes that we have achieved over the past 12 months, say, the next time that we sit in front of the committee.

It is true, Ron, that Ryanair announced a new route to Poland about two weeks ago.

Yes. It is a unique route to the city of Rzeszów in south-eastern Poland. It has been booking remarkably well. It is a fantastic set-up there, because not only is it a high point of aviation engineering in Poland, which means that it will match nicely with our aviation manufacturing business in Scotland, but it is about 100km from the border with Ukraine and 80km from the border with Slovakia. Already, some of the bookings are by citizens of those countries who are using the route as an entry point into the United Kingdom through Glasgow Prestwick. It is an excellent opportunity to show Ryanair exactly what we can do when we are given such an opportunity.

Is it only Ryanair that flies out of Prestwick or are there more carriers?

It is the only scheduled carrier that flies from Prestwick, but we have other services from there.

I know you have other services.

I will be in your airport in a couple of weeks’ time—I will be picking up my relations again—and might see you around.

Could I just add—

Yes, but there are a few questions piling up on the back of that.

It takes a length of time to get the airline traffic business in—anything from 18 to 36 months. We are not sitting back waiting for that to happen. We are actively progressing other income streams as well.

We all appreciate that the last thing that the committee wants to do is frighten potential customers away.

I appreciate that many of the discussions are sensitive commercial discussions. However, Audit Scotland’s 2015 report states:

“the airport is not viable without Ryanair”.

I come from a commercial background and it sounds to me like a tremendous risk for a business to have pretty much a sole customer who is essential for the success of the business. I have seen Ryanair fall out with airports in other parts of Europe. For example, I recall when it pulled out of the Granada route from the UK and the devastation that that caused in the local tourism industry and economy. What are you doing to address the huge risk of having a sole airline that is somewhat notorious for falling out with airports?

I know that you will answer that tactfully, Ron.

Ryanair is a hugely successful airline, albeit an unusual one.

It is well worth making the point that Ryanair started its overseas business at Glasgow Prestwick when it was still a fledgling airline. As part of that launch into the UK, it established its only heavy maintenance base at Prestwick. Ryanair has since expanded the base and we are in discussions with it about further expansion.

The commitment to Prestwick is strong. There are about 300 to 350 jobs, plus a high number of apprentices, employed in that maintenance and overhaul facility, which is the only one of its type anywhere in the Ryanair network. The fact that we are having a discussion with the airline about further expansion and the creation of more jobs is a strong indicator that it sees a future in the Prestwick facility. It also means that every aircraft in the Ryanair fleet, which is rapidly expanding, comes to Prestwick for heavy maintenance and C-check overhaul.

There is a strong bond that is assisted by a new attitude from the senior management and executive team at Glasgow Prestwick about working alongside Ryanair. There was a vacuum for a long time. We have certainly plugged that vacuum now and have a strong working relationship with Ryanair’s senior team in Dublin.

Flying commercially these days is the most miserable experience on earth and it is all down to airports. When I started flying 50 years ago, you parked at the front of the airport and were in the air 20 minutes later. The hassle was almost nil. Does Prestwick have a huge advantage in that it has relatively small throughput at the moment and relatively capacious facilities? We have talked about airlines; how are we energising passengers to demand services from—I will be as good as I can—an airport with a relatively stress-free departure experience?

You raise a good point. Costs associated with compliance on, for instance, security related issues, have fundamentally changed and that works against a calm passenger experience. That is legislated, but I take your point. The other area is the retail experience. All airports are trying to achieve higher spends per head because that is the best way of making them profitable.

11:00  

When Prestwick airport was designed in the 1960s—I will get to your point—passenger processes were completely different from how they are today. There were paper tickets, and passports were checked and bags checked in with no technology, so the allocation between airside and landside was 70 per cent landside. Today, it is the exact opposite: all the space has to be airside, because that is where airports make the most money. Unfortunately, in the history of Prestwick airport, that switch of land allocation in the building has not taken place. One of the projects that Ron Smith and his team are working on is looking at what we will do if we have more money, given our increasing profitability, and how we can address that significant problem.

The unique selling proposition that we have is that we are quiet and can give the passenger a hands-on experience. The downside is that, to achieve that, we have to create an environment that is conducive to that good passenger experience while, at the same time, being very careful in how we spend our money. The management team have plans for how we are going to address that, but it is very much the case that, as we perform, we get more money, and that is exactly what we have been doing.

We have had generalised upgrades in the building, but the point that you raise is a good one. It is not a comfortable experience—I do not mean at Prestwick; I mean at other airports. It is a very good experience at Prestwick.

I realise that, as you said in your answer to Mr Lyle, you cannot say too much about detailed routes, but I think that the strategic plan specifically mentions that you are hoping to get a London route again at some point. Can you comment on that at all?

I would be delighted to do that. London is a vital hub for any UK airport, and we are working hard and with a great deal of focus—it is a prime focus—on making London a priority. London is served by many airports and we have a preference for the one that we would like to establish a route with, but we are working tirelessly to try to establish that London connection to serve the people of the west of Scotland with an alternative, and to give the local catchment area a direct connection to the world.

People will use an airport when it has a flight to where they want to go to or a flight to a hub where they can transfer to get to where they want to go. That transfer connectivity is vital to us, and there is no better place in the UK to have it with than London. We are working tirelessly with a number of the London airports to set that up, and we have conducted some modifications and improvements to both our landside and our airside infrastructure at the airport to cater for a domestic route or routes once we can get one over the line.

Our prime focus is certainly UK domestic connectivity through London, and also European and long-haul connectivity through other airports and airlines that we are targeting around Europe and particularly in North America. All of that is important, but London remains our prime focus as a UK connecting hub.

Can I ask another question on that, convener?

Yes—absolutely. I will then bring in John Finnie before you come back in.

I will play devil’s advocate. Given that we have three airports in the central belt, why would I as a passenger want to go to Prestwick when I have Glasgow and Edinburgh airports? Why would an airline want to go to Prestwick when it has Glasgow and Edinburgh airports, which are closer to the population and either have or are about to get rail links? Can Prestwick offer anything unique?

Ron Smith talked about the market and demand. The CAA statistics show that London is the biggest market for Prestwick’s natural catchment area, which is basically determined by asking people, “Is Prestwick your nearest airport?” We know that over 200,000 pax a year from our natural catchment area bypass Prestwick to get to another airport in order to travel to London. They would prefer not to do that.

This is about our securing an airline that might or might not have duplicated assets in the other two airport locations that you have alluded to but which sees an opportunity to try to cut down the travel time, the carbon footprint and so on that are all part and parcel of the analysis.

Just—

I will bring in John Finnie at this point, Ron, because his question might tie into the answer that you are about to give.

Good morning. It was only last October that the Scottish Government enthusiastically lent its support to a third runway at Heathrow; indeed, it was positively salivating at all the benefits that would come to Scotland. I have the press release here, and it says:

“We will now work with both Heathrow and the UK Government to ensure commitments made to Scotland are followed through.”

One of those commitments related to

“The potential for a logistics hub to be based at Glasgow Prestwick Airport”,

which was described as

“an important part of the Heathrow offer.”

What discussions have you had with the Scottish Government on that aspect?

I should say that there is a photograph in the strategic plan of the signing of that memorandum of understanding, which took place at Glasgow Prestwick airport.

There is a commercial understanding that Heathrow will set up a number of supply hubs to support the construction of the new northern runway and some of its additional terminal requirements as a result of the extension of terminal 2 and further satellites of that. The people at Heathrow learned during the construction of terminal 5 that such an operation is very congesting, and as part of putting some of those lessons into practice, they are looking at the supply hub approach. Spreading the supply chain around the UK will get better value for money, and congestion will be reduced by bringing in componentry for the construction process through alternative methods.

We are very much part of that. We were early contenders in talking to Heathrow at a high level. We held a stakeholder review with it that covered local stakeholders in south Ayrshire and, as part of the process, we have been to several events in which we have followed up our interest. We are complying with the process, and we are working with the Government to follow this opportunity.

All that the MOU suggests is the creation of a supply and support hub in Scotland. In our opinion, Prestwick airport would be an ideal location for that, and it seems that Heathrow shares that view. We are not the only bidding party, but we believe that we are in a strong position, and we will continue to drive the process to show that we are a very suitable candidate to be selected to provide the supply hub in Scotland that has been guaranteed in the MOU.

Can you give some more details on that, Derek?

We will hear from Derek Banks, and then I will take a follow-up question from John Finnie.

As part of the process, we have to register an interest by 31 July, so we are currently working with stakeholders including South Ayrshire Council and Scottish Enterprise to get together a credible bid. As Ron Smith said, Prestwick is only one of the options, but it is a strong one given our links with marine, rail, air and road travel. It makes a lot of sense for the logistics hub to be there.

You might sense my cynicism about the whole project, but it is predicated on the assumption that a third runway will go ahead. What prominence is given in your future business projections to the potential for that to happen? In my opinion, it would be wrong to put too much emphasis on it.

There is nothing about it in the five-year plan. However, I note that the MOU talks about preferred and slot access for any Scottish airport in that new facility.

I understand that it is not a done deal—with all such big projects, we have to plan things well in advance—but there is nothing in our five-year plan in that regard, other than the opportunity that we see to provide the prefabrication hub for air, sea, road and rail that Ron Smith mentioned. After all, Prestwick is very near a very important railhead.

I have been granted a further supplementary question even though we are on a busy schedule. I might have noted what you said incorrectly, but I think that you mentioned a figure of 38 per cent for military income. Did you mean that 38 per cent of your income comes from that, or that that income increased by 38 per cent? Which part of the military were you talking about, and what does it get for that?

That is generated income, which has increased by 38 per cent over the past three years. Unfortunately, we cannot divulge what military flights go in and out of Prestwick.

Okay. Are you co-operating fully with the authorities on the issue of rendition, albeit that that is perhaps a historical matter from your perspective?

John, Derek Banks has given me a sort of undertaking on that matter because he cannot really discuss it, although I understand your point. Derek, if you are uncomfortable about saying any more than you have said on that, I am happy with that.

As the chair, all that I would say is that all military and civil aircraft have to comply with CAA and Department for Transport rules. Any aircraft that complies with those rules can fly to any airport in the UK.

Thank you.

I am not sure, but maybe John Finnie can follow that matter up with the minister, if he wants to. John Mason has the next question.

I understand from the strategic plan that the freight market has changed quite a lot in recent years. Can you explain that to us and say whether it is an advantage or a disadvantage?

The freight market that we talk about at Prestwick is the market for dedicated freight, which involves aircraft that are built or converted simply to be freighters and carry specialist freight and cargo. Our sense is that that market is probably in long-term decline. However, we have a plan to cut ourselves a much bigger slice of the market by offering at Glasgow Prestwick airport special services that are unique to Scotland. I am talking about ground-handling services, the right equipment to load unusual and heavy cargo and the ability to turn round large freight aircraft such as 747s and 777 freighters.

The bulk of the part of the freight market that is booming comes in the form of belly-hold freight, which is carried in the holds of passenger aircraft, mostly those flying long haul. For example, Heathrow airport has a rapidly expanding freight business because of its massive capacity for aircraft with belly-hold freight that go all over the world and carry freight almost as a byproduct.

The low-cost carriers do not like to use freight as an income stream, because it slows down their turnarounds. The low-cost airline industry is based on the flying hours of the aircraft and maximising the hours in the sky, so the last thing that those airlines want to do is to increase the turnaround time and reduce the flying time by taking on freight.

As part of our new business focus on winning new passenger airlines for Prestwick, we have identified target airlines that would be interested in the target market of carrying belly-hold freight. They probably have dedicated freight businesses but are swinging more towards belly-hold carrying. That is the type of knock-on effect that comes from good passenger development. However, we are also following up some passenger airlines because we can offer them a specialist freight facility as part of their belly-hold programme.

The situation is therefore not as simple as it might seem, but we are trying to cover both markets by attracting new airlines that will be interested in belly-hold freight and cutting ourselves a much larger slice of the traditional dedicated freighter market.

I have a supplementary question, if that is all right. Food exports are regarded as a big thing for Scotland and we are hoping to expand that market further. Is that the kind of area that you are looking at, which involves moving products quickly to another market?

The main target has to be high-value products with a shelf life. The prime Scottish exports that meet those criteria are seafood and salmon, and those are the types of markets that we are looking at. We have opened up some dialogue with Scotland Food and Drink about the potential to have specialist facilities and really tap into that market. It is currently handled by excessive road transport down from Scotland to Heathrow, with products often then being exported right over Prestwick on their way to North America. We have analysed the market and the potential that we are trying to tap into.

Before posing my question, I express my support, as an MSP for West Scotland, for the many local jobs that Prestwick airport creates across the west of Scotland and particularly in Ayrshire. There is no doubt that there is a lot of good will across the country for Prestwick airport and a desire to see it succeed and grow successfully. Naturally, however, we want it to do so in a way that gets the best value for the public funding that it is receiving.

In recent months and indeed years, we have heard a lot about Prestwick being used as a spaceport, but there is little detail and little awareness of where we are with that. Will you elaborate on the discussions on that, who is making the decisions, the numbers that are involved and so on?

11:15  

I would be delighted if you could answer that, Derek, but I ask you to be as brief and focused as possible.

I will try my best. On the process, a few years ago, we commissioned a study to look at the feasibility of developing Prestwick as a spaceport. The feasibility study identified development costs and estimated that it would cost about £5 million to build the required infrastructure for the first launch with one operator. That is a relatively low sum for the development of a spaceport, so we believe that it is a viable option.

On the funding requirements, the issue is one for the UK Government to take forward. We have submitted five applications to the UK Space Agency for its recently announced funding route. Unfortunately, that process is being delayed because of the purdah period for the general election, but we hope that at least one of those applications will proceed. I cannot talk too much about that because those bids are commercially sensitive, as they include the operator’s costs and income levels.

Would the spaceport be used for space tourism? What type of use is envisaged?

That is always how it appears in the papers, but the real demand is for satellite launches for global positioning system applications. That market is growing by three or four times a year. We have a major manufacturer in Clyde Space Ltd, but all the satellite manufacturers have to truck their goods to eastern Europe, in the main, and wait for a space on a vertical launch. The spaceport would involve a horizontal launch of a pod up to about 55,000 feet. There is phenomenal demand for that method, which involves a phenomenal reduction in costs. The satellite industry says that it is looking for a low-cost launch facility, like a low-cost airline.

Are you applying for the £5 million of capital investment that is required from the UK Government, the Space Agency or the Scottish Government? I am not sure where that money will come from.

We have put in submissions to the UK Space Agency programme to try to recover some of that money.

I move on briefly to some of your other sources of revenue, such as fixed-base, business and military aviation. How do you plan to grow those revenue streams?

That is an excellent question. Growth in those areas is part of the overall growth process. Military aviation is a good example of something that can be developed quickly. As I said, gaining new passenger routes can take anything between 18 and 36 months, but military business can be won in a substantially shorter timeframe—in days or weeks. Our new business development manager for fixed-base operations, which include military operations, has been in North America talking to potential customers, and the flights that he has managed to win have landed at Prestwick before his return. The lead time for winning military business is much shorter than the one for winning passenger business, and the improved earnings figures from military that Derek Banks mentioned reflect that.

On that basis, we will continue to work on the military side. It is all about meeting people, securing contacts and reassuring people that we have in place the ground services and the technical and fuelling capabilities that attract such business.

A good example is our close working with the SSE Hydro entertainment facility. Five dedicated 747 freight aircraft used Prestwick for a two-night performance at the Hydro—I will not mention the star’s name. Previously, that business would have gone to another airport down south. We worked tirelessly with the Hydro management team to secure those aircraft, which were for costumes only, for that period of time. That is a good example of how we have improved the revenue streams through better business development processes.

That is very helpful—thank you.

You mentioned Ryanair’s servicing facility at Prestwick. Could you not interest other companies in using that facility? You have two long runways. Could you not get other companies to service their planes at Prestwick?

That was very much part of our ambitions, certainly at the start of last year, and I am pleased to say that we have successfully done that. We have attracted the well-known aerospace maintenance and overhaul organisation Chevron Aircraft Maintenance into what was our largest vacant hangar facility at Glasgow Prestwick. It had been vacant for a long time—10 years, I believe. We had been paying rates on the property, whereas we now have no rates to pay and a tenant paying us rent. The swing has been enormous.

We are putting more and more into infrastructure development, focusing on maintenance, repair and overhaul, in order to drive that income stream, which we see as very good. We have a natural attraction for airlines based on the fact that Prestwick has a long history of aviation maintenance and, if we go back far enough, manufacturing. That is of big interest to airlines for their maintenance programmes. It is certainly part of the focus.

My final question is on passenger numbers. Ryanair expects to carry 675,000 passengers from Prestwick in 2017—by my calculation, that is more than 13,000 people a week—yet the new strategic plan predicts 710,000 passengers, which is nearly another 700 people per week. Depending on the size of the plane, that is equivalent to two extra planes. Why is there a difference between what you are predicting and what Ryanair is predicting?

Ryanair’s prediction of 675,000 passengers was for 2016-17, and we actually achieved 678,000. The 710,000 prediction is for the current financial year.

You are making that prediction because you are introducing the new route to Poland and because you have all the extra slots that other airports do not have. It is a bit like the beer advert—you can reach places that other airports cannot. For those reasons, you are predicting that you can do better this year.

Yes. We will take any activity that Ryanair wishes to give us, and we are approaching other airlines as well. The conversations that we are having with other airlines are really positive and are progressing well.

The strategic plan talks about harmonising pay and conditions for staff. What impact will that have on staff salaries and conditions?

That is a very good question. The situation at all airports is quite complex, in terms of the number of positions and salary spine rates. The situation at Glasgow Prestwick is particularly complicated and has, for some time, been operating on the national living wage standard for some levels. We are trying to simplify that; we have just launched a process that will simplify the salary scales and make them far more transparent. We are looking at taking on board all the pledges that are required under the Scottish Government’s ideals. We are not quite there yet, but we want a clear and structured salary spine on which everyone fits and everyone can see where they fit.

We have had a very strong programme, in which we have had what we have called an internal roadshow. Glasgow Prestwick is a very big site, and the management team has gone out to various parts of it and presented what we are trying to do, in consultation with our staff and our unions, to ensure that they understand exactly what we are doing to get everyone into a far more simplified system and move everyone forward. It is our objective to move to the Scottish living wage, but the complexity means that that will take some time. We are sharing that information in our engagement process with our staff and unions, and are making good headway. We see that as being vital, although it is complicated to do and will take time.

We are trying to ensure that we have the necessary amount of funding available to cover that without spending any more from the public purse. That in itself is complex: to move to the Scottish living wage today would require a sum that we simply cannot afford. Our staff understand that, and they understand that we are funded by the public purse. As part of our staff engagement policy we have a very strong communication programme to ensure that everyone knows what is going on, and that we are trying to move to paying the Scottish living wage within the next three years.

Will there be any wage cuts for staff? A lot of support for the airport is provided because of the impact on the local community, and take-home pay is very much a part of that.

We understand that clearly. As I said, many of our staff are already on the UK living wage, so cutting that would not be an option. We are trying to get better efficiencies from our staff and are starting to consider what savings we can make in our employment costs. However, we are not considering reducing salaries or moving contracts to zero hours. We want to be a good model employer, but we want to do so affordably, within the public sector.

It has been interesting to hear what has been said and to read the information that we have received. As we have heard, the airport is not viable without Ryanair, which is increasing its number of routes from Edinburgh airport. The number of flights is down, passenger numbers are down and the amount of freight is down, according to the information that we have here. Mr Smith said that passengers want to fly from where they want to go from—the airport has to be where passengers want to leave from. I therefore have to ask a fundamental question. With other airports expanding, is it not simply that Prestwick airport is in the wrong place to attract new business, whether from passengers or from airlines? The information that we have received is depressing reading, to be frank.

My questions will focus on the finance. When will taxpayers ever get back the money that has been invested in your company?

I will clarify some of those issues. Passenger numbers are growing and have been growing for the past couple of years. In addition, freight traffic has stabilised.

But the number of passengers has fallen, has it not?

It has. However, since the Government took ownership, numbers will increase from 624,000 to a predicted 710,000 this year. The amount of cargo has been static at around 11,500 tonnes per year over the past couple of years.

We are doing as much as we can to turn the business around, and we are looking at every opportunity within that to consider our various income streams. For instance, property accounts for almost 20 per cent of our income, whereas the number of passengers and its indirect impacts account for only 33 per cent of our income. A large part of our business is based on other income streams, which we are trying to grow. We are growing them all at the same time, and some are more challenging than others.

That does not agree with the private papers that have been given to us, which say that annual passenger numbers have fallen, that annual air transport movements have fallen and that annual freight handling has plummeted from where it was a few years ago. I am not confident that we are going to get our money back.

I can confirm that passenger numbers have increased and that the cargo numbers have stabilised over the past couple of years. I would be happy to send you the figures.

If you can provide more figures than we have—

The graphs that have been produced for us show, as Mike Rumbles suggests, that the number of transport movements has decreased. It is difficult to tell exactly from the graph, but I think that the increase in passenger numbers is just above a flat line—it is not much more than that. The amount of freight that is handled is definitely down, according to our figures.

Our accounts will be published around September this year, and they will include a lot of the figures. I would be happy to provide the information in advance of that.

I am asking a more fundamental question, which I think has been skirted around so far this morning. We have three major airports in the central belt. When people spend their money on a service, they want to go to an airport and get on a flight to their destination. It seems to me—I am being radical here, and I seem to be the only one who is voicing the problem—that you are in the wrong place.

May I address that? Prestwick is the closest airport to my home and is where I would like to fly from. Last year, 1.6 million passengers fell into that category. However, we take only between 600,000 and 700,000 of those passengers, which means that a potential 1 million passengers are currently not exercising that catchment right to fly out of Prestwick. That is the number 1 macroeconomic dynamic that we are following: the job of the management and business development team is to find those 1 million incremental pax as part of the process. I therefore beg to differ with you: the airport is not in the wrong place.

I hope that that is correct and that my impression is wrong.

Those are Civil Aviation Authority statistics.

11:30  

I return to my fundamental question about finance. If you are so positive about the future of Prestwick, when, as taxpayers, will we get our money back?

That is partly tied in with the question that I want to ask. Maybe we can clarify the issue. I think that you said that the 2017 accounts are unaudited at the moment.

That is right.

You have a book value for the assets?

We do.

Can you disclose it?

I would rather not do that at this point, because that information is commercially sensitive.

Could you give me the book value of the assets in 2016?

The asset base is actually very low. The answer depends on whether you are talking about the assets in the accounts or the perceived assets as they would be valued at a later date.

Okay. There must be a way for me to get the answer to the question what the value of the asset is in 2016—not on income stream but on book value.

Because of impairment, the book value obviously does not recognise fully the assets that have been purchased over the past few years. Over the past three years, we have spent roughly £12 million on the airport, but that is not recognised as an asset within the business. I am not trying to avoid the question; it is very difficult to give an appropriate answer.

I think that the issue that Mike Rumbles and I are both trying to get to the bottom of is that, when the book value of the assets is disclosed and we understand what it is, if we add £39.6 million to it figure—my understanding is that that is the value of the loan up until 2022—the value of the airport should exceed that amount. My question—I guess this is what Mike is asking, too—is whether in 2022 the value of Prestwick airport will exceed £39.6 million plus the current value of the airport. If it will not, one must ask whether the investment is a viable proposition from a business point of view.

The value certainly has the potential to do what you have described.

Every business would like to think that it has the potential to do that, but is it realistic to expect that it will happen at Prestwick?

With the plan that is in place over five years, and looking at the market at this point in time, we believe that that is possible.

Convener, I would like the witnesses to respond to my question. In what year will the taxpayer get their money back from the investment in your company?

In the strategic plan, we will return to profitability in 2022. Thereafter we would, depending on cash flows, look to start repaying the loan.

You will start repaying the loan in 2022.

So, in 2022, what will your cash flow be? I want to understand the situation.

That is the point at which we would break even. Beyond that is when we will start to repay the loan.

How long will it take to repay £39.6 million, which is the investment between now and 2022 based on your strategic plan?

Based on our projection, which we have done over 25 years, we reckon that we will do so about 10 years after that date.

So in the 10 years post-2022, the airport will generate £39.6 million, plus interest plus running costs.

Yes.

Gosh! That is a lot of money.

There is just one advantage that it would be helpful to confirm. Is it correct that Prestwick airport has the lowest impact from weather of any airport in the UK?

Yes.

We were asked earlier about the attractiveness of Prestwick to airlines. One of the things that we have is capacity. We have been asked why people would want to go to Prestwick when they can catch a flight from airports in the central belt. The simple answer is that a lot of airports in the UK—the two in the central belt in particular—are fast running out of capacity. We have capacity in abundance, which is one of the things that is starting to attract the airlines. We can give them not only the landings and slots that they require but their preferred timings for the slots. It is not for me to say, but I think that it would be pretty difficult today for an airline to get a new slot at its preferred time at Edinburgh airport. We have that advantage, so we are trying to exploit it as part of building the attractiveness of Glasgow Prestwick to the airlines.

I will let Richard Lyle come in very briefly before I ask Gail Ross to ask the final question.

I agree that Prestwick has the slots and the time. However, to go back to what Mike Rumbles was asking about, if I stay in Motherwell and want to fly out of Edinburgh airport, it takes me some time to get there, or if I want to go Glasgow airport, it takes me some time to get there. However, with the new M74 extension, the M8 upgrade, dah-di-dah-di-dah, it takes less time to get to Prestwick airport. That is where you are falling down, guys: you are not advising people that they can get to Prestwick quicker than they could a year ago.

We have launched a new campaign of communications about travel times on the rail networks, on the national coach networks, and for driving. The issues that Mr Lyle just referred to come into play in that campaign. For example, we have half-price rail travel from anywhere in Scotland to Prestwick airport, but getting that message across has been quite difficult. We are redoubling our efforts to communicate with the market in order to ensure that people understand our message.

For people in much of the catchment that Glasgow airport regards as being its own—south-west Glasgow, Newton Mearns, Whitecraigs and so on—it is much easier to get to Prestwick airport than to Glasgow airport, despite Glasgow airport being a bit closer. Getting that message across is the challenge for us: it is certainly one that we are very focused on.

Thank you. I give the final question, if I may, to the deputy convener, Gail Ross.

Thank you, convener. Good morning, panel. We have spoken a lot about Ryanair, and certainly Michael O’Leary has been very vocal about how he thinks Brexit will affect Scottish aviation. Can you tell me how leaving the European Union will affect Prestwick airport?

That is a very good question. We have what I call a Brexit risk overlay in the business. Brexit was not something that we had planned for in the previous plans for the business, and it will have a significant impact. Clearly, however, no one individual is absolutely sure what the outcome will be. If we go back to the dark days of bilateral agreements, with restricted access through duality and one country providing capacity and pricing against another country, the size of the market will be significantly reduced. Ryanair and easyJet have capitalised on the freedom within the EU whereby any airline from any nation can fly anywhere it wants. That turned Ryanair into the biggest airline in Europe through first-mover advantage, and easyJet similarly benefited.

Both those low-cost airline businesses are somewhat exposed, one could say, in terms of the way forward. Both airlines have taken measures to mitigate that, which are in the public domain. Carolyn McCall, who is the chief executive officer of easyJet, suggested that it will incorporate the operating licences of its whole fleet in Germany so that it can, through German location and air operating certificate licensing, access the other markets.

A lot of airlines are working on the Brexit outcome, but no one knows what it will be; it is just a matter of looking at all the issues and preparing robust plans. That is before we even consider the issues to do with the US dollar against the UK pound. About 75 per cent of low-cost airlines’ cost are denominated in US dollars, so a reduction in the currency by 20 per cent would add 20 per cent to 75 per cent of their cost base. That is an impact that we are feeling just now in foreign exchange alone, before we even consider things such as fuel.

It is very difficult to navigate a way forward. However, we have Ron Smith and his team and a broad range of experience, and I have dialogue with people in the aviation industry—that is my background and I know a lot of people in the aviation industry. We are in dialogue constantly on the way forward, but nobody knows the one and only path, which is the problem that we have.

Thank you.

Those were all the questions that we have for you, but I suspect that we will be asking you to come back. Andrew Miller said that it is his first visit to the committee; I am pretty sure that it will not be his last. I suspect that when the accounts are audited and published, the committee might wish to see you again. I thank the panel for coming to the meeting and for being so open and honest in bringing us up to speed with what is happening at Prestwick airport.

Thank you. We extend an invitation to any or all members of the committee to visit Prestwick airport in order to get a three-dimensional understanding of the business. We invited the previous session’s Infrastructure and Capital Investment Committee, to which we reported: it had planned to come but did not. We are open and transparent and will welcome you if you want to visit us.

I am sure that members of the committee would like to visit Prestwick airport. The committee clerks will try to tie that up and arrange a visit for a time that suits the majority. Thank you very much indeed.

Meeting closed at 11:40.