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.
11:30
We 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.