NATS-Annual-Report-2015

Annual Report and Accounts 2015 | NATS Holdings Limited
Strategic Report
15
Financial review
(continued)
Regulatory return
We assess the performance of NERL’s regulated activities
by reference to the regulatory settlement. For the four
years of CP3, NERL achieved a pre-tax real return of just
over 8% compared with the regulatory return of 6.76%
assumed in the regulatory settlement. This was mainly
achieved through service performance incentives and
operating cost efficiencies which offset the impact of lower
traffic volumes.
The cost of capital for RP2 has been set at 5.86% (pretax
real) which, together with challenging cost efficiency
targets, will result in a reduction in NERL’s revenue and is
also very likely to result in lower regulatory profit in RP2.
Comparison between reported profit
and regulatory return
The profits reported in these financial statements are
prepared in accordance with International Financial
Reporting Standard (IFRS) and policies described in note 2
to these accounts. As described above, the CAA applies an
economic regulatory building block model which is mainly
cash-based. It can give rise to some significant differences
between reported operating profit and regulatory return,
mainly due to:
> lower historical cost depreciation compared with
regulatory depreciation which is indexed to inflation; and
> lower accounting pension costs using best estimate
assumptions prescribed by accounting standards
compared with the cash contributions agreed with
Trustees, which include a margin for prudence.
This difference in basis explains why NERL’s reported
operating profit is some £78m higher than its regulatory
profit. This regulatory view is set out in NERL’s audited
published regulatory accounts.
Revenue
Revenue increased by £4.8m to £922.4m (2014: £917.6m).
The RP2 settlement, which applied from January 2015, is
reducing UK en route revenue allowances but during the
year this was offset by the combined effects of air traffic
volume growth, service quality incentives, airport contract
indexation and the benefit of Project Marshall.
These and other factors are described in the Review
of service line performance.
Operating costs
2015 2014
£m £m
Staff costs (403.8) (419.1)
Services and materials (74.7) (79.3)
Repairs and maintenance (40.6) (36.4)
External research and development (0.1) (0.1)
Other operating charges (44.8) (40.3)
Other operating income 4.1 0.7
(559.9) (574.5)
Depreciation and amortisation (109.6) (105.7)
Asset impairment (0.7) (2.0)
Deferred grants 0.8 0.7
(Loss)/profit on disposal of assets (0.2) 4.2
Operating costs (669.6) (677.3)
Operating costs, before exceptional charges, were £669.6m
(2014: £677.3m) or 1.1% lower than the prior year.
The reduction in operating costs was largely due to
lower staff costs following headcount reductions from
redundancies, lower pension and employee share scheme
charges, and more labour capitalised. These factors more
than offset the cost of pay awards linked to the Consumer
Prices Index (CPI).
Strategic Report