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Civil Aviation Authority: Financial Model Review

In April 2023 Vercity were appointed by the Civil Aviation Authority (CAA) to provide assurance on the financial model used to set regulated charges imposed on airlines for airspace management.

A Regulated Pricing Model

The UK’s air traffic servicer provider, NATS En Route Plc (NERL) is responsible for providing air traffic services in the UK and delegated airspace. NERL’s revenue for these services comes from charges which are levied on flights that use this airspace.

Under the Transport Act 2000, the CAA is the independent economic regulator of NERL, with a primary duty to exercise its functions to maintain a high standard of safety in the provision of air traffic services. The CAA reviews the costs from NERL’s business plan to determine the maximum charge to the airlines to cover NERL’s ongoing operating and capital expenditure requirements. Similar to other regulated sectors, the charges are capped over a 5-year period, in this case during 2023-2027.

The charges are calculated from a complex financial model which considers the various operating and capital costs incurred by NERL and assumptions relating to air traffic each year.  The model is then used to calculate the maximum charge  per service unit (a measure of distance flown and aircraft weight) to ensure those costs are covered.

The price control model is a sophisticated excel spreadsheet with over 50 worksheets and a considerable number of calculation formulae and macros.

The price control model is also used as a planning tool to populate charging tables for Eurocontrol, allow assessment of policy options for air traffic risk sharing and incentives, and provide the CAA with a tool for stress testing price control.

Stakeholders for the model outcomes include the CAA, NERL, aviation industry specialists, airlines who pay the air traffic fees, and eventually air travellers who will see those costs in the makeup of their ticket prices.

Assurance and Confidence

Ensuring the model provides accurate answers and information is imperative for the principal functions to be fulfilled and those stakeholders need confidence in the calculations.

Vercity were appointed to review the 2023-2027 model functionality and the audit trail of the values used to provide assurance it was operating correctly. The work included reviewing the structure, logic, formulae, and macros of this business planning tool. Our expert team had to probe into the detail of the model workings and get to know it from the inside out.

Identified queries were raised with the CAA and their appointed modellers with additional iterations of the model produced during the review. Regular interface and a collaborative approach helped this work to progress smoothly and efficiently.

The result of Vercity’s work was a letter of comfort and detailed report which set out Vercity’s findings and provides assurance to stakeholders of the work undertaken.

To learn more about how Vercity’s financial modelling expertise can support you click here, or use the links below to learn more about these case studies: