The financial year ended 31 March 2012 continued to be a challenging environment for the CAA from a financial perspective, with the deteriorating global economic climate continuing to put pressure on income, which is heavily reliant on industry activity levels. Despite these pressures, the CAA achieved a rate of return of 4.2% for the regulatory sector which was marginally below the 6% target rate of return set by the Secretary of State for Transport. This result was achieved by the CAA continuing to implement cost saving measures and generating income from its commercial subsidiary, CAA International Limited (CAAi).
The CAA is directed by the DfT to prepare the financial statements in accordance with the accounting and disclosure requirements of companies’ legislation currently in force and international generally accepted accounting practice. The CAA is required to comply with International Accounting Standard (IAS) 19 ‘Employee Benefits’ for the year ended 31 March 2012. However, the financial results of the Group are assessed by reference to financial targets agreed with the Secretary of State for Transport. The Group regulatory sector target requires the CAA to set its unit charges at levels sufficient to achieve a return of 6% before interest on the average level of capital employed, expressed in current cost terms. In respect of pension costs this target is based upon the level of employer cash contributions paid to the CAA Pension Scheme during the financial year, rather than pension costs evaluated under IAS 19.
The latest formal valuation of the CAA Section of the Civil Aviation Authority Pension Scheme at 31 December 2009 was approved by the Scheme’s Trustees on 31 March 2011. The valuation revealed an ongoing surplus of £99.7m, whereas the IAS 19 valuation surplus was £606.2m (note 18). The methodology underlying the formal valuation differs from that used for IAS 19 disclosures, particularly in relation to the financial assumptions used. Whilst the discount rate used for IAS 19 disclosures should be based on the yield of at least AA-rated corporate bonds, irrespective of the investment strategy actually adopted, the discount rates used for the 2009 formal valuation were largely based on Government bond (gilt) yields (which, as at 31 December 2009, were about 1.2% pa lower than corporate bond yields).This reflects the investment strategy of the Scheme where the majority of the assets (about 84% as at 31 December 2009 and, currently, about 82%) are invested in gilts as part of a strategy to match, so far as possible, the Scheme’s pension liabilities by the cash flows from a portfolio of index-linked gilts. In addition, the formal valuation has a more prudent basis than IAS 19 disclosures and this is allowed for by means of further adjustments to the discount rate and the inclusion of reserves for contingent events, including further improvements in longevity.
CAA International Limited (CAAi)
The wholly owned subsidiary company, CAAi, delivered an expanded programme of technical assistance and training, supporting industry and the Government both in the UK and overseas. The company had another successful year, achieving a turnover of £15.4m (2011 - £14.5m), an annual increase of 6.3%, despite the difficult trading conditions created by a depressed global economy the company continues to expand its new customers, products and markets. The company’s operating result saw a reduced profit after tax of £1.3m (2011 - £1.7m) principally reflecting the increase in employee costs during the year. The company employed an average of 33 staff during the financial year with a further 42 being supplied from other areas within the Group.
Air Safety Support International Limited (ASSI)
ASSI is a wholly owned subsidiary company that was set up at the request of the Department for Transport (DfT). The company’s principal business activity, under Direction from the Secretary of State for Transport, is the enhancement of regulatory oversight of aviation safety in the UK's Overseas Territories (OT). The company does not trade with a view to a profit, with the operating costs being met by way of a grant from the Department for Transport (£2.0m), and from the Government of the British Virgin Islands (£0.1m) to cover the costs associated with supporting and assisting the Government in establishing a department of Civil Aviation in the British Virgin Islands.
Following the public expenditure reductions by the UK Government, the company faced significant challenges, as the grant received for the 12 months to 31 March 2012, from the DfT was reduced by £1.0m to £2.0m, a reduction of 33% of the amount received in the previous financial year ending 31 March 2011. The uncertainties surrounding the future funding of the company were resolved during the current financial year and as a consequence as from 1 April 2012 the grant received from the DfT will continue at £2.0m per annum, with the Governments of the OTs providing additional funding to compensate for the reduction in the level of the grant. The DfT has also agreed that the surplus grant from previous years of £1.1m may also be utilised if required to cover any other shortfalls in funding.