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Reason Foundation

Air Traffic Control Reform Newsletter #12

Topics include: modernization at the UK's National Air Traffic Services; FAA's continuing budget woes; facility consolidation; overflight fees overturned in court; and the need for ATC safety regulation.

Robert Poole
April 1, 2003

In this issue:

UK's NATS Refinanced, Launches $1.6 Billion Modernization

The UK's National Air Traffic Services (NATS) was hit harder by 9/11 and its aftermath than any other ATC provider. The agency had only been corporatized a few months before 9/11 and had no reserve fund. And with a significant fraction of its pre-9/11 revenue coming from the hard-hit North Atlantic, NATS clearly suffered a baptism of fire.

But after more than a year of negotiation with its external regulator (the Civil Aviation Authority) and private-sector investors, NATS emerged last month with a new lease on life. The CAA revised its price-cap regulatory regime for 2003-05 years to RPI minus 2% (instead of RPI minus 4% for 2003 and RPI minus 5% or 2004-05). That strengthening of NATS' revenue base was sufficient to unleash promised investments of about $104 million each from new investor BAA and the UK government (which owns 49% of NATS). This $208 million investment will reduce NATS' bank debt by an equivalent amount, giving the company a more conservative financial structure. As part of the deal, NATS committed itself to an additional $335 million in cost savings. These changes led Standard & Poors to award NATS an investment-grade credit rating of A-.

The refinancing opened the door to NATS' long-awaited $1.6 billion modernization program. And the initial announcements made it clear that NATS will be breaking the mold. For one thing, like Airservices Australia and Nav Canada, NATS is quite comfortable using off-the-shelf technology if it can handle the job, rather than spending years developing its own custom specs. NATS' initial contract with Raytheon to build and install replacement radars for most of its 20 primary and secondary sites is one example.

Another example was the surprise announcement earlier this month that NATS is suspending its competition for a new flight data processing (FDP) system in favor of exploring development of a common system with the corporatized ATC providers of Germany and Spain, DFS and AENA. A joint effort should lead to significant economies of scale, as well as inter-operability in what will soon be a single European sky. NATS will also study the possible acquisition of AENA's core ATC system, rather than developing its own next-generation system from scratch.

This parallels a decision announced in February, under which NATS will purchase Nav Canada's Gander Automated Air Traffic System (GAATS) to replace its now-obsolescent oceanic system based at Prestwick, Scotland. The North Atlantic is the world's busiest oceanic route, and GAATS is the world's most advanced in-service oceanic ATC system.

A key element of the NATS' 10-year modernization plan is to consolidate en-route operations from four centers down to two. Operations now based at West Drayton will move to the new center at Swanwick, while those based at Manchester will move to Prestwick. Clearly, now that NATS' finances have been sorted out, air traffic control will no longer be "business as usual" in the U.K.


Another Year, Another Set of FAA Budget Woes

AIR-21 was supposed to take the FAA off the federal funding roller-coaster, removing its dependence on the ups and downs of the federal budget process. Well, guess again. Due to the decline in ticket tax revenues (quite parallel to what's happened with ATC user fee revenues in the 29 countries with ATC corporations), the proposed FAA budget for FY 2004 will have to tap the general fund for around $4 billion, notes Inspector General Ken Mead, compared with $1-1.5 billion in recent years. And despite all that, the budget squeezes both safety research and modernization at just the time when both need increases.

The proposed FY 2004 budget is representative of the other three years in the proposed reauthorization, Flight 100. To be sure, the Operations account goes up by half a billion dollars next year. But as the FAA's "Budget in Brief" makes clear, nearly all of that is "mandatory increases"-i.e., previously agreed-to pay and benefit increases and increased O&M costs for recent upgrades to the ATC system. As Aviation Week dryly commented, "These accounts absorb extra money like a sponge." After keeping the airport grants (AIP) account constant at its current $3.4 billion, there was no room to increase capital spending on modernization, which is set to take a $65 million decrease to $2.916 billion next year. And the Research, Engineering & Development account gets another cutback, to $100 million. (It was twice that as recently as FY 2002.)

To be sure, ATC providers all over the world, including the 29 corporate ones, are all under budget pressure these days. Most have had to stretch out modernization to some degree. But since much of their modernization is funded by long-term revenue bonds, they can take advantage of economies of scale in ordering new systems; reducing the cost per unit makes modernization funds go further. And not having to go hat-in-hand to a legislative body each year for investment capital means that modernization planning can be done on a more coherent long-term basis.

Moreover, what ATC corporations have also done that FAA has not is to cut their administrative overheads, streamlining their bureaucracies. Most have done so by making careful strategic decisions about how they do business, not by imposing rigid hiring freezes that lead to not filling vacancies in whatever random places those vacancies occur. But then again, one of the hallmarks of ATC corporatization is creating a business model in which management is given the freedom to manage the organization.


Whatever Happened to Facility Consolidation?

Conspicuously absent from the Administration's four-year, $57 billion Flight-100 reauthorization proposal is any mention of facility consolidation. Last November 15th, ATC Market Report's front-page story, based on an early draft of the reauthorization proposal, talked about a plan to appoint a five-member commission to recommend FAA facility consolidations. Like the highly successful process used for military bases (the Base Realignment And Closure Act-BRAC), the commission's recommendations would be presented to Congress as a non-amendable package, to be voted up or down.

Facility consolidation has featured significantly in ATC reform overseas. Airservices Australia replaced six state-based Flight Information Regions with two state-of-the-art en-route centers, one in Brisbane for the northern half of the country and the other in Melbourne. South Africa's Air Traffic & Navigation Services is in the process of consolidating from five to two Flight Information Regions, to be controlled from Cape Town and Johannesburg. As noted above, NATS this decade will consolidate from four to two centers.

This is hardly an academic issue. Today's advanced technology makes it more feasible than ever to control more airspace from fewer facilities. Because there are significant economies of scale in air route traffic control centers (ARTCCs), Roberts Roach & Associates several years estimated that simply consolidating such facilities to the extent where each handled as much traffic as Chicago Center would save FAA $350 million a year. In a further hypothetical calculation, the same report estimated that a single nationwide ARTCC (which they did not recommend) would save $1.8 billion per year.

Needless to say, the union reaction to last fall's trial balloon was entirely predictable. NATCA, fumed John Carr, would "oppose vigorously" any large-scale consolidation or realignment efforts for purposes of cost reduction. And that was apparently enough to doom the effort-at least for this year.


Court Yet Again Nixes Overflight Fees

Azerbaijan charges ATC overflight fees. So does Canada. So does just about every country in the world technically advanced enough to have an air traffic control system. After all, aircraft that fly over without landing or taking off still make use of the system's people and electronics. They expect to pay, and all over the world, they do. Except here.

Congress finally awoke to this anomaly seven years ago and directed the FAA to develop and implement a set of overflight fees. But the bill took some negotiating, because the Finance Committee objected that "overflight fee" sounded a lot like a tax. So to make that issue go away, the Senate Commerce Committee revised the language to say that the fees must be "directly related to the [FAA's] costs of providing the services rendered."

Alas, nobody likes to start paying for something they're used to getting for free. So the Air Transport Association of Canada sued the FAA, arguing that the new fees were arbitrary and not directly related to the costs of service. And on April 8, 2003, the Court of Appeals for the DC Circuit for the third time found in favor of the plaintiffs, much to FAA's chagrin. Each time, the issue has been the same: the FAA doesn't know what its costs are, so it cannot demonstrate that the fees it charges for overflights are based on its costs.

This is pretty pitiful. Though few outside aviation are aware of the fact, the FAA has never had a real cost-accounting system. The same bill that called for FAA to develop and charge overflight fees also mandated that it develop and implement an accounting system. Alas, as repeated reviews by the Inspector General and the General Accounting Office have pointed out, that project is still not complete, seven years later. So no wonder Judge Williams was forced to reject the FAA's case and yet again overturn the overflight fees.

By the way, it's not just overflight fees that are charged everywhere but here. Every place else in the world also charges user fees for en-route and terminal-area ATC services, too, whether they have corporatized ATC or not. Ours is the only country that tries to put this essential operating cost onto the passenger's ticket, rather than simply billing airlines for the services they use.


The Need for ATC Safety Regulation

One of the reasons for the global trend of ATC corporatization is to separate safety regulation from operations. For example, the 59-page National Audit Office's report on the public-private partnership for NATS in the U.K lists the "Government's Objectives for the Public Private Partnership (p. 17). Number 1 on the list is "To enhance aviation safety in the UK by separating regulation from service provision." More and more it is recognized that keeping these two functions together amounts to a conflict of interest.

A good example here at home emerged in the April 3 report of the DOT Inspector General on progress in reducing operational errors and runway incursions. According to the report, the total number of operational errors decreased 11 percent last year, in part due to reduced flight activity. But the rate was still higher than in FY 1998 and 1999. And while runway incursions declined by 17 percent, the rate was still the third highest since 1988. But what is most troubling is OIG's conclusion that "FAA's rating system understates the safety risk of the most serious operational errors." The report identifies 126 times when planes got within 30 seconds of colliding, but FAA classed only half of these as high risk. The OIG said they should all have been so categorized.

This only underscores the need to put safety regulation of ATC at arm's length from ATC operations, by creating an explicit ATC safety regulatory function within AVR, the agency's safety regulatory entity. Secretary Mineta endorsed such a move early in his tenure, but nothing much has been heard of it since then. And unfortunately, the Administration's FAA reauthorization proposal would take an important step away from this vital separation of functions.

In trying to make workable the troubled plan to revamp ATC as a performance-based organization within FAA-the Air Traffic Organization (ATO)-the bill would create a stand-alone Air Traffic Services Board, refining the role of the previous Air Traffic Services Subcommittee. It would serve as a quasi board of directors for the new ATO. But the bill unwisely follows the recommendation of former Administrator Jane Garvey and would make the FAA Administrator the Chairperson of this board. That would put the nation's top aviation safety regulator in charge of the board of the ATC service provider-exactly the opposite of separating these two functions.

As former FAA Administrator Langhorne Bond has written, the separation of ATC safety regulation from ATC operations "is correct whether ATC remains as is, or an ATO is established, or a new ATC Administration in DOT is established, or even a non-profit Nav Canada model is set up."


News Notes

RVSM Comes to Oman. Europe implemented reduced vertical separation minimums (RVSM) 15 months ago, and Canada did it for its northern airspace a year ago. It's in routine use on the North Atlantic and over the Pacific, too. Now comes word (ATM Global, March 28, 2003) that little Oman is training its controllers for the introduction of RVSM in the ICAO Middle East region (MID) this November. When will American airspace get this significant boost in high-level airspace capacity? Not until early 2005, says the "the world's best air traffic control system."

More GA in Europe than AOPA Lets On. One of the stock arguments put forth by AOPA about why we should not follow Europe's example in moving toward user-fee-funded ATC corporations is that GA there is a tiny fraction of what it is in the good old USA. And there's no question that we have a large and vibrant GA sector, doing many good things for America. But AOPA's picture of a handful of beleaguered private pilots hanging on by their fingernails is more of an exaggeration than you might realize. A recent recap of aircraft movements at UK airports in 2002, by Eclat Consulting, shows that non-commercial traffic at airports other than London represented 31% of total UK aircraft movements. That's hardly a trivial amount of GA activity.

More Jobs for the ATC Workforce. One of the side benefits of ATC corporatization is the ability of the ATC company to engage in ancillary business projects, on a paid basis. Now that NATS has been refinanced, it is starting to flex the muscles of NATS Services Ltd., its unregulated business arm. One of its first projects is to assist Lockheed Martin in modernizing Albania's National Airspace System. Just think what opportunities might be available to a U.S. ATC Services Corporation if freed to market its expertise globally.


Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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