Air Traffic Control Reform Newsletter #32

Topics include: new study on ATC commercialization; revenue bonds for ATC modernization; facing facts on ATC facilities; and changing the rules on labor negotiations.
In this issue:

New Study Shows that ATC Commercialization Works

No one disputes the idea that "privatization" of air traffic control is a controversial idea. All sorts of claims have been made in aviation circles and on the floor of Congress, about what has happened as other countries have reformed their air navigation service providers (ANSPs) to be more market-driven entities. But hard data and serious, in-depth analysis have been lacking. Until now.

Late last month a major new report was published by MBS Ottawa, a Canadian consulting firm. Air Traffic Control Commercialization Policy: Has It Been Effective? is by far the most comprehensive look at this important phenomenon. It's the result of a two-year research effort, led by former Transport Canada official Glen McDougall, with the cooperation of three universities: George Mason, Syracuse, and McGill. Funding came from several private foundations and a host of aviation organizations, including IATA, CANSO, the UK's Civil Aviation Authority, ARINC Corp., and several ANSPs. The research was peer-reviewed by an international Advisory Board that included a former FAA Administrator, a former vice chair of the National Transportation Safety Board, former senior congressional aviation staffers, CANSO, IATA, Eurocontrol, etc. and chaired by Prof. Ken Button of George Mason's School of Public Policy.

The study team selected 10 leading "commercialized" ANSPs for detailed study, which included extensive quantitative data collection as well as in-depth interviews with senior officials and key stakeholders in each country. The FAA's Air Traffic Organization was studied in parallel, for comparative purposes. Nine of the 10 ANSPs had been commercialized prior to 1997, so that data were available from 1997 through 2004.

Before getting to the findings, let me point out that the study used a very broad definition of commercialization, which encompasses a variety of models. At one end is the only fully private (nonprofit) corporation, Nav Canada. Nearly all the others are either government corporations or government departments (e.g. DSNA France). But the minimal prerequisite for being considered commercialized was "financial autonomy in its governance arrangements." In other words, all 10 of these ANSPs raise their budgets directly from their users and are therefore not part of the government budget process. And they have direct access to the private capital markets, to issue revenue bonds for modernization.

A very brief summary of the key findings, based on both the quantitative trend data and interpretation of the interview results, is that commercialization had these effects:

  • Safety: either neutral or positive;
  • Modernization: greatly improved;
  • Service quality: improved;
  • Costs: generally reduced, and significantly in some cases;
  • Financial stability: maintained;
  • Public interest: most areas remained neutral or positive.

One of the most interesting findings was the following:

"Providing more autonomy for the ANSPs has tended to cause a reorientation from treating government as the primary client to responding to the needs of the aviation community. There is no longer any doubt as to who the customer is. Commercial ANSPs have demonstrated enhanced ability to respond quickly to customer needs."

And in parallel with this change, the government's role has been clarified. It now focuses on safety and economic oversight, rather than trying directly to manage the ANSP's operations and equipment decisions.

I don't have the space to do justice to this very detailed 104-page report, which I urge you to read (along with the detailed legal description of all 10 ANSPs, on a CD included with the report, prepared by the Air & Space Law Center at McGill). As of this writing, the report is not available on-line, but the hard copy and CD may be purchased from the company. You can reach them by email at: info@mbsottawa.com.


Revenue Bonds for ATC Modernization

In his address to the Aero Club of Washington on January 24th, DOT Secretary Norm Mineta discussed the ongoing Administration efforts to develop "a new, cost-based financing system for the FAA." Not only will the new funding system be cost-based and allocate the burden fairly among users; it will also make it feasible to fund modernization. Creating a "stable and predictable source of revenues," Mineta said, "is our ticket for opening up new financing opportunities — such as taking advantage of the capital markets — to fund our investments in towers, technology, and other equipment needed to keep pace" with expanding aviation activity.

The Wall Street Journal followed up with a detailed front-page article two weeks later (Feb. 4, 2006), mentioning FAA discussions with investment banking firms and looking at some of the alternative models being considered. One of those is the Tennessee Valley Authority, a government corporation that has issued $26 billion in revenue bonds in the private capital markets. Sen. Ted Stevens, who's become an advocate of bonding ATC modernization, mentioned the TVA model in his remarks at the ABA Air & Space Law conference on February 2nd.

There is still a lot of debate about exactly what form such bonding should take. Some think the FAA's Air Traffic Organization should borrow directly from the Treasury, to take advantage of slightly lower rates. I think it's far wiser to require the ATO to borrow solely from the capital markets, so that it is forced to demonstrate the clear business case for its planned capital investments. Commercialized ANSPs abroad easily get investment-grade ratings, since they are the monopoly providers of ATC services, so commercial interest rates should be just fine. There is also no need for (and a similar case against) government guarantees for these bonds. The Journal article quotes Michael Lexton of Bear Stearns to the effect that Wall Street doesn't need government guarantees, as long as there is a predictable revenue stream.

There is also still some support in Congress for creating an entity separate from the ATO to deal just with financing the modernization projects. As I've written here previously, that model misunderstands what next-generation ATC is all about. In making the paradigm shift from a labor-intensive, control-every-move-from-the-ground model to an information-centric system that automates routine tasks and shares more decision-making between the cockpit and the ground, the historical distinction between "operations" and "facilities and equipment" breaks down. Decisions about one are inherently about the other, too: the business case for new systems will often involve substituting capital for labor. Those decisions must not be made in two separate stove-pipe organizations, one for operations and a separate one for facilities and equipment (such as a hypothetical F&E Corp.).

The TVA certainly doesn't operate that way. The reason it is able to issue revenue bonds in the private capital markets is that it has a growing base of customers, who pay TVA directly for providing the electricity they need. The direct flow of funds from customer to provider is what investment bankers mean by a predictable revenue stream. TVA has no need of a separate entity to issue bonds for new power plants.

Let me close this discussion with a sentence from the MBS Ottawa report discussed in the previous article. "[P]roviding access to capital markets alone does not bring discipline to the management of the capital expenditure program." So merely providing a better way to finance new systems (e.g., via a separate F&E Corp.) would do very little to ensure that the funds are spent wisely. That's why ATC reform requires the creation of a payment nexus between ATC customers and the ATC service provider. The Mineta Commission made this point way back in 1997. Let's hope it's not forgotten in 2006.


Facing Facts on ATC Facilities

The FAA is a very facility-intensive agency, and it's mostly due to its ATC responsibilities. Not counting office buildings and unstaffed equipment installations, the agency operates 21 en-route centers, 171 TRACONs and many hundreds of control towers. Most of them are located where they are for historical reasons more than functional reasons. With today's information technology, there is no need for a particular facility to be located beneath the piece of air space it controls; all it needs is the relevant real-time information about which planes are where, and where they are headed. (One of the key concepts of next-generation ATC is that such control can be performed from anywhere to anywhere.) Moreover, since workloads change dynamically, having one center control one fixed block of airspace all the time means it sometimes has too little to do and at other times has too much. There can be major economies of scale in consolidating facilities and broadening their functions.

Facility consolidation is one of the first things an ANSP tends to do once it has been commercialized—because it makes good business sense. Airservices Australia replaced four en-route centers with two identical, high-tech centers, either of which can handle the entire country's air space necessary. Germany's DFS consolidated 17 approach control centers into en-route centers. Airways Corp. of New Zealand went from four to two, South Africa from five to three. And the UK's NATS is consolidating from four to two centers.

The ATO's Russ Chew says the current ATC facilities are aging and in need of major overhaul or replacement. (The average en-route center is 40 years old.) It would cost an estimated $30 billion to replace them on a one-for-one basis. But that would make no sense at all, especially in the context of shifting to an information-centric next-generation model for ATC. What's needed now is a serious plan for consolidating facilities, replacing today's obsolete centers and towers with next-generation facilities.

One of the best proposals I've seen for doing so appears in the proceedings of the Air Traffic Control Association's 50th anniversary conference (which I finally got around to reading on plane trips last month). It's by Mike Harrison of Aviation Management Associates, who has recently become the new editor of ATCA's Journal of ATC. His overall proposal calls for consolidating all U.S. ATC into 35 Air Traffic Service Hubs, replacing all centers, TRACONs, and ultimately towers.

Conceptually, the idea is to move beyond different cultures and procedures for en-route and terminal air space, as well as realigning airspace on a more functional basis. All high-altitude airspace, from 29,000 to 50,000 feet, would be run by two super-hubs, High East and High West. To handle special military and commercial space operations, there would also be one Super-High hub, for everything above 50,000 ft. Below 29,000, there would be 19 AT Services Hubs plus a National Flow Center and a Transit Hub (to handle overflights). And Harrison proposes 11 "transformation" hubs emerging out of TRACON consolidations.

The process could start with the creation of High East and West, realigning all airspace from 29,000 ft. and above, redistributing lower-altitude airspace among the remaining centers. The first two technology tools would be a surveillance data network (SDN) and a new voice switching system to enable controllers to talk with pilots beyond traditional sector boundaries. Terminal consolidation could begin in parallel, moving the functions of smaller TRACONs into nearby larger (generally newer) ones. Over time, they, in turn, would be merged into transformation hubs. Tower functions would gradually be integrated into the new hubs, creating virtual towers no longer physically located on each airport (though extensive surveillance equipment would be). Since new towers in recent years have cost $50-140 million each, the savings just from this would be considerable.

At first blush, some of this may sound like science fiction. But it all logically follows from the basic information-centric model for ATC that is now being worked out by the Joint Planning & Development Office and its industry-government teams. It would make no sense to implement 21st-century air traffic services in 20th-century facilities. Rethinking the airspace and the facilities is essential, if we're going to double or triple the system's capacity at an affordable price.


Changing the Labor Rules in Mid-Stream

Ten years ago Congress enacted "personnel reform" for the FAA. Virtually unique among federal agencies, the FAA has since then allowed its work force to bargain over compensation, rather than having to take whatever the agency decides. The resulting 1998 contract for air traffic controllers ended up giving them the moon�pay increases since then far in excess of any other federal agency and very restrictive work rules. But in exchange for getting this special treatment, FAA union bargaining procedures were also restricted. If negotiations and mediation fail to produce an agreement, the FAA can send its final proposal to Congress, which has 60 days to act — or not. If it fails to act, the FAA proposal gets implemented.

This year is the first time the controllers union, NATCA, has had to face up to the new procedures. After benefiting hugely from the personnel reform since 1998, they know the FAA cannot afford another contract like that one. But they also know that if an impasse gets handed to Congress, the result is likely to be no action — and an FAA victory. So now they have decided to change the rules.

Late last month NATCA's bill to do so was introduced in the Senate by Se. Barrack Obama (D, IL), joined by perennial union supporters Inouye, Lautenberg, and Murray. Two weeks later, the identical bill was introduced in the House by Reps. Sue Kelly (R, NY) and Jerry Costello (D, IL). It would reverse what happens if an impasse is submitted to Congress; if that body took no action, the matter would be turned over to binding arbitration (under which NATCA figures the odds of a friendly outcome would be higher).

A friend sent me a January 30th article from fedsmith.com, comparing the "clout index" of various federal employee unions. Turns out NATCA is the champ, by a mile. Whereas the huge American Federation of Government Employees put $788K into congressional races in the 2004 election (according to Federal Election Commission records), NATCA, with only 6.5% as many members, put in a whopping $2.65 million. That's $179 per member, compared with a measly $3.50 per AFGE member. The FAA estimates that the union's proposal would cost taxpayers an extra $2.6 billion over the life of the contract. If they were to get anything like that, their $2.6 million investment in re-electing friendly members would pay off 1000 to one.

According to Aviation Daily (Jan. 27), FAA Administrator Marion Blakey sent a letter to Sen. Obama, opposing his bill and stating that the White House would likely veto any such legislation. Although President Bush has yet to veto a single bill, there's always a first time.


News Notes

Air Force Outsourcing ATC. Midwest Air Traffic Control Service has won the first private sector contract to provide ATC and airfield management support services at U.S. bases in Central Asia (Afghanistan, Qatar, Kyrgyzstan, and Uzbekistan). The work will be done under a subcontract to Readiness Management Support, which won the Air Force Contract Augmentation Program contract for $10 billion over 10 years. Midwest ATC is one of the firms which has been operating VFR towers in the United States since 1978 under the FAA's Contract Tower Program.

ANSPs in More Joint Ventures. The commercialized ANSPs AENA of Spain and NATS of the UK announced this month that they will jointly develop a new version of AENA's SACTA system for use in both countries. The new system will be installed first at AENA's Canary Islands center in 2007, followed by other Spanish centers, and at the two consolidated NATS centers in Prestwick and Swanwick. Meanwhile, Danish ANSP Naviair will purchase Nav Canada's advanced Integrated Information Display System/Extended Computer Display System for use in its Copenhagen tower. IIDS/EXCDS lets controllers manage data via touch-screns and eliminates the use of old-fashioned paper flight strips.


Quotable Quotes

"In my opinion, we need to be asking and answering the hard questions that will lead to implementation of a next-generation distributed ATC system. And we should be doing it sooner, because later is already here."

—Vern Raburn, President of Eclipse Aircraft, Professional Pilot, November 2005.

"Commercialized ANSPs exhibit three main strengths: sensitivity to customer needs, agility in reaching a decision, and ability to carry it through. These characteristics have led to continuous improvements in efficiency, business discipline that delivers projects on schedule and on budget, and rapid deployment of modern technology to enhance service quality."

—Glen McDougall, in Air Traffic Control Commercialization Policy: Has It Been Effective? January 2006 (www.mbsottawa.com)

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





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