Air Traffic Control Reform Newsletter #36

Topics include: benefits of ATC reform, user fees for business aviation; the Mineta Commission report, ten years later; System Wide Information Management; and ATC privatization advances in Europe.
In this issue:

Business Aviation Could Gain from ATC Reform, User Fees

There's been more heat than light as the airlines and business aviation have sparred over the issue of shifting from aviation excise taxes (on fuel and tickets) to direct fees for ATC services. The airlines, represented by the Air Transport Association, have called for a strictly cost-based approach to user fees, pointing out the unfairness of the current tax system, in which airlines pay 90% of the cost of the ATC system but account for only 60% of its transactions. The business aviation community, led by the National Business Aviation Association, argues that the airlines simply want to shift $3 billion in annual costs to business jets, which would impose a ruinous cost increase on that segment of aviation.

What's been missing from this debate are two things: realistic numbers and a discussion of alternative ways of defining user fees. A study just released by Reason Foundation (authored by this newsletter's writer) deals with both of these issues.

On the latter, it points out that there are many different ways to structure a user-fee system. All such systems charge for every flight, and in that sense are at least somewhat cost-based, and nearly all follow the International Civil Aviation Organization (ICAO) principle of charging separately for en-route and terminal phases of flight. As FAA Administrator Marion Blakey has pointed out many times, the United States is now the only country (apart from a few island mini-states and developing nations) that does not charge direct fees for ATC services. And nearly all of the existing fee structures follow ICAO guidelines that suggest using weight as a factor in defining the fee for terminal airspace operations, and weight and distance as parameters to use for en-route charges.

With that context in mind, the Reason study defined two hypothetical user-fee regimes, representing two poles in the debate. The "full-cost" version is similar to what ATA has been discussing: a flat charge per departure (regardless of aircraft size or type) and a per-mile or per-hour charge for en-route operations (we used the per-mile version in the calculations). There are all sorts of possible intermediate versions which would be somewhat cost-based and somewhat proportional to aircraft size and weight, but the study only analyzed the two polar positions.

To do so, we used specifications for 15 representative business jets, ranging in size from the Eclipse 500 to the Boeing Business Jet. We assumed each would be flown a standard 175,000 nautical miles per year, with the smaller planes making only short flights and the larger ones a mix of shorter and longer flights. We analyzed the business jets under three alternative ownership/operational arrangements: corporate, fractional, and charter. For each plane, under each type of arrangement, we calculated what it pays annually in current aviation taxes and what it would pay under either of the two polar user-fee regimes. (For the weight-distance version, we used the current NavCanada formula.)

The findings produced several surprises. First, we found that under the current tax structure, a Citation Sovereign (for example) would pay $25K per year if operated by a corporate flight department, $70K if operated as a fractional, and $128K if operated in charter service. In other words, the exact same plane flying the exact same set of flights would pay three to five times as much as a corporate jet—for exactly the same ATC services. That's because fractionals and charters pay the 7.5% passenger tax plus segment fee, while the corporate jets pay only the GA fuel tax.

The second finding was that if the U.S. ATC system switched to the NavCanada fee structure and rates, most fractionals and charters would pay less for ATC than they do today—though all corporate jets would pay more.

I think the most interesting finding is our third one. A major thrust of the paper is that shifting from aviation taxes to ATC fees is not an end in itself. It should be a means to the end of creating a self-supporting air navigation service provider which can issue revenue bonds to fund the speedy implementation of the Next Generation ATC system being developed by the JPDO. In my view, the aviation community should support the shift only if this funding reform is tied strictly to governance reform that brings about such a businesslike ATC provider.

Our third finding, then, assumes that this linkage is established, and that the new system delivers on the promise of at least doubling ATC capacity by 2025. That would mean a dramatic reduction in the delays that are otherwise inevitable, according to JPDO studies. So we asked the question: how much of a reduction in delays (i.e., of wasted flight hours) would it take to make even the corporate-owned jet come out with a net savings in operating costs, after the transition from fuel taxes to ATC fees? Again, doing these calculations with the NavCanada version of ATC fees, the results are that most corporate jets would end up paying less per flight hour if the new system saved as little as 3 to 5% of annual flight hours. What's left out of that calculation is the value of the bizjet passengers' time. If that were factored in, even the "full-cost" fee might still end up producing a net saving.

I hope this study opens the door to a more substantive discussion on the pros and cons of shifting from taxes to user fees. It seems to me that instead of continuing to say "No, never" to user fees, business aviation should start debating what kind of fee structure (and board representation) would best serve the interests of this important and fast-growing segment of aviation. (You can find the study at reason.org/ps347_business_jets_atc.pdf.)


Honor Mineta: Enact His Reform

Next year is not only the year in which the Federal Aviation Administration must be reauthorized, and current aviation taxes either renewed or replaced. It will also be the 10th anniversary of "Avoiding Aviation Gridlock & Reducing the Accident Rate," the report of the National Civil Aviation Review Commission, better known as the Mineta Commission. Everyone concerned about the future of air traffic control in this country should read (or re-read) Part II (Funding) of this document. It makes a powerfully argued case for creating a self-supporting, user-fee charging, revenue-bond issuing air navigation service provider.

Congress responded to the report only by allowing the FAA to combine its Operations and Facilities & Equipment branches into a new entity called the Air Traffic Organization, now ably headed by Russ Chew. But it ignored the main focus of the Mineta Commission's Part II by making no changes either to the status-quo tax-based funding or the ATO's dependence on the annual appropriations process. Nor did it set up a governing board for the ATO, as the Commission recommended.

I quibbled then over a few points in the Commission report. Instead of being run by a chief operating officer, the ATO should have a real chief executive officer like any business, accountable to the organization's board. And that board, instead of being the political appointees of typical government corporations, should directly represent aviation stakeholders, as in Canada. Instead of remaining as a self-funding unit within the FAA, the ATO should be moved outside the safety regulator, to be regulated at arms-length, like all the other aviation entities (airlines, airports, airframe and engine makers, etc.) I still think those are important improvements to what the Commission proposed. But compared with the alternative of continuing the status quo, those are just details.

Now that Norm Mineta has retired from his many years of service as America's best Secretary of Transportation, what better way to honor him than for Congress to enact the Norm Mineta ATC Corporation Act of 2007. There will never be a better opportunity to implement the recommendations of his outstanding Commission.


System Wide Information Management: Key to Consolidation

Once again Congress has intervened in an FAA decision about facility consolidation. Sen. Larry Craig (R, ID) was about to introduce a bill to prohibit the FAA from spending any money to consolidate the Boise TRACON into the Salt Lake City facility, as it had been planning to do when replacing the Boise tower. The House recently passed a bill to prohibit such consolidations, and some were hoping Craig would do likewise. But the FAA negotiated a deal to begin work on the new tower next year (two years earlier than planned) as well as adding a Category 3 Instrument Landing System at the airport. Any TRACON relocation would be put off until 2010 or 2011.

So here we have yet another example of the kind of micromanagement that confronts FAA efforts to modernize and save money for its customers. As I've written here before, we really need an institutional fix for this kind of thing, because the Next Generation system now being planned by the Joint Planning & Development Office depends critically on moving away from the 20th-century ATC system architecture. Indeed, one of the key concepts driving the new system architecture is System Wide Information Management (SWIM). What that means is that the entire ATC system will have access to all critical real-time information at the same time ("a common operating picture for all controllers"). And that, in turn, makes it possible to control traffic anywhere from anywhere�i.e., the location of the facility where people and equipment do these vital functions becomes irrelevant.

No, we aren't there yet. But some very promising demonstrations have been carried out. Last fall, for example, Aviation Week reported on a demonstration of Network-Enabled Operations. This demo involved ATC equipment located in 11 facilities in eight states. Prototype SWIM software was able to link disparate types of equipment together—for example, both Lockheed Martin's Common ARTS and Raytheon STARS were linked up with consoles of the North American Aerospace Defense Command and the U.S. Customs and Border Protection Agency. In the Washington, DC area, noted reporter David Hughes, "there are pieces of airspace where six radars may be watching one piece of airspace from different sectors. But the controller is able to see only the returns from the radars in his sector." With SWIM, the controller would have the returns from all six, along with GPS position data transmitted by each plane's ADS-B unit.

Hughes quotes Sensis Corporation's Marc Viggiano to the effect that this approach "would render air traffic controllers' locations irrelevant. It won't be necessary for a controller to be in Cleveland to control traffic in the Cleveland area, for example. It will be possible to shift the workload to controllers as needed, regardless of location." One of the things this will make possible is Virtual Towers, where all that's needed at an airport is a comprehensive set of sensing devices, linked to a consolidated control center with responsibility for tower functions at that airport.

The potential gains in capacity and productivity are enormous. But only if we can keep Congress from intervening to protect the hometown status quo.


ATC Privatization Advances in Europe—Unthinkable Here?

It's frustrating to discuss ATC reform off-the record with congressional staffers and various executive branch people. The problems with the status quo are well-known, and by now a growing number of people have seen presentations from Nav Canada and are aware that this not-for-profit company, created out of the former ATC operations of Transport Canada, has amassed a fine record during its first 10 years (as well as garnering an investment-grade rating for its bonds). They are also somewhat aware that ATC privatization is continuing in Europe. Yet the idea of creating even a self-supporting government ATC corporation, outside the annual appropriations process and able to issue revenue bonds for modernization, is still considered (almost) politically impossible here, desirable though it would be.

It seems ridiculous that the land of free enterprise has created a political system (and budgetary rules!) that are unable to accomplish what a Labor government in the U.K. has already done and what a coalition government in Germany is about to do: actually privatize air traffic control.

The German air navigation service provider, DFS, has operated since 1993 as a self-supporting government corporation. But last year the then-socialist government announced that in 2006 it would sell a 75% stake in DFS, a position that has been re-affirmed by the left-right coalition government headed by Angela Merkel. A joint venture of the country's two largest airlines (Lufthansa and Air Berlin) and privatized airport owner/operator Fraport has announced plans to bid for the entire 75%. Since the group's initial announcement, several other German airlines and the owner/operator of the Munich airport have expressed interest in joining. The airlines say they are acting defensively, in hopes of preventing ownership from being acquired by an infrastructure investment fund that might seek higher user fee rates than an airline coalition would charge. There is already concern about an announced DFS rate hike (after three years of annual rate decreases) due to the company's switch to international accounting rules.

In the U.K., meanwhile, the Airline Group, which owns 42% of part-privatized NATS, in early July announced that it was putting this ownership stake up for sale. Subsequent news reports clarified this, with member Virgin Atlantic declaring that it intended to remain invested in NATS for the long term, but that the charter airline members would like to sell. Press reports indicated interest from Macquarie Bank as well as from a new infrastructure fund being formed by Credit Suisse and General Electric. Air traffic controllers' union Prospect has denounced the sale idea, saying that if even a part of the Airline Group's stake were sold, this would "contradict the guarantee made by the Airline Group when it bought its stake that it would operate on a not-for-commercial return basis." Prospect has declared that the government should buy up any shares put up for sale, and has threatened legal action in the event of any sale of shares to outside investors.

My point here is not to get into the interesting issues raised by these proposed changes in Germany and Britain. Rather, it is to suggest how far ATC reform has moved overseas, while only the internal reorganization that created the unified Air Traffic Organization within FAA has been accomplished in this country. Next year's FAA reauthorization offers a window of opportunity for more serious reform.


News Notes

Nav Canada Reduces Rates After Fund Replenished. One of the things that kept privatized Canadian ATC provider Nav Canada going during the severe aviation downturn after Sept. 11, 2001 was the existence of its "rainy day fund" called the Rate Stabilization Account. To minimize rate increases while its customers were struggling, the company used what was in the account and then some, amassing a deficit of $116 million in that account. Since 2003 Nav Canada has been using a temporary 2% surcharge to rebuild this important fund, and on July 13th, it announced the achievement of its goal. The Account now has a balance of $73 million, and the surcharge is being removed. As of Sept. 1, 2006, Nav Canada's rates will be only 10% above those of March 1999, 10 percentage points below the rate of inflation and 22% less than the ticket taxes they replaced.

ATC Corporation Study Available On-line. The very well-done Clinton Administration study on the feasibility of creating a U.S. air traffic control corporation called USATS is now available on-line. It's been posted on the website of the Air Transport Association. You can find it at www.airlines.org/files/ATCCorpStudyMay1994.pdf.

Bizjets Taking High-End Airline Passengers. According to a study by The Velocity Group, business jets now account for about one-third of the number of airline passengers flying airlines in first class, business class, and full-fare coach. The study is the latest version of a report done every two years by the company. "As a group, the number of higher-yield trips has fallen from 18% of overall airline travel prior to Sept. 11, 2001 to 9% in 2005," the company told Aviation Daily (June 30, 2006). Besides business jets, low-cost carriers have also attracted former high-yield airline travelers. Nothing wrong with that, of course: competition is what drives a free-market economy. But it does give increased salience to the airlines' point about business aviation needing to pay for the infrastructure it uses.

French Join ANSP Group. Commercialized French ATC provider DSNA has become a full member of the Civil Air Navigation Services Organization, the trade association for self-supporting air navigation service providers (ANSPs). Although DSNA remains part of the French government, it was reorganized in 2005 as a commercialized service provider, self-supporting from ATC user charges. It operates five area control centers, 11 approach control centers, and 66 control towers. If even France can do this, why on earth can't we?

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





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