Air Traffic Control Reform Newsletter #41

Topics include: FAA's funding proposal; a "manufactured" funding crisis?; the controller retirement problem; the departure of Russ Chew; boom times for European business aviation; and other news.

In this issue:


FAA Funding Proposal a Big Step Forward—But Not Far Enough

The Federal Aviation Administration this month released its long-awaited proposal to revamp the way its activities are funded. As expected, it would shift from taxes on airline tickets to user fees for air traffic control services. It would permit FAA to issue revenue bonds to fund some of the large capital expenditures needed to implement the proposed Next Generation ATC system. And it would attempt to give a stronger voice to its aviation customers via a new advisory board.

The proposal represents the culmination of several years of analysis and rethinking at the agency, led by Administrator Marion Blakey and Air Traffic Organization (ATO) chief Russ Chew. They have learned a lot by studying ATC reform in the rest of the Western world, where virtually all other countries have converted their government ATC departments into self-supporting air navigation service providers (ANSPs) that can operate on a commercial basis, regulated (at arm's length) for safety and subject to some form of external control over their rates and charges.

The FAA's proposal rests on an impressive piece of work: the "FY2005 Cost Allocation Report," January 2007, available at www.faa.gov. The methodology was developed by PriceWaterhouseCoopers, and it was applied by GRA, Inc. to the agency's FY2004 and 2005 costs. Everyone involved in debating the user fee issue should read this report; in my view, it's the best and fairest FAA cost-allocation study to date—and the first one based on data from the FAA's new cost accounting system.

Thanks to this study, we now know that 67% of FAA's budget is accounted for by the ATO, but if you subtract out the safety-related Flight Service Station program (as I have long advocated), the ATO budget that should be recovered from users is 61%. FAA's traditional safety regulatory functions account for 7%, but adding in FSS boosts that to 13%. Nearly all the rest—25%--is the airport grants program.

Refreshingly, the FAA proposal argues that the government's general fund should be paying only for those functions that are clearly public-interest things: the safety functions (13%) and the use of the system by government users (military and civilian) that Congress has always exempted from paying, another 2.8% of the FAA total. So in round numbers, that's 16% of the total that should come from general taxpayers. (The actual legislative proposal ends up at 19%). Airport grants (AIP) should be paid for by some kind of tax on all airport users, and ATC should be paid for by ATC users, in proportion to their use.

The ATC cost allocation study parses the data, based on three underlying principles:

  • Different air traffic services have different costs;
  • Different types of aircraft affect ATC costs differently (with the main difference being between high-performance/turbine planes and piston/helicopter planes);
  • ATC costs vary according to activity volume, with miles flown in the system used to measure en-route activity and the number of operations (landings & takeoffs) used for terminal-area activity.

These principles are applied all over the world by ANSPs, and are reflected in the charging principles promulgated by the International Civil Aviation Organization.

The underlying principles for allocating costs take seriously the point made by general aviation groups that some major elements of the system (fixed costs) are there primarily to serve high-performance users, so those fixed costs are allocated entirely to the principal users, with only the variable costs allocated among all users, based on percentage use. There are many more details, but the end result is to break down cost responsibility among high-performance users (commercial, GA, and exempt) and piston users (commercial, GA, and exempt) for each flight regime: oceanic, en-route, and three types of terminal areas (large hubs, middle terminal, and low-activity tower). The resulting tables and pie charts show how much cost each of these is responsible for.

The legislative proposal would authorize FAA to charge ATC fees to commercial users only: passenger and cargo airlines plus fractional jet operators (and presumably air taxi/charter operators also). It also takes seriously the repeated plea from the National Business Aviation Association that its mostly turbine users should continue to pay for their share of costs via a fuel tax, rather than direct fees for service. So, in accordance with the cost allocation study, the fuel tax for all GA (piston and turbine) would be more than tripled to 70 cents/gallon to recover their share. A portion of that—13.6 cents/gal.—would be the new AIP tax, which would also be paid by airlines.

Overall, this is a solid proposal. It clarifies who should be paying for what—general taxpayers, high-performance users, and low-end (in terms of demands on the system) users. It provides clear funding sources for each major FAA activity. And it authorizes a modest amount of borrowing authority to help pay for the major upcoming capital investments needed to implement the Next Generation system.

What's not to like? Compared with the financially autonomous ANSPs that are the inspiration for these changes, the proposal falls short in several ways. First, the fees would still be paid to the Treasury, and have to be appropriated each year by Congress. That's a long way from financial autonomy, as is now common in Europe's, Canada's, and Australia's ANSPs. Second, by keeping turbine GA paying fuel taxes for ATC, the proposal further muddies the waters, since user fees paid to the Treasury could eventually be converted to user fees paid to a revamped ATO—but a fuel tax is a tax, and by definition must be appropriated by Congress before it can be spent, creating a stronger barrier to subsequent financial independence. Third, the modest bond funding would allow ATO to access only Treasury borrowing, unlike the access to the private capital markets afforded self-supporting government corporations like the Tennessee Valley Authority and the U.S. Postal Service, let alone virtually every air-carrier airport in the land.

Still, if this proposal were enacted into law (a very big if, I realize), it would represent a far bigger reform than the creation of the ATO three years ago.

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A Manufactured Funding Crisis?

"FAA 'Funding Crisis' Manufactured by the Administration and the Airlines," screamed the headline on a Feb 1st news release from the Aircraft Owners & Pilots Association, in a move intended to discredit the FAA's funding proposal before it was even introduced. We've heard this claim repeatedly from general aviation groups during the past six months, and it's been picked up by several of their friends in Congress. But is there any truth to this claim?

Over the past year the FAA's future revenues and expenditures have been estimated by several agencies. Last April the FAA's Research, Engineering and Development Advisory Committee (REDAC) issued its report, "Financing the Next Generation Air Transportation System," which used the best available estimates of the timing and magnitude of sums needed to implement the various components expected to comprise that system. They made projections of revenues from current funding sources (including a general-fund contribution of 20%, consistent with its average of 19.9% over the past decade). And they projected ongoing FAA expenditures, including continued capital investment to replace wearing-out parts of the existing system. Under those circumstances, at least the early years of the 20-year implementation of NextGen will experience billion dollar annual shortfalls (and projections for the second decade are increasingly matters of guesswork).

A recent (Oct. 18, 2006) report from the Congressional Research Service ("Reauthorization of the Federal Aviation Administration: Background and Issues for Congress") notes that Treasury projections of FAA revenues are consistent with those of the FAA and REDAC, while a Congressional Budget Office projection was more optimistic. But none of these dueling projections (except FAA's) seems to be based on a bottoms-up analysis of the changing nature of flight activity, with more people being flown in ever-smaller units, as narrow-body jets replace wide-bodies on domestic routes, regional jets replace narrow-bodies, and various business jets continue to take market share from airlines. This trend means that flight activity will be growing at a significantly higher rate than passenger numbers, so that a funding system tied largely to passenger numbers (the present ticket/segment tax system) will fall increasingly behind. That makes simple trend extrapolation of historical aviation tax revenue less and less meaningful.

It's the combination of this structural change in air travel and the need for major capital investment to implement the NextGen system that makes the change in the basis of ATC funding so important. If Congress leaves the status quo intact, extending the existing aviation taxes for another 10 years, it will be dooming the FAA to very serious funding shortfalls during that period—or precluding the timely implementation of NextGen. And when the system runs out of capacity 10 years from now and flights have to be rationed, we will know whom to blame.

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Controller Workforce Breathing Room?

I've written several times about the beginning of what will be a huge wave of air traffic controller retirements over the next decade, as a large fraction of the 15,000 member workforce hits the mandatory retirement age of 56. There is a provision in the law (5 USC 8335(a)) under which the FAA can allow certain controllers to remain on duty up to five years past that age. Some have expressed concern about whether this would be a wise thing to do, given the image of controller burnout after many years in this high-stress job.

But there is new research data suggesting that controllers may well be quite competent to continue working well past age 56. As reported by Sharon Begley in the Wall Street Journal ("The Upside on Aging") earlier this month, neuroscience researchers are discovering that what they call "expert knowledge" resists the effects of aging. The brain stores "cognitive templates"—mental outlines of generic ways of dealing with certain kinds of situations—and these remain on tap as professionals (or hobbyists, even) age. Arthur Kramer of the University of Illinois tested aging air traffic controllers, and found that their general memory and reaction time did decline with age. But "on more fast-paced, complex—and hence realistic—tests in which they juggled multiple airliners and handled emergencies, the senior controllers did as well as or better than the young ones. . . . It was as if their experience had equipped them with the most efficient algorithm for keeping the planes safely spaced." Kramer has submitted a paper on these findings to a science journal.

The FAA has recently announced that it will be changing the mandatory age for commercial pilot retirement from 60 to 65. It looks like they should also be looking into changing the retirement age for controllers.

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Thanks, and Good Luck, to Departing Russ Chew

In September 2003 Russ Chew left his senior position at American Airlines to become the Chief Operating Officer of the newly created Air Traffic Organization within the FAA. For the first time, the two "stovepipes" of air traffic operations and the capital modernization (facilities & equipment) program were brought together under one roof. The ATO was intended to be the kind of "performance-based organization" invented in Vice President Al Gore's National Performance Review—i.e., a business serving its customers, though still housed within a government agency.

The creation of the ATO was one of the recommendations of the Mineta Commission's 1997 final report. In enacting the legislation to create it, Congress ignored the rest of the package the Mineta Commission had put forward. To make the ATO able to operate like a business, the Commission said it should be funded by user fees paid to the ATO, creating a customer-provider relationship and enabling the ATO to issue revenue bonds to finance major capital modernization projects. It was to have a board of directors to approve and oversee its budget and modernization plans, and that board would have the primary "oversight" responsibility, transferred from Congress (which would no longer be able to control the purse-strings and thereby make it nearly impossible to operate as a business).

Needless to say, it took FAA more than a year to find someone willing to take on the task, given the lack of control over resources and the need to report to 535 bosses. We all cheered when Russ took on the challenge, and I, for one, think he's done remarkably well, given all the constraints that went with the job. I was sorry to learn that he will be stepping down at the end of this month, after having served more than the three years he promised Marion Blakey he would devote to the job.

I hope, once Russ is back in the private sector, that he will feel free to speak candidly about the near-impossibility of serving the ATO's real customers when the agency depends for every penny on what Congress gives it and the priorities Congress sets. The de-facto customer of any federal agency is the Congress: that's whom you have to serve, because that's who pays your bills and calls you on the carpet when you aren't responsive to its priorities. That's no way to run a business, including an ATC business, and it's time someone who knows that from the inside told it like it is.

And by the way, has anyone else noticed the bizarreness in the ATO's organization chart? The guy in charge is called not the Chief Executive Officer, as in any normal business, but only the Chief Operating Officer. Yet the people reporting directly to him all carry the title of Vice President. If they are the Vice Presidents, who is the President?

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Business Aviation Booms in Europe—Despite User Fees

"Bizav Business Booming," read the headline on Aviation Week's major article covering the National Business Aviation Association annual show in Orlando last fall. Business activity at the show was intense, the magazine reported. The week before, the same magazine carried a long article on how North America, which used to account for 80% of corporate aircraft sales, now accounts for less than half the business jet sales of major players like Dassault and Bombardier. "Demand is much broader now than just U.S. deliveries," the article quoted Mike Miller of Rolls-Royce North America as saying. Honeywell is forecasting shipments of 12,000 new business aircraft over the next decade, worth $195 billion. Cessna CEO Jack Pelton told the Aviation Club of the U.K. that since 2001, European business aviation has "grown at twice the rate of other European traffic," with 22% more flights in 2 005 than in 2001 (compared with a 10% increase in other traffic). In 2005, business flights represented 6.9% of all IFR traffic in Europe.

This shouldn't be happening—at least not if you believe recent rally-the-troops speeches by NBAA president Ed Bolen and General Aviation Manufacturers Association President Pete Bunce. According to them, high user fees have nearly killed general and business aviation in Europe, and that's what will happen here if the forces of evil succeed in bamboozling Congress into enacting ATC user fees.

What especially gripes me about this propaganda effort is that these groups don't show any interest in exposing their members to an honest debate. When they hold panel discussions on ATC funding and user fees, every panel member is a die-hard user-fee opponent. You will search in vain for any article presenting the pros and cons of various alternative ways of funding ATC in publications like AOPA Pilot or Business & Commercial Aviation. (The only—honorable—exception is Professional Pilot, which has several times sought me out to provide the case for the other side.)

This is unfortunate, because business aviation, in particular, accounts for a large and growing share of high-performance users of the ATC system. They should be directly involved in helping to shape a user-fee system, bonding authority, and governance mechanism that works for all of aviation—instead of doggedly defending a failing status quo.

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News Notes

New ATC Reform Policy Study. Several months ago my colleague Ron Utt at Heritage Foundation asked me to do an overview paper for them, explaining to members of Congress and other interested parties what needs to be done to fix America's ATC system, and why it should be done as part of this year's FAA reauthorization. I worked on the paper over the holidays, and I'm pleased to tell you it's just been released. You can find it at www.heritage.org/research/budget/bg2007.cfm. I will be presenting these findings at a Heritage luncheon on March 14th. Invitations to that event are going out this week.

ATO Replaces Old Designations in Budget. Better late than never, the FAA's budget proposal for the first time breaks down its budget request in accordance with the reality of the Air Traffic Organization as the unified ATC provider. Instead of the traditional FAA breakdown into Operations, Facilities & Equipment, R&D, and Airport Grants, the new breakdown is:

  • Air Traffic Organization
  • Safety and Operations
  • R&D
  • Airport Grants.

This may seem like a trivial change, but it sends a message that the ATO is here to stay.

No More Cheap Bizjet Rides for Lawmakers. The new Democratic majority in the House amended the ethics rules in January. Among other things, they can not use official, personal, or campaign funds to "pay for" the use of privately owned aircraft. So there will apparently be no more subsidized rides on corporate jets (the old rules let them pay the equivalent of first-class air fare for a trip worth several times that).

Russia Plans Major ATC Facility Consolidation. In a major makeover of the State Air Traffic Management Corporation, Russia is embarking on a three-stage reform of air traffic control. The first stage will integrate civil and military sectors, while upgrading some of the technology. Stage two will be a larger-scale technology upgrade, including satellite navigation systems (such as ADS-B). And stage three, post-2015, will consolidate the 118 current ATC facilities into 13 new centers. The estimated cost is $5.9 billion. ATC user fees are being increased to help pay for the program.

Iceland Launches ANSP. Yet another European country has converted its ATC system into an autonomous air navigation service provider (ANSP). Iceland has spun off Flugstodir ohf (Isavia) from the Icelandic Civil Aviation Administration, to operate both airports and air traffic control. Its portion of the North Atlantic handles about 30% of the total air traffic crossing the ocean. ICAA will continue to be the air safety regulator, now at arm's length from the ANSP, as in other countries.

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Quotable Quote

"I want to stress how crucially important 2007 is for aviation. Expiration of the FAA authorization and Trust Fund financing provides a once-in-a-decade opportunity to rewrite the book when it comes to America's aviation policies. And I believe we will have failed both the industry and the American people if we do anything less. The importance of getting a financing bill that ties revenues to costs and allows us to manage the FAA more efficiently cannot be overstates. This is our one chance to get it right."

—DOT Secretary Mary Peters, Aero-Club Washington, January 24, 2007.

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





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