Air Traffic Control Reform Newsletter #46

Topics include: House version of FAA reauthorization; paying for ATC services; Congress blocking facility consolidation; user fees and Europe's bizjet boom; rationing airspace has begun; and other news.

In this issue:


The House Bill: Status Quo . . . and Worse

Milton Friedman wrote eloquently about what he called "the tyranny of the status quo." That's an apt phrase to describe the FAA reauthorization bill approved on a voice vote by the House Transportation & Infrastructure Committee on June 28th. At a time when the air traffic control system needs root-and-branch governance and funding reform, the bill does little more than tinker with the status quo. It leaves the current unfair and dysfunctional structure of aviation excise taxes in place (though recommending a small increase in general aviation fuel taxes). It therefore ignores the need for a bondable revenue stream to fund major capital investments in modernization (to begin implementation of the NextGen system) and a governing board representing the interests of ATC customers.

In dismissing the need for funding reform, House members relied on the heavily qualified projection of FAA revenue and spending released by the Congressional Budget Office last fall (also relied upon by the Government Accountability Office). CBO's revenue projection is based on assuming that the historical relationship between GDP and air travel continues over the next 20 years, which does not reflect either the continued down-sizing of airline equipment (which makes ATC costs increase faster than ticket tax revenue) or the downward trend in air fares.

And even in the four-year spending levels authorized in the bill, T&I members seem to be living in fantasyland. Airport groups cheered the steady increases in airport grant (AIP) funds (to a new high of $4.1 billion by the fourth year). But in the real world, when Congress gets around to appropriating the FAA's budget, what's going to actually happen? AIP and "Operations" (basically payroll, mostly controllers) account for the lion's share of the FAA budget. If Congress indulges its love of AIP grants, and if the controllers get a revised (more expensive) contract, there would be only two ways to make the FAA budget balance. Either a massive increase in the general fund contribution (currently 19%) or a large cut in planned modernization (NextGen) investment. Given the ongoing budgetary pressures that GAO keeps warning about, there's a good chance that modernization will get the short end of the stick.

This ugly scenario is made more likely by the last-minute inclusion in the House bill of a mandate to force FAA and the controllers' union to re-open last year's contract settlement—a provision the White House has said would trigger a veto. Should such a provision end up in a final bill that overrides a presidential veto, you can kiss timely NextGen implementation good-bye.

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Who Uses ATC—and Who Pays What

I can't begin to count the number of times I've seen private pilots make statements like "We pay our fair share via the fuel tax." I'm sure many of them have been told this so often by trade groups like AOPA and NBAA that they genuinely believe it. Yet this is so false to fact that it's amazing these groups have been able to continue misleading their members and the public for so long. To clear the air, I'm pleased to reproduce the latest FAA data on this subject, based on FY2005 (the data used for FAA's recent, very competently done, cost allocation study).

Right off the bat, you can see that "airlines"—passenger plus cargo—account for 66.3% of ATC costs while contributing 91.5% of the user tax revenue. And the commercial parts of general aviation, which pay the equivalent of the ticket tax, cover 74% of their ATC costs via their user tax payments. It's the conventional portion of GA—the corporate jets and turboprops and the piston planes and helicopters—that account for 15.6% of ATC costs while paying in via the vaunted fuel tax a whopping 3.2% of the revenue. And that is not counting, on the cost side, Flight Service Stations, used almost exclusively by GA but considered, for this purpose, as a safety function rather than as part of GA-related ATC costs.

And that's also ignoring about $1 billion per year in airport grants that go to GA airports with no commercial air service. AOPA and NBAA play a clever game with their members and the public on this one, too. When the discussion is about airport funding, they claim GA "pays its fair share" of airport costs via the GA fuel tax, just as they make the same claim about ATC costs. But that's counting the same $250 million or so in GA fuel tax revenue twice. If you count it as contributing toward GA-exclusive airport grants, it covers only one-quarter of the relevant $1 billion. Or you can count it toward GA's ATC costs, as in the table below, in which case it covers only 20% of that cost. But you can't do both simultaneously.

Detailed FY 2005 Cost Allocation and Tax Revenue by User Group

Line Number

User Group

Share of FY 2005 Air Traffic Costs

Share of FY 2005 Trust Fund Revenues

1

U.S. Large Commercial Passenger Carriers

36.6%

64.1%

2

U.S. Regional Passenger Carriers

20.9%

12.4%

3

Foreign Passenger Carriers

4.1%

9.4%

4

Charter Flights on U.S. Carriers

0.4%

0.7%

5

Subtotal Passenger Carriers

61.9%

86.5%


6

Large U.S. Freight Carriers

3.1%

4.7%

7

U.S. Regional Freight Carriers

1.0%

0.3%

8

Foreign Freight Carriers

0.2%

0.0%

9

Subtotal Freight Carriers

4.4%

5.0%


10

Part 135 Passenger

2.9%

2.2%

11

Part 135 Freight

1.2%

0.3%

12

Fractional Ownership Programs

1.9%

0.8%

13

Commercial Other

1.2%

2.0%

14

Subtotal Part 135 / Fractional / Other

7.2%

5.3%


15

Subtotal—Users Subject to Commercial Taxes

73.5%

96.8%


16

General Aviation – Turbine

9.7%

2.9%

17

General Aviation Piston / Rotor

5.9%

0.3%

18

Subtotal—Users Subject to GA Taxes

15.6%

3.2%


19

Public Users

4.8%

N/A


20

Flight Service Stations

6.1%

N/A


21

Total

100.0%

100.0%

Source:
www.faa.gov/regulations%5Fpolicies/reauthorization/media/FY05_ATODataPackage.xls

Let me hasten to add that I'm not saying GA should all of a sudden start paying 100% of its airport and ATC costs; no country in the world requires that, and it's entirely unrealistic, politically. All I'm trying to do is to put the facts on the table, so that when a proposal such as the Senate bill's $25 user fee per IFR turbine-powered flight (for ATC modernization bonding) is put forth, it can be discussed in the context of facts, not myths. And in that regard, I was heartened by Senate Aviation Subcommittee chairman Rockefeller's stout defense of that user fee in July 12th debate. Both Rockefeller and ranking Republican Trent Lott are "prepared to go to the mat on this issue," reported Aviation Daily. Good for them.

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Aging ATC Facilities vs. Congress

The media have been full of articles lately based on news releases from controllers' union NATCA about aging ATC facilities—leaky roofs, mold, and other problems. And to be sure, many of these facilities are old and need to be replaced. But the smart way to do this is not one-for-one, but as part of an overall plan that takes account of current and NextGen technologies to consolidate wherever possible. Yet Congress is poised to intervene in worthwhile FAA efforts to do just that.

Rep. Alcee Hastings (D, FL) introduced an amendment to the DOT FY2008 appropriations bill to place a moratorium on consolidation of terminal radar approach control facilities (TRACONs). In addition to preventing upcoming consolidations (such as Beaumont/Houston), it would reverse the just-completed consolidation of the Palm Springs TRACON into San Diego TRACON. The amendment was included in the House version of the bill, passed last week, and there is bipartisan support for a companion measure in the Senate.

Yet facility consolidation is one of the key drivers of productivity gains planned for NextGen. With system wide information management (SWIM) and other tools, it will be feasible to control traffic "anywhere from anywhere," making it possible, in principle, to manage the entire system from one or a handful of mega-centers. While nobody has proposed that extensive a consolidation, serious proposals exist for replacing all 21 centers and 171 TRACONs with a few dozen ATC super-hubs. Such new facilities could be located in parts of the country where land and living costs are low, rather than in high-cost places like San Diego and Long Island.

In its Oct. 18, 2006 reauthorization report for Congress, the Congressional Research Service devoted several pages to near-term facility consolidation. It cited recent FAA consolidation of administrative and support operations that relocated 315 employees to areas with lower costs of living and lower locality pay rates. The savings averaged $12,500 per employee per year. Let's assume that a NextGen consolidation of ATC facilities shifted half the 15,000 controller workforce to places with lower costs (but in fact, due to impending retirements, this would almost entirely be new hires starting out at such places, rather than existing people being transferred). The annual payroll savings would be $94 million, which over 10 years would be nearly $1 billion.

This kind of savings would clearly be in the interest of the ATC system's customers. But it's never going to happen as long as Congress serves as the system's "board of directors."

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The Impossible Keeps Happening: Bizjet Boom in Europe

Article after article, and speech after speech, the message from AOPA and NBAA is the same: ATC user fees are the kiss of death—just look at Europe. Yet three recent conferences in Europe suggest quite the opposite. High-end general aviation, the only kind for which U.S. ATC user fees are being proposed, is positively booming in Europe.

The European Business Aviation Conference & Exposition (EBACE) took place in Geneva at the end of May, with record attendance of 10,000. Among the many news items reported from the conference were planned expansions at Farnborough (the UK's leading GA airport) and Le Bourget (France, and Europe's, busiest). Geneva itself, despite having a population of only 180,000, is the fourth-largest corporate aviation base in Europe.

The Paris Air Show in June also showcased the strong growth of business jets in Europe. Teal Group released a forecast that the next decade will see the production of 12,000 such planes (worth $173 billion), compared with 6,300 worth $109 billion in the previous decade. The United States is no longer the dominant market for these jets; for example, Dassault Falcon now sells just 30% of its planes in the United States. Yet virtually the entire rest of the world charges bizjets for ATC services using the same weight-distance formula that applies to airline jets. Somehow, this doesn't seem to be crippling the industry.

One key factor is the strong growth of fractional ownership in Europe. Market leader NetJets Europe made its first profit last year. The company made 62,000 flights in 2006, a 33% increase over the previous year. Demand for pilots has been so strong that NetJets Europe had to agree to significant pay increases and fewer pilot flight days per month. The company had 650 pilots at the end of 2006; this had increased to758 in May, and they are projecting 1,500 by 2011.

The latest GA growth factor, as in the United States, is air-taxi service using very light jets (VLJs). Late in June the global Air Taxi Association (ATXA) held the first Very Light Jet-Europe conference in Vienna. JetBird has announced VLJ air-taxi service using the forthcoming Embraer Phenom 100, while DayJet is working to set up a European operation using the Eclipse 500. Taxijet Spain also plans Eclipse 500 operations, in southern Europe. EarthJet, which is launching U.S. charter flights on light jets, plans to franchise such operations in Europe, as well. The European air taxi market is estimated at 1 billion Euros per year currently, before the start of any of the new VLJ operations. (Details on this conference at www.miuevents.com).

All of which suggests that the implementation of a $25 per IFR turbine flight ATC user fee would be no big deal for business aviation in America. But then, we already knew that, didn't we.

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Rationing Begins, Hurting Smaller Cities

What can we expect as the ATC system starts bumping up against its capacity limits? Well, since airlines are in business to make money for their shareholders, when they can't fly as many routes as they would prefer to fly, they will choose the more profitable ones over the less profitable ones. And the latter tend to be the ones into smaller communities, these days served mostly by regional airline partners of the major airlines.

A case in point was the mid-July announcement by American Airlines that it would be pulling out of Stewart Airport in Newburgh, NY. AA began serving Stewart in 1990 with mainline twinjets, but later downsized to RJ service operated by American Eagle. The only remaining route was three flights a day to AA's hub at Chicago O'Hare. But the combination of limited slots at ORD and the congested airspace served by Cleveland Center made these flights marginal, despite relatively high load factors. AA decided that it could make better use of the RJs elsewhere.

Aviation consultants Mike Boyd and Robert Mann both pointed to the overburdened ATC system as a causal factor. "The system is clearly broken," Mann told the Times Herald-Record. "But do you blame the guys trying to put 10 pounds of flights into a 7-pound bag or do you blame the guy at the store who keeps selling 7-pound bags?" Boyd said that because the ATC system cannot keep up with demand, airlines have begun to engage in de-facto rationing. "A lot of small and mid-size communities are going to get unpleasant news in the months ahead . . . . Places like Binghampton? Forget it. They're going to be doomed."

I'm sure somebody will respond to this by saying it's not the ATC system that's at fault but rather the lack of slots at congested hubs like O'Hare. But the number of slots at ORD is not a law of nature; it, too, is a function of ATC technology. A forthcoming Reason Foundation policy study will outline how various NextGen technologies can significantly expand the capacity of a given amount of runways.

There is no substitute for fundamental reform of how we separate planes in flight—all phases of flight. But the current funding and governance mechanisms are serious obstacles to making such changes, in any realistic time frame and at an affordable cost.

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ARINC—An Appreciation

You probably had to be an aviation junkie to even notice the early-July news stories on the purchase of Aeronautical Radio, Inc. (ARINC) by the Carlyle Group. But even the more detailed stories in the trade media failed to point out ARINC's historic role in air traffic control.

ARINC was incorporated in 1929 as the federal licensee for aeronautical radio communications for the fledgling airline industry. It was set up as a user-owned nonprofit corporation, whose shareholders were commercial airlines (later augmented by other aviation companies). From 1930 through 1939 ARINC stations performed airport, approach, and en-route communications functions. In 1936, however, the federal Bureau of Air Commerce set up the first official ATC centers (with ARINC technical assistance) at Newark, Chicago, and Cleveland. But ARINC continued to provide various ATC functions through 1939, at which point the government expanded its ATC efforts so as to establish a "uniform centralized system of airway traffic control," paid for by U.S. taxpayers.

ARINC continued to develop airline communications services, and later expanded its avionics R&D activities to become a much larger and diversified business, serving military, airport, and airline markets. After World War II, ARINC helped Cuba and Mexico to set up nonprofit ATC corporations, RACSA and RAMSA, respectively, funded by ATC user fees. Both were ultimately nationalized by their respective governments, RACSA shortly after Castro took over in 1959 and RAMSA in 1978.

It is interesting to consider ARINC's future, under Carlyle Group's ownership. Some Wall Street observers expect that Carlyle will polish up the various ARINC businesses and sell them off. But what about the original airline communications service business? Should some future political environment be ripe for outsourcing ATC, the core ARINC business would be an interesting candidate to operate this business.

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News Notes

Another Audio Interview. Following my Avweb interview on user fees and ATC reform, a second GA-oriented site (Aero-News.net) did another interview along these lines. It was put on their site as an audio-cast on July 5, and I just checked to be sure it's still there. The actual URL is several lines long, so just go to www.aero-news.net and use the search function to get the July 5 news, then click on the audio-cast item.

DFS to be Privatized After All. Thompson Financial reports (July 25) that DFS, the commercialized ATC provider in Germany, may be privatized in 2008 via sale of 74.9% to a strategic investor. Such a plan had been approved by the German parliament in 2006, but plans were halted when the German president found the plan to be incompatible with several provisions of the Basic Constitutional Law. DFS managing director Dieter Kaden told the news service that he expects the necessary legal changes to be completed by May or June of next year.

UK NATS to be Privatized? A brief item on Avweb July 1st, sourced to thisismoney.co.uk, claimed that the UK's partially privatized ATC provider, NATS, is planning on full privatization in the near future. That would mean the government selling its current 49% position. I have seen no other reports on this, so it may just be financial industry speculation.

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Quotable Quotes

After telling the American Association of Airport Executives annual meeting that JetBlue would be happy to pay a $25/flight ATC modernization user fee if it leads to saving flight time, Chairman David Neeleman added: "I shocked my colleagues on the FAA MAC when I said that. But why not have a $50 fee that we can bond to raise billions to modernize the air traffic control system? We need to stop doing it piecemeal, by using earmarks. . . . If we don't fix the system soon, less people will fly. That's not good for us and it's not good for airports."
--Aviation Daily, June 13, 2007

"Aligning revenues and costs would have two significant implications in the context of the air traffic control system. First, users of the system rather than taxpayers as a whole would bear most of the costs . . . . Second, because costs are generated in large part by moving aircraft through the system, taxes and fees would generally be more aligned with that activity than with enplanements or airfares. . . . [Today's] approach to financing based largely on the number of passengers is not closely linked to the costs imposed on the air traffic control system. [T]here is sound economic justification for imposing costs on aircraft operations rather than passenger enplanements. . . . Pricing the air traffic control system so as to provide the appropriate economic incentives to the various sectors of the aviation industry may enable the system to better accommodate the growing demand for air travel."
--Peter Orszag, Director, Congressional Budget Office, testimony before the Senate Finance Committee, July 12, 2007

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





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