Policy Study

How to Commercialize Air Traffic Control

Executive Summary

The record levels of air traffic delays in the summers of 1999 and 2000 have revealed an air traffic control (ATC) system stretched beyond its limits. And not only are delays at record levels; so, too are runway incursions and operational errors by controllers. Clearly the ATC system is in crisis.

Over the past decade a growing consensus has emerged that air traffic control is essentially a commercial service, a 24 hour-a-day, seven-days-a-week, high-tech service business. A number of federal task forces and commissions have, accordingly, recommended that ATC be separated from the Federal Aviation Administration (FAA) and set up as some kind of corporate entity, funded directly by payments from users. Over the past 15 years, nearly two dozen other countries have taken this route, creating either self-supporting government corporations (e.g., Germany) or private nonprofit corporations (e.g., Canada). Recently a number of airline CEOs have spoken out for ATC commercialization along these lines.

The purpose of this report is not to make the case for commercializing ATC; we and others have done that elsewhere. Rather, this report’s purpose is to propose how, in some detail, it might be done. Our intent is to set forth a realistic proposal for shifting the current ATC functions out of the FAA and into a self-supporting, nonprofit corporation governed by a stakeholder board and regulated at arms-length for safety by a slimmeddown FAA (which would also continue to operate the Airport Improvement Program-AIP-to make airport grants).

We first analyze the alternative forms of corporate structure and organization. Since ATC is, and will likely remain, a monopoly, it must be operated in a way that protects its users from possible monopoly exploitation. Three possible corporate forms are a government corporation, a nonprofit corporation, or a regulated for-profit corporation. While a number of countries have opted for the first, the U.S. experience with government corporations has not been highly successful. On the other hand, a for-profit ATC corporation raises the perception of “safety versus profits,” which has led to fierce controversy in the United Kingdom. We strongly recommend the nonprofit corporation approach, as implemented successfully in Canada in 1996. Since it took over ATC operations, Nav Canada has speeded up modernization, dramatically increased efficiency and productivity, and cut user fees by one-third.

The most important feature we have adapted from Nav Canada is the concept of a stakeholder board. Because there are more distinctly different aviation interest groups in the United States, such an approach is even more critical in this country, to ensure that the different interests of, say, major airlines, low-fare airlines, regional airlines, cargo carriers, corporate jets, air taxis, and light plane owners are all taken seriously in the corporation’s decision-making, without any of these interests being able to dictate to the others. We also outline several kinds of external federal oversight of the new ATC Corporation: arms-length safety regulation by the FAA, oversight/appeals regarding fees and service levels by the U.S. DOT, and oversight by congressional committees of FAA and DOT.

Of crucial importance is a workable system of ATC fees and charges. The airline industry is still living with the consequences of the divisive battles of 1997 over restructuring the ticket tax. Our starting point for suggesting a workable fee structure is that the current airline shares of cost responsibility not change significantly at the outset; future shares would obviously depend on changing market structures in the dynamic airline industry. Drawing on international practice, as well as guidelines from the International Civil Aviation Organization, we recommend replacing most current aviation excise taxes with a simple weightdistance fee structure similar to current practice in Canada and Europe, but modified to take into account operations at severely congested airports.

Our initial exercise derives such a fee structure that keeps most airlines’ shares within 10 percent of their current levels (using 1998 as the base year). Moreover, taking into account payments by the federal government (for federal use of the system) and foreign carriers, the amount needed from U.S. airlines to pay for the ATC Corporation would be just 72 percent of what the airlines currently pay in aviation user taxes. Even taking into account the need to retain a small portion of the airline ticket tax and cargo waybill tax to pay for the Airport Improvement Program (AIP), airlines would still pay 12 percent less for ATC and AIP, in total, than they currently pay in aviation taxes. That 12 percent saving is prior to any efficiency gains thanks to corporatization of ATC. Overseas ATC corporations have achieved cost savings of about one-third, which have been passed along in the form of lower user fees. If similar gains were achieved in this country, total airline savings could be on the order of 40 percent by about year five of the new corporation.

General aviation (GA) comes in for special attention. There would be three GA seats on the proposed 15- member corporate board. The current GA fuel tax would be abolished. Instead, each non-jet GA plane would pay a single annual fee, on a sliding scale based on aircraft weight. For most GA planes, the annual fee would be less than the average annual amount currently paid in fuel taxes. The services of flight service stations would continue to be available at no charge, on safety grounds. GA pilots would also continue to receive flight-following and instrument flight services on the same basis as today. Only jet aircraft would pay weightdistance- congestion charges; their hourly cost to use the system would increase compared with today. However, it would take only modest (e.g., 5 percent) annual savings in flight-hours (due to the ATC Corporation’s modernized system) to completely offset the higher per-hour charges for business jets. The new FAA (after the spin-off of ATC) would be supported by general federal revenues (47 percent) and the AIP tax on passenger and cargo airlines (53 percent).

Finally, our plan addresses the transition of current FAA controllers and technicians to the new ATC Corporation. We note that the controllers union is on record supporting a government-corporation approach to ATC, such as the 1995 Clinton administration’s U.S. Air Traffic Services (USATS) proposal. Our plan offers the employees “USATS plus a board seat.” While the union is opposed to “privatization” of ATC, what they mean by that term is shifting ATC responsibilities to a for-profit company, creating a perceived conflict between profits and safety. Our nonprofit, stakeholder-controlled corporation avoids any such conflict.

While it is essential to bring in a new top management team for the ATC Corporation, it is important to retain the current controllers and technicians at the outset. The productivity gains expected from the shift to “freeflight” technologies will help to solve the projected retirement crunch later this decade, permitting a gradual downsizing of the work force. Drawing on two decades of global experience with corporatization and privatization, and U.S. experience with reinventing government, we suggest a number of policies for easing the employee transition: initial no-layoff guarantees, lateral transitions, outplacement assistance, earlyretirement buyouts, and pension protection. We suggest a number of reasons why corporatization would benefit employees: an improved performance-oriented corporate culture, state-of-the-art technology, marketbased compensation, possible gain-sharing (sharing in savings from productivity increases), and the seat on the corporation’s board.