Policy Study

Resolving the Crisis in Air Traffic Control Funding

Executive Summary

The air traffic control system is faced with a major funding crisis, which puts at risk ambitious plans to double or triple the system’s capacity over the next 20 years. Just over a year after the start-up of the reorganized Air Traffic Organization (ATO), its ability to modernize the system is seriously threatened.

The immediate cause of this crisis is dramatic reductions in average airline fares, brought about by the lowcost- carrier (LCC) revolution of the past five years. Intensified competition from LCCs has forced large reductions in most airfares. But since the major funding source for the ATO is a 7.5 percent tax on the price of airline tickets, the ATO’s projected revenue over the next 5, 10, and 20 years is many billions less than expected and needed. And in the current airline financial climate, increasing taxes on this beleaguered industry is simply not an option.

Therefore, it is time to rethink the way we pay for air traffic control. It turns out the United States is the last remaining developed country to use a ticket tax for this purpose. Nearly all other countries follow the guidelines of the International Civil Aviation Organization (to which the United States is a signatory) and charge aviation users directly for air traffic services. Indeed, the 1997 Mineta Commission report, which led to the creation of the ATO, strongly recommended that funding for the new ATO be based on payments for air traffic services, paid directly by aviation users to the ATO. The Mineta Commission pointed out that in addition to creating a stronger customer/provider relationship, such direct user payments would constitute a bondable revenue stream. That would permit funding air traffic control modernization by issuing long-term revenue bonds, rather than via annual appropriations.

This study recommends that Congress make the ATO a self-supporting unit of the FAA, by authorizing it to charge aviation users directly for its services. The ATO would also be authorized to raise money for capital spending (modernization) by issuing long-term revenue bonds in the capital markets. The FAA’s safety regulation and miscellaneous other functions would still be supported, as they are now, by $2 billion per year of general fund monies. And the airport grants program (AIP) would be supported by a modest tax on airline tickets and cargo waybills (in the vicinity of 1 percent).

The transition period to bond-funding of modernization would produce net savings to airlines of hundreds of millions of dollars per year, especially in the early years. At the same time, modernization would be accelerated, thanks to the ability to raise large amounts up front to finance capital expenditures for which there was a demonstrated business case. Modernization plans would first have to be approved by a new ATO Board, consisting largely of aviation stakeholders. This Board would also determine the structure of the new charges for air traffic control services.

We recommend that only that small segment of general aviation which makes extensive use of air traffic control services-jets and turboprops-pay fees under the new system and be represented on the stakeholder board. The large majority of piston-powered general aviation would continue to pay the aviation fuel tax, which would help to support the airport grants program. And we consider the Flight Service Station program used by general aviation to be basically a safety function, which should be paid for out of FAA’s safety budget; in no cases should there be user fees for those services.

There is a real window of opportunity for reforming the way we pay for air traffic control:

  • The funding crunch urgently needs addressing, before serious harm occurs thanks to the aging and deteriorating ATC infrastructure.
  • The new ATO needs the basic tools the Mineta Commission recommended, especially a dependable, bondable revenue stream that is not constrained by federal budget problems.
  • New technology, combined with the impending retirement of more than half the controller workforce, offers a one-time opportunity to change the way air traffic is managed, permitting a huge increase in capacity without increasing the workforce.
  • The ATO will soon have in place the cost-accounting system, which is a precondition for developing cost-based charges for its services.
  • The current aviation taxes sunset in FY 2007, making their replacement an urgent topic for debate this year.

We are proposing a dramatic change, but it’s no less dramatic than the change Congress authorized 20 years ago for the Washington, D.C. airports. Like the ATO, Dulles and National airports were then part of the FAA’s appropriated budget. They were unable to modernize, and they were not directly responsive to what their customers wanted. Congress had the wisdom in 1986 to permit those two airports to become selffunding entities, outside the federal budget structure (though still owned by the federal government). Thanks to developing their own bondable revenue base, the airports embarked on dramatic modernization programs to better serve their customers. No one today would go back to the old model for these airports.

What Congress did for the Washington, D.C. airports in 1986 it can and should do for the Air Traffic Organization in 2005 or 2006.

Attachments

Vaughn Cordle is the CEO and chief analyst of AirlineForecasts, LLC. He is an airline analyst and consultant to various hedge funds, government agencies, corporations, and consulting groups. He has over 25 years of experience in the airline industry and is a practicing CFA Charterholder and a senior B777 captain for a major airline. He has attended numerous executive education programs at Kellogg, Wharton, and other business schools and is a member of the NY Airline and Securities Analysts Societies. He holds an ATP rating in the LR-J, CE500, A320, B727, B737, B747-4, B757, B767 and B777 aircraft and holds 33 world and national speed records.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations.

Surface Transportation

In the field of surface transportation, Poole has advised the Federal Highway Administration, the Federal Transit Administration, the White House Office of Policy Development, National Economic Council, Government Accountability Office, and state DOTs in numerous states.

Poole's 1988 policy paper proposing privately financed toll lanes to relieve congestion directly inspired California's landmark private tollway law (AB 680), which authorized four pilot toll projects including the successful 91 Express Lanes in Orange County. More than 20 other states and the federal government have since enacted similar public-private partnership legislation. In 1993, Poole oversaw a study that coined the term HOT (high-occupancy toll) Lanes, a term which has become widely accepted since.

California Gov. Pete Wilson appointed Poole to the California's Commission on Transportation Investment and he also served on the Caltrans Privatization Advisory Steering Committee, where he helped oversee the implementation of AB 680.

From 2003 to 2005, he was a member of the Transportation Research Board's special committee on the long-term viability of the fuel tax for highway finance. In 2008 he served as a member of the Texas Study Committee on Private Participation in Toll Roads, appointed by Gov. Rick Perry. In 2009, he was a member of an Expert Review Panel for Washington State DOT, advising on a $1.5 billion toll mega-project. In 2010, he was a member of the transportation transition team for Florida's Governor-elect Rick Scott. He is a member of two TRB standing committees: Congestion Pricing and Managed Lanes.

Aviation

Poole is a member of the Government Accountability Office's National Aviation Studies Advisory Panel and he has testified before the House and Senate's aviation subcommittees on numerous occasions. Following the terrorist attacks of Sept. 11, 2001, Poole consulted the White House Domestic Policy Council and the leadership of the House Transportation & Infrastructure Committee.

He has also advised the Federal Aviation Administration, Office of the Secretary of Transportation, White House Office of Policy Development, National Performance Review, National Economic Council, and the National Civil Aviation Review Commission on aviation issues. Poole is a member of the Critical Infrastructure Council of the Los Angeles Economic Development Corporation and of the Air Traffic Control Association.

Poole was among the first to propose the commercialization of the U.S. air traffic control system, and his work in this field has helped shape proposals for a U.S. air traffic control corporation. A version of his corporation concept was implemented in Canada in 1996 and was more recently endorsed by several former top FAA administrators.

Poole's studies also launched a national debate on airport privatization in the United States. He advised both the FAA and local officials during the 1989-90 controversy over the proposed privatization of Albany (NY) Airport. His policy research on this issue helped inspire Congress' 1996 enactment of the Airport Privatization Pilot Program and the privatization of Indianapolis' airport management under Mayor Steve Goldsmith.

General Background

Robert Poole co-founded the Reason Foundation with Manny Klausner and Tibor Machan in 1978, and served as its president and CEO from then until the end of 2000. He was a member of the Bush-Cheney transition team in 2000. Over the years, he has advised the Reagan, George H.W. Bush, Clinton, and George W. Bush administrations on privatization and transportation policy.

Poole is credited as the first person to use the term "privatization" to refer to the contracting-out of public services and is the author of the first-ever book on privatization, Cutting Back City Hall, published by Universe Books in 1980. He is also editor of the books Instead of Regulation: Alternatives to Federal Regulatory Agencies (Lexington Books, 1981), Defending a Free Society (Lexington Books, 1984), and Unnatural Monopolies (Lexington Books, 1985). He also co-edited the book Free Minds & Free Markets: 25 Years of Reason (Pacific Research Institute, 1993).

Poole has written hundreds of articles, papers, and policy studies on privatization and transportation issues. His popular writings have appeared in national newspapers, including The New York Times, The Wall Street Journal, USA Today, Forbes, and numerous other publications. He has also been a guest on network television programs such as Good Morning America, NBC's Nightly News, ABC's World News Tonight, and the CBS Evening News. Poole writes a monthly column on transportation issues for Public Works Financing.

Poole earned his B.S. and M.S. in mechanical engineering at Massachusetts Institute of Technology (MIT) and did graduate work in operations research at New York University.