Air Traffic Control: Preliminary Observations on Commercialized  
Air Navigation Service Providers (20-APR-05, GAO-05-542T).	 
                                                                 
In the past, governments worldwide owned, operated, and regulated
air navigation services, viewing air traffic control as a	 
governmental function. But as nations faced increasing financial 
strains, many governments decided to shift the responsibility to 
an independent air navigation service provider (ANSP) that	 
operates along commercial lines. As of March 2005, 38 nations	 
worldwide had commercialized their air navigation services,	 
fundamentally shifting the operational and financial		 
responsibility for providing these services from the national	 
government to an independent commercial authority. GAO selected  
five ANSPs--in Australia, Canada, Germany, New Zealand, and the  
United Kingdom--to examine characteristics and experiences of	 
commercialized air navigation services. These ANSPs used	 
different ownership structures and varied in terms of their size,
amount of air traffic handled, and complexity of their airspace. 
This testimony, which is based on ongoing work, addresses the	 
following questions: (1) What are common characteristics of	 
commercialized ANSPs? (2) What do available data show about how  
the safety, cost, and efficiency of air navigation services have 
changed since commercialization? (3) What are some initial	 
observations that can be made about the commercialization of air 
navigation services?						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-542T					        
    ACCNO:   A21980						        
  TITLE:     Air Traffic Control: Preliminary Observations on	      
Commercialized Air Navigation Service Providers 		 
     DATE:   04/20/2005 
  SUBJECT:   Air traffic control systems			 
	     Air traffic controllers				 
	     Comparative analysis				 
	     Cost control					 
	     Data collection					 
	     Evaluation 					 
	     Foreign corporations				 
	     Internal controls					 
	     Privatization					 
	     Safety regulation					 
	     Safety standards					 
	     Government and business				 
	     Australia						 
	     Canada						 
	     Germany						 
	     New Zealand					 
	     United Kingdom					 

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GAO-05-542T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Aviation, House Committee on Transportation and
Infrastructure

For Release on Delivery

Expected at 10:00 a.m. EDT AIR TRAFFIC CONTROL

Wednesday, April 20, 2005

  Preliminary Observations on Commercialized Air Navigation Service Providers

Statement of Gerald L. Dillingham, Ph.D. Director, Physical Infrastructure
Issues

GAO-05-542T

[IMG]

April 20, 2005

AIR TRAFFIC CONTROL

Preliminary Observations on Commercialized Air Navigation Service Providers

                                 What GAO Found

The five commercialized ANSPs that GAO selected for review have a number
of common characteristics: Each operates as a business, making and
carrying out its own strategic, operational, and financial decisions. Each
generates and manages its own revenue to cover its costs, charging fees to
users and borrowing funds from private markets instead of relying on
annual governmental appropriations. Each has also put commercial financial
and performance data systems in place. All five ANSPs have retained safety
as their primary goal, and each is subject to some external safety
regulation. Each ANSP is largely a monopoly provider of air navigation
services and undergoes some form of economic review or follows some
guidelines for setting prices.

The ANSPs report that, since commercialization, each has maintained
safety, controlled costs, and improved efficiency. Data from all five
indicate that safety has not eroded. For example, data from New Zealand
and Canada show fewer incidents involving loss of separation (the required
distance between an aircraft and another object). All five ANSPs have
taken steps, such as consolidating facilities, to control their operating
costs. Finally, all five ANSPs have invested in new technologies that the
ANSPs say have lowered their costs by increasing controllers' productivity
and produced operating efficiencies, such as fewer or shorter delays. Such
measures have generally resulted in lower fees for major carriers, but
some smaller, formerly subsidized users now pay new or higher fees and are
concerned about future costs and service.

GAO's work to date suggests a number of observations about commercialized
ANSPs: A contingency fund can help an ANSP cover its costs without greatly
increasing user fees during an economic decline; economic regulation by an
independent third party can ensure that an ANSP sets prices fairly;
providing a forum for stakeholders gives attention to their needs; and
special measures may be necessary to reconcile the inability of some users
to pay the full costs of services at some small communities and the ANSP's
need to recover its costs.

              Size and Scope of Five Commercialized ANSPs Reviewed

                                                                    Movements 
                                                                      handled 
                         Country ANSP name ANSP ownership Employees    (year) 
             Australia Airservices Australia Government       2,900 2,723,828 
                                             corporation               (2004) 
                Canada            NAV CANADA  Private company 5,400 6,000,000 
                                                                       (2003) 
               Germany Deutsche              Government       5,400 2,720,000 
                       Flugsicherung GmbH    corporation               (2004) 
           New Zealand   Airways Corporation Government         680 1,004,161 
                        of New Zealand, Ltd. corporation               (2004) 
                United  National Air Traffic   Public-private 3,758 2,000,000 
               Kingdom          System, Ltd.      partnership          (2004) 

Source: GAO presentation of data from ANSPs.

United States Government Accountability Office

Mr. Chairman, Ranking Democratic Member, and Members of the Subcommittee:

Thank you for the opportunity to testify before you today on our work
related to commercialized international air navigation service providers
(ANSP). Since 1987, 38 nations have commercialized their air navigation
services, fundamentally shifting the responsibility for providing air
navigation services from the national government to an independent ANSP
that operates as a performance-based organization along commercial lines.1
In the United States, of course, the Federal Aviation Administration's Air
Traffic Organization was created as a performancebased organization in
2000, but has not been commercialized and remains entirely within the
federal government.

In the past, governments worldwide owned, operated, and regulated air
navigation services, viewing them as a governmental function. But as air
navigation technologies grew more complex and as nations faced increasing
financial strains, many governments reevaluated existing structures for
providing air navigation services, and some decided that shifting the
responsibility for operating and, in some cases owning, the services to an
independent commercial authority could produce efficiencies that would
benefit both users and the government. In general, the responsibility for
regulating the safety of the services is independent of the ANSP.

Today I will discuss how different countries have commercialized their air
navigation services and how commercialization has affected those services.
Specifically, my statement addresses the following questions:

o  What are common characteristics of commercialized ANSPs?

o  	What do available data show about how the safety, cost, and efficiency
of air navigation services have changed since commercialization?

1For additional information on performance-based organizations, see GAO,
Federal Student Aid: Additional Management Improvements Would Clarify
Strategic Direction and Enhance Accountability, GAO-02-255 (Washington,
D.C.: Apr. 30, 2002); Performance-Based Organizations: Lessons From the
British Next Steps Initiative, GAO/T-GGD-97-151 (Washington, D.C: July 8,
1997); and Performance-Based Organizations: Issues for the Saint Lawrence
Seaway Development Corporation Proposal, GAO/GGD-97-74 (Washington, D.C:
May 15, 1997).

o  	What are some initial observations about the commercialization of air
navigation services?

To address these questions, we reviewed the characteristics and
performance of five ANSPs, which we selected as illustrative of
similarities and differences in the size and scope of commercialized
ANSPs. These ANSPs-Australia's Airservices Australia; Canada's NAV CANADA;
Germany's Deutsche Flugsicherung GmbH (DFS); New Zealand's Airways
Corporation of New Zealand, Ltd.; and the United Kingdom's (UK) National
Air Traffic Services, Ltd. (NATS)-were commercialized between 1987 and
2001 and have been operating ever since as performance-based organizations
along commercial lines. Because of the size of our sample, our results
cannot be generalized to other commercialized ANSPs, and our purpose is
not to assess or evaluate the selected commercialized organizations.

Comparisons of performance before and after commercialization are
generally not feasible because data for assessing performance are
typically unavailable for the time before commercialization, or the
measures have changed in the years following commercialization.
Furthermore, comparisons between or among ANSPs are difficult because each
ANSP may define its measures of cost, safety, and performance differently.
We did not verify the data gathered and reported by the five ANSPs;
however, their financial information is subject to independent audits, and
their safety and operating performance data are publicly reported. As a
result, we considered the data sufficiently reliable for the purposes of
our review. The information presented in this testimony is based on
ongoing work and may be updated as additional information becomes
available. At the request of the Senate Committee on Commerce, Science,
and Transportation, its Subcommittee on Aviation, and Senators John McCain
and Trent Lott, we are planning to issue a more detailed report later this
year on the topics discussed in this testimony. We performed our work in
accordance with generally accepted government auditing standards from
August 2004 through April 2005.

Let me turn now to the results of our review. In summary:

The five commercialized ANSPs that we selected for review have a number of
common characteristics: Each operates as a business rather than a
government organization, making and carrying out its own strategic,
operational, and financial decisions. Additionally, each generates and
manages its own revenue to cover its operating and capital costs. Each
assesses fees on users of air navigation services (e.g., major

commercial air carriers, regional air carriers, and in some cases general
aviation operators) and is able to borrow funds from private markets,
instead of relying on annual appropriations from the government. All five
ANSPs have retained safety as their primary goal, and each is subject to
some external safety regulation. Finally, each ANSP is largely a monopoly
provider of air navigation services and undergoes some form of economic
review or follows some guidelines for setting prices.

Available data from the five ANSPs we reviewed indicate that since
commercialization, the safety of air navigation services has remained the
same or improved, each has taken steps to control costs, and each has
reportedly lowered costs and improved efficiency through modernization.
Though some opponents have raised concerns that commercialization would
compromise safety, data from all five indicate that safety has not eroded.
For example, data from New Zealand and Canada show fewer incidents
involving loss of separation (the required distance between an aircraft
and another object). Additionally, anecdotal information suggests that
safety regulation improved when the regulator was separated
organizationally from the ANSP. All five ANSPs have taken steps to control
their operating costs, whether by eliminating some administrative and
middle management positions or by consolidating facilities. Furthermore,
all five ANSPs have invested in and benefited from new technologies and
equipment, which the ANSPs say have lowered their costs by increasing
controllers' productivity and produced operating efficiencies, such as
fewer or shorter delays. As a result, some ANSPs have been able to lower
the prices they charge the airlines for certain services. However, the
ANSPs have also instituted or increased fees for general aviation
operators. In Australia, a government subsidy for services to smaller
airports is scheduled to expire later this year, raising concerns about
the affordability and availability of services to those airports.

Our work to date suggests a number of initial observations about
commercialized ANSPs. First, having a contingency fund or other mechanism
to offset a revenue shortfall can help an ANSP weather a decline in air
traffic such as the aviation industry experienced, particularly after
September 11, 2001. Second, because the ANSPs are largely monopoly
providers of air navigation services, economic monitoring or regulation by
an independent third party can protect users and ensure a fair pricing
process. Third, addressing the concerns of stakeholders, especially air
traffic controllers, is essential to initiate and sustain commercial
operations, and providing a forum for communication can ensure subsequent
attention to their needs and priorities. Fourth, the conflict between the
inability of some users (e.g., smaller air carriers or

Background

general aviation operators) to pay the full costs of providing services to
small communities and the ANSPs' need to recover their costs means that
special measures may be necessary to protect service to some locations.
Fifth, when a government sells its interest in an ANSP to private
investors as part of the commercialization, the ANSP's assets have to be
appropriately valued to protect taxpayer interests and create a basis for
sound financial decision-making. Sixth, when operations are separated from
regulation during commercialization, it is important to ensure that the
regulator can attract and retain sufficient personnel with the skills and
expertise needed to provide uninterrupted safety regulation. Finally,
developing baseline safety, cost, and efficiency measures prior to
commercialization will allow the ANSP and others to compare the
performance of the ANSP before and after commercialization and over time.

Before commercialization, air navigation services under government control
faced increasing strain. Many were underfunded, as evidenced by air
traffic controller wage freezes and insufficient funds to replace aging
technologies. In some instances, the country as a whole faced widespread
fiscal problems and the commercialization of air navigation services was
simply part of a larger movement to reform government enterprises such as
rail, telecommunications, and electricity.

With commercialization, the government typically retains full or partial
ownership of the air navigation system and continues to regulate
operational safety,2 but an independent ANSP is responsible for operating
the system. The independent ANSP is subject to corporate financial and
accounting rules and, in line with today's current management theories, is
generally designed as a performance-based organization-that is, an
organization that develops strategies, goals, and measures and gathers and
reports data to demonstrate its performance. In the five countries whose
air navigation services we reviewed, the ANSP continued to provide
nationwide services after commercialization and, with certain exceptions,
remained the sole provider of air navigation services.

Each ANSP offers en route, approach control, and terminal air traffic
services. However, in some cases, an ANSP may not be the sole provider

2In the UK and Australia, safety and economic regulators are "statutorily
independent of the government."

of approach control and terminal services in a country. Although technical
definitions may vary slightly among ANSPs, these services broadly
correspond to the services provided in U.S. air traffic centers, approach
control centers, and towers. All but Germany's DFS also offer oceanic air
navigation services. All five ANSPs are responsible for providing air
traffic services to both civil and military aviation. In addition, the
ANSPs may offer other air-navigation-related services, such as
meteorological services, fire and rescue, training, and consulting. The
ANSPs also charge for these services.3

Discussions about the commercialization of air navigation services often
use a number of terms interchangeably. Among these terms are
restructuring, privatization, outsourcing, and corporatization, as well as
commercialization. The Civil Air Navigation Services Organization (CANSO),
which represents the interests of ANSPs worldwide, uses the term
corporatization. Others, such as the International Civil Aviation
Organization (ICAO), which establishes international civil aviation
standards and recommends practices and procedures for ANSPs, use the term
commercialization. Some note that an organization can be "commercialized"
but not "corporatized" (i.e., established under prevailing company law).
For this statement, we will use "commercialization."4

Two of the countries we examined-Germany and the UK-are members of the
European Union and EUROCONTROL.5 As parties to these international
organizations, the two countries follow the policies and regulatory
framework of the European Commission's "Single European

3NATS includes charges for meteorological services in the charges for en
route services.

4According to ICAO, commercialization is the ability of an organization to
operate like a commercial business, whether it is wholly or partly owned
by the government or fully privatized. A commercialized organization
should function as an autonomous body and, compared with a government
organization, have greater freedom from the government in conducting its
financial affairs and developing infrastructure funding. In addition, it
should be self-financing, subject to the usual business taxes, and
required to seek a return on capital. The safety of its operations should
still be regulated by the government, and it should be encouraged to be as
competitive, efficient, and cost-effective as any other commercial
business.

5EUROCONTROL is a European organization responsible for regulating the
safety of air navigation, monitoring the performance of air traffic
management systems, and developing a seamless air traffic management
system in Europe.

Sky" initiative.6 Under this initiative, EUROCONTROL is mandated to
develop implementing rules, one of which specifies that each member state
is to develop an independent safety and economic regulatory authority to
oversee the ANSP. To this end, Germany is planning to develop such an
authority, and the UK has already established one. Table 1 summarizes
information on the size and scope of the five ANSPs in our review:

Table 1: Summary Information on Five Commercialized ANSPs Reviewed

                                       Australia Canada Germany 
                        Agency Airservices NAV Deutsche         
                                 Australia CANADA Flugsicherung 
                                                     GmbH (DFS) 
                             Year of 1988 1996 1993             
                               commercialization                
                        Type of Wholly Privately Wholly         
                     ownership government-owned government-     
                                            owned company owned 
                         Approximate 2,900 5,400 5,400          
                  number of employees (1,100) (2,300) (2,098)   
                                   (Number of                   
                                  controllers)                  
                   Approximate 2,723,828 6,000,000 2,720,000    
                   number of aircraft movements (2004) (2003)   
                                     (2004)                     
                                 handled (Year)                 

New Zealand

Airways Corporation of New Zealand, Ltd.

1987

Wholly governmentowned

680

(340)

1,004,161

(2004)

United Kingdom

National Air Traffic Services, Ltd. (NATS)

2001

Partially governmentowned

3,758

(1,380)

2,000,000

(2004)

Source: GAO presentation of data from ANSPs.

6The "Single European Sky" initiative, approved by the European Parliament
in January 2004, is a legislative package consisting of four regulations
that address (1) the framework for the creation of a single European sky,
(2) the provision of air navigation services in the single European sky,
(3) the organization and use of the airspace in the single European sky,
and (4) the interoperability of the European Air Traffic Management
network.

Common The five commercialized ANSPs that we reviewed have a number of

common characteristics: All operate as businesses rather than as
Characteristics of government organizations, all focus on safety, and all
are largely monopoly Five Commercialized providers that are subject to
some form of economic review or guidelines

for setting prices.

ANSPs

Five Commercialized ANSPs Operate as Businesses

ANSPs Make and Execute Their Decisions and Follow Corporate Practices

All five commercialized ANSPs operate as businesses, although they differ
somewhat in their ownership structures. (See table 1.) Three of the five-
Airservices Australia, Airways Corporation of New Zealand, and DFS-are
currently state-owned corporations-that is, companies wholly owned by the
government. The UK's National Air Traffic Services (NATS) is a
publicprivate partnership, that is, a cooperative venture between the
public and private sectors that is designed to meet defined public needs
with the risks and rewards divided between both parties. The government
holds the largest share of NATS (49 percent), and the remaining shares are
divided among a consortium of seven UK airlines (42 percent), NATS staff
(5 percent), and a private airport company7 (4 percent). By 2006, Germany
plans to change the ownership of DFS, selling 74.9 percent of its equity
to private investors and reorganizing it as a public-private partnership,
along the lines followed in the UK. NAV CANADA is a nonshare capital,
private corporation-that is, it has "members" instead of shareholders.
These members represent the airline industry, the government, and general
and business aviation, and they also include employees such as air traffic
controllers and engineers.

Each ANSP makes and carries out its own strategic, operating, and
financial decisions. A supervisory board oversees policy making and
operations and, when applicable, has fiduciary responsibilities to
shareholders. The members of this board may represent key stakeholders,
such as the airlines, employees, general aviation, and the national
government. An executive officer implements the board's policies and is in
turn, accountable to the board. Individual business units within the ANSP
report to the executive officer and are directly responsible for various
aspects of the ANSP's day-to-day operations.

As commercial organizations, the ANSPs follow corporate practices. Each
ANSP has established performance measures and gathers and reports

7This private company, BAA, plc., owns seven UK airports, including
London's Heathrow, Gatwick, and Stansted, and has interests at 13 airports
overseas.

financial and other performance data. Each ANSP also publishes an annual
report, which makes financial information available to the public to
ensure transparency. Financial statements are typically subject to
third-party audit to ensure that adequate accounting records have been
maintained and that internal controls have prevented and detected any
fraud and error in the accounting policies and estimates. In addition, the
UK and Germany report their data to EUROCONTROL's Performance Review
Commission, which collects data for benchmarking and publishes comparative
studies of members' performance.

Before commercialization, two of the five ANSPs "purchased" the ANSP
assets from their government. NAV CANADA negotiated a selling price with
the Canadian government, rather than going through a formal competitive
bidding process, and purchased the air navigation system in 1996 for C$1.5
billion.8 In the UK, according to information from the National Audit
Office, a collection of seven UK airlines known as "The Airline Group"
provided -L-795 million of funds, partly from its own resources (-L-65
million) and from a loan taken out with a consortium led by four main
banks. The group used these funds to acquire NATS and meet associated
transaction costs, leaving -L-3.5 million of cash in the business. In
total, the government received -L-758 million in cash proceeds from the
transaction.9

All five commercialized ANSPs rely on user charges as their primary source
of revenue and on private capital markets for additional funding. Before
commercialization, governments funded air traffic control services through
annual appropriations from their national government.

All five ANSPs collect and manage their own revenues, charging fees for
services. Their air navigation service fees are based on ICAO's cost
recovery principles, which call for recovering the ANSP's operating
costs.10 Despite some variation across ANSPs, the fees are generally as
follows:

ANSPs Generate Revenue and Have Borrowing Authority

8Unless otherwise noted, all financial amounts are expressed in local
currencies. As of April 13, 2005, 1 U.S. dollar was equivalent to 0.78
euro, 1.29 Australian dollars, 0.53 UK pound sterling, 1.24 Canadian
dollars, and 1.39 New Zealand dollars.

9National Audit Office, The Public Private Partnership for National Air
Traffic Services Ltd., Report by the Comptroller and Auditor General, HC
1096, Session 2001-2002, July 24, 2002.

10Fees for the European ANSPs also include a contribution to cover the
expenses of EUROCONTROL.

o  	The air navigation fees cover operating and capital costs associated
with both en route and terminal services. These charges are based on a
weightdistance formula.11 If applicable, ANSPs also levy charges for
oceanic

control.

o  	ANSPs may also charge for tower-related services. However, not all
ANSPs are the sole providers of tower services. In the UK and Germany, for
example, private firms may provide tower services. These tower charges are
distinct from the landing fees typically charged by airports, which are
usually weight-based.

o  	ANSPs may charge general aviation operators a flat fee for services or
additional fees in particular circumstances rather than charging the
weight-distance fees typically assessed to larger air carriers.

o  	ANSPs may also charge additional fees, as applicable, for other
services, such as meteorological, aeronautical information, training, and
consulting services.

The five ANSPs vary in their treatment of any operating profits or losses.
If an ANSP generates revenues from charges in excess of its costs (i.e.,
operating profits), it may rebate them to the users, lower the charges for
the next year, pay some form of dividend to shareholders, or retain them
in reserve to protect against future losses. If costs exceed revenues,
ANSPs use different strategies to meet those shortfalls. For example, NAV
CANADA established a "rate stabilization fund," which it used to store
revenues when the aviation industry was healthy. The fund could then be
used to cover costs and keep rates stabilized when the industry was
ailing. The fund was capitalized by operating profits earned before
September 11, 2001, but depleted following the economic downturn caused by
the events of September 11 and the SARS outbreak of 2003.12 In 2003, the
rate stabilization fund had reached a cumulative deficit of C$116 million.
According to NAV Canada's 2004 annual report, the C$116 million deficit
has been reduced to C$32 million. In the UK, NATS, which experienced a

11The standard weight-distance formula is a single charge per flight for
en route services based on the distance flown by the aircraft within a
defined area and the aircraft's weight. This formula is based on ICAO's
policies on charges for air navigation services.

12Concerns about the in-flight transmission of SARS (severe acute
respiratory syndrome), a highly contagious respiratory disease that
appears to be transmitted by close personal contact, affected passenger
traffic on international flights to and from Asia, compounding the
economic downturn in the aviation industry that began in 2000.

major decline in transatlantic traffic after September 11, first obtained
a ï¿½60 million short-term loan from its lending banks and then
refinanced, bringing in a new equity partner (BAA, plc.).13

To pay for capital projects, the five ANSPs can either use current
operating revenues or borrow funds. Before commercialization, the ANSPs
relied on annual appropriations for capital projects; now, all five can
borrow funds through access to private capital and debt financing. For
example, NAV CANADA can seek debt financing in private markets. NAV CANADA
has a borrowing capacity of C$2.9 billion. In Germany, DFS mainly finances
its capital expenditures by drawing on a capital market program, which
issues short-, medium- , or long-term notes (i.e., debt issuance and
commercial paper) each amounting to EUR 500 million for a total of EUR1
billion to private investors in the market. DFS can also draw on an annual
credit line of EUR161 million from its bank.

Stakeholders, including employees, as well as the airlines, general
aviation operators, airports, the government, the public, and others, may
be involved in their ANSP through a variety of mechanisms. In Europe, for
example, the Single European Sky initiative directs member states to
establish a consultation mechanism for involving stakeholders. Germany and
the UK have followed this direction by including stakeholder
representatives on their ANSP's board of directors. For example, in
Germany, DFS employees, government ministries, and the private sector are
represented on a supervisory board. In the UK, government appointees, the
airlines, and BAA, plc. (the airport consortium) are represented on NATS's
board. In Australia, the aviation community (e.g., the airports, airlines,
safety authorities, and others) has a role in the air traffic procurement
process through the Australian Strategic Air Traffic Management Group
(ASTRA).

ANSPs Have Mechanisms for Stakeholder Involvement and Communication

Common Focus on Safety Among the Five Commercialized ANSPs

For all five commercialized ANSPs, safety remains the primary goal. In
some countries, government policy requires that the ANSP consider safety
in any and all decisions affecting operations and service. For example, in
Germany, legislation requires DFS to observe ICAO's standards and

13Total new investment made in NATS as part of the refinancing arrangement
was ï¿½130 million-ï¿½65 million from BAA, plc., matched by an
additional ï¿½65 million from the UK's Department for Transport.

recommended safety practices, as well as adhere to the objectives and
policies of international organizations where the German government is
represented, such as EUROCONTROL. Similarly, in Canada, legislation
requires NAV CANADA to maintain a fixed level of safety. Under the Civil
Air Navigation Services Commercialization Act, the Minister of Transport
has the authority to direct NAV CANADA to maintain or increase levels of
service in the interest of safety. Although it can alter operations in
accordance with business principles, it must demonstrate that the changes
meet the required level of safety through an aeronautical risk assessment.

All five ANSPs are subject to external safety regulation. A separate
authority conducts safety regulation and issues relevant certifications or
licenses to air traffic controllers and technicians. In New Zealand, for
example, the Civil Aviation Authority (CAA) is an independent regulatory
authority that establishes civil aviation safety and security standards
and monitors adherence to those standards. CAA carries out accident and
incident investigations and uses information from these investigations to
establish an industrywide safety picture and develop safety initiatives
ranging from education campaigns to increased monitoring and regulatory
action.

All five selected ANSPs have established formal safety programs. For
example, Airservices Australia employs a surveillance model, which
includes incident investigation, trend analysis, system review, and
internal audit. Similarly, DFS and NATS apply a systematic Safety
Management System to all of its operational activities. The system forms
the basis for risk assessment, safety assurance, safety control and safety
monitoring through standards that comply with national and international
obligations.

Five Commercialized Each of the five commercialized ANSPs is its country's
sole provider of en ANSPs Undergo Some route navigation services.14 There
is no opportunity for more than one Form of Economic Review organization
to provide competing air navigation services. Thus, operators

cannot choose alternative providers by changing routes. To forestall theor
Follow Price-Setting abuse of monopoly position and address concerns about
the level of pricesGuidelines or charges, the five ANSPs are subject to
the following:

14Although the ANSP for each country is the only provider of en route air
navigation services and thus functions as a monopoly, some other air
navigation services may theoretically be open to competition. For example,
in the UK, NATS provides tower services-won on a competitive basis against
other service providers-for only 14 UK airports.

o  	In the UK, the Civil Aviation Authority (CAA) exercises economic
regulation over NATS. CAA's Economic Regulation Group sets price caps for
5-year periods, basing them generally on the retail price index15 and the

group's own analyses of allowances for NATS' estimated operating and

capital costs.

o  	The Australian Competition and Consumer Commission (ACCC), an
independent commonwealth authority, monitors primarily monopolistic public
and private service industries, including Airservices Australia. ACCC
oversees Airservices Australia's process of setting user fees for air
traffic services and decides to accept or reject price changes on the
basis of public consultation and its own evaluation of Airservices'
pricing proposals.

o  	Airways Corporation of New Zealand operates under a memorandum of
understanding with its airline users. Under this memorandum, Airways uses
the principle of "Economic Value Added" (EVA) to self-regulate its
pricing. EVA is the difference between net operating profit after taxes
minus the cost of capital. EVA above a certain level is returned to users
in the form of a rebate.

o  	The German Transport Ministry reviews and approves any changes in user
fees, but does not independently evaluate the price-setting process or
pricing changes. According to the Transport Ministry, Germany plans to
create an independent economic regulatory authority by next year to comply
with the requirements of the forthcoming Single European Sky initiative.

o  	The Canadian Transportation Agency (CTA) reviews the price-setting
process against an established set of principles. However, CTA does not
respond to user grievances about existing prices. NAV CANADA is
legislatively required to place all revenues in excess of costs in its
rate stabilization fund.

15The retail price index is the average measure of change in the prices of
goods and services bought for consumption by the vast majority of
households in the UK.

  Available Data Indicate That Since Commercialization, the Five ANSPs Have
  Maintained Safety, Controlled Costs, and Achieved Efficiencies

Based on information from each of the ANSPs we reviewed, following
commercialization, air navigation safety has not declined, and all five
ANSPs have taken steps to control costs. In addition, the ANSPs have
improved the efficiency of their operations through the implementation of
new technologies and equipment. According to the ANSPs, some of these
outcomes would not have been feasible in a government organization.

Since Commercialization, Safety Performance Has Not Been Compromised

At a minimum, safety has not eroded since commercialization, according to
the available data from of each of the five ANSPs. For example, data from
Airways Corporation of New Zealand indicate a downward trend in incidents
involving loss of separation16 for the years following commercialization.
Similarly, according to NAV CANADA's annual report for 2004, the rate of
loss-of-separation incidents decreased from 1999/2000 through 2003/2004.
Officials at Transport Canada, the safety regulator, confirm an overall
decline in aviation incidents since commercialization.

Additionally, stakeholders have anecdotally reported that they believe the
air navigation system is as safe as it was when the government provided
air navigation services. According to some, the separation of operating
and regulatory functions has strengthened safety regulation and diminished
any potential conflict of interest between promoting the financial
interests of aviation operators and protecting safety.

As improved technology and system upgrades have allowed individual
controllers to handle increasing levels of air traffic, concerns have
arisen about the potential for controllers' fatigue to compromise safety.
Data are not available to assess this potential, but some ANSPs have taken
steps to limit and monitor controllers' workload. For example, the UK's
CAA has regulated the hours of civil air traffic controllers, and its
Safety Regulation Group must be notified of any breach by NATS or by
controllers. In New Zealand, as air traffic has increased, some airspace
sectors have been subdivided so that controllers are responsible for a
smaller piece of airspace.

16Loss of separation is an occurrence or operation that results in less
than the prescribed separation between aircraft, vehicles, or objects.

Five Commercialized ANSPs Have Taken Steps to Reduce Operating Costs

To lower their personnel costs, all five ANSPs have reduced their
administrative staff or flattened their management organizations. For
example, NAV CANADA closed most of its regional administrative offices and
centralized corporate functions to its headquarters, reducing mostly
administrative staff by 1,100 people (17 percent of the workforce).
Airways Corporation of New Zealand also reportedly reduced its personnel
costs by eliminating some middle management and administrative positions.
In general, the ANSPs have not reduced their air traffic controller
staffs.

To lower their facility operating costs, all five ANSPs have closed,
relocated, or consolidated facilities. For example, Airways Corporation of
New Zealand reported consolidating four radar centers into two over 8
years and is planning to consolidate these two into a single radar center
by 2006. DFS has also integrated operations and consolidated facilities.
Seventeen approach units have been integrated from the airports to the
four air traffic control centers. It relocated the Dusseldorf control
center to the Langen control center in 2002, a year earlier than planned,
and transferred and consolidated its headquarters from Offenbach to
Langen. DFS reports that, because its supervisory board now makes major
investment decisions, rather than a parliamentary committee, it has been
able to make key strategic decisions that would have been politically
difficult when DFS was under government control.

In the UK, NATS reduced its net operating costs by almost ï¿½96
million during 2002 through 2004, in part through direct management
actions. For example, it consolidated two operations into one at the new
air navigation services center called the Swanwick Center. According to
NATS, it reduced its staff costs by ï¿½12 million and its costs for
services and materials by about ï¿½11 million between 2002 and 2003,
after placing this new center in service. Between 2003 and 2004, NATS
reported reducing its operating costs for air traffic services by another
ï¿½13 million through cost control measures.

Five ANSPs Say They Have Improved Efficiency through Modernization

All five ANSPs have purchased new equipment and technologies that they say
have improved productivity. For example, Airservices Australia reported
increases in controllers' productivity following the introduction of the
Australian Advanced Air Traffic System (TAAATS). This system replaced
conventional radar screens with more advanced computer screens that
display data from a range of sources, including ground based surveillance
equipment and satellite-linked navigational equipment on aircraft, among
others. TAAATS replaced handwritten paper flight progress strips with
screen-based information that is updated

Access to Cash Flow and Borrowed Funds Has Facilitated Modernization

Focus on Cost Control and Operational Efficiency Has Affected User Charges

automatically. DFS is also eliminating systems that depend on paper strips
and anticipates productivity gains and cost savings as a result. In New
Zealand, according to the union that represents air traffic controllers,
individual controllers are now able to handle much more flight activity
because of improved technology.

Besides improving productivity, modernization, together with airspace
redesign, has produced operational efficiencies, including fewer and
shorter delays, according to the ANSPs.

Commercialization has allowed the ANSPs to implement modernization
projects more efficiently. Formerly, the uncertainty associated with the
annual appropriations from national governments made it difficult to plan
over multiple years. With access to cash flow and borrowed funds, the
ANSPs report that they have been able to plan and execute projects more
efficiently and have seen improvements in delivering projects on time,
within budget, and to specification. For example, Airways Corporation of
New Zealand deployed its new oceanic system, FANS1, in less than a year.
The management of NAV CANADA estimates that it is producing new technology
faster than the government once did and at half the cost.

Some of the commercialized ANSPs maintain that they have achieved the
benefits of modernization faster and at less cost by purchasing
commercially available systems and upgrades or by modifying off-the-shelf
technologies to meet their needs, rather than developing their own systems
from the ground up. NATS purchased its oceanic system and automated
tower/terminal control system from NAV CANADA. To achieve further
purchasing efficiencies, some commercialized European ANSPs have developed
an alliance to procure systems. For instance, Germany has developed a
strategic alliance with Switzerland and the Netherlands for the joint
procurement of a new radar system.

Through their cost control initiatives and modernization efforts, some of
the ANSPs have been able to lower their unit costs and, in turn, lower
their charges to major commercial airlines, which pay the largest
proportion of user fees and therefore are the primary users served by the
ANSPs. Airservices Australia, for example, reported lower unit costs
resulting from the increases in controllers' productivity that followed
the introduction of TAAATS. NAV CANADA estimates that it is saving the
airlines approximately C$100 million annually in reduced aircraft

operating costs. According to NAV CANADA, the airlines are now paying 20
percent less in user fees than it formerly paid in ticket taxes when the
government provided air navigation services.17 In Germany, Lufthansa
stated that except in business years 2001 through 2003, it has paid less
in user fees than it paid during the initial commercialization of
Germany's air navigation service. According to Airways Corporation of New
Zealand, it reduced en route charges by 22 percent in 1995 and another 13
percent since 1997, resulting in an overall reduction of more than 30
percent.

However, for general aviation operators, commercialization has sometimes
meant an increase in fees. Before commercialization, many only paid taxes
on fuel. Some countries, such as Canada and New Zealand, have tried to
make the fees affordable for small operators by charging a flat fee. NAV
CANADA, for instance, charges general aviation operators a flat annual fee
of C$72. According to the Aircraft Owners and Pilots Association-New
Zealand, Airways Corporation of New Zealand charges general aviation
operators a fee of NZ$100 for 50 landings. In addition, Airways eliminated
the en-route charge for light aircraft.

Some governments have subsidized air navigation services at small, remote,
general aviation, and regional airports, viewing such services as a public
good. Australia, for instance, provides a subsidy for service to some
remote areas under the Remote Air Subsidy Scheme. Similarly, to protect
service to remote locations and ensure equity of service to smaller
communities, Canada legislatively requires NAV CANADA to maintain service
to such locations. For instance, service to the Northern region, which is
designated as "remote," is guaranteed under the legislation. In addition,
NAV CANADA is required to price services to remote locations on the same
basis as service to the rest of the country.

Through our research, we made a number of initial observations about the
commercialization of air navigation services in the five countries we
selected. The following paragraphs summarize these observations.

  Initial Observations on Commercialized ANSPs

17While Australia, Canada, and New Zealand collect both en route and
terminal fees themselves, Germany and the UK collect terminal fees
themselves and receive en route fees collected for them by EUROCONTROL.

Having a Contingency Fund Can Help, but May Not Be Sufficient, to Protect
Against an Industry Downturn

Following commercialization, two changes-shifting the source of funding
from appropriations to user fees and allowing the ANSPs to borrow money on
the open market-have generally enabled commercialized ANSPs to cover their
operating and capital costs. However, user fees and borrowing may not be
sufficient to cover an ANSP's costs during an industry downturn. As a
result, a contingency fund or other mechanism may help to offset the
effects of a downturn, although it may not do so completely if the effects
are severe.

When the economy began to stagnate in 2000 and air traffic began to
decline, revenues from ANSP user fees began to fall. These revenue losses
grew as transatlantic traffic declined after September 11, particularly
affecting some ANSPs. In the UK, as a result of both these losses and the
relatively high debt that it had assumed to commercialize, NATS's solvency
was threatened. Ultimately, NATS refinanced its debt with the concurrence
of the Department for Transport and other shareholders. In Germany, DFS
also experienced revenue losses, but to a lesser degree. DFS reported a
loss of more than EUR33 million in 2001, when air traffic declined by 0.9
percent over the previous year. In 2002, it sustained a loss of more than
EUR21 million, when air traffic levels fell 2.9 percent below 2001 levels.
To address these deficits, DFS modified investments, canceled projects,
and ultimately raised fees, thereby increasing financial pressures on the
airlines. However, when air traffic increased again in 2003, DFS recorded
an operating profit of more than EUR80 million and reduced fees for 2005
en route by 19.5 percent and terminal charges by 28 percent. DFS has begun
to consider the benefits of a reserve fund, but German legislation
governing air navigation service charges must be changed before DFS will
be allowed to develop such a reserve. NAV CANADA had banked up to C$75
million in its rate stabilization fund before September 11 and the
concerns about SARS. However, following the severe industry downturn
resulting from these two events, the fund was quickly exhausted.

Some Economic Review or Guidelines May Be Needed to Ensure Fairness in
Pricing

Because the ANSP is typically the sole provider of en route and approach
control services in a country, some mechanism may be necessary to keep
prices in check. Since user fees constitute the ANSP's primary source of
revenue, economic monitoring and regulation by an independent third party
can protect users and ensure a fair pricing process. Such an entity can
ensure that all parties' interests are taken into account and a variety of
alternatives are considered. It can also provide assurance to users that
price levels are appropriate, do not reflect overcharging, and are
consistent with competitive practices.

ICAO recognizes the need for an independent mechanism to provide economic
regulation of air navigation services. According to ICAO, the objectives
of economic regulation should include the following:

o  Ensure nondiscrimination in the application of charges.

o  Ensure that there is no overcharging or other anticompetitive practice.

o  	Ensure the transparency and availability of all financial data used to
determine the basis for charges.

o  Assess and encourage efficiency and efficacy in the operation of
providers.

o  Establish standards for reviewing the quality and level of services.

o  Monitor and encourage investments to meet future demand.

o  Ensure user views are adequately taken into account.

Australia and Canada have taken different approaches to reviewing their
ANSPs' user charges and price setting. In Australia, the Australian
Competition and Consumer Commission (ACCC) oversees price changes.
Airservices Australia must notify ACCC whenever it wants to raise fees.
Following a formal notification and vetting process, ACCC decides to
accept or reject the price change on the basis of its evaluation of
Airservices' pricing proposal; and if they reject the proposed price, they
can set a lower price. Recently, the ACCC rejected a proposal by
Airservices for a temporary fee increase to address the revenue losses
that followed September 11 and the SARS outbreak, as well as the collapse
of Australia's second largest airline. In rejecting the proposal, ACCC
considered the fact that the industry took exception to these increases,
raising concerns about the need for longer-term price certainty. ACCC
ruled in favor of the industry and rejected the temporary price increases,
instead deciding that a longer-term arrangement be considered. ACCC
directed Airservices to focus on 5-year pricing plans to encourage
longterm planning, emphasizing that the robustness of the airlines should
be taken into account when a price is set.

Canada has no formal regulation of fee setting. According to the Office of
the Auditor General, the Canadian Transportation Agency (CTA), the formal
appeal agency, can intervene only in matters concerning the price- setting
process, not price levels or price changes. CTA was not given authority
over price-setting issues to ensure that NAV CANADA could

maintain a good credit rating, thus making NAV CANADA appealing to
financiers. (As of April 2005, NAV CANADA's bonds were rated AA-nearly as
high as the government's AAA-rated bonds.) NAV CANADA's board of
directors, which includes air carrier representatives, is the main venue
for the industry to express any grievances over pricing issues. However,
according to Air Canada, its input on the board is limited and, because
the public has comparable representation on the board, the public and the
industry cancel out each other's input. When NAV CANADA raised prices
after its rate stabilization fund was exhausted during the economic
downturn, air carriers argued that this move further disrupted their
business cycle during a time of financial strain.

Early and Continuous Stakeholder Involvement Is Key

CAA officials said they must ensure that society's broader interests are
protected. In particular, GAO believes addressing the concerns of air
traffic controllers was essential because they play a vital role in the
air navigation system. For several of the ANSPs we reviewed, controllers'
support of commercialization was crucial to move the process forward. In
New Zealand, controllers supported commercialization when faced with an
aging system and inadequate public funds to acquire new equipment.
Controllers in Canada supported the transition following a 5-year salary
freeze and hiring freezes. However, Canadian controllers' support for
commercialization has diminished, mainly because of differences over
collective bargaining issues such as wage increases, the right to strike
and controller fatigue. The Canadian controllers have acknowledged that
they were instrumental in pushing for change, but they have also noted
that the results of commercialization have fallen short of their
expectations.

ANSPs have also noted the importance of involving stakeholders in efforts
to design, acquire, and deploy new technologies. According to Airservices
Australia, its air traffic controllers have come to understand the
commercial imperative to make a return on investment. Similarly, Airways
Corporation of New Zealand notes that it is essential to involve the same
controllers throughout the design process so that there is consistency in
requirements and a thorough understanding of the project's ongoing
specifications. In Airways' experience, it is essential for controllers,
manufacturers, and the ANSP to reach agreement in order to establish
realistic expectations for system design from the very beginning.

Steps May Be Needed to Balance Public and Business Interests

Hypothetically, small or remote communities, that rely primarily on
aviation for transportation, may be threatened by location-specific
pricing. Under this pricing scheme, an ANSP charges a fee for service that
matches the cost of providing that service to a specific location. As a
result, some communities may be subject to higher charges than others. By
contrast, two ANSPs have used network pricing, a scheme that charges the
same fee for air navigation services to every airport, regardless of size
or location, even though the costs of providing the services to some
airports may be greater than to others. Under network pricing, the service
to heavily used airports subsidizes the service to others.

Two of the ANSPs have adopted location-specific pricing for some air
navigation services. (Airport services are provided by competition in the
U.K., which may result in different prices.) Often, the minimum costs of
service to small or remote communities are higher per plane than the costs
of service to large communities because the cost of air navigation
services must be spread among fewer operators, usually with smaller
aircraft. If airlines decide that service to such communities is not
commercially viable, they may ultimately discontinue service to these
communities. Similarly, general aviation operators may be threatened if
they are required to pay fees that cover the full costs of the air
navigation services they receive. Continuing to serve small communities
and operators may require special efforts to balance public service needs
and business interests.

In addition to the Remote Air Subsidy Scheme mentioned earlier, Australia
also provided a subsidy that allowed prices to be capped at most general
aviation and regional airports. This subsidy was designed to ease the
transition to location specific pricing for select airports and is
scheduled to end in June 2005. Consequently, Airservices Australia
reported that, in order to compensate, it will be increasing charges over
the next 5 years at these locations and that these increases have been
approved by the regulator. These increases have been moderated to balance
the effect on aviation at airports frequently used by general aviation
operators. As a result, concerns persist about the implications of further
price increases and any future need to close or reduce services at these
locations. Some fear that needed air services to remote bush locations
will be lost while others fear that secondary services such as flight
school training will be affected.

Hypothetically, the impact on small operators and remote communities is
difficult to assess. Theoretically, costs may go up as a result of
implementing user fees, but charges may not necessarily be prohibitive.

Where service to small communities is legislatively mandated, ANSPs may
ultimately be forced to take a financial loss if they are not able to
fully recover their costs. Airservices Australia is seeking to control
costs at some of those locations by deploying new lower-cost technologies
to serve small communities. For example, Airservices Australia is planning
to install Automatic Dependent Surveillance Broadcast (ADS-B) ground
stations, which will allow air traffic surveillance services over remote
regions of Australia where radar is not a cost-effective solution.

Appropriately Assessing the Value of Assets Is Essential for Sound Pricing
and Cost Accounting

To protect taxpayers' interests, the countries that commercialized their
air navigation services needed to have an appropriate valuation of their
facilities and equipment before selling these assets to the newly
established ANSP. According to the Office of the Auditor General (OAG) in
Canada, Canada did not properly value its ANSP assets and infrastructures.
The C$1.5 billion value that the government negotiated with NAV CANADA in
1996 fell short of the C$2.3 billion to 2.4 billion estimate developed in
1995 by a third party hired by the OAG. NAV CANADA reported, however, that
both it and Transport Canada disagreed with the OAG's estimate and its
underlying assumptions. In a study of the NATS reorganization, the
National Audit Office (NAO) found that the UK government had raised some
ï¿½758 million from the sale of the ANSP to a consortium of seven
UK-based airlines. However, these proceeds were realized by increasing the
level of NATS's bank debt. As a result of this debt, NATS was extremely
vulnerable to the decline in air traffic after September 11. DFS is
currently undergoing a valuation of its assets in preparation for selling
74.9 percent of its equity to private investors in a formal competitive
bidding process.

Maintaining Staff Levels and Expertise During Commercialization Can
Prevent Disruptions in Regulatory Functions

Some countries experienced difficulties in retaining a sufficient number
of staff to carry out safety regulation. For example, in Canada, many of
the safety staff moved to the newly established NAV CANADA after
commercialization, leaving the government regulator, Transport Canada,
with insufficient staff to carry out timely safety inspections during the
first 6 months after commercialization. Germany faces a similar challenge
as the government prepares to develop a safety regulatory authority in
accordance with the Single European Sky initiative by the end of this
year. According to the Transport Ministry, it may be difficult for the
government to recruit safety staff on a civil service salary and compete
with the salaries of safety inspectors from the private sector.

Developing Baseline Measures before Commercialization Will Enhance
Performance Measurement

Obtaining baseline measures before commercializing a country's air
navigation services will allow the government and others to assess the new
ANSP's safety, cost, and efficiency. Some of the countries whose ANSPs we
reviewed did not collect baseline data or measure performance as
extensively as the commercialized ANSPs have since done. As businesses,
commercialized ANSPs must assess the progress they are making toward their
goals to access private funding, and therefore they need extensive
performance data. In addition, international organizations, such as CANSO
and ICAO, support commercialized ANSPs and ICAO, for example, emphasizes
the importance of having transparent financial data available for economic
oversight.

  GAO Contacts and Staff Acknowledgements

(540098)

Mr. Chairman, this concludes my prepared statement. I would be pleased to
respond to any questions that you or the other Members of the Subcommittee
may have.

For further information about this testimony, please contact me at (202)
512-2834 or [email protected]. Individuals making key contributions to
this testimony included Bess Eisenstadt, Samantha Goodman, Hiroshi
Ishikawa, Jennifer Kim, Steve Martin, and Richard Scott.

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