Air Traffic Control: Characteristics and Performance of Selected
International Air Navigation Service Providers and Lessons
Learned from Their Commercialization (29-JUL-05, GAO-05-769).
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 as a business. 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 develop, as requested, a descriptive analysis of
commercialized ANSPs that illustrated similarities and
differences in ownership, length of experience with
commercialization, and size and scope of operations. This report
addresses the following questions: (1) What are common
characteristics of commercialized ANSPs in selected foreign
countries? (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 key lessons learned
about the commercialization of air navigation services?
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-769
ACCNO: A31539
TITLE: Air Traffic Control: Characteristics and Performance of
Selected International Air Navigation Service Providers and
Lessons Learned from Their Commercialization
DATE: 07/29/2005
SUBJECT: Air traffic control systems
Commercial aviation
Comparative analysis
Cost control
Internal controls
Lessons learned
Safety regulation
Safety standards
Transportation safety
Foreign governments
Privatization
Australia
Canada
Germany
New Zealand
United Kingdom
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GAO-05-769
United States Government Accountability Office
GAO Report to Congressional Requesters
July 2005
AIR TRAFFIC CONTROL
Characteristics and Performance of Selected International Air Navigation Service
Providers and Lessons Learned from Their Commercialization
a
GAO-05-769
[IMG]
July 2005
AIR TRAFFIC CONTROL
Characteristics and Performance of Selected International Air Navigation Service
Providers and Lessons Learned from Their Commercialization
What GAO Found
The five commercialized ANSPs that GAO selected have a number of common
characteristics: All five have the safe movement of aircraft as their
primary goal and are subject to some external safety regulation. All five
operate as businesses, making and carrying out their own strategic,
operational, and financial decisions. As businesses, all five are
selffinancing, assessing fees on users of air navigation services (e.g.,
major commercial air carriers; regional air carriers; and, in some cases,
general aviation operators) and, as necessary, borrowing funds from
capital markets. Finally, all five are largely monopoly providers of air
navigation services and undergo some form of constraint in setting prices,
such as economic review or procedural guidelines.
Available data from the five ANSPs indicate that since commercialization,
the safety of air navigation services has remained the same or improved;
each ANSP has taken steps to control costs; and each ANSP has reportedly
lowered costs and improved efficiency through investments in new
technologies and equipment. Despite concerns about the possibility that
commercialization could potentially 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 aircraft). All five ANSPs have taken steps to control
their operating costs, whether by eliminating some administrative
positions or by consolidating facilities. All five ANSPs have also
invested in 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. However, the
ANSPs have also increased fees for general aviation operators.
GAO's research points to a number of lessons. For example, commercialized
ANSPs must be prepared to mitigate the effects of an industry downturn,
whether through reserves, higher fees, cost-cutting, or other measures.
Involving stakeholders in modernizing (i.e., upgrading or replacing) ANSP
facilities and equipment can benefit both the ANSP and the stakeholders.
Special measures may be needed to protect service to small or remote
communities. Finally, when a government sells an ANSP's assets,
appropriate valuation is necessary to protect taxpayers' interests.
Montreal Tower Control United States Government Accountability Office
Contents
Letter
Results in Brief
Background
Common Characteristics of the Five Selected Commercialized
ANSPs Since Commercialization, the Five ANSPs Have Maintained Safety,
Controlled Operating Costs, and Achieved Efficiencies Lessons Learned
about the Commercialization of Air Navigation Services
1 3 5
8
18
24
Appendixes
Appendix I: Scope and Methodology 31
Appendix II: GAO Contact and Staff Acknowledgments 34
Table 1: Summary Information on the Five
Tables Commercialized ANSPs
That We Reviewed 6
Table 2: Ownership of the Five Selected 10
Commercialized ANSPs
Figure 1: Langen Control Center, Langen,
Figures Germany Figure 2: The Australian Advanced
Air Traffic System 20 22
Contents
Abbreviations
ACCC Australian Competition and Consumer Commission
ANSP air navigation service provider
CAA Civil Aviation Authority
CANSO Civil Air Navigation Services Organization
CTA Canadian Transportation Agency
DFS Deutsche Flugsicherung GmbH
EVA economic value added
EXCDS Extended Computer Display System
ICAO International Civil Aviation Organization
NATS National Air Traffic Services, Ltd.
OAG Office of the Auditor General
PBO performance-based organization
SARS Severe Acute Respiratory Syndrome
TAATS The Australian Advanced Air Traffic System
UK United Kingdom
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
A
United States Government Accountability Office Washington, D.C. 20548
July 29, 2005
The Honorable Ted Stevens Chairman The Honorable Daniel Inouye Co-Chairman
Committee on Commerce, Science,
and Transportation United States Senate
The Honorable Conrad Burns Chairman The Honorable John D. Rockefeller, IV
Ranking Minority Member Subcommittee on Aviation Committee on Commerce,
Science,
and Transportation United States Senate
The Honorable John McCain United States Senate
The Honorable Trent Lott United States Senate
Since 1987, 38 nations have commercialized1 their air navigation services,
fundamentally shifting the responsibility for providing these services
from the national government to an independent air navigation service
provider (ANSP) that operates as a business and is designed as a
performance-based
1According to the International Civil Aviation Organization,
"commercialization" is the ability of an organization to operate like a
commercial business. In discussions about air navigation services, the
term is often used interchangeably with other terms, including
restructuring, privatization, outsourcing, and corporatization. For this
report, we use the term "commercialization."
organization.2 In the past, governments worldwide owned, operated, and
regulated air navigation services, viewing them as a governmental
function. But as nations were faced with increasing congestion, outdated
equipment and facilities, and financial strains, many governments
reevaluated their structures for providing air navigation services. Some
nations 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 and is still considered a
governmental function.
You asked that we develop a descriptive analysis of selected foreign
countries' commercialized, performance-based air navigation service
organizations. To do so, we asked the following research questions:
o What are common characteristics of commercialized ANSPs in selected
foreign countries?
o What do available data show about how the safety, cost, and efficiency
of air navigation services have changed since commercialization?
o What are some key lessons learned about the commercialization of air
navigation services?
To address these questions, we reviewed the characteristics and
performance of five commercialized ANSPs, which we selected as
illustrative of similarities and differences in ownership, length of
experience with commercialization, and size and scope of operations. 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 since then as performance-based
2A performance-based organization (PBO) is a discrete management unit with
strong incentives to manage for results. In the 1990s, Congress recognized
the need to restructure federal agencies and to hold them accountable for
achieving program results. To this end, Congress legislated the
establishment of PBOs, modeled after the United Kingdom's executive
agencies. As designed in statute, PBOs were to commit to clear management
objectives and specific targets for improved performance. These clearly
defined performance goals, coupled with direct ties between the
achievement of the goals and the pay and tenure of the head of the PBO and
other senior managers, were intended to lead to improved performance.
organizations. Because we selected these ANSPs to illustrate certain
characteristics, our results cannot be generalized to all commercialized
ANSPs.3
A performance-based organization develops strategies, goals, and measures
and gathers and reports data to demonstrate its performance.4 The five
ANSPs that we reviewed have been gathering and reporting data since
commercialization, but their predecessor organizations did not necessarily
gather or publicly report comparable data. Consequently, assessments of
each ANSP's performance since commercialization are possible, but
comparisons of performance before and after commercialization are
generally not feasible. Additionally, opportunities for comparing
performance across commercialized ANSPs are limited to the extent that the
ANSPs define their measures of safety, cost, and performance differently.
We determined that the financial and safety data from each country were
sufficiently reliable for our purposes. For additional information on our
scope and methodology, see appendix I. We performed our work in accordance
with generally accepted government auditing standards from August 2004
through July 2005.
Results in Brief The five commercialized ANSPs that we selected for review
have a number of common characteristics: All five have the safe movement
of aircraft as their primary goal and are subject to some external safety
regulation by an arm's-length government regulatory authority. All five
operate as businesses rather than as government organizations, making and
carrying out their own strategic, operational, and financial decisions. As
businesses, all five are self-financing, assessing fees on users of air
navigation services (e.g., major commercial air carriers; regional air
carriers; and, in some cases, general aviation operators) and, as
necessary, borrowing funds from capital markets, instead of receiving
annual appropriations from the
3Because we selected the five ANSPs in our sample to illustrate
similarities and differences in specific characteristics, our sample is a
nonprobability sample, and the results from such a sample cannot be used
to make inferences about the ANSPs we did not review.
4For 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).
government. Finally, all five are largely monopoly providers of air
navigation services and are constrained in the price-setting process by
some form of economic review or procedural guidelines.
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 ANSP has taken steps to control costs; and each
ANSP has reportedly lowered costs and improved efficiency through
modernization-that is, through investments in new technologies and
equipment. Despite concerns about the possibility that commercialization
could compromise safety, data from all five indicate that safety has not
eroded. For example, data from Canada, Germany, and New Zealand show fewer
incidents involving loss of separation (the required distance between
aircraft). Additionally, stakeholders told us 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 have
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, and some ANSPs have
increased or plan to increase the costs of service to small or remote
locations.
We derived a number of lessons from our research on commercialized ANSPs.
First, commercialized ANSPs must be prepared to mitigate the effects of an
industry downturn through such measures as establishing a reserve fund,
implementing a revenue-generating alternative to user fees, or cutting
costs. Second, involving stakeholders in efforts to modernize (i.e.,
upgrade or replace) ANSP facilities and equipment can help to ensure
mutually beneficial results. Third, the conflict between an ANSP's need to
recover its costs and the inability of some users (e.g., regional air
carriers) to pay the full costs of service to small or remote communities
may mean that special measures are needed to protect service to such
communities. Fourth, 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 taxpayers' interests and create a
basis for sound financial decision making. Fifth, maintaining and
attracting sufficient personnel, with the skills and expertise needed to
ensure that the
regulator can provide uninterrupted safety regulation is important when
operations are separated from regulation during commercialization.
Finally, developing baseline safety, cost, and efficiency measures prior
to commercialization will allow the ANSP and others to assess the progress
the ANSP is making toward its goals and evaluate the results of
commercialization.
Background Before commercialization, air navigation services under
government control faced increasing strains. Many were underfunded, as
evidenced by freezes on air traffic controllers' wages and insufficient
funds to replace aging technologies. Technology replacement programs often
cost more, took longer, and delivered less than promised, and stakeholders
complained about performance and customer service. 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. For instance, the New Zealand
government established 14 state-owned enterprises in 1987, including air
navigation services, rail services, and postal services. The government
also reformed electricity as a state-owned enterprise in 1994 and
telecommunications in 2004.
Although fiscal problems often drove the commercialization of air
navigation services, commercialization was generally intended not only to
relieve the government of a fiscal responsibility but also to free the
ANSP from some governmental constraints. According to the International
Civil Aviation Organization (ICAO),5 a commercialized ANSP, whether wholly
or partly owned by the government or fully privatized, should function as
an autonomous body and, compared with a government organization, should
have greater freedom from the government in conducting its financial
affairs and developing infrastructure funding. In addition, it should be
selffinancing, subject to the usual business taxes, and required to seek a
return
5ICAO is an advisory organization affiliated with the United Nations that
aims to promote the establishment of international civil aviation
standards and recommended practices and procedures.
on capital. According to ICAO, the government6 should still regulate the
safety of the ANSP's operations, but the ANSP should be encouraged to be
as competitive, efficient, and cost-effective as any other commercial
business.
In the five countries whose air navigation services we reviewed, the ANSP
continued to provide nationwide services after commercialization and, with
limited exceptions, remained the sole provider of air navigation services.
Table 1 summarizes information on the size and scope of the five ANSPs in
our review.
Table1: Summary Information on the Five Commercialized ANSPs That We Reviewed
Approximate Approximate
number of number of
Year of employees movements
Country ANSP name commercialization ANSP (controllers) handled
ownership (year)
Australia Airservices 1988 Wholly
Australia government 2,900 2,723,828
owned (1,100) (2004)
Canada NAV CANADA 1996 Privately
owned 5,400 6,000,000
company (2,300) (2003)
Deutsche 1993 Wholly
Germany Flugsicherung government 5,400 2,720,000
GmbH owned (2,098) (2004)
New Airways
Zealand Corporation 1987 Wholly 650
of New government 1,004,161
Zealand, Ltd. owned (340) (2004)
National Air
United Traffic 2001 Partially
Services, government 3,758 2,000,000
Kingdom Ltd. owned (1,380) (2004)
Source: GAO presentation of ANSP data.
Each ANSP generally offers en route, approach control, and terminal (or
aerodrome control) air traffic services. Although definitions of these
terms may vary slightly among ANSPs, the terms generally signify the same
broad functions. Specifically, en route services guide an aircraft while
it is operating at cruising elevations and outside terminal airspace.
Approach control services apply during departure-immediately after the
aircraft has
6In the UK and Australia, safety and economic regulators are "statutorily
independent within the government." A statutory authority is a public
sector entity, established by legislation, which has the legal status of a
corporate body. The reference to "independent" reflects an intended degree
of independence from the Minister, whereby the director of the entity is
responsible for its day-to-day operations but is accountable for its
performance to the Minister.
taken off and while it is climbing from the origination airport-and during
arrival-when the aircraft is descending to the destination airport toward
the end of the flight. Terminal or aerodrome control services are provided
while the aircraft is close to the airport from which it is arriving or
departing. However, in some countries, the ANSP may not be the sole
provider of approach control and terminal services.7 All but Germany's DFS
also offer oceanic air navigation services.8 All five ANSPs are
responsible for providing air navigation services to both civil and
military aviation. In addition, the ANSPs may offer other air
navigation-related services, such as meteorological, training, and
consulting services, and charge for these services.9
The five commercialized ANSPs are affiliated with one or more
international aviation-related organizations. The governments of all five
ANPS are members of ICAO and, therefore, all five ANSPs adhere to ICAO
principles. All five ANSPS are also members of the Civil Air Navigation
Services Organization (CANSO), a voluntary international trade
organization whose mission is to represent the interests of commercialized
ANSPs. In addition, the UK and Germany are members of EUROCONTROL, 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.
EUROCONTROL is mandated to develop implementing rules for the European
Union's "Single European Sky" initiative, a legislative package approved
by the European Parliament in January 2004.10 One of these implementing
rules specifies that each member state is to develop an independent safety
and economic regulatory authority to oversee its ANSP.
7Although 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.
8Oceanic services are analogous to en route services, except that the
aircraft is flying over the ocean, where fewer communication, navigation,
and surveillance capabilities are available than over land.
9NATS and NAV CANADA include charges for meteorological services in their
basic service charges.
10This initiative consists 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.
The UK established such an authority before commercialization, and Germany
is planning to develop one.
Common The five commercialized ANSPs that we reviewed have a number of
common characteristics: First, all focus on safely moving aircraft.
Second,Characteristics of the despite differences in ownership structures,
all operate as businesses Five Selected rather than as government
organizations and are self-financing. Third, all Commercialized are
largely monopoly providers that are subject to some form of price
setting constraint achieved through economic review or proceduralANSPs
guidelines.
The Five Commercialized ANSPs Continue to Focus on Safely Moving
Aircraft
For all five commercialized ANSPs, the safe movement of aircraft remains
the primary goal. In some instances, government policy requires that the
ANSP consider safety in any and all decisions affecting operations and
service. For example, according to DFS officials, German legislation
requires DFS to observe ICAO's standards and recommended safety practices,
as well as adhere to the objectives and policies of international
organizations in which the German government participates, such as
EUROCONTROL. Similarly, in Canada, legislation requires NAV CANADA to
maintain a fixed level of safe operations. According to Transport Canada,
the safety regulator, the Minister of Transport has the authority to
direct NAV CANADA to maintain or increase levels of service in the
interest of safety. Although NAV CANADA 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 certificates or
licenses to air traffic controllers and technicians. In New Zealand, for
example, the Civil Aviation Authority (CAA) is an independent regulatory
authority that, among other things, 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 educational campaigns to increased
monitoring and regulatory action. In Australia, the Civil Aviation Safety
Authority regulates and promotes aviation safety, and the Australian
Transport Safety Bureau investigates aircraft accidents, incidents, and
safety deficiencies within the aviation system, according to Airservices
Australia. In Canada, NAV CANADA and the government, through Transport
Canada, share responsibility for the safety of the national civil air
navigation system. Under a performance-based approach to safety
regulation, known as the relations management approach, Transport Canada,
as the regulator, establishes the requirements in law and standards, and
NAV CANADA, as the operator, must demonstrate compliance by measuring and
reporting on program results. Transport Canada, among other things,
conducts audits, adjudicates safety issues raised by stakeholders, and
licenses air traffic controllers.
All five selected ANSPs have also established formal safety programs. For
example, DFS and NATS apply a systematic Safety Management System,11 in
accordance with EUROCONTROL's safety requirements, to all of their
operational activities. This system forms the basis for risk assessment,
safety assurance, safety control, and safety monitoring through standards
that comply with national and international obligations. DFS's Safety
Management System was also certified by the German Ministry of Transport
in 2004. Similarly, Airservices Australia employs a systemic Safety
Management System that complies with national and international
requirements. To promote safety, the system requires activities such as
operational risk assessments, surveillance, audits, and incident
investigations.
Although the Degree of Government Ownership Varies, the Five Commercialized
ANSPs Operate as Businesses, Making Their Own Decisions and Generating Their
Own Revenue
The five commercialized ANSPs vary in the extent to which they are owned
by the government-wholly, partially, or not at all. (See table 2.) Three
of these ANSPs-Airservices Australia; Airways Corporation of New Zealand,
Ltd.; and DFS-are state-owned corporations (i.e., companies wholly owned
by the government). The UK's NATS is a public-private partnership (i.e., 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
11The Safety Management System is a systematic and explicit approach
defining the activities by which an ANSP undertakes safety management to
achieve acceptable or tolerable safety levels. It is a system to ensure
that the ANSP has identified, assessed, and satisfactorily mitigated all
safety risks, including establishing procedures for reporting and
assessing safety occurrences in air traffic control and for assessing and
mitigating risks.
company12 (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. The corporation has 4 members
representing government, airlines, noncommercial users, and the unions.
These 4 members appoint 10 of the 15 board directors: 4 are appointed by
the airline industry, 3 by the government, 2 by employees such as air
traffic controllers and engineers, and 1 by general and business aviation.
These 10 directors appoint another 4 based on expertise and the chief
executive officer.
Table 2: Ownership of the Five Selected Commercialized ANSPs
State-owned Public-private
ANSP corporation partnership Private
Airservices Australia
Airways Corporation
of New Zealand, Ltd.
Deutsche
Flugsicherung GmbH
(Germany)
National Air Traffic
Services, Ltd.
(United Kingdom)
NAV CANADA
Source: CANSO.
Before commercialization, members of the two ANSPs that are not wholly
owned by their government, NATS and NAV CANADA, "purchased" some or all of
the ANSP assets from the government. Although the UK government retained
the largest share of NATS, the second-largest owner, the consortium of
seven UK airlines known as "The Airline Group," provided approximately
$1.4 billion, according to information from the National Audit Office,
including about $112.2 million from the group's own resources and the
remainder from a loan taken out with a consortium led
12This private company, BAA, plc., owns 7 UK airports, including London's
Heathrow, Gatwick, and Stansted, and has interests at 13 airports
overseas.
The ANSPs Make and Execute Their Own Decisions, Involve Stakeholders, and
Follow Corporate Practices
by four major banks.13 The group used this sum to acquire NATS and meet
associated transaction costs, leaving cash assets of approximately $6.0
million in the business. In total, the government received an estimated
$1.3 billion in cash proceeds from the transaction.14 NAV CANADA purchased
all of the ANSP assets from the Canadian government. Instead of going
through a formal competitive bidding process, it negotiated a selling
price with the government, and purchased the air navigation system in 1996
for about $1.5 billion, using a $2.9 billion line of credit provided by a
syndicate of banks at the time of the purchase. NAV CANADA uses the
remaining funds for capital investment and as working capital, as
required.
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. For example, in the UK, government appointees, the airlines,
and BAA (the airport consortium) are represented on NATS's board of
directors, while in Germany, DFS employees, government ministries, and the
private sector are represented on a supervisory board. As in a
corporation, an executive officer implements the ANSP board's policies and
is, in turn, accountable to the board. Individual business units within
the ANSP report to the chief executive officer and are directly
responsible for various aspects of the ANSP's day-to-day operations. For
example, Airservices Australia is structured around three market-oriented
business groups-the Air Traffic Management, Airport Services, and
Infrastructure Support Services groups. A Corporate Services group and a
small Head Office support and lead the business groups. The managers of
these five groups form the Executive Committee and work with the chief
executive officer to advise the board as well as carry out the board's
policies.
While the supervisory board and its executive officers have decisionmaking
responsibility, stakeholders-including employees, the airlines, general
aviation operators, airports, the government, the public, and others-may
be involved in and provide input to their ANSP through a
13Unless otherwise noted, all financial amounts have been converted to
U.S. dollars from each country's local currency and adjusted for
inflation.
14National 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.
variety of mechanisms. For example, DFS has developed a Customer
Relationship Management System to organize hearings for customers and
involve them in working groups. This approach to involving stakeholders is
consistent with a Single European Sky directive that member states
establish a mechanism for consulting with stakeholders. In Australia, the
aviation community (i.e., the airports, airlines, safety authorities, and
others) participates in Airservices' strategic investment decision-making
process through the Australian Strategic Air Traffic Management Group. In
Canada, NAV CANADA's stakeholders (i.e., associations, unions, and
airports, including international and U.S. representatives) are involved
in the NAV CANADA Advisory Committee, which provides a vehicle for
stakeholders who are not on the board of directors to raise issues and
concerns with NAV CANADA.
As commercial organizations, the ANSPs follow corporate practices. Each
ANSP has established performance measures and gathers and reports
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 audits
by independent third parties to ensure that adequate accounting records
have been maintained, and that internal controls have prevented or
detected any fraud and error in the accounting policies and estimates.15
In addition, the UK and Germany report their data to EUROCONTROL, whose
Performance Review Commission collects data for benchmarking and publishes
comparative studies of members' performance.
The ANSPs Generate Revenue All five commercialized ANSPs rely on user
charges as their primary source
and Have Borrowing Authority of revenue and on capital markets for
additional funding. Before commercialization, governments funded air
navigation services through annual appropriations.
Since commercialization, each ANSP collects and manages its own revenues,
charging fees for services. The air navigation service fees are based on
ICAO's cost recovery principles, which call for recovering the
15As a publicly traded corporation, NAV CANADA is subject to the
equivalent in Canada of the U.S. Sarbanes-Oxley Act, which requires
independent auditors to attest to and report on internal control of the
organization.
ANSP's operating costs.16 Despite some variation across ANSPs, the fees
are generally as follows:
o The air navigation fees cover operating and capital costs associated
with both en route and approach control services. These charges are based
on a weight-distance formula.17 If applicable, ANSPs also levy charges for
oceanic control.
o The ANSPs may also charge for terminal-related services. However, not
all ANSPs are the sole providers of terminal services. In the UK and
Germany, for example, private firms may provide terminal services. These
terminal charges are distinct from the landing fees typically charged by
airports, which are usually weight-based.
o The 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 The ANSPs may also exempt charges for some services. According to ICAO
policies, the ANSPs may choose to recover less than the full costs of some
services in recognition of local, regional, or national benefits. For
example, in Canada, aircraft or flights dedicated to search and rescue,
air ambulance operations, and firefighting services are all exempt from
air navigation service charges.
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 the
revenues 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
16Fees for the European ANSPs also include a contribution to cover the
expenses of EUROCONTROL.
17The 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.
before September 11, 2001, but depleted during the economic downturn
caused by the events of September 11 and the Severe Acute Respiratory
Syndrome (SARS) outbreak of 2003.18
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 debt financing and private capital. For
example, NAV CANADA obtains all of its financing in the public debt
markets. NAV CANADA has a borrowing capacity of about $2.4 billion, of
which $1.8 billion is currently drawn.19 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 approximately $546.4 million for a
total of almost $1.1 billion, to private investors in the market. DFS can
also draw on an annual credit line of around $175.9 million from its bank.
The ANSPs Generate Revenues The ANSPs may also charge fees, as applicable,
for other services, such as
from Other Services
aeronautical information, consulting, and training. For example, a DFS
business unit offers consulting services in air traffic system design and
implementation, feasibility studies, operational planning, air traffic
system evaluation, and safety management systems. In 2003, DFS's
consulting service generated revenue of about $2.8 million. In the UK,
NATS competes with other service providers to provide terminal services at
UK airports. In addition, NATS, like DFS, consults and offers training for
other ANSPs worldwide in implementing safety management systems, solving
airspace capacity problems, and commercializing ANSPs. From this business
unit, NATS generated profits of about $11.7 million in 2003 and about
$14.8 million in 2004.
Besides offering air navigation services in its own country, an ANSP may
provide services and technology to other regions of the world to generate
revenue. For example, Airservices Australia manages the upper airspace in
18Concerns about the in-flight transmission of SARS, 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.
19The amount here does not include adjustments for inflation because it
refers to the current 2005 year. The foreign exchange rate as of June 17,
2005 (1 U.S. dollar = 1.23 Canadian dollars), was used to convert to U.S.
dollars.
the Solomon Islands. NAV CANADA recently signed a contract with NATS to
install the Extended Computer Display System (EXCDS)20 in three
London-area airports, Stansted, Gatwick, and Heathrow, as well as to
provide NATS with its oceanic system. While NAV CANADA prefers commercial
off-the-shelf products, it also invests in developing in-house
technologies. Many of the technology products developed by NAV CANADA are
available to outside organizations, such as NATS, enabling them to reduce
their costs and avoid development risks.
The Five Commercialized ANSPs Undergo Some Form of Economic Review or Follow
Price-Setting Process Guidelines
Each of the five commercialized ANSPs is its country's sole provider of en
route services and, as such, functions as a monopoly. Moreover, except in
the UK, the ANSP is the sole provider of approach control services.21 With
no alternative provider, operators cannot seek lower prices by changing
routes and must pay whatever fees the ANSP charges. 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.
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.
20EXCDS is an advanced flight data processing system developed by NAV
CANADA that allows controllers to manage electronic flight data online
using mouse-based or touchsensitive display screens.
21In the UK, terminal services are open to competition. NATS competed for
and won the opportunity to provide terminal services for 14 UK airports,
including its largest airports, Heathrow and Gatwick.
o Monitor and encourage investments to meet future demand.
o Ensure user views are adequately taken into account.
The five countries whose ANSPs we reviewed have taken different approaches
to reviewing their ANSP's user charges and price-setting process, but all
five ANSPs are subject to some form of economic review or price-setting
process guidelines:
o In Australia, the Australian Competition and Consumer Commission
(ACCC)22 oversees Airservices Australia's process of setting user fees for
air traffic services. Airservices must notify the commission whenever it
wants to raise fees. The commission then evaluates Airservices' pricing
proposal and decides to accept or reject the price change. If the
commission rejects the proposed price, it can set a lower price. ACCC
rejected one of two proposals 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.
ACCC accepted Airservices' first proposal for a temporary fee increase for
a year following the September 11 and SARS outbreak. However, ACCC
rejected Airservices' second proposed fee increase. The airline industry
had objected to the second set of proposed increases, citing a need for
longer term price certainty. The ACCC ultimately decided that a longer
term arrangement should be considered. ACCC directed Airservices to focus
on 5-year pricing plans to encourage long-term planning, emphasizing that
the robustness of the airlines should be taken into account when a price
is set.
22This independent Commonwealth authority monitors primarily monopolistic
public and private service industries, including Airservices Australia.
o The Canadian Transportation Agency (CTA) reviews the price-setting
process against an established set of statutory principles. Appeals may be
made to CTA by the users as to whether NAV CANADA has observed the
charging principles in establishing its rates. 23 The charging principles
do not allow NAV CANADA to make a profit and, as a nonshare capital
corporation, surpluses are reinvested in the business or used to lower
charges to customers.
o Airways Corporation of New Zealand, Ltd., 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 the net operating profit after
taxes and the cost of capital. A portion of any EVA above a certain level
is returned to users in the form of a rebate. For example, in its 2004
Annual Report, Airways reported its net operating profit after taxes as
about $8.3 million. After subtracting the cost of capital ($4.4 million),
the resulting EVA was approximately $3.9 million. Of this amount, $1.8
million was returned to customers in the form of a rebate, since any
profits above a certain level will ultimately be returned to the airlines.
According to the aviation industry, the EVA mechanism has been key in
making pricing of user fees more transparent.
o In the UK, 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 index24 and the group's own analyses of allowances for
NATS's estimated operating and capital costs.
o The German Transport Ministry reviews and approves any changes in user
fees, but it does not independently evaluate the price-setting process or
pricing changes. According to the Transport Ministry,
23NAV CANADA's board of directors, which includes air carrier
representatives, is the main venue for the industry to express any
grievances over pricing issues after a required open and transparent
consultation process. However, according to Air Canada, its input on the
board is limited and, because the public has comparable representation on
the board, the public-with three government and two employee
representatives-and the industry-with four representatives-cancel out each
other's input. As previously noted, when NAV CANADA raised prices after
its rate stabilization fund was exhausted during the economic downturn,
aviation industry representatives argued that this move further disrupted
their business cycles during a time of financial strain.
24The 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.
Germany plans to create an independent economic regulatory authority by
2006 to comply with the requirements of the Single European Sky
initiative.
Since Commercialization, the Five ANSPs Have Maintained Safety, Controlled
Operating Costs, and Achieved Efficiencies
According to information from each of the ANSPs we reviewed, air
navigation safety has not declined since commercialization, and all five
ANSPs have taken steps to control costs. In addition, the ANSPs have
improved the efficiency of their operations by implementing new
technologies and equipment. The ANSPs maintain that some of these outcomes
would not have been feasible in a government organization.
Safety Performance Has Not Been Compromised Since Commercialization
At a minimum, safety has not eroded since commercialization, according to
the available data from most of the ANSPs.25 For example, data from DFS
show a decrease in the number of aircraft proximity26 incidents in
Germany, from 23 in 1995 to 8 in 2003, 3 of which were attributed to DFS.
In the UK, the number of the riskiest air proximity incidents for NATS
declined from 9 in 2001 to 2 in 2003 and 1 in 2004. Similarly, data from
Airways Corporation of New Zealand indicate a downward trend in incidents
involving loss of separation27 for the years following commercialization.
NAV CANADA's annual report for 2004 also cites a decrease in the rate of
loss-of-separation incidents, from an average of 0.96 incidents per
100,000 movements for 1999/2000 to an average of 0.79 incidents for
2003/2004. Officials at Transport Canada, the safety regulator, confirm an
overall decline in aviation incidents since commercialization.
25Since aviation accidents are rare and may be attributable to causes
outside their control, ANSPs gather data on incidents that could pose
hazards and may be within their control. Rates for these incidents are
proxy measures for safety.
26An aircraft proximity incident occurs when the pilot or air traffic
controller deems the safety of the aircraft involved to be endangered,
whether because of speed or nonadherence to minimal standards for
separation between aircraft.
27A loss of separation is an occurrence or operation that results in less
than the prescribed separation between an aircraft and another aircraft; a
land barrier, such as high terrain; or a vehicle on the runways of
airports.
Additionally, stakeholders have told us 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. DFS, in cooperation with its controllers'
association, has undertaken a comprehensive study of controllers' stress
and strain, which has led to internal regulations on the maximum working
hours allowed at individual sectors, according to DFS.
The 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 radar centers into a single
center by 2006. DFS has also integrated operations and consolidated
facilities, moving 17 approach units from airports and integrating them
into four air traffic control centers. DFS also relocated the Dusseldorf
control center to the Langen control center in 2002 (see fig. 1), a year
earlier than planned, and transferred and consolidated its headquarters
from Offenbach to Langen. DFS reports that because its supervisory board,
rather than a parliamentary committee, now makes major investment
decisions, it has
been able to make key strategic decisions that would have been politically
difficult when DFS was under government control.
Figure 1: Langen Control Center, Langen, Germany
Source: Deutsche Flugsicherung GmbH.
In the UK, NATS reduced its net operating costs by almost $161 million
from 2002 through 2004, in part through direct management actions,
according to its audited financial statement. For example, it consolidated
two operations into one at a new air navigation services center, called
the Swanwick Center. According to NATS, after placing this new center in
service, it reduced its staff costs by nearly $20.1 million and its costs
for services and materials by about $18.5 million between 2002 and 2003.
Between 2003 and 2004, NATS reported, it reduced its operating costs for
air traffic services by another $21.4 million through cost control
measures.
The Five ANSPs Said They Have Improved Efficiency through Modernization
All five ANSPs said they have improved productivity through
modernization-that is, through investments in upgrading or replacing air
navigation facilities and equipment. For example, Airservices Australia
reported increases in controllers' productivity following the introduction
of the Australian Advanced Air Traffic System (TAAATS) (see fig. 2). 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 automatically. DFS is
also eliminating systems that depend on paper strips and expects
productivity gains and cost savings to follow. 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.
Figure 2: The Australian Advanced Air Traffic System
Source: Airservices Australia.
Besides improving productivity, modernization-together with airspace
redesign28-has produced operational efficiencies, including fewer and
shorter delays, according to the ANSPs. NATS, for example, reduced its
average delay per flight from 2.7 minutes in 2002 to 0.74 minutes in
calendar year 2003, while handling almost 2.1 million flights.
28Airspace redesign is a reconfiguration of the established routes that
aircraft fly to maintain standard separation from other aircraft when
arriving at or departing from airports.
Access to Cash Flow and Borrowed Funds Has Facilitated Modernization
Focus on Cost Control and Operational Efficiency Has Affected User Charges
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. According to the ANSPs, access to cash flow and
borrowed funds has allowed them to plan and execute projects more
efficiently and has improved their ability to deliver 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 $80.3 million annually in reduced aircraft
operating costs. According to NAV CANADA, the airlines are now paying 20
percent less in user fees than they formerly paid in ticket taxes when the
government provided air navigation services.29 In Germany, Lufthansa
stated that except in business years 2001 through 2003, the airline paid
less in user fees than it paid during the initial commercialization of
Germany's air navigation service in 1993. According to Airways Corporation
of New Zealand, it
29While 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.
reduced en route charges by 22 percent in 1995 and by another 13 percent
since 1997, resulting in an overall reduction of more than 30 percent.
For general aviation operators, however, 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 $58.30 According to the Aircraft Owners and Pilots Association-New
Zealand, Airways Corporation of New Zealand charges general aviation
operators a fee of $68 for 50 landings. In addition, Airways eliminated
the en route charge for light aircraft.
Some governments have provided for air navigation services at small,
remote general aviation and regional airports, viewing such services as a
public good. Australia, for instance, subsidizes service to some regional
areas under the Location-Specific Tower Subsidy Program and, according to
Transport Canada, NAV CANADA is legislatively required to maintain service
to remote locations in the northern region. In addition, NAV CANADA
charges the same price for services to remote locations as for services to
the rest of the country. The price is based on a formula that considers
weight and distance.
Lessons Learned about We have derived a number of lessons from our
research on the
commercialization of air navigation services in the five countries wethe
Commercialization selected. The following paragraphs summarize these
lessons. of Air Navigation
Services
The Commercialized ANSPs Must Be Prepared to Mitigate the Effects of an
Industry Downturn
Because commercialized ANSPs rely primarily on user fees to cover their
costs, an industry downturn presents a fundamental financial risk for such
ANSPs that they must be prepared to mitigate, whether through a reserve
fund, cost-cutting measures, user fee increases, additional borrowing,
restructuring, or some combination of these or other options that will be
30This amount does not include adjustments for inflation because the fee
is established for the current 2005 year. The foreign exchange rate as of
June 17, 2005 (1 U.S. dollar = 1.23 Canadian dollars), was used to convert
to U.S. dollars.
sufficient to offset the decline in air traffic and the concomitant
decline in revenue. The industry downturn that began in about 2000 and
intensified after the events of September 11, 2001, and the SARS outbreak
of 2003 brought this lesson home to at least four of the five
commercialized ANSPs we selected for review. After commercialization and
before the downturn, these four-Airservices, DFS, NATS, and NAV CANADA-had
been able to cover their costs through user fees and borrowing. However,
during the downturn, they had to take additional steps to address the
revenue losses. NATS, with the greatest debt load, was the most
vulnerable, but even NAV CANADA, with a multimillion-dollar contingency
fund, eventually had to take extraordinary measures.
Besides being burdened with debt, NATS was vulnerable to the industry
downturns because nearly all of its costs (95 percent) were fixed,
limiting its ability to cut costs, and its revenues depended heavily on
North American air traffic. Specifically, North American flights accounted
for 14 percent of its flights and 44 percent of its revenues. When
transatlantic traffic declined after September 11, NATS's revenues
declined 15 percent. To avoid insolvency, NATS first obtained an estimated
$104.2 million in short-term loan credit from its lending banks and then
refinanced, bringing in a new equity partner (BAA, plc).31 However, the
combination of lost business and increased debt threatened NATS with
insolvency in early 2002, leading it to implement operational cost
savings, obtain a temporary loan credit, refinance its debts, renegotiate
prices for users through a new regulatory structure, and obtain additional
funds from the government and private shareholders.
Under its new regulatory structure, NATS now has a system in place to
mitigate the effects of an industry downturn through automatic price
increases that are triggered by reductions in air traffic. These price
increases go into effect when traffic falls below a benchmark level,
limiting NATS's revenue loss to 50 percent of the revenue that would have
been generated if the benchmark level of traffic had been reached. If
traffic falls below this 50 percent benchmark, as it might in a severe
crisis, NATS's revenue loss is limited to 20 percent of the projected
revenue. In effect, this automatic trigger mechanism spreads the risk of
traffic downturns between NATS and its airline customers. Without this
trigger, the prices set by CAA,
31Total new investment made in NATS as part of the refinancing arrangement
was approximately $225.7 million-about $112.8 million from BAA, plc,
matched by an additional $112.8 million from the UK's Department for
Transport.
the economic regulatory body, would remain fixed until the next regularly
scheduled review when prices may be adjusted, upward or downward, and
benchmark levels set.
In Germany, DFS also lost revenue during the industry downturn, but to a
lesser degree. DFS reported a loss of more than $36.4 million in 2001,
when air traffic declined by 0.9 percent over the previous year. In 2002,
it sustained a loss of more than $23.2 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 $87.4 million and reduced its 2005 fees for en route services by 19.5
percent and for approach control services 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 can develop such
a reserve.
Before September 11, NAV CANADA banked up to $66.3 million in its rate
stabilization fund to protect against future losses. However, with the
industry downturn, this fund was quickly exhausted and, after the SARS
outbreak in 2003, the fund reached a cumulative deficit of about $96.9
million. To maintain operations, NAV CANADA cut costs and raised its
service fees, consulting with users as required. By the end of 2004, it
reduced the deficit to approximately $26.0 million, according to its 2004
annual report. However, as aviation industry representatives have noted,
the fee increases had the inadvertent effect of disrupting the business
cycles of air carriers, which faced the same difficult economic
circumstances. Moreover, because NAV CANADA's price-setting process is
limited only by statutory charging principles, NAV CANADA was able to
raise its fees unilaterally, without having to negotiate increases with
representatives of the airlines or other interests. Its board approved the
fee increases to balance revenues and expenses as required by legislation.
The CTA rejected an appeal of the increases brought by certain operators.
Involving Stakeholders in According to the ANSPs, involving stakeholders
in efforts to design, Modernization Efforts Can acquire, and deploy new
technologies can be beneficial. For example, Help Ensure Mutually Airways
Corporation of New Zealand noted that its investment decisions
are very much driven by customers' needs. Airways said it consults
closelyBeneficial Results with the airlines before deciding to acquire new
systems and to implement technology upgrades. According to Airways, if the
airlines say they do not
want to make a particular investment and the investment adds no value for
the customer, Airways will not spend the money. For example, the airlines
have reported that they are not currently interested in Automatic
Dependent Surveillance-Broadcast,32 so Airways has no immediate plans to
invest in the technology. DFS has also reported that consulting with its
customers before investing in any modernization efforts has been
beneficial. According to DFS, before commercialization, the German
government did not consult with users and other stakeholders when it
acquired and deployed new air navigation technologies.
Once an initial investment decision has been made, ANSPs have further
reported, it is beneficial to involve stakeholders throughout the design
and acquisition process. For example, Airservices Australia reported that,
since commercialization, air traffic controllers play a much larger role
in the acquisitions process and have come to understand the linkage
between service delivery costs and the costs of new equipment. Similarly,
Airways Corporation of New Zealand noted that it has found it essential to
involve the same controllers throughout the design process to ensure
consistency in requirements and to maintain 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 Business and Small Community Interests
In some instances, an ANSP's need to recover its costs may be at odds with
a small or remote community's need for scheduled air service. Providing
air navigation services for such communities may not be commercially
viable because it typically generates less revenue than providing services
for larger communities. Even though the minimum cost of an air navigation
service is the same, regardless of the location, the cost per plane is
often higher at small or remote locations because the cost of the service
is spread among fewer operators, usually with smaller planes.
In the past and in some countries today, the ANSPs charged the same fee
for air navigation services at every airport, regardless of its size or
location. Under this arrangement, called network pricing, services at
heavily used
32Automatic Dependent Surveillance-Broadcast is a system that allows
pilots and air traffic controllers to "see" the location of nearby
aircraft and engage in collaborative decision making. It broadcasts
aircraft position data from an onboard navigation system, such as the
global navigation satellite system.
airports subsidize services at small or remote airports. However, two of
our five ANSPs, Airservices Australia and Airways Corporation of New
Zealand, have adopted an alternative pricing scheme, called
locationspecific pricing, under which the fee for some service matches the
cost of providing that service to a specific location.33 Once this scheme
is fully implemented, formerly subsidized air navigation services to small
or remote locations may likely cost more. If an airline decides that it
does not want to pay the increased fees, it may discontinue service to the
location. However, air service may be the only means of public
transportation to some small or remote locations. Continuing to provide
air navigation services to small or remote locations may require special
efforts to balance community needs and business interests.
Airservices Australia has reported that it plans to phase in
location-specific pricing to ease the transition from network pricing.
According to Airservices, it will increase charges over the next 5 years
at general aviation and regional airports and the increased charges have
been approved by the regulator. Although the increases will be gradual,
the plan has raised concerns about 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, which are typically
provided at smaller airports, will be affected.
The impact of location-specific pricing on remote communities and small
operators is difficult to predict. Costs may go up, but charges may not
necessarily be prohibitive. When legislation calls for service to remote
communities, an ANSP may ultimately be forced to take a financial loss if
it is not able to fully recover its costs. Airservices Australia is
seeking to control costs at some locations by deploying new lower cost
technologies to serve remote communities. For example, Airservices
Australia is planning to install Automatic Dependent
Surveillance-Broadcast ground stations, which will allow air traffic
surveillance services over remote regions of Australia where no
surveillance currently exists and where the introduction of radar would
not be cost-effective.
33NATS has not implemented location-specific pricing. However, airport
services are provided through a competitive process in the UK, and the
prices for these services may therefore vary by location.
Appropriately Assessing the Value of Assets Is Essential for Sound Pricing
and Cost Accounting
To protect taxpayers' interests, Canada and the UK needed to have an
appropriate valuation of their facilities and equipment before wholly or
partially selling these assets to their newly established ANSP. According
to its Office of the Auditor General (OAG), Canada did not properly value
its ANSP assets and infrastructures. The approximately $1.5 billion value
that the government negotiated with NAV CANADA in 1996 fell short of the
$2.3 billion to $2.4 billion estimate developed in 1995 by a third party.
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 found that the UK
government raised some $1.3 billion 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 key 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 that commercialized their ANSP had difficulty 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 at a civil service salary when the
private sector is paying higher salaries for safety inspectors to develop
safety standards and procedures. CAA managers with responsibilities for
regulating the safety of NATS's operations also raised concerns about
recruiting staff. According to these officials, regulators need the highly
skilled expertise of air traffic controllers. However, the high salaries
of air traffic controllers of the ANSPs make it difficult to recruit them
for regulatory positions.
Developing Baseline Measures before Commercialization Can 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 performance in the areas of 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 performance they
are making toward their goals to access private funding and, therefore,
they need extensive performance data. However, lack of baseline measures
before commercialization makes it difficult to gauge its development
before and after commercialization. For instance, the Canadian OAG
considered the assets of NAV CANADA to be undervalued, due to the absence
of good financial information before commercialization. In addition,
international organizations that support commercialized ANSPs have
emphasized the importance of developing performance measures and
benchmarks. ICAO, for example, stresses the importance of having
transparent financial data available for economic oversight, and CANSO and
EUROCONTROL are working to standardize performance measures and compare
ANSPs across dimensions such as safety, cost, and efficiency.
We are sending copies of this report to interested congressional
committees; the Secretary of Transportation; the Administrator, FAA; and
the chief executive officers of the ANSPs in our sample. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.
Please call me at (202) 512-2834 if you or your staff have any questions
about this report. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
Major contributors to this report are listed in appendix II.
Gerald L. Dillingham, Ph.D. Director, Physical Infrastructure Issues
Appendix I
Scope and Methodology
We developed a descriptive analysis of selected foreign countries'
commercialized, performance-based air navigation services providers (ANSP)
by reviewing the characteristics and performance of five such
organizations, which we selected as illustrative of similarities and
differences in ownership, length of experience with commercialization, and
size and scope of operations. We then analyzed the information we had
gathered to identify lessons learned about the commercialization of air
navigation services. Our review included site visits, agency interviews,
and analyses of documents provided during our site visits and obtained
through our own research. The 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 since then as
performance-based organizations. Because we selected these ANSPs to
illustrate specific characteristics, our results cannot be generalized to
all commercialized ANSPs.
To describe common characteristics of commercialized air navigation
services in the selected countries, we conducted a computer search on key
elements of each ANSP and conducted interviews in each country. We
collected information on the size and scope of air traffic (e.g., number
of aircraft movements and number of air traffic controllers); the
ownership, management, and funding structures of each country's ANSP; and
institutional mechanisms for stakeholder input. We interviewed government
officials, ANSP executives and representatives, union officials, and
representatives of aviation stakeholders in each country to synthesize
information on how air navigation services were delivered before
commercialization and the key elements and characteristics of
commercialized ANSPs.
To describe how the safety, cost, and efficiency of foreign air navigation
services have changed since commercialization, we conducted interviews and
reviewed documents obtained during our site visits. We also gathered
information through our own computer research. We interviewed government
officials, ANSP executives and representatives, national audit officials,
union officials, and representatives of aviation stakeholders to obtain
their views on how safety, cost, and efficiency have changed since air
navigation services were commercialized. In addition, we interviewed
officials from the International Civil Aviation Organization (ICAO), the
Civil Air Navigation Services Organization (CANSO), EUROCONTROL, and the
European Commission to obtain their perspectives on these issues. Finally,
Appendix I Scope and Methodology
through our computer research and analysis of documents obtained during
our site visits, we obtained additional information on the performance of
each ANSP, including its safety, costs, and efficiencies, since
commercialization.
To identify lessons learned about the commercialization of air navigation
services, we conducted interviews and reviewed literature on
commercializing air navigation services and implementing performancebased
air traffic organizations. In each country, we interviewed government
officials, ANSP executives and representatives, union officials, and
representatives of aviation stakeholders, asking them about the lessons
they had derived from commercialization. We also reviewed literature from
academics and experts on commercializing air navigation services and
synthesized information from our interviews with information from the
literature to arrive at some general lessons on the commercialization of
the five air navigation service providers we reviewed.
Unless otherwise noted, we converted the local currencies of each country
into U.S. dollars using the Organization for Economic Cooperation and
Development's purchasing power parity historical series for each country
in the relevant years for the currency. We adjusted for inflation using
the Gross Domestic Product price index of the Congressional Budget
Office's economic projection for 2005 to obtain the estimated value of
each country's currency in 2005 U.S. dollars.
We did not compare performance before and after commercialization or
across countries. Such comparisons 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 determined from our review of the independently audited financial
reports of each ANSP that the financial data we obtained and used for our
engagement were sufficiently reliable for our purposes. An independent
audit was conducted on the annual financial reports of each of the five
ANSPs in accordance with the applicable country's accounting standards and
practices. The independent auditors for each ANSP found that the annual
financial statements were unqualified and fairly presented, in all
material respects, the financial condition and position of the ANSP.
Appendix I Scope and Methodology
To identify any changes in safety since commercialization, we collected
and analyzed information provided by each ANSP and by its independent
safety regulator. We interviewed officials from these regulators, and we
relied on safety data from the ANSPs and their audited annual financial
reports, which had been independently reviewed and evaluated. To assess
the reliability of these data, we (1) interviewed the officials from each
ANSP and its independent safety regulatory authority who were responsible
for compiling these data and (2) corroborated the data through comparison
with other sources of information. We determined that the data from each
country were sufficiently reliable to identify any major changes in safety
since each ANSP was commercialized.
Appendix II
GAO Contact and Staff Acknowledgments
GAO Contact Gerald L. Dillingham, (202) 512-2834
Staff In addition to the contact named above, Elizabeth Eisenstadt,
Samantha Goodman, Brandon Haller, David Hooper, Hiroshi Ishikawa, Joseph
Kile,
Acknowledgments Jennifer Kim, and Richard Scott made key contributions to
this report.
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