Commercializing U.S. ATC

April 8, 2001

Commercializing U.S. ATC

Think-tank reviews alternatives to a government-operated system

By Robert W. Poole, Jr., & Viggo Butler, Reason Public Policy Institute

April 2001

In February, the Reason Public Policy Institute released its latest study, "How to Commercialize Air Traffic Control." Specifically, the group looked at alternatives the U.S. might consider as it seeks to modernize its current system. Following is an edited transcript of the think-tank’s executive summary, and lessons to be learned from the Canadian experience.

Over the past 15 years, nearly two dozen countries have corporatized their air traffic control systems, including Australia, Canada, Ger-many, Ireland, New Zealand, South Africa, Switzerland, Thailand, and the United Kingdom. All of these ATC corporations operate on commercial principles, to a far greater extent than do typical U.S. government corporations (such as Amtrak, U.S. Postal Service, the Tennessee Valley Author-ity). At a minimum, these commercial principles include the following:
• Keeping their books in accordance with generally accepted accounting principles;
• Being governed by a corporate-type board of directors;
• Borrowing from the private capital market;
• Supporting themselves via fees charged to users.
The International Civil Aviation Organization (ICAO) has long supported ATC corporatization, which it terms the creation of autonomous authorities (with) greater freedom from the government in conducting its financial affairs. Importantly, it should still be regulated by the government.

A Stretched System
The record levels of air traffic delays in the summers of 1999 and 2000 have revealed an air traffic control (ATC) system stretched beyond its limits. And not only are delays at record levels; so, too are runway incursions and operational errors by controllers.
Over the past decade a growing consensus has emerged that air traffic control is essentially a commercial service, a 24-hour-a-day, seven-day-a-week, high-tech service business. A number of federal task forces and commissions have, accordingly, recommended that ATC be separated from the Federal Aviation Adminis-tration (FAA) and set up as some kind of corporate entity, funded directly by payments from users.

The purpose of this report is not to make the case for commercializing ATC; we and others have done that elsewhere. Rather, this report’s purpose is to propose how, in some detail, it might be done. Our intent is to set forth a realistic proposal for shifting the current ATC functions out of the FAA and into a self-supporting, nonprofit corporation governed by a stakeholder board and regulated at arms-length for safety by a slimmed-down FAA (which would also continue to operate the Airport Improvement Program (AIP) to make airport grants).
Since ATC is, and will likely remain, a monopoly, it must be operated in a way that protects its users from possible monopoly exploitation. Three possible corporate forms are:
— a government corporation,
— a nonprofit corporation, or
— a regulated for-profit corporation.
While a number of countries have opted for the first, the U.S. experience with government corporations has not been highly successful. On the other hand, a for-profit ATC corporation raises the perception of "safety versus profits," which has led to fierce controversy in the U.K. We strongly recommend the nonprofit corporation approach, as implemented successfully in Canada in 1996 (see sidebar, p. 54). Since it took over ATC operations, Nav Canada has speeded up modernization, dramatically in-creased efficiency and productivity, and cut user fees by one-third.
The most important feature from Nav Canada is the concept of a stakeholder board. Because there are more distinctly different aviation interest groups in the U.S., such an approach is even more critical, to ensure that the different interests of, say, major airlines, low-fare airlines, regional airlines, cargo carriers, corporate jets, air taxis, and light plane owners are all taken seriously in the corporation’s decision-making, without any of these interests being able to dictate to the others. We also outline several kinds of external federal oversight of the new ATC corporation: arms-length safety regulation by the FAA, oversight/appeals regarding fees and service levels by the U.S. DOT, and oversight by (Congress) of FAA and DOT.
Of crucial importance is a workable system of ATC fees and charges. The airline industry is still living with the consequences of the divisive battles of 1997 over restructuring the ticket tax. Our starting point for suggesting a workable fee structure is that the current airline shares of cost responsibility not change significantly at the outset; future shares would obviously depend on changing market structures in the dynamic airline industry. Drawing on international practice (and) ICAO, we recommend replacing most current aviation excise taxes with a simple weight-distance fee structure similar to current practice in Canada and Europe, but modified to take into account operations at severely congested airports.
Taking into account payments by the federal government (for federal use of the system) and foreign carriers, the amount needed from U.S. airlines to pay for the ATC corporation would be just 72 percent of what the airlines currently pay in aviation user taxes. Even taking into account the need to retain a small portion of the airline ticket tax and cargo waybill tax to pay for AIP, airlines would still pay 12 percent less for ATC and AIP, in total, than they currently pay. That 12 percent saving is prior to any efficiency gains. Overseas ATC corporations have achieved cost savings of about one-third, which have been passed along in the form of lower user fees. If similar gains were achieved in this country, total airline savings could be on the order of 40 percent by about year five of the new corporation.

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

About the Report
The Reason Public Policy Institute is a division of the Reason Foundation, a think-tank based in Los Angeles. Robert Poole serves as the group’s director of Transpor-tation Studies; Viggo Butler is chair of United Airports Limited, Inc., and former CEO of the Airport Group International.
To view the full report, contact or (310) 391-2245.

The Nav Canada Example

In its most recent study of the U.S. air traffic control system, the Reason Public Policy Institute reviews at length the experience of Canada’s commercialization effort. Some excerpts ...

As a non-share but stakeholder-controlled nonprofit corporation, Nav Canada has a 15-member board of directors. Ten positions are spelled out by the corporate charter to represent stakeholders, as follows:
• Four appointed by the Air Transport Association of Canada;
• One appointed by the Canadian Business Aircraft Association;
• Two appointed by Nav Canada bargaining agents (unions); and
• Three appointed by the government.
To further ensure that the interests of Nav Canada are served, these board members cannot be active employees or members of airlines, unions, or government. These 10 members select four independent directors, and those 14 then select the CEO, who becomes the 15th board member.
Nav Canada is (an) autonomous ATC corporation, with no government ownership (but with three out of 15 board members representing the government). Air safety regulation remains the responsibility of the government (Transport Canada). The enabling legislation spells out certain other areas in which its behavior is regulated, including specific principles to which user fees must conform. Specifically, it must give 60 days notice of any proposed:
• New or revised fees and charges;
• Reductions in facilities; or
• Material changes in services.
Nav Canada is required to consult with users and other affected parties prior to making modifications with respect to fees and charges. Users may appeal the company’s decision to the Canadian Transportation Agency under certain specified circumstances. With respect to services, users can make representation to Transport Canada if they are concerned that Nav Canada’s proposals would adversely affect air safety.
Nav Canada (was) created by legislation enacted in 1996. The transfer took place in November 1996, when Nav Canada completed its initial financing and purchased the ATC system from the Canadian government. Charges for ATC services were introduced over a two-year period, during which time the existing ticket tax was phased out. A detailed article in the New York Times reviewed the results of Nav Canada’s first two and a half years. In that time period, Nav Canada achieved the following results:
• Productivity increased from 258 flights per employee to 341 (32%);
• Airline costs decreased from $528 million to $355 million (33%);
• The average controller salary increased from $43,316 to $57,530 (33%); and
• Total employees decreased from 6,300 to 5,400 (14%), via reductions in management and administrative staff, not controllers or technicians.
Technological modernization has been accelerated, in part by making greater use of off-the-shelf systems and in part by streamlining procurement. While Nav Canada’s initial four years of operations are a short period, these early indicators are very positive.
The coalition of airlines, business aviation, and other parties that developed Nav Canada reviewed the ATC pricing systems in Australia, Germany, Ireland, New Zealand, South Africa, Switzerland, and the United Kingdom. All charge for overflight, en-route, and terminal-area ATC services, and all use some variant of the ICAO weight-distance principles. Based on this experience, they decided to adopt a weight-distance system for Nav Canada.