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AIR TRAFFIC MANAGEMENT IN

FOREIGN COUNTRIES

(109–13)

HEARING

BEFORE THE

SUBCOMMITTEE ON

AVIATION

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 20, 2005

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

CHARLES W. DENT, Pennsylvania

TED POE, Texas

DAVID G. REICHERT, Washington

CONNIE MACK, Florida

JOHN R. ‘RANDY’ KUHL, JR., New York

LUIS G. FORTUN ̃ O, Puerto Rico

LYNN A. WESTMORELAND, Georgia

CHARLES W. BOUSTANY, JR., Louisiana

VACANCY

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

ROBERT MENENDEZ, New Jersey

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JOHN T. SALAZAR, Colorado

(II)
SUBCOMMITTEE ON AVIATION

JOHN L. MICA, Florida, Chairman

THOMAS E. PETRI, Wisconsin

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

ROBIN HAYES, North Carolina

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

CHARLES W. DENT, Pennsylvania

TED POE, Texas

JOHN R. ‘RANDY’ KUHL, JR., New York

Vice-Chair

LYNN A. WESTMORELAND, Georgia

VACANCY

DON YOUNG, Alaska

(Ex Officio)

JERRY F. COSTELLO, Illinois

LEONARD L. BOSWELL, Iowa

PETER A. DEFAZIO, Oregon

ELEANOR HOLMES NORTON, District of

Columbia

CORRINE BROWN, Florida

EDDIE BERNICE JOHNSON, Texas

JUANITA MILLENDER-MCDONALD,

California

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

TIM HOLDEN, Pennsylvania

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

BEN CHANDLER, Kentucky

RUSS CARNAHAN, Missouri

JOHN T. SALAZAR, Colorado

NICK J. RAHALL II, West Virginia

BOB FILNER, California

JAMES L. OBERSTAR, Minnesota

(Ex Officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Crichton, John W., President and Chief Executive Officer, NAV CANADA ...... 26

Dillingham, Gerald, Ph.D, Director, Physical Infrastructure Issues, Government Accountability Office .................................................................................. 6

Kaden, Dieter, Chief Executive Officer and Chairman of the Board of Managing Directors, DFS Deursche Flugsicherung GmbH (German Air Navigation

Services) ................................................................................................................ 26

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Costello, Hon. Jerry F., of Illinois .......................................................................... 55

Oberstar, Hon. James L., of Minnesota ................................................................. 99

PREPARED STATEMENTS SUBMITTED BY WITNESSES

Crichton, John W. .................................................................................................... 40

Dillingham, Gerald .................................................................................................. 57

Kaden, Dieter ........................................................................................................... 81

SUBMISSIONS FOR THE RECORD

Dillingham, Gerald, Ph.D, Director, Physical Infrastructure Issues, Government Accountability Office:

Response to a question from Rep. Mica ............................................................. 20

Response to a question from Rep. Costello ........................................................ 25

(1)

AIR TRAFFIC MANAGEMENT IN FOREIGN

COUNTRIES

Wednesday, April 20, 2005

HOUSE OF REPRESENTATIVES, COMMITTEE ON TRANSPORTATION ANDINFRASTRUCTURE, SUBCOMMITTEE ON AVIATION, WASHINGTON, D.C.

The Committee met, pursuant to call, at 10:00 a.m., in room

2167, Rayburn House Office Building, Hon. John L. Mica (chairman of the committee), presiding.

Mr. MICA. Good morning. I would like to call this hearing of the

House Aviation Subcommittee to order.

Today’s hearing will focus on air traffic management by foreign

countries and look at some of the things that other countries are

doing. We have two panels of witnesses. I have an opening statement and the order of business will be to recognize other members

who have opening statements and then go to our two panels.

This morning the Aviation Subcommittee will review and obtain

some perspectives on the governance, organizational structure,

modernization efforts and system funding of commercialized international air traffic control providers. Before we get started, I want

to thank our expert witnesses for being with us today. Dr. Gerald

Dillingham, from the GAO, has done extensive work in looking at

this issue and will be a tremendous resources for our panel today.

Also let me thank Mr. John Crichton, from NAV CANADA and

Mr. Dieter Kaden, from Germany, for taking time from what I

know are their busy schedules and traveling great distances to be

with us. We look forward to hearing from both of these witnesses

on their respective air traffic control efforts.

The questions surrounding how other countries have developed

and implemented new air traffic control technologies is particularly

important as we consider the current financial situation and

changes to operations and management in our Federal Aviation

Administration. After spending billions of dollars on an annual

basis over a number of years, the FAA is now at a crossroads as

it seeks new cost-effective approaches to modernize our Nation’s air

traffic control system.

That other countries are doing an air traffic control modernization is also important for competitive reasons. It is clear that the

Europeans intend to be and certainly are fierce competitors with

respect to aerospace.

I am concerned that a clear path for the United States to move

forward with air traffic control modernization does not really exist

yet. The exact level of funding that will be required to meet the anticipated demand for air travel still remains unknown. In fact,
2

much of the future now depends on the Joint Planning and Development Office that is expected to leverage Federal efforts with a

view toward a 2025 time frame. The hearing before this Subcommittee last week clearly highlighted that much work remains

to be done to determine exactly what the JPDO will do, what level

investment will be needed and when new systems can be brought

online. The hearing today is intended to gain insight into how the

FAA could approach some of the challenges it faces and look at

some different approaches.

I will be the first to admit that this is difficult to really compare

the United States’ national aerospace system with foreign systems.

The United States in fact operates the largest and safest air traffic

control system in the world. The United States has about 60 percent of the world’s air traffic activity.

According to the FAA, and as the chart we have got up there indicates, if you combine the number of air operations in the U.S.,

Canada, Germany, Britain, Australia and New Zealand, the United

States accounts for 92.9 percent of those operations or 159 million

operations annually. Second is Canada with 2.5 percent, Germany

is 1.6 percent. We will hear a little bit about what they are doing

shortly.

Notwithstanding the size and complexity, there are a number of

important issues to consider. First, for example, how have differences in governance and funding structure impacted technology

development? Have other air service providers been successful in

reducing operational costs?

So that my colleagues on the other side of the aisle, some other

folks who might be concerned can sleep better tonight, let me say

I do not believe we can simply adopt someone else’s entirely different system. But I do believe that it is incumbent upon us in our

responsibility to look for ways to bring efficiencies to the FAA, for

that matter, any other Federal Government agency.

Over 30 air traffic control providers have gone to commercialized

corporate structure over the past 15 years. With user fees, they

faced very similar challenges like our own government-owned and

operated system. As revenues fell as a result of September 11th,

some of those systems have incurred debt and I am told some have

had to go back to their governments for assistance. Today we will

hear details about how they faced some of these similar challenges.

As I mentioned last week, we heard from the FAA and DOT on

their challenges in the areas of operations, finances and modernization. In a few short weeks, we will look further into issues surrounding the financial conditions of the Aviation Trust Fund and

discuss our current financing structure and see what efficiencies

we can adopt.

Again, let me thank our witnesses for being with us today. I look

forward to their testimony. I am pleased now to recognize our

Ranking Member, Mr. Costello.

Mr. COSTELLO. Mr. Chairman, thank you. Mr. Chairman, I have

a statement that I will submit for the record and would like to

make brief comments concerning the hearing at this point.

Mr. MICA. Without objection, the entire statement will be made

part of the record.
3

Mr. COSTELLO. Mr. Chairman, thank you for calling the hearing

today. I want to welcome all of our witnesses, Dr. Dillingham was

of course with us last week at a hearing. I am pleased to see that

he is here today to talk about the GAO report and their findings.

I also welcome our friends from Canada and Germany as well.

Let me say from the outset that I strongly oppose any suggestion

that we should consider privatizing the air traffic control system

here in the United States. Privatizing the air traffic control system

here puts the user of the system in a position of setting policy and

deciding how much money will be spent on the system and how the

money will be spent. I do not believe that Congress should create

a relationship between airline profitability and ATC spending and

other decisions affecting safety.

Mr. Chairman, selling off our ATC infrastructure to a corporation

that will borrow money to make the improvements necessary to

sustain it is a bad idea. Some believe that only a commercialized

service provider with an independent revenue stream such as a

user fee will have the autonomy and access to private capital markets needed to make transformational changes within the system.

I hope as we hear our witnesses testifying here today that we

will hear about the successes as well as the challenges that commercialized foreign service providers have faced. During recent airline industry downturns marked by declining traffic, some commercialized service providers experienced financial hardships that have

resulted in debt, fee hikes, government funding infusion and capital cuts. I expect to hear testimony that some foreign service providers have deployed new technologies more quickly and efficiently

and effectively than the FAA.

I would just want to remind everyone that these foreign countries appear to rely more heavily on commercialized equipment off

of the shelf technology than the U.S. has. However, we must keep

in mind that not always taking the technology off of the shelf

works for the United States because of the scale and complexity of

the U.S. system versus foreign systems.

In terms of operational scale and air space complexity, there is

really no comparison between the United States and other systems

around the world. Comparing the United States system to other

systems, such as Canada and other countries, is comparing apples

and oranges. In total, the U.S. represents about 60 percent of the

world’s air traffic activity. The FAA reports that there were over

159 million operations in 2004, 13 times the number of operations

of the U.K., New Zealand, Canada, Australia, and Germany combined.

Congressman Oberstar and myself requested actually a breakdown from the FAA, an in-depth study comparing the U.S. system

to foreign systems. I will submit the results of that information for

the record, so that the American public can see for itself and appreciate the scale and complexity of the U.S. system versus other systems around the world.

Mr. Chairman, I agree with you in the statement that you just

made that it is incumbent upon us, this Subcommittee, our full

Committee and the Congress, to look for ways to improve the efficiency of the FAA. That is one of the reasons why I am pleased
4

that you have called this hearing today and I look forward to hearing from our witnesses and hearing their testimony.

Mr. MICA. Thank you.

Do other members have opening statement? Mr. Duncan?

Mr. DUNCAN. Mr. Chairman, I do not have a formal opening

statement. I just thank you for calling this hearing and welcome

the witnesses.

We have the best aviation system in the world, as all of us know.

But we always need to be looking for ways to improve and do better, and if we can learn something from somebody else, that is a

good thing. I am particularly interested in hearing what Mr.

Dillingham has to say about the statement from the witness from

Canada, who says we spend about one-half of what Transport Canada did and are generating three times the product twice as fast.

Is that due to better and increased use of new technology or is that

because of something better in their system? I think we can all

learn from this hearing, and I thank you very much for calling it.

Thank you.

Mr. MICA. Thank you. Ms. Johnson.

Ms. JOHNSON. Thank you very much, Mr. Chairman. I want to

thank you and Ranking Member Costello for holding this important

and timely hearing this morning, as we continue to explore various

avenues to assist the FAA tackle existing and looming modernization challenges.

I feel it is important for us to take a look at international entities

that have enacted successful modernization efforts. To ensure that

the FAA remains the largest and safest air traffic control system

in the world, we as policy makers have some tough decisions to

make in order for us to ensure that modernization is realized. The

U.S. lacks a clearly defined route to move forward with air traffic

control modernization and time is not on our side. At FAA’s annual

forecast conference last month, the agency predicted that by 2015

1 billion passengers will board planes domestically each year.

Yet, cost growth and delayed systems acquisitions are handicapping the FAA’s ability to enhance capacity and modernization.

Finding additional and creative revenue streams also poses a major

challenge. The evolution of the low-cost carrier has brought about

a decline in average ticket prices. At the current pace, tax income

isn’t expected to keep pace with passenger traffic. By 2016, the

FAA estimates that ticket prices per mile flown will have dropped

nearly 40 percent from 2000 levels, further eroding potential income for the deployment of major initiatives.

So the challenges before us are real and we are going to have to

take a hard look at what we can do to prevent a looming gridlock

of our Nation’s aviation infrastructure. As I close, I want to thank

our witnesses that have come before us to testify this morning, and

I look forward to that testimony, as I am particularly interested in

learning more about their utilization of various user fees in expediting systems deployment and the use of new systems to reduce

operating costs.

I thank you, Mr. Chairman.

Mr. MICA. Thank you.

Mr. Hayes.

Mr. HAYES. Thank you, Mr. Chairman.
5

I have a couple quick questions. Could we put that original chart

back up? Is that easily available?

Mr. MICA. Yes, we could.

Mr. HAYES. The question, and I may have missed it, but what

Mr. Costello said was kind of what I would have thought in terms

of our operations. But if you, the way I read it the first time, we

have less operations than England and Canada, am I reading that

incorrectly? It says we have 159 million U.K. has—okay, I am

sorry, you made it bigger, I can see now. You’ve got an extra number. That makes more sense.

Question, how do we define operations versus how do the Brits

and the Aussies define operations? What’s an operation as it relates to this chart? Is an operation an IFR flight plan that is filed

and activated and used and closed?

Mr. MICA. If there is a difference, we can ask them, but we do

not have them up yet. We can pose that question.

Mr. HAYES. You made the print bigger. That answered the first

question. The other would be very helpful, because it does again

point out how professional our controllers are and the amount of

traffic that they do control.

Thank you, Mr. Chairman. Thank you for holding the hearing.

Mr. MICA. Thank you.

Any other comments? Ms. Norton.

Ms. NORTON. Thank you, Mr. Chairman.

I think this is an important hearing, because I do think we have

a lot to learn and that in matters of this kind, particularly as we

see the allied countries have moved to some commercialization,

knowing about that and seeing how it might fit our own operations

is a very worthwhile exercise that could lead somewhere. Indeed,

on the Homeland Security Committee, where I sit, I would like to

see a hearing that has business operations come in and testify before us, because I think some of them are more sophisticated about

security than the Government. They have a very deep, vested interest and bottom line that has kept their eye on that matter for some

time.

Of course, I would not suggest privatizing security, even though

I think we have a lot to learn from them. And I do not suggest that

you suggest that, Mr. Chairman. Especially post-9/11, privatizing

parts of our air system would raise at least some skepticism, I

think, among all of us. We know that there is no silver bullet to

these cost issues.

I am interested in how commercialized operations have somehow

been able to do investments, modernization investments, and we

have not. I mean, I need to know exactly what it is that transforming to a commercialized operation enables a system comparable to

ours to do what it does. I do think that Government agencies are

always more cumbersome. Those of us who believe that there are

certain services that it is necessary for Government control have a

burden to make them as efficient as possible, or give them to somebody who can. I am not convinced that we have gone through the

exercise with FAA.

And since we are focusing on how they save money and not on

other aspects of what it took to save money, I am most interested

to see how these efficiencies, how these economies have also helped
6

these systems to maintain the kind of security that certainly we

would have to think about because of our unique position in the

world. I think we have something to learn here, and perhaps a

great deal than we realized. Therefore, I very much appreciate this

hearing, Mr. Chairman.

Mr. MICA. I thank the gentlelady.

Are there other members who wish to comment? Mr. Poe.

Mr. POE. Thank you, Mr. Chairman, for having this Committee

meeting today.

In Houston, where I live, Intercontinental Airport is a major hub

for Continental. There are many concerns that we have. One of

those is the fact that it appears the FAA cannot keep up with modernization. Congress appropriated money in 2003 for a new tracon

facility, because ours tends to flood during hurricanes. That has yet

to be built, even though the land was donated by the airport.

So I am concerned about the FAA’s ability to modernize, especially with facilities like the tracon, to keep safe airways. The idea

that we could have a new system, a new philosophy, is good.

I look forward to the testimony of the witnesses to see how

maybe we can modernize and make our system safer, more efficient

and all for the benefit of the American traveling public.

So thank you very much, gentlemen, for being here.

Mr. MICA. Thank you.

Any other opening comments?

If not, we will turn to our first witnesses. Before I do that, I just

want to make a Subcommittee announcement. Actually for the

whole Transportation Committee, if they are interested. At 2:30

today we will have a closed door, classified briefing from the Inspector General of DHS and also from GAO on their latest findings

on the aviation security screening. I think you’ll find that interesting. There’s been a lot of commentary in the press lately, prior to

the release of that information.

I encourage members to attend. And if you have a staffer who

has the clearance, they are certainly welcome, to.

With that, we will turn to our first witness and panel, George

Dillingham with GAO. He’s been before us before, and we thank

him for being with us and recognize him at this time.

TESTIMONY OF GERALD DILLINGHAM, Ph.D, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE

Mr. DILLINGHAM. Thank you, Chairman Mica, Mr. Costello, Mr.

Duncan, members of the Subcommittee.

We appreciate the opportunity to testify this morning about our

ongoing work related to commercialized air navigation service providers, also known as ANSPs. Since 1987, 38 nations have commercialized their air traffic services. This generally means that the responsibility for providing air traffic services has shifted from the

national government to an independent organization.

These new organizations generally operate as performance-based

organizations and in accordance with traditional private sector

business practices. In many cases, the countries were facing severe

fiscal strains and years of under-investment in their aviation infrastructure. In some countries, air traffic services was one of a num-
7

ber of services, such as rail and telecom, that were moved from the

national government to the private sector.

Today I am going to discuss how the countries that we selected

for our study have commercialized their air traffic services, and

how commercialization has affected those services. We are examining commercialization as it occurred in Australia, Canada, Germany, New Zealand, and the United Kingdom. Although our sample is not designed to allow conclusions to be drawn about ANSPs

in general, we did select countries that illustrate the similarities

and differences in the size, scope and governance of commercialized

ANSPs.

The bars on this graphic show the relative size of the various

ANSPs in terms of the number of air traffic controllers and total

employees. For context, the bar on the far right represents the U.S.

It shows that the United States has nearly twice as many controllers as the five ANSPs combined.

This snapshot of traffic over North America provides another bit

of context. The graphic shows both U.S. and Canadian air space,

with each dot indicating an aircraft. It shows that although Canada has a very large air space, the traffic is certainly more concentrated in U.S. air space. Overall, the U.S. handles at least six

times more operational traffic than the next largest ANSP in the

world.

With that context, I would like to discuss two dimensions of our

study; specifically, some of the common characteristics of the

ANSPs we reviewed and second, some initial observations that can

be made about commercializing air traffic services. With regard to

the common characteristics, first, flight safety was maintained as

an organizational imperative for all ANSPs. And in all cases, the

responsibility for regulating the safety of services remained with

the government. Based on our review of the information available,

the safety performance of all five of the ANSPs has remained the

same or improved since commercialization.

Another characteristic is that each ANSP operates as a business

rather than as a government organization, even though most are

wholly or partially owned by their governments. As the graphic

shows, three of our samples are government corporations, the U.K.

is a public-private partnership and Canada’s ANSP operates as a

private, non-share company.

Furthermore, in operating as a business, each ANSP makes its

own strategic operational and financial decisions without obtaining

approval from the central government. Additionally, each ANSP

generates and manages its own revenues through user fees to cover

its costs and in some cases, to earn a profit.

Each is able to borrow funds from private markets and each has

established financial and accounting systems to support its business operations. Each ANSP is largely a monopoly provider of air

traffic services, but each undergoes some form of economic review

or follow some guidelines for setting prices.

In terms of cost savings, each ANSP has taken steps to control

its operating costs by eliminating some administrative and middle

management positions or by consolidating facilities. With regard to

modernization, all five ANSPs have invested in technologies and

equipment which they say have improved productivity, lowered the
8

unit cost of delivering services and resulted in fewer and shorter

delays.

With regard to pricing, in at least one case, the ANSP charges

the airlines less than they were paying in ticket taxes under the

prior system. On the other hand, some ANSPs have also instituted

or increased fees for general aviation operators. For example, NAV

CANADA charges a $72 annual fee and New Zealand charges $100

for 50 landings.

Finally, Mr. Chairman, we have several initial observations regarding 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 that which occurred after the 9/11 attacks. Second, because the ANSPs may be monopoly providers of

air traffic 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, including

providing some type of permanent forum for communications, is essential to initiate and sustain commercial operations.

Fourth, the inability of some airlines to pay the full cost of services to small communities and the ANSP’s need to recover their

costs means that special measures may be necessary to protect

service to some locations. This is especially the case when aviation

is the community’s only form of transportation or there are safetycritical services at issue. Fifth, when a government sells its interest

in a nation’s air traffic control system, the system’s assets have to

be appropriately valued to protect taxpayer interests and create a

basis for sound financial decision making.

Sixth, if functions such as safety regulation is separated from operations, it is important to ensure that the regulator can retain and

attract sufficient personnel with the skills and expertise needed to

provide uninterrupted safety oversight. And finally, Mr. Chairman,

developing baseline safety costs and efficiency measures prior to

commercialization will allow robust comparison of ATC services before and after commercialization.

Thank you, Mr. Chairman.

Mr. MICA. Thank you. We will have a few questions then we will

go to other two witnesses.

In your examination of these other operations that are

privatized, there certainly is a dramatic difference in scale of operation between the United States and any, in fact, all of those. Is

there anything that you pick out that we can learn or take from

these other privatized activities that we might consider for adoption by FAA that would increase either safety, efficiency, management, operation?

Mr. DILLINGHAM. Mr. Chairman, as we testified before you last

week, one of the points that we made is that the FAA and the ATO

seems to be turning around their modernization program. In fact,

the report that we made to you was quite different than what we

have been saying to this Committee for the last 10 or 15 years. The

chief operating officer said he thinks he needs at two years to put

all the systems in place that he thinks need to be in place for a

performance-based organization.

So I think from our perspective, the business processes and the

changes that are underway right now are similar business proc-
9

esses that are in place in these other countries. And we would

argue that they need to play themselves out a little bit more.

Mr. MICA. NAV CANADA was probably the most privatized operation. One of the things that struck me when I visited there and

looked at their operations is that their philosophy that the regulator and the policy maker be separated from operations. With

FAA, we have both policy, regulation and operations all combined.

Do you see any potential to divide up, again, policy and regulation versus operation?

Mr. DILLINGHAM. Mr. Chairman, I think a little bit of that is currently taking place at FAA, that in fact they have set up a separate

office of safety, sort of an arm’s length from the ATO. It is not the

same as what we see in the commercial systems, where one is government and one is private. But they are beginning to put that separation in process, recognizing the potential conflict of interest of

it being all in one body.

Mr. MICA. Let me defer to Mr. Costello at this point.

Mr. COSTELLO. Mr. Chairman, thank you.

Dr. Dillingham, you would agree that comparing the U.S. system

to Canada and the other countries that you reviewed is comparing

apples and oranges.

Mr. DILLINGHAM. In many ways it is, Mr. Costello. Size, complexity, air space, in many ways. But I think some of the concepts, the

business processes, concepts that have been instituted are in fact

applicable to the U.S. case.

Mr. COSTELLO. So you are saying that we can learn from these

examples and systems elsewhere in the world, but you wouldn’t

necessarily recommend that we duplicate Canada or any other

country that you examined?

Mr. DILLINGHAM. No, sir, not at this time.

Mr. COSTELLO. Okay. I am just kind of amazed at the comparison

here, the number of operations that we do in the United States, the

complexity of the operation. I do not know if you saw the ad in Roll

Call today with the dots that appeared up on the screen a minute

ago. The number of operations here in comparison to Canada, it’s

amazing to me. My staff tells me that the number of operations in

Canada last year, for instance, we handled more operations in

Cleveland than the entire country of Canada last year and in 2003.

So I just want to make certain, and I agree with you in the statement that the Chairman has made that we can learn from other

systems around the world. But you know, I want to make certain

that everyone understands that we are looking at systems that last

year handled the traffic that we handled here in the United States

in Cleveland alone. So it is a complex system.

I have a couple of other just quick questions for you if I may. You

talk, and I think in your testimony today, both in your written testimony and in what you just said, how commercializing, turning

the system over to a private company can achieve the benefits of

modernization faster and less cost by basically purchasing technology off the shelf. If I am not mistaken, in the past we attempted

to do that, the FAA did, with the STARS program.

Again, given the complexity and the size of the U.S. system,

could we, in your opinion, expect to achieve success in taking off

the shelf technology that is available in other countries when in the
10

example of STARS, it didn’t work for us because of the size of the

system and how complex it is? I wonder if you would comment.

Mr. DILLINGHAM. We have read and talked to some of the principals from the various other air navigation service providers. And

they would argue that commercialization has been a factor in them

being able to modernize more quickly and to do other things more

quickly.

We haven’t been able, at this point, to verify that, that in fact

that it was just commercialization. I think we would argue that it’s

a combination of the things that are inherent in commercialization

as well as the business processes that were put in place.

With specific regard to your question about off the shelf, historically the U.S. has had a difficult time simply pulling things off the

shelf and assuming that they could be readily instituted into the

system. They have oftentimes run into serious problems that have

led to schedule delays and cost overruns, based on that assumption

that they in fact could do that. You were correct, and one of the

reasons that you stated, that the system is so complex that many

times, off the shelf equipment just won’t do.

Mr. COSTELLO. I wonder if you might comment about, in reviewing these systems, how they were affected by economic downturns.

In other words, if we run into an economy that slows down considerably, how it has affected these systems, and is there any way to

ensure that the funding is stable going through an economic downturn.

Mr. DILLINGHAM. Yes, sir. I believe that every system we looked

at experienced serious cash flow problems, particularly after 9/11

and to some extent because of the SARS incidents. Most of the organizations we looked at, or at least many of them, had a fund,

sort of a rainy day fund that was established to take care of economic downturns.

However, I do not think any of the organizations were projecting

15 or 25 percent decrease in traffic. As a result of that, some of the

ANSPs depleted their rainy day fund. In one case, in the U.K, because the organization had been recently formed and then 9/11

happened, I think they probably experienced the most difficult

downturn with regard to having revenues come in and had to be

recapitalized, including having the central government come in as

a partner.

Clearly, one can establish a rainy day fund for those kinds of

downturns. But again, if you get a downturn such as 9/11, I do not

think there’s any way that one can put away enough money to

cover something like that. The systems that we have been looking

at, the various organizations are looking at ways to handle that

downturn, either by increasing their rainy day fund or we have

heard suggestions that the airlines want to maintain the rainy day

fund, rather than pass it on to the ANSP.

So that is clearly one of the issues that has to be addressed. Because as you know, the aviation industry is quite cyclical without

a 9/11 or a SARS.

Mr. COSTELLO. Two other questions very quickly. One, can you

tell us what impact privatizing the air traffic control systems has

had on small operators and smaller, remote communities in your

study?
11

Mr. DILLINGHAM. Yes, sir. With regard to small operators, I

think it was generally the case that small operators pay the aviation fuel tax, and that was the extent of what they were expected

to pay in the prior systems. However, in the new systems, there

have been some flat fees established, taking into account the

amount of activities that GA requires of the air traffic controllers.

They found various and sundry ways of trying to make that an

easy transition for small carriers or small operators.

And in some of the cases, by legislation the air navigation service

provider is required to provide services in some remote areas, in

those areas where aviation is the predominant or only mode of

transportation, similar to the U.S.-Alaska situation, for example.

Mr. COSTELLO. Finally, I wonder if you would discuss a little bit,

you mention in your testimony the concept of location-specific pricing and network pricing. Can you elaborate on that a little bit?

Mr. DILLINGHAM. Mr. Costello, that is something that we are

looking it. They are two different kinds of ways that fees are determined, either to a specific airport or based on the network. So it’s

just two different ways in which fees can in fact be determined to

be charged.

Mr. COSTELLO. Mr. Chairman, thank you.

Mr. MICA. Thank you. Mr. Duncan.

Mr. DUNCAN. Thank you, Mr. Chairman.

Dr. Dillingham, you heard me mention this comment by our Canadian witness, that we spend about one half of what Transport

Canada did and they are generating three times the product twice

as fast. Are those dramatic improvements just, were they primarily

because Transport Canada was just doing an extremely bad job, or

is there something in their system or their methodology that has

led to those types of improvements?

Mr. DILLINGHAM. I think Mr. Crichton probably can give a better

answer. But I will tell you what we learned, that it was a combination of the things you mentioned, Mr. Duncan, that prior to NAV

CANADA coming on board, the business processes were not what

they needed to be, as well as in terms of human capital issues.

NAV CANADA was able to reduce its middle management and administrative staff, which saved some money. They also put in place

a process of bringing ATC equipment into the system in a quicker

fashion. They basically went with what does the customer need and

what can we deliver under those circumstances.

So it was a combination of things that contributed to the changes

that NAV CANADA is reporting.

Mr. DUNCAN. In our briefing memo, we have been given a chart

showing that NAV CANADA, with 5,400 employees, handled 6 million movements. That is a little over 1,000 movements per employee. Australia it says with 2,900 employees, handled 2,723,828

movements. That is a little less than 1,000 movements per employee.

Now, we saw the chart there that said we have 159 million

movements in the U.S. What is the comparable figure there? I’ve

been trying to find out. What is our number of employees dedicated

to this in the U.S. at this time, do you know?
12

Mr. DILLINGHAM. We have approximately 15,000 air traffic controllers and the total air traffic organization is about 35,000 to

38,000 people.

Mr. DUNCAN. So the comparable figure then, does anybody know,

is this chart, is this just employees handling the air traffic control

or is this all employees? Do we know? Just the controllers.

So about how many movements per year is the average air traffic

controller handling in this country, do you know?

Mr. DILLINGHAM. I am not sure about what the average controller handles. That would be something I would have to get back to

you on, Mr. Duncan.

Mr. DUNCAN. All right. And then, when these countries have

gone to these new systems, what have they done in regard to their

employees? Have they given some type of protection to the current

employees? And then also, what’s happened to salaries? Have the

salaries gone up as fast as they did before or less fast, or have they

gone down? I am interested in the employee situation.

Mr. DILLINGHAM. As far as the salary situation is concerned, if

you will keep in mind that several years prior to commercialization, a lot of aviation related funding was frozen, including in some

cases salaries for controllers and for others who were working in

the air transportation areas. So that when these new companies

came in, clearly they were able to raise the salaries and, based on

the information that we were able to obtain, the employees are now

saying that they are making more now than they would have been

making under the old, federalized kind of system.

With regard to protecting employees, I am not entirely clear as

to how each of them protected employees as such. But what I can

tell you is that for those organizations that have reduced the number of employees, they have been middle management, administrative people, and from my knowledge, there has been little or no

movement in terms of reducing the number of air traffic controllers.

Mr. DUNCAN. One last question. Are we making improvements,

have we been making improvements over the last few years similar

to or comparable to some of these other countries? In other words,

we have been buying new technology right and left. I assume and

hope that we are doing more with less now, or we are doing more

per employee? I guess it goes a little bit back to, partially back to

that question I asked a while ago. Do you know?

Mr. DILLINGHAM. That is a tough question. I think some of the

technologies that have been introduced in some of the countries are

in some ways, people would consider them ahead of ours in terms

of bringing greater efficiency. But in other cases, some of the technologies that are being introduced are technologies that we already

have and are trying to move to the next generation. So it’s sort of

a mixed bag, Mr. Duncan.

Mr. DUNCAN. All right, my time is up. Thank you very much.

Mr. MICA. Ms. Johnson, I think you’re next.

Ms. JOHNSON. Thank you, Mr. Chairman.

Mr. Dillingham, you state that in places where government has

sold its interest for commercialization, assets have to be appropriately valued to protect the taxpayer. Have we found that there
13

are enough skilled people attracted to the jobs after commercialization or privatization in any country?

Mr. DILLINGHAM. I think what we were referring to in our statement was an instance where a central government sold the assets

of the air traffic control system to the new organization and in the

process of that sale, our counterpart in that country indicated that

they thought the valuation was significantly lower than the price

that they received. So we made that point. It is important that in

fact one gets an adequate evaluation.

The other part of your question refers to, in one of the countries

that we studied, when the national government gave up the air

traffic control, they sent most of the people that were federal employees over to the corporation. The problem that we saw was that

some of the safety people who were previously into the federal system were now over in the new organization. Therefore, the federal

government, which was still charged with safety regulation, did not

have enough skilled people to carry out their prescribed safety inspections.

Ms. JOHNSON. Thank you. Another question. Did you find a

change in service areas where the smaller airports left in or out of

a system or were they just the large revenue points?

Mr. DILLINGHAM. The smaller airports were kept in the system

oftentimes by legislative means. They were told that services will

be in fact provided to these areas.

Ms. JOHNSON. Thank you. Thank you, Mr. Chairman.

Mr. MICA. Thank you. Mr. Hayes?

Mr. HAYES. Thank you, Mr. Chairman.

Dr. Dillingham, a couple of quick questions. I noticed kind of buried in your figures were a reference to other countries who supposedly had lowered their overall costs for the air carriers by

charging general aviation a fee. Of course, I would question that.

Do you have any thoughts what the present thinking at the agency

is about charging additional fees to general aviation?

Mr. DILLINGHAM. Do you mean the FAA?

Mr. HAYES. A user fee, yes.

Mr. DILLINGHAM. Well, I want to start back from the piece in our

testimony. I think the piece in our testimony says that one result

of commercialization is that fees have been lowered. Now, I am not

sure if we took the next step to say that they were able to lower

those fees because they began to charge GA. Because our understanding is that for the most part, GA is a relatively small part of

most of the other aviation systems besides the United States. We

are of course a major player in the GA community.

I do not have any information with regard to FAA’s thinking

about charging user fees either to large commercials or GA airplanes.

Mr. HAYES. Thank you, sir. That was a very good answer.

There’s kind of a movement underway by some of the airlines to

charge fees to general aviation. Of course, general aviation percentage of usage is far, far lower and what you said is correct, that it’s

not going to affect them at all. As soon as the airlines are prepared

to pay property tax for general aviation, then maybe we can carry

that discussion on.
14

One of the interesting things that comes out of this discussion

this morning is the complexity of our system compared to the other

systems, whether it be the amount of space in Canada, it just clearly to me at least points out the wisdom in continuing to take the

system that we have, not privatize it, provide the personnel and

the equipment to provide the service that we provide, which is excellent.

And one last point, Mr. Chairman, and I will yield back my time,

as we increase through technology the ability of less number of

folks to do more, that same increase in technology, we need to be

aware of, also creates a larger workload for our controllers. Because as you look at RVSM, for instance, which technologically

gives us the ability to move and separate traffic, but with closer

tolerances, that raises the pressure and the stakes and the workload for the controllers. So technology does help us, but it also increase the need to have that professional work force.

Thank you, Mr. Chairman. I yield back.

Mr. MICA. Thank you. Ms. Norton?

Ms. NORTON. Thank you, Mr. Chairman.

Mr. Dillingham, I appreciate the background that you provided

when you indicated that we had twice as many air controllers and

hugely more traffic. The Ranking Member has indicated in one of

his cities alone, they had more traffic than for example in Canada.

And I note that in answer to I believe a question by a member before me, you indicated that there was no reduction in air traffic

controllers. So whatever we are talking about, the number of controllers is not likely to be reduced no matter what we do, given

what you have found if these efficiencies were not made by reducing air traffic controllers.

I must say to Ms. Johnson, you indicated that small communities

were told, you will provide services to small communities, but my

quick read of your GAO report indicated one, that there had been

consolidation of facilities and two, that there had been subsidy of

small communities. I do not think you can tell a private business,

hey, you are going to provide services to this part of the country,

which of course will lose you money. If you’re going to do that,

somebody is going to have to make up for that.

Do you agree that you couldn’t command a business to provide

service where the service is losing money and that somebody would

have to pick it up and that what you found was consolidation

helped to reduce that need, and if that there was anybody who

stepped in it probably was the government itself to enable small

communities to continue the service they received before?

Mr. DILLINGHAM. Yes, ma’am, that is true. In fact, as I said, the

legislation that created some of these corporations or commercial

exercises actually told them that they had to provide the service.

In the United States, I am not so sure how this would all work out.

Because we also have the notion that we have a national system

and it’s part of our national infrastructure and should have as

much access as possible for all the population. So it would be,

again, an issue that would have to be dealt with in terms of thinking about commercialization.

Ms. NORTON. I need to know how the government, you tell us

and your report tells us that they sold their operation, the govern-
15

ments sold their operations or they are owned or partially owned.

You owned that the government doesn’t have to approve what

these ‘‘private’’ corporations do. Now, the government, is there a

board where the government has membership on the board? How

does the government maintain its legitimate interests in its own

traffic control system?

Mr. DILLINGHAM. For the most part, it’s a hands-off for the government. The government still maintains the safety oversight part

of air traffic control. But for the most part, it’s hands-off for the

government.

Ms. NORTON. What does that mean, partially owned by the government, then?

Mr. DILLINGHAM. It means that the government may be a share

owner of the corporation as such.

Ms. NORTON. How much of a share? I am trying to understand,

whether the government is just like every other shareholder with

a few shares here, or whether the government is a major shareholder. Could you give me some examples of what interests, financial interests the government has here that would of course allow

it to exercise a fair amount of control in that way?

Mr. DILLINGHAM. I think the most prominent example is in the

U.K., where the U.K. government still owns about 49 percent of the

air traffic control system.

Ms. NORTON. I just think that is very important. You can say

that is hands-off if you want to, but in the commercial world, if

you’ve got 49 percent of the ownership, you can have perhaps more

to say than anybody else about what that corporation does. Very

important piece of information.

You say on page two of the GAO report something that really

caught my eye. I am reading, ‘‘Comparisons of performance of before and after commercialization are generally not feasible because

data for assessing performance are typically unavailable for the

time before commercialization,’’ etc. You say 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 audit.’’

Hey, sounds like to me that there’s no basis, there’s no before

and after here, not because of anything you’re responsible for but

because the data, the information to know whether improvements

in performance or declines in performance have taken place is simply unavailable. Certainly it would be difficult to make a judgment,

given what your report says it eh absence of any measures to make

a judgment about. That gives me some concern. I wonder if it gave

you any concern as you looked at trying to assess these various systems?

Mr. DILLINGHAM. Yes, Ms. Norton. That is one of the things that

we pointed out as a need. If anyone is thinking about moving from

a government based operation to a private sector operation in order

to know from before and after, you need to have those baseline

measures. The situation that we walked into was that in many

cases, the before data was not available. So we were left with,

okay, let’s talk about what has happened since commercialization.
16

And that is sort of what we were left with. So we agree with you

that information is definitely necessary if you want to make those

kind of before and after comparisons.

And in some cases, like Australia and New Zealand and to some

extent NAV CANADA, they have been doing this for about 10 years

now. So we do have sort of that kind of longitudinal data, but nothing that goes before they were privatized or commercialized.

Ms. NORTON. Thank you very much. Finally, I note that you indicate, of course, that there was financial information. Of course, we

always have that kind of information and it’s important information. And of course, looking at financial information alone, you can

always say that something saves you some money.

But if you’re talking about an operation that is as vital to the

security of the country as your air operations, saving money is one

in a very long list of factors that you would have to consider, particularly if you did not know that saving money might have had

something to do with poor performance, would you not agree?

Mr. DILLINGHAM. Yes, ma’am.

Ms. NORTON. Finally, let me ask you, with the savings that were

found that allowed better investments in modernization, which is

of course most intriguing to us, because that also has a lot to do

with security, can you tell us where the bulk of the savings occurred? How were the savings for the most part made? It doesn’t

seem to me you pluck out a few middle managers and all of a sudden you get a cheaper system. One, do you regard the savings as

substantial? And two, would you give me the one or perhaps two

or three factors that are the cause of what savings you found?

Mr. DILLINGHAM. Well, I will not try to speak for the people who

are coming up after me. But our information is that indeed, it was

a combination of consolidation of facilities, staff reductions and

greater efficiency in passing traffic through the system. All of those

things taken together were the contributing factors for cost savings.

Ms. NORTON. Of course, the greater efficiency in passing traffic

through the system is hard to evaluate here, given what you say

on page two about performance before and after. It just seems to

me, Mr. Dillingham, doing the best you could, there’s a lot of guesswork involved here, because the absence of data which you honestly report on performance, if we could somehow break into the

cause of these savings, for example, and again, you tell me the controllers, have the same number of controllers, that is labor-intensive. We know that there is some savings from consolidation. That

can happen here, maybe should happen here. But you know, there

are a lot of members of this Committee that you would have to

drag kicking and screaming, but nevertheless.

And we know that probably there was some subsidy when there

were operations pulled out of small communities. So of course, that

wouldn’t figure into savings. As I hear you, we would somehow

have to penetrate what the word efficiencies meant. That is very

difficult to do, given the absence of performance data, even though

I think your report is very informative. It would appear that that

is where the bulk of the savings lie, and perhaps looking at these

systems over time will allow us, as you say, given the longitudinal

number of data, to come to some notions of how so radical a change
17

could be made. Obviously in the smaller systems that are not as

subject to attack as ours, it may have made a great deal of sense.

What most intrigues me about your report is that without moving to privatization, I would like to at least adopt whatever efficiencies you have found in those systems that might be transferable to ours notwithstanding privatization.

Thank you very much, Mr. Chairman.

Mr. MICA. I thank the gentlelady.

Do other members have questions? Mr. DeFazio.

Mr. DEFAZIO. Thank you, Mr. Chairman. I apologize for being

late. I had a number of constituents in.

It is good to see you again, Dr. Dillingham, and discuss this important topic. I have a couple of concerns here, and I understand

some of this has been discussed previously in terms of relative efficiency movement, size of system, those sorts of things. I concede at

the beginning there’s only one part of the Federal Government

worse at acquisition than the Pentagon, and that is the FAA. That

seems to me to be an area where we should be focusing all our

major efforts at cost savings and reform when you look at the

promises and the potential cost of the air traffic control system

modernized, and where we are today. That is the greatest failing.

I do not find the failing with the personnel, the controllers and the

others who are putting up with the obsolete technology and trying

to do their job and doing it more efficiently with, in many cases,

a patchwork of technology.

A couple of questions. I am sure you’ve met Ms. Dunwoody, have

you not? She’s an MP from Britain, have you ever had the opportunity to meet her?

Mr. DILLINGHAM. I haven’t had the opportunity.

Mr. DEFAZIO. Well, she’s delightful. She chairs the Transportation Committee of Parliament. I have had the opportunity to

spend some time with her. She thinks that their privatization has

not been wonderfully successful. She points to a couple of things.

She points to the fact that since it is traffic-dependent that it had

to be bailed out after 9/11 when traffic dropped off rather dramatically. There had to be another injection of public funds into the system.

She raises concerns that profit motive could degrade safety and

I would like you to comment on that. Efficiency targets and overstressing staff can also possibly jeopardize safety. And you know,

they have really exposed, as she says, their system much more to

the cycles of the market in terms of the industry because of the

way it raises revenues. Could you comment on those things?

Mr. DILLINGHAM. Yes, sir. Without a doubt, the U.K. had to get

an infusion of capital after 9/11. And again, I am not sure that that

was any different than any other air navigation service provider,

that those that didn’t have

Mr. DEFAZIO. Well, excuse me, just one thing, though. We didn’t

have to increase our support of our system, we just maintained it

as it was.

Mr. DILLINGHAM. Absolutely, Mr. DeFazio.

Mr. DEFAZIO. You said any other system.

Mr. DILLINGHAM. Any of the five that we looked at basically had

problems with having enough funds to cover that situation of the
18

deep drop-off and the cyclical nature of traffic. One of the enduring

issues that comes up when people talk about commercialization is

sacrificing safety for profit. And from our work, what we have seen

is that that is recognized by those countries that haven’t commercialized their air traffic services and have maintained the safety

function with the federal government. So that notion is at least addressed, not totally, but it’s clearly addressed.

Mr. DEFAZIO. So do you, in quantifying the productivity or total

costs, do you attribute the cost of the safety function back onto that

and say, well, since previously they were integrated now they are

separated, and the public is totally supporting that, do you add in

the cost of that when you are figuring productivity and cost of the

system?

Mr. DILLINGHAM. We have not done it that way.

With regard to staff, that is also a concern that we were able to

get some information about. And in fact, the issue of controller fatigue and under-staffing are issues that are addressed in the various countries to prevent that from reoccurring. It did in fact occur

early on, there were some problems in some of the countries, but

that has been codified, and it shouldn’t happen any more. If it does,

it has to be reported to the central safety authority.

Mr. DEFAZIO. So the safety authority or some agency of those

governments has set like work duty time requirements or things

like that that are strictly enforced?

Mr. DILLINGHAM. Yes, sir. And if those things are breached, a report is made to that authority.

Mr. DEFAZIO. Okay. And then what about the exposure to market cycles? Given the fact we are about to see the collapse of a

number of major airlines, well, they’ve already collapsed into bankruptcy, but perhaps whether they will continue or not, major

changes that are pending in the industry, the industry saying it’s

paying too much now, how would that all work out?

Mr. DILLINGHAM. Well, as you know, Mr. DeFazio, when there

are fat times in the aviation industry, nobody has a problem paying

whatever the cost happens to be. But we are also into this cyclical

kind of business, as well as those extraordinary events that happened over the last three or four years that took a hit on all of

these ANSPs. I do not think there is any way that one could have

taken enough money out of the system to sort of carry you through

at that point in time.

So that is clearly one of the issues that has to be addressed.

From our knowledge, most of the systems that we are looking at

are trying to find a way to cover those cyclical downturns in some

form or fashion. It is truly an unresolved issue. No one thought

about it when these things were first formed, because you can handle 5, 6, 8 percent perhaps. But when you get 20, 25 percent drop,

it’s a different world.

Mr. DEFAZIO. Okay. Great. Thank you very much. My time has

expired. Thank you.

Mr. MICA. Thank you. Any other questions for Mr. Dillingham?

Just a couple of quick questions. Did you do a comparison of cost

per operation? Of course, the United States had many more operations, but you have an overall cost of the system versus these

other costs per operation.
19

Mr. DILLINGHAM. No, sir, we did not do any unit cost pricing

comparisons. We didn’t do any comparisons, actually, between the

United States and these others, or even among

Mr. MICA. Can you do that? Can you look at that?

Mr. DILLINGHAM. We can provide that information to you.

Mr. MICA. That would be interesting.

[The information follows:]
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21
22
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Mr. MICA. The other thing, were any of the controller benefits reduced after this privatization? Did you see any of the benefits?

Mr. DILLINGHAM. I do not have any knowledge of that, Chairman

Mica. When we talked to the controllers, in all the places that we

talked to, they basically were in favor of this commercialization,

and in part, they were in favor of it because of the wage freeze and

other under-investment that had taken place.

Subsequent to that, there is a little angst out there from some

of the controllers, about their work conditions and the like. But we

didn’t hear any salary issues.

Mr. MICA. You put a chart up that showed the number of controllers to the number of personnel and FAA versus the other entities.

We had many more people actually doing air traffic control work

than we had total. The percentage was very, very low in the United

States compared to the others, is that correct?

Mr. DILLINGHAM. Yes, sir.

Mr. MICA. Okay. I noticed when I visited NAV CANADA, the

working conditions for the Canadian air traffic controllers were a

thousand times better than what I saw when I visit the air traffic

controllers—did you visit any of the NAV CANADA facilities? Are

they all privatized?

Mr. DILLINGHAM. Yes, sir.

Mr. MICA. Did you see the same thing, or was that just an aberration? May they just showed me the nice stuff.

Mr. DILLINGHAM. I do not know, that could be the case, Mr. Mica.

Mr. MICA. I saw an exercise room, large screen TV place, coffee

bar, nice facilities. It is a pretty stressful job, but what they

showed me was more attuned to what the private sector offers as

amenities to workers as opposed to the, any time you walk into a

government building, including down the hallway here, I get a little bit repulsed by what I see.

Mr. DILLINGHAM. I have been in many U.S. air traffic control facilities, and I have not seen any that fit the description that you

just gave of the NAV CANADA facility that they showed you. And

I would assume that not much of that exists, since in the last hearing that you had, you heard the story about the need for X billions

of dollars for facility modernization.

Mr. MICA. I was just stunned at the conditions for their air traffic controllers under the private system.

Mr. DEFAZIO. Mr. Chairman, just for a second?

Mr. MICA. Did you go with me? I can’t remember.

Mr. DEFAZIO. Not on that trip, Mr. Chairman. But I suggest

maybe we could just not privatize the whole system, but we could

buy private health club memberships for our air traffic controllers.

Mr. MICA. That sounds like a suggestion that would come from

your side of the aisle. I appreciate that.

[Laughter.]

Mr. MICA. Redundancy of systems. Our system has many multipliers of additional traffic. Was there less emphasis on redundancy

of systems that you observed in any of the other privatized or semiprivatized operation?

Mr. DILLINGHAM. We didn’t get into the details of the amount of

redundancy. But just knowing how air traffic control works and

has to work and the required safety elements, I would be totally
24

surprised if there was not redundancy in both the foreign air navigation service providers and clearly, with our system.

Mr. MICA. Any others? Mr. Costello, any last questions?

Mr. COSTELLO. Dr. Dillingham, in looking at the system in Canada, you mentioned a few minutes ago that there is a lack of involvement with the government with the air traffic control system.

I wonder if the lack of involvement or the leadership on the part

of the government, did you detect any problems in the system? In

other words, do you think that there should be more involvement

by the government or not?

Mr. DILLINGHAM. I think that Canada has chosen to set itself up

in the way that this corporation is set up. So I am not sure that

we can comment on that.

In terms of the people that we talked to while we were there,

there is a certain amount of angst that we hear from the major carrier in Canada with regard to how things are being run at this

point in time. But it was not the overwhelming message that we

got from the stakeholders in Canada.

Mr. COSTELLO. Let me give you a quote from a speech on Monday

of this week that appeared in Commercial Aviation Today for April

19th, 2005. It quoted the CEO of Air Canada, Robert Milton. This

is what he said to a group of Montreal business leaders, part of his

speech. He said, ‘‘The damage inflicted by the lack of government

leadership in the airline industry over the past few years will be

felt for many years to come.’’ There are a number of other things

Mr. MICA. Could I interrupt and add—he also said an abysmal

lack of governance over air traffic control in airports. Are you

aware of this and is it true?

Mr. COSTELLO. That is a part of it. But you have to look at the

article. It says—I could read it if you’d like me to.

Mr. MICA. No, no. I wanted to make sure the rottenest, meanest

part got in there.

Mr. COSTELLO. Well, it says, the damage inflicted by the lack of

government leadership. I think it’s a serious comment and that is

why I asked the question. I mean, would you agree, he is saying

here that the government should be more involved in the air traffic

control system than what it is, and that the damage inflicted by

the lack of government involvement will be felt. He also goes on to

say, and Chairman Mica referred to it, he also goes on to say in

the speech that to make matters worse, there is an abysmal lack

of governance over air traffic control and airports. I could go on and

on.

Yesterday he said in this speech, on Monday, that the fees in

Canada are among the highest in the world. So I would just one,

ask unanimous consent to enter this statement into the record and

two, to ask you at some point, Dr. Dillingham, to look at this article and statement and get back with us with your response.

Mr. DILLINGHAM. Yes, sir.

[The information follows:]
25
26

Mr. MICA. Without objection, that statement will be included in

the record. Maybe we could also get our NAV CANADA folks to respond.

Thank you so much for your work and for being with us. We will

probably see you again soon.

Mr. DILLINGHAM. Next week.

Mr. MICA. Thank you.

Okay, we have got our second panel here, Mr. John Crichton,

President and Chief Executive Officer of NAV CANADA; and Mr.

Dieter Kaden, Chief Executive Officer and Chairman of the Board

of Managing Directors of DFS Deutsche Flugsicherung GmbH, German Air Navigation Services.

So Mr. Kaden and Mr. Crichton, welcome. Mr. Crichton, we will

hear from you first. President and Chief Executive Officer of NAV

CANADA. We have stirred it up a bit, and we are anxious to hear

your testimony.

TESTIMONY OF JOHN W. CRICHTON, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, NAV CANADA; AND DIETER KADEN,

CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD

OF MANAGING DIRECTORS, DFS DEUTSCHE

FLUGSICHERUNG GMBH (GERMAN AIR NAVIGATION SERVICES)

Mr. CRICHTON. Chairman Mica, Ranking Member Costello, other

members of this very distinguished Committee, on behalf of NAV

CANADA’s 5,400 employees, I am very pleased to accept the invitation to testify here today.

Our dedicated employees are justifiably proud of what NAV

CANADA has accomplished since the company began operating the

Canadian air navigation system in November 1996. On their behalf, I appreciate the chance today to describe the background of

NAV CANADA, our structure and our continuing successes improving safety, lowering fees and accelerating air traffic modernization.

At the outset, let me emphasize that we have an excellent working relationship with the FAA. We work seamlessly with the FAA

on a daily basis, safely and efficiently exchanging the highest volume of transborder traffic in the world. It is a partnership that

works very well. No day was the strength of our cooperative relationship illustrated more clearly than on September 11th, 2001.

Working with the FAA and NORAD, we safely cleared Canadian

skies of more than 1,500 aircraft, including hundreds of jumbo jets

inbound into the U.S. from Europe and Asia.

Our employees are deeply grateful for the appreciation expressed

by both President Bush and Secretary Mineta in recent speeches.

We are very pleased that we were able to stand by the U.S. on that

fateful day.

Attached to my testimony, Mr. Chairman, are a number of slides

that elaborate on several key points. First, NAV CANADA is a private corporation that operates on a not-for-profit basis. Transport

Canada, which prior to November 1996 owned and operated Canada’s air navigation system, now functions solely as our arm’s

length, independent safety regulator. The Canadian government

designates three directors to serve on our 15 member board. The

Federal Government, however, does not fund NAV CANADA, nor
27

does it guarantee our debt or function as a financial backstop. We

are financially self-sufficient in all respects.

NAV CANADA is organized as a non-share capital corporation.

We have no equity and, accordingly, no need or pressure to generate financial returns for shareholders. Instead, our four ‘‘members’’—commercial carriers, the Canadian Government, our unions

and general aviation—participate in the governance of the company

by appointing directors in varying numbers. We rely on debt financing in the public markets, which is less expensive than equity

funding.

In 1998, the Canadian Government repealed the Air Transportation Tax that previously funded air navigation services provided

by Transport Canada. In its place, we phased in a service-based fee

system developed in consultation with customers and approved by

the stakeholder board of directors. Those fees are designed to recover our costs. For commercial carriers, who provide the vast majority of our fee revenue, we use a weight and distance formula

based on ICAO principles, which is essentially the value of service

principle, to recover all of our costs.

Safety has improved on NAV CANADA’s watch. As measured by

actual losses of separation, safety is better today than when air

navigation services were provided by Transport Canada. Among

the key contributing factors are rigorous safety oversight by Transport Canada, which now functions as a independent arm’s length

safety regulator; internal safety initiatives we implemented that

did not exist previously and the deployment of safety enhancing

modern technologies.

Fees have declined. Today, commercial customers pay around 20

percent less than they would have under the old Air Transportation Tax. Prior to September 11th, 2001, fee savings were even

greater than they are today. However, in the wake of September

11th and other air traffic depressing events, such as SARS, we

were forced to raise fees since cost mitigation efforts alone were not

sufficient to offset lower movement-based fee revenue.

However, with the return of traffic growth, we anticipate that we

can return to our strategy of managing costs to be less than traffic

growth so that our customer charges will decline over the long term

as they were doing prior to 9/11.

Modernization has accelerated and NAV CANADA has gained

recognition as a world-class developer and vendor of leading edge

ATC systems. We have fully implemented numerous modernized

systems that enhance safety, increase system capacity and improve

efficiency. There are other, new modernized systems in the pipeline. We have made such progress in modernization that we are

now selling our systems to leading air navigation service providers,

such as the U.K.’s National Air Traffic Services, which purchased

both our oceanic and automated tower/terminal systems.

NAV CANADA has also dramatically streamlined its capital

spending and system development processes. We spend about onehalf of Transport Canada did and are generating three times the

product twice as fast.

Mr. Chairman, I will just make one comment based on the previous discussion. There was quite a lot of discussion about traffic

volumes and I will have to talk to Gerald afterwards in terms of
28

where he got the figures. But the figures that we work with, and

we do this in conjunction with our counterparts at the FAA, the actual movement comparisons between the U.S. and Canada is somewhere between 45 and 50 million in the U.S. and 6.5 million in

Canada. Where these other figures came from, I am not sure. But

certainly somebody should rationalize that for you. I just wanted

to point that out.

But I will conclude my remarks, again, Mr. Chairman, by thanking you and other members of the Committee, and I will be pleased

to answer your questions.

Mr. MICA. Thank you, and we will hear from Mr. Kaden with the

German Air Navigation Services. Welcome, sir, and you are recognized.

Mr. KADEN. Thank you very much, Chairman Mica and Ranking

Democratic Member Costello, members of the Subcommittee. First

of all, I would like to thank you very much for your kind invitation

and for the opportunity to once again, after 10 years, give you an

overview on DFS, the German air navigation services organization.

At this time, I will also elaborate on the planned privatization of

the German organization as well.

Let me have a short look back. While airlines and major airports

were operating according to private sector principles, the German

air navigation services organization was structured as a federal authority, like the FAA, for 40 years after 1992. Due to this bureaucratic structure, the air navigation services in Germany lacked the

required flexibility and increasingly proved to be a bottleneck within the air transport system.

Believe it or not, ATC projects continuously experienced problems in terms of cost, schedules and performance and the organization was thus unable to deliver value for money. An organizational

culture to encourage collaboration with customers was not in place.

For these reasons, politicians, the ATC associations, as well as all

our users, strongly advocated the corporatization of the federal authority as early as in the 1980s in an effort to modernize the nation’s air traffic management system.

Parliament then amended the German Constitution and the

Aviation Act in 1991 to corporatize the air navigation services

along the lines of which we are operating today. On January 1st,

1993, DFS began to operate as a corporatized enterprise in line

with private sector principles as what we call in Germany a GmbH.

What have we achieved? First, the management of air navigation

services. The Ministry of Transport has the regulatory oversight as

stipulated by law. The MOT is responsible for the legal and functional supervision and plays a supervisory role in all issues relating

to safety, user charges, information and liability. In accordance

with the Chicago Convention, the MOT is still the authority for

international agreements as well as for participation in supranational and international organizations, such as ICAO.

The DFS supervisory board, based on the private law, consists of

six representatives of the owner, the state, and six representatives

of the employees. The chairman of the executive committee is, in

the meantime, a former minister of transport and now a vice president of an international industrial consulting firm. Concerning the

organizational management setup, we have set up a process struc-
29

tured organization with six business units, a group of corporate development centers and corporate service centers following the key

principle: ‘‘structure follows strategy.’’

DFS is financially absolutely autonomous. It finances itself mainly by drawing on the capital market program. The program

amounts to 1 billion Euro. The net financing volume after deduction of the financial investment is currently about 90 million Euro.

In addition, DFS disposes back-up credit lines between 100 and

200 million Euro.

The interest rates we are paying are based on the existing rating, which up until now has been affirmed as AAA by Standard

and Poors and Moody’s and similar, like NAV CANADA. DFS has

not received, from 1993 up until today, any Federal subsidies, since

the initial restructuring. On the contrary, DFS pays the government for all ANS related costs, especially the costs of the Department in the Ministry of Transport, dealing with ANS as well as the

fictitious pension costs of those civil servants who used to work for

the air navigation services, as well as tax dividends and amortization of a loan. Revenue in our organization stems mainly from user

charges for enroute and terminal services and of non-core business.

Concerning safety, our primary corporate objective, which is the

safety of air traffic, has by no means suffered. On the contrary, it

improved dramatically. In 1995, we introduced a corporate safety

strategy which led to the development and implementation of our

today’s safety management system, which is in line with international standards and best practices. In addition, the Euro controlled safety regulation commission, which was established in

1998, adopted several safety regulatory requirements on ATM safety management to be fulfilled by the member states.

In 2004, last year our safety management system was formally

audited by an external company and certified by our regulator to

be fully compliant with the Euro control safety regulatory requirements.

Efficiency. Our efficiency has, from our point of view, significantly increased. Despite the rise in traffic, Europe has seen a general reduction in delays caused by air traffic flow management

measures. This is thanks to capacity increases by the air navigation services organizations.

Certainly one important aspect is that since 1994, we in Germany have been able to use the scarce resource ‘‘airspace’’ in a

more flexible and efficient way, because regional military air traffic

control is entirely integrated into our corporation, which is still,

from my point of view, a unique situation in the world of ANSPs.

It is one organization using one sky according to the flexible use

of airspace.

DFS in Germany and Europe is synonymous with punctuality.

Over 96 percent of all flights controlled by DFS reach their destination without any ATC related delays. Numerous cost and efficiency

control measures which have been presented to the GAO as well,

along with a balanced score cord, have been implemented, which

could not have been implemented at that time as a Federal agency

in former times.

Concerning stakeholder issues and customers, the corporatization

of the air navigation services in Germany in the early 1990s was
30

in line with the political mandate to become more productive. To

meet our customers’ requirement to perform efficient air traffic

services, DFS has taken far-reaching action to reorganize the company. This has led to optimized airspace structures and enhanced

operational processes.

An essential part of the reorganization was in the first step up

through 1998 the integration of 17 approach control units with the

4 area control centers. The follow-up step is the consolidation of the

control centers by reducing the number of these centers by two,

transferring Dusseldorf to Langen in 2002 and Berlin to Bremen in

2006.

When the center consolidation concept was approved in 1996,

cost savings of up to over 50 million Euro were envisaged, and in

the meantime, had really been achieved. Our customers benefitted

two ways. Firstly, they are able to operate their aircraft even more

efficiently; and secondly, we pass on our cost savings to airspace

users. One should have in mind that when the former agency was

corporatized, our customer knew that we would lose government

subsidies of up to 100 million Euro per year, and this would lead

to an initial increase of user charges to offset the expenses.

And their support has paid off. Productivity has increased. Between 1993 and 2005, the enroute traffic increased by 175 percent,

whereas the user charges only increased by 0.6. So almost flat. For

the terminal area, it was in the same period, 1993 to 2005, air traffic increased by roughly 50 percent, whereas user charges were reduced by 37 percent. So it pays off.

A few words about the employees. A project such as the

corporatization could only be successful with the support of motivated employees. For 40 years, German air traffic controllers had

really been at the lower end of the European pay scale. Today, air

traffic controllers worldwide are earning salaries which are at the

top of the scale. In Germany, they are able to earn up to 25 percent

more in net terms than prior to corporatization. However, not all

employees in the operational services reach the top salary. For the

first time in the history of the air navigation services, our collective

agreements with the unions take account of the employee’s work location, their performance and the workload. Salaries of employees

in non-operational areas are oriented toward market conditions.

Concerning modernization, the technical modernization, as Mr.

Dillingham reported, we use state of the art tools, for example, the

SAP for a structured project management process. We built up an

R&D unit to evaluate new technologies and simulate new systems

operations. We established in-house capabilities for software development and modernized the entire ATM system and the entire

CNS technical infrastructure. The whole capital expenditure program, which was realized between 1993 and 2004, amounted to up

to over 1.5 billion Euro. This corresponds, ladies and gentlemen,

really with the modernization of almost everything.

Concerning our organizational setup, apart from these, we modernized our entire organization as well. We developed a financial

investment strategy which is based on the principle that all

shareholdings or corporations have to provided an added value to

DFS, and of course consequently to the shareholders and the stakeholders. This added value may be accomplished in different ways,
31

such as reducing costs for support processes, a defined return on

investment in the form of dividend payments, investment into future markets and technologies to secure revenue in the future, just

to name a few.

Following this rationale, up to the present day DFS has founded

a 100 percent subsidiary to hold shares in the EGNOS, which is

comparable to the GPS and the future system of Galileo, the

EGNOS operational model. We furthermore founded an organization which is responsible for flight calibration. It is a joint venture

company where shareholders are DFS, 55 percent, and the Austrian and Swiss ANSPs hold the rest. We founded a European

group, AID, with all the necessary information for flights, putting

it together. This company is located in Spain, in Madrid, a joint

venture once more with DFS with the Spanish organization,

AENA, and an Austrian high-tech company.

With the implementation, which you might pretty sure know of,

of the Single European Sky drives of the European Union, ANSPs

in Europe will have to become more competitive in future in order

to safeguard their future existence in the long run. This entrepreneurial approach, ladies and gentlemen, can only be achieved by

a company where government holds a minority stake only. This is

based on political principles of the government in Germany.

Since 2004, the German Ministry of Transport has been preparing for the privatization of DFS. The relevant government decisions

were published on the 15th of December last year. The key elements in the privatizations are the government wants to sell 74.9

percent of DFS, retain 25.1. Air traffic services remain still a state

task, it’s a sovereignty issue. The civil-military integration of ATC

will be maintained. A national supervisory authority will be established. And the cost, which is very fundamental, for the supervision

will be financed by user charges.

Ladies and gentlemen, to sum it up, the corporatization of DFS

in 1993 has marked the beginning of a new era in the history of

air navigation services in Germany. We changed the entire civilmilitary airspace structure, reducing the number of sectors and increasing their efficiency. We modernized almost all CNS and ATM

systems. We reorganized our organizational structure, changed half

of all management in the beginning and increased productivity

while enhancing the safety. We handled a traffic increase of 175

percent while user charges increased by 0.6 percent. We changed

the corporate culture from a Federal authority to a company operating in a competitive environment.

And the driving force, if you would ask me, behind all of this is,

we want to deliver value for money for the benefit of all of our

stakeholders. Chairman Mica and Ranking Democratic Member

Costello, members of the Subcommittee, thank you very much for

your kind attention. I am happy to answer your questions.

Mr. MICA. Thank you.

I have a couple of quick questions. First of all, as far as your air

traffic controllers, are they all members represented by unions or

some employee representational group, yours?

Mr. KADEN. Yes, all of them, 100 percent.

Mr. MICA. And yours?

Mr. CRICHTON. Yes.
32

Mr. MICA. A hundred percent? Okay. And you said they experienced a 25 percent increase in pay. Over what period?

Mr. KADEN. Over the last almost 10 years.

Mr. MICA. Okay. What about yours, Mr. Crichton?

Mr. CRICHTON. It is about 50 percent over the last eight and a

half years.

Mr. MICA. Okay. Is it true that NAV CANADA handles all of the

TransAtlantic in the northern Atlantic corridor air traffic, NAV

CANADA?

Mr. CRICHTON. A little over 90 percent of the North America-Europe traffic passes through

Mr. MICA. A little over 90 percent?

Mr. CRICHTON.—through our oceanic system, yes.

Mr. MICA. The other question I had is, there was an accident

some time ago over Germany where a couple of planes collided. I

think it was over the German territory. Can you explain what happened there, and did privatization have any contributing responsibility for that?

Mr. KADEN. No, not at all. It happened in the German airspace

in 2002, first of July, under the responsibility of a delegation of

that air navigation service of our Swiss colleagues. So it was Sky

Guide responsible for that air traffic control measures over the

Lake of Constance. It was based on an agreement between the

state of the Federal Republic of Germany in the beginning of the

1950s, an agreement with the government of Switzerland, where

this small region above the Lake of Constance is still under the responsibility of Switzerland.

Concerning liability, both of our organizations, Sky Guide in

Switzerland and DFS in Germany, more or less have an assurance

in taking care of that from both sides through an insurance company.

Mr. MICA. Thank you. Mr. Costello.

Mr. COSTELLO. Thank you, Mr. Chairman.

Mr. Kaden, you mentioned that your controllers have seen about

a 25 percent increase over a 10 year period, is that correct?

Mr. KADEN. Yes.

Mr. COSTELLO. Which averages about 2.5 percent a year over a

10 year period. I am wondering, as far as benefits are concerned,

pensions and other things of that nature, how the benefits received

by the air traffic controllers since DFS took over compares to what

the benefits were before the takeover.

Mr. KADEN. One of the major changes indeed was that when we

took over in 1993, all the employees, one of the reasons were that

they have to leave the clerical working conditions of the former

agency, they left that, they moved into a private company, based

on a private contract which we negotiated with the unions at that

time. Believe it or not, in the meantime, out of our entire organization, it was roughly 5,500 people, only roughly 400 did not change.

Out of the controllers, we had roughly 2,400 including flight data

assistants. There were 24 controllers which remained as clerical

services employments. And we take care of the full pensions, as to

the historic data up to the change, and then from the 1st of January 1993 onwards, we did it on a private base. It is much better

than the year before.
33

Mr. COSTELLO. How did you deal with the downturn of the economy after September 11th? Were you forced to increase user fees,

postpone capital improvements? Did you receive any government

loans or an infusion of cash?

Mr. KADEN. The first decision after the downturn of 2001, 2002

and even the beginning of 2003 was more or less to very limited

increase our user charges, in agreement with the customers, and

in agreement with the government. This entire, even small increase of the charges affected our equity. We created a loss as a

company, which at that time were more than 30 percent of our equity. So we created a private company loss based on that downturn.

From 2003-2004 onward then we increased in one step, once

more, in small steps the user charges. Then from 2004-2005 and

onward we are reducing, as I mentioned, once more the ATC entire

user charges below the level of the downturn phase of 2001.

Mr. COSTELLO. Mr. Crichton, same question for you as well for

NAV CANADA.

Mr. CRICHTON. I guess we were the hardest hit of anybody. We

had 9/11, we had SARS, we had traffic dampening effect of the Iraq

war, and then we had our biggest customer go into chapter 11. So

I do not think any other ANS in the world was hit as hard as we

were over the last three years.

We had money in reserve, Gerald referred to it as a rainy day

fund. We used that up first. We did increase our rates in a measured way, bearing in mind the industry was suffering at the time.

We also ran a deficit for two years. We have the financial strength

to do that, so we did it.

And we just managed it, we managed expenses and we are back

on the beach now, we are back into a positive balance in the rate

stabilization fund, the traffic is back to normal. It was a very manageable situation.

Mr. COSTELLO. And the fee increases, can you give us some examples of how you were forced to increase fees by percentage or

dollar amount?

Mr. CRICHTON. At the time 9/11 happened, the fees at that time

had a 6 percent discount, sort of a rebate, if you will, attached to

them. We let that rebate lapse at the end of 2001. Then over the

course of the next two years, we increased fees by 12 percent. Prior

to that, we had reduced them by 11 percent.

If you look at our costs today, on a unit cost basis, on a cost per

weighted charging unit, put it on the same basis that airlines

measure their costs for available seat mile, our costs in real terms

are 15 percent less than they were when we started in 1996.

Mr. COSTELLO. Did you receive an infusion of cash from the government at the time, in addition to increasing the fees?

Mr. CRICHTON. Zero.

Mr. COSTELLO. And capital improvements, were you forced to either delay or postpone capital improvements?

Mr. CRICHTON. We deferred a few things that impacted our capital spending by maybe 10 percent, just through deferrals.

Mr. COSTELLO. Mr. Chairman, I do not have any other questions.

Mr. KUHL. [Presiding] Gentlemen, I have just a couple of questions, do not want to delay your presentation any longer than necessary. But I am quite interested, number one because of the size
34

differences of the various organizations, particularly that of this

country compared to yours. I am interested to know really what the

major, what the biggest impediment to the transfer or transition

over to commercialization was in each one of your operations.

Mr. CRICHTON. I think the biggest challenge, and we are still

dealing with it to a certain extent, is the culture of the people. It

is taking what previously had been a government organization

since the very beginning of air traffic control, 50, 60 years, and

turning it into a private business and getting people, management

and employees alike, to think in a performance-based fashion of a

business and relating it to what they are doing, that we have customers, they pay us for the service, we are obligated to provide the

service, we are obligated to do it in a safe way and an efficient way.

And just to break that mind set of being a government and that

we are going to do things differently, we are going to do procurement differently, we are going to do R&D differently, there is accountability to deliver on time, on budget, and so on. That is probably the biggest challenge we deal with. We are coping with it successfully in terms of the rest of it. It is all the usual business challenges that you will find in any business, whether high tech or otherwise. It is simply the application of sound management principles

to deal with those issues.

Mr. MICA. Mr. Kaden?

Mr. KADEN. I would fully support that. It was one of my major

mistakes when I took over the organization in the beginning of the

1990s, where I estimated that this cultural change, by getting rid

of the bureaucratic systems and decision making processes and taking over responsibilities and being a more customer-driven organization will take time, at least five to seven years. After looking

back in the meantime now I know it sometimes happens, you need

a decade or even more for that.

We are a small organization. When we started, we changed almost half of our management. They had to run through an assessment center and we changed them. Then we hired a couple from

the outside. Then in the meantime, based on the pension funds of

controllers, half of them had really changed and had been hired

from the outside and trained in our own organization. It takes time

to exactly change the mind set of being a monopoly organization instead of preparing for a competitive environment where are a couple of ANSPs are developing the future. That is the major challenge.

One minor point might be that management positions in Germany, we are lacking of some ladies.

Mr. KUHL. And along the same vein, you both speak, at least

what I am hearing, as though these transitions have been successful. If you were to look at that success, what would you say was

the most acceptable successful part of the transition to the general

public in your country?

Mr. KADEN. I might say that from my point of view, with all due

respect to my colleagues, it’s leadership. You have to start from the

top. If you are hiring some new management people and you have

to really put that and push that through to the organization. Give

them the vision, try to define a mission statement and then live it.

Try to day by day underline that what you are talking, at least the
35

president or CEO of an organization, and try to convince the people

to do it.

Mr. KUHL. Mr. Crichton?

Mr. CRICHTON. Mr. Chairman, the motivating factor behind the

privatization of the Canadian ANS was first and foremost a rather

decided opinion on the part of the customers, the commercial aviation industry, that the system was breaking down. They were convinced that leaving it within the government framework that over

time, things would only get worse and that something had to be

done, something fundamental had to be done to change the equation.

That is why that was a motivating, driving force behind ultimately what was privatization. Before that happened, there was a

government study participated in by all of the various stakeholders

in the industry. They looked at six different corporate models,

three of which were government controlled in one form or another.

They looked at a fully privatized shareholder driven for-profit entity, they looked at ultimately the non-share capital that we settled

on.

But there was very much a moment in time there where the political will existed, where the customers were lined up, the employees were lined up, all the stars aligned and we acted, took advantage of that. I do not think we have looked back since. It has produced, everybody has been a winner. The customers are getting

better service, we have virtually eliminated the delays in the system. They are paying less than they did before. The employees are

making more money. There are fewer of them, I grant you that, but

they are making more money. We are well on our way to totally

modernizing the system.

And it is a safer system. It is a demonstrably safer system. We

have a safety regulator now who is actually doing safety regulation.

One of the amazing things that I discovered one day was our controller’s union came to me and said, hey, Transport Canada just

fined one of our controllers in the Montreal Tower for doing something wrong. He was instructing another controller and should not

the company pay the fine. I was kind of intrigued by that and I

looked into it, because I did not think it was fair to fine a guy when

he is trying to teach somebody, because you have to let them make

mistakes.

I looked into it, so I said to my VP of operations, I said, well,

what happened in the past when the system was in Transport, how

did they do it? Oh, they never fined anybody. They did not enforce

any regulations.

So we have a safer system and we can prove that we have a safer

system. But it is a question of—it is a high tech business. This is

what this is. The ANS is a high tech business. It has customers,

they have to pay for it. And if they have to pay for it, they want

to see demonstrable efficiency. That is what we try and deliver. We

have a board where a third of the board is in fact appointed by the

customers. They hold their feet to the fire to make sure we do.

Mr. KUHL. So you do not feel really that there has been anything

that you have had to give up through this process of commercialization, then, relative to productivity, safety, any of the other

items?
36

Mr. CRICHTON. Oh, absolutely not. Everything has been enhanced. I would say the only losers in our experience have been the

system vendors. I do not think Lockheed and Raytheon like me

very much, because I do not spend very much money with them

any more. But everybody else has won.

Mr. KUHL. Obviously your experience is very helpful to us as we

look at our system continuously. I am just curious as to, given the

size, and perhaps Mr. Crichton, this is a better question for you,

and the experience that you have had with certainly our system,

whether or not you think there is any transferrable experience to

the system as you see it from an outside standpoint. I am talking

about the U.S. system. I do not want to put you on the spot here,

but we are obviously looking always for ways to improve. I am not

saying there are any deficiencies, but certainly you may have a different perspective on that.

Mr. CRICHTON. You are asking me an essentially political question, which I always try to avoid. But we are in a political body

here. That is a decision that each individual country has to make.

All I can tell you, from the Canadian point of view, they bit the

political bullet back there in 1996 and decided this is the way to

go. Government does not have to do this, government’s role should

be as the assurer of safety and the feeling was that the government

should no more run the air traffic control system than it should

own the airlines or the airports. They backed out.

So when I heard various people earlier today talk about differences in traffic volume, that simply means the opportunity is

bigger. The opportunity for efficiency is bigger. That has absolutely

nothing to do with running the business. Nothing.

In fact, if I were trying to make money off air traffic control, my

mouth would water at the opportunity of the efficiencies I could

produce and the shareholder value that I could produce, because it

is so much bigger.

Mr. KUHL. Okay. Mr. Kaden, did you want to make any comment

on that?

Mr. KADEN. One comment, as an additional one, small indeed. As

Mr. Dillingham mentioned, over 80 percent in the meantime of the

world’s air traffic is in the hands of commercialized, corporatized

organizations, and we all together founded an association which we

call the Commercial Civil Air Navigation Services Organization. In

the meantime, over 40 member organizations are really the members of it, and we are happy that the FAA decided to become an

associate member.

So with all due respect, as my friend John mentioned, it is a political decision to follow up and to benchmark how other organizations are doing, at least once more the same type of business. We

are all together, based on the Chicago Convention. We are all together, using the same type of separation management.

We are all together responsible for safety and to do it in the best

way, based on modernized equipment and based on highly motivated people. What are the differences then between the United

States and, once more, with all due respect, it is not the number

of operations. It is the way of treating two airways safe through a

certain airspace. Whether you do it 1 billion, 2 billion or 45 billion

times a year makes no difference. Therefore, we very much appre-
37

ciate that the FAA becomes a member of the organization where

they can really once more, if I may be very provocative, learn from

the best.

Mr. MICA. Mr. Crichton, I just had one other question. I think

Mr. Costello has another question.

When you made your transfer over to privatize your operation,

did you consider selling your systems? I noted in your comments

that you say you have sold your systems to other countries. Was

that part of the original plan? If it was, what was the motivation

for it then, or if it was not, what is the motivation for it now?

Mr. CRICHTON. To tell you the truth, in the early days no, we

were too busy trying to do the transition. But as we got into the

business, we certainly knew in the due diligence leading up to the

transaction, when we bought the system from the government, that

we were buying a high tech business that depended to a great degree on the successful development and implementation of technology. As we got into that and started to fix it, because it was very

much broken in terms of the way it was being run under the government, it occurred to us as we looked around like any good business would in the procurement world, and we said, well, you know,

why should I make something here, maybe I should look outside

and see if somebody else has already invented this, and get rid of

all the risk and development costs.

It dawned us at a given point that with some of those systems

that we had no choice but to develop ourselves, it would only make

sense to replicate those and license them or sell them to others, because we looked out and we saw other ANSs around the world basically duplicating the same technology at great expense. So why

keep re-inventing the wheel over and over again. And then we said,

what makes it even worse is we had the same customers. Why

should they pay us to develop something then turn around, pay the

U.K. to develop something, the exact same thing, when we can

incur the development costs once and everybody is a winner.

That is what led us to this solution. As it turns out, we are just

levering off the investments we had to make anyway to the mutual

benefit of the other ANSs and our common customers.

Mr. KUHL. Thank you.

Mr. Costello.

Mr. COSTELLO. Mr. Chairman, thank you.

Mr. Crichton, I have one question then I will give you an opportunity to make a comment to the statement attributed to Mr. Milton, the chairman and CEO of Air Canada.

But first, the question of liability. Is liability either shared by

your company and the government, what is the government’s responsibility from a standpoint of liability? Are you insured for any

type of an accident, or did the government do some type of hold

harmless agreement when they gave you the contract?

Mr. CRICHTON. We purchase insurance on the market, aviation

insurance. We actually have the third largest aviation liability policy in the world, I think next to Boeing and Airbus. We have $2.3

billion U.S. covered right now. That is a straight commercial transaction.

Since 9/11, when the international insurance markets canceled

their war risk and terrorism insurance for everybody, ANSs, air-
38

lines, airports, the Canadian government stepped up and has provided the aviation industry with an indemnity for war risk and terrorism. So we depend on that indemnity the same way the airlines

and the airports do. But the basic insurance is a strictly commercial transaction, the same way the airlines do and the aviation insurance markets.

Mr. COSTELLO. In fairness to you, I would like to give you an opportunity to respond, Mr. Milton had some very harsh words on

Monday of this week when he spoke to a group of Montreal business leaders. I quoted earlier quotes attributable to him that ‘‘Unfortunately, Canada has become a world leader, not in creating an

environment where airlines can flourish, but in charging some of

the world’s highest airport fees, security fees and other fees and

charges. The damage inflicted by the lack of government leadership

in the airline industry over the past few years will be felt for many

years to come.’’

Then he goes on to criticize the system further in this speech. In

fairness to you, I would like to give you an opportunity to respond.

Mr. CRICHTON. I have not actually seen that speech. I saw a

press report. But just based on what you quoted, I do not think he

mentioned the air traffic control system. He was criticizing the airport fees.

Mr. COSTELLO. Actually, this is a statement attributed to him

and it says, ‘‘To make matters worse, there is an abysmal lack of

governance over air traffic control and airports,’’ which seems to

imply that he believes that there should be more government control or influence both over the air traffic control system and the airports.

Mr. CRICHTON. In terms of the governance issue, I am a bit puzzled, because Mr. Milton appoints two of the directors to our board.

One of those directors is the former CEO of Air Canada. Another

director is a former vice president of Air Canada. All I can tell you

at this point is that I think there is some confusion on this issue.

But you will never win a fight with your customers, so I will leave

it at that.

Mr. COSTELLO. Thank you.

Thank you, Mr. Chairman, and I thank our witnesses for appearing here today.

Mr. KUHL. Okay. Well, being that there are no other members

here to fire up some really difficult questions for you two gentlemen, let me tell you how much, on behalf of Chairman Mica and

the Ranking Subcommittee Chairman Costello and the rest of the

members who have been in and out how much we really appreciate

your traveling. We know that you have come from afar and we

really appreciate your written testimony and the testimony you

have given us. We know you shortened it up so we could get a

chance to ask some questions and have some answers and some

dialogue.

We appreciate your sharing your experience, certainly, of your

countries. Obviously it is a huge, complex issue and question. Obviously there is a lot involved, and a lot of attention being paid to

how well you all perform and how well we perform here in this

country.
39

So thank you for coming and sharing your experiences with us.

Thank you for your testimony.

[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]
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