## Overflight Fee Development Report in support of “Update of August 2001 Overflight Fee s”

Notice of Proposed Rulemaking

Office of Financial Controls

Federal Aviation Administration 800 Independence Ave. S.W. Washington, DC 20591

July 26, 2010STAFF WORKING DRAFT, 7/26/2010

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### PURPOSE OF THE REPORT

The purpose of this document is to provide supporti ng information concerning the updated schedule of fees that the Federal Aviation Administration (FAA) is proposing to charge for aircraft flights that transit U.S.-contr olled airspace, but neither land in nor depart from the United States. The FAA currently c harges fees for such flights, pursuant to its Final Rule, "Fees for FAA Services for Certa in Flights (Docket No. FAA-2000- 7018)."

The FAA issued a similar report in support of the J une 2000 Interim Final Rule for these fees, and subsequently amended that repor t in August 2001 to reflect some adjustments to the cost data used to derive the fee s in the Final Rule. The basic fee development methodology used for the 2001 fees has remained virtually the same, with only minor modifications, described herein.

INTRODUCTION

Fees for FAA services for aircraft flights that tr ansit U.S.-controlled airspace, but neither land in nor depart from the United States, are authorized by 49 USC 45301. These flights are commonly referred to as “Overflights.” Unlike flights that land and/or takeoff in the United States 1 

### , Overflights did not have a mechanism to assess an d recover the costs they impose on the FAA’s air traffic control (ATC) system until the August 1, 2000 implementation of the Overflight Fee Interim Final Rule (IFR).

The practice of charging Overflight Fees for ATC an d related services provided to Overflights is common within the international comm unity. For example, a flight from Frankfurt, Germany, to Bogota, Colombia, could pass through airspace controlled by France, Portugal, the United States, the Netherland s Antilles, and Venezuela, in addition to airspace controlled by the countries of origin a nd destination, Germany and Colombia. The operator would have been charged ATC fees by al l of these countries except the United States until the U.S. Overflight Fees were e stablished on August 1, 2000.

The level and type of air traffic services provided to Overflights depend, in part, on the portions of U.S.-controlled airspace transited by s uch flights. This report is concerned with only the flight activity that occurs in the tw o ATC operating environments (Enroute and Oceanic) where Overflights occur. Figure 1 ide ntifies the U.S.-controlled airspace and illustrates where the FAA generally provides En route and Oceanic services. A complete description of U.S.-controlled airspace ca n be found in the docket for this Rulemaking.

1 which pay one or more of the following excise tax es: passenger ticket tax, fuel tax, international arrival/departure tax, or cargo waybill taxSTAFF WORKING DRAFT, 7/26/2010

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## Figure 1 U.S.-Controlled Airspace 2



## Cost of Services:

The FAA’s Overflight Fees are derived from the agen cy’s costs of providing Enroute and Oceanic services, which are two of the four services or cost pools into which

all of the FAA’s costs for ATC and related services are distributed. The FAA’s Cost Accounting System (CAS) determines the costs of pro viding ATC and related services

within the Oceanic and Enroute environments. The a gency's costs of providing the other two ATC services (Terminal and Flight Services), ar e not included in the cost base for the FAA’s Overflight Fees.

The FAA has determined, based on the structure and operation of its ATC system, that

there is little or no difference between the costs of making ATC and related services available to an Overflight within a particular serv ice environment (Enroute or Oceanic) versus making the same services available to any ot her operation within the same environment. Flights in the Enroute ATC environmen t (Overflights and domestic/international U.S. operations) use similar types of services. This is also the case for those flights receiving procedural control in U .S.-controlled Oceanic airspace.

The process of deriving Overflight Fees from the co sts of providing Enroute and Oceanic services initially involved the following four step s:

1. Using CAS data, determine the FAA’s total costs of providing Enroute and Oceanic ATC and related services to all flights;

2. Determine which of these costs can be used as a bas is for fees per the then existing statutory requirement that the Overflight Fees be “ directly related” to the FAA’s costs of providing the ATC and related services;

3. Determine the unit costs of Enroute and Oceanic ser vices;

4. Derive the Overflight Fees that will recover the co sts of providing ATC and related services, plus the costs of billing and collections

.

2 For illustrative purposes only. See “Description of U.S.-Controlled Airspace” in the docket for actu al airspace coordinates.

Oceanic EnrouteSTAFF WORKING DRAFT, 7/26/2010

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### Subsequent to the derivation and implementation of the August 2001 Overflight Fees, the U.S. Congress enacted a provision of law in the Air Transportation and Security Act (ATSA) of 2001 that changed the statutory standard for the FAA’s Overflight Fees. Whereas the original statutory authorization for th e fees had specified that the fees must be “directly related” to the FAA’s costs of providi ng the ATC and related services, the ATSA language changed that requirement from “direct ly related” to “reasonably related.”

The “directly related” requirement had been the sol e reason that the FAA had removed all

overhead costs from the cost base used to derive th e fees. Since overhead costs are frequently and typically included in the cost base when setting fees to achieve full cost recovery, the FAA believes it is reasonable to incl ude overhead costs in the cost base for its Overflight Fees. Therefore, this step of remov ing all overhead from the cost base to ensure that the fees are “directly related” to cost s has been eliminated for the currently proposed update of the August 2001 Overflight Fees.

The step-by-step process of deriving the fees propo sed in this Notice of Proposed Rulemaking (NPRM) is as follows:



## STEP 1 :

Using CAS data, determine the FAA’s total costs of providing Enroute and Oceanic

ATC and related services



## Introduction

The FAA’s CAS was developed both for overall agency management purposes and to provide the basis for determining Overflight Fees, which were being developed initially by the FAA at about the same time. Each cost categ ory in the CAS was individually analyzed to determine whether it was directly relat ed to the provision of Enroute and/or Oceanic services. Other costs, such as those incur red for the provision of Terminal and Flight Services were not included, as they were det ermined not to be related to the provision of Enroute and Oceanic services.

All costs in the CAS have been assigned or allocate d to services based on generally accepted accounting principles. Federal Accounting Standards Advisory Board’s “Statement of Federal Financial Accounting Standard s,” Number 4, the Federal Government’s guiding framework authority on cost ac counting matters, was used throughout the development of the CAS. All assignm ents were performed using the best available data and, where economically feasible, ne w processes were created to enhance the fidelity of particular assignments.STAFF WORKING DRAFT, 7/26/2010

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## Expenditures vs. Obligations

The FAA has used CAS data for fiscal year (FY) 2008 (October 1, 2007 through September 30, 2008) for this update of its Overflig ht Fees. Total expenses recorded for FY 2008 do not precisely match the FAA’s FY 2008 bu dget as enacted by the U.S. Congress. This is due to the Governmental budgetin g rules that allow obligations (legal reservations of budgeted amounts) to be incurred ov er a period of one to several years after enactment of the budget by Congress.

As Figure 2 below indicates, expenses for FY 2008 w ere actually obligated against budgets enacted from FY 1999 through FY 200 8, depending on whether the expenditures were for Facilities & Equipment; Opera tions; or Research, Engineering & Development.



## Figure 2

Conversion of Obligations to FY 2008 Expenditures



# .....

..................

.................................... Facilities and Equipment

Operations

Research, Engineering & Development 

## FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08



# FY 2008 CostsSTAFF WORKING DRAFT, 7/26/2010

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## Description of the Cost Accounting System (CAS)

The FAA has developed the CAS to better understand its costs. The purpose of the CAS is twofold: 1) to provide information to he lp improve the management of the FAA, and 2) to determine the costs of Enroute and O ceanic services in support of Overflight Fees. The first phase of the CAS develo ped the cost information for the agency’s Enroute and Oceanic air traffic services. This cost information was the basis from which the agency’s August 2001 Overflight Fees were derived, and is now the basis for the currently proposed update of those fees.

Full details on how the FAA’s cost accounting syste m captures costs for all FAA lines of business and the methods of assignment of costs to the Enroute and Oceanic ATC services are available in a separate report. A cop y of that report, titled “Costing Methodology Report,” has been placed in the Overfl ight Fee rulemaking docket.



## Enroute and Oceanic Costs

Table 1 below indicates the cost categories and the total costs for the FAA’s Enroute and Oceanic ATC and related services, as de termined by the FAA’s CAS. These costs were based on the FAA’s FY 2008 expenditures.



## Table 1

TOTAL COST OF ENROUTE AND OCEANIC SERVICES*

FAA COST ACCOUNTING SYSTEM

COST OF SERVICE REPORT

FOR THE YEAR ENDING SEPTEMBER 30, 2008

ENROUTE

COSTS OCEANIC

COSTS

Level 1: Facility ATC Direct Labor $1,138,099,860 $35,680,507

ATC Indirect Labor $295,361,250 $8,281,574

ATC Direct Non-Labor $7,611,551 $313,498

ATC Indirect Non-Labor $1,734,228 ($18,476)

ATC Contract Training $37,976,882 $1,366,605

ATC Academy Training $18,535,080 $534,765

Tech Ops Direct Labor $157,504,541 $2,296,720

Tech Ops Direct Non-Labor $51,978,066 $2,686,825

Tech Ops DO Indirect $116,662,775 $1,627,924

Tech Ops Academy Training $19,414,905 $141,259

Telecommunications $105,590,688 $29,821,321

Telecommunications Support $55,816,758 $427,928

Flight Inspection Services $23,938,424

Logistics $50,374,654 $239,182STAFF WORKING DRAFT, 7/26/2010

7 Utilities $31,603,426 $777,348

subtotal: $2,112,203,089 $84,176,979

Level 2: Service Unit ATC Workers' Compensation $31,353,290 $984,296

Tech Ops Workers' Compensation $5,448,184 $81,739

Direct Field Support $183,434,987 $4,248,972

Contract Weather $9,598,341 $286,277

Contract Weather Observations - -

Contract Tower - - Contract Flight Service - -

DUATS - -

Contract Maintenance $9,604,678 $134,564

Implementation $148,075,922 $446,022

Acquisition (non ATO) $5,089,860

- Acquisition (ATO) $606,408,421 $35,141,267

Depreciation & Capital Leases $509,081,843 $8,322,390

subtotal: $1,508,095,525 $49,645,527

Level 3: ATO ATC System Command Center $157,059,988 ($14)

Atlantic Operations Control Center $2,038,340 $51,016

Mid-States Operations Control Center $2,256,995 $6,799

Pacific Operations Control Center $2,235,817 $57,661

National Network Control Center $21,089,422 $330,029

Charting $26,715,925

-

Service Area Indirect $67,033,453 $1,385,440

Service Unit Indirect $163,012,617 $3,077,507

ATO Indirect $163,789,674 $4,183,410

subtotal: $605,232,230 $9,091,847

Level 4: FAA FAA Regional Indirect $25,035,113 $530,550

FAA Headquarters Indirect $174,903,978 $6,598,127

Medical $9,047,349 $284,112

Gain/(Loss) $32,375,669

-

Accrued Liabilities $267,393,595 $5,668,185

subtotal: $508,755,704 $13,080,973

Grand Total: $4,734,286,548 $155,995,327



### As shown by the table above, the total cost, as det ermined by the CAS, for the FAA’s provision of Enroute services in FY 2008was $4,734, 286,548, and the total cost for the FAA’s provision of Oceanic services in FY 2008 was $155,995,327.STAFF WORKING DRAFT, 7/26/2010

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## Step 2:

Determine the unit costs of Enroute and Oceanic ser vices

In the previous section, the total costs for Enrout e and Oceanic services were identified. The next step is to derive the unit co st of providing services within the

Enroute and Oceanic environments. The unit costs c alculated herein reflect the FAA's cost of making services available on a per 100-naut ical-mile basis. The level and type of services provided are highly similar for all aircra ft operations within a particular environment (i.e., Enroute or Oceanic), although th e cost of making services available for safe flight to all users, including Overflights, co nstitutes much of the cost. The FAA has determined, based on the structure and operation of its ATC system, that there is little or no difference between the costs of providing servic es to an Overflight versus any other operation within each of these service environments . Consequently, the unit cost of providing services to Overflights within each envir onment is considered identical to the unit cost of providing services to any other flight within each respective environment. 3



### To construct these unit costs, flight miles within each environment are identified on an annual basis. The costs of providing ATC and relat ed services within each environment are divided by the respective flight miles to deter mine the unit costs of services. Flight miles are tracked using FAA’s Enhanced Traffic Mana gement System (ETMS). ETMS provides detailed information on a flight-by-flight basis for every aircraft operation. Using ETMS data, it is possible to track flights fr om origination to destination and thereby determine the amount of services provided b ased on distance flown within U.S.- controlled airspace.



## Air Traffic Activity

Table 2 shows the total number of flights and miles traveled within the Enroute

and Oceanic environments for FY 2008.

3 Let α i = (Overflight Activity i )/(Total Activity i ), for i = Enroute, Oceanic. It has been determine d, based on the structure and operation of the FAA ATC syste m, that within each airspace environment, the cost of making available and providing ATC services to Over flights is proportional to the total cost of making available and providing ATC services within that en vironment, i.e., Overflight Costs i = α i *Total ATC

Costs i . The unit cost of services made available and pro vided to Overflights within environment i, for i = Enroute, Oceanic is as follows:

(Overflight Costs i

)/( Overflight Activity i

) = ( α i *Total ATC Costs i )/ ( α i * Total ATC Activity i ) = (Total ATC Costs i )/(Total ATC Activity).STAFF WORKING DRAFT, 7/26/2010

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## Table 2

ENROUTE AND OCEANIC ACTIVITY

TOTAL TRAFFIC WORKED 4



## (10/1/2007-9/30/2008)

Enroute Airspace Oceanic Airspace U.S.-controlled Airspace **/

Flights GCD nm */ Flights GCD nm Flights GCD nm



### Total

annual activity 17,492,183 8,326,843,296 959,736 721,081,489 17,908,482 9,047,924,785

*/ GCD nm is the great circle distance for these fl ights expressed in nautical miles. **/ These numbers represent total number of flights that transited through U.S.-controlled airspace an d the total number of miles these flights traveled in the U.S.-controlled airspace. The flight count is not the sum of flights across the Enroute and Oceanic environme nts. Some flights transit both environments and summing flights across these environments would res ult in double counting.



### Over this 12-month period, there were 17,492,183 fl ights traveling 8,326,843,296 nautical miles (nm) within the Enroute environment and 959,736 flights traveling 721,081,489 nm within the Oceanic environment.



## Unit Cost of Service

Using the total annual GCD flight miles shown in Ta ble 2, the unit cost of each type of service (Enroute or Oceanic) is computed. Table 3 illustrates this calculation.

The unit costs of ATC and related services are calc ulated by dividing the respective total costs by the respective number of miles flown.



## Table 3

UNIT COST OF ENROUTE AND OCEANIC SERVICES

Enroute Oceanic

Reasonably Related ATC and related Costs $4,734,286,548 $155,995,327

Total annual GCD (nautical miles -- nm) 8,326,843,2 96 721,081,489

Unit Cost (per 100 nm) = (ATC Costs/ GCD nm)*100 $ 56.86 $21.63

4 Flight miles are expressed in terms of the great c ircle distance (GCD) traveled in each type of U.S.- controlled airspace. For any individual flight, th e point of entry and the point of exit are determin ed based on the best information available as determined by the FAA. The GCD is calculated for each set of ent ry and exit points per airspace. This mileage is then summed by airspace and appropriate fee is applied to the total miles in each type of airspace (Enroute or Oc eanic) to determine the total charge for the flight . GCD was used rather than actual flight miles to, among other reasons, reduce the computational burden associated with the calculation of flight miles.STAFF WORKING DRAFT, 7/26/2010

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### Because the FAA's costs of making services availabl e to Overflights have been determined to be the same as for any other aircraft operation (as discussed previously) within the same respective (Enroute or Oceanic) env ironment, these unit costs represent the “reasonably related” unit cost of services made available to Overflights on a per 100- nautical-mile basis. Thus, the cost of providing A TC and related services to a flight within the Enroute environment is $56.86; similarly, the c ost of providing ATC and related services to a flig ht within the Oceanic environment is $21.63.



## Step 3:

Derive the amount of the Overflight Fees that, when fully implemented, will recover the reasonably related costs of provid ing ATC and related

services in the Enroute and Oceanic environments

As explained earlier in this report, the change in the statutory standard for the FAA’s Overflight Fees from “directly related” to “reasona bly related” to costs has allowed the

FAA to include overhead in the cost base for the fe es now being proposed in the accompanying NPRM. This is a departure from what w as done when the current fees were first established in August 2001. At that tim e, all overhead was carefully removed from the cost base before the respective unit costs were derived. Among other things, this exclusion had the effect of removing almost al l of the FAA’s billing and collection

costs from the cost base.

Therefore, at this point in the fee development pro cess, the estimated billing and collection costs associated with the fees were expl icitly factored in, resulting in an

increase in the calculated unit costs of 3.5%. Thi s time, since overhead has already been included in the cost base, the FAA has not increase d the calculated unit costs to account for billing and collection costs in order to avoid double counting of those costs.

Thus, the proposed updated Overflight Fees will be, quite simply, the unit costs of providing services in the two operating environment s, as detailed in Table 3, but with one significant caveat. As explained and detailed in t he accompanying NPRM, the FAA is proposing that the updating of the fees be done inc rementally over a several year period.

While it is difficult to predict how long a full, n otice and comment Rulemaking such as this might take, we are proposing an effective date for the first fee increase of October 1, 2011, to be followed by annual increases on October 1 for the next three years.. Because costs have increased more relative to activity leve ls in the Enroute service area than in the Oceanic service area, the annual increases are larg er for Enroute (14%) than for Oceanic (8%). The specific fees, by year, would be as foll ows:

Effective Date Enroute Oceanic

October 1, 2011 $38.44 $17.22 October 1, 2012 $43.82 $18.60 October 1, 2013 $49.95 $20.09 October 1, 2014 $56.86 $21.63