Air Traffic Control: Preliminary Observations on Commercialized Air Navigation Service Providers
Published: 2005-04-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In the past, governments worldwide owned, operated, and regulated air navigation services, viewing air traffic control as a governmental function. But as nations faced increasing financial strains, many governments decided to shift the responsibility to an independent air navigation service provider (ANSP) that operates along commercial lines. As of March 2005, 38 nations worldwide had commercialized their air navigation services, fundamentally shifting the operational and financial responsibility for providing these services from the national government to an independent commercial authority. GAO selected five ANSPs--in Australia, Canada, Germany, New Zealand, and the United Kingdom--to examine characteristics and experiences of commercialized air navigation services. These ANSPs used different ownership structures and varied in terms of their size, amount of air traffic handled, and complexity of their airspace. This testimony, which is based on ongoing work, addresses the following questions: (1) What are common characteristics of commercialized ANSPs? (2) What do available data show about how the safety, cost, and efficiency of air navigation services have changed since commercialization? (3) What are some initial observations that can be made about the commercialization of air navigation services?
section_title: What GAO Found
paragraphs: The five commercialized ANSPs that GAO selected for review have a number of common characteristics: Each operates as a business, making and carrying out its own strategic, operational, and financial decisions. Each generates and manages its own revenue to cover its costs, charging fees to users and borrowing funds from private markets instead of relying on annual governmental appropriations. Each has also put commercial financial and performance data systems in place. All five ANSPs have retained safety as their primary goal, and each is subject to some external safety regulation. Each ANSP is largely a monopoly provider of air navigation services and undergoes some form of economic review or follows some guidelines for setting prices. The ANSPs report that, since commercialization, each has maintained safety, controlled costs, and improved efficiency. Data from all five indicate that safety has not eroded. For example, data from New Zealand and Canada show fewer incidents involving loss of separation (the required distance between an aircraft and another object). All five ANSPs have taken steps, such as consolidating facilities, to control their operating costs. Finally, all five ANSPs have invested in new technologies that the ANSPs say have lowered their costs by increasing controllers' productivity and produced operating efficiencies, such as fewer or shorter delays. Such measures have generally resulted in lower fees for major carriers, but some smaller, formerly subsidized users now pay new or higher fees and are concerned about future costs and service. GAO's work to date suggests a number of observations about commercialized ANSPs: A contingency fund can help an ANSP cover its costs without greatly increasing user fees during an economic decline; economic regulation by an independent third party can ensure that an ANSP sets prices fairly; providing a forum for stakeholders gives attention to their needs; and special measures may be necessary to reconcile the inability of some users to pay the full costs of services at some small communities and the ANSP's need to recover its costs.

section_title: Letter
paragraphs: Thank you for the opportunity to testify before you today on our work  related to commercialized international air navigation service providers  (ANSP). Since 1987, 38 nations have commercialized their air navigation  services, fundamentally shifting the responsibility for providing air  navigation services from the national government to an independent ANSP  that operates as a performance-based organization along commercial  lines. In the United States, of course, the Federal Aviation  Administration’s Air Traffic Organization was created as a performance- based organization in 2000, but has not been commercialized and remains  entirely within the federal government.
In the past, governments worldwide owned, operated, and regulated air  navigation services, viewing them as a governmental function. But as air  navigation technologies grew more complex and as nations faced  increasing financial strains, many governments reevaluated existing  structures for providing air navigation services, and some decided that  shifting the responsibility for operating and, in some cases owning, the  services to an independent commercial authority could produce  efficiencies that would benefit both users and the government. In general,  the responsibility for regulating the safety of the services is independent of  the ANSP.
Today I will discuss how different countries have commercialized their air  navigation services and how commercialization has affected those  services. Specifically, my statement addresses the following questions:    What are common characteristics of commercialized ANSPs?
What do available data show about how the safety, cost, and efficiency of  air navigation services have changed since commercialization?
What are some initial observations about the commercialization of air  navigation services?
To address these questions, we reviewed the characteristics and  performance of five ANSPs, which we selected as illustrative of  similarities and differences in the size and scope of commercialized  ANSPs. These ANSPs—Australia’s Airservices Australia; Canada’s NAV  CANADA; Germany’s Deutsche Flugsicherung GmbH (DFS); New  Zealand’s Airways Corporation of New Zealand, Ltd.; and the United  Kingdom’s (UK) National Air Traffic Services, Ltd. (NATS)—were  commercialized between 1987 and 2001 and have been operating ever  since as performance-based organizations along commercial lines.  Because of the size of our sample, our results cannot be generalized to  other commercialized ANSPs, and our purpose is not to assess or evaluate  the selected commercialized organizations.
Comparisons of performance before and after commercialization are  generally not feasible because data for assessing performance are typically  unavailable for the time before commercialization, or the measures have  changed in the years following commercialization. Furthermore,  comparisons between or among ANSPs are difficult because each ANSP  may define its measures of cost, safety, and performance differently. We  did not verify the data gathered and reported by the five ANSPs; however,  their financial information is subject to independent audits, and their  safety and operating performance data are publicly reported. As a result,  we considered the data sufficiently reliable for the purposes of our review.  The information presented in this testimony is based on ongoing work and  may be updated as additional information becomes available. At the  request of the Senate Committee on Commerce, Science, and  Transportation, its Subcommittee on Aviation, and Senators John McCain  and Trent Lott, we are planning to issue a more detailed report later this  year on the topics discussed in this testimony. We performed our work in  accordance with generally accepted government auditing standards from  August 2004 through April 2005.
Let me turn now to the results of our review. In summary:  The five commercialized ANSPs that we selected for review have a  number of common characteristics: Each operates as a business rather  than a government organization, making and carrying out its own  strategic, operational, and financial decisions. Additionally, each generates  and manages its own revenue to cover its operating and capital costs.  Each assesses fees on users of air navigation services (e.g., major  commercial air carriers, regional air carriers, and in some cases general  aviation operators) and is able to borrow funds from private markets,  instead of relying on annual appropriations from the government. All five  ANSPs have retained safety as their primary goal, and each is subject to  some external safety regulation. Finally, each ANSP is largely a monopoly  provider of air navigation services and undergoes some form of economic  review or follows some guidelines for setting prices.
Available data from the five ANSPs we reviewed indicate that since  commercialization, the safety of air navigation services has remained the  same or improved, each has taken steps to control costs, and each has  reportedly lowered costs and improved efficiency through modernization.  Though some opponents have raised concerns that commercialization  would compromise safety, data from all five indicate that safety has not  eroded. For example, data from New Zealand and Canada show fewer  incidents involving loss of separation (the required distance between an  aircraft and another object). Additionally, anecdotal information suggests  that safety regulation improved when the regulator was separated  organizationally from the ANSP. All five ANSPs have taken steps to control  their operating costs, whether by eliminating some administrative and  middle management positions or by consolidating facilities. Furthermore,  all five ANSPs have invested in and benefited from new technologies and  equipment, which the ANSPs say have lowered their costs by increasing  controllers’ productivity and produced operating efficiencies, such as  fewer or shorter delays. As a result, some ANSPs have been able to lower  the prices they charge the airlines for certain services. However, the  ANSPs have also instituted or increased fees for general aviation  operators. In Australia, a government subsidy for services to smaller  airports is scheduled to expire later this year, raising concerns about the  affordability and availability of services to those airports.
Our work to date suggests a number of initial observations about  commercialized ANSPs. First, having a contingency fund or other  mechanism to offset a revenue shortfall can help an ANSP weather a  decline in air traffic such as the aviation industry experienced, particularly  after September 11, 2001. Second, because the ANSPs are largely  monopoly providers of air navigation services, economic monitoring or  regulation by an independent third party can protect users and ensure a  fair pricing process. Third, addressing the concerns of stakeholders,  especially air traffic controllers, is essential to initiate and sustain  commercial operations, and providing a forum for communication can  ensure subsequent attention to their needs and priorities. Fourth, the  conflict between the inability of some users (e.g., smaller air carriers or  general aviation operators) to pay the full costs of providing services to  small communities and the ANSPs’ need to recover their costs means that  special measures may be necessary to protect service to some locations.  Fifth, when a government sells its interest in an ANSP to private investors  as part of the commercialization, the ANSP’s assets have to be  appropriately valued to protect taxpayer interests and create a basis for  sound financial decision-making. Sixth, when operations are separated  from regulation during commercialization, it is important to ensure that  the regulator can attract and retain sufficient personnel with the skills and  expertise needed to provide uninterrupted safety regulation. Finally,  developing baseline safety, cost, and efficiency measures prior to  commercialization will allow the ANSP and others to compare the  performance of the ANSP before and after commercialization and over  time.
subsections: section_title: Background
paragraphs: Before commercialization, air navigation services under government  control faced increasing strain. Many were underfunded, as evidenced by  air traffic controller wage freezes and insufficient funds to replace aging  technologies. In some instances, the country as a whole faced widespread  fiscal problems and the commercialization of air navigation services was  simply part of a larger movement to reform government enterprises such  as rail, telecommunications, and electricity.
With commercialization, the government typically retains full or partial  ownership of the air navigation system and continues to regulate  operational safety, but an independent ANSP is responsible for operating  the system. The independent ANSP is subject to corporate financial and  accounting rules and, in line with today’s current management theories, is  generally designed as a performance-based organization—that is, an  organization that develops strategies, goals, and measures and gathers and  reports data to demonstrate its performance. In the five countries whose  air navigation services we reviewed, the ANSP continued to provide  nationwide services after commercialization and, with certain exceptions,  remained the sole provider of air navigation services.
Each ANSP offers en route, approach control, and terminal air traffic  services. However, in some cases, an ANSP may not be the sole provider  of approach control and terminal services in a country. Although technical  definitions may vary slightly among ANSPs, these services broadly  correspond to the services provided in U.S. air traffic centers, approach  control centers, and towers. All but Germany’s DFS also offer oceanic air  navigation services. All five ANSPs are responsible for providing air traffic  services to both civil and military aviation. In addition, the ANSPs may  offer other air-navigation-related services, such as meteorological services,  fire and rescue, training, and consulting. The ANSPs also charge for these  services.
Discussions about the commercialization of air navigation services often  use a number of terms interchangeably. Among these terms are  restructuring, privatization, outsourcing, and corporatization, as well as  commercialization. The Civil Air Navigation Services Organization  (CANSO), which represents the interests of ANSPs worldwide, uses the  term corporatization. Others, such as the International Civil Aviation  Organization (ICAO), which establishes international civil aviation  standards and recommends practices and procedures for ANSPs, use the  term commercialization. Some note that an organization can be  “commercialized” but not “corporatized” (i.e., established under prevailing  company law). For this statement, we will use “commercialization.”
section_title: Common Characteristics of Five Commercialized ANSPs
paragraphs: The five commercialized ANSPs that we reviewed have a number of  common characteristics: All operate as businesses rather than as  government organizations, all focus on safety, and all are largely monopoly  providers that are subject to some form of economic review or guidelines  for setting prices.
subsections: section_title: Five Commercialized ANSPs Operate as Businesses
paragraphs: All five commercialized ANSPs operate as businesses, although they differ  somewhat in their ownership structures. (See table 1.) Three of the five— Airservices Australia, Airways Corporation of New Zealand, and DFS—are  currently state-owned corporations—that is, companies wholly owned by  the government. The UK’s National Air Traffic Services (NATS) is a public- private partnership, that is, a cooperative venture between the public and  private sectors that is designed to meet defined public needs with the risks  and rewards divided between both parties. The government holds the  largest share of NATS (49 percent), and the remaining shares are divided  among a consortium of seven UK airlines (42 percent), NATS staff (5  percent), and a private airport company (4 percent). By 2006, Germany  plans to change the ownership of DFS, selling 74.9 percent of its equity to  private investors and reorganizing it as a public-private partnership, along  the lines followed in the UK. NAV CANADA is a nonshare capital, private  corporation—that is, it has “members” instead of shareholders. These  members represent the airline industry, the government, and general and  business aviation, and they also include employees such as air traffic  controllers and engineers.
subsections: section_title: ANSPs Make and Execute Their Decisions and Follow Corporate Practices
paragraphs: Each ANSP makes and carries out its own strategic, operating, and  financial decisions. A supervisory board oversees policy making and  operations and, when applicable, has fiduciary responsibilities to  shareholders. The members of this board may represent key stakeholders,  such as the airlines, employees, general aviation, and the national  government. An executive officer implements the board’s policies and is in  turn, accountable to the board. Individual business units within the ANSP  report to the executive officer and are directly responsible for various  aspects of the ANSP’s day-to-day operations.
As commercial organizations, the ANSPs follow corporate practices. Each  ANSP has established performance measures and gathers and reports  financial and other performance data. Each ANSP also publishes an annual  report, which makes financial information available to the public to ensure  transparency. Financial statements are typically subject to third-party  audit to ensure that adequate accounting records have been maintained  and that internal controls have prevented and detected any fraud and error  in the accounting policies and estimates. In addition, the UK and Germany  report their data to EUROCONTROL’s Performance Review Commission,  which collects data for benchmarking and publishes comparative studies  of members’ performance.
Before commercialization, two of the five ANSPs “purchased” the ANSP  assets from their government. NAV CANADA negotiated a selling price  with the Canadian government, rather than going through a formal  competitive bidding process, and purchased the air navigation system in  1996 for C$1.5 billion. In the UK, according to information from the  National Audit Office, a collection of seven UK airlines known as “The  Airline Group” provided £795 million of funds, partly from its own  resources (£65 million) and from a loan taken out with a consortium led by  four main banks. The group used these funds to acquire NATS and meet  associated transaction costs, leaving £3.5 million of cash in the business.  In total, the government received £758 million in cash proceeds from the  transaction.
section_title: ANSPs Generate Revenue and Have Borrowing Authority
paragraphs: All five commercialized ANSPs rely on user charges as their primary  source of revenue and on private capital markets for additional funding.  Before commercialization, governments funded air traffic control services  through annual appropriations from their national government.
All five ANSPs collect and manage their own revenues, charging fees for  services. Their air navigation service fees are based on ICAO’s cost  recovery principles, which call for recovering the ANSP’s operating costs.  Despite some variation across ANSPs, the fees are generally as follows:    The air navigation fees cover operating and capital costs associated with  both en route and terminal services. These charges are based on a weight- distance formula. If applicable, ANSPs also levy charges for oceanic  control.
ANSPs may also charge for tower-related services. However, not all ANSPs  are the sole providers of tower services. In the UK and Germany, for  example, private firms may provide tower services. These tower charges  are distinct from the landing fees typically charged by airports, which are  usually weight-based.
ANSPs may charge general aviation operators a flat fee for services or  additional fees in particular circumstances rather than charging the  weight-distance fees typically assessed to larger air carriers.
ANSPs may also charge additional fees, as applicable, for other services,  such as meteorological, aeronautical information, training, and consulting  services.
The five ANSPs vary in their treatment of any operating profits or losses. If  an ANSP generates revenues from charges in excess of its costs (i.e.,  operating profits), it may rebate them to the users, lower the charges for  the next year, pay some form of dividend to shareholders, or retain them  in reserve to protect against future losses. If costs exceed revenues,  ANSPs use different strategies to meet those shortfalls. For example, NAV  CANADA established a “rate stabilization fund,” which it used to store  revenues when the aviation industry was healthy. The fund could then be  used to cover costs and keep rates stabilized when the industry was ailing.  The fund was capitalized by operating profits earned before September 11,  2001, but depleted following the economic downturn caused by the events  of September 11 and the SARS outbreak of 2003. In 2003, the rate  stabilization fund had reached a cumulative deficit of C$116 million.  According to NAV Canada’s 2004 annual report, the C$116 million deficit  has been reduced to C$32 million. In the UK, NATS, which experienced a  major decline in transatlantic traffic after September 11, first obtained a  ₤60 million short-term loan from its lending banks and then refinanced,  bringing in a new equity partner (BAA, plc.).
To pay for capital projects, the five ANSPs can either use current  operating revenues or borrow funds. Before commercialization, the ANSPs  relied on annual appropriations for capital projects; now, all five can  borrow funds through access to private capital and debt financing. For  example, NAV CANADA can seek debt financing in private markets. NAV  CANADA has a borrowing capacity of C$2.9 billion. In Germany, DFS  mainly finances its capital expenditures by drawing on a capital market  program, which issues short-, medium- , or long-term notes (i.e., debt  issuance and commercial paper) each amounting to € 500 million for a  total of € 1 billion to private investors in the market. DFS can also draw on  an annual credit line of €161 million from its bank.
section_title: ANSPs Have Mechanisms for Stakeholder Involvement and Communication
paragraphs: Stakeholders, including employees, as well as the airlines, general aviation  operators, airports, the government, the public, and others, may be  involved in their ANSP through a variety of mechanisms. In Europe, for  example, the Single European Sky initiative directs member states to  establish a consultation mechanism for involving stakeholders. Germany  and the UK have followed this direction by including stakeholder  representatives on their ANSP’s board of directors. For example, in  Germany, DFS employees, government ministries, and the private sector  are represented on a supervisory board. In the UK, government  appointees, the airlines, and BAA, plc. (the airport consortium) are  represented on NATS’s board. In Australia, the aviation community (e.g.,  the airports, airlines, safety authorities, and others) has a role in the air  traffic procurement process through the Australian Strategic Air Traffic  Management Group (ASTRA).
section_title: Common Focus on Safety Among the Five Commercialized ANSPs
paragraphs: For all five commercialized ANSPs, safety remains the primary goal. In  some countries, government policy requires that the ANSP consider safety  in any and all decisions affecting operations and service. For example, in  Germany, legislation requires DFS to observe ICAO’s standards and  recommended safety practices, as well as adhere to the objectives and  policies of international organizations where the German government is  represented, such as EUROCONTROL. Similarly, in Canada, legislation  requires NAV CANADA to maintain a fixed level of safety. Under the Civil  Air Navigation Services Commercialization Act, the Minister of Transport  has the authority to direct NAV CANADA to maintain or increase levels of  service in the interest of safety. Although it can alter operations in  accordance with business principles, it must demonstrate that the changes  meet the required level of safety through an aeronautical risk assessment.
All five ANSPs are subject to external safety regulation. A separate  authority conducts safety regulation and issues relevant certifications or  licenses to air traffic controllers and technicians. In New Zealand, for  example, the Civil Aviation Authority (CAA) is an independent regulatory  authority that establishes civil aviation safety and security standards and  monitors adherence to those standards. CAA carries out accident and  incident investigations and uses information from these investigations to  establish an industrywide safety picture and develop safety initiatives  ranging from education campaigns to increased monitoring and regulatory  action.
All five selected ANSPs have established formal safety programs. For  example, Airservices Australia employs a surveillance model, which  includes incident investigation, trend analysis, system review, and internal  audit. Similarly, DFS and NATS apply a systematic Safety Management  System to all of its operational activities. The system forms the basis for  risk assessment, safety assurance, safety control and safety monitoring  through standards that comply with national and international obligations.
section_title: Five Commercialized ANSPs Undergo Some Form of Economic Review or Follow Price-Setting Guidelines
paragraphs: Each of the five commercialized ANSPs is its country’s sole provider of en  route navigation services. There is no opportunity for more than one  organization to provide competing air navigation services. Thus, operators  cannot choose alternative providers by changing routes. To forestall the  abuse of monopoly position and address concerns about the level of prices  or charges, the five ANSPs are subject to the following:  In the UK, the Civil Aviation Authority (CAA) exercises economic  regulation over NATS. CAA’s Economic Regulation Group sets price caps  for 5-year periods, basing them generally on the retail price index and the  group’s own analyses of allowances for NATS’ estimated operating and  capital costs.
The Australian Competition and Consumer Commission (ACCC), an  independent commonwealth authority, monitors primarily monopolistic  public and private service industries, including Airservices Australia.  ACCC oversees Airservices Australia’s process of setting user fees for air  traffic services and decides to accept or reject price changes on the basis  of public consultation and its own evaluation of Airservices’ pricing  proposals.
Airways Corporation of New Zealand operates under a memorandum of  understanding with its airline users. Under this memorandum, Airways  uses the principle of “Economic Value Added” (EVA) to self-regulate its  pricing. EVA is the difference between net operating profit after taxes  minus the cost of capital. EVA above a certain level is returned to users in  the form of a rebate.
The German Transport Ministry reviews and approves any changes in user  fees, but does not independently evaluate the price-setting process or  pricing changes. According to the Transport Ministry, Germany plans to  create an independent economic regulatory authority by next year to  comply with the requirements of the forthcoming Single European Sky  initiative.
The Canadian Transportation Agency (CTA) reviews the price-setting  process against an established set of principles. However, CTA does not  respond to user grievances about existing prices. NAV CANADA is  legislatively required to place all revenues in excess of costs in its rate  stabilization fund.
section_title: Available Data Indicate That Since Commercialization, the Five ANSPs Have Maintained Safety, Controlled Costs, and Achieved Efficiencies
paragraphs: Based on information from each of the ANSPs we reviewed, following  commercialization, air navigation safety has not declined, and all five  ANSPs have taken steps to control costs. In addition, the ANSPs have  improved the efficiency of their operations through the implementation of  new technologies and equipment. According to the ANSPs, some of these  outcomes would not have been feasible in a government organization.
subsections: section_title: Since Commercialization, Safety Performance Has Not Been Compromised
paragraphs: At a minimum, safety has not eroded since commercialization, according  to the available data from of each of the five ANSPs. For example, data  from Airways Corporation of New Zealand indicate a downward trend in  incidents involving loss of separation for the years following  commercialization. Similarly, according to NAV CANADA’s annual report  for 2004, the rate of loss-of-separation incidents decreased from 1999/2000  through 2003/2004. Officials at Transport Canada, the safety regulator,  confirm an overall decline in aviation incidents since commercialization.
Additionally, stakeholders have anecdotally reported that they believe the  air navigation system is as safe as it was when the government provided  air navigation services. According to some, the separation of operating and  regulatory functions has strengthened safety regulation and diminished  any potential conflict of interest between promoting the financial interests  of aviation operators and protecting safety.
As improved technology and system upgrades have allowed individual  controllers to handle increasing levels of air traffic, concerns have arisen  about the potential for controllers’ fatigue to compromise safety. Data are  not available to assess this potential, but some ANSPs have taken steps to  limit and monitor controllers’ workload. For example, the UK’s CAA has  regulated the hours of civil air traffic controllers, and its Safety Regulation  Group must be notified of any breach by NATS or by controllers. In New  Zealand, as air traffic has increased, some airspace sectors have been  subdivided so that controllers are responsible for a smaller piece of  airspace.
section_title: Five Commercialized ANSPs Have Taken Steps to Reduce Operating Costs
paragraphs: To lower their personnel costs, all five ANSPs have reduced their  administrative staff or flattened their management organizations. For  example, NAV CANADA closed most of its regional administrative offices  and centralized corporate functions to its headquarters, reducing mostly  administrative staff by 1,100 people (17 percent of the workforce). Airways  Corporation of New Zealand also reportedly reduced its personnel costs  by eliminating some middle management and administrative positions. In  general, the ANSPs have not reduced their air traffic controller staffs.
To lower their facility operating costs, all five ANSPs have closed,  relocated, or consolidated facilities. For example, Airways Corporation of  New Zealand reported consolidating four radar centers into two over 8  years and is planning to consolidate these two into a single radar center by  2006. DFS has also integrated operations and consolidated facilities.  Seventeen approach units have been integrated from the airports to the  four air traffic control centers. It relocated the Dusseldorf control center  to the Langen control center in 2002, a year earlier than planned, and  transferred and consolidated its headquarters from Offenbach to Langen.  DFS reports that, because its supervisory board now makes major  investment decisions, rather than a parliamentary committee, it has been  able to make key strategic decisions that would have been politically  difficult when DFS was under government control.
In the UK, NATS reduced its net operating costs by almost ₤96 million  during 2002 through 2004, in part through direct management actions. For  example, it consolidated two operations into one at the new air navigation  services center called the Swanwick Center. According to NATS, it  reduced its staff costs by ₤12 million and its costs for services and  materials by about ₤11 million between 2002 and 2003, after placing this  new center in service. Between 2003 and 2004, NATS reported reducing its  operating costs for air traffic services by another ₤13 million through cost  control measures.
section_title: Five ANSPs Say They Have Improved Efficiency through Modernization
paragraphs: All five ANSPs have purchased new equipment and technologies that they  say have improved productivity. For example, Airservices Australia  reported increases in controllers’ productivity following the introduction  of the Australian Advanced Air Traffic System (TAAATS). This system  replaced conventional radar screens with more advanced computer  screens that display data from a range of sources, including ground based  surveillance equipment and satellite-linked navigational equipment on  aircraft, among others. TAAATS replaced handwritten paper flight  progress strips with screen-based information that is updated  automatically. DFS is also eliminating systems that depend on paper strips  and anticipates productivity gains and cost savings as a result. In New  Zealand, according to the union that represents air traffic controllers,  individual controllers are now able to handle much more flight activity  because of improved technology.
Besides improving productivity, modernization, together with airspace  redesign, has produced operational efficiencies, including fewer and  shorter delays, according to the ANSPs.
subsections: section_title: Access to Cash Flow and Borrowed Funds Has Facilitated Modernization
paragraphs: Commercialization has allowed the ANSPs to implement modernization  projects more efficiently. Formerly, the uncertainty associated with the  annual appropriations from national governments made it difficult to plan  over multiple years. With access to cash flow and borrowed funds, the  ANSPs report that they have been able to plan and execute projects more  efficiently and have seen improvements in delivering projects on time,  within budget, and to specification. For example, Airways Corporation of  New Zealand deployed its new oceanic system, FANS1, in less than a year.  The management of NAV CANADA estimates that it is producing new  technology faster than the government once did and at half the cost.
Some of the commercialized ANSPs maintain that they have achieved the  benefits of modernization faster and at less cost by purchasing  commercially available systems and upgrades or by modifying off-the-shelf  technologies to meet their needs, rather than developing their own  systems from the ground up. NATS purchased its oceanic system and  automated tower/terminal control system from NAV CANADA. To achieve  further purchasing efficiencies, some commercialized European ANSPs  have developed an alliance to procure systems. For instance, Germany has  developed a strategic alliance with Switzerland and the Netherlands for  the joint procurement of a new radar system.
section_title: Focus on Cost Control and Operational Efficiency Has Affected User Charges
paragraphs: Through their cost control initiatives and modernization efforts, some of  the ANSPs have been able to lower their unit costs and, in turn, lower their  charges to major commercial airlines, which pay the largest proportion of  user fees and therefore are the primary users served by the ANSPs.  Airservices Australia, for example, reported lower unit costs resulting  from the increases in controllers’ productivity that followed the  introduction of TAAATS. NAV CANADA estimates that it is saving the  airlines approximately C$100 million annually in reduced aircraft  operating costs. According to NAV CANADA, the airlines are now paying  20 percent less in user fees than it formerly paid in ticket taxes when the  government provided air navigation services. In Germany, Lufthansa  stated that except in business years 2001 through 2003, it has paid less in  user fees than it paid during the initial commercialization of Germany’s air  navigation service. According to Airways Corporation of New Zealand, it  reduced en route charges by 22 percent in 1995 and another 13 percent  since 1997, resulting in an overall reduction of more than 30 percent.
However, for general aviation operators, commercialization has  sometimes meant an increase in fees. Before commercialization, many  only paid taxes on fuel. Some countries, such as Canada and New Zealand,  have tried to make the fees affordable for small operators by charging a  flat fee. NAV CANADA, for instance, charges general aviation operators a  flat annual fee of C$72. According to the Aircraft Owners and Pilots  Association—New Zealand, Airways Corporation of New Zealand charges  general aviation operators a fee of NZ$100 for 50 landings. In addition,  Airways eliminated the en-route charge for light aircraft.
Some governments have subsidized air navigation services at small,  remote, general aviation, and regional airports, viewing such services as a  public good. Australia, for instance, provides a subsidy for service to some  remote areas under the Remote Air Subsidy Scheme. Similarly, to protect  service to remote locations and ensure equity of service to smaller  communities, Canada legislatively requires NAV CANADA to maintain  service to such locations. For instance, service to the Northern region,  which is designated as “remote,” is guaranteed under the legislation. In  addition, NAV CANADA is required to price services to remote locations  on the same basis as service to the rest of the country.
section_title: Initial Observations on Commercialized ANSPs
paragraphs: Through our research, we made a number of initial observations about the  commercialization of air navigation services in the five countries we  selected. The following paragraphs summarize these observations.
subsections: section_title: Having a Contingency Fund Can Help, but May Not Be Sufficient, to Protect Against an Industry Downturn
paragraphs: Following commercialization, two changes—shifting the source of funding  from appropriations to user fees and allowing the ANSPs to borrow money  on the open market—have generally enabled commercialized ANSPs to  cover their operating and capital costs. However, user fees and borrowing  may not be sufficient to cover an ANSP’s costs during an industry  downturn. As a result, a contingency fund or other mechanism may help to  offset the effects of a downturn, although it may not do so completely if  the effects are severe.
When the economy began to stagnate in 2000 and air traffic began to  decline, revenues from ANSP user fees began to fall. These revenue losses  grew as transatlantic traffic declined after September 11, particularly  affecting some ANSPs. In the UK, as a result of both these losses and the  relatively high debt that it had assumed to commercialize, NATS’s  solvency was threatened. Ultimately, NATS refinanced its debt with the  concurrence of the Department for Transport and other shareholders. In  Germany, DFS also experienced revenue losses, but to a lesser degree.
DFS reported a loss of more than €33 million in 2001, when air traffic  declined by 0.9 percent over the previous year. In 2002, it sustained a loss  of more than €21 million, when air traffic levels fell 2.9 percent below 2001  levels. To address these deficits, DFS modified investments, canceled  projects, and ultimately raised fees, thereby increasing financial pressures  on the airlines. However, when air traffic increased again in 2003, DFS  recorded an operating profit of more than €80 million and reduced fees for  2005 en route by 19.5 percent and terminal charges by 28 percent. DFS has  begun to consider the benefits of a reserve fund, but German legislation  governing air navigation service charges must be changed before DFS will  be allowed to develop such a reserve. NAV CANADA had banked up to  C$75 million in its rate stabilization fund before September 11 and the  concerns about SARS. However, following the severe industry downturn  resulting from these two events, the fund was quickly exhausted.
section_title: Some Economic Review or Guidelines May Be Needed to Ensure Fairness in Pricing
paragraphs: Because the ANSP is typically the sole provider of en route and approach  control services in a country, some mechanism may be necessary to keep  prices in check. Since user fees constitute the ANSP’s primary source of  revenue, economic monitoring and regulation by an independent third  party can protect users and ensure a fair pricing process. Such an entity  can ensure that all parties’ interests are taken into account and a variety of  alternatives are considered. It can also provide assurance to users that  price levels are appropriate, do not reflect overcharging, and are  consistent with competitive practices.
ICAO recognizes the need for an independent mechanism to provide  economic regulation of air navigation services. According to ICAO, the  objectives of economic regulation should include the following:    Ensure nondiscrimination in the application of charges.
Ensure that there is no overcharging or other anticompetitive practice.
Ensure the transparency and availability of all financial data used to  determine the basis for charges.
Assess and encourage efficiency and efficacy in the operation of providers.
Establish standards for reviewing the quality and level of services.
Monitor and encourage investments to meet future demand.
Ensure user views are adequately taken into account.
Australia and Canada have taken different approaches to reviewing their  ANSPs’ user charges and price setting. In Australia, the Australian  Competition and Consumer Commission (ACCC) oversees price changes.  Airservices Australia must notify ACCC whenever it wants to raise fees.  Following a formal notification and vetting process, ACCC decides to  accept or reject the price change on the basis of its evaluation of  Airservices’ pricing proposal; and if they reject the proposed price, they  can set a lower price. Recently, the ACCC rejected a proposal by  Airservices for a temporary fee increase to address the revenue losses that  followed September 11 and the SARS outbreak, as well as the collapse of  Australia’s second largest airline. In rejecting the proposal, ACCC  considered the fact that the industry took exception to these increases,  raising concerns about the need for longer-term price certainty. ACCC  ruled in favor of the industry and rejected the temporary price increases,  instead deciding that a longer-term arrangement be considered. ACCC  directed Airservices to focus on 5-year pricing plans to encourage long- term planning, emphasizing that the robustness of the airlines should be  taken into account when a price is set.
Canada has no formal regulation of fee setting. According to the Office of  the Auditor General, the Canadian Transportation Agency (CTA), the  formal appeal agency, can intervene only in matters concerning the price– setting process, not price levels or price changes. CTA was not given  authority over price-setting issues to ensure that NAV CANADA could  maintain a good credit rating, thus making NAV CANADA appealing to  financiers. (As of April 2005, NAV CANADA’s bonds were rated AA–nearly  as high as the government’s AAA-rated bonds.) NAV CANADA’s board of  directors, which includes air carrier representatives, is the main venue for  the industry to express any grievances over pricing issues. However,  according to Air Canada, its input on the board is limited and, because the  public has comparable representation on the board, the public and the  industry cancel out each other’s input. When NAV CANADA raised prices  after its rate stabilization fund was exhausted during the economic  downturn, air carriers argued that this move further disrupted their  business cycle during a time of financial strain.
section_title: Early and Continuous Stakeholder Involvement Is Key
paragraphs: CAA officials said they must ensure that society’s broader interests are  protected. In particular, GAO believes addressing the concerns of air  traffic controllers was essential because they play a vital role in the air  navigation system. For several of the ANSPs we reviewed, controllers’  support of commercialization was crucial to move the process forward. In  New Zealand, controllers supported commercialization when faced with  an aging system and inadequate public funds to acquire new equipment.  Controllers in Canada supported the transition following a 5-year salary  freeze and hiring freezes. However, Canadian controllers’ support for  commercialization has diminished, mainly because of differences over  collective bargaining issues such as wage increases, the right to strike and  controller fatigue. The Canadian controllers have acknowledged that they  were instrumental in pushing for change, but they have also noted that the  results of commercialization have fallen short of their expectations.
ANSPs have also noted the importance of involving stakeholders in efforts  to design, acquire, and deploy new technologies. According to Airservices  Australia, its air traffic controllers have come to understand the  commercial imperative to make a return on investment. Similarly, Airways  Corporation of New Zealand notes that it is essential to involve the same  controllers throughout the design process so that there is consistency in  requirements and a thorough understanding of the project’s ongoing  specifications. In Airways’ experience, it is essential for controllers,  manufacturers, and the ANSP to reach agreement in order to establish  realistic expectations for system design from the very beginning.
section_title: Steps May Be Needed to Balance Public and Business Interests
paragraphs: Hypothetically, small or remote communities, that rely primarily on  aviation for transportation, may be threatened by location-specific pricing.  Under this pricing scheme, an ANSP charges a fee for service that matches  the cost of providing that service to a specific location. As a result, some  communities may be subject to higher charges than others. By contrast,  two ANSPs have used network pricing, a scheme that charges the same fee  for air navigation services to every airport, regardless of size or location,  even though the costs of providing the services to some airports may be  greater than to others. Under network pricing, the service to heavily used  airports subsidizes the service to others.
Two of the ANSPs have adopted location-specific pricing for some air  navigation services. (Airport services are provided by competition in the  U.K., which may result in different prices.) Often, the minimum costs of  service to small or remote communities are higher per plane than the costs  of service to large communities because the cost of air navigation services  must be spread among fewer operators, usually with smaller aircraft. If  airlines decide that service to such communities is not commercially  viable, they may ultimately discontinue service to these communities.  Similarly, general aviation operators may be threatened if they are  required to pay fees that cover the full costs of the air navigation services  they receive. Continuing to serve small communities and operators may  require special efforts to balance public service needs and business  interests.
In addition to the Remote Air Subsidy Scheme mentioned earlier, Australia  also provided a subsidy that allowed prices to be capped at most general  aviation and regional airports. This subsidy was designed to ease the  transition to location specific pricing for select airports and is scheduled  to end in June 2005. Consequently, Airservices Australia reported that, in  order to compensate, it will be increasing charges over the next 5 years at  these locations and that these increases have been approved by the  regulator. These increases have been moderated to balance the effect on  aviation at airports frequently used by general aviation operators. As a  result, concerns persist about the implications of further price increases  and any future need to close or reduce services at these locations. Some  fear that needed air services to remote bush locations will be lost while  others fear that secondary services such as flight school training will be  affected.
Hypothetically, the impact on small operators and remote communities is  difficult to assess. Theoretically, costs may go up as a result of  implementing user fees, but charges may not necessarily be prohibitive.
Where service to small communities is legislatively mandated, ANSPs may  ultimately be forced to take a financial loss if they are not able to fully  recover their costs. Airservices Australia is seeking to control costs at  some of those locations by deploying new lower-cost technologies to serve  small communities. For example, Airservices Australia is planning to  install Automatic Dependent Surveillance Broadcast (ADS-B) ground  stations, which will allow air traffic surveillance services over remote  regions of Australia where radar is not a cost-effective solution.
section_title: Appropriately Assessing the Value of Assets Is Essential for Sound Pricing and Cost Accounting
paragraphs: To protect taxpayers’ interests, the countries that commercialized their air  navigation services needed to have an appropriate valuation of their  facilities and equipment before selling these assets to the newly  established ANSP. According to the Office of the Auditor General (OAG)  in Canada, Canada did not properly value its ANSP assets and  infrastructures. The C$1.5 billion value that the government negotiated  with NAV CANADA in 1996 fell short of the C$2.3 billion to 2.4 billion  estimate developed in 1995 by a third party hired by the OAG. NAV  CANADA reported, however, that both it and Transport Canada disagreed  with the OAG’s estimate and its underlying assumptions. In a study of the  NATS reorganization, the National Audit Office (NAO) found that the UK  government had raised some ₤758 million from the sale of the ANSP to a  consortium of seven UK-based airlines. However, these proceeds were  realized by increasing the level of NATS’s bank debt. As a result of this  debt, NATS was extremely vulnerable to the decline in air traffic after  September 11. DFS is currently undergoing a valuation of its assets in  preparation for selling 74.9 percent of its equity to private investors in a  formal competitive bidding process.
section_title: Maintaining Staff Levels and Expertise During Commercialization Can Prevent Disruptions in Regulatory Functions
paragraphs: Some countries experienced difficulties in retaining a sufficient number of  staff to carry out safety regulation. For example, in Canada, many of the  safety staff moved to the newly established NAV CANADA after  commercialization, leaving the government regulator, Transport Canada,  with insufficient staff to carry out timely safety inspections during the first  6 months after commercialization. Germany faces a similar challenge as  the government prepares to develop a safety regulatory authority in  accordance with the Single European Sky initiative by the end of this year.  According to the Transport Ministry, it may be difficult for the government  to recruit safety staff on a civil service salary and compete with the  salaries of safety inspectors from the private sector.
section_title: Developing Baseline Measures before Commercialization Will Enhance Performance Measurement
paragraphs: Obtaining baseline measures before commercializing a country’s air  navigation services will allow the government and others to assess the  new ANSP’s safety, cost, and efficiency. Some of the countries whose  ANSPs we reviewed did not collect baseline data or measure performance  as extensively as the commercialized ANSPs have since done. As  businesses, commercialized ANSPs must assess the progress they are  making toward their goals to access private funding, and therefore they  need extensive performance data. In addition, international organizations,  such as CANSO and ICAO, support commercialized ANSPs and ICAO, for  example, emphasizes the importance of having transparent financial data  available for economic oversight.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or the other Members of the  Subcommittee may have.
section_title: GAO Contacts and Staff Acknowledgements
paragraphs: For further information about this testimony, please contact me at (202)  512-2834 or dillinghamg@gao.gov. Individuals making key contributions to  this testimony included Bess Eisenstadt, Samantha Goodman, Hiroshi  Ishikawa, Jennifer Kim, Steve Martin, and Richard Scott.
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