Air Traffic Control: Characteristics and Performance of Selected International Air Navigation Service Providers and Lessons Learned from Their Commercialization
Published: 2005-07-29T00:00:00

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 as a business. As of March 2005, 38 nations worldwide had commercialized their air navigation services, fundamentally shifting the operational and financial responsibility for providing these services from the national government to an independent commercial authority. GAO selected five ANSPs--in Australia, Canada, Germany, New Zealand, and the United Kingdom--to develop, as requested, a descriptive analysis of commercialized ANSPs that illustrated similarities and differences in ownership, length of experience with commercialization, and size and scope of operations. This report addresses the following questions: (1) What are common characteristics of commercialized ANSPs in selected foreign countries? (2) What do available data show about how the safety, cost, and efficiency of air navigation services have changed since commercialization? (3) What are some key lessons learned about the commercialization of air navigation services?
section_title: What GAO Found
paragraphs: The five commercialized ANSPs that GAO selected have a number of common characteristics: All five have the safe movement of aircraft as their primary goal and are subject to some external safety regulation. All five operate as businesses, making and carrying out their own strategic, operational, and financial decisions. As businesses, all five are self-financing, assessing fees on users of air navigation services (e.g., major commercial air carriers; regional air carriers; and, in some cases, general aviation operators) and, as necessary, borrowing funds from capital markets. Finally, all five are largely monopoly providers of air navigation services and undergo some form of constraint in setting prices, such as economic review or procedural guidelines. Available data from the five ANSPs indicate that since commercialization, the safety of air navigation services has remained the same or improved; each ANSP has taken steps to control costs; and each ANSP has reportedly lowered costs and improved efficiency through investments in new technologies and equipment. Despite concerns about the possibility that commercialization could potentially compromise safety, data from all five indicate that safety has not eroded. For example, data from New Zealand and Canada show fewer incidents involving loss of separation (the required distance between aircraft). All five ANSPs have taken steps to control their operating costs, whether by eliminating some administrative positions or by consolidating facilities. All five ANSPs have also invested in new technologies and equipment, which the ANSPs say have lowered their costs by increasing controllers' productivity and produced operating efficiencies, such as fewer or shorter delays. However, the ANSPs have also increased fees for general aviation operators. GAO's research points to a number of lessons. For example, commercialized ANSPs must be prepared to mitigate the effects of an industry downturn, whether through reserves, higher fees, cost-cutting, or other measures. Involving stakeholders in modernizing (i.e., upgrading or replacing) ANSP facilities and equipment can benefit both the ANSP and the stakeholders. Special measures may be needed to protect service to small or remote communities. Finally, when a government sells an ANSP's assets, appropriate valuation is necessary to protect taxpayers' interests.

section_title: Letter
paragraphs: Since 1987, 38 nations have commercialized their air navigation services,  fundamentally shifting the responsibility for providing these services from  the national government to an independent air navigation service provider  (ANSP) that operates as a business and is designed as a performance-based  organization. In the past, governments worldwide owned, operated, and  regulated air navigation services, viewing them as a governmental function.  But as nations were faced with increasing congestion, outdated equipment  and facilities, and financial strains, many governments reevaluated their  structures for providing air navigation services. Some nations decided that  shifting the responsibility for operating and, in some cases, owning the  services to an independent commercial authority could produce  efficiencies that would benefit both users and the government. In general,  the responsibility for regulating the safety of the services is independent of  the ANSP and is still considered a governmental function.
You asked that we develop a descriptive analysis of selected foreign  countries’ commercialized, performance-based air navigation service  organizations. To do so, we asked the following research questions:  What are common characteristics of commercialized ANSPs in selected  foreign countries?
What do available data show about how the safety, cost, and efficiency  of air navigation services have changed since commercialization?
What are some key lessons learned about the commercialization of air  navigation services?
To address these questions, we reviewed the characteristics and  performance of five commercialized ANSPs, which we selected as  illustrative of similarities and differences in ownership, length of  experience with commercialization, and size and scope of operations.  These ANSPs—Australia’s Airservices Australia; Canada’s NAV CANADA;  Germany’s Deutsche Flugsicherung GmbH (DFS); New Zealand’s Airways  Corporation of New Zealand, Ltd.; and the United Kingdom’s (UK) National  Air Traffic Services, Ltd. (NATS)—were commercialized between 1987 and  2001 and have been operating since then as performance-based  organizations. Because we selected these ANSPs to illustrate certain  characteristics, our results cannot be generalized to all commercialized  ANSPs.
A performance-based organization develops strategies, goals, and  measures and gathers and reports data to demonstrate its performance.  The five ANSPs that we reviewed have been gathering and reporting data  since commercialization, but their predecessor organizations did not  necessarily gather or publicly report comparable data. Consequently,  assessments of each ANSP’s performance since commercialization are  possible, but comparisons of performance before and after  commercialization are generally not feasible. Additionally, opportunities  for comparing performance across commercialized ANSPs are limited to  the extent that the ANSPs define their measures of safety, cost, and  performance differently. We determined that the financial and safety data  from each country were sufficiently reliable for our purposes. For  additional information on our scope and methodology, see appendix I. We  performed our work in accordance with generally accepted government  auditing standards from August 2004 through July 2005.
subsections: section_title: Background
paragraphs: Before commercialization, air navigation services under government  control faced increasing strains. Many were underfunded, as evidenced by  freezes on air traffic controllers’ wages and insufficient funds to replace  aging technologies. Technology replacement programs often cost more,  took longer, and delivered less than promised, and stakeholders  complained about performance and customer service. In some instances,  the country as a whole faced widespread fiscal problems and the  commercialization of air navigation services was simply part of a larger  movement to reform government enterprises. For instance, the New  Zealand government established 14 state-owned enterprises in 1987,  including air navigation services, rail services, and postal services. The  government also reformed electricity as a state-owned enterprise in 1994  and telecommunications in 2004.
Although fiscal problems often drove the commercialization of air  navigation services, commercialization was generally intended not only to  relieve the government of a fiscal responsibility but also to free the ANSP  from some governmental constraints. According to the International Civil  Aviation Organization (ICAO), a commercialized ANSP, whether wholly or  partly owned by the government or fully privatized, should function as an  autonomous body and, compared with a government organization, should  have greater freedom from the government in conducting its financial  affairs and developing infrastructure funding. In addition, it should be self- financing, subject to the usual business taxes, and required to seek a return  on capital. According to ICAO, the government should still regulate the  safety of the ANSP’s operations, but the ANSP should be encouraged to be  as competitive, efficient, and cost-effective as any other commercial  business.
In the five countries whose air navigation services we reviewed, the ANSP  continued to provide nationwide services after commercialization and,  with limited exceptions, remained the sole provider of air navigation  services. Table 1 summarizes information on the size and scope of the five  ANSPs in our review.
Each ANSP generally offers en route, approach control, and terminal (or  aerodrome control) air traffic services. Although definitions of these terms  may vary slightly among ANSPs, the terms generally signify the same broad  functions. Specifically, en route services guide an aircraft while it is  operating at cruising elevations and outside terminal airspace. Approach  control services apply during departure—immediately after the aircraft has  taken off and while it is climbing from the origination airport—and during  arrival—when the aircraft is descending to the destination airport toward  the end of the flight. Terminal or aerodrome control services are provided  while the aircraft is close to the airport from which it is arriving or  departing. However, in some countries, the ANSP may not be the sole  provider of approach control and terminal services. All but Germany’s DFS  also offer oceanic air navigation services. All five ANSPs are responsible  for providing air navigation services to both civil and military aviation. In  addition, the ANSPs may offer other air navigation-related services, such as  meteorological, training, and consulting services, and charge for these  services.
The five commercialized ANSPs are affiliated with one or more  international aviation-related organizations. The governments of all five  ANPS are members of ICAO and, therefore, all five ANSPs adhere to ICAO  principles. All five ANSPS are also members of the Civil Air Navigation  Services Organization (CANSO), a voluntary international trade  organization whose mission is to represent the interests of commercialized  ANSPs. In addition, the UK and Germany are members of EUROCONTROL,  a European organization responsible for regulating the safety of air  navigation, monitoring the performance of air traffic management systems,  and developing a seamless air traffic management system in Europe.  EUROCONTROL is mandated to develop implementing rules for the  European Union’s “Single European Sky” initiative, a legislative package  approved by the European Parliament in January 2004. One of these  implementing rules specifies that each member state is to develop an  independent safety and economic regulatory authority to oversee its ANSP.
The UK established such an authority before commercialization, and  Germany is planning to develop one.
section_title: Common Characteristics of the Five Selected Commercialized ANSPs
paragraphs: The five commercialized ANSPs that we reviewed have a number of  common characteristics: First, all focus on safely moving aircraft. Second,  despite differences in ownership structures, all operate as businesses  rather than as government organizations and are self-financing. Third, all  are largely monopoly providers that are subject to some form of price- setting constraint achieved through economic review or procedural  guidelines.
subsections: section_title: The Five Commercialized ANSPs Continue to Focus on Safely Moving Aircraft
paragraphs: For all five commercialized ANSPs, the safe movement of aircraft remains  the primary goal. In some instances, government policy requires that the  ANSP consider safety in any and all decisions affecting operations and  service. For example, according to DFS officials, German legislation  requires DFS to observe ICAO’s standards and recommended safety  practices, as well as adhere to the objectives and policies of international  organizations in which the German government participates, such as  EUROCONTROL. Similarly, in Canada, legislation requires NAV CANADA  to maintain a fixed level of safe operations. According to Transport Canada,  the safety regulator, the Minister of Transport has the authority to direct  NAV CANADA to maintain or increase levels of service in the interest of  safety. Although NAV CANADA can alter operations in accordance with  business principles, it must demonstrate that the changes meet the  required level of safety through an aeronautical risk assessment.
All five ANSPs are subject to external safety regulation. A separate  authority conducts safety regulation and issues relevant certificates or  licenses to air traffic controllers and technicians. In New Zealand, for  example, the Civil Aviation Authority (CAA) is an independent regulatory  authority that, among other things, establishes civil aviation safety and  security standards and monitors adherence to those standards. CAA carries  out accident and incident investigations and uses information from these  investigations to establish an industrywide safety picture and develop  safety initiatives ranging from educational campaigns to increased  monitoring and regulatory action. In Australia, the Civil Aviation Safety  Authority regulates and promotes aviation safety, and the Australian  Transport Safety Bureau investigates aircraft accidents, incidents, and  safety deficiencies within the aviation system, according to Airservices  Australia. In Canada, NAV CANADA and the government, through  Transport Canada, share responsibility for the safety of the national civil air  navigation system. Under a performance-based approach to safety  regulation, known as the relations management approach, Transport  Canada, as the regulator, establishes the requirements in law and  standards, and NAV CANADA, as the operator, must demonstrate  compliance by measuring and reporting on program results. Transport  Canada, among other things, conducts audits, adjudicates safety issues  raised by stakeholders, and licenses air traffic controllers.
All five selected ANSPs have also established formal safety programs. For  example, DFS and NATS apply a systematic Safety Management System,  in accordance with EUROCONTROL’s safety requirements, to all of their  operational activities. This system forms the basis for risk assessment,  safety assurance, safety control, and safety monitoring through standards  that comply with national and international obligations. DFS’s Safety  Management System was also certified by the German Ministry of  Transport in 2004. Similarly, Airservices Australia employs a systemic  Safety Management System that complies with national and international  requirements. To promote safety, the system requires activities such as  operational risk assessments, surveillance, audits, and incident  investigations.
section_title: Although the Degree of Government Ownership Varies, the Five Commercialized ANSPs Operate as Businesses, Making Their Own Decisions and Generating Their Own Revenue
paragraphs: The five commercialized ANSPs vary in the extent to which they are owned  by the government—wholly, partially, or not at all. (See table 2.) Three of  these ANSPs—Airservices Australia; Airways Corporation of New Zealand,  Ltd.; and DFS—are state-owned corporations (i.e., companies wholly  owned by the government). The UK’s NATS is a public-private partnership  (i.e., a cooperative venture between the public and private sectors that is  designed to meet defined public needs) with the risks and rewards divided  between both parties. The government holds the largest share of NATS (49  percent), and the remaining shares are divided among a consortium of  seven UK airlines (42 percent), NATS staff (5 percent), and a private airport  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. The corporation has 4 members  representing government, airlines, noncommercial users, and the unions.  These 4 members appoint 10 of the 15 board directors: 4 are appointed by  the airline industry, 3 by the government, 2 by employees such as air traffic  controllers and engineers, and 1 by general and business aviation. These 10  directors appoint another 4 based on expertise and the chief executive  officer.
Before commercialization, members of the two ANSPs that are not wholly  owned by their government, NATS and NAV CANADA, “purchased” some  or all of the ANSP assets from the government. Although the UK  government retained the largest share of NATS, the second-largest owner,  the consortium of seven UK airlines known as “The Airline Group,”  provided approximately $1.4 billion, according to information from the  National Audit Office, including about $112.2 million from the group’s own  resources and the remainder from a loan taken out with a consortium led by four major banks. The group used this sum to acquire NATS and meet  associated transaction costs, leaving cash assets of approximately $6.0  million in the business. In total, the government received an estimated $1.3  billion in cash proceeds from the transaction. NAV CANADA purchased  all of the ANSP assets from the Canadian government. Instead of going  through a formal competitive bidding process, it negotiated a selling price  with the government, and purchased the air navigation system in 1996 for  about $1.5 billion, using a $2.9 billion line of credit provided by a syndicate  of banks at the time of the purchase. NAV CANADA uses the remaining  funds for capital investment and as working capital, as required.
subsections: section_title: The ANSPs Make and Execute Their Own Decisions, Involve Stakeholders, 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. For example, in the UK, government appointees, the airlines,  and BAA (the airport consortium) are represented on NATS’s board of  directors, while in Germany, DFS employees, government ministries, and  the private sector are represented on a supervisory board. As in a  corporation, an executive officer implements the ANSP board’s policies  and is, in turn, accountable to the board. Individual business units within  the ANSP report to the chief executive officer and are directly responsible  for various aspects of the ANSP’s day-to-day operations. For example,  Airservices Australia is structured around three market-oriented business  groups—the Air Traffic Management, Airport Services, and Infrastructure  Support Services groups. A Corporate Services group and a small Head  Office support and lead the business groups. The managers of these five  groups form the Executive Committee and work with the chief executive  officer to advise the board as well as carry out the board’s policies.
While the supervisory board and its executive officers have decision- making responsibility, stakeholders—including employees, the airlines,  general aviation operators, airports, the government, the public, and  others—may be involved in and provide input to their ANSP through a  variety of mechanisms. For example, DFS has developed a Customer  Relationship Management System to organize hearings for customers and  involve them in working groups. This approach to involving stakeholders is  consistent with a Single European Sky directive that member states  establish a mechanism for consulting with stakeholders. In Australia, the  aviation community (i.e., the airports, airlines, safety authorities, and  others) participates in Airservices’ strategic investment decision-making  process through the Australian Strategic Air Traffic Management Group. In  Canada, NAV CANADA’s stakeholders (i.e., associations, unions, and  airports, including international and U.S. representatives) are involved in  the NAV CANADA Advisory Committee, which provides a vehicle for  stakeholders who are not on the board of directors to raise issues and  concerns with NAV CANADA.
As commercial organizations, the ANSPs follow corporate practices. Each  ANSP has established performance measures and gathers and reports  financial and other performance data. Each ANSP also publishes an annual  report, which makes financial information available to the public to ensure  transparency. Financial statements are typically subject to audits by  independent third parties to ensure that adequate accounting records have  been maintained, and that internal controls have prevented or detected any  fraud and error in the accounting policies and estimates. In addition, the  UK and Germany report their data to EUROCONTROL, whose  Performance Review Commission collects data for benchmarking and  publishes comparative studies of members’ performance.
section_title: The ANSPs Generate Revenue and Have Borrowing Authority
paragraphs: All five commercialized ANSPs rely on user charges as their primary source  of revenue and on capital markets for additional funding. Before  commercialization, governments funded air navigation services through  annual appropriations.
Since commercialization, each ANSP collects and manages its own  revenues, charging fees for services. The air navigation service fees are  based on ICAO’s cost recovery principles, which call for recovering the  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 approach control services. These charges are based  on a weight-distance formula. If applicable, ANSPs also levy charges  for oceanic control.
The ANSPs may also charge for terminal-related services. However, not  all ANSPs are the sole providers of terminal services. In the UK and  Germany, for example, private firms may provide terminal services.  These terminal charges are distinct from the landing fees typically  charged by airports, which are usually weight-based.
The ANSPs may charge general aviation operators a flat fee for services  or additional fees in particular circumstances, rather than charging the  weight-distance fees typically assessed to larger air carriers.
The ANSPs may also exempt charges for some services. According to  ICAO policies, the ANSPs may choose to recover less than the full costs  of some services in recognition of local, regional, or national benefits.  For example, in Canada, aircraft or flights dedicated to search and  rescue, air ambulance operations, and firefighting services are all  exempt from air navigation service charges.
The five ANSPs vary in their treatment of any operating profits or losses. If  an ANSP generates revenues from charges in excess of its costs (i.e.,  operating profits), it may rebate them to the users, lower the charges for  the next year, pay some form of dividend to shareholders, or retain the  revenues in reserve to protect against future losses. If costs exceed  revenues, ANSPs use different strategies to meet those shortfalls. For  example, NAV CANADA established a “rate stabilization fund,” which it  used to store revenues when the aviation industry was healthy. The fund  could then be used to cover costs and keep rates stabilized when the  industry was ailing. The fund was capitalized by operating profits earned  before September 11, 2001, but depleted during the economic downturn  caused by the events of September 11 and the Severe Acute Respiratory  Syndrome (SARS) outbreak of 2003.
To pay for capital projects, the five ANSPs can either use current operating  revenues or borrow funds. Before commercialization, the ANSPs relied on  annual appropriations for capital projects; now, all five can borrow funds  through access to debt financing and private capital. For example, NAV  CANADA obtains all of its financing in the public debt markets. NAV  CANADA has a borrowing capacity of about $2.4 billion, of which $1.8  billion is currently drawn. In Germany, DFS mainly finances its capital  expenditures by drawing on a capital market program, which issues short-,  medium-, or long-term notes (i.e., debt issuance and commercial paper),  each amounting to approximately $546.4 million for a total of almost $1.1  billion, to private investors in the market. DFS can also draw on an annual  credit line of around $175.9 million from its bank.
section_title: The ANSPs Generate Revenues from Other Services
paragraphs: The ANSPs may also charge fees, as applicable, for other services, such as  aeronautical information, consulting, and training. For example, a DFS  business unit offers consulting services in air traffic system design and  implementation, feasibility studies, operational planning, air traffic system  evaluation, and safety management systems. In 2003, DFS’s consulting  service generated revenue of about $2.8 million. In the UK, NATS competes  with other service providers to provide terminal services at UK airports. In  addition, NATS, like DFS, consults and offers training for other ANSPs  worldwide in implementing safety management systems, solving airspace  capacity problems, and commercializing ANSPs. From this business unit,  NATS generated profits of about $11.7 million in 2003 and about $14.8  million in 2004.
Besides offering air navigation services in its own country, an ANSP may  provide services and technology to other regions of the world to generate  revenue. For example, Airservices Australia manages the upper airspace in  the Solomon Islands. NAV CANADA recently signed a contract with NATS  to install the Extended Computer Display System (EXCDS) in three  London-area airports, Stansted, Gatwick, and Heathrow, as well as to  provide NATS with its oceanic system. While NAV CANADA prefers  commercial off-the-shelf products, it also invests in developing in-house  technologies. Many of the technology products developed by NAV  CANADA are available to outside organizations, such as NATS, enabling  them to reduce their costs and avoid development risks.
section_title: The Five Commercialized ANSPs Undergo Some Form of Economic Review or Follow Price-Setting Process Guidelines
paragraphs: Each of the five commercialized ANSPs is its country’s sole provider of en  route services and, as such, functions as a monopoly. Moreover, except in  the UK, the ANSP is the sole provider of approach control services. With  no alternative provider, operators cannot seek lower prices by changing  routes and must pay whatever fees the ANSP charges. Since user fees  constitute the ANSP’s primary source of revenue, economic monitoring and  regulation by an independent third party can protect users and ensure a fair  pricing process.
ICAO recognizes the need for an independent mechanism to provide  economic regulation of air navigation services. According to ICAO, the  objectives of economic regulation should include the following:  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.
The five countries whose ANSPs we reviewed have taken different  approaches to reviewing their ANSP’s user charges and price-setting  process, but all five ANSPs are subject to some form of economic review or  price-setting process guidelines:   In Australia, the Australian Competition and Consumer Commission  (ACCC) oversees Airservices Australia’s process of setting user fees  for air traffic services. Airservices must notify the commission  whenever it wants to raise fees. The commission then evaluates  Airservices’ pricing proposal and decides to accept or reject the price  change. If the commission rejects the proposed price, it can set a lower  price. ACCC rejected one of two proposals by Airservices for a  temporary fee increase to address the revenue losses that followed  September 11 and the SARS outbreak, as well as the collapse of  Australia’s second largest airline. ACCC accepted Airservices’ first  proposal for a temporary fee increase for a year following the  September 11 and SARS outbreak. However, ACCC rejected Airservices’  second proposed fee increase. The airline industry had objected to the  second set of proposed increases, citing a need for longer term price  certainty. The ACCC ultimately decided that a longer term arrangement  should be considered. ACCC directed Airservices to focus on 5-year  pricing plans to encourage long-term planning, emphasizing that the  robustness of the airlines should be taken into account when a price is  set.
The Canadian Transportation Agency (CTA) reviews the price-setting  process against an established set of statutory principles. Appeals may  be made to CTA by the users as to whether NAV CANADA has observed  the charging principles in establishing its rates. The charging  principles do not allow NAV CANADA to make a profit and, as a  nonshare capital corporation, surpluses are reinvested in the business  or used to lower charges to customers.
Airways Corporation of New Zealand, Ltd., operates under a  memorandum of understanding with its airline users. Under this  memorandum, Airways uses the principle of “economic value added”  (EVA) to self-regulate its pricing. EVA is the difference between the net  operating profit after taxes and the cost of capital. A portion of any EVA  above a certain level is returned to users in the form of a rebate. For  example, in its 2004 Annual Report, Airways reported its net operating  profit after taxes as about $8.3 million. After subtracting the cost of  capital ($4.4 million), the resulting EVA was approximately $3.9 million.  Of this amount, $1.8 million was returned to customers in the form of a  rebate, since any profits above a certain level will ultimately be returned  to the airlines. According to the aviation industry, the EVA mechanism  has been key in making pricing of user fees more transparent.
In the UK, CAA exercises economic regulation over NATS. CAA’s  Economic Regulation Group sets price caps for 5-year periods, basing  them generally on the retail price index and the group’s own analyses  of allowances for NATS’s estimated operating and capital costs.
The German Transport Ministry reviews and approves any changes in  user fees, but it does not independently evaluate the price-setting  process or pricing changes. According to the Transport Ministry,  Germany plans to create an independent economic regulatory authority  by 2006 to comply with the requirements of the Single European Sky  initiative.
section_title: Since Commercialization, the Five ANSPs Have Maintained Safety, Controlled Operating Costs, and Achieved Efficiencies
paragraphs: According to information from each of the ANSPs we reviewed, air  navigation safety has not declined since commercialization, and all five  ANSPs have taken steps to control costs. In addition, the ANSPs have  improved the efficiency of their operations by implementing new  technologies and equipment. The ANSPs maintain that some of these  outcomes would not have been feasible in a government organization.
subsections: section_title: Safety Performance Has Not Been Compromised Since Commercialization
paragraphs: At a minimum, safety has not eroded since commercialization, according to  the available data from most of the ANSPs. For example, data from DFS  show a decrease in the number of aircraft proximity incidents in  Germany, from 23 in 1995 to 8 in 2003, 3 of which were attributed to DFS. In  the UK, the number of the riskiest air proximity incidents for NATS  declined from 9 in 2001 to 2 in 2003 and 1 in 2004. Similarly, data from  Airways Corporation of New Zealand indicate a downward trend in  incidents involving loss of separation for the years following  commercialization. NAV CANADA’s annual report for 2004 also cites a  decrease in the rate of loss-of-separation incidents, from an average of 0.96  incidents per 100,000 movements for 1999/2000 to an average of 0.79  incidents for 2003/2004. Officials at Transport Canada, the safety regulator,  confirm an overall decline in aviation incidents since commercialization.
Additionally, stakeholders have told us they believe the air navigation  system is as safe as it was when the government provided air navigation  services. According to some, the separation of operating and regulatory  functions has strengthened safety regulation and diminished any potential  conflict of interest between promoting the financial interests of aviation  operators and protecting safety.
As improved technology and system upgrades have allowed individual  controllers to handle increasing levels of air traffic, concerns have arisen  about the potential for controllers’ fatigue to compromise safety. Data are  not available to assess this potential, but some ANSPs have taken steps to  limit and monitor controllers’ workload. For example, the UK’s CAA has  regulated the hours of civil air traffic controllers, and its Safety Regulation  Group must be notified of any breach by NATS or by controllers. In New  Zealand, as air traffic has increased, some airspace sectors have been  subdivided so that controllers are responsible for a smaller piece of  airspace. DFS, in cooperation with its controllers’ association, has  undertaken a comprehensive study of controllers’ stress and strain, which  has led to internal regulations on the maximum working hours allowed at  individual sectors, according to DFS.
section_title: The 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 radar centers into a single  center by 2006. DFS has also integrated operations and consolidated  facilities, moving 17 approach units from airports and integrating them into  four air traffic control centers. DFS also relocated the Dusseldorf control  center to the Langen control center in 2002 (see fig. 1), a year earlier than  planned, and transferred and consolidated its headquarters from Offenbach  to Langen. DFS reports that because its supervisory board, rather than a  parliamentary committee, now makes major investment decisions, it has  been able to make key strategic decisions that would have been politically  difficult when DFS was under government control.
In the UK, NATS reduced its net operating costs by almost $161 million  from 2002 through 2004, in part through direct management actions,  according to its audited financial statement. For example, it consolidated  two operations into one at a new air navigation services center, called the  Swanwick Center. According to NATS, after placing this new center in  service, it reduced its staff costs by nearly $20.1 million and its costs for  services and materials by about $18.5 million between 2002 and 2003.  Between 2003 and 2004, NATS reported, it reduced its operating costs for  air traffic services by another $21.4 million through cost control measures.
section_title: The Five ANSPs Said They Have Improved Efficiency through Modernization
paragraphs: All five ANSPs said they have improved productivity through  modernization—that is, through investments in upgrading or replacing air  navigation facilities and equipment. For example, Airservices Australia  reported increases in controllers’ productivity following the introduction of  the Australian Advanced Air Traffic System (TAAATS) (see fig. 2). This  system replaced conventional radar screens with more advanced computer  screens that display data from a range of sources, including ground-based  surveillance equipment and satellite-linked navigational equipment on  aircraft, among others. TAAATS replaced handwritten, paper flight  progress strips with screen-based information that is updated  automatically. DFS is also eliminating systems that depend on paper strips  and expects productivity gains and cost savings to follow. In New Zealand,  according to the union that represents air traffic controllers, individual  controllers are now able to handle much more flight activity because of  improved technology.
Besides improving productivity, modernization—together with airspace  redesign—has produced operational efficiencies, including fewer and  shorter delays, according to the ANSPs. NATS, for example, reduced its  average delay per flight from 2.7 minutes in 2002 to 0.74 minutes in  calendar year 2003, while handling almost 2.1 million flights.
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. According to the ANSPs, access to cash flow and  borrowed funds has allowed them to plan and execute projects more  efficiently and has improved their ability to deliver projects on time, within  budget, and to specification. For example, Airways Corporation of New  Zealand deployed its new oceanic system, FANS1, in less than a year. The  management of NAV CANADA estimates that it is producing new  technology faster than the government once did and at half the cost.
Some of the commercialized ANSPs maintain that they have achieved the  benefits of modernization faster and at less cost by purchasing  commercially available systems and upgrades or by modifying off-the-shelf  technologies to meet their needs, rather than developing their own systems  from the ground up. NATS purchased its oceanic system and automated  tower/terminal control system from NAV CANADA. To achieve further  purchasing efficiencies, some commercialized European ANSPs have  developed an alliance to procure systems. For instance, Germany has  developed a strategic alliance with Switzerland and the Netherlands for the  joint procurement of a new radar system.
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 $80.3 million annually in reduced aircraft operating costs.  According to NAV CANADA, the airlines are now paying 20 percent less in  user fees than they formerly paid in ticket taxes when the government  provided air navigation services. In Germany, Lufthansa stated that  except in business years 2001 through 2003, the airline paid less in user fees  than it paid during the initial commercialization of Germany’s air navigation  service in 1993. According to Airways Corporation of New Zealand, it  reduced en route charges by 22 percent in 1995 and by another 13 percent  since 1997, resulting in an overall reduction of more than 30 percent.
For general aviation operators, however, commercialization has sometimes  meant an increase in fees. Before commercialization, many only paid taxes  on fuel. Some countries, such as Canada and New Zealand, have tried to  make the fees affordable for small operators by charging a flat fee. NAV  CANADA, for instance, charges general aviation operators a flat annual fee  of $58. According to the Aircraft Owners and Pilots Association–New  Zealand, Airways Corporation of New Zealand charges general aviation  operators a fee of $68 for 50 landings. In addition, Airways eliminated the  en route charge for light aircraft.
Some governments have provided for air navigation services at small,  remote general aviation and regional airports, viewing such services as a  public good. Australia, for instance, subsidizes service to some regional  areas under the Location-Specific Tower Subsidy Program and, according  to Transport Canada, NAV CANADA is legislatively required to maintain  service to remote locations in the northern region. In addition, NAV  CANADA charges the same price for services to remote locations as for  services to the rest of the country. The price is based on a formula that  considers weight and distance.
section_title: Lessons Learned about the Commercialization of Air Navigation Services
paragraphs: We have derived a number of lessons from our research on the  commercialization of air navigation services in the five countries we  selected. The following paragraphs summarize these lessons.
subsections: section_title: The Commercialized ANSPs Must Be Prepared to Mitigate the Effects of an Industry Downturn
paragraphs: Because commercialized ANSPs rely primarily on user fees to cover their  costs, an industry downturn presents a fundamental financial risk for such  ANSPs that they must be prepared to mitigate, whether through a reserve  fund, cost-cutting measures, user fee increases, additional borrowing,  restructuring, or some combination of these or other options that will be  sufficient to offset the decline in air traffic and the concomitant decline in  revenue. The industry downturn that began in about 2000 and intensified  after the events of September 11, 2001, and the SARS outbreak of 2003  brought this lesson home to at least four of the five commercialized ANSPs  we selected for review. After commercialization and before the downturn,  these four—Airservices, DFS, NATS, and NAV CANADA—had been able to  cover their costs through user fees and borrowing. However, during the  downturn, they had to take additional steps to address the revenue losses.  NATS, with the greatest debt load, was the most vulnerable, but even NAV  CANADA, with a multimillion-dollar contingency fund, eventually had to  take extraordinary measures.
Besides being burdened with debt, NATS was vulnerable to the industry  downturns because nearly all of its costs (95 percent) were fixed, limiting  its ability to cut costs, and its revenues depended heavily on North  American air traffic. Specifically, North American flights accounted for 14  percent of its flights and 44 percent of its revenues. When transatlantic  traffic declined after September 11, NATS’s revenues declined 15 percent.  To avoid insolvency, NATS first obtained an estimated $104.2 million in  short-term loan credit from its lending banks and then refinanced, bringing  in a new equity partner (BAA, plc). However, the combination of lost  business and increased debt threatened NATS with insolvency in early  2002, leading it to implement operational cost savings, obtain a temporary  loan credit, refinance its debts, renegotiate prices for users through a new  regulatory structure, and obtain additional funds from the government and  private shareholders.
Under its new regulatory structure, NATS now has a system in place to  mitigate the effects of an industry downturn through automatic price  increases that are triggered by reductions in air traffic. These price  increases go into effect when traffic falls below a benchmark level, limiting  NATS’s revenue loss to 50 percent of the revenue that would have been  generated if the benchmark level of traffic had been reached. If traffic falls  below this 50 percent benchmark, as it might in a severe crisis, NATS’s  revenue loss is limited to 20 percent of the projected revenue. In effect, this  automatic trigger mechanism spreads the risk of traffic downturns between  NATS and its airline customers. Without this trigger, the prices set by CAA,  the economic regulatory body, would remain fixed until the next regularly  scheduled review when prices may be adjusted, upward or downward, and  benchmark levels set.
In Germany, DFS also lost revenue during the industry downturn, but to a  lesser degree. DFS reported a loss of more than $36.4 million in 2001, when  air traffic declined by 0.9 percent over the previous year. In 2002, it  sustained a loss of more than $23.2 million, when air traffic levels fell 2.9  percent below 2001 levels. To address these deficits, DFS modified  investments, canceled projects, and ultimately raised fees, thereby  increasing financial pressures on the airlines. However, when air traffic  increased again in 2003, DFS recorded an operating profit of more than  $87.4 million and reduced its 2005 fees for en route services by 19.5 percent  and for approach control services by 28 percent. DFS has begun to  consider the benefits of a reserve fund, but German legislation governing  air navigation service charges must be changed before DFS can develop  such a reserve.
Before September 11, NAV CANADA banked up to $66.3 million in its rate  stabilization fund to protect against future losses. However, with the  industry downturn, this fund was quickly exhausted and, after the SARS  outbreak in 2003, the fund reached a cumulative deficit of about $96.9  million. To maintain operations, NAV CANADA cut costs and raised its  service fees, consulting with users as required. By the end of 2004, it  reduced the deficit to approximately $26.0 million, according to its 2004  annual report. However, as aviation industry representatives have noted,  the fee increases had the inadvertent effect of disrupting the business  cycles of air carriers, which faced the same difficult economic  circumstances. Moreover, because NAV CANADA’s price-setting process is  limited only by statutory charging principles, NAV CANADA was able to  raise its fees unilaterally, without having to negotiate increases with  representatives of the airlines or other interests. Its board approved the fee  increases to balance revenues and expenses as required by legislation. The  CTA rejected an appeal of the increases brought by certain operators.
section_title: Involving Stakeholders in Modernization Efforts Can Help Ensure Mutually Beneficial Results
paragraphs: According to the ANSPs, involving stakeholders in efforts to design,  acquire, and deploy new technologies can be beneficial. For example,  Airways Corporation of New Zealand noted that its investment decisions  are very much driven by customers’ needs. Airways said it consults closely  with the airlines before deciding to acquire new systems and to implement  technology upgrades. According to Airways, if the airlines say they do not  want to make a particular investment and the investment adds no value for  the customer, Airways will not spend the money. For example, the airlines  have reported that they are not currently interested in Automatic  Dependent Surveillance-Broadcast, so Airways has no immediate plans to  invest in the technology. DFS has also reported that consulting with its  customers before investing in any modernization efforts has been  beneficial. According to DFS, before commercialization, the German  government did not consult with users and other stakeholders when it  acquired and deployed new air navigation technologies.
Once an initial investment decision has been made, ANSPs have further  reported, it is beneficial to involve stakeholders throughout the design and  acquisition process. For example, Airservices Australia reported that, since  commercialization, air traffic controllers play a much larger role in the  acquisitions process and have come to understand the linkage between  service delivery costs and the costs of new equipment. Similarly, Airways  Corporation of New Zealand noted that it has found it essential to involve  the same controllers throughout the design process to ensure consistency  in requirements and to maintain a thorough understanding of the project’s  ongoing specifications. In Airways’ experience, it is essential for  controllers, manufacturers, and the ANSP to reach agreement in order to  establish realistic expectations for system design from the very beginning.
section_title: Steps May Be Needed to Balance Business and Small Community Interests
paragraphs: In some instances, an ANSP’s need to recover its costs may be at odds with  a small or remote community’s need for scheduled air service. Providing air  navigation services for such communities may not be commercially viable  because it typically generates less revenue than providing services for  larger communities. Even though the minimum cost of an air navigation  service is the same, regardless of the location, the cost per plane is often  higher at small or remote locations because the cost of the service is spread  among fewer operators, usually with smaller planes.
In the past and in some countries today, the ANSPs charged the same fee  for air navigation services at every airport, regardless of its size or location.  Under this arrangement, called network pricing, services at heavily used  airports subsidize services at small or remote airports. However, two of our  five ANSPs, Airservices Australia and Airways Corporation of New  Zealand, have adopted an alternative pricing scheme, called location- specific pricing, under which the fee for some service matches the cost of  providing that service to a specific location. Once this scheme is fully  implemented, formerly subsidized air navigation services to small or  remote locations may likely cost more. If an airline decides that it does not  want to pay the increased fees, it may discontinue service to the location.  However, air service may be the only means of public transportation to  some small or remote locations. Continuing to provide air navigation  services to small or remote locations may require special efforts to balance  community needs and business interests.
Airservices Australia has reported that it plans to phase in location-specific  pricing to ease the transition from network pricing. According to  Airservices, it will increase charges over the next 5 years at general  aviation and regional airports and the increased charges have been  approved by the regulator. Although the increases will be gradual, the plan  has raised concerns about further price increases and any future need to  close or reduce services at these locations. Some fear that needed air  services to remote bush locations will be lost, while others fear that  secondary services, such as flight school training, which are typically  provided at smaller airports, will be affected.
The impact of location-specific pricing on remote communities and small  operators is difficult to predict. Costs may go up, but charges may not  necessarily be prohibitive. When legislation calls for service to remote  communities, an ANSP may ultimately be forced to take a financial loss if it  is not able to fully recover its costs. Airservices Australia is seeking to  control costs at some locations by deploying new lower cost technologies  to serve remote communities. For example, Airservices Australia is  planning to install Automatic Dependent Surveillance-Broadcast ground  stations, which will allow air traffic surveillance services over remote  regions of Australia where no surveillance currently exists and where the  introduction of radar would not be cost-effective.
section_title: Appropriately Assessing the Value of Assets Is Essential for Sound Pricing and Cost Accounting
paragraphs: To protect taxpayers’ interests, Canada and the UK needed to have an  appropriate valuation of their facilities and equipment before wholly or  partially selling these assets to their newly established ANSP. According to  its Office of the Auditor General (OAG), Canada did not properly value its  ANSP assets and infrastructures. The approximately $1.5 billion value that  the government negotiated with NAV CANADA in 1996 fell short of the $2.3  billion to $2.4 billion estimate developed in 1995 by a third party. NAV  CANADA reported, however, that both it and Transport Canada disagreed  with the OAG’s estimate and its underlying assumptions. In a study of the  NATS reorganization, the National Audit Office found that the UK  government raised some $1.3 billion from the sale of the ANSP to a  consortium of seven UK-based airlines. However, these proceeds were  realized by increasing the level of NATS’s bank debt. As a result of this debt,  NATS was extremely vulnerable to the decline in air traffic after September  11. DFS is currently undergoing a valuation of its key assets in preparation  for selling 74.9 percent of its equity to private investors in a formal  competitive bidding process.
section_title: Maintaining Staff Levels and Expertise during Commercialization Can Prevent Disruptions in Regulatory Functions
paragraphs: Some countries that commercialized their ANSP had difficulty retaining a  sufficient number of staff to carry out safety regulation. For example, in  Canada, many of the safety staff moved to the newly established NAV  CANADA after commercialization, leaving the government regulator,  Transport Canada, with insufficient staff to carry out timely safety  inspections during the first 6 months after commercialization. Germany  faces a similar challenge as the government prepares to develop a safety  regulatory authority in accordance with the Single European Sky initiative  by the end of this year. According to the Transport Ministry, it may be  difficult for the government to recruit safety staff at a civil service salary  when the private sector is paying higher salaries for safety inspectors to  develop safety standards and procedures. CAA managers with  responsibilities for regulating the safety of NATS’s operations also raised  concerns about recruiting staff. According to these officials, regulators  need the highly skilled expertise of air traffic controllers. However, the high  salaries of air traffic controllers of the ANSPs make it difficult to recruit  them for regulatory positions.
section_title: Developing Baseline Measures before Commercialization Can 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 performance in the areas of safety, cost, and efficiency. Some of the  countries whose ANSPs we reviewed did not collect baseline data or  measure performance as extensively as the commercialized ANSPs have  since done. As businesses, commercialized ANSPs must assess the  performance they are making toward their goals to access private funding  and, therefore, they need extensive performance data. However, lack of  baseline measures before commercialization makes it difficult to gauge its  development before and after commercialization. For instance, the  Canadian OAG considered the assets of NAV CANADA to be undervalued,  due to the absence of good financial information before commercialization.  In addition, international organizations that support commercialized  ANSPs have emphasized the importance of developing performance  measures and benchmarks. ICAO, for example, stresses the importance of  having transparent financial data available for economic oversight, and  CANSO and EUROCONTROL are working to standardize performance  measures and compare ANSPs across dimensions such as safety, cost, and  efficiency.
We are sending copies of this report to interested congressional  committees; the Secretary of Transportation; the Administrator, FAA; and  the chief executive officers of the ANSPs in our sample. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
Please call me at (202) 512-2834 if you or your staff have any questions  about this report. Contact points for our Offices of Congressional Relations  and Public Affairs may be found on the last page of this report. Major  contributors to this report are listed in appendix II.
section_title: Scope and Methodology
paragraphs: We developed a descriptive analysis of selected foreign countries’  commercialized, performance-based air navigation services providers  (ANSP) by reviewing the characteristics and performance of five such  organizations, which we selected as illustrative of similarities and  differences in ownership, length of experience with commercialization, and  size and scope of operations. We then analyzed the information we had  gathered to identify lessons learned about the commercialization of air  navigation services. Our review included site visits, agency interviews, and  analyses of documents provided during our site visits and obtained through  our own research. The ANSPs—Australia’s Airservices Australia; Canada’s  NAV CANADA; Germany’s Deutsche Flugsicherung GmbH (DFS); New  Zealand’s Airways Corporation of New Zealand, Ltd.; and the United  Kingdom’s (UK) National Air Traffic Services, Ltd. (NATS)—were  commercialized between 1987 and 2001 and have been operating since then  as performance-based organizations. Because we selected these ANSPs to  illustrate specific characteristics, our results cannot be generalized to all  commercialized ANSPs.
To describe common characteristics of commercialized air navigation  services in the selected countries, we conducted a computer search on key  elements of each ANSP and conducted interviews in each country. We  collected information on the size and scope of air traffic (e.g., number of  aircraft movements and number of air traffic controllers); the ownership,  management, and funding structures of each country’s ANSP; and  institutional mechanisms for stakeholder input. We interviewed  government officials, ANSP executives and representatives, union officials,  and representatives of aviation stakeholders in each country to synthesize  information on how air navigation services were delivered before  commercialization and the key elements and characteristics of  commercialized ANSPs.
To describe how the safety, cost, and efficiency of foreign air navigation  services have changed since commercialization, we conducted interviews  and reviewed documents obtained during our site visits. We also gathered  information through our own computer research. We interviewed  government officials, ANSP executives and representatives, national audit  officials, union officials, and representatives of aviation stakeholders to  obtain their views on how safety, cost, and efficiency have changed since  air navigation services were commercialized. In addition, we interviewed  officials from the International Civil Aviation Organization (ICAO), the Civil  Air Navigation Services Organization (CANSO), EUROCONTROL, and the  European Commission to obtain their perspectives on these issues. Finally,  through our computer research and analysis of documents obtained during  our site visits, we obtained additional information on the performance of  each ANSP, including its safety, costs, and efficiencies, since  commercialization.
To identify lessons learned about the commercialization of air navigation  services, we conducted interviews and reviewed literature on  commercializing air navigation services and implementing performance- based air traffic organizations. In each country, we interviewed government  officials, ANSP executives and representatives, union officials, and  representatives of aviation stakeholders, asking them about the lessons  they had derived from commercialization. We also reviewed literature from  academics and experts on commercializing air navigation services and  synthesized information from our interviews with information from the  literature to arrive at some general lessons on the commercialization of the  five air navigation service providers we reviewed.
Unless otherwise noted, we converted the local currencies of each country  into U.S. dollars using the Organization for Economic Cooperation and  Development’s purchasing power parity historical series for each country  in the relevant years for the currency. We adjusted for inflation using the  Gross Domestic Product price index of the Congressional Budget Office’s  economic projection for 2005 to obtain the estimated value of each  country’s currency in 2005 U.S. dollars.
We did not compare performance before and after commercialization or  across countries. Such comparisons are generally not feasible because data  for assessing performance are typically unavailable for the time before  commercialization, or the measures have changed in the years following  commercialization. Furthermore, comparisons between or among ANSPs  are difficult because each ANSP may define its measures of cost, safety,  and performance differently.
We determined from our review of the independently audited financial  reports of each ANSP that the financial data we obtained and used for our  engagement were sufficiently reliable for our purposes. An independent  audit was conducted on the annual financial reports of each of the five  ANSPs in accordance with the applicable country’s accounting standards  and practices. The independent auditors for each ANSP found that the  annual financial statements were unqualified and fairly presented, in all  material respects, the financial condition and position of the ANSP.
To identify any changes in safety since commercialization, we collected and  analyzed information provided by each ANSP and by its independent safety  regulator. We interviewed officials from these regulators, and we relied on  safety data from the ANSPs and their audited annual financial reports,  which had been independently reviewed and evaluated. To assess the  reliability of these data, we (1) interviewed the officials from each ANSP  and its independent safety regulatory authority who were responsible for  compiling these data and (2) corroborated the data through comparison  with other sources of information. We determined that the data from each  country were sufficiently reliable to identify any major changes in safety  since each ANSP was commercialized.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Elizabeth Eisenstadt, Samantha  Goodman, Brandon Haller, David Hooper, Hiroshi Ishikawa, Joseph Kile,  Jennifer Kim, and Richard Scott made key contributions to this report.