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.” 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. 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. 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. 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. 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.