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Air Traffic Control:
Chances of Reform? May 2016 Download PDF

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Airlines, airports and air traffic control companies were once overwhelmingly owned and centrally controlled by governments. Airlines (and increasingly airports) have long since moved on, with the majority now in private ownership, having experienced both deregulation, substantial cost cutting and efficiency improvements. For air traffic management, on the other hand, while there have been technological advances, the changes in ownership structures and the increase in competitive pressures have been far more modest. Is this about to change? Don't hold your breath.

Before considering the global trends behind this statement, it is important to differentiate between the two sub-sectors of the ATM industry: towers and en-route. Often, though not always, they are provided by the same company, and they differ in particular in that there does seem to be at least some movement towards more competition in tower services. In the UK, for example, the market is deregulated and while most airports employ NATS, some use an alternative supplier or provide their own ATM. The second largest tower contract in the UK, that for Gatwick Airport, was recently transferred from NATS to DFS of Germany.

Similarly, faced with extremely high salary levels and inefficiencies, together with the country's general economic situation, Spain contracted out the provision of tower services at several of it secondary airports. Ten of the contracts were awarded to a consortium of NATS and the Spanish company Ferrovial. The UK outsourcing company Serco won the remaining three contracts. In Germany the Austrian ANSP Austro Control handles air traffic services at several smaller airports. Even in the United States the FAA has outsourced a significant number of smaller tower operations, apparently with little if any opposition from other stakeholders. (This contrasts markedly with the reaction of some to reform of the FAA's en-route services).

This trend for more contracting out, and therefore increased competition, in the provision of tower services is likely to continue, probably aided by the development of “virtual” towers at smaller, more remote airports.

En-route ATM, however, is quite a different matter. A very small number of countries have brought in external expertise to run their air traffic control, often those faced with rapid increases in demand and very limited local ATC expertise, such as the Gulf States. But overwhelmingly governments guard the sovereignty of their airspace ferociously, with the result that the vast majority of countries, no matter how small, retain control over ATM provision. It is certainly true that the separation of ATM companies from direct ministerial control is now common, but the companies involved still tend to be State enterprises.

The monopoly positions and public sector employment practices (including pensions) of ATM companies make achieving efficiencies and meeting customer needs all the more challenging. Cost pass-through practices reduce the pressure to reform and often mean ATC prices increase significantly when air services demand is weakest, such as in 2001/02 and 2008/09, just when the profitability of their airline customers is under particular pressure. It is not difficult to see why relations between airlines and ATC companies are often strained, even without the controller strikes that have become all too common in Europe.


Two countries in particular have broken out of this rigid model, the UK (NATS) and Canada (Nav Canada). Their objectives were similar, but the solutions they came up with differed in several important respects. In the UK, the Labour party strongly opposed privatisation of NATS in any form when in opposition. (“Our skies are not for sale”.) However, when elected to form a government in 1997, Labour quickly proceeded to sell off 51% of the company by means of a so-called Public Private Partnership (PPP) initiative. It chose a complex governance structure with the objective of at least reducing the opposition to the sale from various interests, not least the unions and the left wing of the Labour Party, while at the same time maximising the financial proceeds for the Treasury.

5% of NATS' shares were given to the staff at no charge, with 46% made available to the private sector. However, this 46% brought with it the role of “Strategic Partner”, effectively giving the minority shareholder control of the company, subject only to certain powers reserved for the State. Three serious bidders were in the running, Serco, Lockheed Martin and a consortium of seven UK airlines known as The Airline Group. It was The Airline Group, politically the least contentious bidder, which emerged as the winner.

The fact that seven airlines put aside their intense competitive instincts to co-operate in this way is indicative of how critical air traffic control is for their operations. Considerable attention is often paid to ATC charges, which are certainly a significant cost item for airlines, but in fact the avoidance of delays and reduction in flight times which flows from an efficient ATC system is far more important for most carriers. At the time of the privatisation, NATS, like almost all ATC companies, had a poor reputation for meeting customers' needs, with airlines experiencing major delays to their flights on a regular basis and investment projects failing to be delivered on time and budget.

This and the feeling that the other bidders were less likely to address the company's fundamental problems in a way that would satisfy airlines' needs, led to the creation of The Airline Group and eventually to the successful bid. It was a reflection of the group's priorities, and of the expectation that the investment would not produce early profits, that the bid was promoted as “not for commercial return”, subsequently often misquoted as “not for profit”, which was not the objective. Profits would (hopefully) come, but the main challenge was to turn NATS into an efficient ATC provider meeting its customers' requirements. To this end, several airline employees were seconded for a period to the ANSP.

The Airline Group bid, which was higher than its two competitors, involved a highly geared investment. It may well have worked, with NATS' borrowing being reduced gradually as the effects of the new investment programme worked through, except for one event — 9/11. The dramatic reduction in traffic, especially across the Atlantic, put considerable pressure on NATS' finances shortly after the completion of the PPP in 2001. It proved necessary to refinance the company. The Government provided additional finance and a new investor was introduced, the airport operator BAA (now Heathrow Airport Ltd) with a 4% stake. The Airline Group's shareholding was reduced from 46% to 42%, but its Strategic Partnership role, and accompanying governance powers, were largely unaffected.

So, apart from the initial financial problems, which arguably could not have been foreseen, has the privatisation been a success? The answer is almost certainly a yes. Despite claims to the contrary at the time, safety has not been impaired; indeed it has improved. Flight delays have been reduced substantially and project delivery standards raised to those common in the private sector. Industrial relations have been good and financial performance excellent.

The main negative aspect is probably the fact that NATS remains, largely as a result of high employment costs, one of the most expensive ATC companies in Europe, despite quinquennial price reviews by the Civil Aviation Authority. More recent regulatory intervention by the European Commission, however, is likely to increase the pressure to reduce costs.

Although the seven airlines which formed The Airline Group were initially focussed primarily on improving the service provided by NATS rather than financial returns, after a few years their investment in fact proved to be quite profitable, probably more so than running airlines. However, reorganisation among the group, such as bmi's shares being acquired by Lufthansa and ownership changes and mergers with respect to Thomas Cook and Tui, eventually led to four of the founding carriers (Tui, Thomas Cook, Lufthansa and Virgin Atlantic) deciding to sell most of their shares to USS, a pension fund. This left British Airways, easyJet and the Monarch Airlines Pension Fund (which had acquired the airline's stake in The Airline Group some time previously), together with the four selling carriers which retained small stakes, owning 51% of the company. The Airline Group's 42% ownership of NATS and its Strategic Partnership role remained unaffected.

In 2015, the Government announced its intention to sell its 49% shareholding in NATS, but it remains to be seen whether this will in fact prove to be feasible. A previous attempt to sell down the stake got nowhere. The complexity of the governance procedures introduced at the time of the initial PPP have created difficulties which, while not insurmountable, are certainly a challenge.

Nav Canada

NATS was not the first ATC company to be privatised. That honour goes to Nav Canada, established as a private company in May 1995, and formally taking responsibility for the provision of ATC services on 31 October 1996. It controls an enormous airspace stretching from the Pacific West coast of Canada to the East coast of Newfoundland and on to the centre of the North Atlantic. It describes itself as representing “a unique consensus among the company's four founding groups: commercial air carriers, the Government of Canada, business and general aviation, and our employees, represented by their unions.” A Board of 15 Directors, all Canadian citizens, consists of four elected by the airlines, one elected by the Canadian Business Aviation Association, three appointed by the Government, two representing the unions and four independent Directors elected by the other 10 members, plus a Chief Executive Officer appointed by the Board.

This governance structure of the Board is important because it is designed to minimise the opportunity for any one stakeholder group to exert excessive influence. In addition, Board members are not permitted to be active employees of airlines, unions or government. There is, however, a 20-member Advisory Committee of aviation professionals which analyses and reviews issues facing the company and makes recommendations to the Board. It is perhaps an indication of the stakeholder consensus approach adopted from the beginning in establishing the governance principles for Nav Canada that its first Chief Executive, John Crichton, who went on to serve for 20 years, came from the Air Transport Association of Canada.

Clearly Nav Canada is not a normal commercial company. It was established by an Act of Parliament as a “non-share capital corporation”, financed by means of publicly-traded debt, currently amounting to some C$2bn (US$1.5bn/£1bn). The Canadian Government initially received C$1.5bn as compensation for the assets transferred to the new company. By law Nav Canada is not allowed to set its service charges “at a level exceeding what is required to meet the cost of providing civil air navigation services.” The previous ticket tax approach to funding was replaced by charges levied directly on the users of ATC services, with airline rates depending on the weight of aircraft and distance travelled as is the case in most countries and general aviation operators paying a fixed annual fee.

The reasons for establishing Nav Canada were similar in a number of ways to those behind the UK Government's decision to privatise NATS. It had a good safety record and respected operational staff. But its infrastructure was in desperate need of modernisation and flight delays and costs were seen as far too high. Government investment restrictions and wage freezes were affecting the company's ability to reform and move forward. There was also concern about having the service provider and regulator as part of the same organisation, contrary to the trend found in many other countries.

Airlines were particularly vocal in their demands that something had to be done. As the current Nav Canada Chief Executive, Neil Wilson, has said: “We had general dissatisfaction from everybody. We had a safe system, but it was not a system that was delivering all that it could.” The option eventually chosen by the Canadian Government was certainly radical, and presumably not without its risks. In the event it has proved to be a great success.

John Crichton has cited six critical achievements which have contributed to that success:

  • Safety, especially halving the loss of separation rate .
  • World-leading technology, reflecting a C$2bn investment in modernisation.
  • People, with a constructive and productive labour relations climate.
  • Fiscal strength, in particular maintaining an AA credit rating
  • Focus on customer service, mainly as a result of reduced delays and lower charges.
  • Space-based ADS-B, a new joint venture with Iridium Communications, ENAV, the Irish ANSP and Navair to be introduced into service in 2018, designed to maintain Nav Canada's leading technical position.

As we will see later, this success has often been compared with the FAA's record in the United States. Writing in in February of this year, Dan Reed highlighted the differences, and didn't mince his words: “By removing the air traffic control function from the clutches of government budget restraints and politically-driven appropriators, Nav Canada has been able to rapidly upgrade its technologies and practices and to implement those with considerable success. Meanwhile, the FAA has become the laughingstock of the global air transportation management world for its chronic false starts, delays, missed deadlines, and misunderstandings of what's actually needed or possible in terms of air traffic control modernisation.” Another journalist, Scott McCartney, writing in the Wall Street Journal, has described flying over the US-Canada border as like time travel for pilots. “Going north to south, you leave a modern air traffic control system run by a company and enter one run by the government struggling to catch up.”

Rest of the World

When the UK Government partly privatised NATS in 2001, many involved expected the new company to act as a model for other countries, just as the UK's early privatisation of other State industries had been followed, to a greater or lesser extent, by many other governments. This has not, however, proved to be the case. The only exception, and even this is far from certain, is the proposed sale of ENAV in Italy. Similarly, while Nav Canada has attracted considerable interest in the US, so far there has been no duplication. There are a number of explanations for this lack of action. Pressure to “do something” is certainly building up throughout the world, but the obstacles to progress should not be underestimated.

This is particularly the case in the Far East, for example. Depending on how Asia/Pacific is defined, there are over 40 ANSPs in the region, almost all nationally based. Khaw Boon Wan, Singapore Infrastructure and Transport Minister, has commented that the potential of the ASEAN Single Aviation Market, which came into effect early in 2015, is being stifled by poor co-ordination between air navigation service providers in South East Asia. “We need our airspace to be better integrated so air traffic can be more efficiently managed and safety enhanced.” He went on to call for “one market, one seamless airspace” among ASEAN countries. “Governments are the key players in airspace integration.”

Therein lies the problem, of course. As Tom Ballantyne has commented, if there is one issue that more than anything unites airlines, ANSPs and airports in Asia/Pacific it is the belief that the region's governments are not moving fast enough to address the damage the increasingly crowded skies is doing to their businesses. But the fact remains that integration and consolidation, to be effective, to save costs and to improve efficiency, almost inevitably mean closing ATC centres. Not surprisingly governments shy away from announcing that high skilled, well paid jobs are to be abolished and the work handled by employees of foreign ANSPs, especially since there are likely to be few actual cost savings for the governments themselves apart from probably modest initial sale proceeds. This is despite the fact that there are very real economic benefits from ATC reform for the countries involved which have been repeatedly identified.

In the Middle East, for example, airspace is similarly highly fragmented, made worse by the impact of regional conflicts which result in traffic disruption from airspace closure. According to a report produced by Oxford Economics and commissioned by the UK's NATS, if nothing is done the Gulf Co-Operation Council States (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) together with Iraq and Iran will lose some $16bn in economic benefits by 2025 as a result of increased delays to passengers and airlines.

Speaking last October at the IATA Middle East Aviation Day conference in Abu Dhabi, IATA's Director General and Chief Executive Tony Tyler noted: “The enormous success that aviation has enjoyed in much of the region has created challenges that will require co-operation and visionary planning to overcome. In some ways the region is in danger of becoming a victim of its own success… The challenge is to increase the overall efficiency of the ATM system of the region through improved airspace design and organisation… The need for action is urgent and strong political will is required.” Co-operation, visionary planning and strong political will have, unfortunately, all been notable by their absence so far in the ATM field, especially among governments.

Europe is just as complicated, with a highly fragmented, expensive and politically dominated airspace. The Internal Aviation Market may have existed for several decades, but there is very little sign of consolidation among European ANSPs. A study recently published by IATA highlights what is at stake. European ATM modernisation/reform would, it is claimed, result in the creation of one million additional jobs and boost the European economy by some $245bn by 2035. Currently average flights in Europe are nearly 50 kms longer than they need be and delays average some ten minutes per flight.

Single European Skies

To address this problem Europe has an ambitious technical/organisational solution, the Single European Skies initiative, including the Single European Sky ATM Research project, or SESAR, with the objective of delivering a threefold increase in capacity, improved safety by a factor of ten, reduced environmental impact of 10% per flight and 50% lower costs. Unfortunately, as Tony Tyler has pointed out, these goals are not being achieved. “Despite a strong European Commission vision and push for SES, national interests have prevailed.” The ambitious SESAR technical initiative is running way behind schedule and over budget and faces major challenges. As Michiel van Dorst, KLM's EVP Flight Operations and Deputy COO, has said: “There has been a lot of talking and not much action. We have become a bit cynical and disappointed about the progress of SES.”

The introduction of Functional Airspace Blocks, or FABS, is a start towards consolidation, but a very tentative one with limited objectives. Nine have been proposed, but only two (UK-Ireland and Denmark-Sweden) have been implemented (see map). In fact some believe FABs may even be a step backwards in certain respects. For example, Mark Deacon of Monarch Airlines and a long-serving representative of the International Air Carrier Association on ATC matters has argued that they have “actually increased fragmentation of the network by protecting States and ANSPs within another line of defence. For those of us longing for a Single European Sky, the FAB empires appear to be the biggest blocker of all.”

Jan Klas and Lubos Hinovsky of Air Navigation Services of the Czech Republic similarly question the value of FABs, noting that there is no doubt that their current development cannot meet the high expectations of both airspace users and the European institutions, although they argue that it would be a mistake to abandon the concept altogether. They go on to comment: “Unfortunately there is a hopeless lack of shared vision in the European air traffic management industry... [The] consequences are a poorly communicated political vision; inconsistent stakeholder requirements; contradictory regulations; inefficient and inaccurate business planning across the ATM industry; outcomes opposite to expectations of the airline users; and a rigid environment preventing better use of state of the art technology.” Presumably apart from that, everything else is rosy!

The industrial relations problems experienced by several ATC providers in Europe illustrate the scale of the underlying issues. The one-day strike by French controllers in late-May was the sixth in five months, the 47th in seven years. (More strikes are already in the pipeline, so by the time you read this these numbers will almost certainly have been exceeded.) And this is not just a French problem. Similar strikes have occurred recently in Greece, Italy, Belgium and Iceland. It is perhaps hardly surprising that a growing number of airlines, led by the new lobbying group Airlines for Europe, are calling for such strikes to be banned, or at least for ways to be found to mitigate their effects, such as allowing other ANSPs to take over strikebound airspace. The financial impact on airlines from grounded aircraft and longer flying times is considerable, now exacerbated by the need to compensate passengers for delays under EU Regulation 261. All European ANSPs are protected from being sued by airlines or passengers for delays caused by strikes.

Perhaps the nadir of European ATM industrial relations came with the strike by Belgian controllers in April, shortly after the Brussels Airport terrorist attack. For once putting diplomatic language to one side, and reflecting the anger increasingly felt by ANSPs' customers, IATA called the action “a kick in the teeth for all the airlines and airport staff who have worked so hard to reconnect Brussels to the world after the appalling terrorist attack just three weeks ago. It is the height of irresponsibility … If we cannot count on simple human decency from such highly-compensated professionals then it's time for governments to find ways to guarantee the availability of air traffic control services.”

The job of an air traffic controller is certainly challenging, requiring a high level of technical competence and several years of training. However, as IATA points out, controllers are almost invariably highly compensated and it is difficult to believe their working conditions are such as to justify the level of disruption seen recently in Europe. The underlying problems are more likely to be structural, and therefore unfortunately all the more difficult to solve given their political dimension.

Some among the European ATM leaders do have a vision of a reformed future. Klaus-Dieter Scheurle, CEO and Chairman of DFS, the German ANSP, and former State Secretary at the German Federal Ministry of Transport, Building and Urban Development, recently wrote, for example: “My vision is that, within the regulatory framework, the air navigation services sector will be consolidated and free-market conditions will determine success .... ANSPs will co-operate and at the same time offer and purchase services from each other as required. Only a few of the privatised enterprises will be able to provide the complete value chain of air navigation services. National borders will no longer determine the route network or service provision throughout Europe.” That may be Herr Scheurle's vision, but unfortunately so far there is precious little sign of it being implemented.

ye August (C$m) 2015 2014
Enroute 679 641
Terminal 476 464
Daily/annual/quarterly 78 75
North Atlantic 47 46
Other 52 46
Total revenues 1,332 1,272
Salaries 858 817
Depreciation 136 137
Other 238 226
Costs 1,232 1,180
Operating profit 100 92
Net finance costs 102 104
Rate stabilisation and fair value adjustments 2 12
Pretax profit -- --
Tax -- --
Net profit -- --
ye March (£m) 2015 2014
Airspace 716 720
Airports 177 170
Engineering 17 13
Other 13 14
Total Revenues 922 918
Salaries 404 419
Depreciation 110 108
Other 156 151
Costs 670 677
Operating profit 253 240
Net finance costs 28 28
Fair value adjustments 2 18
Pretax profit 227 230
Tax 45 38
Net profit 181 193
This is the first of a two-part examination of air traffic control reform around the world. Part 2 will feature in the next issue of Aviation Strategy.
EUROPE: IFR FLIGHT FORECAST Produced by GNUPLOT 5.0 patchlevel 1 8,000 9,000 10,000 11,000 12,000 13,000 2000 2005 2010 2015 2020 Base High Low Base Base High Low

Source: Eurocontrol STATFOR Feb 2016


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