On The Radar

Typically each country imposes regulatory controls to ensure that this monopoly position is not abused by the air navigation service provider (ANSP) in the setting of user charges. That monopoly provision of air traffic control usually extends to approach and aerodrome control service areas, but some countries, like the United Kingdom, have created a regulatory environment that enables competition to take place in the delivery of these services. In the UK aerodrome and approach control services at almost all airports are deregulated. Spain, too, has deregulated its aerodrome control services in order to lower air traffic control costs, which are the highest in Europe.

Unlike in Australia, approach and aerodrome control services – described as terminal air navigation services – in the UK have never been a statutory monopoly. Of the 128 licensed aerodromes in the UK, only approach control services for 14 airports, including the fiveLondon airports, are handled by NATS, the UK equivalent of Airservices.

Instead airport owners at 110 locations throughout the UK are responsible for terminal services, while two additional organisations provide services at the remaining four airports.

NATS is a privatised company whose shareholders include the UK government, a consortium of airlines, staff and Heathrow Airport Limited. There is light-handed government influence over its activities. To match the organisation to the competitive operational environment, NATS is split into two subsidiary companies.

NATS En Route is the sole provider of en route services. During FY 2014/15 it generated 75 per cent of total group income and contributed 86 per cent of its net profits.

NATS Services, meanwhile, provides terminal services and related engineering services at 14 airports in the UK plus two military bases. Through FerroNATS it also provides terminal services at nine airports in Spain.

These terminal air navigation services are competitively tendered, with revenue earned from airport owners, not directly from the aircraft operators. In turn the airport owner recovers the cost of terminal air navigation services at the airport through charging its airline customers. NATS Services contributes 25 per cent of total group income but only 14 per cent of net profits, reflecting the lower margins earned through competitive tenders.

Pressure on costs in non-regulated areas seems to influence decision-making in monopoly service areas. NATS claim that since privatisation in 2001, it has reduced operating costs by 33 per cent in real terms. Pension liability costs have been addressed and two air traffic control centres closed.

Competitive forces

As part of its obligations to the European Commission, the UK Civil Aviation Authority has a goal for terminal air navigation services at the nine UK airports with more than 70,000 IFR movements annually for market competition to drive a 2. 3 per cent per year reduction in cost over 2015-2019.

As part of that goal, by the end of 2016 the CAA would like half of those nine airports to have tendered their terminal air navigation services.

To create a market for terminal services, considerable regulatory intervention has occurred to remove barriers to entry over and above legislation that enables competition. The foremost initiative undertaken by the CAA is to push airport owners to put terminal service delivery to competitive tender.

Some of airport owners are reluctant to tender terminal services, and there is evidence to suggest that

The costs and risks of transition to a new service provider are a significant barrier.

the costs and risks of transition to a new service provider are a significant barrier to ending an incumbent relationship with NATS Services. Manchester Airports Group has expressed concerns about the costs of tendering and risks associated with switching suppliers, while Heathrow Airport Ltd is cautious in exploring alternative terminal air navigation services supplier options due to concerns about whether a seamless transition could be achieved in a cost-effective manner.

To foster competition, the CAA has directed initiatives to remove NATS Services’ many competitive advantages. Assets needed to provide terminal air navigation services such as control towers and technology systems are owned by airports and the CAA has introduced protections to ensure that NATS En Route does not favour NATS Services over other suppliers and to prevent cross subsidisation.

The availability of skilled staff is arguably the most important input for operating an ATC service and it is presumed that ATC staff will transfer to an alternative supplier should the contract for service provision change hands. This enables an alternative supplier to access the existing pool of ATC staff without incurring major transition costs associated with the recruitment and training of replacements.

But an agreement with staff at the time NATS was privatised, however, inhibits this movement of staff. Staff who are covered by the agreement can choose to remain with NATS rather than transfer to the new employer should equivalent pension arrangements not be provided. An alternative supplier, therefore, faces the prospect of higher set-up costs before being able to commence a service. NATS Services faces competition from three sources in the form of other UK terminal air navigation services suppliers, international ANSPs or airports themselves self supplying terminal air navigation services.

Other UK terminal air navigation services suppliers have been shaped to meet the needs of airports with comparatively low levels of traffic movements and complexity. They have become low-cost providers through reducing non-operational overheads and operational costs. VantageANS, for example, provides terminal air navigation services at three airports. It claims they pay little more than half that of NATS Services for an aerodrome-only qualified air traffic controller.

The comparatively low levels of sophistication of these organisations, however, make it problematic for them to deploy the resources needed to successfully tender for terminal air navigation services at the nine large airports. They are also waryof assuming the greater operational risk associated with terminal air navigation services at the nine largest airports.

Then there is competition from other sophisticated ANSPs. In 2014 Gatwick Airport Limited chose the German ANSP Deutsche Flugsicherung Gmbh to replace NATS, with service transition to be completed in the second quarter of 2016.

But providing terminal air navigation services at only one location means that an alternative supplier is likely to be at a considerable cost disadvantage to an incumbent with responsibility for a number of airports. To compete at a single location, it is likely the alternate supplier would need to adopt some level of cost subsidisation from the home country until further terminal air navigation services service can be won and economies of scale realised.

The small number of compliant bids for terminal air navigation services tenders at Gatwick (three) and Birmingham (one) highlights the difficulty smaller suppliers have in meeting the service capability thresholds required by larger, more complex airports. There also appears to be only a very small number of international ANSPs who have the operational sophistication, cost structure and commercial aspirations to compete with NATS.

Self-supply, involving the airport owner being the terminal air navigation services service supplier, is the third source of competition. Birmingham Airport decided to self-supply in 2014, replacing NATS.

Self-supply provides three possible advantages to an airport owner. It enables an airport to exert greater control over activities that take place at their airport. Some cost savings might be realised by increasing the job scope of air traffic control management and staff. Airport owners also avoid the costs and effort needed to periodically re-tender their terminal air navigation services service, along with the transition risks. The airports, on the other hand, need to be able to increase their operational air traffic management capability and assume these risks.

A model for Australia?

What could be some implications for Australia? In comparison to NATS, Airservices provides aerodrome and approach services at 29 locations ranging from small regional to sophisticated international airports. While run as a commercial concern, it experiences considerable political influence over its operations and business activities. Airservices is obligated to provide an aerodrome service when CASA identifies a safety requirement.

Should a competitive market be created for aerodrome services, responsibility for service provision would revert from Airservices to the airport owner and Airservices would become a service supplier.

Competition – likely from other ANSPs like Airways New Zealand, NATS and DFS – would probably lead to Airservices taking some commercial decisions that would lower costs in both monopoly and contestable service areas.

But while the largest airports would be able to recoup costs from their users, smaller airports may have more difficulty, increasing the cost burden many regional communities already face in running their airports. And government would not be able to exert the same influence over Airservices operations and commercial activities.