A Model Choice

Earlier this year The Australian Aviation Associations Forum (TAAAF) proposed a number of policies to enhance Australian aviation, foremost of which was the privatisation of Airservices. The TAAAF speaks for 10 peak bodies with Greg Russell, a former chief executive of Airservices, its honorary chair.

“TAAAF was established in 2008 over concerns that the aviation industry was quite fractured. There was a need for various associations representing aviation organisations to come together to share intelligence and formulate policy initiatives that are representative of the whole industry. ” Russell says.

“The TAAAF document presented a broad list of policy recommendations and while it called for immediate action on some issues (like LAME training), on others such as the Airservices ownership, it was designed to begin the discussion on a better model. ” In its policy document, TAAAF critiqued the ownership and scope of activities performed by Airservices. It referenced a number of government reports to highlight problems with Airservices’ performance, and said that submissions to the Productivity Commission have questioned Airservices’ capital efficiency.

A Competition Policy Review undertaken in 2014 challenged Airservices’ pricing structure and efficiency, while the ‘Towards Responsible Government’ report, prepared by the National Commission of Audit in 2014, highlighted the opportunity to outsource some Airservices activities to improve efficiency.

The TAAAF strategy document also raised concerns about the costs of service delivery and capital projects.

Airservices chief executive, Jason Harfield, noted in an interview in the May issue of Australian Aviation that staff numbers have increased by 1,500 over the past 10 years, while operational numbers have remained static. These staff increases have occurred in project delivery and back-office functions. High costs make their way into air navigation service charges imposed by Airservices on airspace users.

Russell provides his perspective about Airservices staff numbers. “Airservices staff numbers were due for reduction. In the past 10 years Airservices has gone through a broad renewal, which has added temporarily to some staff numbers. This renewal involved extensive and urgent training programs to replace key staff like air traffic controllers and technical people due to large numbers that were retiring. Additionally, the asset base of the organisation needed urgent renewal as many critical pieces of infrastructure were life-expired and this required more project management staff. Furthermore the organisation found itself obliged, by a flawed regulatory process, to open more fire stations. ” Concerns over staffing inefficiencies were exacerbated when Airservices announced a proposed five per cent increase in air navigation charges for its next five-year pricing agreement. One of Harfield’s first acts as CEO was to postpone a new five-year pricing agreement while he initiated the ‘Accelerate’ program to reduce employee numbers by up to 1,000 people.

In reality Airservices is subject to quite heavy-handed government influence.

Another industry concern is execution of the OneSky program, a $1. 6 billion joint civil-military air traffic management system. Unless overcome, current issues and inefficiencies with program management and engineering functions will almost certainly be multiplied when facing the complexity presented by OneSky. The TAAAF notes industry concerns about a budget blowout and delays in OneSky’s implementation.

The Accelerate program has involved an organisational restructuring whereby the engineering functions have been combined with air traffic control activities under a new air navigation services division. Aviation Rescue Fire Fighting Services (ARFFS) has been established into a separate division. Program management functions have been devolved into each of the operating divisions.

TAAAF, however, considers that much of Airservices’ inefficiency is a result of its current government ownership model. Airservices is a corporate Commonwealth entity. It charges aircraft users for services and provides a dividend to government based on the capital employed. The Minister of Infrastructure and Regional Development appoints a board of directors who determine objectives, strategies and policies. This implies a separation of government from the commercial activities of Airservices. In reality Airservices is subject to quite heavy-handed government influence. Its activities are frequently scrutinised by Senate review, while its infrastructure programs are subject to analysis from the Senate Public Works Committee.

Government often dictates to Airservices, informally and formally, about its activities and strategic initiatives. Russell notes “Airservices is highly susceptible to government interference, particularly over the short term. ” As a result, Airservices has very few commercial activities outside Australia and, at times, has been unable to adopt initiatives to reduce costs, such as consolidating services and outsourcing technical functions.

The issues impacting Airserices’ financial performance are not all of its own making. Airservices has little control over the scope of activities it is required to undertake. Since aerodrome and approach control services are part of its statutory monopoly it has limited discretion over the locations where these services are provided. When CASA performs a safety assessment at an un-towered airport and concludes that an aerodrome service is required then that responsibility falls to Airservices.

TAAAF notes that in 2007 the government sought to introduce competition for ARFF by certifying another provider. But the new provider could not compete with Airservices due to the high cost of entry and the nationwide pricing structure. Consequently, Airservices remains the monopoly provider of ARFF.

Further, should aircraft movements at an airport exceed CASA’s threshold triggers, then Airservices is required to provide an ARFF service. But both within and outside Airservices there are concerns that these trigger levels are outdated and too low, and not properly reflective of the contemporary risks associated with modern aircraft.

By way of illustration, as a result of the resources boom new aerodrome and ARFF services have been established at remote Western Australia locations. These services require a significant capital investment to build the necessary infrastructure and high on-going operating costs, and the costs of these services are then recovered from the nationwide air navigation charges, not directly from aircraft operations at the location.

While the necessity to establish and maintain these services at remote locations increases the capital and operational costs for Airservices, revenue growth almost certainly does not directly recover these costs. It means that regional aerodrome tower and ARFF services are cross-subsidised from en route air navigation service charges.

ARFF is particularly contentious for the TAAAF. In most countries, including the United Kingdom and Canada, the responsibility for ARFF rests with the airport owner. TAAAF believes that the responsibility for ARFF be handed to each airport owner where a service is required.

While the current ARFF provided nationally by Airservices enables economies of scale, TAAAF considers that greater service efficiencies could be achieved by having the service provided by individual airports. Individual airports can be more adaptive in integrating ARFF with other operational activities, as well as municipal fire brigades, and lowering its service cost base.

The nationwide pricing model adopted by Airservices shelters regional airports from the operational and financial obligations of providing ARFF and aerodrome control services. The experience of the United Kingdom indicates that while airport owners shape their services and cost base to meet the needs of their traffic, a financial burden may fall to the local community. Airlines often require some level of cost subsidy to continue providing services.

Nevertheless, significant cost reductions are possible. The providers of some aerodrome and approach services at small UK airports pay air traffic controllers around half the salary compared to those at large international airports.

From his experience, Russell concludes that a privatised organisational model would improve air traffic service delivery. So what are the experiences of the privatised ownership models adopted by the United Kingdom and Canada?.

UK NATS

NATS, the United Kingdom equivalent of Airservices, was privatised in 2001. Its main shareholders comprise the government, a consortium of airlines and Heathrow Airport Limited (HAL). There is light-handed government influence over its activities, and although the Department of Transport is a significant shareholder and provides some policy input into NATS activities, commercial shareholders are able to appoint the majority of board members, have greatest control over the appointment of senior management and approve the business plan.

The shareholding structure, involving both public and private interests, results in management having to navigate the different interests of the various owners. For example, an annual dividend from NATS profits is important to the government. On the other hand, dividends are not as important to airline owners who prioritise lower air navigation charges. There are also concerns that the current shareholding structure is not adequately representative of all stakeholders, particularly the staff.

A high proportion of airline ownership presents a financial risk to privatised air traffic control organisations in a severe traffic downturn when it has a high level of debt financing. At the same time if an air traffic control organisation is experiencing sharp revenue decline, so too are the airlines. NATS experienced significant financial stress for these reasons soon after it was privatised in 2001 as a result of the recession following 9/11. It required a cash injection from government plus new shareholders to remain solvent.

Unlike Australia, aerodrome and approach services in the UK are, in the main, contestable and the responsibility of the airport owner to provide, with the exception of the approach services for the five London airports, which are part of the regulated monopoly services. Of the 128 licensed airports in the UK, there are 64 providers of aerodrome and approach services. NATS provides aerodrome and approach services at only 13 locations. It charges airport owners for the cost to provide these services. Airport owners, in turn, recover some or all of these costs from airline users.

In the last 18 months three large airports, Gatwick, Birmingham and, recently Edinburgh, have ended their service arrangements with NATS. Gatwick and Edinburgh airports, both owned by Global Infrastructure Partners, have contracted the UK subsidiary of the German air navigation service provider (ANSP) to provide services. Birmingham has decided to provide the aerodrome and approach service itself.

The loss of these three major airports has caused a sharp change in NATS customer orientation and cost of services. Previously airport owners had perceived NATS as complacent, bordering on arrogant, in dealing with their concerns. An attitude of ‘we know best’ prevailed. There was a belief that NATS was charging a high premium for its services based on a perception of high service quality and that airport owners had no realistic alternative service options. Airport owners were also concerned that NATS was not adequately investing in new or upgraded infrastructure.

NATS is perceived as a high cost provider of air traffic services and has had difficulty in reducing its cost base due to legacy pension costs negotiated by government and unions at the time of privatisation. Nevertheless, NATS has had some success in lowering its cost base. Eurocontrol benchmark data shows that NATS has a lower service cost than other large European air traffic control organisations in Germany, France, Spain and Italy.

In the UK, there are 64 providers of aerodrome and approach services.

Since the service changes at Gatwick, Birmingham and Edinburgh airports, NATS has had some success in changing its cost/benefit proposition for airports, with NATS now willing to assume responsibility for a greater scope of airside activities. At Heathrow, for example, in addition to air traffic control, the NATS general manager is now responsible for other activities such as airside safety and standards, ground handling (fuel and baggage) and rescue fire services under a common organisational umbrella.

En route and approach services for the five London airports are monopoly services controlled by regulation. Under the Single European Sky (SES) performance scheme established by the European Commission, the UK Civil Aviation Authority negotiates performance and cost targets with NATS. For these monopoly services NATS is required to achieve real cost reductions and meet performance targets established for items such as aircraft delay and the successful completion of capital projects.

NATS has extensive commercial activities and has demonstrated a capability to compete successfully by winning various ATM-related contracts in 36 countries. These contracts include providing aerodrome services at nine airports in Spain. In a joint venture with Thales, NATS provides air traffic control and management services for the British military at home and abroad under Project Marshall. The loss of service contracts at Gatwick, Birmingham and Edinburgh airports is somewhat offset by winning this 22-year contract.

Oh, Canada

The Canadian equivalent of Airservices, NavCanada was formed as a private, non-share capital corporation in 1996. Canada took the view that a government-owned corporation would result in only cosmetic change to the manner and performance of its air traffic management services. There was a concern that a government-owned entity would still be influenced by many government policies and continue to be subjected to political interference.

In essence, NavCanada operates like any other business corporation except that, with no shareholders, it does not need to generate profits. Surpluses of revenue over costs are used to pay down debt, finance capital expenditure or reduce user charges. A rate stabilisation fund has also been created to protect revenue from a drop in aircraft movements, generally associated with an economic downturn.

This fund provides protection from the need to raise user charges in difficult economic times.

The NavCanada board of directors is representative of four groups, namely the airlines, the federal government of Canada, unions representing employees providing air navigation services, and the Canadian Business Aircraft Association. Each of the four groups elects people to represent them on the board, which sees the interests of users, staff and government to be represented. User representation on the board ensures scrutiny over service efficiency, costs and charges. Unions have assurance that their issues are fairly considered.

NavCanada has a regulated monopoly over air traffic services. It provides these services from seven air traffic control centres, 41 control towers and 55 flight service stations. Limiting charges to achieve cost recovery and the significant presence of users on the board means that only light-handed government regulation is needed to provide protection for users from NavCanada’s monopoly position.

NavCanada also has international commercial aspirations. Unlike NATS, which has concentrated international activities on providing consulting and aerodrome services, NavCanda has been successful in commercialising its technology. Examples include NavCanada selling control tower automation technology to Airservices and oceanic technology to NATS.

Interestingly, NavCanada has been a foundation investor in the Aireon satellite constellation, which will provide the capability to provide ADS-B surveillance over oceanic or low density transcontinental areas. Consequently NavCanada is well placed to increase its influence in managing the very lucrative oceanic airspace over the north Atlantic.

A model choice?

An accurate cost comparison between Airservices, NATS and NavCanada is difficult. However a comparison made for the air traffic management cost per flight hour using Eurocontrol information for NATS and the Civil Air Navigation Service Organisations (CANSO) data for NavCanada shows that, in 2014, NATS’s cost per IFR flight hour was approximately 35 per cent greater than that of NavCanada. Information for Airservices was not available.

When it considered organisational arrangments for NATS, the UK government of the time rejected the NavCanada model. It considered that public sector borrowing constraints would still apply, but analysts claim that concerns about limitations on borrowing did not take account of other financing options available. There were also concerns that the NavCanada model provided fewer incentives to drive efficiencies and with doubts over whether it could effectively undertake major capital expenditure projects. But NavCanada believes that the high representation of users on the board of directors provides a strong efficiency incentive and a focus on the efficacy of capital investment.

Russell strongly endorses the NavCanada organistional model.

“The NavCanada model is particularly relevant. It has been able to make significant progress since it has been privatised, largely because it has operated free from political interference. In Australia it is the politicians and their staff who respond to media issues and to self-serving pressure from public sector unions. Air traffic organisations are long-term infrastructure businesses and they perform best in a more stable environment removed from short-term day to day politics. ” The NavCanada organisational model certainly seems to have applicability as an ownership model for Airservices. Its monopoly for aerodrome and approach services along with a national charging structure means there is no transferring the burden to local communities. Its governance structure provides greater separation from government, reducing political meddling. It is now an innovative, commercially progressive organisation that did not raise user charges between 2004 and 2015. Indeed during 2006 and 2007 there were price reductions, and yet while real costs have reduced since NavCanada’s inception, safety indicators have substantially improved. This fund provides protection from the need to raise user charges in difficult economic times.