23: Private space
Commercialistion of air traffic control
The problem: bureaucratic state ATC
The explosion in demand for air travel around the world has placed immense pressures on air traffic control (ATC) systems. Many of these are government-owned and government-managed. However, budgetary constraints often mean that ATC systems cannot cope with demand. Even worse, investment has been squandered on complex systems that are over-budget and behind schedule.
The idea: corporatize and privatize
A solution is to establish air traffic control systems as a separate, regulated business. - privatizing them in order to attract in new investment capital, bolster efficiency and ensure the highest safety standards. Involve airlines in the sale and subsequent control of the system, so that its most direct customers have an incentive to make it work efficiently and cheaply.
Examples: giving up control
Several countries have corporatized their air traffic control services, moving them into a discrete unit along the lines of a commercial company, although (for the moment) state-owned. New Zealand corporatized its ATC in 1987, for example. Within the EU, Germany, the Netherlands, the Republic of Ireland, Portugal and Spain operate air traffic services through state-owned entities.
Canada has pioneered a different model - a business operated as a trust, with surplus revenues being ploughed back into the company, or transferred back to the airlines through lower charges. The move to commercialize was driven primarily by the need for a more efficient and responsive service.
Air traffic control in Canada was established as a separate commercial business, NAV Canada, in November 1996. It is run on a non-profit basis by a board which includes representatives of the airlines, government, and trade unions. It is entirely self-financing, charging fees for the services it provides to the airlines. To raise capital it issues bonds, which are rated AA despite the fact that there is no government guarantee on the business's debts.
Although the company has a monopoly in ATC in Canada, it is subject to a performance-based regulatory regime. Regulatory accountability is maintained through regular monitoring, audits and inspections of its facilities.
Along with its New Zealand counterpart, Airways Corporation, NAV Canada is participating in international consortia bidding for work world-wide.
In the United Kingdom, John Major's Conservative administration proposed the privatization of the Civil Aviation Authority's air traffic control division (the National Air Traffic Service or NATS). Despite initial misgivings, the Labour government elected in 1997 accepted the need to get fresh capital and management expertise into ATC and, against the opposition of its own left wing, decided to press ahead with the privatization.
The UK plan entailed a public-private partnership (PPP) arrangement, under which 46% of NATS was sold (for £750 million) to a consortium of the airlines. Another 5% was reserved for the staff, and the remaining 49% stayed with the government - although part of this shareholding is non-voting, by which means the government has indicated that it will not use its stake to interfere in the day-to-day management of the company. Like other shareholders, however, it did have to stump up extra cash when NATS needed more money when North American traffic (which provides 44% of NATS's income) slumped by 14% as a result of the September 2001 terrorist attacks in New York and Washington.
NATS is regulated by the Civil Aviation Authority, and under the pricing formula (see the chapter Competition by Proxy) it is obliged to cut its charges by 4 or 5 per cent in real terms each year. However, because of the gloomy outlook for the airlines, NATS's chairman Ian Gibson-Smith has asked for this price cap to be reviewed.
NATS has also been dogged by delays in the opening of new air traffic control centres: its £700 million facility in Swanwick in Hampshire opened five years late and £200 million over budget. However, this is a problem that the newly privatized company inherited, not one that it created.
Assessment: up and away
The trust model exemplified by NAV Canada has demonstrated the benefits of removing air traffic control from direct government control and financing. Costs have been reduced, efficiency improved and substantial capital investment has been made in the system. However, full privatization is likely to generate even greater benefits.
The UK government has gone further than Canada because it believes that NAV Canada's charging regime is designed simply to recover costs, and its ownership structure creates little incentive to maximize efficiency or improve management.
Even so, NAV Canada has made good progress in using its increased freedom to reduce costs, particularly overheads and administration. It has invested many hundreds of millions of dollars in increasing capacity and upgrading technology. This enabled it to nearly halve its user charges for major services in 1999, while reducing airline delays and raising customer service at the same time.
Airlines in the United States looked on enviously, and Leo Mullin, head of Delta Airlines, proposed a new organization to control US air space, financed by the airlines and run along similar lines to the Canadian model. But the US lags behind 17 other nations in privatizing air traffic control, including Australia, Germany, Switzerland, Ireland, and even Fiji.
Full privatization provides the profit incentives to drive through efficiency savings and changes in working practices; but this does not come at the expense of giving safety a lower priority.
As the former NATS chief executive, Bill Semple, put it: "Safety is our business." Any commercial ATC system that compromised on safety would quickly be out of business.
Investors know that safety is key: their investment would be instantly put at risk by any failings in terms of safety. However, corporatized and privatized ATC systems have in fact been able to raise capital for new safety systems that might have had to wait under the old system of public finance.
Thus, for example, on a 20% increase in air traffic, NAV Canada logged only two safety irregulatities per 100,000 aircraft movements. This world-beating record can be attributed to better management, and to NAV Canada's new ability (and incentive) to make large investments in new technology, remove inefficiencies - and increase staffing and raise controllers' salaries.
For further information:
- The UK House of Commons Select Committee on transport has published a series of reports on the pros and cons of privatising air traffic control.
- NAV Canada has an excellent website at www.NAVcanada.ca. See also NATS at www.ais.org.uk/nats.
- A useful summary of the background to establishing air traffic control as a separate business in New Zealand is given in the written and oral evidence of Doug Andrews, a former NZ Treasury official, see 'Air Traffic Control', House of Commons, DETR Committee, 4th report, session 1997/8, vol 2.
Copyright 2002: Adam Smith Institute
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