Service Providers vs. the Recession How do ANSPs Respond to the Crisis & by Alexander ter Kuile, Secretary General of CANSO Alexander ter Kuile was appointed Secretary General ofthe Cin Ai Navigation Services Or- ganisation, CANSO, in January 2001. The o- sgoniation represents 49 ANSPs and 42 associ ates alstakeholders inthe aviation community Starting bis aviation career in 1978 with KLM Royal Dutch Airlines, he also holds a Bachelors Degree in Economic Geography from London University and a MBA from Cranfield School of “Management. Heis@ Board Member ofthe Air ‘Transport Action Group and 2 Governor of the Flight Safety Foundstion. Alexander ter Kuile For the last twelve mionths, aviation has been facing an economic crisis. Following a brief return to growth and profit in recent years, in 2008 commercial ai transport was first hit by a trebling of the oil price, then dramatic de- cline in demand. The final few months of last year revealed that recession in every region ofthe world was plunging airlines into lesses and even the most optimistic cannot foresee any growth in the market in 2009. How have the world's Air Navigation Service: Providers (ANSP) responded to this crisis? It must be remembered that unlike zirlines, who can reduce capacity swiftly by grounding planes, ANSPs are fixed infrastructure provid- fers who cannot simply tum radars off. How- ‘ever, in June CANSO members promised to increase their efforts to find airspace afficien- cies (the CANSO ‘Madeira Statement’), and this was welcomed by the airlines. But with fuel prices now less of a problem, the focus has also moved to the cost base of ANSPs. While the rest of the economy cuts costs, what is ATM doing to seek efficiencies? THE CONTROLLER Deficient Charging Model The answer is that almost all ANSPs find themselves in a regulatory straightjacket, which prevents them from responding to economic cycles in the way any other busi= ness would. Within the confines of the sys- ‘tem they operate in, many ANSPs have done ‘their best to help airlines, but the realty is that most cannot significantly overcome the deficiencies of the ATM charging model, and this situation will continue to have negative repercussions on the aviation industry unless itis remedied. Atthough itis important to note that no two [ANSPs are the same, and that the problems Of ATM economics do net apply equally al parts of the world, broadly speaking, there are five deficiencies in ATM finance. Firstly, in many cases there is the impossibility of building reserves. Secondly, for those hav- ing to provide compulsory services, there is not always compensation in return. Thirdly, there are the many shortcomings of the cost recovery system. Fourthly, the problems with cross-subsicising services. And fifty, there Js the absence of normal business practices. No Reserve In the currant ‘cost recovery’ ayetem, once traffic falls, cevenve falls as well. It is a “Tair weather’ system, which runs into great ficulty during a storm. This problem is acute in Europe, which rune on a ‘cath-flow’ basis, In other parts of the world solutions exist; NAV CANADA, for example, is allowed to hold a contingency reserve. Under the cost recovery method, ANSPs have to balance the books, so under-recovery in one year re quires them to compensate in future years, which can result in increased charges. In other cases, airline bankruptcies result in the unpaid fees being paid by surviving carriers This syste, created during the years of pre- dictable growth and protected national flag carriers, is no longer suitable for the modern, liberalised and dynamic aviation industry. Uncertainty and Suspicion The resuk of this inflexible system is that the relationships between ANSPs and sitines canso ; frequently become strained and planning becomes opaque and short-term. What should be. a cooperative, equal and Innovative process is instead 2 unilateral position breeding Uncertainty and suspicion. Such fears are sometimes warranted, for example when the costs of provision are hidden, or the monies raised for services are ivertad into other areas, or used to cross-subsidise other activities. Fortunately CANSO members have worked hard to improve transparency and open customer relations. The recent CANSO/IATA ‘Guide to customer relations in turbulent times’ is a good example of this cooperative spirit, ‘There are of course other ar- eas of concern, which should be addressed, such as the potential imbalance between the amounts charged to large commercial airliners, com- pared to other airspace users. But the coro of the problem is sill the fact that governments = particularly in Europe - set or approve navigation. charges, and most ANSPe stil have lit le control over their own busi- nesses, rarely given the chance to set their charoes according to service quality. Almost all ANSPs find themselves in a Ns EV CoMMa ores Oe uated BU KS cei LL to economic cycles.PPS NA Tae >» Economics Charging Model ieee Frustratingly Slow While a corporatized environ: ment has given many ANSPs greater independence, very ‘ew have true, ful, financial independence. ANSPs remain businesses without access to proper business tools, and re- main servants to, not masters of, their financial destiny. The move towards full operational managerial independence is a frustratingly slow process for most ANSPs, but there are some things which States can and should do quickly ~ actions which CANSO members have identified as representing best practice in the industry. Firstly, introduce a full separation between the state and ANSP budget. Secondly, achieve greater transparency of all in dividual charges. Thirdly, com- pletely separate the provision and regulation aspects of ATM, Fourthly, state contrbbutions to third partes (such as EURO- CONTROL) should be outside the ANSP budget. Implementing these steps acrass the board would mark a big advance for the ATM finan cial system, butit is clear that in ‘the long-term, more fundamen- tal reform is needed. The cost recovery system is fundamen: tally flawed, creating a shortage of capacity during an economic upturn, and unable to respond 12 ‘to cost pressuresin adownturn, While we com= pletely accept that ATM remains a monopoly and must therefore be carefully regulated, we believe that lke every other industry, itis time for ANSPs to be ivan the proper financial in- struments and incentives to manage the size and shape of their industry, Towards a Consensus? So what sures are in the way of a successful implementation of these four recommenda- tions? Cracaly, there has not been agreement ‘among all the various players of the best way forward. The various actors ~ states, ANSPs, airlines, and unions ~ all differ on the best eco- nomic prescription for ATM, Butaslowly grow ing consensus has been given greater impetus bythe economic cris. For example, despite its flaws the European cost recovery system has been reletively stable over the last decade, but this is nct going 10 be the case for the next few years. The stalled debate over the fund- ing of the FAA looks lke it may be re-opened. ‘And a number of ANSPs have been privatised (or corporatized (albeit within a economic regu: lation framework) either as profit or non-profit ‘enterprises, which has given rise to the con= cept of shareholder or stakeholder value. In Europe, the introduction of Funtional Airspace Blocks ard the move to a Single European Sky will increasingly mean ANSPs co-operating on major investment issues such as procurement and trainng, which in turn may lead to new ef- ficiancies and harmonised accounting systems. These changes create uncertainty, which must be managed carefully. To assist with this, CANSO members have laid down @ number of key criteria by which any reforms to the charging system should be judged [see side bar). This can be summarised by a statement of principle, which helds that ANS is a public service, but it needs to be based on business principles for optimum effectiveness and effi- iency, as an integratad part of the commer- ally-driven aviation value chain Transformation To further assist ANSPs manage this difficult process, CANSO’S ‘Business Transformation’ work programme is aimed at helping ANSPs become more performance-oriented and customer-focused organisations, We believe that the next few years mark a golden oppor- tunity to reform the ATM system to create the conditions for a truly seamless airspace experience. CANSO is preparing best prac- ‘tice guidance and practical tools to enable ANSPs to transform themselves, and we are arguing vigorously for States to adopt 2 systems approach to aviation regulations. Programmes such as the Single European Sky, and co-operative projects such as AS- PIRE, are opportunities for this work to take route. Ultimately, ATM finance is just part of ’ package of long-term reform which needs ‘to happen. But in the short term, CANSO is determined to push fer the adoption of a set of reasonable, effective, and deliverable changes to the ATM financial system, to en- sure that aviation emerges stronger from this, economic crisis. 8 SG@canso.org > Unlike airlines, who can reduce capacity swiftly by grounding planes, ANSP are fixed infrastructure providers who cannot simply turn radars off Photo: lan Radack | Wikipecia & GFDL THE CONTROLLER