2017: The Year of Air Traffic Control Reform?

January 18, 2017

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By Jon Glick, Rick Wysong, and Alex Stillman, PwC

The privatization of the Air Traffic Control (ATC) function in the United States has been the subject of much discussion over the past decade. Many constituencies in the aviation community are arguing to increase the pace of ATC improvements while freeing its management and investment from political interference and annual budget battles. In addition to increasing efficiency, these efforts could help to accelerate innovation. But as is often the case in Washington, progress moves quite slowly. There were, however, three changes in 2016 which indicate significant progress towards deciding the future of Air Traffic Control. They will likely be part of discussions relating to the reauthorization of FAA funding, whose current spending authority expires on September 30, 2017.

Legislatively, the introduction of the AIRR Act, which proscribes the transition of ATC services to a non-profit corporate entity (likely based on user fees instead of ticket and fuel taxes), enjoys surprisingly wide support. Among the various supportive stakeholders are most airlines, the flight controllers union, previous Secretaries of Transportation and FAA Administrators, and others. While opposition still exists from some groups – a major US airline, cargo airlines, and the General Aviation organization – it seems likely that the latter two groups could be persuaded otherwise. But it would be contingent on the recommended user-fee pricing methodology to acknowledge their different operating characteristics from commercial airlines. One example involves removing weight as an input to their user fees; this would allow the two groups to be charged based on distance only (or a flat fee), instead of being penalized for carrying heavier loads or fewer passengers by weight, respectively.

Politically, the incoming US Presidential administration has selected a Transportation Secretary with a background in aviation policy, including serving on the board of a major US airline and participating in a previous FAA reauthorization package as Deputy Secretary of Transportation. Additionally, the President-elect will have a Republican Congress and 33 states with Republican Governors. While this does not guarantee support of administration-directed changes, the chances of support at the state and local level are more likely than in years past.

Financially, even if the incoming administration does not enact the campaign promise of $1 trillion in infrastructure investment over 10 years, there is a distinct possibility that related investments will expand to address decaying aviation infrastructure. This would include airport facilities and technologies, as well as bridges and roads, which are most often targeted. We also envision the new administration focusing more carefully on calculating and meeting a projected return on infrastructure investment. For aviation, a key measure would be to reduce the estimated $4 billion annual cost of flight delays and congestion, caused by high airport terminal volumes.

With most passenger airlines enjoying the highest profitability they have in years, do they have reason to be concerned with these changes coming in 2017? Should they count on any near-term benefits?

We believe that even if decisions are made and legislation is passed this year, it will be several years before airlines see significant impacts. Nevertheless, developing a proactive plan this year that analyzes possible scenarios will allow airlines to accelerate benefits and better prepare for possible impacts in the years to come. Following are three areas to consider:

  • First, examining privatization timelines in other countries (Canada, UK, and New Zealand are insightful blueprints) indicates that any changes to the FAA will evolve over the coming years, not months. Previous ownership transitions indicate a 1-2 year period to establish the legal and governance elements, and another 1-2 years to phase in the financial changes (i.e., change to user fees). Considering the FAA manages the busiest and one of the largest airspaces in the world, it is likely that any major changes to the FAA would take more than five years to fully implement. Primary objectives must include no impact to safety and regulatory functions and close management of attrition levels among the trained workforce through the transition period. Airlines should therefore evaluate how they would advocate for governance, legal and financial payment structures to be set up. How involved does each airline want to be on any oversight board for the new entity? What financial reconciliation methods should be implemented to streamline transactional payment flows?
  • Second, it seems fairly certain that any financial change to the current FAA structure will be from taxation-funded to user-fee-funded. Fees based on a formula including an aircraft’s weight and flight distance may be opposed by cargo airlines and the General Aviation organization, but are quite likely for commercial airlines. Even without the new scheme’s details being known, airlines should model how such a change will impact their total cost as well as individual current and planned routes and schedules. The ATC corporatization that created NavCanada and which is held up as a likely model for the FAA reported increased fees immediately after the transaction but has held user fees stable since 2007. Defining a range of scenarios for the stabilization period will do airlines well for financial and operational planning purposes.
  • Third, one of the expected benefits of privatization is the acceleration of pace in new technology deployments. Much has been written about NextGen and the $130 billion in benefits it may bring, and airlines certainly understand how that deployment will impact and benefit them. But what other roadmap advancements are planned? How should airlines re-plan their internal investments to capitalize on a pull-forward of certain innovations envisioned for later this decade? What new technologies can become a cross-industry platform that benefits all consumers of air traffic control services?

Beyond the new administration taking office on January 20, 2017, not much is certain. Although uncertainty has become the norm, particularly when considering political and legislative changes, change does appear more likely than in the recent past. Airlines would do well to plan now and prepare for whatever ATC changes do take off in 2017.

©2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.  This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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