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Reason Foundation

Air Traffic Control Reform News #92

Should Passengers Pay for NextGen?, NetJets vs. the IRS

Robert Poole
April 19, 2012

In this Issue:

Eno Report Calls for NextGen Airport Fee

A new policy paper, "NextGen: Aligning Costs, Benefits, and Political Leadership" was released by the Eno Transportation Foundation at an event April 4th, co-sponsored by the Bipartisan Policy Center. The presentation of the paper, by Eno CEO Joshua Shank and the paper's author, 2011 Eno Fellow Sakib bin Salam, was followed by a panel discussion by a number of long-time aviation policy people, all supportive of NextGen. I'm glad to see more attention being paid to ATC modernization, but I'm disappointed in this paper, for several reasons.

It begins promisingly, by seeking to show that even modest improvements in air traffic flow should result in meaningful savings in fuel costs, reduced CO2 emissions, and traveler time savings, while improved surveillance should also produce significant safety benefits for general aviation (GA). The author assembled data from DOT and MIT to estimate current annual airline-specific delays, as well as airline-specific operating costs. Using that information, he produced spreadsheets quantifying the benefits from delay reductions of various percentages, from 1% to 35%, accruing to airlines and to passengers. Similar parametric calculations were applied to estimate GA fuel savings, time savings, and safety benefits (reduced deaths and aircraft damages due to fewer crashes).

Selecting some sample figures from the author's tables, I used his annual dollar benefit figures for the case of 10% delay reduction for airlines and 5% for GA (as well as 5% safety improvements for GA), and added them up. The annual benefits to these beneficiaries were as follows:

Airlines $1,078 million 54.8%
Passengers $537 million 27.3%
GA $352 million 17.9%

Remember those numbers, because we will come back to them in a moment.

The author next provides some estimates of NextGen costs, both FAA infrastructure costs and aircraft equipage costs. He does not attempt to relate costs to benefits, which is one of the major concerns of the ATC customer community, but let's leave that aside. The next (and longest) chapter delves into funding NextGen, first setting forth criteria for assessing various alternatives (since many, including me, are concerned that current aviation user taxes are unlikely to be sufficient). These criteria are equity, transparency, efficiency, and political feasibility. Five alternatives are considered: a tax on airline baggage fees, a higher tax on commercial jet fuel, a higher passenger ticket tax, a higher general fund contribution, and a separate airport-specific NextGen passenger fee that would be higher at the large hub airports where NextGen's impact is likely to be larger. His preferred approach is the airport-specific passenger fee.

If you step back from this approach, it appears that equity has been given short shrift. Airlines get more than half of the benefits, and GA gets another 18%, but the poor passengers get stuck with paying the whole NextGen bill. How on earth is that equitable? I got a lot of positive feedback from last month's article in which I criticized a recent online screed claiming that it is passengers who should pay for ATC, not aircraft operators (for whom this is an ordinary operating cost), yet this report from a respected think tank essentially makes the same misguided recommendation.

An even larger failing is that the report seems to consider the main problem with NextGen to be lack of funding. The author's PowerPoint from the April 4th event rightly notes GAO and Inspector General reports citing a long and continuing history of FAA cost overruns and program delays. A growing number of aviation stakeholders express concern that simply providing more funding, without more-fundamental reforms, would amount to "feeding the beast." They have concluded that the underlying problem is that the governance of the ATC system is poorly matched to the task. The FAA's Air Traffic Organization ought to be focused directly on meeting the needs of its aviation customers. Instead, its real customer is Congress, which provides its funding and to which it must be responsive.

No other developed country so inherently politicizes the governance of its ATC system. In recent decades, nearly all developed countries have de-politicized their air navigation service providers (ANSPs), allowing them to operate as businesses, paid directly by their aviation customers, and in several cases (Canada, the UK), with aviation stakeholders on their governing boards. These (mostly governmental) ATC corporations have ready access to the bond market to raise the capital for modernization projects vetted as cost-effective by their customers. This approach is misleadingly labeled "privatization" in the report and therefore dismissed after three paragraphs as politically infeasible. In fact, what nearly all these countries have done is to reform in place the existing ANSP, changing its governance and funding, not turning it over to some outside private provider.

Reforming the ATC system's governance and funding in this manner will resolve the questions regarding which technologies and procedures are worthwhile to aircraft operators and which are not. And thanks to access to the bond market and a bondable revenue stream, those capital improvements judged worthwhile can readily be financed.

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NetJets Tax Flap Underscores Bizarre ATC Funding

Business aircraft operated under fractional ownership arrangements offer a way for individuals and companies too small to own such planes to have access to this useful and valuable form of travel. When fractional operations first began, operating under Part 91 of the Federal Air Regulations, the FAA ruled that those who flew on such flights are subject to the 7.5% passenger ticket tax and segment fee, which is the proxy in this country for ATC charges. Individuals and companies that use fractional providers like NetJets, Flight Options, and Flex Jet pay both a monthly management fee (a fixed cost) and a per-flight charge based on the flight hours used.

Since the proceeds of all aviation user taxes are legally taxes, rather than fees for service, they must be remitted to the U.S. Treasury, and therefore be collected by the IRS. Early in the history of fractional ownership, the IRS decided that the ticket tax and segment fee would be charged only on the variable charge levied for flight hours, not for the fixed cost represented by the monthly management fee. But more recently, the IRS has changed its position, claiming that fractional users must pay the user taxes on the monthly management fees, as well.

Last Nov. 14th, NetJets sued the IRS to recover $643 million in taxes it had previously paid on management fees. In response, on March 9th, the IRS sued NetJets for $366 million in unpaid taxes on management fees between 2003 and 2009. Interestingly, a former NetJets official tells me that competitor Flex Jet, which at one time paid tax on the management fees, won a refund of those taxes, based on the fact that several other fractional providers, including NetJets, did not pay the tax on management fees. It was after that decision that the IRS audited NetJets and decided that the company owed tax on its management fees.

I have read two detailed memos on previous IRS rulings on the ins and outs of these tax provisions, one from the IRS dated March 9, 2012, and a law firm's memo which has been circulated by the National Business Aviation Association. I will spare you the gory details, but if you read through all that complicated splitting of hairs, I think you'd be inclined to agree with me that just as the ticket tax is a bizarre way of forcing airline passengers to pay for the ATC services the airlines use, it is likewise a bizarre way for fractionals to pay for this service. Everywhere else in the world those who fly jets in controlled airspace pay directly for this service. And in the more advanced countries, they pay such fees directly to the ANSP; the government's tax collectors are not involved. Moreover, in every case that I know of, these charges are proportional to the weight of the aircraft, based on what economists call "Ramsey pricing." That's what ICAO recommends to all counties, and only the United States persists with this bizarre array of taxes instead.

It would be great if the highly respected owner of NetJets, Warren Buffett, would embrace this much better way for his company and its competitors to pay for ATC.

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Competition in Space-Based ADS-B

Last year I reported the FAA's landmark June 2011 decision to approve space-based provision of ADS-B surveillance over oceanic and remote regions. The first company that announced plans to provide such services was Iridium, which operates a global constellation of satellites in low earth orbit, providing continuous coverage of the entire globe. Iridium will soon begin launching its new 81-satellite Iridium Next constellation, and is reserving up to 20% of the payload space for "hosted payloads" such as ADS-B. In early March, Iridium said it expects to announce agreements by June under which it would sell such data services to the FAA and other ANSPs wanting to extend ADS-B to areas not reachable from ground stations.

There is now a second contender doing something very similar. ADS-B Technologies plans to offer global ADS-B service using the Globalstar second-generation constellation of 24 low-earth-orbit satellites. The company was created by Skip Nelson and several other former FAA engineers who implemented the Capstone pilot project in Alaska, which provides ADS-B (both Out and In) services to general aviation aircraft. The company has installed conventional (ground-based) ADS-B systems in Africa and China. Nelson told Air Traffic Management that his company prefers the Globalstar constellation because its satellites "operate very much like a mirror. The satellite does nothing to the signal. We do not put any of the brains in space [where it cannot be repaired]; there are no ADS-B-specific components on the satellite. It simply receives the signal from the aircraft and whips it right around and sends it back to the ground," to Globalstar's large and growing network of ground stations.

Another company that I've written about previously is also making progress with space-based communications. AeroMechanical Services (AMA), based in Calgary, has been signing up aircraft operators for its AFIRS 228 automated flight information system. It uses the Iridium constellation to upload data to electronic flight bags, to provide text messaging to and from flight crews, and to downlink data for maintenance planning and to supplement what is stored on-board by flight data recorders—as well as for ADS-B. In March Transport Canada certified AFIRS 228 for use on a CRJ900 jet operated in northern Canada by a U.S. operator. Other AFIRS customers include airlines flying in northern Canada, airlines in Africa, and a government agency and two airlines in China. AMA is also discussing the system with airlines in South America.

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"Blended Airspace": Providing Tower Functions via Technology

Control towers provide increased safety and more-efficient flight operations at small, remote airports-- but they are costly to build and operate. And in remote, mountainous regions without radar surveillance, they cannot provide the level of service needed during high-traffic times such as the Colorado ski season. Many such towers do not operate 24/7, since most of the time there is insufficient traffic to justify full-time staffing. But technology can provide for more cost-effective provision of tower functions in such cases.

I have reported previously on the Colorado Surveillance Project (CSP), a joint effort of FAA and the Colorado DOT, which is bringing improved ATC services to remote airports in the Colorado ski country using wide area multilateration (WAM) and ADS-B to provide radar-like service. Phase 1 brought these benefits to the airports at Craig, Hayden, Rifle, and Steamboat Springs. Phase 2, currently under way, is doing likewise for Durango, Gunnison, Montrose, and Telluride. More recently, a proposed Phase 3 would go further, providing what is called "Blended Airspace" at (potentially) Durango, Montrose, Yampa Valley, and Fort Collins.

One of the prime movers of the concept, CSP Program Manager William E. Payne, gave an invited presentation on Blended Airspace last month as part of the Advanced Tower Workshop at the ATC Global conference in Europe. Bill shared his PowerPoint with me and answered my questions. The basic concept is to provide a smooth "blended" transition from en-route airspace to the airport by providing radar-like service from a controlling radar facility (rather than a tower at each airport). A "fusion tracker" would combine surveillance data from legacy radars, ADS-B, WAM, and surface surveillance systems like ASDE-X, plus airport operational data, flight plan data, weather data, etc. to provide controllers with menu-driven displays for guiding individual flights to safe landings with radar-like service. This is an application of the remote or virtual tower concept now being implemented in Australia and Sweden. Bill tells me the presentation was well-received by attendees from a number of EU countries.

Since Bill has developed a number of Federal Contract Towers (FTCs) at airports like these, he has a good handle on the costs to design, build, equip, and operate small towers. His presentation included data on five small-airport FCTs in Colorado and other states, with the following average costs to build:

Design & construction management:

$311,711

Construction:

         $2,724,600

Equipment Cost:

$175,001

Total:

         $3,211,312

The average annual cost of five contract controllers for such a tower is $550,000; in addition, the average airport operating & maintenance cost for such a tower is another $185,000. A similar tower, if designed, funded, and staffed by the FAA itself is typically three to five times the cost of a FCT.

With the FAA "facilities and equipment" account now budgeted for zero increases over the next four years (and the contract tower budget facing cuts), being able to provide radar-like tower services from a distant controlling radar facility would avoid the construction costs of more such towers, requiring only space, equipment, and shared use of controllers in that facility. By thus sharing facilities and controllers, low-demand airports that currently have either no tower or only part-year or part-time tower services could have such services whenever needed, but without bearing the costs of their own facility.

Blended Airspace strikes me as a great example of the NextGen vision of managing air traffic "anywhere from anywhere." This has the potential to significantly improve safety, capacity, and efficiency at non-towered and part-time-tower airports.

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ICAO Case Studies on ANSP Commercialization

A new tool for policy-makers, policy analysts, and aviation infrastructure practitioners is now available on the website of the International Civil Aviation Organization. It now hosts 26 case studies on the commercialization, privatization, and economic oversight of airports and ANSPs worldwide. Each case study focuses on what has happened with airports, the ANSP, and economic oversight in a particular country in recent decades, in a fairly consistent format that includes:

I have already had occasion to use the database, to refresh my memory on the specifics of what had occurred, and when, in a particular country, for a recent conference presentation. It's a very handy reference source, developed by people who have deep knowledge of aviation.

In a forthcoming article in the journal Airport Management, the database developers, Philippe Villard and Julian de la Camara of ICAO, explain how the database came to be created and why this is a natural fit for ICAO to make available to the aviation community. They also make some interesting observations on what can be learned from these case studies. For example, they find that the transition of airports and ANSPs from traditional government departments to autonomous entities has led to the following advantages:

  1. Service providers are empowered through financial and operational autonomy;
  2. The growth of a business culture and the use of best practices of good corporate governance are encouraged;
  3. Expenses per traffic unit relative to other airports/ANSPs of comparable size or characteristics are reduced;
  4. The financing burden on government revenues is reduced;
  5. The quality of services is generally improved; and,
  6. A clear distinction between the regulator and the provider of services is established.

I'm pleased that ICAO has done this work and made the results easily accessible. You can access these case studies as follows:

www.icao.int/sustainability/pages/Eap_ER_Databases_CaseStudies_ANSPs.aspx.

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Upcoming Conference

Aviation Week 2012 NextGen Ahead Conference, April 23-25, Washington, DC, Marriott Metro Center. Details at: http://aviationweek.com/events/current/nextgen. (Bob Poole speaking)

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News Notes

NATS Sale in UK Government Budget. In releasing its budget proposal for the coming fiscal year, the U.K. government affirmed its intention to sell part or all of its 49% interest in NATS, the U.K.'s air navigation service provider (ANSP). A final decision has not been made on the share offering, although airport operator BAA, which owns 5%, has indicated its willingness to sell its stake also. Potential buyers include German ANSP Deutsche FlugSicherung (DFS), Global Infrastructure Partners (principal owner of Gatwick Aiport), and Lockheed Martin. Controllers' union Prospect has urged the government to retain at least 25% of NATS.

Nav Canada Expands ADS-B Coverage. On March 29th, Canadian ANSP Nav Canada announced that ADS-B is now operational over 1.3 million square kilometers of airspace over the North Atlantic. Combined with ADS-B surveillance in the Hudson Bay region, implemented in 2009 over 850,000 sq. km. and Northeast Canada in 2010 with another 1.9 million km, the reduced fuel burn due to optimal altitudes, earlier ascents to more fuel-efficient altitudes, and more direct routings will save airlines $91 million in fuel costs and reduce CO2 emissions by 239,000 metric tons between 2012 and 2020. Most of these incremental savings are made possible by replacing "procedural" separation in non-radar areas with the far more precise locational information provided by ADS-B.

Reduced Contract Tower Funding in FAA Budget. The FAA's acting Administrator Michael Huerta on March 6th defended the Administration's decision to trim the budget for contract towers by $2 million, at a hearing before the House Appropriations Committee's transportation subcommittee. The funding applies to those towers in the cost-share portion of the program, in which airports pick up a portion of the costs of tower operations, since the airports in question do not meet the normal traffic criteria for having a control tower.

Italy's ANSP Streamlines En-route Routings. ENAV, the ANSP of Italy, is implementing a number of steps to provide its customers with optimum altitudes and more direct routings. Its annual flight efficiency report for 2011states that route adjustments made last year reduced flight miles by 5.8 million, which reduced CO2 emissions by 134,000 tons. ENAV's flight efficiency program began in 2008, and changes made since then have saved an estimated 98,000 tons of fuel worth $79 million.

Tanzania CAA Joins CANSO. The newest ANSP to join the Civil Aviation Navigation Services Organization is Tanzania CAA, which provides air navigation services for the entire Dar es Salaam Flight Information Region, which includes the airspace above Burundi and Rwanda, in addition to Tanzania itself. Tanzania CAA is the 72nd ANSP to attain membership in CANSO, which also has 71 industry suppliers as associate members.

Airberlin Begins RNP Departures and Landings. German airline Airberlin has equipped its Boeing airliner fleet for RNP operations and trained its pilots to make use of these new capabilities. The initial airport where these precision capabilities are being used is Innsbruck, in the ski country of the Austrian Alps. Airberlin also plans to use the RNP procedures at the new Berlin Brandenburg Airport, scheduled to open in June.

Correction re CANSO. Alert newsletter reader Carter Brockman spotted an error in a News Note in last month's issue. I wrote, incorrectly, that CANSO's ANSP members are responsible for 85% of the world's airspace. Actually, the CANSO website says its members handle 85% of the world's air traffic.

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Quotable Quote

"[T]oday, piston-powered aircraft are virtually worthless for transportation. The absurd costs ($6/gal. fuel, insurance, spare parts), the regulatory requirements (equipment requirements, TCAs, TFRs, etc.) and the cost of being a safe, current pilot make cost-effective transportation via piston aircraft nearly impossible. Those disadvantages, combined with the economic advantages of very inexpensive airline travel, have sounded the death knell for piston-based aircraft transportation Granted, the existing fleet of piston aircraft will soldier on while the death spiral of decreasing fleet size and ever-increasing costs accelerates. . . . But . . . the Light Sport Aviation industry is growing—though admittedly at a lower rate than originally envisioned . . . .The aircraft that are succeeding today in both certified and LSA categories are being built for and used for FUN! Americans spend nearly a trillion dollars a year on recreational activities—everything from golf and boating to RVs and other activities, most of them using some form of piston power. Aviation's share of that trillion-dollar market is not even a rounding error. Of course, at this point there will be howls of indignation from the experts, and greyheads will scream, 'But aviation is for transportation—it's serious business!' Here, the unspoken statement is, 'How else can we justify the absurd cost of GA?' And that's precisely the point—GA can no longer justify its existence as a pure transportation industry. It is time to recognize, accept, and embrace that, in many ways, GA is the very best way to have more fun and personal fulfillment, and to share a great passion with a great community of people than anything else available."
—Vern Raburn, founder, Eclipse Aviation, "GA is Dead—Long Live GA!" Professional Pilot, March 2012

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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