Airlines are demanding fast action from Europe's air traffic service providers to reduce charges, but a deeper reform of the sector's cost structure is needed too

IATA's blunt message on the urgent need for infrastructure providers to reduce their charges has been delivered right to the door of Europe's air traffic service (ATS) community.

In a late June meeting at Eurocontrol in Brussels, with the major airline associations, the European Commission and ATS chief executives in attendance, IATA director general Giovanni Bisignani lambasted what he says is the fastest growing of all airline costs. The average unit rate charged by Eurocontrol member states for air traffic management (ATM) services grew by 13% in 2002 and by 11% this year, representing an additional expense of €240 million and €234 million in each year, he said.

IATA's conclusion that ATM has simply become too expensive and that providers have to become more cost effective is borne out by the Performance Review Commission (PRC), an independent body established in 1998 to assess ATM performance in Europe. Its latest report concludes: "Not only are real unit costs high by reference to other ATM systems - for example, the USA - but they are growing fast in many states. The real unit cost is set to increase by 9% net of inflation over 2000-2003."

The PRC says that regular efficiency gains should lead to a reduction in real unit costs of 2-3% a year, which means that annual costs are growing some 5-6% faster than expected. "This indicates the need for better discipline in controlling costs," says the report.

With such evidence to hand, and the industry crisis causing an unprecedented focus on their cost base, airlines are pushing ATS providers for radical change. "Starting in 2004, and for every year in the future, we can no longer accept such increases - we are looking for major reductions," Bisignani told the meeting. He acknowledged that ATS providers had done a good job after being asked by IATA in the late 1990s for capacity increases to reduce delays and allow air traffic to grow. However, "the problem is that you solved it in a very expensive way", he said.

"The system as it exists is giving an excellent service to airlines and now we have to address cost-effectiveness," says Victor Aguado, director general of Eurocontrol. "According to recent estimates, if we made efficiency gains of 1% every year over 20 years, we could save some €7 billion."

Turning point

Bisignani's forthright approach is designed to kickstart a sector that is all too often slow to change and dogged by state-imposed regulation and charges. Aguado agrees that the June meeting may prove to be a turning point. "It is a unique opportunity to have everybody together to do the changes that are needed," he says. But he warns that the issues both sides face must be understood for progress to be made.

"While airlines send us information on the reductions in passenger numbers, the reality is that Eurocontrol sees traffic growing in April, May and June," he notes, with flights rising by 0.5%, 0.6% and 2.6% in each respective month. "Airlines may have lower load factors, but the reality for the ATM system is more flights."

Aguado is also quick to list the achievements of the ATM system. "In the last 13 years we have probably doubled capacity in Europe, while in the last three we have increased capacity by 24%. In 2002 there were big and important actions taken by different ATS providers and Eurocontrol implemented RVSM (reduced vertical separation minima) that created a capacity increase of over 12% in upper airspace. In 2002 delays in upper airspace were reduced by 40% - all that doesn't come for free."

Nevertheless, the June meeting did agree an action plan to reduce the cost of ATM across Europe from next year. It identifies areas where there are medium and long-term ways to increase ATM efficiency; the need for the establishment of cost-effectiveness targets for air traffic control (ATC) infrastructure and operations; and to find the most effective way of funding and charging for ATC services. The plan also called for ATS providers and Eurocontrol to outline their current and future cost containment measures.

A key issue within the action plan is to establish the link between the cost airlines pay and the performance of the ATM system, says Aguado. The aim is to define targets for reasonable rates for ATM charges and timings for when these should be reached. Both Eurocontrol and IATA favour this task being performed by the PRC, and Aguado is working towards the next Eurocontrol Council meeting in November to trigger this priority setting.

"If you are unable to deliver, airlines will be forced to take other action," Bisignani warned the June meeting. "Defining the levels of unit rates that they consider reasonable, for example." Aguado is not keen on this path, preferring instead to emphasise the partnership approach. "All sides have to understand the limitations of the system," he notes.

ATS providers are themselves equally frustrated with a variety of conditions that hamper their ability to act more cost-effectively. One of the limitations that all agree must be reformed is the system of cost recovery that dictates how ATM charges in Europe are set. This produces a rate that will generate enough revenue to cover all ATS provider costs. During periods of healthy traffic growth, charges tend to fall, but conversely they rise when traffic drops off.

"This whole muddle is coming from a high growth market since the mid-1990s," says Alain Rossier, chief executive of Swiss ATS provider Skyguide. "Cost recovery worked well during this time because market growth was higher than cost growth." Problems emerge now that the reverse is true.

ATS chief executives believe there are other equally critical practices that also need to be reformed. Rossier points to the issue of the cost allocation for delegated airspace, where one country pays for ATM services offered in another. For example, Skyguide controls some German, Austrian and Italian upper airspace but does not obtain the revenue for the work it performs. The Swiss national unit ATC rate would fall from €95 to €67 if a fair cost allocation between these states were in place, Rossier says.

While this issue needs to be dealt with between states, the issue of who pays for loss-making ATM services at regional airports and for the control of general aviation traffic is a question for national governments.

Imposed costs

ATS providers are also critical of the large portion of their costs that are state- imposed but nothing to do with ATM provision, says Rossier. These are regulatory, meteorological or special request costs and can amount to 10-15% of the total ATS cost, he notes. One solution, being discussed in Switzerland, is for these costs to be shown separately from the "real business cost" of en route ATM provision so that "airlines and passengers can see what they are really paying for".

"There has to be clear cost transparency and a cost allocation debate," he says. This needs to take place in parallel with a frank debate about what kind of ATM service airlines really want. Rossier points out that 60-70% of ATS costs are staff-related where there are only two real solutions - reducing headcounts or salaries. "If we talk about reducing headcounts we have to reduce the service. Then you begin to talk about what kind of service is no longer needed." For instance, he questions whether a full 24h ATM service is really needed, as a move to a 20h service would produce major cost reductions.

It is just such questions that will be drawn into the charges debate, and they will be addressed by the Eurocontrol co-ordinated Industry Crisis Monitoring High-Level Group of "wise men" formed in May and consisting of senior ATS provider and airline executives. But these are tough issues, with a large political dimension, and as such are likely to take time to resolve. That is not what airlines want to hear, nor ATS providers, but in such a complex environment a quick fix will be difficult to achieve.

Promisingly, there is an increasing willingness from ATS providers to address change. The tougher task will be to get states to follow suit.


Source: Airline Business