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ATC cost hangover looms

While today's cost-recovery model for air traffic control will lead to rising ATC bills in the next couple of years, a new charging regime offers hope.

Under the current system, Europe's air navigation service providers pass on their costs to airlines. In an ideal world, traffic would go up, spreading any cost increase. But this was not the case in 2009 and airlines are now facing the threat of higher air navigation charges against a backdrop of a sickly market and highly price-sensitive traffic. The Association of European Airlines describes this as "an enormous issue".

Xavier Fron heads up Eurocontrol's Performance Review Unit, which monitors ANSP charges. "The concern is that in 2009, versus 2008, ANSP costs went up by 2%, while traffic went down by 6.3%. It is true there will be a significant burden because of traffic going down in 2009. The order of magnitude of that figure is around €600 million ($825 million)," he says. Under-recovery is usually charged to airlines two years later, so the pinch of 2009 will be felt by airlines in 2011, says Fron.

"We see a lot of monopoly providers turning up the heat on costs," says Aer Lingus chief executive Christoph Mueller. British Airways chief financial officer Keith Williams says: "During the first nine months of the year, our overall costs are down more than 10%, but our ATC charges have increased and will increase by between 2-3%. We have had close co-operation from our other suppliers and would call on ATC providers to recognise the exceptional position of the airlines at this time."

Like airports, the ANSP business is infrastructure-, labour- and capital-intensive. "That all has to be paid for," says CANSO director general Graham Lake. "ANSPs will take costs out wherever they can, but, like airlines, they have not been able to reduce their costs quickly enough to meet falling demand."

ANSPs charges are governed by law and Lake suggests it is governments, rather than ANSPs, which need to be lobbied. "There are some extremely good ANSPs and it is irritating to hear the criticism when we know what's going on behind closed doors." He says a number of cost initiatives are underway - such as job cuts, wage and cost freezes - and some governments now run their ANSPs like a private entity, with transparent cost structures.

Hard Line

States, like Spain, are also taking a tougher stance with ATC staff than before. "Something has happened, it is happening and will continue to happen," says Lake. "I don't think that we are doing too much wrong, but there is still more to be done." Eurocontrol's Fron says ANSPs have shaved €150 million from their costs, but he adds: "There is still a lot of margin for improvement."

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The pace of change is too slow in the eyes of the airlines battling to stay afloat. "The situation now is clearly much better than, say, 15 years ago, and the corporatisation of service providers has been a major step forward," says AEA manager, information, David Henderson. "But service providers cannot say that they are as efficient as they can get."

He adds that airlines have, for a long time, argued against the cost-recovery model. "It is bad in the times when traffic is growing, but when traffic shrinks it is far, far worse." When the ANSPs came up with their initial charging estimates last June, some of the increases were "eye-watering", claims Henderson, but the final average increase was "much better" at 2.7%.

Even so, concerns remain. "We worry how they did it," he says. "Was it simply by fudging the numbers of assumed cost reductions they can't sustain, or based on better traffic than the original forecasts? The question is how much of the efficiency is genuine and will not give rise to further cost recovery in the future."

Henderson believes things will improve with the implementation of the Single European Sky project. "We are expecting very large efficiency gains through the Single European Sky. In the future, we will pay less than we are doing now, but it is a question of surviving that long and this is the worst possible time to be feeling the effects of cost-recovery."

By around 2012 cost-recovery is due to be replaced by "determined pricing", where ANSPs will be required to meet strict performance targets. Fron from Eurocontrol explains: "Airlines have been very flexible, but ANSPs act in a way which is very rigid. This will be changed by the incentive system. They will be strongly encouraged to control costs and be responsive to traffic increases and decreases, because they will be able to retain a large part of the margin which they generate."

The system will be based around an overall European ANSP efficiency target, which will be met by individual member state plans, but if these do not go far enough, the European Commission can push through more rigid objectives.

Fron is working with the EC to set this up and he says a roadmap will be established during a key meeting in Madrid in late February. He says: "The rules are not set in stone. They are due to be adopted by June this year."

One outstanding question is how the cutover will be managed. "Where do you start from? Which baseline? Does it include the impact carried over from 2009? There will be a transition, but this is delicate. It is being discussed, but it has not been resolved yet," says Fron. Either way, if airlines can survive long enough, they are likely to see a better risk balance with the ANSPs. "We are entering a completely new world, where it will no longer be the case that, whatever the cost, airlines have to pay," says Fron.

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