Directions for innovative route charging systems

Transcription

1 EUROCONTROL Care Innovative Action Project Innovative Route Charging Schemes Work Package 8 Directions for innovative route charging systems Final Report In collaboration with: University of Trieste University of Padova Air Dolomiti S.p.A. PdR Ref. Project: 5269 PdR Ref. Contract: 6788 Customer: EUROCONTROL (Contract Ref: C/1.049/HQ/EC/02) Date: 3 February 2004 PADOVA RICERCHE Scpa Galleria Spagna, Padova - Tel Fax direzione@padovaricerche.it

2 DOCUMENT REVIEW Version Date Description Modifications Draft Final Report Second Draft Final Report ES, Chs. 1, 2, 3, Third Draft Final Report ES, Chs. 1, 2, 3, 4 (editorial); Apps. A, B, C (new) Final Report Appendix D (new). PRINCIPAL INVESTIGATORS Name Lorenzo Castelli Marta Omero Raffaele Pesenti Walter Ukovich Affiliation University of Trieste University of Trieste University of Palermo University of Trieste OTHER CONTRIBUTORS Name Giovanni Andreatta Lorenzo Brunetta Affiliation University of Padova University of Padova CARE-Innovative-IRCS-TS-WP8_4.0.doc 2-04/02/2004

3 Executive Summary Introduction This report has been prepared for EUROCONTROL by the Operations Research Group at the University of Trieste, Italy. The work has been performed under contract C/1.049/HQ/EC/02 within the framework of the CARE Innovative Action Project Innovative Route Charging Schemes (IRCS). The present document is the final report of Work Package 8 (WP8) of the project. Background The final purpose of the Innovative Route Charging Schemes project is to study the impact of changes in en-route charges with respect to the demand and supply sides of ATM in a view to improve the overall efficiency of the system. The demand side of ATM in the ECAC area has been studied in Work Packages 1, 2 and 3 of IRCS, while the supply side has been addressed in Work Package 7, as far as performance evaluation is concerned. Work Packages 4, 5 and 6 considered demandsupply interactions, from different points of view. Being the final Work Package of the IRCS project, WP8 subsumes, develops and concludes all the results attained in the rest of the project. Accordingly, WP8 considers a number of alternative route charging systems and analyses the impact each of them could have on all actors involved in the ATM system. Premises Empirical evidence from [WP4] and [WP6], and opinions gathered from airlines point out that the route charging system presently in use produces distortions in some cases, generating inefficiencies. In particular, routes longer than required (wasting time and fuel, and raising pollution) can be generated in the strategic phase as an effect of differentials in the unit rate of different countries. Moreover, the Maximum Take-Off Weight (MTOW) factor in the route charge formula is claimed to induce airlines to use aircraft configurations with lower MTOW figures, thus giving up the possibility of fully exploiting the technical characteristics of the aircraft (in terms, for instance, of load capacity, or of maximal range). Moreover, the present charging system: is not affected by performance factors, i.e., the quality of the provided service does not influence the charge level; due to the Full Cost Recovery principle, it does not provide incentives to reduce costs or to improve performance; does not contemplate any form of benefit or risk sharing. As a consequence, it is sensible to consider innovative rules for determining, collecting and distributing route charges. The general approach followed to this task is to CARE-Innovative-IRCS-TS-WP8_4.0.doc 3-04/02/2004

4 consider alternative route charge systems in such a way as to provide to each involved actor suitable incentives to increase the overall system performance, considered as a decreasing function of the overall costs incurred by all the actors involved in the ATM system, both on the demand and on the supply sides. Ideally, an innovative route charges system should have the following characteristics: it should not increase costs for any class of actors in the system; it should actually decrease costs for virtuous actors; it should actually stimulate each actor to reduce not only its own costs, but also the external costs it indirectly induces on other actors. Considerations for thinking about innovative route charging principles The Full Cost Recovery principle has drawbacks but also merits: in particular, it guarantees the economical independence of the European ANS system and the possibility of financing investments for capacity and performance improvement. If it would be abandoned, great care should be paid in order not to miss these positive effects. The process of collecting route charges and the process of distributing them to the ANSPs need not to follow the same rules. If separated, a larger flexibility can be gained in devising alternative systems. Route charges could be made dependent on the number of passengers. In this way, the MTOW factor, which is a proxy for the willingness to pay (cf. [PC01]), could be dropped, thus eliminating a cause of distortion. An innovative system should consider performance. In general terms, a charging system should be hopefully able to: 1. penalise actors worsening the performance of the system 2. reward actors raising performance levels 3. compensate for external costs induced by poor performance 4. provide incentives to improve performance. It is awkward to imagine an effective penalty-reward system based on performance actually involving passengers and airports, although the former ones mainly suffer from poor performance, and the latter ones may adversely affect system performance. For airlines and ACCs, two separate penalty-reward systems could be conceived, whose revenues could be used to provide incentives for investments in projects aimed to improve the overall system performance. In a complex system like the ATM system, the behaviour of an actor may severely affect other actors, to the point of producing external costs to them. In general, any deviation from a planned procedure produces a perturbation that requires some effort (thus producing a cost) to be dealt with. Hence it would be desirable to have a system promoting stable, planned, smooth situations and penalising perturbations. CARE-Innovative-IRCS-TS-WP8_4.0.doc 4-04/02/2004

5 Accordingly, route charges could be paid not just for the service of providing air navigation services for a specific flight, but for the service of managing the flight plan of that flight. A super partes authority should assess the investment projects of the ANSPs on a cost effectiveness basis contemplating performance improvements. This authority should decide which investment plans are eligible for funding from the route charging system. Following the example of the UK ANSP system, a price cap regulation could be adopted, imposing a reduction, over a given time horizon, of the real (inflation free) prices. Suitable technology on-board aircraft can make the work of controllers easier. Accordingly, route charges could be lowered (possibly in a differentiated way, according to the simplification level implied for the control) for suitably equipped aircraft. Main findings A Common European Unit Rate for route charge collection (not distribution) would make much simpler calculations, thus dropping costs, and would eliminate geographical distortions for routes. Local, and possibly temporary, adjustments could obviate some difficulties. In this case, regional unit rates could be used, but at the expenses of most benefits of the common case. A two-part tariff with different costs for the ascent and descent parts of the route and the central part would be more strictly cost-related, and would allow for demand management. However, the effectiveness of demand management could be questionable according to [WP6]. Making route charges depend on the load factor would foster using larger aircraft and would favour business-oriented airlines, while penalising low cost airlines. Route charges proportional to the ticket price would dramatically simplify accounting operations, thus reducing costs. Moreover, higher elasticity passengers would be penalised, and lower elasticity passengers would be favoured. Two distinct penalty systems for airlines and ACCs based on performance figures, and especially delays, could provide concrete incentives to improve performance and to provide funds to finance investments to the same aim. Charging flight plans instead of actually performed flights should foster predictability and smoothness of operations, thus reducing perturbation costs. Different penalties (possibly negative) for flight plan changes should vary according to who causes them, how large is the change, and how much time is left before take-off time. In the case of a price cap regulation, the unit rate should evolve year by year during a pre-determined time horizon according to the value of the Retail Price Index (RPI), minus a quota, indicated by X, that actually introduces a decrease for the real (not inflated) price. Thus suitable values for RPI and the X factor should be chosen. National values seem more adequate. CARE-Innovative-IRCS-TS-WP8_4.0.doc 5-04/02/2004

6 Partial compensations for differences between forecast and actual revenues could be used to tune risk sharing levels between ANSPs and airlines. Discounts for suitably equipped aircraft could help in sharing benefits resulting from operational simplifications in ACCs produced by such equipment. As a consequence, investments to this aim would be stimulated. Conclusions Possible benefits that could be drawn from the application of the considered scenarios encompass: reducing costs fostering performance improvement, by penalty-reward methods stimulating investments, both 1. sharing benefits and risks between ANSPs and airlines 2. relating charges to actual costs. Of course, applying any of these scenarios requires consensus from most, if not all, the involved actors. For this reason, it is important to clarify the consequences of their implementation. In conclusion, formulating proposals or making recommendations was not within the scope of the IRCS project. Nevertheless, from the above analyses a possible alternative to the present route charging system seems to emerge as the one showing the major possible merits. It contemplates: 1. charging flight plans; 2. imposing penalties for modifications to the first plan; 3. calculating charges for each flight plan according to a two-part tariff, accounting for different rates for the ascending and descending phases, and for the cruising part of the flight plan; 4. using a common European unit rate for the cruising part of the flight plan; 5. offering a discount for flight plans prepared for suitably equipped aircraft, requiring simpler or anyway facilitated control procedures. Furthermore, two penalty-reward systems could be integrated with this new charging system: for airlines, penalising each minute of delay they cause on each operated flight; the corresponding revenues could contribute to finance the discount of point 5 above; for ANSPs, again penalising each minute of delay they cause on each controlled flight; the corresponding revenues could contribute to finance investment projects producing verified performance improvements. CARE-Innovative-IRCS-TS-WP8_4.0.doc 6-04/02/2004

7 Summary INTRODUCTION GENERAL ANALYSIS AND APPROACH BASIC FEATURES OF THE EUROPEAN ANSP SYSTEM THE PRESENT CHARGING SYSTEM THE FOLLOWED APPROACH DESIRED FEATURES FOR AN INNOVATIVE SYSTEM KEY ISSUES FULL COST RECOVERY COLLECTION VS. DISTRIBUTION OF ROUTE CHARGES RELATING ROUTE CHARGES TO PASSENGERS PERFORMANCE Delays Smoothness of Operations INVESTMENTS COST REDUCTION TECHNOLOGY IMPACT OF THE ALTERNATIVES A COMMON UNIT RATE FOR THE EUROPEAN AIRSPACE A TWO-PART TARIFF CHARGES PROPORTIONAL TO THE LOAD FACTOR CHARGES PROPORTIONAL TO THE TICKET PRICE PENALISE WHO CAUSES DELAYS Penalise Airlines for Flights they Delay and Promote Virtuous Airlines Penalise ACCs for the Produced Delays and Incentivate Investments to Enhance Performance Penalise Airports for the Produced Delays CHARGE FLIGHT PLANS INSTEAD OF FLIGHTS COST REDUCTION COMPENSATIONS PROMOTING INVESTMENTS FOR TECHNOLOGY ON AIRCRAFT CONCLUSIONS...30 A. SCENARIOS FOR ANS PROVISION REGULATION...32 A.1 COMPARISON BETWEEN PRICE CAP AND RATE OF RETURN REGULATION B. CHARGING POLICIES OF NETWORK INDUSTRIES...36 B.1 THE EUROPEAN ELECTRICITY NETWORK B.2 THE EUROPEAN RAILWAY NETWORK B.3 THE EUROPEAN AIR TRANSPORTATION INDUSTRY C. CHARGE DIFFERENTIATION...42 C.1 CHARGE DIFFERENTIATION ACCORDING TO THE PRINCIPLE OF MARGINAL COST PRICING C.2 CHARGE DIFFERENTIATION ACCORDING TO SERVICE QUALITY C.3 CHARGE DIFFERENTIATION ACCORDING TO CUSTOMERS D. THE NATS CASE...65 D.1 THE FORM OF THE CHARGE CONTROL LIST OF ACRONYMS...69 REFERENCES...70 CARE-Innovative-IRCS-TS-WP8_4.0.doc 7-04/02/2004

8 Introduction The final purpose of the Innovative Route Charging Schemes (IRCS) project is to study the impact of changes in en-route charges with respect to the demand and supply sides of ATM in a view to improve the overall efficiency of the system. The demand side of ATM in the ECAC area has been studied within IRCS in [WP1], [WP2] and [WP3], while the supply side has been addressed in [WP7], as far as performance evaluation is concerned. [WP4], [WP5] and [WP6] considered demandsupply interactions, from different points of view. In particular, WP8 considers a number of alternative route charging systems and analyses the impact each of them could have on all actors involved in the ATM system. Following the indications of the Monitoring Group, the title of WP8 has been modified in order to make it adequate to its actual content. Being the final Work Package of the IRCS project, WP8 subsumes, develops and concludes all the results attained in the rest of the project. Whenever appropriate, explicit reference to the pertinent findings of other IRCS Work Packages are made in the text. Other studies have been devoted, in the more or less recent past times, to problems related to the one considered here. Among them, [RPI03], [Logica 01], [BAC01], [PC01] and [FAA97] are particularly interesting. Furthermore, the general framework of the Single European Sky (cf. [SES00]) provides both an analysis of the present ATM system in Europe and guidelines on how to improve it. With respect to these documents, the present study is distinguished at least by its specific scope (route charges), and by its specific attention on the impact of new rules on demand and supply sides of ATM. Moreover, IRCS was not committed to formulate proposals or recommendations, although some indications on viable alternatives naturally come out of the performed analyses. Furthermore, institutional arrangements are not considered in this study, as it is essentially concerned with the possible impacts of the new rules, and not with their implementation issues. This document is structured as follows. Chapter 1 outlines some critical features of the present en route charging system in the European Civil Aviation Conference (ECAC) area, and points out which features would be desirable for an alternative system. Then Chapter 2 considers some key questions that should be addressed when devising an alternative route charging system. From this analysis, some possible new scenarios emerge. They are then studied in Chapter 3, as far as their effects on all the actors involved in the ATM system are concerned. Finally, some concluding remarks are sketched in Chapter 4. Three appendixes are devoted, respectively, to a sketch of possible regulation approaches (Appendix A), to an overview of charging policies in network-structured industries (Appendix B), to the issue of charge differentiation (Appendix C), and to the economic regulation system in the UK (Appendix D). CARE-Innovative-IRCS-TS-WP8_4.0.doc 8-04/02/2004

9 Chapter 1 1. General Analysis and Approach Before considering innovative systems for determining, collecting and distributing route charges, and studying their conceivable impacts, it is wise to sketch some relevant features of the European ANSP system in general and in particular of the route charging system presently in use. This is the premise to outline the approach followed in this WP and, in particular, to propose some requirements any alternative charging system should meet. 1.1 BASIC FEATURES OF THE EUROPEAN ANSP SYSTEM For the purpose of this study, the European ANSP system appears to be essentially as a complex, integrated system. Complexity factors are, on one hand, the presence of several actors, of different types, such as the national Air Navigation Service Providers (ANSPs), EUROCONTROL, the European Commission, airlines, passengers, airports, national governments, etc. On another hand, it is essential to consider the network structure of the air transportation system. It is a transportation network with a strong local control, structured in a hierarchical way (sectors, ACCs, ANSPs, EUROCONTROL), performed manually for each individual aircraft, mainly based on control-to-vehicle communications, and acting essentially in real time. Moreover, in ANS there cannot be different, independent networks acting in parallel on the same geographic area. As a consequence, a very large number of different companies (airlines) interact on the same network parts (not to mention military aviation). Also, routes cannot be split (like, for instance, in digital communication), and transit times on network arcs are mostly relevant, both to transportation service providers (airlines) and to end users (passengers), which is not the case, for instance, in communication networks, or in electric power delivery networks. These two latter characteristics have evident consequences on link saturation issues and network flow balance possibilities. Another feature of the ANS system is that, as humans are involved both on the ground and in the air, capacity is not completely determined by physical characteristics, as it is for most other types of network. This implies that, at least to some extent, capacity in the ANS system can be modulated with more flexibility than in other network types, although with an impact on variable costs. Finally, performance measures for the ANS system are very different than for other service providing networks. In particular, safety issues appear to be much more critical in the ANS case than in other contexts. CARE-Innovative-IRCS-TS-WP8_4.0.doc 9-04/02/2004

10 All these features make the ANS system radically different from other network systems, like distribution networks (energy, gas) or communication networks. Rather, a (relatively) more similar system is the rail transportation system (cf. also [OJ01]), although with less complexity elements (consider at least the different complexity of connections and routes, the type of control, and the number of different companies that usually use the same network part). A lucid analysis of critical strategic issues about policies for this kind of systems at a European level is proposed in [Helm01]. Interactions among actors within the system are very strong. There are not only several intentional interactions that are necessary to make the system work (e.g., a controller imposing a height level on a fix to an aircraft), but also many indirect interactions, whereby the attitude or the behaviour of an actor can have a substantial impact on another actor, e.g., imposing constraints on his behaviour, or affecting his performance. For instance, equipping aircraft with suitable apparatus could simplify control operations, or modifying a flight plan induces perturbations in the control setting procedures, with possible effects on other airspace users. It is important to point out, for the purpose of this study, that the effects of these indirect interactions often also have an economic impact, producing extra indirect costs. 1.2 THE PRESENT CHARGING SYSTEM The present system to determine route charges, as it is currently implemented, is analysed in [WP4] and [WP6], and needs not to be repeated here. According to it, airlines only pay for ANS provision. Unit rates are determined on a national basis according to the Full Cost Recovery principle, whereby costs incurred by each national ANSP are fully recovered according to a procedure contemplating compensations for deviations between forecast and actual traffic volumes 1. It should be pointed out that the present charging system, as it is presently implemented in all EUROCONTROL states, except UK 2 : is not affected by performance factors, i.e., the quality of the provided service does not influence the charge level; does not provide incentives to reduce costs or to improve performance; does not contemplate any form of benefit or risk sharing; fully supports investments. Furthermore, the present charging system introduces distortions in the air traffic system, which in turn produce inefficiencies. The reasons are at least two: differences in national unit rate values induce airlines to devise longer routes to pass round expensive states (cf. [WP4] and [WP6]), thus dropping flight efficiency (cf. [WP7]); moreover, finding the least cost route with the present 1 The Full Cost Recovery is the main regulation mechanism adopted by almost all European States. In April 2001, a price cap regulation mechanism has been introduced in UK. According to [CRCO99], each state is allowed to adopt an independent economic regulation system. 2 Concerning the UK system, see and CARE-Innovative-IRCS-TS-WP8_4.0.doc 10-04/02/2004

11 system is not an easy task at all (cf. [WP4]), requiring a large set of input data and of computing and processing power, thus indirectly raising airline costs; the presence of the MTOW factor in the formula induces airlines to use aircraft configurations with lower MTOW figures, thus giving up the possibility of fully exploiting the technical characteristics of the aircraft (in terms, for instance, of load capacity, or of maximal range). General guidelines about charges are provided in [SES00], within the framework of the Single European Sky: the charging system should stimulate cost-effectiveness and include incentives for practices that increase capacity to enhance system-wide efficiency, whilst maintaining a high level of safety. A further specification is in [PEP03]: charges shall encourage the safe, efficient and effective provision of air navigation services at the lowest possible cost and shall stimulate integrated service provision. They may provide incentives and deterrents consisting of financial advantages and disadvantages, which apply to air navigation service providers and/or airspace users. They may also provide revenues to benefit projects designed to assist specific categories of users and/or air navigation service providers in order to improve collective air navigation infrastructures, the provision of air navigation services and the use of airspace. 1.3 THE FOLLOWED APPROACH From the previous analyses carried out within the IRCS project and in particular from [WP4], [WP5] and [WP6], it emerges that, in practice, reasonable variations in the route charge levels: are not expected to sensibly affect ANS demand nor air transportation demand, due to the relatively low values of involved elasticities, but are expected to affect airspace users operational decisions (concerning, e.g., route choice), due to the low profit margins they normally face. In the current work-package, innovative rules for determining, collecting and distributing route charges are analysed. The general approach followed to this task is to reformulate the route charges system in such a way as to provide to each involved actor suitable incentives to increase the overall system performance. To be specific, the overall system performance is considered as a decreasing function of the overall costs incurred by all the involved actors. Thus increasing the overall system performance corresponds to decrease costs. Then the benefits resulting from cost reduction should be shared among the involved actors. Within this general approach, it should be reminded, as it has been pointed out above, that in a so highly integrated system such the ATM system, the behaviour of an actor can substantially influence other actors costs. Accordingly, promoting virtuous behaviours is a sensible mean to improve the overall system performance. In particular, measures directed to simplify operations can produce meaningful savings by allowing to CARE-Innovative-IRCS-TS-WP8_4.0.doc 11-04/02/2004

12 reduce resources (time, equipment, workforce 3, etc.) devoted to perform these operations. 1.4 DESIRED FEATURES FOR AN INNOVATIVE SYSTEM According to the general approach just outlined, an innovative route charges system should have the following characteristics: it should not increase costs for any class of actors in the system; in particular, the possibility of just shifting costs from a group to another one should be avoided; it should actually decrease costs for virtuous actors; it should actually stimulate each actor to reduce not only its own costs, but also the external costs it indirectly induces on other actors. In this study, the above guidelines will be considered both for formulating innovative scenarios and for assessing their possible impact on the ATM system. 3 Of course, reducing the workforce required for some operation does not necessarily implies reducing occupation. CARE-Innovative-IRCS-TS-WP8_4.0.doc 12-04/02/2004

13 Chapter 2 2. Key issues In this chapter, some basic issues that are relevant for devising innovative charging schemes for en route charges are considered. From them, some alternative scenarios are drawn whose possible impact on the ANSP system will be addressed in Chapter FULL COST RECOVERY The Full Cost Recovery (FCR) is a basic principle for the current charging system. In practice, it implies that all costs incurred by ANSPs are recovered through route charges. According to it, national unit rates are first determined each year on the base of expected traffic volumes in order to cover all incurred costs. Then compensations are made to fill the gap (positive or negative) between actual and expected revenues. The FCR principle has the great merit of making the European ANS system economically independent. In particular, governments are not required to subsidise ANSPs. Moreover, investments are completely supported, and this provides means to guarantee adequate quality levels, starting from safety. However, FCR has also some drawbacks. First, it does not make ANSPs share risks with airlines. In fact, when traffic volumes decrease, unit rates increase in order to provide the expected revenues to ANSPs. But this in turn increases costs for airlines, while their revenues are lower. Second, FCR does not provide any incentive towards reducing costs of ANS. In practice, FCR imposes quite rigid constraints to any charging scheme: according to it, the only allowed degree of freedom consists in the way costs are distributed among payers. Recently, hints towards abandoning FCR have been issued (cf. [WP7]), in order to overcome its drawbacks. However, it seems wise to be very careful in this direction, in order not to miss the positive effects of FCR on the financial independence of the ANSP system and on the support of investments. 2.2 COLLECTION VS. DISTRIBUTION OF ROUTE CHARGES The present European system of ANS is essentially structured on the basis of a certain number of ANSPs (in practice, the national providers, although with an increas- CARE-Innovative-IRCS-TS-WP8_4.0.doc 13-04/02/2004

14 ing tendency towards integration). Accordingly, route charges are first calculated and collected (by EUROCONTROL from airlines) and then distributed (by EUROCONTROL to ANSPs) essentially on a national basis 4. In particular, the same rule is used for calculating how much airlines have to pay for each service unit controlled by each ANSP, and how much each ANSP has to receive: in both cases the amount is given by the product of the unit rate of the relevant ANSP by the serviced units. It is important to point out that there appears no particular reason why these two processes (i.e., determining how much airlines have to pay and how much ANSPs have to receive) follow the same rule. In principle, the processes of collecting charges and of distributing charges could follow completely different rules. This opens the way to a first alternative system for route charges: the amount to be paid could be determined on the basis of a common European unit rate, determined in a suitable way (e.g., in such a way to comply with FCR). This alternative collecting rule needs not to influence, in principle, the way the global revenues are then distributed to the ANSPs. The scenario of a common European unit rate has been already considered in [WP6], and will be further analysed in Chapter RELATING ROUTE CHARGES TO PASSENGERS According to the present system, airlines pay route charges. They then recover this cost through the revenues they get from ticket sale, as it has been analysed in [WP5]. But airline revenues depend on the number of passengers, so it is sensible to make also route charges dependent form this parameter. In this way, the MTOW factor, which is a proxy for the willingness to pay (cf. [PC01]), could be dropped, thus eliminating a cause of distortion. Three options could be considered: make route charges for each flight proportional to the load factor of that flight; make route charges proportional to the ticket price; make route charges proportional to the number of passengers. Note that the third alternative above is in some sense intermediate between the first two. Furthermore, in the last two cases route charges could be not linked to a particular flight, and could, in principle, bypass airlines. They will be further analysed in Chapter PERFORMANCE As route charges are a price paid for a service, it is sensible to imagine that they could vary according to the quality of the provided service. In principle, quality could affect both rules for determining how much users have to pay, and how much ANSPs must receive, in an independent way, according to the distinction proposed in the above 4 Multi- or supra-national ANSPs are expected to follow essentially the same rules. CARE-Innovative-IRCS-TS-WP8_4.0.doc 14-04/02/2004

15 Section 2.2. Both penalties and incentives could be considered to this end. However, it is to mention that such measures could raise costs, and possibly violate the FCR principle. So a great attention should be paid in devising appropriate measures. A particular argument should be considered concerning safety. Safety is the first performance key area, and no trade-off is allowed for it (cf. [WP7], and [PRC03]). However, as it has been already pointed out above, safety can be affected by investments, which in turn are fostered under an FCR system (although, of course, not necessarily by such a system only). Anyway, it is clear that guaranteeing a given safety level has a cost. In [WP7], a large variety of performance measures has been analysed. A distinction was made there between simple indicators, each related to a specific aspect of service performance, and more complex systems, aiming to provide an assessment of the service quality considering at the same time several issues. For the sake of clarity of presentation, mainly simple indicators are considered here. In particular, arguments will be focused on delays. However, the proposed considerations can be extended to the case of complex indicators in several cases, provided they can be expressed by aggregate numerical values. For instance, benchmarking methodologies could be suitably embedded in the considered scenario DELAYS In general terms, a charging system should be hopefully able to: 1. penalise actors causing delays 2. reward actors not causing delays 3. compensate for external costs induced by delays 4. provide incentives to reduce delays 5. airlines ACCs Relevant actors in this scenario are: airports passengers. First, it should be pointed out that passengers can only suffer, and usually do not cause delays (or, delays caused by passengers can be attributed to airlines, at least in principle). Compensating passengers for the delays they suffer is normally taken care of by airlines as a part of contractual duties, whenever contemplated. Nevertheless, direct compensations from route charges for delays to passengers could be devised in the case of route charges paid directly by them (for instance as a tax on the ticket price), according to the scenarios outlined in Section 2.3. A form of compensation of this type is in operation, for instance, with the Italian railways company. Concerning airports, it is known that they have a significant impact on the performance of the ATM system (cf. [WP7]). However, it is awkward to conceive sensible 5 For a similar approach in railways, see Article 11: Performance scheme, of [OJ01]. CARE-Innovative-IRCS-TS-WP8_4.0.doc 15-04/02/2004

16 ways to involve them in a penalty/incentive system, essentially for two reasons: first, they are managed by independent entities, very often of private nature, and in mutual competition, so that the necessary consensus to implement such measures appears to be rather problematic. Second, there is the risk of raising costs, which could be transferred upon airport charges, thus increasing airline costs. Airlines are the customers of the ANS system, but they can also seriously affect the performance of the system with their behaviour. So a possible scenario contemplates charging airlines for the delays they cause, and devoting the penalties to a common fund, which in turn could be shared among airlines not causing delays. For instance, charges could be proportional to the number of minutes of delay for each flight. IATA codes could be useful to identify the reason of the delay, and to attribute it to the relevant actor. However, a great care should be posed in defining a sound and unambiguous procedure to measure delays (e.g., departure vs. arrival delay, delay with respect to the published schedule, etc.). In principle, a reward/penalty system of this kind should meet at least three of the four requirements mentioned at the beginning of this section, although it should be mentioned that its strength in providing incentives to reduce delays is only through penalties. Clearly, a system like this one cannot provide compensations for external costs induced by delays to other airlines. A different penalty/incentive system could be devised for ACCs and, more in ge n- eral, for ANSPs. Also in this case, ACCs causing delays should be penalised, and penalties devoted to a common fund (in principle, a different one from the airline fund considered above). In turn, this fund could be used to finance investments aiming at improving the ATM system performance. In this way, an ACC with a poor performance could be encouraged to invest in order to improve its performance. Also in this case, at least three of the four initial requirements are met. In particular, promoting investments is a quite concrete and effective way to provide incentives to improve performance. However, compensations are not contemplated SMOOTHNESS OF OPERATIONS As it has been already pointed out above, in a complex system like the ATM system, it turns out that the behaviour of an actor may severely affect other actors, to the point of producing external costs to them. While this kind of effects is evident in some cases (e.g., when delays are produced), there are some more subtle situations. In general, any deviation from a planned procedure produces a perturbation that requires some effort (thus producing a cost) to be dealt with. Hence it would be desirable to have a system promoting stable, planned, smooth situations and penalising perturbations. In this sense, the action of submitting a new flight plan, or of modifying an existing one, issued by either the airline operating that flight, or by the ATM system, has the effect of inducing reactions in the other actors of the system (including passengers) that generate additional costs. Thus, for instance, an involved ACC might be forced to open a new sector, or a restriction could be issued. Furthermore, it is clear that these perturbations will be more intense if less time is left to react to them. In order to deal with these situations, route charges could be paid not just for the service of providing air navigation services for a specific flight, but for the service of CARE-Innovative-IRCS-TS-WP8_4.0.doc 16-04/02/2004

17 managing the flight plan of that flight. Of course, the latter should be intended to include the former, but not only: it would include also all tasks to plan, organise and manage the suitable resources in order to be able to provide air navigation services. The difference is that, at least in principle, these tasks need to be performed every time a flight plan is modified, not just when the flight is performed. So penalties could be imposed to the submission, or modification, of flight plans, and differentiated according to who is proposing it: penalties should be increased when the airline operating the flight modifies its plan, while a reduction should be applied when the modification is imposed by the ATM system. Moreover, the penalty should increase as the time to the actual flight becomes shorter. According to the same principle, unused plans, as well as unused slots, should be heavily penalised (cf. [WP7]). 2.5 INVESTMENTS Guaranteeing investments is of basic importance for a technologically sophisticated system like the ANSP system. In fact, investments can affect performance, and safety at the first point. As it has been pointed out above, the present system is excellent in supporting investments, due to FCR (although it does not consider performance). But any alternative charging system, if not implementing the FCR principle, should provide strong guarantees for supporting investments needed to maintain safety. In principle, incentives to investments should promote cost-effectiveness in the provision and use of ANS, also according to the Single European Sky Recommendations ([SES00]), as pointed out above. However, there is no reason why any investment should be allowed (hence refunded). According to this argument, investments should be strictly related to performance improvement, and only investments bringing verified improvements in performance should be financed. This leads to the scenario of a super partes authority charged with of the task of assessing the investment projects of the ANSPs on a cost effectiveness basis contemplating performance improvements. This authority should decide which investment plans are eligible for funding from the route charging system. Of course, this system concerns only the rules for distributing route charge revenues to ANSPs. It could be matched with any system for collecting charges. In particular, for financing investment projects it could use the fund coming from charges to ACCs causing delays as described in 2.4. In this way, the ANSP system itself would finance projects to improve its performance. 2.6 COST REDUCTION Devising suitable means to foster cost reduction is certainly a central issue in all systems where there is no competition to guarantee the achievement of welfare optimum. Different tools have been experienced in different areas, noticeably in those of utilities (provision of electricity, gas, telecommunication services, transportation services, etc.). A large literature exists on these issues, to which the interested reader is referred (see for instance [RPI03], and the references quoted there). There, merits and CARE-Innovative-IRCS-TS-WP8_4.0.doc 17-04/02/2004

18 drawbacks of the proposed systems are deeply analysed, to the extent that it seems superfluous to repeat here in detail the produced arguments. In essence, the problem is to reduce costs without dropping performance, as a consequence of depressing investments. In general, these are contrasting objectives (since performance has a cost), so a suitable compromise between them should be achieved. In the case of the European ANSP system, however, there seems to be room for (partially) achieving net benefits, for instance in the scenarios outlined in this study, where the cost of investments not leading to significant performance improvements are avoided, system inefficiencies are mitigated, and external costs produced by other actors behaviours are reduced. Nevertheless, some additional form of cost reducing measures could also be considered, according to the common use of the incentive regulation practice. Following the example of the UK ANSP system, the price cap regulation could be adopted, which imposes a reduction, over a given time horizon, of the real (inflation free) prices. In practice, it could be applied to unit rates (the price of a service unit), or to any other suitable unit price of the specific system (such as, for instance, the fraction of the ticket price yielding route charges, if they were paid in that way, as considered in the previous Section 2.3).In this case, however, price cap should be accompanied by suitable measures to maintain performance levels and to sustain investments. In particular, safety issues should be considered with the utmost care in such a framework. As it has been mentioned above, guaranteeing a given safety level has its cost. As a consequence, the risk of reducing safety as a side effect of reducing costs should be carefully monitored. To this aim, the role of a super partes authority at a continental level could be very fruitful. 2.7 TECHNOLOGY Technology on one hand can impact on performance, on the other hand requires investments. Thus it is a mean linking these two issues, investments to performance, which have been already considered above. In particular, it is clear that technology in ACCs can improve ANSP performance, and a scenario to finance it has been sketched above in Section 2.5. What is also interesting is to consider how technology on the airline side can impact system performance. In this case, suitable technology on aircraft can simplify the work of controllers. In other words, it can help in smoothing control operations. As a consequence, ANSPs unit costs could be reduced (or, equivalently, their productivity, or their performance, could improve). The resulting savings could be shared with airlines, thus in turn providing funds for financing these new technologies on aircraft. Of course, costs for new technologies must include not only equipment, installation and maintenance costs, but also possible costs for certification, training, inspections, etc. In practice, there could be different ways of using these savings (or part of them) to promote the suitable new technology aboard. Some of them could be not related at all to route charges. An apparently attractive idea in this sense comes from the example of Hong Kong, where GPS equipment is freely provided to car owners by the municipal authority in order to make it easier to control traffic. In this case, the investment is made CARE-Innovative-IRCS-TS-WP8_4.0.doc 18-04/02/2004

19 by the controller side, thus simplifying operations, and no money transfers or compensations are contemplated. However, translating this example to the ANSP case is not easy, as several actors are involved (especially from the controllers side), equipment can be different for different situations (e.g., different aircraft), maintenance requirements can be expected to be much stricter, etc. Instead, a different incentive action through route charges appears to have more chances to be effective: route charges could simply be lowered (possibly in a differentiated way, according to the simplification level implied for the control) for suitably equipped aircraft. As a final possibility, the fund fed by the yields of the airlines penalties, as contemplated in the previous Section 2.4.1, could be alternatively inserted in this scenario, in order to contribute to lower route charges for equipped aircraft. CARE-Innovative-IRCS-TS-WP8_4.0.doc 19-04/02/2004

20 Chapter 3 3. Impact of the alternatives In this chapter, the different alternatives emerged from the analysis of the previous chapter are discussed in detail, considering their merits and drawbacks. As a general remark on the considered alternatives, it should be pointed out that they are actually alternative to the present system, but not necessarily to each other. In fact, several of them could be implemented simultaneously. 3.1 A COMMON UNIT RATE FOR THE EUROPEAN AIRSPACE This scenario basically consists in using a common unit rate in all European states for the purpose of determining the route charges. For the sake of simplicity, in order to more clearly analyse the impact of this system, route charges are assumed to be calculated according to the rules that are presently in use. In this scenario, it turns out that the distance according to which route charges are calculated, for intra-european flights, is always the great circle distance between the origin and destination airports, like it is the case, with the present system, for domestic flights: in this sense, all intra-european flights would be considered as domestic flights (which would be a nice slogan for this system). This system has at least the following merits with respect to the present system: calculations are simpler, as they do not depend anymore on the details of the proposed route for intra-european flights (actually, the CRCO route ), as it is with the present system, but only on the location of the origin and destination airports; in practice, a simple look-up table could provide route charges for all origin/destination pairs in Europe; as a consequence, accounting costs for companies decrease; actually flown distances never increase, and in some cases may decrease, when in the present system a route is made longer to pass round a state with a high (national) unit rate (as seen in [WP4]); in other terms, the flight efficiency would improve (cf. [WP7]); this implies possible savings in terms of shorter time, less consumed fuel and reduced pollution. On the other hand, this proposal is fully compatible with a Full Cost Recovery policy: the unique unit rate needs only to be fixed at the value given by the ratio between the desired amount of global revenues (aggregated at the European level) and the level of expected service units, again at the whole European level. But any other cost CARE-Innovative-IRCS-TS-WP8_4.0.doc 20-04/02/2004

21 recovery policy could be implemented as well, in a very simple and natural way, provided the desired amount of total revenues is given. A first estimate of the value of the unique unit rate can be inferred from a result of [WP6]. There, it is found that a common unit rate of would produce a total amount of collected charges during the reference week, using the new rule, which is the same as the total amount of charges that was actually paid during that week. However, it should be noticed that the new system is expected to produce less service units, as pointed out above. An estimate of the difference between the number of present service units, calculated according to the current CRCO rule, and the value produced by the new system with distances computed along the great circle for all intra- European flights (and not only for domestic ones), can be drawn form [WP6], for a set of flights of the considered sample week. It turns out that the number of service units would decrease by about 3%. Hence a corresponding increase in the common unit rate should be expected, leading to an estimate of 59,74 (the used data refer to the last week of August 2002). An adverse effect of this proposal will be of rising costs for route charges for airlines with several domestic flights within states with a present unit rate lower than the proposed common value. This is the case, for instance, of Olympic Airways, connecting the many Greek islands at a unit rate of in the reference week of [WP4] and [WP6] (but the same applies to Turkish Airlines, which had a unit rate of 29,89 in the same week). In order to mitigate such a drawback, domestic flights could maintain their present unit rate, at least in the states with a present value lower than the proposed common level. In addition, a gradual evolution towards the common value could be also envisaged. Alternatively, the unit rate could be differentiated in few areas (cf. also [RPI03] and [Logica01]); however, this would only partly maintain the advantage of the common rate by reducing (but not eliminating) the opportunity of avoiding expensive areas; however, CRCO-like calculations would still be needed, thus giving up accounting savings. 3.2 A TWO-PART TARIFF Here the basic idea is to have two different tariffs for the ascent and descent parts of the route (more demanding in terms of control effort) and the central part, which is normally flown at a more constant height (and is simpler to control). In practice, the two terminal parts of the route should cost more than the central part (now the converse is true, at least in Italy, thus subsidising national airlines); this would not introduce distortions, or flight inefficiencies, since the terminal parts are obliged by the origindestination to serve; conversely, charges for the terminal parts could be different for different areas, thus allowing for demand management. In this case, the relation between route charges and terminal charges should also be reconsidered (cf. also [PC01] and [RPI03]). However, from [WP5] and [WP6] it turns out that demand management measures can be expected to have only limited impact. CARE-Innovative-IRCS-TS-WP8_4.0.doc 21-04/02/2004