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ATM cost-efficiencytargets

A guide for European ANSPs and NSAs

Analysis & commentary for decision makers in aviation

Contents 1 Introduction................................................................... 1

1.1 Context.......................................................................... 1

1.2 Impacts of traffic shortfalls.................................................. 2

1.3 Applying the lessons of RP1.................................................. 3

2 FromEU-widetonationalcost-efficiencytargets..................... 4

2.1 A two-stage assessment process............................................. 4

2.2 Interactions between the PRB, NSAs and ANSPs.......................... 4

3 Thetrafficforecast–astrategicdecision............................... 7

3.1 Adopting a traffic forecast for the next reference period.............. 7

3.2 Financial impact analysis.................................................... 9

4 Evaluatingthecost-efficiencyoptions................................. 11

4.1 Analysis of staff costs....................................................... 11

4.2 An illustrative model of ANSP costs....................................... 13

5 Conclusions.................................................................. 16

FiguresFigure 1: Link between the Performance and Charging Regulations......... 1

Figure 2: RP1 traffic development against NPP traffic forecast.............. 2

Figure 3: From RP1 ambitions to adoption of performance plans............ 4

Figure 4: Interactions between ANSPs, NSAs and the PRB..................... 4

Figure 5: Traffic forecast analysis in 3 steps..................................... 7

Figure 6: Ex-post analysis of traffic forecast.................................... 8

Figure 7: Assessing the impact of traffic forecast on ANSP profitability..... 9

Figure 8: Typical ANSP cost structure............................................ 11

Figure 9: Examples of past improvement in ATCO productivity.............. 12

Figure 10: Projection of ANSP costs by nature................................. 13

Figure 11: Performance gap resulting from the baseline scenario.......... 13

Figure 12: The time line for RP2 preparation.................................. 16

TablesTable 1: Strengths and challenges for ANSPs, NSAs and the PRB............. 5

Table 2: Key parameters to model future ANSP costs (illustrative baseline). 13

Right now, ANSPs are starting to prepare their business plans covering the 2015-2019

period, and to identify how they can contribute to future EU-wide cost-efficiency

targets. To present strong cases and demonstrate adequate contribution at both the

national and the European level, detailed investigations and analyses are vital.

This paper explains what the EU is looking for, how ANSPs and NSAs can respond, and

presents simplified models of the analysis required.

contents

1 Introduction 1.1 ContextThe second regulatory package of the Single European Sky (SES II) introduced

a Performance Scheme (Commission Regulation (EU) N° 691/2010) and a

new Charging Regulation (Commission Regulation N° 1191/2010). The overall

objective of this regulatory package is to accelerate reform in air navigation

and to lower the cost of ANS provision in Europe. Based on the experience

gained with the first application of these regulations, the European

Commission issued new versions (Commission Regulation (EU) N° 390/2013

and N° 391/2013) in order to strengthen the performance and charging

schemes for the 2nd Reference Period.

The Performance Scheme and the Charging Regulation are interlinked. In

particular the en-route determined unit costs charged to airspace users are

defined in the context of the Performance Scheme, and fixed for a reference

period. Other links include financial incentives on quality of services as

well as the reporting of specific information on uncontrollable costs and

restructuring costs. With the introduction of a traffic risk sharing mechanism

in the Charging Regulation, the assumptions used as part of the National

Performance Plans (NPPs) to set cost-efficiency targets are a key driver to

future ANSP profitability.

The preparation of NPPs for RP1 has been a learning exercise not only for NSAs but also for all contributing entities (ANSPs, MET providers and NSAs) as for each country, the cost efficiency target reflects the aggregation of performance plans for several entities.

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Figure 1: Link between the Performance and Charging Regulations

The Performance Scheme created a new responsibility for the NSAs as the

cost-efficiency targets adopted in NPPs should be justified by NSAs in terms

of local conditions and adequate contribution to EU-wide targets. The

preparation of NPPs for the first Reference Period (RP1) has been a learning

exercise, not only for NSAs but also for all contributing entities (ANSP, MET

provider and NSA) as for each country, the cost efficiency target reflects the

aggregation of performance plans for several entities.

The Performance Scheme also gives a regulatory role to the European

Commission, aided by the Performance Review Body, which also plays an

important role in defining EU-wide performance targets, and in assessing

and challenging the targets adopted at national level.

For RP1 (2012 to 2014) cost-efficiency targets focus on the reduction of the

en-route determined unit rate in the 27 EU Member States plus Norway and

Switzerland. The costs of terminal ANS services and terminal unit rates are

not subject to binding targets, but are subject to monitoring activities. For

RP2 (2015-2019), cost-efficiency targets for individual terminal charging

zones will have to be presented in NPPs.

1.2 Impacts of traffic shortfalls As of June 2013, the NPPs adopted for RP1 are faced with traffic levels that

are substantially lower than envisaged. For the year 2012, actual en-route

service units at EU level are 4.4% lower than foreseen in NPPs (which were

in most cases based on STATFOR forecasts from May 2011). If the February

2013 STATFOR en-route service unit forecasts materialise, the gap between

actual and planned traffic is likely to widen to around -8% in 2013 and 2014.

Given the traffic risk sharing arrangement specified in the Charging

Regulation, the collective loss of revenues for ANSPs is estimated to be in

the region of €170m for the year 2012 and over €200m per year in 2013 and

2014. For a mid-size ANSP, this would typically represent a loss of €5m to

€7m per year during RP1.

As the monitoring activities of RP1 are about to start, it will be interesting

to examine whether ANSPs have been able to react to the revenue shortfall,

possibly by postponing projects or implementing cost containment measures,

or revealing that the plans included some contingency costs.

The traffic risk sharing arrangement is a 2% dead band within which the loss of revenue remains with the ANSP, followed by a risk sharing of 30% for the ANSP and 70% for airspace users when traffic deviations range between 2% and 10%.

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Figure 2: RP1 traffic development against NPP traffic forecast

However, as shown by the ATM Cost-Effectiveness Benchmarking reports

which analysed the consequences of the 2008 economic crisis, the downward

flexibility of ANSP costs is limited, and there can be a lag effect of one to

two years before cost containment measures materialise into actual cost

reductions.

1.3 Applying the lessons of RP1In the meantime, preparation for RP2 has just started, and lessons learnt

from RP1 will be essential to defining ambitious cost-efficiency targets while

minimising the risks. A challenging work programme lies ahead for both NSAs

and ANSPs who will have to evaluate the range of possible cost options,

assess the risks with the adoption of traffic forecasts and clearly make

the case that their national plans contribute adequately to new and more

ambitious targets. To add to their challenges, the assessment criteria in

the new Performance Scheme (EU Regulation N°390/2013) are substantially

more demanding. Information on Terminal unit cost trends, common

projects, pension costs, restructuring costs, cost of capital, “uncontrollable

costs” and of capital expenditure will be subject to more attention.

In this paper, we explore the challenges faced by NSAs and ANSPs in

preparing strong performance plans. These are plans based on solid and

realistic assumptions, clearly responding to transparency requirements,

anticipating risks, and facilitating dialogue in the regulatory review at

both national and European levels by developing clear justifications of the

proposed targets.

This paper is organised in three sections. In Section 2, we discuss the

mechanisms and issues of the cost-efficiency disaggregation from EU-wide

level to national and entity levels. In Section 3, we discuss the strategic

importance of traffic forecasts, the financial implications for ANSPs and the

necessary steps in preparing NPPs to anticipate risks and justify scenarios. In

Section 4 we look at ANSP cost structure and discuss the sensitivity of cost-

efficiency targets to changes in basic KPIs and cost items.

In this paper, we explore the challenges faced by NSAs and ANSPs in preparing strong performance plans. These are plans based on solid and realistic assumptions, clearly responding to transparency requirements, anticipating risks, and facilitating dialogue in the regulatory review at both national and European levels by developing clear justifications of the proposed targets.

3

2 From EU-wide to national cost- efficiency targets 2.1 A two-stage assessment process Under the Performance Scheme, cost-efficiency targets are defined at EU-

wide level, representing the expected outcome of the collective efforts

of participating countries (27 EU States + Norway and Switzerland for RP1,

or a total of 30 States for RP2, with Croatia joining the EU in 2013) and

contributing entities (typically three entities per State, with the ANSP, the

NSA and the MET provider). There is no disaggregation of the target per

country or per reporting entity at EU-level. The strength of justifications

brought by NSAs and ANSPs is therefore of the utmost importance in the EU-

wide assessment. In practice the link between EU-wide and national cost-

efficiency targets builds upon a two-step “negotiation” between the States

and the Commission. First, States adopt NPP targets which are then subject

to the PRB assessment.

The PRB assessment results in Commission recommendations asking some

States to revise their NPPs. NSAs then examine the recommendations, work

out possible modifications and in most cases submit amended versions of

their NPP. There is then a second assessment by the PRB to examine the

efforts made by the States to reflect the Commission’s recommendations,

and to assess the overall impact on reducing the gap towards the EU-wide

cost-efficiency target. This process (using RP1) is illustrated in Figure 3

below.

2.2 Interactions between the PRB, NSAs and ANSPsThe process for adopting local cost-efficiency targets mainly involves the

ANSPs, the NSAs and the PRB. They all complement each other, bringing a

mixed expertise in the different aspects of cost efficiency. NSAs have a key

role in the preparation and delivery of NPPs. They must also challenge the

inputs received from ANSPs and other reporting entities, taking into account

their knowledge of local conditions. In this process, NSAs can benefit from

the support of the PRB, but are also challenged by the PRB during the NPP

assessment phase. The PRB assessment considers the costs of all reporting

entities. However,withANSPcostsrepresentingtypicallybetween85%and90%ofthenationalcostbase,mostoftheeffortsactuallyconcentrateonANSPs. In its assessment exercises, the PRB can rely on the

long-standing PRU benchmarking activities, which provide precious insights

on economic issues affecting ANSP performance.

The NSAs are left with the responsibility of justifying that the NPP is adequately contributing to the EU-wide objective, but there is no straightforward approach to calculate what an “adequate” contribution is.

4

Figure 3: From RP1 ambitions to adoption of performance plans

Figure 4: Interactions between ANSPs,

NSAs and the PRB

At State level, NSAs are well placed to challenge ANSP business plans. The

Performance Scheme provides for sufficient time for the NSAs to organise

consultation, examine planning assumptions, commission studies, and

liaise with ANSP management to determine which level of ambition can

be justified for the forthcoming reference period. NSAs have access to

historical trends on ANSP performance and examples of past performance

improvement. They can perform detailed benchmarking studies either at

the corporate level, or at a functional level. Although the EU-wide cost

efficiency target is not expected to be applied in a uniform manner across

all States, it is essential that NSAs document their decisions and justify why

the outcome of their regulatory review diverges from the EU-wide target.

The risk with the absence of justification or a weak argument is for the NSAs

to be considered by third parties as “captured” by ANSPs, especially when

the separation between service provision and regulation functions is recent.

At ANSP level, performance planning becomes much more than a standard

internal business activity. Conformance with the Performance Scheme

and the Charging Regulation engage ANSPs in the dissemination of

detailed information. For RP2, even more transparency will be required,

especially for pension related costs, cost of capital, terminal ANS costs and

restructuring costs. This might require changes in ANSPs information systems

and analytical accounting processes. The sensitivity of revenue to traffic

engages ANSPs in new trade-offs whereby the cost of capital, which includes

a market risk element can play the role of shock absorber. Sensitivity

analysis of revenues to different traffic scenarios should actually form the

basis for contingency planning and justification of business decisions.

ANSPs are left with the decision of how to meet the cost efficiency target.

This requires from ANSPs a series of assumptions and investigations of all

cost categories:

l What is the required staffing to cope with traffic demand and quality of

service targets?

5

Table 1: Strengths and challenges for ANSPs, NSAs and the PRB

The risk with the absence of justification or a weak argument is for the NSAs to be considered by third parties as “captured” by ANSPs, especially when the separation between service provision and regulation functions is recent.

ANSPs business plans need to find the right balance between a sufficient contribution towards EU-wide performance objectives and their own objectives, which encompass economic viability and the need to invest in system modernisation to cope with future demand.

l What are the margins for improvement in terms of productivity?

l How does capex affect capital-related costs for the next reference

period and is it likely to improve productivity or contribute to meet other

performance area targets?

More generally, ANSPs business plans need to find the right balance between

a sufficient contribution towards EU-wide performance objectives and their

own objectives, which encompass economic viability and the need to invest

in system modernisation to cope with future demand.

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3 The traffic forecast – a strategic decision 3.1 Adopting a traffic forecast for the next reference period The traffic risk sharing introduced by the Charging Regulation makes the

traffic forecast a particularly strategic decision, and the Performance

Scheme requires that the adoption of any traffic forecast other than

STATFOR be justified.

So if NSAs and ANSPs don’t consider the STATFOR

forecast to be the most realistic scenario, they will

have to demonstrate that their forecasts are more

relevant than STATFOR forecasts. There are two

complementary approaches to this activity:

l The first is to conduct an ex-post analysis of

publicly available forecasts against actual

traffic, with a view to identifying which traffic

forecasts were closer to actual developments

or to identify any systemic bias in STATFOR

forecasts.

l The second is a market analysis of future

developments affecting traffic flows. This is

particularly relevant for medium and small

countries, as we explain later in this paper.

Once a reference traffic forecast is selected, it is

important for ANSPs to elaborate what-if scenarios

illustrating risks and opportunities in order to quantify

the financial impacts.

Although STATFOR is widely recognised for its independent forecast and the

rigour of the methods applied to produce a Pan-European traffic forecast,

the examination of past forecasts shows two main limitations:

l the observed differences between actual and forecast tend to be larger

when focusing at the State level, especially for the smaller States; and

l with a five-year horizon, the probability of a major traffic downturn was not

well captured by the STATFOR medium-term forecast.

Figure 6 is an illustrative example of ex-post analysis of traffic forecasts, for

nine countries selected randomly: three among the largest countries, three

among the medium size countries, and three among the smaller countries.

We focus on the differences after three years and after five years, which

are the most relevant planning horizons in the context of RP1 and RP2

performance planning.

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Figure 5: Traffic forecast analysis in 3 steps

In our illustrative example, at a five-year horizon (2005-2010), very large

differences are observed, which is mainly due to the economic crisis in

2008/2009. Even though other forecast agencies would not have performed

better in capturing the risk of economic downturn, our example shows that

in medium and small countries, there is a wide range of differences. In one

country the difference is strongly negative (-22% in country F), while in

others there was more traffic than forecasted (+6% in country H, and +50% in

country I).

At a three-year horizon (2008), in our illustrative sample, the difference

between actual and forecasted traffic is generally small. However, for

medium and small countries, actual traffic developments tend to diverge

from the forecast faster than for large countries. When a large proportion

of traffic is overflight, and when the airspace size is relatively small, small

changes in traffic flows may have a large impact on the number of flights

controlled. Changes in traffic flows can be the result of many factors, such

as congestion, temporary airspace restrictions, and relative level of unit

rates. For the number of departing/arriving flights, the opening of just a

few new airline services, or the bankruptcy of one carrier will also have a

greater impact (in percentage of total traffic) in smaller countries.

Ex-post analysis of different traffic forecasts is therefore necessary to

inform decisions regarding the adoption of a particular source. It is however

not sufficient on its own and it should be associated with a detailed analysis

of forthcoming issues. In particular, even if the ANSP does not produce

In some regions, the relative level of the unit rate com-pared to neighbours is likely to affect the level of demand. In such a case traffic forecast and unit cost determination feed each other’s.

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Figure 6: Ex-post analysis of traffic forecast

its own forecast, the following questions should be addressed:

l What are the planned developments of the main airspace users in terms

of new routes and frequencies?

l Are the current traffic levels biased by exceptional events (e.g. airspace

restriction, temporary delegation agreements, congestion) and what would

be the impact on traffic when the situation returns to normal?

l Is traffic demand sensitive to unit rate differences and are the relative

levels of unit rate likely to change with the adoption of new determined unit

costs in the next reference period?

l How are all these factors captured by the reference forecast, and can

they justify divergence from the STATFOR baseline scenario?

3.2 Financial impact analysisOnce a reference traffic forecast is selected, it is important for ANSPs to

elaborate ‘what-if’ scenarios illustrating risks and opportunities in order

to quantify the financial impacts. Figure 7 below illustrates the case of a

fictitious ANSP with a cost base around €150m and controlling some 2.7m

service units per year. It shows that in a given year, a -2% difference in

traffic leads to a loss of revenues of some €3m. An 8% difference combined

with a traffic risk sharing of 30% beyond 2% (a probable scenario for a

number of real-life ANSPs in 2013) would lead to a loss of revenues of some

€5.7m in our illustrative example.

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Figure 7: Assessing the impact of traffic forecast on ANSP profitability

For an ANSP with determined costs of some €150m, the cost of capital is

likely to be around €11m (using a typical ANSP cost structure). Assuming that

half of the cost of capital relates to interests on debt and that the other

half to return on equity, this ANSP could possibly absorb the loss of revenue,

but its actual return on equity would become nil.

By running this kind of sensitivity analysis before submitting their business

plans, ANSPs are in a stronger position to elaborate fall-back positions. They

can also anticipate options to increase short-term flexibility on the cost side

and to secure long-term profitability, taking into account the traffic risks

and the element of risk embedded in the cost of capital.

By running sensitivity analysis before submitting their business plans, ANSPs are in a stronger position to elaborate fall-back positions. They can also anticipate options to increase short-term flexibility on the cost side and to secure long-term profitability, taking into account the traffic risks and the element of risk embedded in the cost of capital.

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4.1 Analysis of staff costsThe level of future staff costs is influenced by the following factors:

l the number of ATCOs in OPS, which itself depends on attrition,

recruitment and possible productivity gains;

l operational support staff ratio;

l other support staff ratio;

l the average ATCO employment costs;

l the average support staff employment costs; and

l non-recurrent elements such as exceptional pension contributions or

redundancy costs.

Achieving real term reductions in the average unit employment costs,

although not impossible seems to be quite challenging as it raises issues

11

Figure 8: Typical ANSP cost structure

4 Evaluating the cost-efficiency optionsIn May 2013, the PRB published RP2 indicative performance ranges for

consultation purposes. Four scenarios are discussed ranging from -2.5% per

year to -5.8% per year for the EU-wide average en-route determined unit

cost. In all scenarios, the total costs are expected to fall in real terms (-2%

for the base and high scenarios).

The RP2 objectives take into account the longer-term SES High Level Goal (a

reduction of 50% in the cost per flight compared to 2004) and also consider

the results of a US/Europe comparison as well as econometric models, both

suggesting that the current European system inefficiencies are around 40%.

FormostANSPs,achievingrealtermreductionsmightbechallengingandallcostscategorieswillneedtobescrutinisedtoidentifypossibleefficiencygains. Given the cost structure of ANSPs (see Figure 8 below),

staff costs should be examined in the first instance as they typically

represent over 60% of ANSP costs (with a 50-50 split between ATCO and non-

ATCOs employment costs).

Natural attrition in the ATCO population provides ANSPs with an opportunity

to increase productivity by simply not replacing leaving ATCOs, which avoids

transition costs. Assuming an average attrition rate of 5% per year, there

is clearly a large potential, over a complete reference period, to optimise

the level of recruitment so that productivity gains can be exploited while

minimising transition costs. One difficulty however, is that the impact of

changes in recruitment policy are only realised three to four years later, due

to the relatively long training period for ATCOs. Exploiting the maximum

benefits of this strategy therefore requires anticipation, and adoption of

planning horizons going beyond a single reference period.

12

Example of ANSP starting with relatively low productivity

and combining the benefits of strong traffic increase

with a reduction in the number of ATCOs.

Example of ANSP starting with relatively high

productivity and managing to further improve

productivity despite a strong traffic downturn.

Figure 9: Examples of past improvement in ATCO productivity

to be addressed through staff negotiation. Unless there have been obvious

anomalies in the past, this option is unlikely to be a major driver towards

meeting cost-efficiency targets for the majority of ANSPs.

ATCO productivity has a direct impact on the size of the ATCO workforce,

and productivity gains can arise from many different factors, most of them

being directly controlled by the ANSP. These for example include:

l flexible deployment of ATCOs;

l airspace and sector designs, ATFM, civil/military arrangements;

l technical, human and managerial tools; and

l cooperation with other ANSPs.

Benchmarking and identification of best practice, especially within FABs,

should help ANSPs identify areas for improvement and implement beneficial

measures.

Historical data shows that many ANSPs have been able to achieve ATCO

productivity increases well beyond the traffic increase. While this is clearly

easier to achieve for those starting from low productivity levels, there

are also several examples of improvements by ANSPs starting from higher

productivity levels.

Improving ATCO productivity could have either a positive or a negative

knock-on effect on the number of support staff required. If the ATCO

productivity gain is obtained by reallocating tasks to operational support

staff, the benefit in terms of total staff numbers might not be positive.

However, there would still be cost advantages, as average employment

costs for support staff are generally much lower than for ATCOs. If the ATCO

productivity gain is not offset by additional support staff, then maintaining a

constant support ratio would deliver further cost benefits.

Modelling future ANSP costs, making assumptions for each main cost

category and each driver, is a necessary step for ANSPs and for regulators

to be able to challenge ANSP plans. We have constructed a simplified cost

model, for illustrative purposes.

4.2 An illustrative model of ANSP costsThe baseline assumptions of this model are presented in Table 2 and are

used to generate a fictional baseline scenario for an ANSP starting with an

en-route cost base of €150m and having a cost structure similar to that

presented in Figure 8.

Modelling future ANSP costs, making assumptions for each main cost category and each driver, is a necessary step for ANSPs and for regulators to be able to challenge ANSP plans.

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Table 2: Key parameters to model future ANSP costs (illustrative baseline)

2015 2016 2017 2018 2019

Traffic scenario 3.0% 3.3% 2.7% 3.0% 2.9%

RP2 target scenario -4.8% -4.8% -4.8% -4.8% -4.8%

Productivity scenario No productivity gains

Average ATCO employment costs +1% per year in real terms

Average support staff employment costs +0.5% per year in real terms

Support staff ratio scenario Constant support staff ratio

Other operating cost scenario 50% fixed & 50% variable (increasing with traffic)

Capex requirements Representing around 10% of the NBV at the start + elasticity to traffic assumed to be 0.5

WACC (value, not % change) Constant: 5.5%

In our example, the ANSP baseline scenario would fall short of the cost

efficiency target, and cumulative savings of €104m would be required to

meet the target.

Figure 10: Projection of ANSP costs by nature Figure 11: Performance gap resulting from the

baseline scenario

ATCOproductivityThe first option we examine is the impact of productivity on the

performance gap reduction. Assuming that a series of measures can be

implemented to increase ATCO productivity by 1% per year, the performance

gap would fall to €89m, a cumulative benefit of €15m. Based on the

preliminary inputs submitted by the SESAR JU to the PRB in preparation for

RP2 targets (an 8% to 10% increase in capacity over RP2), it seems realistic

to assume a 1% to 2% increase per year in ATCO productivity during RP2.

SupportstaffratioA second option is to explore opportunities to improve the support staff

ratio. Again, using natural attrition is likely to avoid transition costs. In

our illustrative example, we assume the ANSP would be able to decrease

the support staff ratio by 1% per year (from 3.1 in 2014 to 2.9 in 2019).

Under this scenario the total work force would still increase, and the target

ratio would not be unrealistic as it would still be far from the lowest ratios

observed across Europe. All else being equal, implementing this second

option would also reduce the performance gap by some €15m, a benefit

similar to that of ATCO productivity gains.

Depending on the ANSP cost structure and on current efficiency levels,

productivity improvements and support ratio improvements may not

always lead to benefits of a similar magnitude. Or it might not be possible

to exploit both at the same time. However, the implementation of even

relatively small improvements in these two areas clearly shows a big

potential to address the performance gap.

Non-staffoperatingcostsPossible contributions from other cost categories should also be

investigated. Looking back at the cost structure of our illustrative ANSP,

we estimate, however, that reaching the same level of contribution to gap

closing as the ATCO productivity improvement scenario (€15m savings with

a +1% improvement per year over five years) would require at least a 10%

reduction in the level of non-staff operating costs from the first year of the

reference period. If, for any reason, these savings only materialise in year

N+3 instead of year N, then the required savings from non-staff operating

costs would need to reach nearly 20%.

Capital-relatedcostsCapital-related costs planned for a reference period are partly determined

by past capex, (which can offer limited scope for adjustment - although

changes in depreciation life span remain possible) and by future capex. The

difficulty with downward pressure on planned capex is that capex might be

the enabler to other performance targets or be necessary to delivering ATCO

productivity improvements. Once these trade-offs are assessed, the decision

to reduce capex affects two cost categories: the depreciation costs and the

cost of capital.

ATCO productivity and support staff ratios are key variables ANSPs can influence to meet the cost efficiency target.

Planned capex might support the achievement of other performance targets and enable ATCO productivity improvements. Downward pressure on planned capex should therefore consider the existing trade-offs.

14

Using our illustrative ANSP, reaching the same level of savings with capex

reductions as opposed to using an ATCO productivity improvement scenario

(€15m savings with a +1% improvement per year over five years) would

require a 50% cut in capex (from €18m in the baseline scenario to €9m), for

all years of the reference period. There are two main reasons why capex

reductions are less efficient than other options in reducing the performance

gap:

l First, the depreciation costs are basically the capex spread over the

accounting life span. Therefore, if the accounting life is 10 years, achieving

€1m reduction in depreciation costs requires a €10m cut in capex.

l Second, the planned cost of capital is calculated from an asset base which

includes both past and planned capex. The asset base is then multiplied by

the Weighted Average Cost of Capital (WACC) covering the cost of debt and

the expected return on equity. With a WACC around 5.5% and assuming that

most of the past capex at the start of a reference period would still be in

the asset base at the end of the period, the efficiency of capex reductions

to actually deliver reductions in the performance gap seems actually to be

quite limited.

Ourillustrativemodelshowsthat,whilesomeoptionsaremoreefficientthanotherstoreducetheperformancegap,thereisnosimplesingleoption.ANSPsneedtocombineseveralinitiativesandassessthebestmixfortheirownsituation.

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5 ConclusionsANSPs are now beginning to prepare their business plans covering the 2015-

2019 period, and to investigate the range of contributions they can make to

future EU-wide cost-efficiency targets. The figure below illustrates how the

activities of ANSPs, NSAs and the PRB synchronise between July 2013 and

June 2014.

To present strong cases and demonstrate adequate contribution at both the

national and the European level, detailed investigations and analysis are

vital. Two particularly important elements are:

l Critically assessing existing traffic forecasts - understanding associated

risks and preparing mitigation options.

l Analysing the ANSP cost structure and identifying the most efficient

options to meet cost-efficiency targets. This requires focused benchmarking,

performance modelling and financial modelling.

Based on our understanding of the ATM industry and using an illustrative

ANSP performance model, this paper suggests that ATCO productivity

improvements have a key role to play as they appear to be the most

efficient lever to generate cost-efficiency gains. However, each ANSP is

different and it is unlikely that acting on only one cost item would be

sufficient.

It is also worth noting that cost reduction initiatives often carry with them

transition costs, which might increase the unit rate in the short term. As

the revised Performance Scheme makes a specific reference to restructuring

costs (Annex IV, Principles for assessing performance plans and targets),

a window may be open to address some challenging restructuring issues

during RP2.ThiswillhoweverrequiretheregulatorstoacceptspecificbusinesscasesinwhichANSPsshalldemonstratethenetbenefitsoftherestructuringprojects.n

Cost reduction initiatives often carry with them transition costs, which might increase the unit rate in the short term. As the revised Performance Regulation makes a specific reference to restructuring costs, a window may be open to address some challenging restructuring issues during RP2.

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Figure 12: The time line for RP2 preparation

AboutHeliosHelios is a leading consultancy specialising in air transport, airports and in

Air Traffic Management. The company was established in 1996 and joined

Egis, an international engineering and infrastructure group, in January 2013.

As an acknowledged market leader, we help our customers deliver

technology, operational and business improvements.

We have for some years been active in the strategic development of the

ATM industry. Recently in Europe, this has focused on the Single European

Sky; we have helped develop a number of Functional Airspace Blocks, and

supported the Industry Consultation Body.

The rapidly changing environment for ANSPs brings an increasing need

for independent, objective advice and support for service providers.

Helios has worked extensively with the European Commission (EC) on the

implications of legislation and projects to promote reform. We have worked

with the EUROCONTROL PRU, the EC, regulators and ANSPs on international

benchmarking projects. We have provided support in developing and

evaluating plans for providing new capacity in the most economically

effective way, and supported procurement in accordance with the plans. We

have helped ANSPs develop performance measurement systems.

We work frequently in partnership with ANSPs, combining our skills

to provide advice and support throughout the world for change and

development in ATM. Our support in strategic, operational and technical

areas is complemented by the provision of high-quality training in areas

related to air navigation services.

The company is ISO 9001 certified.

HowHelioscanhelpHelios understands the regulatory requirements and the challenges faced by

NSAs and ANSPs in the preparation of business plans, investment plans and

performance plans.

Helios economists and performance experts have practical experience

responding to these challenges and can support clients with customised

benchmarking, financial modelling, loan requests, traffic forecasts, revenue

sensitivity analysis and regulatory conformance assessment. Helios has also

recently invested in the development of in-house tools, which comprise

ATM economics databases and models. These optimise our efficiency in

addressing specific issues and developing tailored solutions.

If you would like to meet us and to discuss the contents of this paper, please

contact Jean-ClaudeHustache (jean-claude.hustache@askhelios.com).

Helios

29 Hercules Way

Aerospace Boulevard l AeroPark

Farnborough l Hampshire l GU14 6UU l UK

T +44 1252 451 651

F +44 1252 451 652

E info@askhelios.com

W www.askhelios.com

The content of this document is intended for general guidance only and, where relevant, represents our understanding of the current status of transport industry matters. Action should

not be taken without seeking professional advice. No responsibility for loss by any person acting or refraining from action as a result of the material in this document can be accepted and we cannot

assume legal liability for any errors or omissions this document may contain.© Helios Technology Ltd – July 2013

All rights reserved.