Air Navigation Service Charges in Europe - ATM Seminar

doi: 10.4322/tmm.00202004

1. Non-discrimination based on the nationality ofthe airspace user. However, as underlined bythe Association of European Airlines (AEA) indifferent circumstances, some airlines mayhave substantial benefits by the way ANSPsallocate their costs, e.g., if meteorological costsare levied to en route instead of terminalcharges, carriers operating on that airport(homebased carriers) take clear advantage.2. Users are charged according to their ability topay: the presence of the weight factor into thecharging formula is in line with Ramseypricing principles for the efficient recovery offixed costs and has been generallyacknowledged as a proxy for users’ ability topay [6]. Nevertheless, other studies affirm thata better proxy for the ability to pay would bethe seating capacity of an aircraft, which hasbeen proved to be related to the MTOW by afactor 0.7 [7].3. A unique charging system, i.e., the calculationof air navigation service charges follows thesame rules in (nearly) the whole Europe.4. Simplicity of the system of calculating en routecharges through a single formula, and theircollection through a unique organization suchas EUROCONTROL CRCO.On the other side, the Regulation aims atgoing over the main shortcomings of the previouscharging system.The European Commission andEUROCONTROL [8] stated that the absence ofincentives for both system users and providers tooptimize the use of existing capacity, or to respondto signal to invest in new capacity, was one of themain weaknesses of the previous charging system.Article 12 of the Regulation explicitly allowsMember States to establish or approve incentiveschemes […] to support improvements in theprovision of air navigation services […]. Theseincentives may apply to air navigation serviceproviders and/or airspace users. If the incentivescheme is limited in time, scope and amount, aMember State may modulate air navigation servicecharges, e.g., night-time charged differently fromdaylight-time, decreased charges according toairborne equipment that increases capacity or tooffsetting the inconvenience of choosing lesscongested routes, […] to optimize the use of airnavigation services, to reduce the overall costs ofthese services and to increase their efficiency.Nevertheless, the adoption of measures incentivingairspace users to avoid congested areas (spatialdifferentiation) or congested times (peakdifferentiation) may have limited impact on airlinesbehaviour. In fact, on one side there is evidence thatin some circumstances en route charges are the costfactor driving airline operators to prefer longerroutes but cheaper in terms of en route charges [9].On the other side, we also showed [10] that trafficdemand is inelastic with respect to en route charges.In addition, most passengers travelling duringcongested hours and areas are business customerswhose willingness to pay is generally insensitive toticket fares. Hence, airlines might easilycompensate an increased burden of air navigationservice charges through an appropriate ticketpricing. However, some low cost and charterairlines may operate flights at less congested timesand/or airspaces if peak pricing would beintroduced.The lack of transparency in establishing theannual forecasts for ANSPs’ cost bases and the lackof consultation with airspace users were othercauses of major concern of the previous chargingsystem. Articles 8 and 15 of the Regulation dealwith both issues by ensuring consultation withairspace users on the charging policy on a regularbasis and by granting to them the disclosure of thenecessary information on ANSP decisions on theircost bases, planned investments, expected trafficand charging mechanism. This transparency policyshould also enforce ANSPs to improve the controlof their costs thus providing further support to thealready existing trend of decreasing en route unitcosts [11].Finally, the obligation for ANSPs to introduceterminal charges will improve cost-reflectivity, i.e.,there will be better correlation between theoperational phases of control and types of chargeslevied.Air navigation service charges onairspace usersAirspace users (or aircraft operators) pay airnavigation service charges. Since the vast majorityof charged flights are performed by regular airlinesor carriers, in the remainder of the paper weconsider airspace users (or aircraft operators) assynonymous of airlines (or carriers), unlessotherwise specified. In this section, we analyse theimpact that air navigation service charges have onairline strategies and operations.Table 4 shows the air navigation servicecharges percentage of total operating costs for someEuropean airlines, which published financial resultsfor 2005, including en route charges amount voice.We observe that the impact of such unavoidablecharges significantly differs in accordance with theairline cost structure: low cost carriers (EasyJet andRyanair) are more affected than legacy carriersbecause of their simplified services offered topassengers thus reducing as much as possible their- 6 -

costs. As already mentioned in the introduction, theAssociation of European Airlines (AEA) claimsthat air navigation service charges account for 9%of direct operating costs of its members in 2005.Similar findings are reported in [12]: air navigationservice charges represent from 2% to 6% of aircraftoperating costs, with the lower percentage appliedto long haul flights (possibly over oceans) and thehigher percentage related to regional flights thatoften face congestion and operational inefficiencyproblems.AirlineAustrianAirlinesTotaloperating costsFY2005En routechargesamountShare2585,8 €m 126,6 €m 4,9%EasyJet 1132,5 £m 108,6 £m 9,6%Iberia 4823,2 €m 276,4 €m 5,7%Ryanair 1007,1 €m 135,7 €m 13,5%Table 4: Route Charges vs. total operating costsfor some companiesAir navigation service charges on airlinestrategiesThe take-off of a specific aircraft at a giventime in a given airport is the outcome of a longplanning process that may have started severalmonths before. The aim of such process, generallyreferred to as schedule planning, is to maximizeairline profitability [13]. Its main steps are theidentification of which Origin-Destination pairs toconnect, the frequency of departures and allocationto specific timings based on market preferences, thetype and capacity of aircraft to be used, and thenumber of passengers to serve [14].In principle, the level of air navigation servicecharges may have an impact on such decisions.Nevertheless, long-term planning on which marketsto serve generally depends on macro-economicfactors as forecast of GDP, which is the main driverfor passenger growth, location and other marketfeatures. Other studies show that the number offlights and passenger demand are inelastic withrespect to en route charges [10].However, the fact that airlines and passengershave such an inelastic attitude does not necessarilyimply that airlines have to be indifferent tovariations to route charges. In fact, profit marginsmay be often very low, so even tiny percent costvariations may have a high impact on profits. Inparticular, even limited perturbations of en routecharges often have an impact on low-cost carriers,because such companies have already optimized theother components of the operating costs that aredirectly manageable.Hence the need to understand whether airlineshave the opportunity to reduce the burden of airnavigation service charge on their balance sheets.Air navigation service charges on airlineoperationsFollowing airline cost classification in [14],air navigation service charges are direct variableoperating costs along with fuel and oilconsumption, airport fees, maintenance and crewcosts. More specifically, terminal charges dependon the schedule design and fleet assignment phaseswhere the departure and arrival aerodromestogether with the type of aircraft are decided. Sofar, terminal unit rates, when they exist, aregenerally the same for each aerodrome of a specificcountry. Hence, they have no impact on anyschedule design because their magnitude is too lowto influence airline’s decisions on which countriesto fly. However, in accordance with the Regulation,any ANSP may set different terminal unit rates fordifferent airports or groups of airports. It followsthat in the future terminal charges may become adriver, as airport fees are today, for airlines to selectwhich airport to serve. There is also no evidencethat the limited level of terminal charges may haveany influence on airline decisions on which aircraftto use.On the other side, en route charges haveinfluence on the airspace routes actually flown.Indeed, aircraft are not allowed to freely fly in theEuropean airspace, but are constrained to follow, atleast in principle, a sequence of ATC points fromthe departure to the destination aerodrome. Theflight level and the time each ATC point is crossed,along with other relevant information, are recordedin the Flight Plan that must be approved byEUROCONTROL Central Flow Management Unit(CFMU) before the aircraft actually takes off. Wedistinguish three phases: strategic (from severalmonths until two days before the flight), pre-tactical(two days before the day of operations) and tactical(in the day of the departure of the flight) planning.In the strategic planning phase aircraft operatorssubmit to CFMU flight plans representing – to thebest of their knowledge – their preferred routechoice for connecting the specified departure anddestination aerodrome using the specified aircraft.In other words, any flight plan sent to CFMU in thestrategic phase indicates the aircraft trajectory (bothin the 3D space and in time) the airline would liketo follow in the actual day of flight operations. Inbuilding such an “optimal” route, aircraft operatorsminimise all the predictable costs associated to theflight: any unexpected event (like, e.g., weatherconditions or delays) that would possibly occur isnot taken into account and is considered in the pretacticaland tactical phases.- 7 -

The factors producing predictable route costchanges when alternative routes are underinvestigation are fuel, en route charges,maintenance, and crew costs. Even though the routedesign process is also influenced by some otherfactors such as, e.g., mean delay in some airspace,frequency of restrictions in airspace, and quality ofservice obtained by ANSP, a few studies [9,15]show that en route charges have influence on theairline choice of the airspace route to be flownwhen connecting a specific origin and destinationpair. More precisely, due to the high variability ofen route unit rates among different countries, thereis evidence that in the strategic planning phaseairlines, when alternatives exist, may prefer to flylonger routes (thus spending more in terms of fuel,maintenance and crew costs) but cheaper in termsof en route charges to minimize their predictableroute costs. We claim that this is an undesirableeffect of the present system since airline costsincrease due to higher fuel consumption, highercrew utilisation and maintenance costs. In addition,also pollution rises. Thus to some extent the presentroute charging scheme does not promote the bestuse of the available airspace because airlines mayfly longer to mitigate the impact of en routecharges. There is also evidence that delays andregulations affect airlines’ route choice. From atheoretical point of view, the introduction of thecost of the delay reduces the influence that en routecharges may have on route choice. In [16] authorsgive an empirical proof of the weaker impact ofroute charges on airlines’ behaviour when delays oren-route congestions occur.En route charges vs. fuel costsWe compare en route charges with fuel costsfor various categories of aircraft, as indicated inTable 5.A380B747-400B757-200A319CRJ200MTOW (t) 560 395 113 68 24 12EMB120Weight Factor 3,35 2,81 1,50 1,17 0,69 0,49Fuel Cons. (Kl/h) 16,9 12,8 4,2 2,6 1,2 0,63Cruise speed (km/h) 1013 927 903 853 785 555Table 5: Aircraft characteristics.The jet fuel price has been calculated usingglobal average value calculated by IATA for theweek 12-19 January 2007 (Source:http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm), corresponding to 0,436 $/l,equivalent to 0,3373 €/l (according to Euroexchange rate as at 18 th January 2007, published byEuropean Central Bank). Nevertheless, this price isindicative as airlines negotiate their own fuel pricesthat largely vary from place to place and fromairline to airline. In addition, this price does notexactly track the price of a barrel of oil because fuelis generally bought in advance on the futuresmarket in a process called hedging.A380B747 -400B757 -200A319CRJ200EMB120Fuel Cost 5,63 4,66 1,57 1,03 0,52 0,38Table 6: Fuel Cost per km (€/km).Figure 4 shows the ratio obtained by dividingen route charge cost per km by fuel cost per km(Table 6), for different values of en route unit rates.Ratio2,521,510,5EMB120CRJ200A319B757-200B747-400A38000 25 50 75 100En Route Unit RateFigure 4: En route charge Cost/Fuel Cost perkm per aircraft type.Considering the average unit rate in 2007equal to 51,52 € (Table 2), we claim that for smallaircraft en route charges have almost the samemagnitude per km as fuel costs, while for largeraircraft en route charges should almost doublebefore being equal to fuel costs. This resultdemonstrates that the cost of en route route chargesis not insignificant, expecially for small aircrafts.Air navigation service charges onpassengersSince air navigation service charges representa non-negligible fraction of variable directoperating costs of airlines, they are also likely toaffect passenger ticket price. Unfortunately, it is notstraightforward to estimate such impact becausethey are not charged directly to passengers by anytaxes and fees, as airport fees or fuel surcharges,but are implicitly included in the base fare ticket.This is a major difference with the U.S., where thefederal ticket (7.5% of the base fare ticket price)- 8 -

AppendixICAOCodeCountryICAOCodeCountryEB Belgium LM MaltaED Germany LI ItalyLF France LC CyprusEG United Kingdom LH HungaryEH Netherlands EN NorwayEI Ireland EK DenmarkLS Switzerland LJ SloveniaLP Portugal LR RomaniaLO Austria LK Czech RepublicLE Continental Spain ES SwedenGC Canary Islands LZ SlovakiaAZ Portugal Santa Maria LD CroatiaLG Greece LB BulgariaLT Turkey LW MacedoniaTable A. ICAO Country CodesReferences[1] EUROCONTROL PRU, June 2006, ATM CostEffectiveness 2004 Benchmarking Report.[2] Association of European Airlines, December2006, Summary Report.[3] European Commission Press ReleaseIP/06/1693[4] EUROCONTROL PRC, April 2006,Complexity Metrics for ANSP BenchmarkingAnalysis.[5] Steer Davis Gleave, 2004, Study on thefinancing of air traffic management to achieve theSingle European Sky, Single Sky Final Report.[6] Raffarin, Marianne, 2004, Congestion inEuropean Airspace. A pricing solution? Journal ofTransport Economics and Policy, 38, 109-126.[7] PriceWaterhouseCoopers, 2001, Study of theTerminal Charges for Air Traffic Control Services.[8] EUROCONTROL PRC, 2005, An Assessmentof Air Traffic Management in Europe during theCalendar Year 2004.[9] Castelli, Lorenzo, Raffaele Pesenti, WalterUkovich, 2004, Analysis of Airline OperationalBehaviours, Final Report of WorkPackage 4 ofEUROCONTROL Care Innovative Project‘Innovative Route Charging Schemes’.[10] Castelli, Lorenzo, Raffaele Pesenti, WalterUkovich, 2003, Study of ATS demand elasticity ofairspace users, Final Report of WorkPackage 5 ofEUROCONTROL Care Innovative Project‘Innovative Route Charging Schemes’.[11] EUROCONTROL PRC, 2006, An assessmentof Air Traffic Management in Europe during thecalendar year 2005.[12] Swan, William M., Nicole Adler, 2006,Aircraft trip cost parameters: A function of stagelength and seat capacity, Transportation ResearchPart E, 42(2), 105-115.[13] Barnhart, Cynthia, Peter Belobaba, Amedeo R.Odoni, 2003, Applications of Operations Researchin the Air Transport Industry, TransportationScience, 37(4), 368-391.[14] Holloway, Stephen, 2003, Straight and Level:Practical Airline Economics, Ashgate PublishingLimited, Hampshire, England.[15] Babić, Obrad, Vojin Tošić, 2005, Serbia andMontenegro Air Traffic Analysis and Forecast,Internal report, Faculty of Transport and TrafficEngineering, University of Belgrade, Serbia.[16] Brunetta, Lorenzo, Luca Righi, GiovanniAndreatta, 2004, Analysis of alternative routes forselected city pairs, Final Report of WorkPackage 6Part II of EUROCONTROL Care InnovativeProject ‘Innovative Route Charging Schemes’.[17] Yamanaka, Shiro, Joakim Karlsson, AmedeoR. Odoni, November 2005, Aviation infrastructuretaxes and fees in the United States and theEuropean Union, Compendium of Papers CD-ROM, 85th Annual Meeting of the TransportationResearch Board, Washington, DC.[18] EUROCONTROL PRC, May 2003, Acomparison of performances in selected US andEuropean En-route centres.[19] Castelli Lorenzo, Philippe Debels, WalterUkovich, 2005, Route-charging policies for acentral European cross-border upper airspace,Journal of Air Transport Management, 11, 432-441.KeywordsAir navigation charges, air trafficmanagement, economic analysis.BiographiesLorenzo Castelli is currently Assistant Professor inOperations Research at the University of Trieste,Italy. He holds a Ph.D. in Transportation.Andrea Ranieri is a Ph.D. student at the Universityof Trieste, Italy. He developed his Master thesis atEUROCONTROL CRDS in Budapest, Hungary.- 10 -