ATM cost efficiency targets

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Helios Advisor white paper
Author: Jean-claude Hustache of Helios
jean-claude.hustache@askhelios.com
Abstract: Work is already starting on ANSP business plans for RP2, and questions are being asked about how each ANSP can contribute to future EU-wide cost-efficiency targets. To help the people involved in this challenging endeavour, Helios has published a White Paper explaining what the EU is looking for and how ANSPs and NSAs can respond.
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ATM cost efficiency targets

  1. 1. HELIOSADVISER ATM cost-efficiency targets A guide for European ANSPs and NSAs Analysis & commentary for decision makers in aviation
  2. 2. Contents 1 Introduction................................................................... 1 1.1 Context.......................................................................... 1 1.2 Impacts of traffic shortfalls.................................................. 2 1.3 Applying the lessons of RP1.................................................. 3 2 From EU-wide to national cost-efficiency targets..................... 4 2.1 A two-stage assessment process............................................. 4 2.2 Interactions between the PRB, NSAs and ANSPs.......................... 4 3 The traffic forecast – a strategic decision............................... 7 3.1 Adopting a traffic forecast for the next reference period.............. 7 3.2 Financial impact analysis.................................................... 9 4 Evaluating the cost-efficiency options................................. 11 4.1 Analysis of staff costs....................................................... 11 4.2 An illustrative model of ANSP costs....................................... 13 5 Conclusions.................................................................. 16 Figures Figure 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 Tables Table 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.
  3. 3. 1 Introduction 1.1 Context The 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. 1 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.
  4. 4. 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%. 2 Figure 2: RP1 traffic development against NPP traffic forecast
  5. 5. 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 RP1 In 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
  6. 6. 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 ANSPs The 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, with ANSP costs representing typically between 85% and 90% of the national cost base, most of the efforts actually concentrate on ANSPs. 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
  7. 7. 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.
  8. 8. 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. 6
  9. 9. 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. 7 Figure 5: Traffic forecast analysis in 3 steps
  10. 10. 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. 8 Figure 6: Ex-post analysis of traffic forecast
  11. 11. 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 analysis 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. 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. 9 Figure 7: Assessing the impact of traffic forecast on ANSP profitability
  12. 12. 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. 10
  13. 13. 4.1 Analysis of staff costs The 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 options In 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%. For most ANSPs, achieving real term reductions might be challenging and all costs categories will need to be scrutinised to identify possible efficiency gains. 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).
  14. 14. 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.
  15. 15. 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 costs The 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. 13 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
  16. 16. ATCO productivity The 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. Support staff ratio A 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-staff operating costs Possible 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-related costs Capital-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
  17. 17. 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. Our illustrative model shows that, while some options are more efficient than others to reduce the performance gap, there is no simple single option. ANSPs need to combine several initiatives and assess the best mix for their own situation. 15
  18. 18. 5 Conclusions ANSPs 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. This will however require the regulators to accept specific business cases in which ANSPs shall demonstrate the net benefits of the restructuring projects. 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. 16 Figure 12: The time line for RP2 preparation
  19. 19. About Helios Helios 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. How Helios can help Helios 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-Claude Hustache (jean-claude.hustache@askhelios.com).
  20. 20. 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.

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