IATA Submission in response to Airservices Australia Terminal Navigation Pricing Review Discussion Paper

IATA Submission in response to Airservices Australia Terminal Navigation Pricing Review Discussion Paper May 2010

This submission presents the response of the International Air Transport Association (IATA). IATA s mission is to represent, lead and serve the airline industry and brings together 230 member airlines whose flights account for 93% of all international scheduled air traffic. IATA welcomes this opportunity to submit its comments to Airservices Australia regarding its Terminal Navigation Pricing Review discussion paper. IATA s comments are from an international perspective and are based on the requirements of, and practices in, international civil aviation. IATA firmly believes that charges should be cost-related, non-discriminatory and equitably applied in line with ICAO and IATA charges principles, and that no group of users should be given special treatment with regards to charges. This submission covers the following topics in detail: Terminal Navigation pricing options CASA regulation determines service levels and Airservices Australia s duty is to provide services and recover costs. IATA recommends retaining the current location specific pricing framework with improvements in the charging structure. Graduated services IATA supports the concept of graduated service options though the solutions should be location specific. Regulatory, operations and long term business considerations will determine the applicable options at a particular location. Phasing in prices at new locations IATA supports phasing in for major changes in line with ICAO as long as it can be balanced with interim under recoveries. New services should only be setup if there is a long term business case supported by a thorough cost benefit analysis and agreed in consultation with airline users. Risks and costs for new locations should be borne by the users of the new locations. Airservices Australia should price with a long term view whilst keeping its cost base flexible in the initial implementation stage. General aviation charging basis Service costs should be shared equitably among all users. Demand sensitivity to price is irrelevant. Administration costs should be minimized by simplifying the charges structure. Tiered pricing arrangement could be envisaged depending on the frequency of use. Equity in TN services pricing Equity and efficiency are best served by charging operators at a particular location that particular location s cost. Charging operators the same price for the same service regardless of location results in equity and efficiency distortions. Simplicity and transparency in TN pricing The current TN pricing structure is not fully transparent because of cross subsidization. TN prices should be on a per flight basis in line with charges principles such as costrelatedness, non-discrimination and no cross subsidization. For clarity purposes, the above topics are covered in detail in the subsequent sections with the relevant questions as listed in the Discussion paper. IATA submission Airservices Terminal Navigation Pricing Review Page 2 of 11

Overview of IATA submission IATA agrees with the Australian government s views to support aviation services and safety throughout Australia as highlighted in the National Aviation Policy White Paper (December 2009). However, IATA does not condone the concept of users at larger airports providing greater cost support for secondary or regional airports. This should come from the government or the beneficiaries of services at remote airports such as mining companies. Users at the top 8 Australian airports already contribute 90% of terminal navigation revenues with the current location specific pricing system in place 1. IATA believes that the role of Airservices Australia is to provide ATC services on behalf of the Australian state and to recover the costs for services based on ICAO principles. Moreover, CASA regulation determines service levels as opposed to a pricing policy that would support the introduction of new or upgraded services. Upgraded or new services should only be setup if there is a long term business case supported by a thorough cost benefit analysis. It is paramount for airport users to be fully engaged from an early stage in order to ensure that the upgraded and/or new services proposed meet their needs, and that users are aware of the financial implications in terms of the charges they would have to pay. The role of international aviation IATA halved its loss forecast for 2010 to US$2.8 billion (compared to the US$5.6 billion loss forecast in December 2009). The improvement is largely driven by a much stronger recovery in demand seen by year-end gains that continued into the first months of 2010. Improvements are driven by economic recovery in the emerging markets of Asia-Pacific and Latin America whose carriers posted international passenger demand gains of 6.5% and 11.0% respectively in January. North America and Europe are lagging with international passenger demand gains of 2.1% and 3.1% respectively for the same month. Asia-Pacific carriers will see the US$2.7 billion 2009 loss turn to US$900 million in profits on the back of a rapid economic recovery being driven by China. Cargo markets are particularly strong with long-haul cargo capacity for shipments originating in Asia experiencing a capacity shortage. Aviation contributes enormously to Australia s economic strength and is a major employer. According to the White Paper the annual gross value added by the air and space industry to the Australian economy is nearly AU$6.3 billion 2. In August 2009, nearly 50,000 Australians were directly employed in the air and space industries, over 80 per cent of them full-time employees 3. Moreover, the White Paper mentions that aviation is a major contributor to Australia s tourism industry. As an island continent with no land borders, Australia relies almost exclusively on air services to bring international visitors to the country, with over 99% of inbound tourists arriving in Australia by air. Domestic tourism also relies heavily on air transport 4. As per the World Travel and Tourism Council 5, Australia s travel and tourism is expected to generate US$123 billion of GDP activity in 2010. However, this contribution has declined by -3.6% compared to 2009. Moreover, the travel and tourism industry direct GDP contribution is forecast to have declined by -4.3% (at US$50 billion). Employment related to the travel and tourism economy is also forecast to fall to 1.3 million jobs this year (down -1.9% compared to the previous year). 1 Figure 10 Terminal navigation charges 2006-2007 Price structure options Discussion paper August 2008 p.42 2 ABS, Australian National Accounts: National Income, Expenditure and Product (ABS cat. No. 5206.0, June 2009, Table 33) 3 ABS, Labour Force, Australia, Detailed, Quarterly, Aug 2009 (ABS cat. No. 6291.0.55.003, Table 6) 4 National Aviation Policy White Paper (December 2009) - page 31 5 World Travel & Tourism Council Travel & Tourism Economic Impact Australia 2010 IATA submission Airservices Terminal Navigation Pricing Review Page 3 of 11

In this current environment, IATA firmly believes that any price increases especially on international travel would have a negative impact on Australia s economy and would delay the recovery ahead. This is, of course, very much the case for TN pricing. TN pricing structure positions The Australian government states in its White Paper that Airservices will review aeronautical pricing options for terminal navigation services in the first quarter of 2010 with a view to establishing a framework that facilitates the enhancement of air traffic services around Australia. This is particularly important when the introduction of new or enhanced safety air traffic services and facilities is required in the future to reflect higher traffic and passenger levels at major regional airports such as Broome, Karratha and Maroochydore (Sunshine Coast). The review will help inform Airservices consultations with industry regarding a new long-term pricing agreement, planned to take effect from July 2011. 6 Airservices Australia s current charges for Terminal Navigation (TN) services are a combination of location specific and basin charges. The Australian Competition and Consumer Commission (ACCC) supported location specific pricing in 2005 as referred to in attachment 2 of the discussion paper. Furthermore, ACCC s views on fixed costs were for a particular service at a location and did not imply spreading the costs across locations. IATA strongly supports location specific pricing as it ensures compliance with ICAO policies on transparency and cost-relatedness of charges. ICAO policies on charges for air navigation services (Doc 9082/8) highlights that users should pay their share of the related costs (paragraph 42), that the allocation of the costs of air navigation services among aeronautical users be carried out in a manner equitable to all users and that no users are burdened with costs not properly allocable to them according to sound accounting principles (paragraph 46). In our view, these references also support the principle of site-specific charges versus network pricing. IATA strongly recommends for Airservices Australia to keep the current TN pricing framework based on location specific pricing as it ensures compliance with ICAO policies on transparency and cost-relatedness of charges. Additionally, the current charges structure for TN services should be further improved as follows: The TN charge should be based per flight instead of per maximum take off weight of the aircraft. TN charges should be cost-related and fairly allocated amongst users. There should be no cross subsidization between lines of service especially between TNC and en route charges. The charges structure should be simple in order to minimize administration costs. By contrast, IATA is opposed to network pricing because this will result in the TN charge being increased at the major Australian airports whilst the regional airports will contribute even less than during the previous 5-year Long Term Pricing Agreement (LTPA). Consequently, international airlines will contribute even more than 90% of TN revenues as is the case in the current model. This will, therefore, place an extra burden on international airlines versus domestic airlines. Overcharging further at major airports would also have negative implications for Australian companies that rely on air transport to conduct their business. Moreover, the Australian government does not refer to network or location specific pricing in its white paper. 6 Page 131 National Aviation Policy White Paper (December 2009) IATA submission Airservices Terminal Navigation Pricing Review Page 4 of 11

Questions for feedback Terminal Navigation pricing options Question #1: Which of the options is most likely to support the introduction of new or upgraded services to enhance safety and best meets the criteria of efficiency, equity and transparency? Additional information required from Airservices Australia Airservices Australia has put forward 7 pricing options for discussion in its TN pricing review and provided an indication of the prices corresponding to each of these options at each location under attachment 5. IATA urges Airservices Australia to provide airline users the following key information related to Terminal Navigation at the beginning of the review process including but not limited to: Terminal navigation revenue and cost base breakdown at each of the 30 airports. Movement and traffic forecast at each of the 30 airports over the period of the second LTPA. CASA regulations for establishment/de-establishment of towers. CASA regulations on alternatives and gradual services. Latest capital expenditure plans with details of functionality, importance of classification (e.g. mandatory, critical, nice to have) and regulatory implications. Any changes to the TN pricing structure are directly linked to the level of TN charges. It is, therefore, important for airport users to have access to the above information early in the consultation process and leading to the preparation for the second LTPA. Furthermore and as requested in IATA s 2008 submission paper, it is essential that a simulation be done to review and understand the full impact of capital city airport specific pricing versus basin concept pricing. Airservices Australia service expectations IATA firmly believes that Airservices Australia s duty is to provide services and recover costs rather than promoting new services when such services may not be justified or sustainable. Moreover, CASA regulation determines service levels as opposed to a pricing policy that would support the introduction of new or upgraded services. IATA comments on each of the 7 pricing options Pure location specific prices. As noted in the previous section, IATA strongly supports location specific pricing. In a pure location specific structure, prices at the 30 smaller airport locations (per attachment 5) will be considerably higher. If the users at these locations are not in a position to pay for TN services, it is recommended that Airservices Australia review service options at each of these 30 airport locations in conjunction with possible changes in the regulatory requirements. Current pricing framework. IATA strongly recommends Airservices Australia to keep this current pricing framework provided the pricing structure could be further improved as follows: - The TN charge should be based per flight instead of per maximum take off weight of the aircraft. - TN charges should be cost-related and fairly allocated amongst users. - There should be no cross subsidization between lines of service especially between TNC and en route charges. - The charges structure should be simple in order to minimize administration costs. IATA submission Airservices Terminal Navigation Pricing Review Page 5 of 11

Location specific with basin prices and training circuit charge. The same points referred to under the current pricing framework are also pertinent to this option. Additionally, the concept of training circuit charge is relevant in Australia especially at General Aviation Aerodrome Procedures airports and should also be taken into consideration in all the other pricing options. Location specific variable costs with fixed cost network charge. The fixed costs in this option would correspond to the infrastructure costs which would be the biggest proportion of the costs. This option would be contrary to ICAO policies as some airports would cross subsidize other airports. Furthermore, the unit charge per MTOW would put a heavier burden on the international aviation that tends to have heavier aircraft. Base level network charge with location specific class C charge. The same comments made for the location specific variable costs with fixed cost network charge also apply to this option as the location specific costs would correspond to Class C charge instead of variable costs. Moreover, this option is the most expensive option when looking at the prices at the 30 airport location in attachment 5. Service based network pricing. This pricing option is a hybrid price model which would also be contrary to ICAO policies as some airports would cross subsidize other airports. Pure network pricing. This pricing option would be completely contrary to ICAO policies as some airports would cross subsidize other airports. Furthermore, this option would be least likely to meet the criteria of efficiency, equity and transparency. IATA strongly supports location specific pricing as it ensures compliance with ICAO policies on transparency and cost-relatedness of charges. IATA, therefore, recommends for Airservices Australia to keep the current pricing framework whilst improving the charges structure as detailed above. CASA regulation determines service levels and Airservices Australia s duty is to provide services and recover costs. IATA recommends retaining the current location specific pricing framework with improvements in the charging structure. IATA submission Airservices Terminal Navigation Pricing Review Page 6 of 11

Graduated services Question #2: What opportunities exist for more graduated levels of service options, prior to the introduction of a new tower service, which vary with traffic volumes at airports? The need to establish services of any form is based on two primary factors, an operational need and regulatory requirements. Any service option graduated or not needs to meet both the operational needs and regulatory requirements. Assuming that regulatory requirements are based on appropriate risk analysis, first and foremost, all graduated service options will need to be subject to similar risk analysis and satisfy the risk parameters used for non-graduated services. Conceptually, the following graduated service options can be broadly considered though a stepped methodology within each option may also be feasible: A simple UNICOM system that may not need any other infrastructure. This could potentially require some form of remote lighting or some form of recording system. The next level of FIS requires staffing and increased infrastructure which will vary depending on location. Remote provision of this service should also be considered. A virtual tower could simply be a series of cameras through to a full surveillance environment. But, from a regulatory point of view, there may be question marks whether a system only based on cameras will be sufficient to provide ATC services. As a result, this could mean a virtual tower actually needs more ground infrastructure than a typical Class D tower. While IATA is of the view that there are opportunities for graduated levels of service, the options applicable to a particular airport will depend on the traffic profile of (and possibly in the vicinity of) that location. In addition to traffic volumes, mix of aircraft capabilities, traffic patterns and other factors should be taken into account while reviewing the feasibility of such service options. Lastly, the long term outlook for the airport should be taken into consideration. For example, if the outlook for a location is long term growth, then a case could be made for implementation of complete services rather than a graduated solution that results in frequent service changes. IATA supports the concept of graduated service options though the solutions should be location specific. Regulatory, operations and long term business considerations will determine the applicable options at a particular location. IATA submission Airservices Terminal Navigation Pricing Review Page 7 of 11

Phasing in prices at new locations Question #3: For new TN services, should Airservices phase prices in over a period of time ultimately moving toward full cost recovery and on what basis should this be done? Additionally, should the activity forecast for new locations be reviewed and the price adjusted for significant variations after the first 12 months? As highlighted under question #1, IATA firmly believes that Airservices Australia s duty is to provide services and recover costs rather than promoting new services when such services may not be justified or sustainable. Moreover, CASA regulation determines service levels as opposed to a pricing policy that would support the introduction of new or upgraded services. Additionally, new services should only be setup if there is a long term business case supported by a thorough cost benefit analysis. The new services referred to would be part of the infrastructure investments that are contained in the long term CAPEX plans. Before envisaging any new TN services, airport users should also be fully engaged from an early stage in order to ensure that the new services proposed meet their needs, and that users are aware of the financial implications in terms of the charges they would have to pay as mentioned in ICAO s document 9082/8 paragraph 24. Furthermore, if TN services are introduced at new locations, the risks and costs should be borne by the users of these new locations as the TN services would only be used at these new locations. This is also compliant with ICAO document 9082/8 paragraph 46 which states that the allocation of the costs of air navigation services among aeronautical users be carried out in a manner equitable to all users and that no users are burdened with costs not properly allocable to them according to sound accounting principles. Considering that the above elements are fulfilled, IATA supports phasing in for major changes. This is in line with ICAO document 9082/8 which mentions that in determining the costs to be recovered from users, the approach towards the recovery of full costs should be a gradual progression (paragraph 45iii). The phasing in for major changes needs, however, to be balanced with interim under-recoveries in order to minimize higher charges levels in the long term. In the case of new locations, IATA recommends for Airservices Australia to price with a long term view whilst keeping its cost base flexible in the initial stage. IATA supports phasing in for major changes in line with ICAO as long as it can be balanced with interim under recoveries. New services should only be setup if there is a long term business case supported by a thorough cost benefit analysis and agreed in consultation with airline users. Risks and costs for new locations should be borne by the users of the new locations. Airservices Australia should price with a long term view whilst keeping its cost base flexible in the initial implementation stage. IATA submission Airservices Terminal Navigation Pricing Review Page 8 of 11

General aviation charging basis Question #4: Should pricing for low volume general aviation operators be based on a fixed price tiered arrangement? If so, what tiers should apply? IATA firmly believes that charges should be cost-related, non-discriminatory and equitably applied in line with ICAO and IATA charges principles, and that no group of users should be given special treatment with regard to charges. IATA, therefore, recommends for Airservices Australia to adhere to the following key principles, as all users need to pay for the services they are using: Non-discrimination: There should be no discrimination between the different groups of users with regards to charges. No cross subsidization: There should be no cross subsidization where airlines subsidies other airlines. From an economic point of view, demand sensitivity to price is irrelevant when it comes to which customers Airservices Australia should charge. The price is not determined by the user who values the service most. In fact, there would be competition to provide services at each location, which would create incentives for efficiency improvements, but there would be one price for the service determined by the marginal customer who values it least. The argument that the viability of services may be precluded by location specific pricing is, therefore, spurious. IATA would welcome it if Airservices Australia were to simplify its charging structure in order to minimize administration costs that can be very expensive to general aviation operators. IATA would support the concept of tiered pricing arrangement suggested by Airsservices Australia depending on the frequency of use based on the previous year s level of flight activity. The reason is that charges should not be prohibitively expensive to prevent the use of ATC services by Light Aircraft as it would have a negative impact on the overall shared airspace security especially for approach and terminal areas. Service costs should be shared equitably among all users. Demand sensitivity to price is irrelevant. Administration costs should be minimized by simplifying the charges structure. Tiered pricing arrangement could be envisaged depending on the frequency of use. IATA submission Airservices Terminal Navigation Pricing Review Page 9 of 11

Equity in TN services pricing Question #5: What are the equity and efficiency implications of: (a) charging operators at a particular location that particular location s cost; or (b) charging operators the same price for the same service regardless of location? Equity and efficiency implications mean different things to different entities. In this context, it is important to note that the National Aviation Policy White Paper does not specifically require an equity and efficiency implication analysis of location specific or service specific pricing. In IATA s view, a pricing model based on a solid relationship between costs and revenues for any service best promotes both equity and efficiency. For a user, equity considerations should require the user to only pay for the costs incurred in provision of used services. For a provider, efficiency is only promoted if there is a direct link between the revenues from and the investment and expenses incurred in the provision of a service. Both these criteria are met by charging operators at a particular location that particular location s cost i.e. Location Specific Pricing. On the other hand, charging operators the same price for the same service regardless of location is a form of network pricing. It does not meet the equity considerations as an operator at one location would essentially be paying to subsidize the higher costs at another location. The key issue here is that the unit operation costs can be vastly different for the same service at various locations if the traffic levels are different. Charging them the same price is essentially asking one location to support the other until the time that they have equivalent traffic. There is simply no equity or efficiency justification for such a practice. In reality, the only reason for this can be a social one, in which case, the Australian government - and not the airline users should provide the needed funding. IATA would also like to comment on some issues related to the Section 6 on Pricing of TN services TN establishment and thus the cost drivers are based on CASA regulation. CASA determines the required level of TN services based on its risk assessment model. As part of this risk assessment, cost of providing services should be part of the risk model. Operators at a particular location need to be aware and should sign up to the risk of increased unit costs when location classification changes (up or down). This should be part of the business and risk case pre-agreed with the users prior to the investment. There is reference to Airservices sending pricing signals to its customers and promoting the shifting of traffic. IATA does not agree with these concepts as Airservices is a monopoly providing services based on Australia s national obligations. Pricing signals and traffic shifting by Airservices are irrelevant in this context. There is also reference that.existence of smaller.airports serves to reduce costs at the larger airport. This is a misleading statement as basin smaller airports are not designed to reduce costs at the larger airports. There are a number of other reasons for the existence of basin airports. Rather in some cases, the larger airport can cater to all the traffic in the region without substantial increase in costs - thus reducing the sum total costs (even after taking into account the sunk costs at the smaller airports). Equity and efficiency are best served by charging operators at a particular location that particular location s cost. Charging operators the same price for the same service regardless of location results in equity and efficiency distortions. IATA submission Airservices Terminal Navigation Pricing Review Page 10 of 11

Simplicity and transparency in TN pricing Question #6: Is Airservices current TN pricing structure transparent, easily understood and easy to administer? IATA strongly recommends for Airservices Australia to keep the current TN pricing structure based on location specific pricing as it ensures compliance with ICAO policies on transparency and cost-relatedness of charges. The current charges structure should, however, be further improved as follows: The TN charge should be based per flight instead of per maximum take off weight of the aircraft. TN charges should be cost-related and fairly allocated amongst users. There should be no cross subsidization between lines of service especially between TNC and en route charges. The charges structure should be simple in order to minimize administration costs. It must be noted that the current pricing structure is not completely transparent as there is cross subsidization between both lines of services and between major and basin airports. Users should have complete visibility of terminal navigation revenue and cost base breakdown at each of the 30 airports. Furthermore, the TN pricing structure must to be based on charges principles such as costrelatedness, non-discrimination, and no cross subsidization. Although the current TN charge is MTOW based and easily understood, it does not conform to ICAO recommendations that the terminal navigation charge should be less than proportional to weight (ICAO Doc 9082/8 paragraph 50). The current TN pricing structure is not fully transparent because of cross subsidization. TN prices should be on a per flight basis in line with charges principles such as costrelatedness, non-discrimination and no cross subsidization. For additional information or clarification, please contact: Vinoop Goel Magali Collot Assistant Director Manager Airport and ATC charges Airport & ATC Charges Tel. +65 6239 7134 Tel. +41 22 770 2759 Fax. +65 6415 1259 Fax. +41 22 770 2689 goelv@iata.org collotm@iata.org International Air Transport Association International Air Transport Association 111 Somerset Road, #14-05 TripleOne Somerset Route de l Aéroport 33, P.O. Box 416 Singapore 238164 1215 Geneva 15 Airport, Switzerland IATA submission Airservices Terminal Navigation Pricing Review Page 11 of 11