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Tuesday, May 7, 2013

The Problem with the FAA and Sequestration

“The world runs on individuals pursuing their self-interests. The great achievements of civilization have not come from government bureaus. Einstein didn't construct his theory under order from a, from a bureaucrat. Henry Ford didn't revolutionize the automobile industry that way.” — Milton Friedman

As lines grew at airports and passengers began to fume, Congress lumbered into action, holding hearings on furloughs and sequestration, and, ultimately tweaking the law to allow the Federal Aviation Administration (FAA) to add more manpower at the nation’s air traffic control towers. The only silver lining to the whole calamity may be that some small part of the government actually had a real discussion about spending. Not that it solves the underlying problem or averts mounting complaints about flying. If Congress was serious about improving air travel, they would have moved forward with plans to modernize our aviation system with new technologies that would render many of the existing towers redundant and obsolete, while allowing private entrepreneurs to play a larger role in airport management.

Airlines were deregulated in 1978, saving consumers billions of dollars and opening air travel to a much larger public. But as anyone who has flown recently knows, air travel is far less enjoyable than it was in the days of regulation and pampered passengers. It’s not just the TSA security checks; airlines have restructured their routes to keep flights as full as possible while trimming back on amenities. And airport facilities lag far behind the growing demand for air travel. In short, air travel is a no frills experience that leaves many passengers dreading the trip to the airport.

A large part of the problem is that while airlines have been deregulated, airports remain mired in red tape and bureaucratic sclerosis that make expansion and modernization difficult. The FAA relies on antiquated technologies to regulate increasingly congested skies. An upgrade is sorely needed, and the technology exists to more accurately monitor planes in the sky with significantly fewer facilities on the ground. In fact, a study by the Reason Foundation finds that over 100 air traffic control centers could be closed if new technologies are adopted for a smaller set of modern facilities that can manage flights “from anywhere-to-anywhere.” These changes would generate a one-time windfall of $1.7 billion as well as annual savings of $1 billion a year.

In addition to obsolete technologies, airport infrastructure improvement projects are hampered by bureaucratic oversight and politically powerful interests — from the air traffic controllers union, to monopolistic airlines with virtual veto power over new gates, to politicians seeking to divert federal dollars to favored projects. Delays and cost overruns plague airport improvement projects, leaving passengers in crowded and dilapidated waiting areas.

A better solution would be to harness the power of entrepreneurship by allowing the private sector to manage airport facilities and the ATC system. The deregulation that began in 1978 needs to be extended to airport facilities and air traffic control as well. The United States is a straggler in this respect, with many countries around the globe already shifting airports and airport management to private companies. From the U.K. to Australia, airports have been shifted towards private management, funded by aviation users. Canada has completely privatized its air traffic control system and is a model for other countries, including the United States. A shift to the private sector would provide access to capital markets to fund the necessary improvements that are fast outstripping the capacity of the Airport Trust Fund and the federal government’s ability to pay.

Unfortunately, the United States has a long way to go before air travel is on solid operational and financial ground. Despite the obvious flaws of the current system, the political interests that have congealed around the status quo make change difficult. Much of this can be explained by what economist Gordon Tullock called the transitional gains trap. That is, the current system bestowed substantial benefits on particular groups, such as the air traffic controllers who continue to man the control towers that would become obsolete in an upgraded system. Or the politicians who see dollars and jobs in airport improvement projects. Tullock notes that over time these benefits dissipate and the programs may become ineffective. Yet change will impose significant costs on these groups, creating a powerful coalition opposing reform.

Federal involvement in air traffic control has a long history. The 1926 Air Commerce Act tasked the Department of Commerce with issuing and enforcing air traffic rules, licensing pilots, certifying aircraft, establishing airways, and operating aids for air navigation. In the mid-1930s, the federal Bureau of Air Commerce took over the initial air traffic control centers for en route tracking created by the airlines, which complemented the operation of local control towers by municipal authorities. During the 1940s, the federal government began taking over the operation of local control towers, and following World War II all aspects of air traffic control became federal.

Airport development took a different path. In the early years of commercial aviation, some private airports (e.g., Burbank, California) existed alongside those established by state and local governments. Today, virtually all U.S. commercial airports are owned by state and local governments. The federal government's role has been to regulate and subsidize those facilities. Federal financial aid to airports began with work relief programs in the 1930s, and was followed by the Federal Airport Act of 1946, which provided $500 million in airport grants to state and local governments over seven years.

The coming of jet aircraft and the large number of aviation accidents spurred Congress to pass the Federal Aviation Act of 1958, which created the Federal Aviation Administration. The new administration replaced previous federal agencies involved in air traffic control and airport development.

Congress started taxing the commercial aviation industry soon after it was established. It passed an excise tax on gasoline and aviation fuels in 1932 and an excise on airline passenger tickets in 1941. The revenue from these levies went into the federal government's general fund. That changed in 1970 when Congress passed legislation creating an Airport and Airway Trust Fund, which had dedicated streams of revenue to be used for air traffic control and federal aid to airports. Trust Fund revenue sources included ticket taxes on domestic and international flights, taxes on fuels, and various fees.

The Airport and Airway Trust Fund currently raises more than $12 billion annually from a 7.5 percent tax on domestic airline tickets, a tax on each segment flown, taxes on gasoline and jet fuel, international departure and arrival taxes, and half a dozen other fees. Trust Fund revenues pay for almost four-fifths of the FAA's $16.4 billion budget, with the balance coming from general federal funds covering the FAA's safety regulatory and miscellaneous other activities.

While air traffic control is an increasingly technology-intensive industry, labor union issues have long played an important role in the ATC system. A period of labor unrest began in the late 1960s as FAA controllers pushed for job improvements and official status as an employee union. In 1969, about 500 members of the Professional Air Traffic Controllers Organization stayed home "sick" causing air service interruptions. The following year, 3,000 PATCO members took part in another "sickout" or illegal strike, which caused chaos for the nation's air traffic.

Labor problems continued during the 1970s, with various work slowdowns and union protests over contract issues. Then in 1981, PATCO declared a major system-wide illegal strike after negotiations on a new contract broke down. That prompted President Ronald Reagan to order controllers to return to work within 48 hours or else face termination. More than 11,000 controllers refused to return to work and were fired by Reagan and initially banned from federal service. PATCO was dissolved and a new controllers union was created in 1987, the National Air Traffic Controllers Association (NATCA).

Today, an important aspect of the federal ATC system is the high labor costs. In 2010, the operations portion of FAA had about 43,000 workers who earned a total of $6.5 billion in wages and benefits, or about $151,000 per worker. Just looking at controllers, a 2005 FAA study found that compensation packages averaged $166,000 annually. Labor costs account for two-thirds of the cost of FAA operations.

While organized labor has created management challenges for the FAA, so has the implementation of new technologies. Delays and cost overruns on major technology projects have been common. For example, the Advanced Automation System project was launched in the early 1980s and was originally expected to cost $2.5 billion and be completed by 1996. But by 1994, estimated project costs had soared to $7.6 billion and the project was seven years behind schedule. The FAA terminated some parts of the AAS program and restructured others, but $1.5 billion of spending ended up being completely wasted.

More recently, a 2005 study by the Department of Transportation's Office of Inspector General looked at 16 major air traffic control upgrade projects and found that the combined costs had risen from $8.9 billion to $14.5 billion. The cost of the Standard Terminal Automation Replacement System project had jumped 194 percent to $2.7 billion and was seven years behind schedule. The OIG said that the STARS project was "facing obsolescence" even before it was completed. Meanwhile, the cost of the GPS controlled Wide Area Augmentation System (WAAS) project had jumped 274 percent to $3.3 billion and was 12 years behind schedule. A Government Accountability Office analysis in 2005 found similar cost overruns and delays in these projects.

Many experts are predicting major problems with U.S. aviation infrastructure in coming years as large demand growth outstrips the capacity of available facilities. In addition to a rising number of airline passengers, the average size of planes has fallen, which increases the number of planes in the sky that the ATC system needs to handle. On the supply side of the aviation equation, the FAA has long had problems with capital funding, high labor costs, and an inability to efficiently implement new technologies. Major changes are needed because the increased air traffic will soon bump up against the limits of the current air traffic control system.

In 1999 I received a consulting contract from the U.S. Trade and Development Agency to provide precise geodetic GPS surveys at 10 airports in Central America. The surveys were needed for the implementation of GPS navigation and approach to the airports. We were also contracted to provide training in the establishment of the Global Navigation Satellite System (GNSS) for airport approach systems.

When this contract was announced at an aviation conference in Miami I gave a presentation to the audience on the purpose of the contract and what we would be providing through USTDA and with the cooperation of FAA. During the dinner I sat at a table with Jane Garvey, the then FAA Administrator and<i>SI Neg. 2001-12304.17. Date: 10/17/2001.</i><br /><br />Jane Garvey, Federal Aviation Administration (FAA) Administrator, speaking at the National Press Club on the state of aviation following the 9/11/01 terrorist attacks. <br /><br />Credit: Jim Wallace (Smithsonian Institution) gave her a more detailed explanation of what we would be doing and how the GNSS would be a tremendous benefit to civil aviation in the region. Ms. Garvey was quick to grasp the technology and its benefits. When I asked her why the United States was not moving forward with this less labor intensive and less expensive technology her answer was simple and direct — “it’s the unions.” She explained that any new technology introduced into the ATC system had to be approved by the NATCA. The approval was not for the viability of the technology or the safety of the airways but for the impact the technology would have on the union jobs of the air controllers. This did not bother the aviation officials in Central America as they were more concerned with implementing an ATC system they could readily afford and one that would satisfy the airlines serving the region.

Virtually all commercial airports in the United States are owned by state and local governments. But around the world, airports are becoming viewed more as business enterprises, and less as monopoly public services. Governments in both developed and developing countries are turning to the private sector for airport management and development.

The benefits of a more entrepreneurial approach to running airports include increased operating efficiency, improved amenities, and more rapid and efficient expansion in capacity to reduce congestion. Airlines, passengers, private-plane owners, and taxpayers can all benefit from this new commercial approach to airport management.

For existing state and local airports, the simplest form of privatization is to contract out management of the airport on a short-term basis. But long-term leases can shift much greater responsibility and entrepreneurial incentive to the airport company, while liberating much of the city's previous investment in the airport. To create new airport facilities, the private sector can be brought in as a partner and granted either a long-term or perpetual franchise to finance, design, own, and operate the new facility. Full private ownership and management of airports is also possible and is becoming fairly common in Europe.

Airports have been fully or partly privatized in many foreign cities, including Amsterdam, Athens, Auckland, Brussels, Copenhagen, Frankfurt, London, Melbourne, Naples, Rome, Sydney, and Vienna. Britain led the way with the 1987 privatization of British Airports Authority, which owns Heathrow and other airports. Other countries followed with a wide range of commercialization reforms under which private firms own or operate various aspects of airport facilities.

Since 1987, more than 100 airports have been partly or fully privatized worldwide. A recent survey found that there are about 100 companies around the world that own and operate airports, finance airport privatization, or participate in projects to finance, design, build and operate new airports or airport terminals.

Many aviation experts predict serious trouble in coming years as air travel demand grows faster than the ability of the U.S. air traffic control system to expand capacity. In the 2003 reauthorization of the FAA, Congress acknowledged the seriousness of the problem by creating the Joint Planning and Development Office (JPDO) to coordinate the transition to a Next Generation Air Transportation System (NextGen). NextGen will be a major redesign of the ATC infrastructure, as described by the Congressional Budget Office:

“The new system is designed to accommodate up to three times the volume of current air traffic by making more efficient use of both the national airspace and airport facilities. The new air traffic control system would be more decentralized than the one currently in place in the United States. Guidance systems on planes would work in conjunction with satellites of the Global Positioning System (GPS) to supplement direct supervision by ground-based controllers and radar stations. As a result, each plane would depend less on instructions from an air traffic controller and more on its own resources for maintaining a safe flight pattern and would be better able to adjust to the particular air traffic conditions in its vicinity.”

The JPDO has estimated that not expanding the ATC system's capacity will be costing the U.S. economy $40 billion per year by 2020 because the overburdened system will force significant rationing of flights. That rationing would increase prices and eliminate some trips entirely. To avoid this crisis, JPDO has called for restructuring the ATC system to safely and efficiently handle the heavier demand.

One problem is the mismatch between the growth in air traffic and the projected growth in FAA revenue. The FAA will need about $1 billion more per year over the next 20 years just to implement NextGen. In 2007 the FAA proposed a user-fee-based funding reform that could provide a more efficient and growing revenue source. The idea was to make each air transportation user's burden on the ATC system more closely match that entity's cost for using the system. That approach has thus far been ignored by Congress.

However, the challenge ahead for the ATC system is more complex than just financial. NextGen will be a major paradigm shift — from 20th-century (manual) air traffic control to 21st-century (semi-automated) air traffic management — and it will be more complex and riskier than any other challenge the FAA has previously attempted. Given the FAA's management and cost overrun problems in the past, simply fixing the funding problem for the ATC system without dramatically reforming its governance poses risks of larger and more dramatic failures and greater congestion down the road.

Here are three key problems with the current government-owned and operated system of air traffic control:

Inflexible Funding. Government funding sources tend to be static and subject to political considerations, and they are decoupled from changing market demands. Changes in aviation over the past decade have hurt the FAA's funding base. A large part of the FAA budget comes from aviation excise taxes, especially the 7.5 percent tax on airline tickets. As average ticket prices have fallen over time, ATC funding has been squeezed. Payroll costs of the current labor-intensive ATC system consume most of the available budget, leaving less funding for capital investment.

Making the transition to NextGen will require billions of dollars of new investments in advanced technologies. The FAA's capital budget is still focused mostly on patching up the existing system, such as replacing antiquated display consoles. Such investments are needed in the short-term, but won't add very much capacity to the system. But that is nearly all the FAA can afford under the current funding structure.

Some people argue that Congress could solve the funding problem by appropriating a larger amount of general federal revenue for the ATC system. But given the giant federal budget deficit, federal discretionary spending is going to be severely squeezed in coming years. The solution, as discussed below, is to create a commercialized ATC system that can flexibly respond to changing conditions and access private capital markets for investment.

Technology Implementation Risks. The FAA has been attempting to modernize its system, expand capacity, and increase its productivity for decades. But dozens of reports over the years from the Government Accountability Office and the Office of Inspector General in the Department of Transportation have faulted the FAA for poor management of major projects, which are often delayed and over budget. The Advanced Automation System, Wide Area Augmentation System, and other major projects have had large cost overruns and been years behind schedule or cancelled, as discussed above.

In 2005 two OIG researchers presented an overview of the FAA's failed efforts over the years to modernization the National Airspace System.25 In reviewing what went wrong, they concluded that FAA modernization efforts had neither reduced costs nor increased productivity:

“NAS modernization plans have been consistently subverted by requirements growth, development delays, cost escalations, and inadequate benefits management. All these things were symptomatic of the fact that FAA didn't think it needed to reduce operating costs.”

Many experts are greatly concerned that the FAA's institutional culture is poorly suited to implementing anything as dramatic as NextGen. In 2004, the National Academy of Sciences convened an expert panel to assist the GAO in understanding the cultural and technical factors that have impeded previous ATC modernization efforts. It found that "the key cultural factor impeding modernization has been resistance to change, which is characteristic of FAA personnel at all levels" and that "the key technical factor affecting modernization has been a shortfall in the technical expertise needed to design, develop, or manage complex air traffic systems."

As a government agency, the FAA is not designed to judge risks, aim at the most efficient investments, manage people to produce results, reward excellence, or punish incompetence. It is therefore not equipped to fundamentally reform the ATC system. Thus, major institutional change is probably a prerequisite for implementing the advanced ATC system the nation needs to meet rising aviation demand. This echoes Jane Garvey’s comments to me in 1999.

Political Constraints. A third impediment to ATC reform is political. The redesign of the ATC system foreseen in NextGen could potentially deliver major cost savings and greatly expand ATC capacity. However, realizing those gains would require retirement of large numbers of costly radars and other ground-based navigation aids and the consolidation of ATC facilities. One current proposal would replace 21 en route centers and 171 terminal radar approach control (TRACON) facilities with just 35 air traffic service hubs in a redesign of U.S. airspace. 28 Physical control towers located at many smaller airports would gradually be phased out as "virtual tower" functions are built into the new super-hubs.

However, Congress tends to resist consolidating ATC facilities because of concerns about job losses and the like, which is similar to the political resistance to closing post offices and military bases. A major 1982 proposal for consolidating ATC facilities was quietly dropped after it became clear that getting it through Congress would be very difficult. Similarly, Congress came extremely close to forbidding the FAA's recent success in outsourcing its Flight Service Station system, which involved reducing the system from 58 facilities to 20. The prohibition was defeated only by a credible veto threat from the Bush White House. In sum, as long as ATC remains government-owned and controlled, making the needed reforms to improve efficiency and implement NextGen will be very difficult.

In 1999 and 2001 I spent a great deal of time at the FAA headquarters in Washington, D.C and in offices of Representatives Don Young (R-Alaska) the then Chairman of the House Transportation and Infrastructure Committee and John Mica (R-Florida) the then Chairman of the Committee on Aviation. During one meeting with Rep. Young I explained what we were doing in Central America with GNSS and he was flabbergasted that he was not aware of this project. He was more annoyed that ate the current time Congress was holding hearings on the cost overruns of Lockheed-Martin’s STARS system. That’s the last I ever heard of GNSS implementation. Evidently Lockheed Martin had way more political and financial clout than one obscure consultant.

The way to address all three of these organizational problems is to take the ATC system out of the federal budget process and make it a self-supporting entity, funded directly by its customers. Variants of this commercialization approach have been recommended by a series of federal studies and commissions over the past 15 years.

As part of Vice President Al Gore's efforts at "reinventing government" in the 1990s, for example, the Clinton administration proposed turning the ATC system into a separate, self-funded, nonprofit government corporation within the Department of Transportation. The 1997 National Civil Aviation Review Commission, which was chaired by Norman Mineta, similarly proposed moving toward a self-supporting air traffic control organization.

Commercialization would entail shifting from aviation-related taxes paid to the U.S. Treasury to fees for ATC services paid directly by customers to a new self-supporting Air Traffic Organization (ATO). This change would allow fees to grow in proportion to the growth of flight activity, rather than being tied to a less-stable variable, such as fuel prices or airline ticket prices. Moreover, a predictable revenue stream that was not subject to the federal budget process would provide the basis for the ATO to issue long-term bonds for funding capital investments.

Commercialization would also address the management problems that have plagued the FAA's efforts to modernize. A non-civil-service ATO could attract the best private-sector managers and engineers skilled at implementing complex technology projects. Such an ATO could hire, fire, and compensate its employees as other high-tech businesses do. Private sector managers would have an incentive to ask tough questions about whether new investments offered real value for the money, a process that often doesn't occur at the FAA or in Congress.

In addition, a separate, self-supporting ATO—no longer part of the FAA—would be overseen at arm's length for aviation safety by the remaining FAA. Numerous studies have pointed out that the FAA's air-safety role is compromised when it comes to the ATC system, since that system is operated "in-house" by a different branch of the same FAA. All other players in aviation—pilots, mechanics, aircraft manufacturers, airlines, and so forth—are regulated at arm's length for safety by the FAA. This separation of ATC operations from safety regulation is especially critical given the major changes entailed by shifting to the semi-automated NextGen, where numerous safety versus capacity questions will need to be addressed in a rigorous and transparent manner.

Finally, a self-supporting ATO would address the political obstacles to improving system efficiency, such as making decisions to close facilities. By passing the enabling legislation for ATC reform, Congress would delegate such contentious issues to the customer-oriented ATO organization.

During the past two decades, nearly 50 governments have commercialized their air traffic control systems. That means they have separated their ATC activities from their transport ministries, removed them from the civil service, and made them self-supporting from fees charged to aircraft operators. These new air navigation service providers (ANSPs) are usually regulated at arm's length by their government's aviation safety agency.

Britain's ATC system has been commercialized by means of a "public-private partnership." National Air Traffic Services (NATS) is a jointly owned company, with British airlines owning 42 percent, airport company BAA owning 4 percent, employees owning 5 percent, and the government owning the remaining minority stake. NATS is operated on a not-for-profit basis.

Canada's ATC system has been fully commercialized. In 1996, Canada set up a private, nonprofit ATC corporation, Nav Canada, which is self-supporting from charges on aviation users. The Canadian system has been widely praised for its sound finances, solid management, and its investment in new technologies.31 The Canadian system is a very good reform model for the United States to consider.

Nav Canada's corporate board is composed largely of aviation stakeholders. It has 4 seats for the airlines, 3 for the government, 2 for employees, and 1 for the non-commercial aviation industry. Those 10 stakeholders select 4 directors from outside aviation, and then those 14 select the company president, who becomes the 15th board member. To further strengthen governance, neither elected officials nor anyone connected with suppliers to Nav Canada can serve on the board. Nav Canada also has a 20-member outside Advisory Committee.

A number of studies have found that ATC commercialization has generally resulted in improvements to service quality, better management, and reduced costs. At the same time, air safety has remained the same or improved in the countries that have pursued reforms to set up independent ANSP organizations.

A thorough 2009 report by Glen McDougall and Alasdair Roberts compared the performance of 10 commercialized ATC systems and the FAA during the 1997 to 2004 period. They looked at large amounts of performance and safety data from the systems in the various countries and conducted over 200 interviews with managers, workers, and users of the different systems. The researchers found:

ANSP commercialization has generally achieved its objectives. Service quality has improved in most cases. Several ANSPs have successfully modernized workplace technologies. The safety records of ANSPs are not adversely affected by commercialization and in some cases safety is improved. Costs are generally reduced, sometimes significantly. Other risks of commercialization—such as erosion of accountability to government, deterioration of labor relations, or worsened relationships between civil and military air traffic controllers—have not materialized.”

For the United States, a commercialized ATC organization would be more likely than the FAA to efficiently implement the major aviation infrastructure advances that the nation desperately needs. Air traffic control is more complex and dynamic than ever, and it needs to be managed in the sort of efficient and flexible manner that only a commercialized environment can offer. Countries like Canada have shown the way forward for air traffic control, and U.S. policymakers should adopt the proven organizational reforms that have been implemented abroad.

As you can see from this long report sequestration did not have a damn thing to do shutting down ATC control; towers and furloughing civil service employees. This was merely Obama’s way of creating pain for the air travelers so he could get the public behind him in his fight with Congress. It was petty, childish and mean. But like the scorpion in Alsop’s fable of he scorpion and the frog Obama was merely being a scorpion and reverting to his Saul Alinsky playbook on politics.

Air travel has become an inconvenience, and it will only get worse in the future. Congress rescued the flying public from the burden of sequestration, but has done little to address the more serious concerns about the future of aviation. The federal budget — with a debt ceiling looming and a growing entitlement problem — is hardly up to the task of bringing air travel into the 21st century. The United States should take its cue from the countries around the world that have turned to the private sector to build the air transport systems of the future. We have the technology and we have the skills. If Costa Rica, Nicaragua, Guatemala, and Honduras can do it we certainly can if we have the political will. Next we need to privatize the TSA!

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