Russell Chew, chief operating officer at the US Federal Aviation Administration (FAA), looks ahead to a unique chance for fundamental restructuring of the US air transport system in the face of budget constraints, ageing technology and a welcome recovery in traffic, although revenues still lag
This summer sees a sharp rebound in air travel with more aircraft and passengers in the skies than ever before. Travellers are attracted by bargain fares, and reassured by an accident rate that is the lowest in history.
Nevertheless, aviation in the USA is still beset with difficulties. Some of our airlines continue to struggle financially, and the FAA is pressured to balance growing demand against dwindling resources. Unlike our privatised or corporatised counterparts, the Air Traffic Organization (ATO) is a government entity, operating inside the FAA. Taxes collected from passengers cover about 78% of our costs. For the remaining 22%, we go to the General Treasury, where we have to compete fiercely with many other government agencies.
Cheaper airfares have proved to be a mixed blessing. Lower ticket prices boost the load factor, but shrink the taxes on which ATO depends. Since 1999, we have seen a 31% real reduction in ticket tax revenues per flight. In 2002 revenues dropped 20%.
This decrease in revenue occurs at the same time that our costs are increasing with the workload generated by more aircraft in the air. We expect that over the next four years the number of flight operations will increase significantly. In part, this acceleration is due to the deployment of more efficient mid-size and regional jets that will crowd the airspace with shorter, more frequent flights.
Market forces have created a vicious circle. The airlines’ competitive strategies have succeeded in generating heavier traffic but at the cost of curtailing the revenue we need to provide the services necessary to support the sustained growth of the industry. Last year, passengers paid $4 billion less than it cost the FAA to carry out its work. Discussions are now under way to find a reliable, consistent revenue stream that is primarily aligned with the costs of the service rather than the price of a ticket.
Knowing that tough times were ahead, ATO launched a major realignment and consolidation that will give us a leaner, more efficient, performance-based organisation. Now in its second year, it is one of the largest reorganisations ever undertaken by the federal government.
Changing the way the FAA does business is a daunting task because of its size and complexity. In 2004, we had over 36,000 employees and a budget of $9.1 billion – including $6.2 billion in operating costs. Our technology infrastructure comprises more than 40,000 systems – most of which are beyond their useful life. Total replacement would cost more than $32 billion.
We know we must find ways to significantly reduce our costs while we improve safety and efficiency. Our first step was to simplify the organisational structure by eliminating five layers of management and moving everyone closer to the front line of service. Using a balanced scorecard approach, we adopted system-wide performance goals and methods for assessing our progress toward achieving those goals. We began a five-year strategic business planning process that incorporated both operational and financial commitments.
Within a year we began to see results. For the first time in years our unit costs were down and our productivity up. In 2004 our costs per flight fell by about $17, from $457 to $440 in 2003.
We solicited bids to provide weather briefings and flight planning services to private pilots and others. The aim is to improve service, reduce payroll costs and modernise technology. Outsourcing the work of our automated flight servicing stations will save us at least $2 billion over the next decade.
We reduced delays and congestion through airline agreements and took steps to increase the capacity of our airspace by reducing minimum requirements for vertical separation of aircraft.
Safety first
None of these changes distracted us from our primary task – to maintain the highest possible level of safety. During the past year, there were no fatal accidents in commercial aviation and there were fewer accidents in general aviation. We also saw a decrease in serious runway incursions.
These near-term results confirm that we are following a sound strategy. In the long term, however, we must rely on technology to give us productivity gains that will bring down costs while increasing capacity and ensuring safety.
Our existing infrastructure cannot be tweaked to yield much more. On average, our facilities are 30 years old. Some of the en route centres were built 40 years ago or more. Our present technology belongs to the “industrial age” of air traffic control. They must be replaced with technology from the “knowledge age”, so we can improve system capacity and our efficiency at the same time. And that is going to require a lot of up-front capital investment.
Decisions about replacement technologies are risky because mistakes can be very costly far into the future. History teaches us that the cost of a bad investment choice is often a long-term diversion of effort and resources to cope with the consequences.
We are aware of the risks, but also recognise the rare opportunity for technological and infrastructure renewal that comes only once every 35 to 40 years. The most compelling reason for running the ATO more like a business is to ensure that we have the resources, both fiscal and managerial, to make the right choices.
Source: Airline Business
