The new US Federal Aviation Administrator may want to consider investing in a pair of velvet gloves on taking up office. The new appointee will need to execute some fancy handling as the organisation's stagecoach of reform speeds inexorably towards the most controversial area: financing.
FAA reform might be viewed by both the new administrator and new secretary of transportation Rodney Slater as either a challenge or a headache, depending on their outlook. Whatever their viewpoints, the process gained a momentum of its own during 1996 and this year will be an unstoppable force that both chiefs must address and direct with a firm hand. The ultimate goal of reform is to free the FAA from its current cumbersome, bureaucratic mode of operation and enable it to act more like a modern, efficient business.
The groundwork for this high ideal was laid by former administrator David Hinson and few, at least outside the FAA, would question its necessity. However, new ways of doing things require new ways of paying for them and, as is always the case where large sums of money are concerned, the subject of how to raise those funds has provoked a fierce debate.
The new administrator will need to pull on his or her gloves immediately on taking office, as a proposal to replace one of the FAA's main sources of funds - the 26-year-old ticket tax - could shift nearly $600 million in costs from one segment of the US airline industry to another. With the possibility of a cost burden of that size shifting, the question of a replacement for the tax will become the number one domestic issue for US carriers in 1997.
The reform of the FAA can be split into three parts, of which two are already complete: both the agency's hiring and acquisition policies have been revamped. Barry Valentine, assistant administrator policy, planning and international aviation, points out the importance of these two reform steps, both less than 12 months old. 'As an operating agency in a technical environment, we could not meet our obligations if we continued to do things the old fashioned way,' says Valentine. 'The FAA is fairly unique in that we are an operating agency, operating the largest air traffic control system in the world, and we also oversee safety. That makes us somewhat different from, say, the Department of Agriculture or any other departments of government.'
But as part of the downsizing process across the federal government, the FAA has already shed 5,000 employees. Valentine points out that if the FAA is to continue as a viable operating agency, as well as ensuring a safe transport system, the internal processes have to change. 'By the old way of doing things, in order to field a major ATC modernisation system it would take us several years, because of the cumbersome federal procurement process, and the system would be obsolete by the time it came into operation . . . we have [now] been granted freedom from those constraints.'
Moreover, the reform of the acquisition process has also allowed the FAA to be tougher with its suppliers. The agency now has the freedom to withhold payments or even cancel a contract if the supplier doesn't meet its conditions. It has already flexed its muscles in this area by cancelling a contract with Wilcox, which was contracted to supply a system to augment the accuracy and integrity of the global positioning satellite system. Wilcox protested the subsequent award of the contract to rival Hughes, only for a judge at the Department of Transportation to rule in favour of the FAA.
The FAA must now turn to the issue of financial reform, which many see as the most important part of the agency's restructuring. This third process will take longer to implement than the first two but once achieved the FAA, released from the constraints of the annual appropriations budgets from Congress, will be free to make long-term, major financial decisions. But to underline how long the process will take Valentine adds: 'We may be working in that direction incrementally.'
As a first step towards financial reform, the FAA is this year expected to raise some direct funding by imposing overflight fees on aircraft that use ATC services as they pass over the US without landing. The FAA may also start charging a fee every time it is called upon to assess a proposal for the building of a structure, either over a certain height or close to an airport. The agency is asked to provide thousands of such assessments every year, hitherto without charge.
These examples, although significant in themselves, still will bring in only relatively small amounts of money. Much more significant this year will be the outcome of the ticket tax debate. Since 1970, financing of the FAA's investments in the airport and airway system has come from the Airport and Airway Trust Fund. Historically, some 87 per cent of the tax revenues for the trust fund have come from a levy on US domestic airline tickets - a 10 per cent fee on the price of the ticket.
The problem is that the ticket tax is not based on factors that directly relate to the FAA's actual costs in providing the ATC structure and services. For example, two airlines flying the same route using the same aircraft type with the same number of passengers on board will impose identical cost burdens on the airport and ATC system. But the contribution to the trust fund will differ according to the fare levels imposed by the two carriers. The airline that charges the lower fares obviously contributes less. So one of the main arguments against the current system is that it discriminates in favour of low-fare carriers - an argument not surprisingly championed by the seven largest US majors.
The ticket tax was allowed to expire during 1996 while alternatives were explored. So far, the only other proposal on the table is a user-fee system, devised by the so-called big seven. Under this proposal airlines would pay fees for domestic operations according to a three-part formula that takes into account the number of passengers on board an aircraft, the number of seats that aircraft has, and the nonstop passenger miles flown. This system, while being much more closely linked to the FAA's actual costs, tends to favour the larger airlines, which have hub-and-spoke operations, at the expense of low-fare airlines, which tend to operate point-to-point.
An analysis of this proposal by the US General Accounting Office published at the end of 1996 shows that the shift in financial burden would be severe: the cost to the nation's seven largest airlines would decrease by nearly $600 million, while the cost to Southwest Airlines, America West and other low-fare carriers would increase by nearly $550 million. Furthermore, the big seven's proposal would mean regional carriers being charged only half of the $2 per seat fee which would be imposed on the larger carriers. This charging structure has helped to persuade the board of directors of the Regional Airline Association to back the proposal. However, as most commuter airlines are owned by or affiliated with one of the major carriers, this concession to the commuters indirectly benefits the majors.
With so much at stake, both those in favour of a user fee and those in favour of re-introducing the ticket tax are expected to fight their causes fiercely during 1997. 'This is the number one issue among US carriers this year, there is no mistake about that,' says Southwest Airlines, which has an average fare of $62 and stands to be the largest loser of all - to the tune of $205 million - if the user-fee proposal is implemented. Southwest's stock price dropped after the GAO report was published, revealing the full potential impact of the user fee.
The GAO report does point out, however, that the introduction of any type of user fee, even if not the one proposed by the majors, will increase the relative shares paid by the low-fare airlines. The report points out that in 1995 Southwest accounted for 10 per cent of departures and 7 per cent of aircraft miles flown in the US, but its low-fare policy meant that it contributed just over 6 per cent of payments under the ticket tax system.
The big seven coalition, naturally, makes much of this fact. Elliott Seiden, chairman of the coalition and vice president law and government affairs at Northwest Airlines, says that the GAO report merely highlights the fact that a user fee will shift costs and so its effects should be studied properly. It is not saying that the user-fee system, in which airlines pay for what they use, is unfair. 'They make the proposition that any switch from the current tax to any other fee will increase Southwest's costs,' says Seiden. 'People are throwing darts at our proposal, but no one is proposing anything else. We decided that it had got to be simple and this is.'
Seiden says the coalition will make an all-out effort in 1997 to ensure that the ticket tax is not reintroduced and then get the user-fee system into place. 'The coalition is clearly prepared to make all of the necessary investments in the ATC system, so our position has never been that we don't want to pay taxes any more. We just want to pay this money in an efficient and fair way and with a basis of accountability,' says Seiden.
Whichever way it falls, the FAA will need to raise some $5 billion annually. Although the ticket tax expired at the end of 1996, there remains sufficient money in the trust fund to see the FAA through to around mid-1997 at its current level of spending, and to later in the year if it cuts back on non-priority services. So the decision can be pushed back a few months, but cannot be postponed indefinitely.
The regionals will leave the larger carriers do battle over the ticket tax, although RAA president Walter Coleman says a few very short-haul carriers would be adversely affected by the proposed new system, so he will be seeking 'some form of language' that gives consideration to their circumstances.
Of more serious concern to the RAA, says Coleman, are the accumulative regulatory burdens that RAA members will have to pay for as they move to full Part 121 operation during 1997, and even more importantly assurances that the ATC system functions efficiently. 'The single most important part of reform would be the establishment of a predictable, stable income source for the FAA so that it can run more like a business,' says Coleman. 'It does not matter to us how the FAA ends up being structured organisationally - it is what they can do in whatever form they take that matters. And the most important issue for us is an improved ATC system.'
Coleman's argues that modern aircraft have the technology to be less dependent on ground-based navigation aids, but operators of those aircraft are being held back by the current ATC system. 'This is not something that the FAA does not recognise, but the problem has been that there is no predictable, long-range planning because money gets appropriated from year to year by Congress. Our board would endorse any change here.'
A more efficient ATC system, says Coleman, would enable members to improve their on-time arrival records - a critical issue on short-haul services where passengers might choose to drive rather than fly - as well as improving operating costs.
At the FAA, Valentine is all too aware of these needs, and the challenges the agency faces as it attempts to meet them within the turmoil of reform. The agency can draw on other examples, however. Around the world, other agencies have implemented fees to cover the costs of the services they provide, most notably the UK, New Zealand and Switzerland, and in Canada the civil air navigation system is now operated by a private corporation, Nav Canada, providing another example of how the FAA might want to move forward in the longer term.
Valentine is keen to stress, however, that irrespective of all the changes that will take place, safety will never be compromised. 'We must craft a fee system that makes sense, and that is going to be a real challenge,' admits Valentine. 'What we must not do is introduce any disincentives to the system because we don't want to see people trying to circumvent the system. Our principal goal is still safety and we will not do anything to diminish that.'
Fundamental change is not just around the corner, however. The new transportation secretary and FAA administrator need to get to grips with all the issues first before any real progress can be made. But everyone agrees that change will come.
Source: Airline Business
