Is there an opportunity to de-regulate European ANSPs?
A recent article in Eurocontrol’s Skyway magazine provides further evidence that competition is starting to emerge between ANSPs. Air traffic flow managers at Maastricht Upper Airspace Centre (MUAC) have noticed a changing in routings through their airspace, as airlines avoid neighbouring expensive airspace. Even though the resulting routes are longer, once the cost of fuel is taken into account, the total cost can be lower. Just don’t tell the environmentalists. MUAC point to a 5% increase in 2015 in the proportion of aircraft flying on routes through their airspace that limit travel in the more expensive German and British airspace. This change comes at a time when both the German and UK ANSPs increased their route charges, the Belgian ANSP reduced theirs, and the average price of jet fuel fell by almost 30%. The perfect recipe for airlines to re-think their flight plans. Unfortunately, given the current regulatory set-up in Europe, any such change in airspace patterns is all too quickly posed as a challenge to ANSPs, not an opportunity. As we have discussed in a blog post last year, European ANSPs are at risk of not meeting their flight efficiency targets as a result of airline route economics. The situation does not appear to be getting any better. According to the latest data in Eurocontrol’s Performance Review Report, flight inefficiency (measured as planned flight trajectory relative to the ‘achieved’ distance between the two airports) deteriorated further in 2015. Furthermore, with revenue capped, ANSPs have to worry about over-charging their customers. They must be careful to reduce their rates in order to ensure that, as demand increases, their overall revenue falls within this cap. There is little reward for responding to the increase in popularity. Harmonised route charges are often mentioned as a solution to this problem. However, so far there has been little progress on this. The much-lauded FABs, , which have this as an item on their ‘to-do’ lists, are struggling to get off the ground, largely for political reasons unrelated to harmonising their route charges. (Although the debates about harmonising route charges at most FAB board meetings is a short-cut way to see the political issues the FABs face in all their gory detail.) So, instead, how about looking at this from an alternative angle: reward ANSPs that can keep their costs (and therefore their charges) low by allowing them more independence and freedom? A number of airports have managed to persuade their regulators that there is sufficient competition for their market power to be constrained. As a result, they are subject to light, or in some cases, no regulation. Is there a case for arguing the same logic could apply to some ANSPs? The European regulatory regime does provide some flexibility for ANSPs that improve their performance, or where demand for their services is much higher than anticipated. While the amount of revenue an ANSP can earn is capped, there is scope for them to earn additional revenue if traffic is higher than forecast, or for outperforming performance targets. ANSPs that are able to reduce their costs are also able to retain some of these savings, rather than passing them through directly to customers in lower charges. Consequently, ANSPs that excel can earn higher profits. However, economic regulation is expensive and often creates perverse incentives. Regulatory gaming is a common phenomenon in regulated industries. For example, regulated businesses may identify cost savings but delay implementing these until after their revenue limits have been set, so as to earn additional profits. Regulation can also result in a service that is determined more by the whims of a government body than by the demands of the customers themselves. Economic regulation of European ANSPs may be appropriate in most cases (and for some of these, stronger regulation may be what is actually needed) but that is not to say it is necessary for all. As subscribers to the Aviation Intelligence Reporter will be aware, Eurocontrol’s Performance Review Body (PRB) has recently released a White Paper slamming the regulatory regime (see August’s edition of the Aviation Intelligence Reporter for more on this). Could a case-by-case assessment of the need for economic regulation provide at least part of the solution to both the problem of performance raised by the PRB, while also enabling ANSPs to turn price differentials into an opportunity rather than a challenge?Trackback from your site.