International Civil Aviation Organization

World-wide CNS/ATM Systems

Implementation Conference

Rio de Janeiro, 11 – 15 May 1998

Agenda Item 3:	Financial matters

INVESTING IN AIR NAVIGATION SYSTEMS

by

TONY KELLY

DIRECTOR, INDUSTRY MONETARY AFFAIRS

INTERNATIONAL AIR TRANSPORT ASSOCIATION (IATA)

Good morning, ladies and gentlemen,

I am here today as the representative of the international airlines, who fund over 90% of the international air navigation system, your customers, who incidentally probably provide the money to pay the salaries of the majority of the people here today.

Marina Donato has put up the proposition, which I simplify, that "aviation infrastructure is a good investment". Speaking on behalf of the customers, I can assure the representatives of the financial community here today, that we agree with and support that proposition.

Let me give you some reasons.

Air transport continues to be a fast growing business (doubling of traffic every decade or so)

World economic and political stability will ensure this continues and will spread over all regions.

The banks are already heavily financing airlines - airlines cannot continue to grow without a growing infrastructure.

The airline industry is becoming more profitable, as result of improved management, increased productivity, lower costs, and better prices.

The ANS are, so far, monopoly producers, providing essential services, and are guaranteed to recover 100% of their costs.

So, aviation infrastructure is a good investment.

Further strengthening the financing environment, and lowering your risk, is the fact that the States in ICAO have agreed a set of principles on cost recovery, with which you are familiar.

The result of this is that the air navigation providers are guaranteed to get back from the civil air transport operators, all of the money spent on providing the world-wide air navigation system. This is a unique position, which does not apply to other transport modes, and obviously gives a high level of comfort to any investors in the system. These same principles will apply to the costing, pricing, financing and cost recovery of the CNS/ATM network, and already do today, in various parts of the world.

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The airlines are paying about $7 billion a year for international ANS charges. In fact, most providers in the world are recovering their full costs. There are a few common reasons why some providers are not sure whether they are recovering their costs:

1.	they do not know what these costs are,

There many examples of providers who do not know what their costs are. They are usually providers who do not have an autonomous existence outside of their government and range from the US FAA, to various States in Europe whose providers are part of the government, to most of the States of Africa, Middle East and Latin America. Obviously these States are either under-collecting or over- collecting. WE have reason to believe that many of them are over-collecting, but who knows?

2.	they do not have a proper system for recovery of charges,

When we started the IATA ATC Billing & Collection system in 1990, it was at the request of State providers who could not recover their charges. Many of them were collecting less than 60% of their charges, which we have been able to push up to close to 100% in most cases, putting new money into the system. This is one of the reasons for the success of IATA's ATC B&C service, as we now have 25 provider clients in the FSU, Europe, Middle East, Africa, Caribbean, Latin America and Asia. In fact, we have opened up two closed airspaces, that of Albania and the Democratic People's Republic of Korea, (with the support of ICAO) because of this facility.

3.	the revenues are being collected by the government (or someone else) and are not going to the ANS provider.

This is very prevalent where the provider is part of the State machinery, and I also include in this, the situation where the ANS provider is part of the military establishment. The user charges are paid in good faith by the airlines, but go into government coffers. When the ANS provider wants funds for safety and other improvements, funds are not available. We have a documented case in one region where the provider complained that one of our Members had not paid his charges. We found that the airline had paid $2 million in charges, but only $200,000 arrived at the provider. The rest simply disappeared.

Some States have suggested that it is none of the airlines' business what they do with the moneys they receive. They claim that this is a sovereignty issue. Sorry, it has nothing to do with sovereignty. It is an issue of doing business honestly. The airlines are paying for a service. These States are infringing Chicago Article 15, by de facto taking the money and not providing the service.

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It has been stated already, and it is written in the working papers, that there is a problem in financing ANS facilities. Given that the airlines are paying the total costs, you may wonder why there is a financing problem. Well, we do not believe the real problem is financing. The real problem is political and managerial.

The political problem is that governments want to continue to try to manage their ANS themselves. But for one, they do not have the funds to do so. Governments have other priorities for the tax payers moneys. This has its good side. Governments cannot afford to pay for what they want, therefore they have no business trying to dictate what should be done. They should get out of the business of managing airspace, as they have done to a large extent in the case of airlines and airports. Their only raison d'être, or raison d'état, is to provide the regulatory base, the safety regulations, but also the economic regulations, under which the provider will operate. They are also responsible to ensure respect of international treaties, including international conventions.

The management problem is that you do not have the right people managing your ATM systems. Like the airlines over the last decade, you need new blood at the top - people who understand finances. Your most experienced air traffic controller does not necessarily make your best chief executive. You need a Bob Crandall or Richard Branson of airspace, to shake up the system, improve profitability and reduce costs!

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One "magic" solution which is being proposed is to set up an international aviation fund, or even a bank. My wife would love it if I owned a bank, with an ATM machine in the front porch!

On a world wide basis, the airlines are already paying more than is necessary to provide the ANS services we need. Where providers have identified that more money is needed, we have been willing to pay that. We have offered funding to several providers, but our offer has not been taken up, because of people who have vested interests in the present system and who do not want a transparent system.

It is obvious that States which already collect their full costs are not interested in participating in such a fund. If all the traffic in the rest of the world was billed $1 a trip, it would not generate enough money to buy one new aircraft a year.

The creation of the fund as proposed would be contrary to all the principles of ICAO. It would add an extra layer of cost and bureaucracy to a system that is already not very transparent. It would reduce States commitments to feel responsible for their provision of the air transport infrastructure. And since, for competitive reasons, the airlines could probably not pass all these costs on to the passengers, they will end up absorbing them. And it will be the weaker airlines who will have to face this burden, putting them at an even greater disadvantage.

The providers and the airlines must work together to precisely identify a detailed work programme to tackle the deficiencies and the future needs of infrastructure development. The first step must be to set up independent financial accounts for each ANS provider so that a clear picture can be had of how much money is already in the system and how much is being spent. From there, they are on their way to setting up an autonomous unit.

At the end of the day, you can pass all the resolutions you want, but no bank manager will take these resolutions as collateral on a loan. You must show that you have a good business, well managed, customer oriented. This applies whether you are large or small, whether you are from a rich or a poor region of the world, whether you go it alone or as part of a regional community.

Finally, ladies and gentlemen, let me give you a solemn guarantee from your customers, the international airlines, to find the funds, get the equipment (your choice of supplier), and ensure the installation and running costs of the systems needed for safe operations. We will pay that, including the interest on capital and loans. In return, all we ask is a transparent, well managed system. You have my word on this.

Thank you.