As the airline industry begins to recover from the pandemic, airlines will have to pay more for air navigation service
This article from Geraint Harvey, Western University; Huw Thomas, University of Bristoland Peter Turnbull, University of Bristol originally appeared on Conversation and is published here with permission.
Commercial aviation is essential to the global economy. In 2019, it supported over 65 million jobs and had a global economic impact of US$2.7 trillion. The COVID-19 pandemic is unlike any crisis, both in depth and duration, and has damaged the aviation industry more than most sectors.
The global economy has contracted by more than 3% in 2020, which is more than enough to cause a sharp decline in air travel. The economic downturn has been compounded by the closure of international borders and strict quarantine procedures imposed by governments around the world.
As a result, airlines had their worst year on record in 2020, with passenger numbers down 60% from 2019. Total passenger revenue fell 69% and net losses soared. over $126 billion.
The slump in traffic was reflected in the number of flights handled by air navigation service providers. These service providers are responsible for the safety of flights departing from and arriving at airports and in transit. In North America, losses topped US$448 million in 2020.
Our international team, based in the UK, Ireland and Canada, spent two years studying the impact of the pandemic and the funding of air navigation services in the airline industry. Our comprehensive report revealed that the COVID-19 pandemic has severely impacted air navigation service providers and raises concerns about the industry’s current financial model.
Current airline “user-pay” model
Air navigation service providers are a public good — like public lighting — that serves everyone’s interests. For this reason, it is not possible to prevent people or customers from using the service. It also means that when the good or service is consumed, it does not reduce its availability to others.
Nevertheless, as airlines and their passengers are the most direct beneficiaries of air navigation services, many air navigation service providers have adopted a “user-pays” model. The user-pays model is a financing approach where customers pay the full cost of the good or service they consume.
For the user-pays model of air navigation services, charges are generally determined by a cost-plus system. The calculation is determined by air navigation service provider costs divided by air traffic, plus a mark-up that allows service providers to make a small profit. This model does not reward performance. Otherwise, charges are determined by a price cap whereby the regulator sets the price, providing an incentive for air navigation service providers to reduce their costs.
The aim of these models is to make air navigation service providers more efficient, but in the absence of competition — service providers are natural monopolies — this system does not work as intended. Some have even pointed out the dangers of commercializing air navigation service providers.
These models have proven inadequate in the face of a crisis, such as that created by the pandemic. As a result, personnel costs have been reduced, leading to job cuts, recruitment freezes and a reduction in training. These measures can save money in the short term, but they also create a problem for the organization when passengers return and traffic increases.
Many airlines have encountered problems serving returning passengers, leading to canceled flights and chaos at airports, as a direct result of cuts made in response to the pandemic.
At several European air navigation service providers, the age structure of the workforce also complicates matters. Huge numbers of air traffic control officers are nearing retirement as traffic returns to pre-pandemic levels.
It would be disastrous both to halt recruiting and to cut staff under such circumstances, as training new air traffic controllers is a lengthy process. In fact, the increase in traffic delays across Europe before the pandemic has been attributed to the decline in the number of apprentice air traffic control officers.
Problems with the “user-pays” model in air navigation
There is a fundamental problem with the user-pays model of air navigation which is disrupting the recovery of the industry from the current crisis. The problem is this: as the airline industry begins to recover from the pandemic, airlines will have to pay more for air navigation services, at a time when they can least afford it.
At the same time, air navigation service providers will need to invest more in skills and equipment while trying to recover lost and deferred revenue from their depleted cash reserves. One need only mention the case of WestJet and NAV CANADA to clearly illustrate this point.
NAV CANADA could have raised fares by 42% to cover all its financial needs, but WestJet’s CEO has called the price hike “scandalous” and appealed to Canada’s national transportation regulator, the ‘Canadian Transportation Agency. The agency agreed with NAV CANADA, rejected WestJet’s appeal and prices rose by almost 30%.
The pandemic has demonstrated, beyond doubt, that the user-pays system for air navigation services is neither resilient nor sustainable enough. Just as a country’s road network is usually funded by general taxation and road tolls, a similar approach is quite feasible for air navigation services. General taxation would allow air navigation service providers to finance a minimum level of service and staffing.
Geraint HarveyDANCAP Private Equity Chair in Human Organization, Western University; Huw ThomasLecturer in Labour, Employment, Organization & Public Policies, University of Bristoland Peter Turnbullmanagement teacher, University of Bristol