top of page
  • Michał Słojewski, Krzysztof Kalaman

"Inflows and outflows" - discussions on aviation financing

Airlines are the main customers of air traffic service providers. Their participation in the cost planning of such entities turns out to be extremely important. In the aviation business, the number of passengers does not always bring profits, which is why every euro saved counts.


In an interview with PolskaSky, Ewa Suchora-Natkaniec, an aviation finance expert and former vice president of the Polish Air Navigation Services Agency, discusses the development of ANSP's financial plans in Europe and the factors influencing the unit rates airlines pay for their services. One thing is certain: the lower the unit rate paid by the airline, the greater the chance of more affordable travel for passengers.

Where do the ANSPs get their financial resources from?

When it comes to services such as air traffic control and related requirements, airlines cover the costs by including them in ticket prices, which means that passengers ultimately bear the expenses. Taking a closer look at the details, ANSPs primarily finance their operations through various sources, such as route and terminal fee revenues, as well as compensation mechanisms in these domains. In addition, ANSPs have the opportunity to apply for subsidies for charge-free flights and funding for investment initiatives. It is worth mentioning that ANSPs also generate revenues from financial or operating activities, as well as from non-navigation-related activities. However, these revenue sources are relatively small compared to the main sources of navigation income.


What are exempted flights and from whom do ANSPs receive such funding?

In Poland, we have several flight categories that can be refunded. In accordance with the national regulation issued under Aviation Law, air navigation service providers are entitled to a special-purpose subsidy from the state budget for services provided to flights exempt from navigation charges.

For example, navigation charges are not imposed for flights conducted in accordance with visual flight rules (VFR), aircraft with a maximum takeoff weight (MTOW) of less than 2 tons, search and rescue flights or military air operations. A catalogue of such operations is detailed in the mentioned national regulation.

The regulation specifies the rules, types of documentation and deadlines by which budget funds will be transferred to the institutions concerned to cover the returned costs. These costs are financed from the part of the state budget administered by the minister responsible for transport.

How do ANSPs value their services? Whether all services provided are chargeable?

In principle, all services should be charged. In accordance with the principles set by EU regulations and national law, ANSPs should prepare their cost base. This is the starting point for calculating en-route or terminal unit rates for the following year based on the planned amounts of each cost item. ANSPs should follow a planning procedure that includes the most important elements of budgeting and deadlines for approving navigation service unit rates.


Unit rates depend primarily on the structure and level of costs and expenditures, considering the division into charging zones and cost allocation keys for individual services. Rate calculations also take into account assumptions regarding obtaining funds from public subsidies (which reduce the unit rates of navigation fees in the calculation), macroeconomic assumptions, air traffic forecasts and the settlements of compensation mechanisms.


Billing and invoicing the airlines for en-route navigation services on behalf of ANSP are handled mostly by the Central Route Charges Office (CRCO), based in Brussels. In terms of terminal services in individual countries, however, with a few exemptions (there are two charging zones in Poland), lies with the respective air navigation service providers.


When it comes to navigation charges, it is important to remember the established algorithm for the en-route, which is the charging zone based not only on the aircraft's takeoff weight but also on the distance flown. In terms of terminal charges, only the aircraft's takeoff weight is taken into account.

This calculation mechanism entails that airlines not only consider aircraft tonnage/size but also strategize their network of connections and seek out optimal flight routes.

Are there any formal guidelines or best practices in place for determining the percentage allocation among individual cost components? Which ANSP cost group holds the largest proportion? Furthermore, why is the cost of capital regarded as a critical component?

The structure of the cost base and its components should be aligned with the specific requirements, goals, objectives, and Key Performance Indicators (KPIs) established by the ANSP for the planning period. It is evident that the largest cost item is staff costs, i.e. employee salaries. The subsequent significant cost components include other operating expenses, followed by depreciation associated with investment activities, the cost of capital, and extraordinary costs.

A crucial factor in estimating the cost for both terminal and route services is the cost of capital. This economic element determines the rate of return on capital and encompasses the overall expense of external capital (such as debt) and internal capital (own funds). The cost of capital serves two purposes: firstly, it ensures the coverage of financing costs for planned expenses and investments, and secondly, it acts as a buffer or cushion to absorb the financial implications of unforeseen deviations beyond compensation mechanisms (such as risks related to air traffic volume).

Assumptions considered in determining the capital rate must be in line with the SDG (Steer Davies Gleave Study on Cost of Capital) and should address: ROE (Return on Equity) and CAPM model taking into account risk-free rate, market risk premium, asset beta and equity beta, CIT rate, financing structure (equity vs. debt capital) and effective debt rate.

There is significant emphasis placed on cost efficiency, and it holds great importance for several reasons. Optimizing the cost of services provided by ANSPs is crucial to ensure financial sustainability and competitiveness in the aviation industry. How do airlines influence ANSP's financial plans, and do they even have the ability to do so?

Cost efficiency refers to how to achieve optimal, efficient business operations; it is a comparison of performance with the cost of achieving the results. For ANSP, efficiency can be considered in various areas. Cost efficiency is one of the most essential concerns for carriers and other service recipients. An important consideration for airlines and others is the cost of ANSP's execution of imposed tasks and investment initiatives. In other words, how much of ANSP's cost efficiency will be reflected in the ticket price for the passenger.


How do air traffic service providers plan their cost bases over a specific reference period (5 years), and why is it necessary to create financial plans based on air traffic forecasts? What scenarios of air traffic growth or decrease are being used and why? How does the adopted traffic forecast scenario affect the final amount of unit rate?

According to the regulations on the performance system, ANSPs should take into account the most up-to-date traffic forecast based on the “baseline” scenario published by EUROCONTROL/STATFOR (Statistic and Forecast Service). There are also "high" and "low" scenarios, representing optimistic and pessimistic outlooks, respectively. The regulations permit the consideration of alternative scenarios and assumptions in air traffic forecasts, different from the "baseline" scenario.

Furthermore, if the deviation in the adopted traffic forecast has an impact on the navigation unit rate, air navigation service providers (ANSPs) are obligated to implement compensation mechanisms following the conclusion of the reporting period. This entails that if an excessively high fee is charged (in the "low" scenario), ANSPs must reimburse carriers in period n+2 (where "n" denotes the current charging year). Conversely, if a lower fee rate is applied (in the "high" scenario), ANSPs must collect additional funds from airlines during period n+2 as well.

Who participates in the negotiation process of ANSP rates, and what roles do these participants play? Do they act as passive participants or active partners who have an influence on the final costs and unit rate? How do ANSPs engage in consultations with carriers as service recipients, and what is the purpose of this aspect of the process? What potential consequences can arise from these consultations for ANSP plans?

The process of preparing cost bases may vary from institution to institution quite a bit. It should begin by gathering the needs and expectations in terms of opex (i.e., costs) and capex (i.e., expenses), in line with the ANSP's goals, mission and vision of the air navigation service provider. The collected and verified costs and expenses, along with cost allocations, should be assigned to individual services (en-route and terminal) to calculate navigation charges. The level of the planned cost base should be verified by the relevant supervisory authorities in the country. The data should be submitted to the PRB (Performance Review Body) / EC (European Commission) and subject to stakeholder consultation.


Meetings with representatives of airlines, i.e., the main users of space and de facto contributors to the operations of air navigation service providers, are very important from the point of view of the substantive justification of the costs and expenses planned and included in the cost base, the purpose of which is primarily to ensure safety, increase airspace capacity while maintaining the cost-effectiveness regime.


Consultations with carriers are a regular part of the implementation of the agency's financial plans and take place periodically, at least once a year. ANSP presents cost bases and proposed unit rates to its customers, including the level of realization of costs and investments affecting the price of services. According to EU regulations, consultations with air navigation service providers, representatives of airspace users and airport managers and the slot coordinator are organized by the aviation authorities of the country concerned, in Poland by the President of the Civil Aviation Authority. The scope of such consultations should cover the execution of the previous year's costs, including in relation to the costs determined for the current year.

Depending on the expectations of airspace users or others, it should be possible to hold additional meetings on mutual expectations and intentions. In addition, service customers may request more detailed information on individual items in the cost base, as has been done in the past.

Air navigation service providers also participate in multilateral consultations on route charges within the EUROCONTROL Extended Route Charging Committee or in consultations on airspace use.


You mentioned the PRB. What is this organization and what is its role in relation to the cost bases of air navigation service providers?

The PRB is an organization under the European Commission that verifies the actions of ANSPs. The PRB provides the EC with independent advice and expertise to improve the performance of air navigation services in Europe in key areas (KPAs), i.e. safety, airspace capacity, environmental impact and cost-effectiveness.


What is the role of this body in the process of approving unit rates? Is the PRB's opinion the determining factor for the European Commission in accepting or rejecting the costs planned by the ANSPs concerned and, as a result, the agreed rates?

The PRB's opinion prepared for the European Commission is an important voice in making decisions to accept or reject the plans and cost bases of a given ANSP. It stands for the correct application of the rules imposed on all European air navigation service providers. The PRB assists the Commission in implementing the performance regime. Its task is to standardize the methods of determining costs and ensure transparency in the calculation of rates.

Does the ANSPs have any control over the implementation of the approved financial plan, and by whom? Whether the ANSPs are controlled in terms of the implementation of the approved financial plan, and by whom? Do carriers, as service recipients, also have the ability to control ANSP expenses?

The main stakeholders of the cost base of any ANSP are the carriers. They mainly decide whether they can accept the planned cost level of such an entity. ANSPs are subject to constant monitoring by the competent aviation authorities and relevant state bodies. In Poland, these are the CAA and the Ministry of Infrastructure.

In addition, on the part of the European Commission, it is the aforementioned PRB that is responsible for verifying the cost basis and reviewing ANSP reports on the implementation of the performance plan. In this regard, the PRB is the reviewer of whether ANSP is achieving its performance targets. In addition, the European Commission may carry out audits in various areas of ANSP operations.

As mentioned earlier, airlines and other stakeholders may request additional information from the ANSPs. In fact, this has happened before.


The costs of services provided by European ANSPs vary widely. Why are there such huge differences in en route and terminal charges in between?

It is a matter of the tasks and goals imposed on these institutions to achieve, the geopolitical location of the country, the volume of air traffic and the determination of such an entity to expand. It should be noted that the calculation method for the charges is the same, but what significantly affects the amount is what is included in the cost base. How the specific entity prepares an action plan and justifies the need for such and not other components of this plan affects the final value of the cost price.

Once again, I want to emphasize that a very important aspect is to justify the intentions and cost items included in the cost bases to stakeholders and the PRB, and ultimately to get the projected values accepted by the EC. It is essential to note that the operating costs of such institutions are not covered by the state budget. Each institution is obliged to prepare appropriate operating plans so that it can function adequately to the needs. However, this does not mean willfulness. Airlines are entities operating in a highly competitive market, which means that they try to make business decisions that will give them a commercial advantage. The issue of the costs incurred by the carrier on ANSP affects the airline's final financial result, which is why they struggle to reduce unit rates. Simply stated, airlines always expect cost optimization.


Why are there two different terminal charging zones in Poland?

Until 2017, Poland applied a single unit rate for all airports. However, as a result of pressure from airlines and later wide-ranging discussions at the ministerial level, Poland introduced a revised charge structure consisting of two terminal fee zones.


The Civil Aviation Authority decided to establish the first zone exclusively for Warsaw's Chopin Airport, while the second zone covers all other airports across the country. The calculation of unit navigation rates is carried out in accordance with the rules set forth in Commission Implementing Regulation (EU) 2019/317, which defines the Single European Sky performance and charging regime.

From which cost pool are the specific types of ATC paid?

The payment for air traffic control services is determined by different navigation charges depending on the type of service. En-route control (ACC) and approach control (APP) services are financed through en-route units, while airport control (TWR) services are primarily funded by terminal charges. In some cases, there may be a partial allocation from en-route charges, depending on the size of the controlled airspace around a particular airport. The cost allocation within these institutions is carefully considered to ensure proper financial management.

The preparation period for ANSPs to RP4 is about to begin, what can we expect in the near future?

ANSP and airlines are looking forward to guidance on this issue. Regulatory changes are expected to be necessary, especially given the long-term effects of the COVID-19 pandemic on ANSP, airspace users and airports. In the case of Poland, the decrease in revenue from air navigation services due to the conflict in Ukraine and the resulting drop of air traffic in Polish airspace (FIR Warsaw) will also be a critical aspect to address. It will be crucial to properly adjust the cost structure of the Polish ANSP to these circumstances.





BIO:

Ewa Suchora-Natkaniec is a graduate of the Department of Statistics and Econometrics at the University of Szczecin, where she was a PhD academic. She also completed postgraduate studies in project management at the Warsaw School of Economics and an MBA at the Polish-American Business School at Wrocław University of Technology.

She specializes in financial management, strategic planning and process optimization in large organizations. Since 2018, as Vice President of the Polish Air Navigation Services Agency (PAŻP), she has been responsible for the development of the agency's development strategy, financial advisory and supervision of the CRA planning and monitoring process.

In 2018, she also acted as an advisor to the Minister of Infrastructure in the Office of the Government Plenipotentiary for the Central Port of Communications (CPK/CPK).

She has extensive experience in financing and project management in executive activities, as well as in planning processes in banking institutions and external organizations. She was a member of the Association of Project Managers at the Warsaw School of Economics and served as Chairman of the Audit Committee of the BCB4 Association.

Privately, she is a happy mother of two children and passionate about interior and garden design.


Comments


Commenting has been turned off.
bottom of page