Pricing For Demand

In Issue 1, 2019, of Air Traffic Management magazine, Ian Thompson examines the merits of an alternative pricing structure for air navigation services that focuses on creating a market for airspace access

As air traffic numbers throughout European airspace continue to rise following the global financial crisis, air navigation service providers (ANSP) are once again faced with the problem of increasing airspace capacity.

A 2018 academic paper by Lubos Hlinovsky – director of strategy and international relations of the Air Navigation Services of the Czech Republic – contends that European economic and performance regulation places priority on ANSP price cutting and is an obstacle to addressing capacity challenges. It recommends making structure changes to air navigation charges as a means to increase available airspace capacity and balancing airline demand with the supply of air navigation services.

To provide context, ICAO requires each member state to provide air navigation services (ANS). The 1970s saw Eurocontrol begin to collect the real costs of providing these services from airspace users on behalf of European countries. It involved recovering ANSP costs in a transparent and simplistic manner. Since this time, air navigation service charges have been based on the maximum weight of the aircraft, services that are provided and the distance flown. Charges are made on a real-time basis, at the time the flight takes place. They do not vary across the day, irrespective of the user demand for air navigation services.

This price mechanism was developed when airspace capacity was not a significant issue and targets the tactical phase of ANS provision. Strategic and pre-tactical phases of air traffic control delivery are not separately reflected in price mechanisms. They are incorporated, along with operating expenditure in the air navigation charges that are incurred at the time a flight takes place.

The 1990s involved states establishing commercially operating ANSPs to deliver a range of air traffic control services for profit. Most significantly, ANSPs hold a monopoly over en-route services, which comprise approximately 80 per cent of their revenue. The remaining 20 per cent is derived mainly from terminal air navigation services (TANS).

In the early 2000s, the ATM industry in Europe could have been characterised as comprising financially independent, commercially operated ANSPs receiving almost all revenue from monopolistic services. Air navigation charges were based on pricing mechanisms established in the 1970s. The ANSPs were beginning to struggle with providing sufficient airspace capacity as a result of a rapid growth in air traffic numbers.

While the global financial crisis eased pressure on ANSPs to increase capacity in the years following 2008, traffic levels reached in 2017 have once again caused this to be a prevailing issue. Despite the commercialisation of ANS throughout Europe and the challenge ANSPs face with increasing airspace capacity, the pricing structure established in the 1970s remains in place.

The European Union (EU) regulates the performance of ANSPs though the Single European Sky (SES) regulations. Each state is required to prepare national performance plans to meet four key performance area (KPA) targets, namely safety, environment, capacity and economic efficiency. In turn, ANSPs must also prepare performance plans that are approved by their national regulatory agency and then by the European Commission. These plans are prepared for five-year intervals – termed reference periods. Europe is currently nearing the end of the second Reference Period (RP2) that extended from 2015 to 2019.


Hlinovsky highlights a number of issues with this process. He states that the only and strongest focus of the European Commission (EC), in response to airline pressure, is to reduce ANSP prices. In 2018, the EU Performance Review Body reported the average ANSP price reduced from €58.5 per service unit in 2012 to €50.4 in 2016, demonstrating that ANSPs have undertaken measures to meet the parameters of the SES regulations.

Problematically, these price reductions were achieved by postponing investment, curtailing training programmes and, in some cases, air traffic controller lay-offs. They were helped by the sharp drop in traffic numbers in the years immediately following the global financial crisis. Delay metrics, unfortunately, highlight that these cost reduction measures are often detrimental when the imperative shifts from cost reduction to the need to increase airspace capacity. ANSPs are now bearing the consequences of cost reduction initiatives that were key drivers in RP2 performance plans. In 2018, ATC related delays have increased to 21 minutes per flight, up from 13.6 minutes per flight in 2016.

The process of developing ANSP performance plans within the reference period context is problematic. Targets and plans for the reference period are established based on assumptions and priorities of airspace users and ANSPs up to six years prior to the end of the RP. By illustration, the price of 2019 was set in 2014 based on the traffic forecast of 2013. It is an unresponsive and problematic approach, which does not adapt to the changing circumstances of the aviation industry. While ANSP cost reduction may have been a priority for airlines in 2013, when RP2 plans were developed, it is almost certainly of lesser importance late in RP2 as significant delays are now being experienced. Hlinovsky concludes that existing market and pricing regulations have a negative impact on providing airspace capacity.

A 2015 University of Westminster study sets the expenditure for one minute of delay per flight at €100. The main weakness of this value is that it represents an average value for all types of airline companies with no regard to the time of the demand. The value of one minute of delay for an airline network provider during the morning peak hour at Heathrow International Airport will most probably differ from that of a charter transport provider at a holiday destination.

Hlinovsky believes that creating a market for access to an airspace could provide an answer. A market enables price increases to occur when the demand to access airspace rises at a given place and time. At present, this market does not exist and the present regulation provides no price mechanisms to regulate demand or place an economic value on airspace capacity. The present price mechanisms do not play a role in balancing supply and demand.

In many ways, ANSPs can be considered to be long term infrastructure providers. Decisions about technology investment and staffing are mainly strategic. A fairly long term and stable planning horizon is important. It can often take between four to six years to implement major ATM systems and three years to recruit and train air traffic control staff for demanding sectors. During the pre-tactical phase, generally a six-week horizon, ANSPs allocate resources to meet forecast demand. Real time provision of air traffic control to aircraft occurs in the tactical phase. As noted earlier, air navigation charges are incurred by an individual aircraft while it receives an air traffic control service during the tactical phase.

Hlinovsky considers there are two markets for air navigation services, namely capacity and fluency. The capacity market, which incorporates the strategic and pre-tactical phases, is based on the expected demand for an airspace. Since high traffic volumes impact neighbouring states, the entire European air traffic network needs to be considered. Under the present system the price for this capacity market has not been defined.

Real Time

The fluency market takes place within the tactical phase of air traffic control delivery. It is based on the real time demand by aircraft to operate within an airspace. Although a price is currently defined, it does not take account of the time an aircraft operation will take place and the variations in demand to use a specific airspace. Pricing is not used as a responsive tool to balance supply and demand for an airspace as it changes over the course of a day, week, month or year.

Hlinovsky recommends that independent price-setting and regulation takes place for each market. National or regional setting of air navigation charges no longer applies. The price for the capacity market is based on the existing capacity of an airspace as well as the investments needed to increase it, not on actual traffic. In effect, ANSPs are paid for long term initiatives to increase the capacity of a specific airspace, such as investments in new technology and operational personnel. Cost compensation or an agreed price is provided to ANSPs who may need to provide services in the event of a short term loss in capacity of an adjoining airspace. He likens the ANSP’s function in the capacity market to electric power network providers.

The fluency market involves selling airspace users access to a particular airspace segment at a given time. This price varies depending on the user demand to access this airspace. Airspace users are then faced with a choice between an expensive direct route, or an alternative route at a lower price, or the same route at another time. It provides a demand-side incentive for airspace users to operate flights outside peak times or on underutilised routes. For ANSPs, it enables more efficacious investments in new technologies and operational personnel that are utilised for greater periods, rather than for only relatively limited durations.

Hlinovsky believes that these two markets could be managed by a central body, possibly an entity within Eurocontrol. For the capacity market, this body would define the airspace capacity required for a specific airspace, then fund strategic and pre-tactical initiatives of ANSPs accordingly. In the fluency market, it would set a price schedule for airspace users to access a specific airspace at a given time. The charge would be incurred at the time the flight takes place.

The Hlinovsky paper provides a framework to help balance demand for ANS with supply throughout the entire European network and overcomes some of the significant problems with the present SES economic regulation. On the other hand, concerns may surround the creation of a large bureaucratic body making decisions over vast capital investment sums and the setting of air navigation charges for states throughout Europe. Discretion by each state and their ANSP over these decisions will almost certainly lessen. Significant changes to EU economic regulations will also be required.

Airlines may consider that this framework restricts access to selected airspace segments at the most important times or, at least, increase their operational costs. They may have less influence over determining priorities for ANS and scrutinising ANSP costs. Consultation over investment plans and operating expenditure needs to take place on a Europe-wide level, rather than on a state by state basis. Carriers who are influential within a state will likely see their influence lowered when the interests of many others are considered. Low cost carriers, who undertake significant operations in peak capacity periods, are cost conscious and have a priority to lower air navigation charges, could be most impacted.

Lubos Hlinovsky’s white paper Air Navigation Services Providers – The Market, Prices and Performance can be found at Air Traffic Management’s White Paper Resource Bank