The Economics of the ATM Regulation in EU : The impact of the Single European Sky

The Economics of the ATM Regulation in EU.
The impact of the Single European Sky.
Emese K. Papp1, Thanos C. Papavramides2
1 Student, BKF Budapest College of Communications, Business and Management of
Organizations.e.k.papp@gmail.com, http://www.bkf.hu/en/
2 EUROCONTROL Organisation, Rue de la Fuse 96, 1130 Brussels,
thanos.papavramides@eurocontrol.int
Abstract1
"...by thinking and trying, it [regulation] can be made to make more of a difference-or, more importantly, a better
difference."[14] Starting in April 2004 the European Commission (EC) with the Council and the European Parliament
have been gradually introducing a set of regulations establishing the “Single European Sky” (SES) in EU. This has
put the Air Navigation Services (or ATM) provision to a category of business for which the Member States (MS) had
to implement a separation of the provision of service from its regulation and allow service provision to develop under
specific rules[1]. To supervise the correct application of the new regulations the Member States had to establish
National Supervisory Authorities (NSAs)[1]. Although one may argue that these type of regulatory tasks have been
executed in the past by competent State’s Authorities as part of their obligations to ICAO Convention and SARPS, in
practice States had to establish new or enforce existing institutions and organizations to cope with the those new
obligations[2]. This inevitably impacted the cost of regulation. The paper introduces a model for regulation of Air
Navigation Services, inspired by the High Level Group Report (2007) to address the role and the multiple functions
of the NSA. It has been observed that the SES regulations inevitably generate a cost but as the regulations allow
different choices, states have followed a diversified path in recovering this cost. The paper stipulates and introduces
principles regarding the fair handling and recovery of this cost. In addition other ways are proposed in an effort to
rationalize the cost and minimize the impact on the market without compromising the effectiveness of the regulation
in particular regarding safety and security. The case of “many NSAs” functioning in a FAB environment is also
addressed.
Keywords
Optimized Regulation, Regulation Efficiency and Effectiveness, Economics of Regulaiton, Collaborative
Environments, Air Navigation Services, Monopolies.
1 Introduction and definitions.
1.1 Principles and definitions adapted for the study.
For this study regulation is considered to be a set of interrelated functions following a complete
cycle (see Fig. 1) deployed and exercised across at least three interacting levels (Fig. 2). The
necessity for this set of regulative functions is being created by the inevitable human (economic)
activities, in this case the provision of Air Navigation Services to airspace users.

1 The paper expresses the personal views of the authors.

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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Based in a set of principles developed also by EU, the cost of regulation must be born by those
who create the need for regulation through their activities and by those who receive the benefits
(i.e. appropriate safety, security, unobstructed, non-discriminative access to service in
performing business, etc.). In this sense the bearer of the regulative functions or the regulator in
general has to be independent with adequate authority and power to exercise its duties. In
addition these functions need to be deployed and exercised with the higher possible cost
efficiency[3].


Fig. 1: Standard definitions and functions regarding aviation regulation from the High Level Group
Report[5]. The complete cycle of regulation in aviation.
2 Literature research
Although there is enough material regarding the cost efficiency and performance[8] of the
provision of the Air Navigation Service (ANS), there is very little for research looking to the
efficiency of the specific activities in regulating ANS and its economics. In our research we
found references [6], [14] and [15], very useful and important although not particularly focusing
on the specific subject of ANS regulation. The theoretical proof regarding the naturally
monopolistic character of the Air Traffic Services argued in [13], helped to understand better the
need and function of the ANS regulation. Regarding the economic regulation of ANS the “Study
on the implementation rules of economic regulation within the framework of the implementation
of the Single European Sky” of the Regulatory Policy Institute[9] provides a number of analysed
alternatives, which nevertheless were not entirely adopted by the respective regulation[10].
3 A model for regulating ANS. Why the NSA is also a regulator.
As part of the study, a model for ANS regulation was developed inspired by the Report of the
High Level Group for the future of aviation regulation[5]. The Report aimed as well to
recommend measures to improve regulation efficiency[3]. The model is described in he
following sections. We have identified three major elements (dimensions) involved in the
regulation business:

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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? The regulatory Functions and their interrelation and interaction including of course the
individuals involved in exercising regulation;
? The Domains of Regulation (i.e. what regulation covers) and
? The Addressees or recipients of regulation actions/activities and their results.

The details of this structured approach follow:
Regulatory Functions and their levels:
To start with the design of the model the main regulatory functions in different levels is given
below:
Rule preparation: i.e. preparing regulatory material by an organisation that has the technical
(legal) competences/skills to do so and that follows adequate procedures to ensure all necessary
inputs and consultations were received and applied from and by those that will be affected by the
regulation; ensure an appropriate level of transparency and stakeholder involvement and achieve
an appropriate spread of response from relevant stakeholders.
Rule setting: i.e. the promulgation of rules prepared by the previous function above, and other
binding requirements in a context that allows for proper application and enforcement of these
rules as well as for legal and political accountability for any choice/decision/verdict that can be
made.
Implementation support, i.e. assisting organisations and individuals in charge of the application
of regulatory requirements such as support to monitoring, to application, to certification etc.
Certification/licensing/operational approval: i.e. the initial verification of the application of
regulatory requirements to individuals, organisations, equipment and procedures or groups of
these so as to authorise ex ante the conduct of specific activities and provision of services;
Monitoring/oversight/inspection: i.e. the ex post assessment of continuing compliance with
regulatory requirements, the identification and definition of corrective action and enforcement
when, where and as needed;
Enforcement: i.e. the exercise of formal powers to ensure compliance with regulatory
requirements including the imposition of dissuasive and proportionate sanctions; and finally

Who receives the regulation or who are they the regulation addressees for the case of Air
Navigation Services:
? Air Navigation Service Providers of all type (i.e. ATS, CNS, AIS and MET);
? Recognised organisations;
? Notified bodies;
? The staff of all these organisations and more.
The military aviation is not the subject of the exercise of regulatory functions as described above.
However, it is highly beneficial and therefore desirable to associate the military closely so as to
achieve an integrated approach where and as possible. Involvement of military can take place
through specific national military organisations, through their association with civil bodies or
through their participation in civil bodies. This inevitably generates an additional hidden cost.

Domains of regulation or what is/has to be regulated
Regulation to addressees is applied and exercised to achieve specific results and goals e.g. to
maintain and improve safety levels for the public or to increase the financial efficiency of a
monopolistic service provision without deteriorating the quality of the service. We call these
areas domains of regulation. It is important to identify and register them for the case of ANS:

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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? Safety;
? Security;
? Quality of service;
? Protection of the environment;
? Fairness to access the service and
? Economic regulation or cost efficiency.
In addition to the above, the following domains were considered as well in the realm of
regulatory functions:
? Achieve seamless operation of complex systems through interoperability requirements and
coordinating functions;
? Work towards a better organisation and “perfection” of the market;
? Enforce and apply international coordination and cooperation;
? Regulate as part of the fairness to access the allocation of scarce resources (airspace
capacity),
?
Consult Stakeholder and verify if service providers apply consultation;
?
Secure the sustainability and continuity of service (applying a multiplicity of measures
including economic oversight to finances).
In the context of the above the difference between domains and addressees should be understood
as one to all mapping situation e.g. the regulation of ANS competent staff and their licensing
aims to secure safety, security, quality, etc. and all the items in the domains of regulation. Fig. 2
provides a schematic illustration of the three-dimensional model of ANS regulation develop by
this study. The model enables and support checking for completeness and for estimating effort
necessary to perform the regulation functions adequately and with cost efficiency.


Fig. 2: The three dimensional model of ANS regulation. Not all elements are shown. As an example
square numbered 1, shows the case of exercising regulation to ANS for security purposes.

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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In the context of the model described above we argue that the NSA although called basically
Supervisory Authority is in reality also a full regulator since their activities cover all three levels
of regulatory functions described in the model. Indeed NSAs are obliged to issue directives
(safety for example) even on the spot of activity as to order corrective action to be accomplished
in given time when deviations are observed (e.g. during an oversight, audit or inspection)2.
The NSA is also charged and entitled to impose dissuasive and proportionate sanctions, for
example removing the licence of non-complying ATCOs without degrading safety and/or
capacity, taking similar measures technical staff involved in safety related tasks, etc.
4 The economics and finances of the ANS regulation
The financing of ANS regulation does not currently add considerably to the overall cost of ANS
provision in EU. The last official survey on the issue was conducted late 2006, released early
2007 for the purpose of supporting the EC report to the European Parliament three years after the
publishing of the SES Regulation (i.e. April 2007). The SESFARR Report[2] addressed the issue
by asking States to report effort spent in implementing SES and their respective planned budget
for 2008. By extrapolating linearly the data of the SESFARR[2] survey, we estimated to total
budget for NSAs to be approx. 2,5m€ per state by the end of 2008, which with the necessary
adaptations provide a sum of approximately 75m€ yearly for all SES participating States. Given
that the total cost of ANS in Europe that year was ~7,5b€3, it was found that the cost of the ANS
regulation adds only ~1% to the total actual cost of the service.
However inequalities and disharmonies in handling locally this cost may cause considerable
distortions in given specific areas. More importantly the appropriate regulation of ANS depends
also on the right economics and finances of the regulators. ANS regulators fit to purpose can help
achieving quicker and cheaper the necessary benefits in particular on performance. Concerning
the sources of financing the NSAs, the SESFARR survey found that the majority of them are
financed by the route charges while a few remain clearly under state budget. It was observed that
the latter has a negative effect on the staffing and functioning of the respective NSA in particular
in Central and South-eastern Europe where the wages of the civil service are particularly low.
The situation creates large difference regarding attractiveness for skilful experts between the
Service Provider and the NSA; in other words NSAs have tremendous difficulties to recruit the
appropriate staff to performing their duties. The SESFARR study also revealed that often an
NSA is an integral part of a (larger) Civil Aviation Authority (CAA). This provides a number of
advantages regarding cost efficiency (see Fig. 3 for a theoretical business model based on this
approach). However there are cases where the accounting system is unable to provide separate
accounts for the NSA from the rest of the CAA. In these cases (about 13 in 2007) it was
impossible to estimate the budget for the NSA and consequently the cost for regulating the Air
Navigation Services. Often the whole budget of the CAA is entirely financed by the revenues of
the en-route charges. To alleviate this issue the ASATC Programme (2003-2007)4 with its Work
Package 6 developed Business Plans for five CAAs in the Western Balkans which foresee that
respective activities of the CAA are financed by the corresponding recipients of the regulation
functions (i.e. Airport, Airlines, Maintenance Organisation, Pilot Schools etc. were to be charged
for the cost necessary for their regulation.

2 Art. 8 of Reg. 2096/2005
3 Excluding flight inefficiencies
4 http://www.eurocontrol.int/asatc/public/standard_page/Work_Package_6.html

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
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5 Cost efficient regulation in ATM
In this section we examine phenomena and approaches that are conducive to reducing cost and
improving efficiency and effectiveness in ANS regulation. As already mentioned a major issue is
how NSAs/CAAs are organised and structured i.e. if they have settled to an organisational
functioning scheme that is optimised regarding efficiency and effectiveness. Fig. 3 (from [11])
provides one generic example of organising NSAs as part of larger CAA organisations. However
experience has shown that there is no one solution for everybody. Size of business plays an
important role in choosing organisational schemes.
While a regulator has to have a hierarchical structure, the quest for efficiency in small countries
favours projectized matrix schemes. In this case staff from other part of the CAA (e.g. legal
experts, economists, technical inspectors, etc.) may support temporarily the NSA in significant
tasks for example carrying initial certifications, ascertaining initial interoperability for large
systems or their important upgrades, etc. The Commission started promoting the cooperation of
NSAs via a specific platform. The idea has been already introduced and explored[4].

Fig. 3: A business model for an integrated efficient regulation of aviation business[11]. The regulation of
ANS (NSA) appears at the application level since the other important levels are shared with other
departments (regulation of airports, airlines, etc.), thus creating efficiencies and economies of scale.
It offers considerable advantages and requires only administrative and procedural inter-State
measures. In essence collaborating NSAs do not have to develop and maintain al the necessary
expertise and effort required formally for their functions. They may focus on their already best
and get what is missing from other collaborative NSA while them selves offer equally their
respective contributions. The idea can be easily promoted and implemented within FABs[7].
The importance for the Regulators (NSAs) to have as the Service Provider5, appropriate business
plans if possible with a 3-5 years horizon, has been already addressed. To secure the proper
implementation and follow-up of the plan, competent State authorities may apply external audits
to the finances of their NSAs. The measure will complement and add to the value and effect of
the foreseen Peer Reviews[1].

5 See requirements of Reg. 2096/2005

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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Recently organisational developments regarding the organisational transformation of ANSPs to
become similar to each other or to the considered best among them, through the mechanism of
organisational isomorphism were observed [12]. They may be promoting better regulation first
by standardising further the work of the NSAs and secondly by extending isomorphism to the
NSAs them selves as collaborative organisations complementing each other within a FAB[4].
6 Conclusions and future work
6.1 Conclusions
We studied the economics of the ANS regulation by first developing and describing a three-
dimensional model for ANS regulation. The model may as well address other areas of aviation
regulation. In our study we found that currently the cost of ANS regulation is approx. 1% of the
total cost of the regulated serviced and has no observable trends to increase.
On the contrary methods and mechanism are in place to alleviate the issue of scarce resources of
NSAs and preserve the acquired relative efficiency. The Commission promotes a platform for
NSA cooperation while incentives exist for NSA to develop and maintain their business plans to
control and secure their budgets.
Overall the important conclusion is that while the economic impact of the new regulation was
found to be negligible (approx. 1% of the total cost of business) the benefits already achieved by
having harmonised effective regulation with widespread common best practices in EU outpaces
the cost.
6.2 Perspectives of further work
The economics of regulation in difference to the economic regulation do not usually attract
particular interest in studying and research. Nevertheless our strong believe is that as the
Regulators looks carefully and correctly after finances and the economics of the provision of the
service them selves and their competent state authorities should take of the economics of the
regulation. Healthy economics and proper financing make regulators more efficient and
effective. In his important work Kahn[14] thinks that what is needed is: a) to make [II, p. 112]
"... regulation more intelligent and more effective in those circumstances in which competition is
simply infeasible;" and b) to find [p. xxxvii] "... the best possible mix of inevitably imperfect
regulation and inevitably imperfect competition." Accordingly, economic analysis should, and
must, play an important role in accomplishing these objectives. Modelling and promoting models
represents also a good practice.
Acknowledgements
The authors wish to thank all those colleagues in BKF Budapest College of Communications, Business and
Management of Organizations and those in EUROCONTROL who by any means helped to carrying out and
complete this work. Particular reference is made to Katalin Véghné Bálint and Dr. Balázs Gyenge. Their support was
most encouraging and conducive to the completion of this endeavour.
References
[1]
Regulation (EC) No. 549/2004 of 10th March, 2004: Single European Sky; Framework Regulation.
Regulation (EC) No. 550/2004 of 10th March, 2004: The Provision of Air Navigation Services. Regulation
(EC) No. 551/2004 of 10th March, 2004: Organisation and Use of Airspace and Regulation (EC) No.
552/2004 of 10th March, 2004: Interoperability of the European Air Traffic Management Network
[2]
EUROCONTROL SESFARR Report in
http://www.eurocontrol.int/ses/public/standard_page/SESFARR.html

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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[3]
Second strategic review of Better Regulation in the European Union. Brussels 30.01.2008 in:
http://www.ec.europa.eu/governance/better_regulation/documents/com_2008_0032_en.pdf.
[4]
Papp E. K., Papavramides T.C., Perhat D. “A Model for a Collaborative Regulation of the European Air
Navigation Services” 16th International Conference on Concurrent Enterprising, Leiden – The Netherlands,
June 2009.
[5]
Report of the High Level Group for the future European Aviation Regulatory Framework, “European
Aviation: A framework for driving performance improvement, July 2007
[6]
Jamison M. and Berg S. V. “Annotated reading list for a body of knowledge on infrastructure regulation”
Developed for The World Bank. Public Utility Research Center, University of Florida Revised August 15,
2008.
[7]
Performance Review Commission “Evaluation of Functional Airspace Block (FAB) initiatives and their
contribution to performance Improvement” Produced by the EUROCON TROL Performance Review
Commission upon the invitation of the European Commission DG-TREN, October 2008.
[8]
ATM Cost-Effectiveness (ACE) 2007 Benchmarking Report 2007. Commissioned by the Performance
Review Commission. May 2009.
[9]
Regulatory Policy Institute, 2003. Study on the implementation rules of economic regulation within the
framework of the implementation of the Single European Sky. Final Report, European Commission, DG
Energy and Transport, Brussels.
[10]
Regulation (EC) No.1794/2006 of 6 December 2006, laying down a common charging scheme for air
navigation services
[11]
Papavramides, T.C. “High order organizational learning in air navigation services: the role of cross-
functional teams” Proceedings of the Engineering Management Conference, 2006 IEEE International.
Publication date: 17-20 Sept. 2006 page(s): 446-451. Bahia Salvador 2006.
[12]
Papavramides, T.C., “Organizational Isomorphism in European Air Navigation Services”, 16th International
Conference on Concurrent Enterprising, Leiden – The Netherlands, June 2009.
[13]
Papavramides, T.C., Aupée P., “Achieving Sustainable Performance in Natural Monopolies: The role of
Strategic Planning in the European Air Navigation Services”. Proceedings of IEMC2004, Singapore, Oct.
2004
[14]
Kahn, Alfred, “The Economics of Regulation: Principles and Institutions”. Cambridge, MA: MIT Press,
1988, Reissue Edition.
[15]
Stiglitz J. E., & Driffil J. “Economics”, W.W. Norton & Company, Inc. 2000.

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Papp E.K, Papavramides T. C. “The Economics of the ATM Regulation in EU. The impact of the Single European Sky”
Conference on Air Traffic Management (ATM) Economics, Belgrade, 10 Sep. 2009

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