EUROCONTROL Gökçe Benderli Experimental Centre

ATM Market Evolution due to Deregulation

EEC/SEE/2005/008

EUROCONTROL

ATM Market Evolution due to Deregulation

Gökçe Benderli, ENV-ISA 38, rue des Gravilliers 75003 Paris - FRANCE

EEC Note : EEC/SEE/2005/008

© European Organisation for the Safety of Air Navigation EUROCONTROL July 2002

This document is published by EUROCONTROL in the interest of the exchange of information. It may be copied in whole or in part providing that the copyright notice and disclaimer are included. The information contained in this document may not be modified without prior written permission from EUROCONTROL. EUROCONTROL makes no warranty, either implied or express, for the information contained in this document, neither does it assume any legal liability or responsibility for the accuracy, completeness or usefulness of this information.

REPORT DOCUMENTATION PAGE

Reference: Security Classification:

SEE Note No. EEC/SEE/2005/008 Unclassified Originator: Originator (Corporate Author) Name/Location:

Society, Economics and Environmental EUROCONTROL Experimental Centre Research Area Centre de Bois des Bordes B.P.15 91222 BRETIGNY SUR ORGE CEDEX France Telephone: +33 1 69 88 75 00 Sponsor: Sponsor (Contract Authority) Name/Location:

EUROCONTROL EATM EUROCONTROL Agency Rue de la Fusée, 96 B –1130 BRUXELLES Telephone: +32 2 729 90 11 TITLE: ATM Market Evolution due to Deregulation

Authors : Date Pages Figures Tables Appendix References Gökçe Benderli (ENVISA), Phil Smith (EEC Contact) 09/05 88 15 18 1

EATMP Task Project Task No. Sponsor Period Specification - - May – September 2005

Distribution Statement: (a) Controlled by: EUROCONTROL Project Manager (b) Special Limitations: None (c) Copy to NTIS: YES / NO Descriptors (keywords): Air Traffic Management – Market Structure – Internet – Mobile Telecommunication – Air Transport – Economic Regulation

Abstract: This report presents a description of some of the major services provided by “Air Traffic Management” with a market oriented vision. The structure of the ATM market is thus partially analysed in terms of supply and demand, with the view to identify possible discrepancies. The aim was to investigate how the current ATM markets may evolve through time and as consequences of Single European Sky projects, in light of the evolution happening in other network industries such as Internet, Mobile Telecommunications, and Air Transport sectors.

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Executive Summary The Single European Sky (SES) legislation sets out regulatory principles with a view to improve air transport safety, restructure the airspace according to traffic flows rather than national boundaries, create additional capacity, and more generally to improve the overall efficiency of the ATM system. In this context, the Air Traffic Management (ATM) market structure, its actors, and the services provided to users may experience significant changes. The European Commission already launched studies addressing the legislative and regulatory dimensions able to generate the right incentives for meeting the SES objectives, but no exploratory work on the shape of a future ATM organisation was done as such. The contribution of this study focuses on this particular aspect. To achieve its objective, the study adopts a market oriented vision (analysis in term supply, demand, and discrepancies) and deliberately focuses on long term possible structure by looking at three other sectors that have already undergone such a process: mobile telecommunication, passenger air transport and Internet. The ATM market is composed of many services which are provided by different actors. Within the scope of this project only the following sub-markets are examined: • Airspace Organisation & Management (AO&M) • Air Traffic Flow Management (ATFM) • En-Route Air Traffic Control (ATC) • ATM Network Access Point • En-Route Charges Management

On the supply side of these services, the emphasis is put on Air Navigation Service Providers (ANSPs) and EUROCONTROL units in charge of these services, while industrial actors are left aside. On the demand side, this study focuses on “passenger” air transport operated by commercial carriers. The study therefore excludes analysis of military air transport and the specific needs related to freight transport, business flight, and general aviation. Concerning the selection of candidate industries to be compared to ATM, a wide range of possibilities exist: rail, road, sea navigation, electricity, gas, telecommunications (fixed or mobile services), internet, health, nuclear activities, etc. The factors driving the choice for the three selected industries (internet, mobile telecommunication, air transport) were: • To have an example of 3D network industry • To illustrate recent experience of economic liberalisation at the European scale • To illustrate relations between rapid demand growth, congestion, and technological shift benefits • To show different levels of maturity in the internationalisation process of previously State-owned companies operating only within their national market

Although a total comparison between ATM and the selected network industries is not possible due to the safety factor in the ATM market, some general consequences of the deregulation in the three markets can be determined which give an idea of the possible results of the deregulation of ATM: • Fast development of the technology • Introduction of new services types • Lower prices that result in increased demand and high penetration rates

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After analysing the Internet, mobile telecommunications and passenger air transport industries, we defined three approaches for the future ATM market that are in line with the SES initiative, and aim to solve the ATM specific problems such as scarce capacity and the need for greater efficiency. Here, the possibility to introduce notions like “backbone”, “flat rate as pricing mechanism”, “guaranteed flows”, etc. into the ATM market are examined, since these are significant attributes of the three networks that are compared with ATM. The first scenario involves the introduction of intermediate organisations between the airspace users and the ANSPs. These would deal with the ATM issues (e.g. obtaining the capacity that the airlines need, billing procedure for the ATM related charges, etc.) in the name of their member airlines. Such an organisation can be compared with the travel agencies in the passenger air transport market. The aim of creating a third party is to introduce a more service-oriented approach to the ATM market. The second scenario looks at the possible effects of a new capacity management, using slot mechanism for airports and ATFM that would be based on economic incentives. The last scenario discusses the possibility of the vertical unbundling of the national ANSPs in order to create international “backbones” for control of the upper airspace by re-bundling the related business units at European level. It should be noted that this study only identifies possible scenarios with the aim of providing ideas on the possible impacts of the evolution for the future ATM market. However, further investigation would be necessary on three aspects: First, to link the scenarios with innovative operational concepts; then to answer the question whether similarities in the structure of ATM market with other network industries would result in similar consequences after deregulation; and finally to make quantitative analyses regarding the financial impacts of the proposed scenarios.

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TABLE OF CONTENTS

REPORT DOCUMENTATION PAGE...... III

TABLE OF CONTENTS...... VI

LIST OF TABLES ...... IX

LIST OF FIGURES...... IX

ABBREVIATIONS...... X

1 INTRODUCTION...... 11 1.1 General Background ...... 11 1.2 Objectives ...... 12 1.3 Scope...... 12 1.4 Methodology ...... 13

2 PRESENTATION OF THE ATM SECTOR ...... 15 2.1 Institutional Context...... 15 2.2 ATM Services and Market Segmentation ...... 16 2.3 Trends in ATM Services...... 18

3 STUDY OF FIVE ATM “SUB-MARKETS” ...... 22 3.1 Airspace Organisation & Management (AO&M) ...... 22 3.1.1 Supply ...... 22 3.1.2 Demand...... 24 3.1.3 Discrepancies...... 25 3.2 Air Traffic Flow Management (ATFM) Services ...... 26 3.2.1 Supply ...... 26 3.2.2 Demand...... 28 3.2.3 Discrepancies...... 29 3.3 En-route ATC Services ...... 29 3.3.1 Supply ...... 29 3.3.2 Demand...... 31 3.3.3 Discrepancies...... 31 3.4 ATM Network Access Point...... 32 3.4.1 Supply ...... 32 3.4.2 Demand...... 33

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3.4.3 Discrepancies...... 34 3.5 En-route Charge Management ...... 35 3.5.1 Supply ...... 35 3.5.2 Demand...... 38 3.5.3 Discrepancies...... 38

4 COMPARISON OF ATM WITH SELECTED NETWORK INDUSTRIES ...... 39 4.1 Mobile Telecommunication ...... 39 4.1.1 Introduction to the Mobile Telecommunication Sector ...... 39 4.1.2 Segmentation of the Market ...... 40 4.1.3 Liberalisation in Telecommunication Sector across Europe...... 41 4.1.4 ATM Market Comparison with Telecommunication Industry ...... 50 4.2 Passenger Air Transport Services...... 51 4.2.1 Introduction to the Passenger Air Transport Services Sector ...... 51 4.2.2 Segmentation of the Market ...... 52 4.2.3 Liberalisation experiences in Passenger Air Transport Services across Europe 52 4.2.4 ATM Market Comparison with Passenger Air Transport Services Industry ...... 57 4.3 Internet ...... 57 4.3.1 Introduction to the Internet Sector ...... 57 4.3.2 Segmentation of the Market ...... 61 4.3.3 Liberalisation Experiences in Internet Sector across Europe...... 61 4.3.4 ATM Market Comparison with Internet Industry ...... 65

5 ATM MARKET STRUCTURE EVOLUTION ...... 66 5.1 Introduction ...... 66 5.1.1 Methodology...... 66 5.1.2 Synthesis of the three network industries...... 67 5.1.3 Review of main SES trends...... 67 5.2 A Third Party in ATM Service Provision...... 68 5.2.1 Introduction of the Scenario ...... 68 5.2.2 Possible Benefits and Risks ...... 70 5.3 Economic Incentives for Network Capacity Utilization ...... 72 5.3.1 Introduction of the Scenario ...... 73 5.3.2 Possible Risks and Benefits ...... 74 5.4 Airspace Backbone Separation ...... 75 5.4.1 Introduction of the Scenario ...... 77 5.4.2 Possible Benefits and Risks ...... 78

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6 CONCLUSION...... 80 6.1 Synthesis of Results ...... 80 6.2 Comments & Possible Ways Forward...... 80

ACKNOWLEDGEMENTS ...... 82

REFERENCES ...... 83

APPENDIX: SUMMARY OF ATM SERVICES IN EUROPE ...... 86

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LIST OF TABLES

Table 1: Overview of ATM markets...... 17 Table 2: Comparison of supply and demand for AO&M...... 26 Table 3: Comparison of supply and demand for ATFM ...... 29 Table 4: Comparison of supply and demand for en-route ATC...... 31 Table 5: Comparison of supply and demand for ATM network access...... 34 Table 6: Comparison of supply and demand for route charges collection ...... 38 Table 7: Segmentation of the mobile telecommunications market...... 41 Table 8: The mobile telecommunication service providers in Germany...... 44 Table 9: The mobile telecommunication service providers in UK (June 2005) ...... 46 Table 10: The mobile telecommunication service providers in France (2003)...... 49 Table 11: Comparison of Mobile Telecommunications with ATM Sub-markets...... 50 Table 12: Segmentation of the air transport market...... 52 Table 13: Comparison of passenger air transport industry with ATM sub-markets ...... 57 Table 14: Segmentation of the Internet market...... 61 Table 15: Internet Usage in Europe ...... 62 Table 16: ATM Market Comparison with Internet Industry...... 65 Table 17: Overview of the Possible Evolutions in the ATM Market...... 67 Table 18: Summary of ATM services in Europe...... 86

LIST OF FIGURES

Figure 1: Concept of “Structure-Behaviour-Performance” ...... 14 Figure 2: The Structure of ATFM ...... 26 Figure 3: Organisation of the CFMU ...... 27 Figure 4: EUROCONTROL Charging Areas - 2004...... 35 Figure 5: Organisation of CRCO...... 37 Figure 6: Mobile Telephone Network ...... 40 Figure 7: Germany - Mobile Penetration Rates...... 43 Figure 8: UK - Mobile Penetration Rates ...... 46 Figure 9: France – Mobile Penetration rates...... 48 Figure 10: The network of an Internet Backbone...... 58 Figure 11: Internet Network...... 59 Figure 12: Role of SESAPs in the ATM Market ...... 69 Figure 13: Possible Approaches for the Creation of the Single European Sky Access Providers...... 69 Figure 14: Internet Backbones...... 76 Figure 15: Passenger Air Transport Backbones ...... 76

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ABBREVIATIONS

AIS Aeronautical Information Services ANSP Air Navigation Service Provider ATM Air Traffic Management ATFM Air Traffic Flow Management ATS Air Traffic Services CAA Civil Aviation Authority CFMU Central Flow Management Unit CRCO Central Route Charges Office CNS Communication, Navigation and Surveillance CRS Computer Reservation Systems DTAG Deutsche Telecom AG DFS Deutsche Flugsicherung ECAC European Civil Aviation Conference EATM European Air Traffic Management EEC EUROCONTROL Experimental Centre FAB Functional Airspace Block FUA Functional Use of Airspace HICP Harmonised Index of Consumer Prices ICAO International Civil Aviation Organisation ICT Information and Communication Technology ISP Internet Service Provider KPI Key Performance Indicator MET Meteorological Services MUAC Maastricht Upper Area Cntrol Centre NAA National Aviation Authority NAP National Access Point PRC Performance Review Commission RPI Regulatory Policy Institute RVSM Reduced Vertical Seperation Minimum SAAM System for traffic Assignment and Analysis at a Macroscopic level SES Single European Sky

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1 Introduction

1.1 General Background This study, launched by the EUROCONTROL Experimental Centre/Society-Economics and- Environmental Research Area, aims at exploring what similarities can be drawn between ATM at the start of a de-regulation process, and other industrial sectors that have already undergone such a process: mobile telecommunication, passenger air transport and Internet. In the research frame of Economic Impact of Market Regulation and Drivers, it is examined how the Single European Sky initiative might change the ATM market. The Single European Sky (SES) legislation sets out regulatory principles with a view to improve air transport safety, restructure the airspace according to traffic flows rather than national boundaries, create additional capacity, and more generally to improve the overall efficiency of the ATM system. Achieving these ambitious objectives relies, inter alia, on sub-activities such as: • The harmonisation of European airspace • The enhancement of air traffic flow management • The re-design of European airspace and creation of Functional Airspace Blocks • The enhancement of civil and military coordination • Cross border service provision based on certification • Incentive mechanism for route charges

In this context, the Air Traffic Management (ATM) market structure, its actors, and the services provided to users may experience significant evolutions. Two essential factors are driving the future changes. These are the factors related to the integration of the ATM architecture, and the technological shifts that will be facilitated by this integrated architecture. The European Commission has already sponsored a number of studies within the SES framework that cover, for the most recent publications, the following areas: • The provision of aeronautical information for the European Upper Flight Information Region [Ref. 1] • The financing of air traffic management (ATM) to achieve the SES [Ref. 2] • The implementation rules of economic regulation within the framework of the implementation of the SES [Ref. 3] • The priorities for SES implementation rules related to the interoperability of the European Air Traffic Management [Ref. 4]

These studies mainly address the legislative and regulatory dimensions able to generate the right incentives for meeting the SES objectives, but no exploratory work on the long term shape of the ATM organisation was done as such. The contribution of this study focuses on this particular aspect. It adopts a market oriented vision in order to shed light on possible ATM structure evolution based on experiences of “comparable industries”.

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1.2 Objectives The overall objective of this study is to look at the evolution of market organisation following deregulation trends in the ATM sector. It tries to ascertain the trends that could happen by the changing of service provision and looks at how they might change with regards to the type and quality of services provided. To achieve this final objective, the study aims in intermediate steps to analyse other network industries that have gone through the process of de-regulation/liberalisation and/or major technological shifts with the view to: • Learn from other industries’ experience • Identify risks • Anticipate possible trends

It is expected that no other industry will, alone, bring sufficient similarities to cover all aspects of ATM. Therefore, several candidate industries have to be reviewed in order to increase chances to find relevant benchmarks.

1.3 Scope The ATM market is composed of many services which are provided by different actors. Within the scope of this project only the following sub-markets are examined: • Airspace Organisation & Management (AO&M) • Air Traffic Flow Management (ATFM) • En-Route Air Traffic Control (ATC) • ATM Network Access Point • En-Route Charges Management

On the demand side, this study focuses on “passenger” air transport operated by commercial carriers. The study therefore excludes analysis of military air transport and the specific needs related to freight transport, business flight, and general aviation. Concerning the selection of candidate industries to be compared to ATM, a wide range of possibilities exist: rail, road, sea navigation, electricity, gas, telecommunications (fixed or mobile services), internet, health, nuclear activities, etc. The factors driving the choice for the three selected industries (internet, mobile telecommunication, air transport) were: • To have an example of 3D network industry • To illustrate recent experience of economic liberalisation at the European scale • To illustrate relations between rapid demand growth, congestion, and technological shift benefits • To show different levels of maturity in the internationalisation process of previously State- owned companies operating only within their national market

Although internet, mobile telecommunication and air transport appear to have a good potential for comparison with the ATM activities, it nevertheless remains true that any choice is partly subjective. Selecting the “best possible benchmarks” would have required a detailed investigation of all network industries, which represents an amount of research work far beyond the scope of this study.

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1.4 Methodology The study comprises three major steps: i) to characterise the ATM institutional background and to segment its services with a market-oriented vision; ii) to compare ATM with the internet, mobile telecommunications and passenger air transport sectors, and iii) to anticipate possible trends for the future evolution of ATM markets. 1. The first step of the study is to give a picture of ATM as a whole and to introduce the actors as well as the different segments of the market. The sub-markets Airspace Organisation & Management (AO&M), Air Traffic Flow Management (ATFM), En-Route ATC, ATM Network Access and En-Route Charges Management are presented. The description criteria that were selected follow the standard economic logic of market analysis, thus comprising three steps: o Analyse supply o Analyse demand o Identify areas and factors that are sources of discrepancies between supply and demand With the view to provide a coherent theoretical background to the supply and demand analysis, the classical Harvard Concept “Structure-Behaviour-Performance” was used as a guide. The underlying assumption of this methodological framework is the existence of links between organisation’s structures, their strategies, and their performances. Although not all aspects of this framework fit the reality of ATM service provision and airspace users’ expectation, the notions presented in [Figure 1] were used as potential orientations to guide the analysis.

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Figure 1: Concept of “Structure-Behaviour-Performance”

2. In the second step of the project, the market evolution and liberalisation experiences are described for the Internet, mobile telecommunications and passenger air transport industries. It is explained how liberalisation affected the market structure, and also who is regulating the actors of these market and to what extent. A particular focus was given to the German, French, and UK experiences when factual information was needed. 3. Finally, the last step of the study consists of drawing possible evolution scenarios for ATM in light of experiences from the Internet, the mobile telecommunication and the air transport sectors. The idea is to analyse if enough commonalities exist across these industries to extrapolate possible future pathways for ATM. Rather than trying the define a “forecast” as such, this part points to the reasons why observed trends may or may not happen for ATM markets, and questions the probability of these trends to result in comparable consequences and to meet SES objectives.

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2 Presentation of the ATM Sector

2.1 Institutional Context ATM services were originally provided by National Aviation Administrations (NAAs), often integrating the civil and military elements of the activity within one organisation.1 In the past, NAAs fell under the control of the Ministry of Defence in some countries. More recently, the military and civil parts of NAAs have been separated, with the civil aspects coming under the responsibility of Civil Aviation Authorities (CAAs), either as an integral part of a governmental department or reporting to it2. The CAA typically operates on an annual budget allocated by the government, with all revenue generated through user charges channelled back into the administrations or central Treasury. This system for ATM service provision is called “Conventional Integration”. According to this model, the service provision as well as the ownership, control, operation and management of the infrastructure are all integrated within the national CAAs. The CAA is self regulating3, i.e. it determines its own pricing structure, safety requirements and compliance against those requirements, etc. 4 The CAA is also responsible for other regulatory functions, such as: • Personnel licensing • Air transport licensing • Airworthiness • Flight operations • International/bilateral air transport agreements, etc.

The actual implementation, or service bundle, varies on a national basis. For example, meteorological services are often provided by other government departments or agencies, but the general concept of service provision as a national monopoly service is usually applied. In Europe some parts of the Air Traffic Flow Management (ATFM) process have been delegated to the EUROCONTROL Central Flow Management Unit (CFMU), but each State retains a local ATFM unit. The current model of ATM service provision originated from a combination of the implementation of the rights and obligations enshrined in the Chicago Convention of 1944 (and its Annexes) into national law and the combination of regulatory and service provision functions in a National Aviation Administration5. All European States are signatories to the Chicago Convention. Under the Convention, States agree to adopt certain principles and arrangements for the development of international civil aviation. The emphasis of the Convention is to create a framework to facilitate the development of international air transport services and to provide a regulatory regime to

1 The German air navigation service provider DFS (Deutsche Flugsicherung) is still an integrated civil-military operation, military traffic is controlled by civil controllers. 2 Military control in France is separated from civil and there are separate military zones, where traffic is controlled from air defence centres. 3 ATM is coordinated globally according to the standards of the International Civil Aviation Organisation (ICAO) and the national civil aviation authorities work according to the recommended practices. 4 In some cases regulatory and service provision functions have been, at least partially, separated through the creation of different bodies charged with regulatory type functions and ATM service provision. 5 For further information on regulation, see EEC report “La régulation économique européenne des transports aériens” by R. Mouyrin and F. Metrot. 15

secure safe operations. Each State has rights and obligations arising from the Chicago Convention including: • Sovereignty of airspace • Provision of standardized air navigation services • Charging mechanisms, based on cost recovery principles • Exemptions for State aircraft

The Convention recognizes the complete and exclusive sovereignty of every State over the airspace above its territory and the right of aircraft to overfly the territory of other States and, subject to conditions, to land and take-off. ICAO has no power to enforce compliance with its standards and recommended practices. According to the “Study on ATM Market Organisation” [Ref. 12], which was prepared for the European Commission, there are several disadvantages of the current system: the fragmentation of the European airspace leads to unnecessary interfaces, inefficiency, excessive coordination costs and reductions in the available capacity. Due to the national nature of the Conventional Integration Model there is a degree of duplication of infrastructure, including air traffic control centres, radar, communications and navigation systems. As a result, the investment, operational and maintenance costs are probably higher than they could be.

2.2 ATM Services and Market Segmentation This section presents the ATM (Air Traffic Management) actors, and provides a segmentation of the different services provided to airspace users (sub-markets). ATM coordinates air traffic organisation and offers its customers (the airlines, military aviation and other actors in air traffic) principally safety and capacity. To achieve these ambitious objectives, ATM relies on a combination of several actors and is organised into specific services. Table 1 presents the categories of actors in the global ATM market, and lists the main services needed to satisfy airspace user’s demand relative to ATM. • Suppliers are defined, in the scope of this study, as all the actors providing a direct input to ATM services. Therefore, it includes all ANSPs, airports, and the EUROCONTROL Agency. Private industry provides infrastructure and ATC systems to ANSPs, airports, and airspace users. However, since the actors of the industry are operating in a competitive market, they are not specifically targeted by possible deregulation process related to the SES context. Therefore, the industry will be only mentioned within the third part of the study where we will examine some possibilities of the ATM market reorganisation including the vertical integration of the suppliers at the different levels of the service provision • Basic ATM Services are defined, in the scope of this study, as the main components enabling a safe and organised ATM system. It includes AO&M services, ATFM services, and Air Navigation Services [Ref. 5] • Intermediate services correspond to one particular case, En-route charges management, which is a necessary activity but not a basic input in the final service provision (air transport). • Demand is composed of a heterogeneous group of actors, commercial airspace users, military users, etc. having their own (and possibly different) objectives but being served by ATM on non-discriminatory principle [Ref. 6]

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Table 1: Overview of ATM markets6

Suppliers Basic ATM Services Intermediate Demand (ATM inputs needed for airspace users) Services

ANSPs Airspace Organisation En-route Charges “Traditional (1 per State) & Management Services Management Airlines”

Airports • Airspace management • Calculation (several per State) • Route network development • Billing • Airspace modelling • Collection Low Cost • Distribution Carriers Eurocontrol ATFM Services • Advisory services (CFMU, CRCO, EATMP, MUAC, CEATS, IANS) Air Navigation Services Charters • ATC Services •En-Route ______• Terminal •Airport Freight Industry • Advisory Services (Infrastructure • Flight Information Services & systems, Thales, • Alerting Control Services BAE Systems, • Infrastructure Services Military users Lockheed Martin, • Communication Services etc.) • Navigational Services • Surveillance services • Other Services General • Aeronautical Info Services • Meteo info services Aviation • Emergency •Training/Simulation

In the scope of this project, investigations were focused on a limited number of markets, namely: • Airspace Organisation & Management (AO&M) • Air Traffic Flow Management services • En-route ATC services • Airport Access Right • En-route charges management services

These five markets cover the most important areas of the ATM business, and include the main attributes of the EUROCONTROL Agency. In terms of network analysis, it covers the ex ante design of routes and airspace organisation (AO&M), the access to the network (the airport), the utilisation of the network (ATFM services), the control of traffic (En-route ATC), and finally the monetary transfers between users and providers (En-route charges management). These 5 areas form a logical chain providing a coherent basis for comparison with other network industries. Including more ATM activities (advisory services, infrastructure services and other services such as meteorology, training, etc.) in the study would have extended the scope of the project without bringing significant insight regarding the ATM “core business”.

6 Based on [Ref. 5] 17

2.3 Trends in ATM Services In this chapter, the viewpoint of the airspace users regarding the main trends in the ATM services will be introduced in order to understand the demand for ATM and the expectations of the airlines from the service ANSPs. For this purpose, the comments of the airlines and airline associations on an EC report about the Single European Sky and its economic impacts were analysed. In 2003, the European Commission launched a study on the implementation rules of economic regulation within the framework of the implementation of the Single Sky. This study entitled “Study on the Implementation Rules of Economic Regulation within the Framework of the Implementation of the Single European Sky”, prepared by the Regulatory Policy Institute (RPI), was commissioned by the European Commission Directorate General of Transport and Energy (DG TREN) for assistance in defining the rules required to implement the major provisions of the SES legislative package in relation to economic regulation. Specifically the main objective of the study was to propose possible charging mechanisms that will promote the development of appropriate incentives on both airspace users and service providers to improve the system effectiveness. ERA (European Regions Airline Association) ERA was founded in 1980 and has now over 230 members (including 67 airlines, 40 airports and over 115 associate and affiliate members comprising aircraft & engine manufacturers, international & regional airports and avionic suppliers & service providers). ERA represents the interests of the regional air transport industry in Europe. According to ERA, the aim of EC when developing and implementing rules on economic regulation should be to develop a regulatory framework which encourages the ANSPs and the States to increase the productivity, lower overall costs, become more cost effective and where possible, introduce competition for the provision of services (e.g. for meteorological services). For the charging mechanism, the existing charges based on aircraft weight are acceptable and don’t have to be changed. The Enlarged Committee for Route Charges is seen as inefficient as a means of consultation for the purpose of route charges. Therefore ERA supports the development of a multilateral consultation body which is independent from EUROCONTROL, states/ANSPs and political influence. The aircraft operators should be considered as equal partners rather than observers. Regarding information disclosure, the current arrangements do not require the ANSPs to provide financial data to customers, so benchmarking comparison between ANSPs can not be undertaken. ERA would support the development of comprehensive information disclosure requirements and a means of enforcement to disclosure. The current charging system is based on cost recovery but, according to ERA, it also must allow the user industry to continue to operate profitably, and to provide satisfactory services by way of flight frequencies and aircraft choice flexibility. The charges should direct the ANSPs to more efficient outcomes. ERA does not support the congestion-based charges. The cost of delays is itself a great motivator to avoid congestion. Charter or leisure carriers that are able to move their time of operation are already moved away during periods of congestion. For carriers who operate in congested airspace, congestion charges will represent additional costs. It is more important to find operational solutions to match the capacity to the demand to avoid congestion occurring. Additionally, the terminal charges should be harmonised in the same way in which en-route charges are levied.

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ERA supports the development of a “hybrid” regulatory framework which could apply more pressure on ANSP costs and expects greater user participation in regulatory processes7. The regulations also shall enable enhanced disclosure, reporting and consultation amongst states and ANSPs. Development of more precise indicators of performance which can be used to, ex post, evaluate the performance is important to ensure the quality of the service. ERA does not support a charge difference between upper and lower airspace since such a split does not represent a differentiation of costs for an ANSP and would favour non-EU carriers who spend more time in upper space.

IATA (International Air Transport Association) The association was founded in Cuba, in 1945 and represents now 270 member airlines in 140 nations. IATA proposed previously in a “Five-Point-Plan” that in order to achieve a more efficient and cost- effective European ATM system, decision makers should: • Adopt the ATM 2000+ Strategy including the financial objective to reduce the unit cost of ATM • Give EUROCONTROL and the EU the necessary regulatory powers • Establish a permanent European-wide capacity planning process • Liberalise the provision of ATS • Develop incentives for ATS providers

The airport infrastructure costs and air navigation charges now generate 10% of the airlines’ costs, as over the last ten years ATS charges have grown by 14% per annum world wide. The average weighted unit charges increased 13% for 2002 and 11% for 2003. On the other hand, average yields per passenger have decreased 3.4% annually on average over the past five years and IATA Member airlines had to reduce their unit costs by 2% annually. In recent years IATA has stressed the need for more capacity, new route structures and access to more airspace. Indeed these problems were solved but in a very expensive way. According to IATA, ATS providers should consider possibilities for cost reduction and increased efficiency, while maintaining safety, capacity and service quality at the required levels. Since the current full cost recovery system does not provide any incentives to ANSPs, IATA suggests that it should be replaced by the price-cap regulation even though it is not the perfect model. If the hybrid solution will be adopted it should strive for efficiency, quality of service and customer focus. Generally three main principles have to be kept in view: cost-reflectivity, non-discrimination and transparency. IATA supports the separation of economic regulation from service provision and unbundling8 of non-core services, particularly where these parts of the service can be outsourced or open to competition. Also the infrastructure costs and costs for the service provision shall be separated and the costs shall be made transparent. IATA believes that users of air navigation services who

7 Pure cost-of-service and price-cap regulation represents two ends of a spectrum of possible charging/prices arrangements. The principle of hybrid arrangements is to set an effective price/charge mechanism which lies somewhere between to extreme ends and which is based on benefit sharing. 8 "Unbundling" refers to disaggregation of traditionally integrated monopoly functions in the utility industries. The aim is to allow components of the network industries to operate more competitively with only monopolistic bottlenecks regulated by the state. 19

are paying 100% of the costs through their charges are not enough involved in the decision processes of EUROCONTROL so substantial change in this situation is needed. IATA does not support any system of congestion or peak/off-peak charging because that would only arbitrarily redistribute costs between different users. An average cost pricing regime, as used in general practice, is considered the most transparent and fair regime. According to IATA, the differentiation of charges for upper and lower air space does not have any benefit regarding the efficient use of the system and is not easily justifiable from a cost-relationship viewpoint. IATA’s opinion is that the current fragmentation of airspace is a major cause of the high costs and charges. Therefore the Single European Sky initiative will be a step forward to promote greater levels of harmonisation, integration and interoperability between European ATM infrastructures and will also make the European ATM more efficient through economies of scale. easyJet According to easyJet, the current ATM system in Europe is inadequate and unsustainable both organisationally, technically and commercially. It should be rather investigated how to reduce the need for ATM services. The aircrafts should be equipped with instruments allowing them to operate with “electronic VFR” (Visual Flight Rules). easyJet argues that on that issue, the air transport is “far beyond the systems which are used in the maritime industry”. easyJets opinion is that the current cost and inefficiency of ATM in Europe –when benchmarked against the USA– show the urgent need for innovative regulation. With respect to the charging system, it should represent the value-added of services provided while being transparent and being able to uplift the ultimate vision of “free flight” in which the need for ANSP & controller involvement in a flight is minimal. Separation of regulators from providers would be an important step for a more efficient ATM system. According to easyJet, discussions on risk sharing are interesting but only of value if it means ANSPs or airports are going to share the risks faced by airlines (including accident risks and security issues) and investing in them. According to easyJet, the active collaboration by all key actors of the ATM value chain i.e. end consumers, airspace users, airports, ANSPs and regulators, is important to achieve the optimum solutions.

AEA (Association of European Airlines) AEA was founded in 1952 to represent the interests of its members to the institutions of the European Union, to the European Civil Aviation Conference, to any other institutional organisations or to individual governments. The AEA now has 30 member airlines. AEA supports a substantial change according to the position voiced by airlines. Establishment of a new body –infrastructure manager or system manager– could facilitate the collaboration between ANSPs and the airspace users. Currently, users can only attend meetings of the Central Route Charging Office (CRCO) Enlarged Committee on an observer basis. According to AEA, one of the key problems of the ATM system is that the infrastructure costs and the costs of service provision are not separated. To ensure an efficient provision of service, the hybrid solution which was proposed in the RPI report could be a possible approach. However, the regulators should strive for cost reduction, better quality and a customer focused service.

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AEA supports changes in the ATM system which will prevent discrimination by the use of air navigation service charges. In the current situation some airlines have substantial benefit by the way some ANSPs allocate their costs (home carrier versus overflights). For example, if a country chooses not to levy meteorological costs to terminal navigation charges but 100% to en-route, this substantially benefits carriers operating on that airport (homebase carrier). As long as not all competing airlines are working in the same country some have a better financial “home base” than others, sponsored through ATC charges. To avoid that, accounting methods, pricing structures and cost allocation should be transparent and harmonised throughout Europe and should be under close independent review.

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3 Study of five ATM “Sub-Markets”

3.1 Airspace Organisation & Management (AO&M) In this section, AO&M services are presented using a “market oriented” vision, although in practice these services are not really exchanged on a market. Air transport is an industry which needs to be organised and controlled at the international level for safety and reliability reasons. Airspace users have a need for a global (or at least a coordinated) organisation of ATM. The airspace management and organisation is thus a necessary element of ATM where users need focus principally on airspace network capacity and interoperability. The analysis attempts to describe supply and demand, although both notions are not perfectly symmetric.

3.1.1 Supply

3.1.1.1 The structure of AO&M supply AO&M activities comprise: i) the modelling of airspace structure, ii) the development of a coherent network, and iii) the management and coordination of actions in order to ensure system wide efficiency. These activities (Airspace Management, Airspace Modelling and Route Network Development) are carried out by the EUROCONTROL “Programme for Performance Enhancement in European Air Traffic Management” (EATM) on behalf of the participating states, and by the dedicated units of ANSPs in each State. There are thus 34 actors working on AO&M at local and regional scales but just 1 actor is dealing with the wide European dimension of this activity. The notion of service differentiation is not relevant to the AO&M as the actors do not operate as competitors but as complements. Structural issues are rather to achieve convergence in network design and management. The systemic nature of this activity is such that its structural evolution tends to be a horizontal concentration, where individual ANSPs collaborate on specific trans-boundary projects for proposing unified organisations and management systems, and where EUROCONTROL play an increasing role. Barriers to entry in the AO&M market exist at different levels. These activities are vertically integrated with all other activities under mostly “State-owned” ANSP responsibilities. Access to flight data and simulation tools, knowledge of military zone constraints, and the ability to legitimately enter into bilateral agreements with foreign ANSPs are significant limits preventing contestability of the market structure. The cost structure of this activity is not fully transparent due to the fact that its budget is embedded into wider ANSP activities. The EUROCONTROL agency however publishes its budget per domain, which gives an order of magnitude of the importance of this activity. The total cost of the EATM unit9 was 120.4M€ for 2003, which was equal to 31% of the total EUROCONTROL agency budget [Ref. 14]. The EATM budget is split into several domains

9 The EATM is one of the main actors in charge of, inter alia, “AO&M”. 22

and programmes, which are not all relevant to airspace organisation & management functions. The annual costs10 for the 3 domains corresponding to the context of this study total 7-10M€: • Airspace management: 4-5 M€ • Airspace modelling: 1-2 M€ • Route network: 2-3 M€

In addition to these costs, national ANSPs dedicate effort and budget for AO&M, although these were not investigated in this study.

3.1.1.2 The behaviour / strategy of AO&M supply While the strategy of more “business oriented” industries can be classified based on their pricing and advertising strategies, these two elements are not relevant to the provision of “AO&M” strategies. Instead of these traditional strategic levers, this activity relies on a “service oriented” strategy, where each function is dedicated to specialised units, having a focused experience on technical issues. Each ANSP has its own strategy but, basically the overall trend in behaviour is to accept and conform with convergence principles and EUROCONTROL ATM strategy. Airspace management activities are focused primarily on the realization of the EUROCONTROL airspace strategy for the ECAC States [Ref. 11]. The strategy consists of the implementation of measures such as: • Enhancement of civil /military co-ordination • Simplification of airspace organisation • Development and harmonisation of ATM procedures to support operational efficiency [Ref. 10]

The objective of the airspace modelling activity is to conduct quantitative analysis of potential European airspace changes, validate airspace concepts and operational plans, and define potential capacity gains using mathematical simulation models. The objective of the route network development activity is to organise and carry out the necessary development and co-ordination of planning and implementation activities for the optimisation of the ATS route network and supporting sectorisation in the ECAC area, in both en-route and terminal airspace. In order to enhance ATM capacity in line with forecast demand, ATS route network and sectorisation development aims at a dynamic airspace based on multi-option routes and adaptable sectorisation within an integrated international airspace structure. Finally, research and development plays an important role in the strategy and action plans adopted by “AO&M” units. Research and development activities regarding the AO&M focus on the innovative activities and the overall planning and co-ordination of European ATM improvement actions to increase the airspace capacity and reach the goal of SES. In order to achieve the long term vision of SES, an initiative has been launched under EUROCONTROL leadership to develop a European ATM Master Plan, which will include the actions necessary to implement the future ATM network [Ref. 10]. EUROCONTROL Experimental Centre (EEC) has the responsibility to carry out the activities to support the ATM Master Plan as well as to work on other innovative research topics such the “Network Capacity and Demand Management”.

10 Forecast annual average 2005-2009 23

3.1.1.3 The performance of AO&M The AO&M have a direct impact on aircraft trajectories, and thus on the fuel consumption and operating costs of airspace users. Measuring its performance is a complex exercise as the airspace organisation is the result of many compromises such as safety, capacity, need for military zones, etc. So far, a mature performance review process does not exist in this area. Initial investigations indicate that there are en-route flight inefficiencies resulting from both horizontal and vertical deviations. While the cost of vertical inefficiencies is still a research area, the total cost of the direct route horizontal inefficiencies have been (for the first time this year) estimated by the Performance Review Commission at around 1000€M per year [Ref. 8]. As far as route network optimisation and performance measurement is concerned, EUROCONTROL makes use of simulation tools such as SAAM (System for traffic Assignment and Analysis at a Macroscopic level), which is an integrated system for wide or local design evaluation, analysis and presentation of Air Traffic Airspace / TMA scenarios. These features support the development of the EUROCONTROL Airspace Strategy for the ECAC states. SAAM can operate on the wide ECAC area or at the detailed level of an airport, and is able to process a large quantity of data: hundreds of sectors, millions of cells, and several days of traffic. Airspace structure design and the processing of traffic trajectories are fully managed and linked together in SAAM. Users of SAAM can create/change/design both air traffic route networks and airspace volumes. At any time full 4D trajectories can be generated (based on traffic demand, route network, aircraft performance) and intersected with airspace volumes. By default, SAAM will choose the best trajectory option (shortest path and optimal profile performance), but operational rules can be applied such as flight level constraints (arrival, departure, cruising) and/or reserved or restricted route network segments.

3.1.2 Demand

Direct demand for AO&M does not exist as such. Currently, airspace users do not pay for airspace AO&M services directly, but pay for the whole cost of ATM through the route charges including both EUROCONTROL (including EATM) and ANSP costs. AO&M is actually an enabler for wider needs, and airspace users would in theory do without these services if there were enough capacity and fully harmonised airspace management. What airspace users need is safety and system capacity, and they are willing to “accept constraints in the AO&M” as a result. The characteristics of the demand from civil users can be summarised as follow: • To be allowed to have direct trajectories and free flight areas where feasible • If obliged to follow predetermined routes: to be offered the choice between alternative routes • To obtain climb and descent profiles and cruise altitudes compatible with aircraft performance and allowing for cost minimisation (in time or in fuel)

In addition to these, the characteristics for demand from military users are to have reserved airspace zones to train and perform their defence missions. Demand for AO&M consists of several aspects: On the one side, there are trade-offs between airspace users’ satisfaction (military – civil) on the other side, the demand is linked 24

to an airspace user’s category (need for efficient cruise levels might be linked with the shape of horizontal routes). As a conclusion, airspace user’s demand in an ideal ATM system would be a “free-flight” environment, allowing them to adjust their route, altitude and speed without restrictions. As this situation is not possible in dense traffic areas, a “second best” demand is to minimise deviations from the optimum trajectories. The function of airspace organisation and management is therefore to facilitate the most efficient design and management of airspace while taking into account tradeoffs.

3.1.3 Discrepancies

The role, structure, and performance of airspace design and management services correspond to an activity enabling more general airspace users’ needs and expectations. This absence of symmetry between supply and demand makes it difficult to highlight concrete discrepancies. However, the question can be shifted to the overall ability of ANSPs and of EUROCONTROL AO&M functions to respond to global efficiency needs. Although a global view on performance becomes available through the reports of the Performance Review Commission (PRC) unit of EUROCONTROL, it is expected that wide-scope projects like SES and Functional Airspace Block (FAB) organisation could allow even higher standards in terms of users’ satisfaction11. Centralised functions such as network design, simulation and production of flight efficiency indicators and coordination of management actions, basically respond to current needs. However, the main discrepancy is often seen to be the limits of a rather fragmented and very structured network provision, where the initial need is a global and fully flexible system. While this discrepancy allowed for acceptable performance and traffic growth in the past, the future is subject to interrogations. As the traffic is forecast to grow and as airlines operate with tighter margins, the pressure on ATM AO&M efficiency will become stronger. In this context, fundamental changes such as SES and FABs might be mandatory steps to relieve future discrepancies.

11 Within the scope of the SES, “Functional Blocks of Airspaces” will be created to define a single, unified upper airspace. The idea is that the control of the upper airspace should occur without being restricted by the national boundaries. The SES Framework Regulation has defined the generic term “Functional Airspace Block (FAB)”, as: “An airspace block based on operational requirements, reflecting the need to ensure more integrated management of the airspace regardless of existing boundaries.” See [Ref. 48]. 25

Table 2: Comparison of supply and demand for AO&M

Characteristics of the supply Requirements of the users (EUROCONTROL EATMP and ANSPs) (airlines) ANSPs and EATMP define the network Airspace users would in an ideal situation organisation and management actions as the operate under “Free-flight” conditions, but synthesis of specific projects and local solutions accept as a result of tradeoffs to operate in a constrained network, as an enabler for wider “global efficiency needs”.

3.2 Air Traffic Flow Management (ATFM) Services In this section, ATFM services are presented using a “market oriented” vision, although in practice these services are not really exchanged on a market. The analysis attempts to describe supply and demand, in the particular context where it is recognised by all parts that the management of the network utilisation is profitable compared to an unmanaged situation. The aim of the European ATFM system is to protect ATC sectors from overload. It centralises the demand for traffic in the European airspace, and processes it in order to smooth traffic peaks where demand exceeds capacity so the available capacity is used in the most efficient manner [Ref. 33]. Flow management services are provided by the CFMU unit of EUROCONTROL 24 hours per day. CFMU provides: • Flight plan data, best utilisation of the available capacity • The smoothing of air traffic flows • Protection against overloads

For aircraft operators, CFMU provides advice for flight planning, and attributes slots to minimise the penalties due to congestion (assignment of ground delays instead of en-route delays). An important issue is that whilst individual ANSPs can determine the amount of capacity that they make available, they do not determine which parties get access to that capacity. Rather, the current system can be understood as treating the provision of capacity by ANSPs as an input into the effective capacity of the European network. The allocation mechanism for this capacity is then substantially carried out by the CFMU.

3.2.1 Supply

3.2.1.1 The structure of ATFM supply The supply of ATFM services is structured in a centralised unit (the CFMU), that plays the role of a resource allocation manager. It receives the declared capacity of the different ATC units facing potential capacity problems, and also the flight plans of all airspace users. Below, the figure shows how the ATFM works.

Figure 2: The Structure of ATFM

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z airspace users planning to use the x ATC units knowing their local ATM network capacity and expecting risks of traffic surcharge at time t in area x

Declare information to

Declare information to y Flow Management Position (FMP) one in every Air Traffic Control Centre

Declare information to

Central Flow Management Unit

IFPU 2 (backup of CFMU)

In addition to pure flow management activity, the CFMU also has units in charge of researching future flow management strategies, archiving data, and providing advice on flight planning, etc. The different units of CFMU are presented in the next figure.

Figure 3: Organisation of the CFMU DIRECTOR CFMU

Safety, Quality and Office of the Director Security Manager (SQS)

User Relations and Development Bureau (URB)

Operations Division Engineering Division Software Europ. Aeronautical (OPSD) (ENGD) Development Division Database and (DEVD) Aeronautical Info. Bureau (EAB)

3.2.1.2 The behaviour / strategy of ATFM As with AO&M functions, current ATFM behaviour can not be described in terms of pricing and advertising strategies. The capacities declared by local FMP units are not linked with a specific tariff, and traffic is neither smoothed nor attracted by dynamic slot pricing.

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ATFM strategies are “service oriented” in the sense that they focus on traffic smoothing itself, concentrating on general non discriminatory principles, and optimisation of the process used to deliver the service. Traditional actions performed in the ATFM process include 3 phases [Ref. 9]: • Strategic Flow Management takes place between 18 months and a few days prior to the operation. This phase consists of analysing the evolution of the forecast demand and the identification of potential new problems and in evaluating possible solutions • Pre-tactical Flow Management is applied during the few days prior to the day of operation. This phase analyses and decides on the best way to manage the available capacity resources and on the need for the implementation of flow measures • Tactical Flow Management updates the daily plan according to the actual traffic and capacity

3.2.1.3 The performance of ATFM As the mission of CFMU is to manage flows, its performance can be seen as: • Ability to make use of all available capacity (do not assign delay if not really necessary) • Ability to make use of the best algorithm in the complex exercise of slot allocation and the ability to propose innovative solutions • Ability to actually protect regulated zones from overload • Respect the equity criterion (first come first serve) • Cost efficiency

The total cost of the CFMU in year 2004 was 102.4 M€, which was 22% of the total EUROCONTROL agency budget. The cost of the unit is increased by 28% between 2001 and 2004. According to the Performance Review of EUROCONTROL, the increase arises mainly from new tasks given to the CFMU (implementation of the ATFM action plan). Since the ATM capacity is becoming more and more constrained for air transport, the mission of ATFM is changing: it will not only be restricted to slot allocation but will also be extended to the maximisation of the use of available capacity. For this purpose, ATFM is moving towards Air Traffic Flow and Capacity Management (ATFCM). The aim of ATFCM is to balance demand and capacity within a gate to gate perspective by mean of a more collaborative approach to capacity management where the partners are involved in the planning phase.12 Currently, the performance of the CFMU is only monitored according to the total cost of the unit. With this new approach of ATFCM, the management of the capacity will be an indicator for the performance of CFMU as well.

3.2.2 Demand

As with AO&M services, ATFM does correspond to a demand linked to a particular status of the ATM system (congestion). If capacity were always much higher than demand, then airspace users would not need ATFM services. Accepting as a matter of fact that in the current system some form of flow regulation is needed, the airspace users’ requests upon ATFM are:

12 See EUROCONTROL web site: http://www.eurocontrol.int/eatm/public/standard_page/atfcm.html 28

• Looking at the current regulation system, there is a request to be served on a non discriminatory basis. • Looking at enhanced functions, there is a request for more flexibility (slot swapping, prioritise flights), and more collaborative decision making. • Looking at alternative regulation means, geographical re-routing is accepted in some cases as appropriate flow management strategy (this corresponds to delaying aircraft in the air instead of on the ground).

Finally, airspace users would benefit from flow management strategies focusing on the minimisation of delay at arrival rather than strategies starting from departure time and delaying the flight until enough capacity is available. This evolution could correspond to a form of “contractualisation” between ATFM units and airspace users, where the users would express priorities in term of arrival time constraints.

3.2.3 Discrepancies

The benefit of ATFM for the airspace users is that it ensures smooth operations and minimizes the delays. However, there is need for enhanced flow management, especially regarding the departure and arrival ATFM slots. Currently, the arrival time constraints are expressed with “seconds” whereas actual departure slots are expressed in +/- 10 minutes. Therefore it is impossible to have a precise flow management because all the flights depart with 10 minutes uncertainty. In order to avoid the penalties of arriving later than it is planned, the airspace users expect flow management at the airports during the departure to be more precise.

Table 3: Comparison of supply and demand for ATFM

Characteristics of the supply Requirements of the users (CFMU and ANSPs) (airlines)

The capacity of the ANSPs is an input for CFMU. Airlines need gate to gate flow and The unit only allocates this capacity. capacity management to optimize the use of the available capacity.

3.3 En-route ATC Services

3.3.1 Supply

3.3.1.1 The structure of en-route ATC supply ATC controls the traffic and gives instructions to let aircraft fly while minimising the risks of collision with the relief, and with other aircraft. ATC units are created and managed by ANSPs, in function of operational constraints and traffic patterns. They are in a monopolistic situation in each State. However, because of the importance of international flights, efficient procedures need to ensure the coordination between these national monopolies [Ref. 17].

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There are 34 ANSPs in charge of delivering ATC services in the EUROCONTROL area, however, the “production units” are organised into 75 centres. A centre is a production unit within which a controller should be able to work on any of the sectors composing the centre. There is a total of about 400 sectors in Europe. ATC is thus composed of relatively small units called sectors. An ATC sector corresponds to an airspace volume under the responsibility of a team of 2 or 3 controllers. They make use of radar data, radio communication, etc. The shape of sectors can be changed through time to adapt to traffic conditions. In theory, the basic service delivered by each ATC sector is the same for all users and in all sectors. However, in practice, local traffic complexity does not always require the same equipment nor procedure sophistication, leading thus to possible variation in the service quality.

3.3.1.2 The behaviour / management of en-route ATC At the strategic level, ATC sectors are created and managed by ANSPs, in function of operational constraints and traffic patterns. This is subject to AO&M review, safety impact assessment, and capacity simulation and validation process. ATC functions thus often involve long decision and implementation procedures, requiring investments that take time to pay back. As part of other ATM costs, costs specific to ATC services are subject to a full recovery through amortisation of capital expenditure and direct allocation of operating costs. The time required to train a controller from ab initio to full qualification on an operation position is about 4 years. Anticipations on future traffic levels and retirements are thus essential to correctly plan the recruitment policy of air traffic controllers. The tactical management of ATC is done as a function of the quantity of traffic, the patterns of flows transiting sectors, and number of controllers available at a given time (dealing with sickness, and holiday constraints). Flexibility in the management of sectors (grouping and de-grouping) exists, but is however limited to individual control centres. Flexible sectors grouping and de-grouping across different ANSPs, or even across different centres of the same ANSPs does not exist so far. The price of ATC services is not used as a strategic lever to attract demand, although the observed price difference across control centres might, in some cases, influence the shape of demand. ATC supply is subject to a great level of research and development. It is an activity requiring high technology and high reliability. However, the human remains the key element in ATC, and research actions on human factors and the human machine interface play a significant role in the management of ATC services. These R&D activities are lead by national specialised research units, and international research centres (such as EEC). However, compared to other industries, research outcomes are expected to be fully shared by the community to have a chance of implementation (e.g. airspace users will not invest in one technology if it is only used in one ATC centre). Finally, legal aspects play an important role in ATC. As mentioned above, human resource is the key element in ATC and the level of responsibility handled by air traffic controllers is such that strict regulation of their working conditions is mandatory. On this aspect, each country has its own legislation and working rules (hours per day, night operation conditions, etc.) Moreover, legal obligations in terms of safety incident reporting are also important (e.g. punitive versus non punitive strategy, a controller punished for a safety incident might become an incentive for the others not to report their incident, which leads to losing control of safety monitoring).

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3.3.1.3 The performance of en-route ATC The performance of the en-route ATC unit of an ANSP can be measured according to its ability to avoid accidents and major incidents. After three ATM-related fatal accidents involving commercial aircraft in 2000, 2001 and 2002, there were no such fatal accidents in 2003 and 2004 so the information on the number of accidents is not sufficient to predict future accidents. To analyse the ATM risks, it is more important to have data on the incidents. However, procedures for incident reporting differ among the States and ATM safety performance data according to the number of incidents is publicly available in a minority of States. In 2003, the European Commission announced the directive 03/42 on incident reporting. According to this direction, submission of all aviation incident reports, including ATM incidents, becomes mandatory. The results of the incident reporting will be presented in the yearly reports of the Performance Review Unit of EUROCONTROL.

3.3.2 Demand

The customers of the service, which is provided by the ANSPs, are the airlines. For a safe operation of flights, en-route ATC is essential. During the flight, pilots communicate with air traffic controllers and they receive instructions to adjust the flight routes.

3.3.3 Discrepancies

The en-route ATC is the ATM sub-market where the airspace users are in direct contact with the service provider. There is a direct demand for air traffic control because it is an essential element of safe flight. Regarding the safety level, there are no complaints of the airspace users. The suggestions for improvement target rather the financial performance of the ANSPs which offer the ATC services. Since the ANSPs are mostly state-owned monopolies in their geographical area, the benefits of competition (e.g. quality improvement, decreased costs, etc.) are missing.

Table 4: Comparison of supply and demand for en-route ATC

Characteristics of the supply Requirements of the users (ANSPs) (airlines)

The current charging mechanism for ATC is based - Price cap or hybrid regulations which on cost recovery induce more incentives for efficient service provision - Separation of infrastructure and service charges to avoid cross subsidizing There are many different operating systems and The European ATM should be programming languages for en-route ATC within harmonised for more efficiency EUROCONTROL area

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3.4 ATM Network Access Point In this section, the role of the airports in the ATM is explained. All airspace users need airports as the entry and exit point of the network for their operations. However, the capacity of an airport for take-off and landing is limited because of factors such as runway space and air traffic control capabilities. Accordingly, the number of aircraft that can use the airport within a time period is restricted by the capacity of the airport [Ref. 38]. When insufficient airport capacities due to the increasing air traffic demand became a constraint for the airspace users, airports started to grant specific authorizations to the airlines for using the airport at a specific time. These authorizations are known as “slots”.

3.4.1 Supply

3.4.1.1 The structure of ATM network access The slot allocation system is a result of the capacity constraint at congested airports. If the capacity of an airport is not a constraint for the traffic, all the aircraft can land and take off whenever they want, and capacity regulation is not necessary. In case of capacity problems, slot allocation is required to distribute to the airlines what is available. By obtaining slots for an airport, airlines can be guaranteed a certain amount of take-offs and landings within a limited time.

3.4.1.2 The behaviour / management of ATM network access In the 1960’s, airlines agreed to voluntarily respect specific take-off and landing times at the airports, which are allocated by a “slot coordinator”. Today, the regulation of the international allocation of scarce runway capacity is dominated by the Worldwide Scheduling Guidelines of the International Air Transport Association (IATA) that provides the framework for the slot allocation13. Twice a year, Schedule Coordination Conferences are held, to discuss the airport capacity limitations, in which ICAO membership airlines may participate. Three weeks before each conference, airlines provide coordinators of the airports Coordinators with “schedule clearance requests” for the arrival and departure times. According to this information, the coordinator identifies the periods with capacity problems and during the conference, schedules are adjusted through bilateral discussions to match the capacity. The main principles of the Worldwide Scheduling Guidelines are: • Time niches are assigned according to the grandfather-principle: It means that the airline gets a slot it had already owned the previous period. However, airlines lose grandfather rights if they do not operate them for at least 80% of the time of one period (use-it-or-lose-it principle) where one flight period is six months. • Airlines offering scheduled service over a longer duration are given priority over those who fly less frequently. • Commercial traffic takes priority over non-commercial or military traffic.

In 1993, the European Community introduced Regulation 95/93 on common rules for the allocation of slots. The purpose of the regulation was to give legal force to the existing IATA

13Only in UK, slot allocation is managed by an independent agency called “Airport Coordination Limited” on behalf of airports in accordance with the IATA Scheduling Guidelines. 32

system. Within this regulation, “grandfather rights” remained as the main slot allocation principle, however “slot exchange” was allowed on a transparent and non-monetary basis. Slot trading in combination with monetary transactions is not intended for the near future. To compensate newcomer airlines for disadvantages that result from grandfathering, the guidelines state that 50% of free or new slots should be primarily allocated to them.

3.4.1.3 The performance of ATM network access From the economic perspective, the performance of the slot mechanism depends on the efficiency of the allocation of the available airport capacity. The overall capacities of airports depend on several aspects such as daily weather conditions, capacity of runways, taxiways, etc. The airport coordinator needs to calculate an average of the available slots. Since some conditions like the weather vary during the season, it is difficult to find the optimum amount of slots to give to airlines that there is neither overloading nor unused capacity. The performance of the current slot allocation regarding the optimal use of the available airport capacity has some weaknesses: Firstly, the slots are not allocated to the airlines which express the greatest willingness to pay so they are not distributed to those airlines which would use the slots most efficiently. Secondly, the system is a market entry barrier for newcomers on attractive airports and reduces in the long run the efficiency pressure on the old settled airlines [Ref. 37]. In 2001, the European Commission proposed a Regulation amending Regulation 95/93 in order to promote more efficient usage of airport capacity based on “market values” without changing the system of “grandfather rights” radically [Ref. 36]. Some EU Member States have already considered technical amendments and proposals in order to clarify the role and position of the slot coordinator and better declare airport capacities. Within this scope, slot allocation should be revised according the direction of economic approaches and market mechanisms.

3.4.2 Demand

From the airlines’ perspective, slots at the airports are the access points to the whole air traffic network. With an unlimited capacity of airports, the organisation of the entry would not be a constraint. However, the main airports in Europe are congested due to the high air traffic. The fact that most of the airlines prefer to fly during peak hours (day-time) increases the capacity problem at airports. On the other hand, even if the carriers would agree to distribute their flights evenly between peak and non-peak hours, there are airport regulations which prohibit night flying because the residents who live around the airport area are disturbed by the noise of the aircraft. As a result, the airlines are not free to choose the time of their take-off and landing. It has to be mentioned here that an airport is in most cases a monopoly in its geographical area. Therefore it is essential that the slot allocation is granted in a non-discriminative way to ensure fair conditions for the network entry. The current slot allocation discriminates against the airlines which try to enter the market at an airport. In particular, the new emerging low cost carriers which fly at much lower prices than traditional airlines have difficulties to get slots at peak hours at big airports. It is not always possible to extend the capacity of the congested airports. Therefore, new approaches for slot mechanism have to focus mainly on efficient allocation of the existing airport capacity. Some examples of the recommendations given in the economic studies, which examine alternative slot allocation systems are:

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• Slot auctioning, where slots are distributed on a monetary basis to the airlines which are ready to pay the highest price [Ref. 39] • Slot prices depending on the time of day (peak/ off-peak) in order to distribute the capacity more equally between day and night [Ref. 38]

3.4.3 Discrepancies

The main objection of the airspace users to the current slot allocation system is that the new airlines, especially the low cost carriers which try to enter an airport, are discriminated because of the “grandfather rights”. There is no actual “market” for slots where they are exchanged on a monetary basis. Therefore the slots are not allocated to the airlines that will use them in the most efficient manner Table 5: Comparison of supply and demand for ATM network access

CHARCTERISTECS OF THE SUPPLY REQUIREMENTS OF THE USERS (AIRPORTS) (AIRLINES)

The current slot allocation system is based on The airlines expect non-discriminatory “grandfather rights”: The airline which had the slot access to the network. in the previous period gets it again, if it uses at least 80%.

Slot distribution on a monetary basis, to Slots are allocated free ensure a more efficient use of the capacity

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3.5 En-route Charge Management

3.5.1 Supply

In Europe, en-route ATM services are subject to a charge regime defined by the EUROCONTROL Enlarged Committee on Route Charges; these are administered and collected by the Central Route Charges Office (CRCO)14. Figure 4: EUROCONTROL Charging Areas15 - 2004

Source: EUROCONTROL CRCO report, 2004 The basic principles for a harmonised regional en-route charge system for the EUROCONTROL Member States came into operation on 01.11.1971. Regarding the EUROCONTROL International Convention relating to Cooperation for the Safety of Air Navigation of 13.12.1960 (supplemented in 1981 and 1997), the Member States are now implementing a common policy for the calculation of the charges levied on aircraft operators

14 The general principles for the determination of the route charges are defined by ICAO in “Statements by the Council to Contracting States on Charges for Airports and Air Navigation Services", Doc 9082/5, International Civil Aviation Organisation, 1997. 15 The European countries on the map, shown in white (not members of CRCO) are: Poland and Serbia- Montenegro. 35

of en-route air navigation facilities and services. This common policy builds on the provisions of the Multilateral Agreement relating to Route Charges, which has been in force since 1986. The EUROCONTROL Route Charges System is open to all European States wishing to participate and in particular those States which are members of ECAC (European Civil Aviation Conference). The Central Route Charges Office at EUROCONTROL operates the charging system, whose principles are set by the International Civil Aviation Organisation (ICAO), on behalf of the States. The en-route charges are based on the cost recovery principle. Thus the EUROCONTROL Member States recover the costs of providing air traffic control facilities and services to ensure safe and efficient air traffic flow by means of route charges levied on users of their airspace. This charge depends on the distance based on the last flight plan and, less then proportionately, the aircraft weight.

3.5.1.1 The structure of route charges management supply: CRCO offers services to its member States: • Collection of the en-route charges • Billing and distribution of the charges • Bilateral agreements for approach and terminal charges • Advisory services including financial simulations and studies

To the airspace users, CRCO offers services software to calculate charges and to calculate the payment to each state overflown. Thanks to the CRCO, the airlines interface only one entity instead of several ANSPs to pay the en-route charges and they get only one invoice.

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3.5.1.2 The behaviour / strategy of CRCO Figure 5: Organisation of CRCO16

The Enlarged Commission of the CRCO, which is composed of the Ministers with responsibility for transport in the Member States, determines the principles for establishing the costs incurred by the States in respect of en-route services, and also determines the common rules for calculating route charges. The Enlarged Committee of the CRCO, which consists of Member States' representatives at a senior level, prepares the decisions for the Commission and supervises the operation of the Route Charges System, including the use of the resources employed by EUROCONTROL for this purpose. It also takes all necessary measures, particularly in respect of the recovery of route charges, to comply with the decisions of the Commission.

3.5.1.3 The performance of CRCO CRCO publishes its annual cost and a performance metric expressed as the percentage it represents among the total en-route air navigation costs. In 2002 the total cost of the CRCO unit was 19M€ in 2002 which represents 5% of all EUROCONTROL agency cost. The CRCO is financed through a separate administrative rate that is paid by the EUROCONTROL Member States. The productivity of the CRCO is expressed as the number of flight messages processed per staff member and it showed an increase of 7.3% between 2003 and 2004 [Ref. 7]. Also the recovery rates of en-route charges are published annually by CRCO as a performance indicator for the unit. It is the recovery rate, at 31 December of year N, for amounts billed in respect of year N-1. The recovery rate for 2003, measured on 31 December 2004, was 99.20% whereas the recovery rate of the previous year was 99.33%.

16 http://www.eurocontrol.int/crco/public/standard_page/intro_crco.html 37

3.5.2 Demand

The customers of the CRCO unit are in the first place the EUROCONTROL member states. The military aircraft do not pay en-route charges so they do not use the service provided by the CRCO. The main advantage of the airlines is that they have to pay only one institution instead of all the states they overfly. They get only a bill, which includes all the en-route charges of the ANSPs whose ATC service they used during the flight. In that way, the airlines reap the benefits of a centralized charging mechanism even though they are not the direct customers of it. The fact that the en-route charges are collected by a EUROCONTROL unit is not criticised by the airspace users. This seems to be the most efficient way, since the required flight data for the en-route charges collection is already stored by another EUROCONTROL unit, namely by CFMU. The critics regarding the billing and invoicing function in the ATM market are more related to the role of the airspace users in the Enlarged Commission and in the Enlarged Committee, where the decisions on the route charges are taken.

3.5.3 Discrepancies

The CRCO is an intermediate body for collecting and re-distributing the en-route charges. Additionally, it gives recommendations to the States on rules and procedures of the route charges system. The airlines do not have a direct demand for the service provided by CRCO. Nevertheless, according to the comments of the airspace users on the EC report “Study on the Implementing Rules of Economic Regulation within the Framework of the Implementation of the Single European Sky”, the CRCO is expected to have more influence regarding the assistance of the States for the rules on en-route charges.

Table 6: Comparison of supply and demand for route charges collection

Characteristics of the supply Requirements of the users (CRCO) (airlines)

The charging mechanism and unit rates are decided The airspace users expect enhanced by the Enlarged Committee collaboration between ANSPs, CRCO and them CRCO assists the Enlarged Committee regarding The system relies on goodwill of the rules & procedures of the route charges system individual States. CRCO should enforce compliance CRCO is currently studying various issues related to The implementing rules shall be charges including lower/upper charges, fixed and developed by more than one stakeholder variable charges, etc.

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4 Comparison of ATM with selected network industries

In this chapter, the liberalisation experiences of three network industries -mobile telecommunications, passenger air transport and Internet- are described and their nature is compared with ATM in order to anticipate a possible scenario for the ATM market. Over the past years, the European Commission launched a deregulation reform program to liberalise the market for the network industries covering telecommunications, electricity, gas, water, rail and air transport. Deregulation or liberalisation is a set of regulatory reforms which refers to complete or partial elimination of regulation in order to improve the performance of the industry, e.g. to introduce lower prices and better quality of service. With regard to network industries, the aim of deregulation or liberalisation is to enhance competition in the industry. After the liberalisation of the telecommunications and air transport industries, many service providers entered these markets. New types of services have emerged due to the technological developments driven by competition among the suppliers of the services. Prices of these services declined significantly which resulted in high penetration rates (e.g. the percentage of the population that uses mobile phone) while the quality of some services has increased. The following three sections are each dedicated to one network industry. First, some background information on the industry is given including its technological evolution. Then, the market development is explained by means of examples from France, Germany and UK. Lastly, each network industry is compared with ATM industry sub-markets in order to find the similarities in their functioning.

4.1 Mobile Telecommunication

4.1.1 Introduction to the Mobile Telecommunication Sector

The first radiotelephone service was introduced in the US at the end of the 1940s, and was meant to connect mobile users in cars to the public fixed network. In the 1960s, a new system launched by Bell Systems, called “Improved Mobile Telephone Service” (IMTS), brought many improvements like direct dialling and higher bandwidth. The first cellular systems were based on IMTS and developed in the late 1960s and early 1970s. The systems were “cellular” because coverage areas were split into smaller areas or “cells”, each of which is served by a low power transmitter and receiver. During the phase of the first generation (1G) of mobile communications in the 1970s, the microprocessor was invented and the control link between the mobile phone and the cells were digitalised. Second generation (2G) digital cellular systems were first developed at the end of the 1980s. These systems digitised not only the control link but also the voice signal. The new system provided better quality and higher capacity at lower cost to consumers. With the introduction of the third generation (3G), mobile phones will provide high-speed data access to all forms of information. Customers will be able to access the Internet, to shop on-line, download video and audio clips. Even to conduct videoconferences will be possible by using 3G devices. 39

A mobile phone is a low-powered two-way radio converting human voice and data messages into radio waves. When making a call, these radio signals are transmitted from the mobile phone to the nearest base station. Once a signal reaches a base station it is then transmitted to the main telephone network where it is transferred to the network of the person receiving the call. In order to enable millions of people to make calls, each of the mobile phone service providers divides the country where they operate into thousands of individual geographic areas known as ”cells”. At the heart of each cell is a base station. The cells overlap at the edges to prevent holes in coverage. If the radio base stations are too far apart, calls cannot be handed over from one area to another and are interrupted when mobile users are on the move. Radio base stations are sites that enable mobile phones to work. They can be big or small and have transmitters and receivers in a cabin connected to antennas. They can be mounted on a large mast or tower, an existing building, rooftops or street furniture such as street lamps. Without base stations, mobiles will not work. The base stations are connected via the public land mobile network (PLMN) to the Public Switched Telephone Network (PSTN) which delivers fixed telephone service. Figure 6: Mobile Telephone Network

4.1.2 Segmentation of the Market

The suppliers of the mobile telecommunication market can be broken down into 4 categories: fixed telephone network owners, mobile telecommunication operators, network equipment suppliers and mobile phone manufacturers. In most countries, the fixed telephone network is

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owned by the incumbent operator. However, according to the EC regulations, they have to grant symmetric access to all telecommunication operators. Table 7: Segmentation of the mobile telecommunications market Mobile Telecom. Suppliers Demand Services

Local Network Owner Voice transfer Individuals (mostly the incumbent operator in each country, SMS Companies e.g. France Telecom) MMS Mobile Telecommunications Internet Operator (news, downloads, (Orange, Vodafone, T- etc.) Online e.g.) Private Mobile Phone communication Manufacturers networks (Nokia, Siemens, Samsung e.g.)

Network Equipment Suppliers (Ericsson, Nortel, Alcatel)

4.1.3 Liberalisation in Telecommunication Sector across Europe

Telecommunication was one of the network industries which were affected in the last years by the regulatory reform of the European Union in the hope of achieving significant economic benefits such as permanently lower prices, increased technological development and more efficient production [Ref. 16]. The following issues gave incentives to the EC to liberalise the telecommunication market: • Radical developments in the electronics/computer industry and digital technology lowered the costs for certain types of infrastructure and offered opportunities for market entry. • Increasing technological convergence between previously separated industries (consumer electronics industry and media publishing) created new types of value- added services. • Internationalisation of national carriers • In Europe, concerns were raised over creating a single European market for equipment and services able to compete against the US and Japanese rivals

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Furthermore, the Member States had the intention to increase the use of mobile telecommunications and therefore capacity of the mobile network, by means of new investments. Public Private Partnership was seen as a possibility for the financing. An initial start for government policies in the EU Member States came from European Commission policy. In 1993, the European Community and the Member States committed themselves to liberalise the telecommunication services sector in Europe on 1 January 199817. The background for this policy was the Commission’s White Paper on “Growth, Competitiveness and Employment” of 1993. It emphasised the importance of the information society as a key to future economic growth, competitiveness, job creation and improved quality of life for all Europeans. The EU liberalisation was implemented on 1 January 1997 in most countries and opened the markets in each Member State on 1 January 1998. After the opening of the telecommunication markets, the incumbent fixed line operators remained the dominant providers in most European countries. However, the situation was different for the mobile telecommunications segment. Since 1998, there has been extensive competition in most Member States, with services being provided by three or more operators. The incumbents have a smaller share of the market than is the case in the fixed telecommunications market. One of the reasons is that the mobile telephony has boomed during the last 10 years, which makes it easier for new market participants to enter the market [Ref. 16]. Another reason for the entrance of competitors in the mobile market lies in the regulatory scrutiny imposed on the historical incumbent telecommunication operators. This scrutiny limited the extent to which they could use their dominant position in fixed line telecommunication to stifle competition in newly liberalised markets, such as mobile or Internet access. Even with additional entrants, competition in the mobile market was sometimes limited due to the small number of available radio spectrum licenses. To counter this barrier to entry, many countries have encouraged the established mobile network operators to lease network space to Mobile Virtual Network Operators (MVNOs). These new entrants make the market even more competitive, and in some countries the market is now considered to be saturated. Operators in the UK and Germany were among the first to open their network to MVNOs (Virgin Mobile in the UK launched in 1999); French operators were obliged to open their networks to MVNOs in 2005.

Germany Germany introduced political decisions during 1997 and 1998 to ensure a competitive Information Society. Major achievements during this period were: • Opening up the telecommunication market since 1998 • The introduction of new multi-media services • The issuance of new laws and more than 500 telecommunication licenses by the Regulatory Authority for Telecommunications and Postal Services

17 “The aim of Community telecommunications policy is to remove barriers to the proper functioning of the single market in equipment, services and telecommunications networks, to open up foreign markets to Community companies and to make modern, accessible services available to EU nationals and companies. These aims are to be achieved by harmonising standards and requirements for the provision of services, opening up the terminals, services and networks markets and adopting the necessary regulations.” See European Commission database at http://europa.eu.int/scadplus/leg/en/lvb/e21103.htm 42

• Reduction in telephone and Internet access costs Since the 1st of January 1998, the German telecommunications market has been opened up to competition without any restrictions. Until that time T-Mobile, the mobile arm of Deutsche Telekom, was the sole provider for mobile telecommunication services. As of August this year, 10 mobile cellular licenses have been given to mobile telecommunication operators, of which 6 were for Universal Mobile Telecommunications System (UMTS, known as 3G) services. However, only 4 3G licenses are currently active due to the market conditions and the general economic situation. [Ref. 20] The strong competition in the market resulted in substantial reductions in the cost of mobile phone calls and in significant increase in population penetration. New entrants have stimulated investment and innovation throughout the market18 and there have been improvements in products, product choice and quality of service. [Ref. 24] Figure 7: Germany - Mobile Penetration Rates19

The evolution of the penetration of mobile telecommunications in Germany

80 70 60 50 40 30 20 10 0

2 3 4 5 6 7 8 9 0 1 2 9 9 9 9 9 9 0 0 99 99 00 19 1 19 19 19 19 1 19 20 20 2

Above, the figure shows that mobile penetration in Germany has increased from 1.2 per 100 inhabitants in 1992 to 7.1 in 1996 and to 71.7 per 100 in 2002. Some 99% of the German population is covered by mobile networks. Germany has four mobile operators, but nearly 80% of the market is split fairly equally between the incumbent-owned T-Mobile and Vodafone. E-Plus has the next largest market share of 13%, followed by O2 with the remaining 9%. Those four operators also received 3G licenses. According to the European Central Bank report [Ref. 16] the average mobile charge in Germany was 0.51€/minute in 2000. The tariffs shown in the table below indicate that as of 2005, the charges declined to 0.30€/minute20.

18 For instance, T-Mobile has been active in provision of wireless Internet access systems not only in Germany but elsewhere. 19 See [Ref. 24]. 43

Table 8: The mobile telecommunication service providers in Germany21

Market Subscribers* Basic tariff share*

T-MOBILE 38% 27.5 M 50 min for 15€ (Between T-Online numbers and to national fixed network)

VODAFONE 37.6% 27.2 M 50 min for 15€ (Between Vodafone numbers and to national fixed network)

E-PLUS 13.3% 9.7 M 50 min for 15€ (To all national mobile and fixed operators)

O2 11% 8 M 50 min for 14,95€ (To all national mobile and fixed operators)

At the same time as the liberalisation of the telecommunication market, the Regulatory Authority for Telecommunications and Posts (RegTP) of Germany was set up in 1998 as a sector specific telecommunications regulator subordinate to the Federal Ministry of Economics and Labour. RegTP’s functions include22: • Promoting competition • Licensing, frequency management and assignment, numbering • Control of anti-competitive practices • Price regulation of operators with significant market power • Order interconnection/network access • Market observation • Monitoring universal service obligations

As an independent authority, any general directives given by the Minister of Economics and Labour to RegTP must be transparent. Nevertheless, there have been concerns expressed about the independence of the regulator. The government still owns 42.3% of the incumbent operator DTAG (Deutsche Telecom AG, parent company of T-Mobile), which raises concern about a conflict of interest as it is both shareholder and regulator/policy maker [Ref. 24]. In Germany, rates of dominant companies for voice telephony, transmission lines, for network interconnection and for special network access are subject to regulation by the RegTP. However, under the 1996 Telecommunications Act, mobile termination rates are subject to ex-ante regulation only if a mobile network operator is determined to have significant market power. The two largest mobile telecommunication providers T-Mobile and Vodafone have a combined market share of about 80% with roughly 40% of the market each. However RegTP concluded that there was no single provider with substantial market power.

20 Even though the monthly prices are the same, there are some differences between the tariffs. Some offers include a mobile phone or unlimited text messages. 21 See, http://www.ovum.com/germany/grcomment15.asp 22 See, http://www.essex.ac.uk/ecpr/events/jointsessions/paperarchive/grenoble/ws20/bollhoff.pdf 44

Accordingly, RegTP does not regulate the mobile telecommunications sector by means of ex-ante price regulation over retail or wholesale prices. United Kingdom The UK led the rest of the Europe when it began the deregulation process in the mid 1980s. Constraints on the availability of radio spectrum for mobile communications have led the government to develop a regulatory framework based on competition, with new licences issued by auction to the highest bidder. This was intended to give opportunities to new entrants wishing to bring greater innovation and quality to the consumer. In the 1990s, UK took the lead in Europe to develop the standards for 2nd generation digital GSM mobile phones. It was one of the first countries to establish second generation networks and PCN digital (GSM-1800) networks, and is now one of the leading countries in developing third generation mobile telecommunications. In April 2000 the British government granted five 3G licenses which earned the country over 35 billion Euros. The companies which received a license were Vodafone, BTCellnet, One 2 One, Orange, and TIW (Telesystem International Wireless, now Hutchison 3G UK Ltd). The UK government considers that the licence costs and increased competition brought by a new entrant will encourage the operators to introduce new and innovative services quickly, at attractive prices to maximise the return on their investment [Ref. 21]. By 2002, there were over 200 licensed telephony operators in the country. Among licensed operators were five mobile operators, one of which was an MVNO23. The first 3G network was launched in 2003. At the beginning of 2005 there were four 3G networks operational in the UK, although network coverage was mostly limited to a number of cities. The UK mobile market was experiencing dramatic growth in 2002, which had led to a number of acquisitions in the previous two years. Mannesmann was acquired by Vodafone, Deutsche Telekom (T-Mobile) acquired One 2 One, and France Telecom acquired Orange24.

23 MVNO is an operator which does not own its own network but rather leases capacity on another operator’s network to provide mobile services. 24 Initially, Orange was a British company which was set up in 1994. In February 2000, Mannesmann acquired Orange. At that time, Mannesmann itself was bought by Vodafone. In August 2000, France Télécom acquired Orange from Vodafone for a total consideration of 36.4B€.

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Figure 8: UK - Mobile Penetration Rates25

The evolution of the penetration of mobile telecommunications in UK

80 70 60 50 40 30 20 10 0 1998 1999 2000 2001 2002

Currently, there are four mobile 2G network operators in the UK: Vodafone, mm02, One 2 One and Orange. These operators in turn host a number of MVNOs. At the end of September 2001 there were 44 million mobile subscribers in the UK. This represents an increase of 27% over a one-year period. There are a growing number of pre-pay subscribers whose usage tends to be lower than contract subscribers; this initially led to a fall in average outgoing minutes per subscriber as has occurred in many other OECD countries [Ref. 25]. The yearly volume of the business rose to 40 billion GBP in 2000 (7.5 billion in 1984). Also the range of the services has been increased. Especially after the privatisation of the British Telecom in 1984, the UK telecommunications market has experienced a significant expansion. In 1984 the independent regulator, the Office of Telecommunications (Oftel), was set up to provide regulatory safeguards. “Oftel’s primary regulatory responsibilities in the telecommunications sector are: • Ensuring UK customers have the best deal in terms of price, choice and value for money and access at any time to a minimum set of services at reasonable cost • Encouraging competition in infrastructure and services as the best way to secure the best deal, minimising regulation in step with the competitiveness of markets • Carrying out market reviews to assess state of competition and hence appropriate regulation • Regulating retail prices (and quality of service) where the market does not sufficiently protect customers • Regulating interconnection charges and other conditions where appropriate to safeguard competition • Considering claims against operators of exploitative or anti competitive behaviour and where appropriate imposing suitable remedies within its powers, including modifying licences.”26 Table 9: The mobile telecommunication service providers in UK (June 2005)

25 See, [Ref. 26]. 26 See [Ref. 25], p. 21. 46

Market Subscribers Basic Tariff share

T-MOBILE27 27% 19 M 50 min + 500 SMS for 28€28 (The price/min is same to any network)

ORANGE 25% 14 M 120 min + 250 SMS for 36€ (The price/min is same to any network)

O2 24% 14 M 50 min + 500 SMS for 22€ (Price/min to fixed network and to O2 is 10p, to other mobile networks 40p)

VODAFONE 23% 13 M 25 min for 28€ (Price/min to fixed network and to Vodafone is 15p, to other mobile networks 40p)

France Competition in the mobile telecommunications market was first introduced in France in 1987 when SFR obtained a licence allowing it to compete with the incumbent mobile operator, France Telecom Mobiles (now known as Orange). As a result of the duopoly the development of mobile markets in France was initially relatively slow so that in 1996 France had a mobile penetration rate of 4.2 subscribers per 100 inhabitants, below the EU average penetration rate of 9%. The mobile duopoly remained in place until 1994 when a third GSM licence was awarded to Bouygues Telecom. Since 1996, with the development of service by the 3rd operator, growth has accelerated with a compound annual growth rate of 72 percent from 1996-2001. Today, the market situation in France with only three operators is still unique in Europe given that in most countries there are at least four operators.29 France Telecom (Orange) is the market leader and targets voice and data services to both the business and the mass market. Bouygues Telecom aims at the consumer market through an aggressive tariff scheme and bundled packages. SFR on the other hand targets high value mobile subscribers. In June 2000 the French government decided to allocate four 3G licenses. In June 2001, only two licenses were granted, to France Telecom-Orange and SFR, due to the decrease in telecoms investments.

27 The subscribers of Virgin Telecommunications are counted together with T-mobile subscribers. 28 Original amounts were in GBP and were converted with the exchange rate 1.45. 29 There are four operators in Germany, UK , Italy and Netherlands. 47

Figure 9: France – Mobile Penetration rates30

The evolution of the penetration of mobile telecommunications in France

80 70 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003

Together with the rest of the European Union Member States, the French Telecommunication market has been open to competition since 1998. Since then, the market has significantly expanded, from 22.7 billion euros in 1998 to 32 billion euros in 2002. Mobile telephony became the driver of growth in the telecommunications market. Revenues rose 12.6% on 2002 and were on a level with fixed telephony revenues in 2003. Mobile network call volumes continued to grow sharply (+21.2% in 2003), at a similar rate to previous years [Ref. 28]. The range of services on offer increased as well. As of 31 December 2003, there were more than 41.6 million people in France with a mobile, corresponding to a penetration of 69.1%. According to the sector regulator, Autorité de Régulation des Télécommunications (ART),31 prices have declined for mobile telecommunications by 12% - 39% between 1998 and 2001 depending on individual subscriber packages. Due to the requirements of ART, the fixed to mobile call charges were also reduced by 40% over the same period.

30 See [Ref. 28] 31 ART was recently renamed Autorité de Régulation des Communications Electroniques et des Postes (ARCEP) in order to include the regulation of, among others, the Postal sector (cf. http://www.art-telecom.fr/). 48

Table 10: The mobile telecommunication service providers in France (2003)

Market subscribers basic tariff share

ORANGE 48.8% 20.3M 45 min + 120 SMS for 24€ (The price/min is the same to any network)

SFR 35.3% 14,7 M 1 h for 22€ (The price/min is the same to any network)

BOUYGUES 15.9% 6.6 M 1 h for 17.9€ (The price/min is the same to any network)

It has to be added that the market shares of the French mobile operators obviously do not depend only on the tariffs which are shown above. Those tariffs are chosen as examples for the pricing system of the companies. However, there are a great number of other tariff possibilities which are sometimes also connected with the provision of special mobile phones. The choice of the mobile operator by a customer is the result of the price/performance ratio of different, combined services. mobile telecommunications company. The ART was set up in 1997. When Parliament voted for the first budget of the ART it decided that the regulator’s budget should come completely from the State Budget. ART has shared powers with the Minister responsible for telecommunications. ART, as a regulator, should have sufficient powers to take action where it is necessary to create more effective conditions of competition. It does not seem to have this power to act autonomously when necessary [Ref. 27]. There have been continuing criticisms about certain aspects of the ART’s approach to dispute resolution, but the real problem appears to be the lack of power to enforce decisions or unwillingness to implement sanctions where these are not respected. ART’s primary regulatory responsibilities32: • Provides authorisation for the provision of independent networks for closed user groups • Can sanction operators for not meeting legal or regulatory requirements • Set out regulations for rights and obligations arising from the operation of various categories of networks and services • Set out technical rules required to ensure interoperability, efficient use of radio spectrum and of telephone numbers • Examine licence applications on behalf of the Minister • Propose to Minister the sum payable as the contribution to the financing of universal service, and supervise financing mechanisms • Allocate frequency and numbering resources to operators • Responsible for interconnection dispute resolution and conditions of access to networks • Responsible for settling disputes concerning sharing of rights of way

32 See [Ref. 27], p.16. 49

In France, price regulation is applied only to those services for which the regulator considers there are no competitors in the market. In this chapter, the evolution of the mobile telecommunication industry due to the liberalisation process was examined. For this purpose, the situation in the mobile telecommunication markets of Germany, UK and France was described to see what changed after they were opened. In all of these countries, the States issued licenses to companies that intended to provide mobile telecommunication services. At the same time, independent regulatory bodies were created to regulate the telecommunications operators. In the following years, it was observed that the prices declined significantly thanks to the competition on the market. The liberalisation resulted in new technologies, better service and increased penetration rates as well.

4.1.4 ATM Market Comparison with Telecommunication Industry

• The borders of the mobile operators are divided into cells which are comparable with the ATM sectors • The cells have to overlap each other in order to avoid an interruption of the calls • Seamless network is important for the quality of the service. Up to the speed of 300km/h, the network is still available during the change from one cell to another one • Seamless network is highly dependent on standardisation between operators • Cells in mobile are technology intensive whereas they are labour intensive in ATM • In mobile, users pays his “own” operator (i.e. first operator to initiate the call) even if cost and billing activities involve other operators (access to someone from a different network, either fixed or mobile, roaming in a different country) • Each operator manages its own cells and installs its own base stations • Operators share the infrastructure for base stations whenever it is possible Below, the mobile telecommunication industry is presented corresponding to the five ATM sub-markets which were examined in the first part of the report.

Table 11: Comparison of Mobile Telecommunications with ATM Sub-markets Network Design Flow Traffic Network Pricing and Invoicing Management control Access Function Point - The hertzian space is - Flow - Protocols - Telephone - Each operator bills and fragmented into cells, management and numbers collects from its own users depending on the mobile exists only to encryption grant access - Bilateral agreements users density some extent ensure to the between the operators in - Each mobile operator (e.g. for privacy network different countries for needs its own markets such monetary transfer infrastructure in its cells as corporate (Roaming, call termination) - No overall optimization SMS, where - Higher charges during of the network design companies peak hours connect to the network to send bulk SMS).

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4.2 Passenger Air Transport Services

4.2.1 Introduction to the Passenger Air Transport Services Sector

In this chapter, the evolution of the passenger air transport services is described. The importance of air transport as a travel mode is increasing rapidly. In 2004, IATA estimated an average yearly growth rate of 6% for worldwide international passenger air transport. The estimated growth rate is even higher for some markets, e.g. Europe-Asia/Pacific (7.1%) and Europe-Middle East (7.7%). Although the passenger air transport market experienced some crises in the last years like the terrorist attack of the 11th of September, the war in Iraq and the SARS alarm in China, most airlines are operating successfully again. Here, the liberalisation/deregulation initiative of the European Commission played a major role as well. After the air transport market was fully liberalised in most western countries, a great number of airlines emerged which provide flights at significantly lower prices than the national flag carriers. Also some technological developments like e-ticketing and online travel agencies have occurred so travelling by air is becoming more and more attractive for passengers.

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4.2.2 Segmentation of the Market

The air transport market consists of several actors who are involved in the passengers’ travel at different levels. Below, the market is presented and actors both on the supply and demand side are described. Table 12: Segmentation of the air transport market

Suppliers Basic Air Transport Intermediate Users Services Services

Airlines Code Sharing Passengers Ticketing Management and (different Alliances of Reservation services Interlining purposes) Airlines Baggage handling Facilities Private Post transporters Trip per se (seat km) “on request” Direct flight Freight Airports 1 stop flight More than 2 stops flights Customs 1st class/business/eco miles Police Comfort services Ground H. service prov. Lunch on board/drinks Free tax sales Travel Newspapers, etc. Agencies

Fuel Providers

ATM

4.2.3 Liberalisation experiences in Passenger Air Transport Services across Europe

Within the scope of the liberalisation/deregulation initiative of the European Commission, the European air transport sector was liberalised between 1980 and 1993. Aviation is an international industry where most of the legislation now originates at the European Union level. The first "package" of 1987 limited the right of governments to object to the introduction of new fares. Some flexibility was allowed to enable airlines in two countries which had signed a bilateral agreement to share seating capacity which allowed the airlines to increase their capacity.

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In June 1990 a second "package" of measures opened up the market further, allowing greater flexibility over the setting of fares and capacity-sharing. The third "package" of measures were adopted in July 1992 and applied as of January 1993. This package gradually introduced freedom to provide services within the European Union and led in April 1997 to the freedom to provide cabotage, i.e. the right for an airline of one Member State to operate a route within another Member State. After the liberalisation of air transport in Europe, the European airlines were allowed to enter into alliances unless they resulted in a monopoly. The European airline sector has historically been dominated by national “flag carriers” which emerged along national boundaries after World War II. These historically important airlines were state-owned or state-sponsored instruments of economic development. Examples are British Airways, Lufthansa and Air France. The dominance of the flag carriers is now being reduced as the European airline market is being liberalised. The private airlines can design their routes depending on the needs of the passengers. The States intervene only to complement the network with subsidized destinations that are not profitable enough for the private carriers. Today, there are many private airlines which are competing in a free market environment and the market share of the low cost carriers is rising permanently. General results of the liberalisation of the air transport are: • New ticket pricing strategies including widespread use of yield management by means of Internet sales • The fast growth of route expansion (Hub-Spoke and Point-to-Point flights) • A process of mergers and takeovers within the industry • Introduction of the innovative services like interlining, code sharing and e-ticketing For the customers, the liberalisation of air passenger transport led to several benefits. In particular, the entry of the low cost carriers has resulted in lower prices, higher choice of carriers on routes, and better service in terms of number of destinations and frequency of the flights. On the other hand, there are still barriers for entry in the aviation industry. Main reasons are: • The high ratio of fixed costs in the cost structure results in economies of scale [Ref. 40] • The service provision can be considered as “capital intensive” and it requires high technology as well as very specific qualification of the human resource • The current slot systems (grandfather rights) are discriminating against the newcomers. • Frequent flyer programs • The remaining flag carriers still get public subsidies from the states [Ref. 40]

4.2.3.1 Pricing Strategies In recent years, airlines started to use different pricing strategies to attract passengers. Previously the prices were defined according to simple categories (e.g. economy class, business class); now, especially for low cost flights, nearly each seat is sold at a different price. The aim of this new strategy -called “yield management”- is to increase the load factor by selling the flight tickets to passengers according to their willingness to pay. For the same flight, seats are offered at different prices for students, for retired people, for the first 10 seats, for last minutes offers, etc. Airlines are not capable of achieving 100% load factors because on certain days and at certain times there is not enough traffic to fill an aircraft. Indeed, if the load factor is too high, 53

it might suggest that the airline is undercharging. Therefore, yield management is an important issue for airlines to optimise their revenue. Passengers who can afford higher prices do not book in advance, or buy first class tickets, whereas the others can reap the benefit booking 2 months before the flight.

4.2.3.2 Evolution of the direct flight system versus hub & spoke system and route expansion The hub-and-spoke system is a cost-efficient network type for air transport, which the airlines prefer rather than operating a large number of point-to-point destinations. With this system, the airlines provide flights to a hub-airport, from which all the connections extend. It allows significant cost saving because the number of non-stop flights to a large number of city pair is reduced. For an efficient hub-and-spoke system, a high level of co-ordination is needed between the hub airport and the airline that is using this airport. Several flights must arrive at the airport approximately at the same time in order to catch the connection to the final destination. Even though it is theoretically possible that an airport is used as a hub by more than one airline, normally this is not the case. The strong collaboration between the airport and one specific airline in addition to the “grandfather rights” by slot allocation system results in most cases in the dominance of this airline at the airport, which can be a cause for dispute with the competition. Contrary to the traditional airlines, which prefer hub-and-spoke system, the low cost carriers provide mostly point-to-point flights by using smaller airports outside of the city centres. After the liberalisation of air transport, a great number of low cost carriers have emerged. Therefore the number of flight destinations and specifically the point-to-point flights have both increased rapidly.

4.2.3.3 Airline Alliances Alliances are a strategy that companies use if the growth of their own company is not possible for some reason. Alliances vary from marketing cooperation to complete mergers and acquisitions. The major benefits of an alliance are: • Increased revenue due to the increased passenger flows from connections, and due to new services that would not have been possible without the alliance • Cost saving, which can be achieved through sharing the terminal facilities, the fleet (in case of a short term capacity constraint), the administration; also through joint reservations, combining cargo operations, joint aircraft purchase, etc. • Joint marketing programs like tour programs and frequent flyer incentives • Strengthened network and increased hub connectivity33

Although airline alliances have been undertaken to ensure higher services to consumers they also raise some issues relating to the competition effects. This can be the case if the alliance partners are the only service providers on some routes or if there is only limited competition. In that case the alliance can set prices which are above the social optimum. The approach of the European Commission in such cases has been to allow alliances with some constraints. As an example, the airlines are not allowed to reduce the frequencies of flights, and must accept pricing rules [Ref. 34]. In 1996, the Commission approved for 10 years co-operation agreement between Lufthansa and SAS. However after the alliance, there was no new forthcoming competition on the routes where these airlines were operating.

33 See “AirlinesGate”, http://airlinesgate.free.fr/articles/alliances.htm. 54

As a result, the European Commission has committed to measures to facilitate entry by new competition.

4.2.3.4 New Services Computer Reservation Systems and Online Reservation Computer Reservation Systems (CRS) are used for inventory management by the airlines. Through terminals, CRSs allow direct access for travel agencies to check availability, make reservations and print tickets. They can also provide a wide range services such as hotel reservations, car rentals and leisure tours. In the 1990s, the CRS industry consolidated into four major companies: Amadeus, Galileo, Sabre and Worldspan. Airline ownership of three of the four CRSs has been declining over the last few years. Sabre is publicly owned since 2000 and Galileo became part of Cendant which is a provider of travel service. Although Amadeus is controlled by three European airlines, 40% of the company is held by the public. Worldspan is still owned entirely by three U.S. airlines. At the time when the CSRs were mainly owned by some airlines, concern was raised that these airlines had designed the systems in a way so the tickets of their own flights were privileged. Now these regulatory concerns have diminished since airline ownership of the CRSs has declined. Nevertheless, the CRSs are still subject to regulation, since they are essential facilities34 for the marketing of air travel services [Ref. 40]. Therefore, EU Council Regulation 2299/89 establishes a code of conduct to ensure non-discriminatory service35. According to this code of conduct, it has to be ensured that these systems present all carriers with equal opportunities. Since 2000, the European Commission is developing this regulation further, especially in the area of e-commerce. Although a big percentage of flight tickets are still being sold through travel agents (thus through CRSs), online sales are becoming more and more important, especially in countries where internet and credit card use is high [Ref. 41]. For most low cost carriers, online sales through the internet are the only distribution channel for the flight tickets. In recent years, different types of Web sites in the “business-to-customer” area have emerged: • Traditional travel agents’ Web sites • Online travel agents • Airlines’ own Web sites • Web sites owned by groups of airlines which offer wider product choice than single airlines’ Web sites Today, most of these Web sites are somehow related with the CRSs. As a result, the same concern about the discrimination of some airlines is discussed, as was the case when CSRs

34 The essential facilities doctrine which results from US antitrust law is now being increasingly used in European competition law. In accordance with this doctrine, a facility can be regarded as essential if the following two conditions are fulfilled: 1- Market entry to the complementary market is not actually possible without access to this facility. 2- Providers on the complementary market cannot, using reasonable effort, duplicate the facility; substitutes do not exist either. The doctrine states that the owner of an essential facility must permit the downstream service providers (complementary market) to use the facilities at fair and competitive conditions. 35 “A system vendor offering distribution facilities in respect of scheduled passenger air services shall allow any air carrier the opportunity to participate, on an equal and non-discriminatory basis, in these facilities within the available capacity of the system concerned, subject to any technical constraints outside the control of the system vendor.” See Council Regulation (EEC) No 2299/89 of 24 July 1989 on a code of conduct for computerized reservation systems. 55

were owned by the airlines. New regulations are therefore needed to ensure a competitive market for airlines. Interlining and code sharing “Interlining is where passengers transfer between airlines in the course of their journey or use different carriers on their outward and return trips”36 without any sharing of the airline codes. The passengers can change the airline at the hub without checking-in for the second time. The revenues of the tickets are distributed between the interlining carriers according to their bilateral agreement. Interlining facilitates baggage handling and ticketing for connecting service since the baggage is transferred automatically from one aircraft to the other. With the Third Aviation package however, limits on the number of carriers which provide flights on each route have been removed so there is a much wider choice for the consumer. As a result, the liberalisation of the air transport in general and the emergence of the airline alliances decreased the need for interlining. However, the service is still important where it makes the access to regional airports and less frequented destinations possible. The competition rules of the EC Treaty permits the practice of interlining and a degree of tariff co-ordination between different carriers, but the rules require that interlining operates in a non-discriminatory way. This means that all airlines should have the chance to participate fairly and that small carriers are not discriminated by unfair pricing of connecting journeys by larger companies. The more recent service in the area is called “code sharing” whereby an airline places its code on a service operated by another airline37. In the case of connecting flights of two or more code-sharing carriers, the passenger's entire flight is displayed as a single carrier service on a CRS. Code sharing can bring both advantages and disadvantages for the passengers. With this service, the network is more extensive and the frequency of the flights is higher. On the other hand, when the two code sharing operators arrange one price, this will have anti-competitive results. The solution is to allow this kind of arrangements, with the constraint that the airlines which provide the service code sharing offers tickets at different prices for the same flight. An additional risk of code sharing is that passengers may end up flying with a different airline than they chose. Therefore, the carriers should tell the passengers which airline will operate the flight when they buy their ticket. E-Ticketing In case of electronic ticketing, reservations are done over the Internet without issuing a hard- copy ticket. The cost of the hard copy tickets can be saved this way. IATA plans the complete change-over to e-ticketing by 2007. According to IATA, the following benefits of e- ticketing can be expected: • It is estimated that via e-ticketing, 9US$ per ticket can be saved which means around 30 billion US$ per year for the whole aviation industry • The problem of lost tickets will be solved • Last-minute travel decisions will be more easily handled • Increased efficiency in revenue accounting due to the use of internet

36 See, [Ref. 42] 37 For example; a French carrier can provide flights to Germany by offering seats for the flight, which is operated between France and Germany by a German carrier. 56

4.2.4 ATM Market Comparison with Passenger Air Transport Services Industry

The comparison of the ATM sub markets with passenger air transport is presented in the table below. Network design and flow management are important issues for the airlines, however, those are not optimized overall, since the airlines are each responsible for their own flights. Table 13: Comparison of passenger air transport industry with ATM sub-markets Network Design Flow Traffic Network Pricing and Invoicing Function Management control Access Point - The design of the - Flow - Safety - The network - Mostly, passengers pay to an network is done by airlines Management during the access is intermediate body (travel themselves (function of means flight is granted by agencies, web site reservation strategy and market management of partially means of the systems) analysis) but it is more and the capacity delegated flight ticket more optimized within utilisation (Yield (via travel - Low cost carriers sell their alliances management) - TCAS agencies, tickets directly to the customers equipment online via Internet - Code sharing and - Charters are a on board booking, etc.) interlining are two specific case, - In case of code sharing, instruments for network where the - CRS is a revenue is distributed between design capacity is not possibility to the code sharing airlines - States can complement planned in access. On according to their agreement the network with advance this side of subsidized destinations the market, (Public Service Obligation) there is a risk for discrimination

4.3 Internet

4.3.1 Introduction to the Internet Sector

This section focuses on the Internet infrastructure and does not cover services that are proposed through the infrastructure (such as web services, sharing software, etc.). In the early 1960s, as computers became important to national defence, the U.S. Department of Defence began to search for ways to share computing resources of major research centres and institutions. The purpose was to create a worldwide network that would not require a centralized control, so that the network would operate even if some parts of it fail. On the other hand it was important to exchange resources despite having different systems, different languages and hardware and network devices. In 1969 the Advanced Research Projects Agency (ARPA) of the Department of Defence developed ARPANET, the first wide area packet switching network, which allowed individual units of data to be transmitted from one computer to another as independent entities. In the late 1980s the independent networks merged into one. In 1991 restrictions on the Internet commercial traffic were eliminated, and by 1995 the privatization of the Internet was completed. After the privatization four companies (Pacific Bell, Sprint, Ameritech and MFS Corporation), became owners of four Network Access Points (NAPs), located in San

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Francisco, New York, Chicago and Washington. The companies, so called backbone providers, exchanged traffic with each other at NAPs. Today, the backbone providers are selling Internet access rights to other large companies, so called Internet Service Providers (ISP), which in turn are providing services to smaller firms and individuals. The ISPs provide the local internet connection for end users, whereas the backbones interconnect the ISPs with each other. Below the network of one Internet backbone, PSINet, is presented. Figure 10: The network of an Internet Backbone38

The networks that comprise the Internet are autonomous and communicate with each other without being controlled by a central authority. The Internet is based on a technology where no dedicated connection is required and no dedicated route has to be set up between the sender and the receiver. The reason is that the Internet uses packet switching technology to transfer data across the network. The outgoing data is converted to a format which is usable by the local network medium, and then data files are broken down into so called packets, labelled with codes, which have information on their origin and destination. Each packet is transmitted over the Internet and reassembled at the destination. [Ref. 29] The heart of the Internet is a principle: cooperation through common language (communication protocols). It is not a single network, but an enormous network of networks that voluntarily chooses to interconnect with each other. To support customer expectations, an ISP must have access to the rest of the Internet. Because these independent networks are organised in a decentralized way, they have to enter into interconnection agreements with one or more other ISPs. Without suitable interconnection an ISP cannot operate, since being part of the “Internet” means access to the full global Internet [Ref. 30].

38 See, http://www.cybergeography.org 58

At the top of the hierarchical structure of the Internet are the backbones that own national and/or international high speed networks. The second layer of the hierarchy includes so called retail ISPs. At the bottom of the hierarchy are the end users, i.e. consumers who browse websites, and use the internet to exchange various types of data. Figure 11: Internet Network39

Web Sites Web Sites

Local Local ISP A ISP B Loop Loop Owner Owner

Backbone Carrier

Users Users

End users generally want to have access to all other possible end-users, regardless of the network they are attached to. To provide such universal connectivity to their users, the firms must interconnect with each other and share their network infrastructure. It must nevertheless be recognized that the Internet evolution raised some concerns over cooperation. It has been argued that the evolution of the Internet infrastructure moved from a basically cooperative structure to a more strategic one. Even if the Internet’s most important feature lies in its ability to link any two points on the network, mergers between international telecommunication operators have often been scrutinized by competition authorities because they attempt to take strategic advantage over the infrastructure (e.g. WorldCom/MCI merger). Two main forms of interconnection emerged after the privatization of the National Access Points: Peering, under which firms carry each other’s traffic without any payments and transit, under which the downstream firm pays the upstream firm for carrying its traffic.

39 See, “Liberalisation and regulation in the electronic communications sector: Theory and empirical evidence”, Network Management and Optimal design Laboratory

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In general, end-users connect to ISPs via originating and terminating carriers40. ISPs connect to backbones. Backbones connect to each other at the National Access Points. With regard to connectivity agreements, large backbones mostly peer with each other at the NAPs and these are called public peering. The growing congestion at the NAPs has increasingly necessitated private peering between the backbones which use direct connections between providers bypassing NAPs. ISPs generally have transit agreements with backbones but they also privately peer with other ISPs which is called retail peering. [Ref. 32] The Internet infrastructure has long been treated in a specific way by regulatory bodies. Indeed, it is the largest non-regulated network in the history of the humanity. Despite the regulation trend in most network industries after the Second World War, Internet has developed a form of regulation by mutual consent. Regulatory activities cover in most cases only the content of the web sites presented on the Internet [Ref. 44]. Moreover, the development of the Internet has often been politically supported in Europe that resulted in the universal service obligation policies. As an example, the regulation policy in the United States focused on the ensuring Internet connection for all schools and hospitals.

40 Originating / terminating carrier is a telecommunications carrier whose network is used by a customer to originate / terminate its telecommunications traffic. An originating carrier may be a wireline or wireless carrier transmitting local telecommunications traffic, or it may be an interexchange carrier transmitting non-local telecommunications traffic. 60

4.3.2 Segmentation of the Market

On the supplier side of the Internet market, the actors are: local infrastructure owners which provide consumer access to the ISPs, ISPs, and Backbone companies which interconnect the ISPs. Generally the consumers pay one bill to their ISP each month, and the ISPs in turn pays the charges of local infrastructure owners and backbones. Table 14: Segmentation of the Internet market

Suppliers Internet Demand Services

Backbones Data transfer Individuals

UUNET/MCI, AT&T… (Online banking, (Core network ISPs, oligopoly online ticket Companies market structure at reservation, e-mail, international level) online newspapers, ISPs music download...) Noos, Free…

(Competitive Market) Voice over I.P.

Local Infrastructure Owner France Telecom… (Local loop, mostly the incumbent operator, monopoly in each country) ______Industry

4.3.3 Liberalisation Experiences in Internet Sector across Europe

The EU policy on liberalisation of the telecommunications market has resulted in a process of increasing introduction of Internet communication networks and services in the EU Member States. In the second half of the 1990s, indicators show the rapid growth of the Internet and a rapidly emerging knowledge-based economy. The European Commission identified four main handicaps which were holding back the rapid uptake of digital technologies: • Generally expensive, insecure and slow access to the Internet and e-commerce • The fact that an insufficient number of people have the sufficient knowledge to use the Internet • Lack of a sufficiently dynamic, entrepreneurial, service-oriented culture • A public sector which is not playing a sufficiently active role in enabling the development of new applications and services [Ref. 31]. To overcome these handicaps the European Commission launched the “eEurope” initiative in December 1999. The aim was to increase the use of Internet in Europe. At the Lisbon Council in March the strategic goal was declared “to become the most competitive and

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dynamic knowledge-based economy in the world by 2010”. This action plan which was adopted in 2000 was a wide-ranging initiative to speed up the liberalisation of the Internet sector and extend the use of the Internet to all actors of European society. Since the liberalisation, the European Commission has been seeking to provide competitive market conditions for the emerging technologies. The Regulation on local loop unbundling41, with which competition in local broadband access should be encouraged and high-speed Internet access brought to a wider public, is an example of this policy [Ref. 31]. Table 15: Internet Usage in Europe42 Internet Use EUROPE % POPULATION % Pop. Users, Growth Usage (2005 Est.) of World Latest Data (2000- of World (2005) 2005) European Union 459,938,780 7.1 % 215,765,036 131.6 % 24.3 %

Rest of Europe 271,052,358 4.3 % 43,888,108 341.9 % 4.9 % TOTAL EUROPE 730,991,138 11.4 % 259,653,144 151.9 % 29.2 %

Rest of World 5,681,076,047 88.6 % 629,027,987 143.9 % 70.8 %

TOTAL WORLD 6,412,067,185 100.0 % 888,681,131 146.2 % 100.0 %

Germany In Germany, Deutsche Telekom’s Internet access subsidiary T-Online has a market share of around 40% of total connections though there are many new competitors in the German Internet market. The incumbent has started to offer a “flat rate”43 service (per subscriber) to other carriers at the end of 2000. There are no entry barriers for offering Internet access in Germany but the market is highly competitive, with several pan-European ISPs (T-Online, AOL) so it is hard for the new ISPs to enter the market. T-Online is Europe’s largest ISP. T-Online, which was formerly state-owned, was transformed into a publicly held company in December 1999 and has traded since April 2000. The German ISP is 81.71% owned by incumbent Deutsche Telekom, while 5.69% is owned by Lagardère (Paris), 2.03% by Commerzbank (Frankfurt/Main), 1.25% by Jazztel/Ya.com Management (Madrid) and 9.32% is free float. [Ref. 21] The regulatory decisions have placed the non-incumbents in a better position regarding the provision of Internet access. The Regulatory Authority made it possible for ISPs to provide complete services to customers. Since then, Internet users have concluded contracts only with Internet service providers, who in turn pay the relevant telecommunications costs to the local infrastructure owners, other ISPs and the backbones. In this way, they have been able to offer their customers Internet access at a single price. [Ref. 20] Germany has one of the largest numbers of Internet users in Europe. With both narrowband and broadband connections, Internet use is increasing rapidly. In narrowband, German consumers have a wide variety of tariffs for dial-up Internet access, with relatively low access

41 “Local Loop” refers to the circuit running from the user’s home or office to the telecom operator’s local network. Before, competition was limited because of this “last mile” bottleneck, because the incumbent telecom operators have had complete control of the local loop and refused to give their rivals access to their networks. 42 See, http://www.internetworldstats.com/stats4.htm 43 The subscriber pays a monthly fixed charge and has unlimited access to the Internet. 62

prices for residential consumers, including “pay-as-you-go” Internet access and unlimited packages. The German Federal Ministry of Economics and technology published a governmental action plan in 1999, to enhance the use of modern information technology. The results were: • In 2001, 98 % of the schools were connected to the Internet in comparison to 15% in 1998 • The development and widespread use of high-quality teaching and learning software, via the creation of a program entitled “New Media in Education” with a budget of more than 307M €. • Until the end of 2000, 54 000 career training opportunities were provided in the ICT and media sectors. • Since the program was initiated, 80 000 unemployed persons have obtained an Internet certificate. About 50 per cent of the participants were from the eastern German states and 60 per cent were women.

In 1997, Germany was the first country to pass a law which regulates the Internet: the so- called “Multi Media Law”. One of its objectives was to create a legal platform to deal with Internet crime and with conflicts arising from the use of the internet. Germany is also subject to all EU agreements on areas such as data protection. The Internet is treated by the legislative body as another branch of the Media where freedom of expression will be guaranteed. Additionally the ISPs follow a voluntary and self-regulated approach. Within the scope of the “Voluntary Self-Control of Multimedia Services” association, the German ISPs are obliged to avoid creating or knowingly carrying content that violates existing German state law. [Ref. 31] United Kingdom Since 1990, the rapid technological development of the Internet industry has played the main role in facilitating liberalisation in the UK [Ref. 25]. The Internet market in the UK is now very competitive, and includes hundreds of ISPs, and the incumbent does not have a large market share. There are currently over 400 ISPs active in the market, most of them in the consumer sector. Freeserve, which was acquired by Wanadoo (owned by France Telecom) has the most subscribers. As of July 2005, 59.8% of homes in UK were connected to the internet compared to 30% by the end of the year 2000. This makes UK a higher user than most of Europe44, although it is still behind the USA. The British government involved different sectors of the society to achieve progress towards its Internet policy goals, primarily via the creation of the organisation “UK Online”. It is a partnership between government, industry, trade unions and consumer groups. The centre of the UK government’s Internet agenda is the “UK Online Strategy” which describes the government’s program to ensure that the UK is a world leader in the new knowledge economy. It sets out a range of recommendations for action where the main goals are: • To ensure that everyone who wants it has access to the Internet • To make the UK the best environment in the world for e-commerce • To make all public services available electronically [Ref. 31]

44 The average Internet penetration rate for the EU countries was 48.1% in July 2005. 63

The Internet industry is obliged to operate under the UK Competition Act 1998, as with the telecommunications industry. The Act is designed to make sure that the service providers do not operate with an anti-competitive behaviour. The Office of Fair Trading has strong powers to investigate businesses suspected of breaching the Act and to impose penalties on those that do. France In France approximately 28% of households were connected to the Internet as of 2003. At that time, the number of dial-up subscribers was estimated at 7.2 million in France and 2.3 million of them were broadband customers. France Telecom’s Internet subsidiary Wanadoo holds a market share by connections of around 40%. Other large ISPs in France are pan-European ISP Tiscali (14% market share), which acquired French ISP Liberty Surf in the beginning of 2000, and AOL (21% market share) of the US. France Telecom has a strong presence and the majority of the market share in the French Internet industry. Wanadoo, which is owned by the incumbent, is one of the top five ISPs in Europe due to its ownership of ISPs in other countries such as in the UK and in the Netherlands. In the French broadband market Wanadoo is dominant in the retail sector where its market share is 57%. Its parent company, France Telecom, is dominant in the wholesale market. The incumbent operator France Telecom is installing new equipment and estimates that by the end of 2005, 90% of the existing fixed telephone lines will be able to provide broadband access using ADSL. Entry into the Internet market is technically easy but the market is crowded with ISPs. Therefore, entry into the Internet market is only realistic via acquisitions rather than starting new operations. France was one of the first countries to introduce unlimited dialling for residential internet access. In May 2000, OneTel launched an unlimited access product for 21€ per month. However, the carrier received a number of complaints regarding the service and withdrew it in summer 2000. Another start-up, Oreka, launched a limited (minimum of one hour and maximum 18 hours a month) unlimited service in May 2000 and became France’s fifth biggest ISP in terms of subscribers. In September 2002, France had a penetration rate of 1.6 Internet subscribers per 100 inhabitants, compared to the European average of 2.3. According to ISP associations, this delay was caused by France Telecom’s unwillingness to install telephone switches compatible with the supply of ADSL services. The aim of France Telecom was to supply cable-based Internet access through the intermediary company NOOS-Net. At the time this held back the development of the high-speed Internet services market in France [Ref. 27]. In France, two institutions are in charge of the regulation of the Internet: the CNIL (Commission Nationale de l’Informatique et des Libertés) and the ART (Autorité de Régulation des Télécommunications). The first one was created to deal with ”ethical” problems raised by computer technologies and later, Internet (secrecy, private life), while the second one regulates the telecommunication sector in general which includes the Internet [Ref. 31]. In December 2001, the regulator ART launched a public consultation process for the use of wireless local area network. In June 2002 ART allowed the creation of WLAN hotspots in the 2.4GHz and 5GHz frequency bands where no licence was required. This decision allowed private companies, local governments and individuals in certain regions to provide indoor and outdoor coverage in public spaces with high Internet traffic, such as airports. In January 1998, the French Government launched the governmental program for the Information Society PAGSI (Plan gouvernemental d’action pour la société de l’information). Further to PAGSI, the Council of ministers examined a project on "the Information Society"

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on 13 June 2001. The project seeks to promote confidence in networks by guaranteeing the freedom of public communication, clarifying the legal framework for online trade and increasing security in the information society. It also wants to widen Internet access and the territorial reach of networks of communication. French Government policy focused on access for all residents, on systematic introduction of ICT in schools and on promoting research and development on ICT.

4.3.4 ATM Market Comparison with Internet Industry

For the Internet market, network design is done by ISPs, local infrastructure owners and backbone owners in order to interconnect their physical networks. The data flow is not regulated during the transfer, however flow management exists in form of automatic routing strategies which are set in advance.

Table 16: ATM Market Comparison with Internet Industry Network Design Flow Management Traffic Network Access Pricing and Invoicing control Point Function - ISPs, local - Flow is not - There are - IP addresses - From the user infrastructure owners regulated on protocols for are the access perspective, the cost of and backbone owners departure time, the safe point of the Internet includes the interconnect their however transfer of Internet subscription to an ISP physical network congestion results the data Each PC user has and paying for the in slower to protect himself telephone access - There is no global exchanges from virus, optimization for network spyware, etc. via - There is no central design - The regulation of anti-virus invoicing system; but flows exit with programs for the user, there is automatic routing just one bill to pay strategies - In case of congestion, data arrives late or incomplete

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5 ATM market structure evolution

5.1 Introduction In this chapter, we examine possible approaches for the future ATM market that are in line with the SES initiative, and aim to solve the ATM specific problems such as scarce capacity and the need for greater efficiency. The first scenario involves the introduction of intermediate organisations between the airspace users and the ANSPs. These would deal with the ATM issues (e.g. obtaining the capacity that the airlines need, billing procedure for the ATM related charges, etc.) in the name of their member airlines. Such an organisation can be compared with the travel agencies in the passenger air transport market. The aim of creating a third party is to introduce a more service-oriented approach to the ATM market. The second scenario looks at the possible effects of a new capacity management, using slot mechanism for airports and ATFM that is based on economic incentives. This is expected these would increase the efficiency. The last scenario discusses the possibility of the vertical unbundling of the national ANSPs in order to create international “backbones” for control of the upper airspace by re-bundling the related business units at European level. The fact that safety is the paramount issue in the ATM market restricts the possibilities for comparing the sector with other industries. Still, there are some general attributes of network industries which are applicable to ATM as well as to mobile telecommunication, Internet and passenger air transport. For the prediction of the future ATM market, the possibilities to introduce notions like “backbone”, “flat rate as pricing mechanism”, “guaranteed flows”, etc. are examined. These notions are significant attributes of the Internet, mobile telecommunications and air passenger transport networks.

5.1.1 Methodology

Before developing the ideas for market evolution, we reviewed the current EC regulation on the SES initiative and possible trends for the creation of FABs. However, we deliberately didn’t go into much detail as this subject is covered by another EEC project. The three evolution scenarios introduced above are based on the situations observed in other network industries that are “roughly” transposed to ATM in the view to raise discussions, highlight ATM particularities and identify innovative market structures. This chapter synthesizes what was learnt from the 3 studied industries, and then proposes three visions of possible evolutions for the ATM market (introduction of a third party in the ATM service delivery, introduction of economic incentives in the slot allocation process, and introduction of new airspace organisation. These scenarios are not independent approaches which exclude each other. Rather, they should be considered as possibilities answering different needs where combinations could also be feasible. In the following sections, after the introduction of each scenario, their possible impacts on the different ATM units and actors are discussed. The table below indicates, which sub-markets of the ATM are affected by each scenario. Although the proposed approaches will probably have some indirect effects on all the ATM sub-markets, these effects are not analysed in the study.

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Table 17: Overview of the Possible Evolutions in the ATM Market

NETWORK PRICING AND NETWORK FLOW TRAFFIC ACCESS INVOICING DESIGN MANAGEMENT CONTROL POINT FUNCTIONS Introduction of a Third x x x Party Economic Incentives for Capacity x x Utilization Airspace Backbone x x x Separation

5.1.2 Synthesis of the three network industries

The synthesis of the three network industries indicates significant benefits of the market liberalisation. After the markets were opened in Europe for mobile telecommunications, Internet and Passenger Air Transport, the number of service providers rose rapidly. Some of the results are: • Fast development of the technology • Introduction of new services types • Lower prices that result in increased demand and high penetration rates

Even if the examined network industries are now liberalised, they are still subject to regulation both at national and European level45. The regulatory authorities do not often intervene in the pricing mechanism of the service providers but regulate, ex-post, in case of non-competitive behaviour of the actors. In the mobile telecommunications industry, liberalisation was followed by separation of regulation from service provision. Independent regulatory authorities were created at a national level. These authorities monitor the performance of the providers and ensure the non-discriminative market access of the new entrants to the local loops owned by the incumbent operator. In the passenger air transport industry, the alliances and co-operation agreements (e.g. for interlining and code sharing services) were controlled by the European regulatory authorities to avoid high market concentration that would result in inefficiencies.

5.1.3 Review of main SES trends

In recent years, the European Commission has started to investigate the possibilities for new ATM market organisation, in order to overcome the capacity problems and increase efficiency, while maintaining the safety and environment standards. The increasing demand

45 The regulation of the Internet differs from other network industries. For more information, see chapter 4.3.1 67

for air transport has culminated in saturated airspace above Europe, especially for upper airspace. The EC Regulations on SES foresee an action plan that proposes inter alia: • Separation of ATM “core business” (ATC) from “peripheral services” (MET, AIS, CNS) and opening of the peripheral services to competition while the core business remains a monopoly in the near future • Capacity gain from modernization of the ATM equipment and technology (e.g. efficient use of the radio spectrum) • Assurance of the interoperability of the different systems for a harmonised ATM • Introduction of a more market-oriented slot mechanism during the implementation phase of the SES • Introduction of a new mechanism for airport charges depending on the peak- and off- peak hours • Set up of independent regulatory authorities for each State which monitor the development of the ANSPs and publish annual reports • Creation of FABs for the upper airspace where the main goals are safe, economic, efficient and environmentally friendly air transport • Creation of a licensing system for ANSPs

5.2 A Third Party in ATM Service Provision The examination of the Internet, passenger air transport and mobile telecommunication sectors showed that a full comparison with the ATM market is not possible, since some of the actors or types of services which play an important role in these industries do not exist in the ATM market. As an example, some French ISPs recently started to offer a bundle of services, known as a “triple-play" package, which includes unlimited high speed internet access, unlimited national telephone calls and cable TV. The consumers pay only one bill to the ISP without caring about the cost of the each service element, or about the succession of network access and utilization that are needed to get the final service. Similarly, travel agencies act as intermediate bodies of the passenger air transport sector, selling “all inclusive holidays” to their customers that are composed of the flight tickets, hotel reservation and car rental. The agencies negotiate with the different actors on the related markets to get the best prices so they can make profits as well. The travellers prefer not to be in direct contact with the airlines or the hotels since they are only interested in having an attractive holiday packet as whole. The travel agencies organise the connection between the travellers and the hotels or airlines. The following scenario discusses the idea having an agency between the ANSPs and the airspace users which would be responsible to manage the capacity in an efficient way.

5.2.1 Introduction of the Scenario

In the ATM sector, the airspace users are each in direct contact with ANSPs. In the future, an intermediate organisation (one organisation for all of Europe or a small number of “international” organisations) hereafter called SESAP (Single European Sky Access Providers) could be the only interface for airlines to enter the European ATM network. For our scenario, we assume that it makes sense to establish more than one SESAP in order to introduce competition for at least some parts of the ATM service. These SESAPs would have the right to buy or rent the network capacity for a certain period on certain routes and resell it to airlines according to specific agreements / contracts. The price of these contracts would depend on the quality of the service (e.g. punctuality of the received ATFM slots, time of day of the flights, etc.)

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Figure 12: Role of SESAPs in the ATM Market

ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSPANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP ANSP

SES SES SES SES Access Provider Access Provider Access Provider Access Provider

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Such a service could be provided by an existing organisation (e.g. EUROCONTROL) or by a new consortium (comprising airlines, ANSPs, etc.) or by a mixture of existing and new actors. However, it should be noted that a SESAP which only consists of ANSPs would not be an efficient solution since it would lead to concentration on the supplier side in the ATM market, and would not bring a solution for the airlines’ requirements. Installing a new charging mechanism for ATM services within the scope of the introduction of SESAPs is not mandatory; however, there could be some modifications of the invoicing function. One possible approach would be to combine SESAPs charges with the rest of the ATM costs. The SESAPs would charge the airlines for their service and this charge could include the ATC cost as well. The flat rate system observed in the Internet industry could also be an innovative method for SESAP invoicing, while keeping a cost base system between ANSPs and SESAPs. Once the airlines pay a “flat rate” that is depending on their requirements from SESAPs, it would be the mission of the SESAPs to negotiate with the ANSPs to get the necessary capacity with the best conditions. There are several possible ways to establish the SESAPs. Following the mobile telecommunication industry model, several SESAPs could get state licenses via tendering to operate for a limited time. They would be free to set prices and would be responsible for the quality of the service that they offer to their customers. If SESAPs were commercial entities, they would have the incentive to lower ANSP charges and offer a good service regarding the capacity, in order to obtain a good share of the competitive market. Accordingly, the creation of these third parties would introduce a more service oriented approach for ATM where the price of the service depends on its quality.

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Figure 13: Possible Approaches for the Creation of the Single European Sky Access Providers

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5.2.2 Possible Benefits and Risks

Investigating further the introduction of an intermediate body, the question must be answered whether this body would bring more efficiency into the ATM market or not. Generally, the SESAPs which would deal with the ATM needs of a group of airlines would have the advantage for the airlines of more negotiation power than a single airline so the ATM market could be re-formed in accordance with its users’ needs. The analysis of other network industries gives indications of the possible impacts of a new, service-oriented party in the ATM industry. As an example, the following results could be observed regarding the market structure in the Internet industry, where several ISPs with service-oriented strategies operate:

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• Competition exists at the ISP level, even if at the network operational level the market is more concentrated • The market segmented, targeting different needs of different users • Through innovative charging mechanisms, prices declined within a short time • The market evolved dynamically (horizontal bundling of services that were previously distributed separately, i.e. TV, Internet, and telephone).

One can expect that SESAPs (horizontally integrated actors) would be in a similar position as the ISPs in the Internet industry or as Mobile Virtual Network Operators in the mobile telecom industry so that similar benefits could be achieved: • With SESAPs, there would be an actor on the ATM market which is able to take into consideration airlines’ specific needs in terms of network utilization, and segment the market by proposing “contracts of services”. Then, the users’ needs would be considered in priority instead of designing ATM services based on operational constrains. • It would be possible to introduce price discrimination (service quality in terms of punctuality of the ATFM slots, depending on the price) so users get better value for extra money • Such a service would open the door to new bundles of services (gate to gate services, flight planning services, billing services, airport slot management and scheduling assistance, etc.) stimulated by possible competition between SESAPs (which are not geographically restricted).

On the other hand, it has to be recognized that an additional organisation in the ATM market might increase the cost of the total ATM service since this provider would be paid for its services as well. Possible “rigidity” by ANSPs could limit the efficiency of the system by constraining SESAPs on costs. Maybe some of current ANSP / EUROCONTROL tasks would need to be given to SESAPs, so that cost reductions and restructuring of ANSPs activities can generate significant saving. Another possible risk that might rise is called “hold-up problem”. Since the SESAPs would have more power on the ANSPs then the airlines have, they could convince the ANSPs to make any kind investments in order to increase the capacity, with the argument that their customers (e.g. airlines) would need this additional capacity. However, once the investments are done, the SESAPs have a strong bargaining power that they could abuse because they would be the only customers of the new capacity. After defining the role of the SESAPs as new actors in the ATM market, it is necessary to investigate further on their impact on ANSPs to weigh up the benefits and risks. Below, the possible impacts of SESAPs on the related ATM markets [Table 17] are analysed.

5.2.2.1 The Impacts of SESAP on the ATM Network Design The SESAPs mission would be to play an intermediate role in the distribution of the available airspace capacity. In this scenario, EATMP and the dedicated units of ANSPs would continue to carry out the airspace modelling. SESAPs would have the right to buy or rent the network capacity and resell to airlines according to specific agreements/contracts, because they would own the property rights of the ATFM slots for a specific area. The member airlines would request a particular amount of the capacity from SESAPs, and would pay according to the quality of the service (i.e. punctuality of the ATFM slots). The idea of having a third party in the ATM market that guarantees optimum results for airlines is in line with the “Contract of Objectives” approach presented in the “PARADIGM SHIFT” project of EEC Innovative Research Area (INO). By means of the contract of

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objectives, the quality of the service that is offered to an airline by an ANSP would be determined in a contract on the basis of known constraints. Since the airlines’ contentment depends on the punctuality of their arrival time, the final objective of the contract would be destination punctuality instead of departure punctuality. The task of the controllers would be to accomplish the requirements of the contract by keeping safety as the paramount objective. Based on this idea, SESAPs could be the actors which would prepare these contracts according to the airlines’ specific needs and would negotiate the conditions with the ANSPs. The key benefits of a commercial third party into the ATM network design combined with the “contract of objectives” would be: • Service oriented perspective for the network design • Efficient use of the airspace capacity • Incentive for ANSPs to take measurements for increased punctuality 5.2.2.2 The Impacts of SESAP on the ATM Network Access Besides their function to negotiate the ATFM capacity, SESAPs could take the role of the airport slot manager, or at least be delegated by airlines to acquire airport slots as required by future operations. The comparison of ATM with the passenger air transport showed that the flight tickets grant access to the passenger air transport network so tickets are the equivalent of the airport slots. The travel agencies which are analogue to the SESAPs are selling the flight tickets (i.e. the “network access”) as a part of their service. Similarly, the SESAPs could be responsible for the distribution of the airport slots if a commercial slot allocation system would be introduced in the future. They could obtain the property rights of the slot at particular airports and become responsible for the secondary trading among their member airlines. Although it can be expected that slot trading organised by SESAPs and slot exchange between airlines would be a step to optimize the airports’ capacity, further research on the financial aspects of new slot mechanisms is needed. The European Commission is currently launching studies on this subject.

5.2.2.3 The Impact of SESAP on the ATM Pricing and Invoicing From the airlines’ viewpoint, an intermediate organisation would infringe upon CRCO responsibilities. The pricing and invoicing delegated to SESAPs would however enable introduction of more innovative charging systems. The total amount invoiced would have to cover: • Cost of SESAPs own service • EUROCONTROL agency costs for network design, flow management, etc. • En-route ATC costs of the ANSPs for a particular number of flights within a time period But the pricing would become “value for money” oriented rather than “cost oriented”, so these 3 categories of costs would be transparent to users.

5.3 Economic Incentives for Network Capacity Utilization The current flow management occurs according to the “first come first served” rule, so economic incentives for the actors are missing. The only instrument for capacity management in ATM is time. The capacity which is available within a particular time period is seen as an input and it is distributed among airspace users in a non-discriminatory way while avoiding possible overloads. Airspace users do not pay to get ATFM slots. During off-peak hours, where the traffic density is low, the ATC sectors are re-grouped so controllers manage larger airspaces. During peak hours sectors are divided in order to decrease the controllers’ workload. However, this is just a limited solution for capacity

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problems. On a pre-set route over several countries, the capacity is equal to the capacity of the weakest ATC centre that has the least capacity. As a result, the global airspace capacity is not fully utilized [Ref. 43]. The scenario proposed in this section discusses the possibilities of introducing pricing mechanisms for flow management and network access in the ATM market in order to optimize the capacity by mean of economic incentives46.

5.3.1 Introduction of the Scenario

The network access points of the ATM market, i.e. airport slots, also point to inefficiencies caused by a mechanism where there are no property rights for the slots. In the report of the High Level Group, the need was identified for a new slot allocation system to increase the efficiency at the airports [Ref. 47]. According to the current EC regulation on the airport slot allocation, airlines just have the right to use the slots they obtain for a limited time. As a result, the slots are rigid within one period; once they are allocated to the airlines, it is not possible to adjust or redistribute them. Another disadvantage of non-commercial slot systems, in terms of efficient use of capacity, is that the airlines try to keep the grandfather rights for their slots, even if they do not use them. Grandfather rights are considered by airlines as a market barrier mechanism since the system with rigid slots prevents the competitors from entering the market at particular airports. If the slots were sold to the airlines, the airlines would own the property rights so they would be able to exchange slots among each other47. A commercial slot mechanism would introduce flexibility and increased efficiency to the air transport market so that the airport infrastructure could be fully used. Slot trading would make adaptations due to seasonal demand variations possible. Expected benefits of this slot system are: • Promotion of fair and effective competition • Development of an airport's route network • Ensuring the effective use of scarce capacity

In the mobile telecommunication industry, the operators own licenses that can be compared with property rights. Once the mobile telecommunication companies get the frequency spectrum where they can operate, they can lease a part of their spectrum to Mobile Virtual Network Operators which resell services under their own brand name. This “secondary trading” option makes the optimum usage frequency spectrum in the mobile telecommunication sector possible. In order to have ideas on the possible pricing mechanism for ATM flow management, analysis of the relevant attributes in the passenger air transport market can be useful.

46 The flow management and network access are not the only ATM sub-markets that operate without any economic incentives. The route charges are also based on a system where the main goal is cost recovery. They do not reflect the cost of the service depending on the traffic density and the capacity. Within a country, there is no cost differentiation between the charges of different ATC centers or between peak and off-peak hours. The charging mechanism re-distributes the cost of ANSPs equally among the airspace users on the basis of cost recovery. However, it should be noticed that alternative charging mechanisms for en-route ATC are not within the scope of this study. 47 This option is known as “secondary slot trading”. Primary allocation refers to the distribution of airport slots from the regulator to the airports, airlines and other actors, secondary allocation/ trading refers to the redistribution of slots among airlines. Within the scope of the EC initiative IMPRINT-EUROPE (Implementing Reform in Transport in Europe) different aspects of commercial slot allocation including secondary slot trading are examined. For further information, see [Ref. 50]. 73

Capacity management for passenger air transport (i.e. aircraft load factor) is based on yield management where the seats are sold at different prices depending on the load factor and passenger propensity to pay, and this is managed dynamically. In additional to capacity optimization via price differentiation, most aircraft are overbooked in order to avoid any unused capacity. The airlines conduct statistics to calculate the average number of passengers which make a reservation but do not fly for some reason. Following these statistics, extra tickets are sold. If a passenger loses his seat because of overbooking, he gets compensation from the airline. A main difference in today’s AFTM compared to current aircraft capacity utilization is that ATFM objective is to make sure the network is not full, whereas airline capacity management objective is to make sure the aircraft is full. Such a re-orientation for ATFM would therefore seem revolutionary. However it is envisaged, that “overbooking strategies”, for example, would not realistically apply in a system where safety is of paramount importance. Nevertheless, an approach similar to the yield management system could be introduced for ATFM. The ATM capacity can be distributed to the airlines according to their willingness to pay. If an airline insists on exact ATFM slots on a specific route, at a specific day time, it would have to pay the cost for this specific request. By paying an additional amount, airlines could guarantee to operate with minimum delay.

5.3.2 Possible Risks and Benefits

In the following section, the expected impacts of the introduction of economic incentives on the related ATM markets [Table 17] are analysed. It is assumed that this scenario will affect the flow management, network access and the invoicing function in the ATM market.

5.3.2.1 The Impacts on ATM Flow Management It can be expected that a pricing mechanism for ATFM (i.e. yield management via price differentiation) would lead to the more efficient distribution of the available capacity even though the ATM market structure remains as today. By means of yield management, capacity problems regarding the flow management and network access point could be solved without changing the actors on the ATM market or the market organisation.

If CFMU would serve the airspace users according to their willingness to pay, the ATFM slots could be categorized in a way that the price depends on the length on the maximum expected delay. For instance, for the first and most expensive category of slots, a maximum delay of 20 minutes could be guaranteed whereas for the cheapest category, no guarantee according to the punctuality would be given to the airlines. Additionally, the time of day could also be a criterion for the ATFM slot prices, to encourage the distribution of traffic density more evenly during the day. The fact that the prices of the ATFM slots at peak hours are significantly higher than the prices at non-peak hours could be an incentive for the airlines to re-organise their flight schedules. The passengers for whom cheap ticket prices are a priority would prefer flights at non-peak hours. This would reinforce existing airline ticket-pricing strategies.

5.3.2.2 The Impacts on ATM Network Access In order to increase the network access capacity, either new airports or new runways at existing airports must be built, or a new slot mechanism should be introduced that would distribute the existing capacity more efficiently. Since environmental and financial issues

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restrict the possibility of adding new capacity for network access, commercial slot allocation and secondary slot trading could be an alternative to optimize the scarce capacity. The key issue for the capacity optimization is to give the property rights of the airport slots to the airlines or to another actor. Once a group of actors owns the airport slots these could be traded on a commercial basis. Here, it would be important that a regulatory authority takes measures to avoid discrimination of the market entrants by big airline companies or by alliances of airlines. It would have to be ensured that all the airlines have the same chance to buy slots at the airports they want to operate on. The benefits of such an airport slot allocation system would be: • Promotion of effective competition for airlines • Ensuring the effective use of scarce airport capacity

5.4 Airspace Backbone Separation The idea of creating backbones derives from the Internet industry. The backbones of the Internet industry provide the interconnection of the local Internet Service Providers by giving them access to the global network. They transmit large amount of data over large regions of the world using long haul cables that ensure high-speed network connection. The lower airspace can be compared with the local ISPs in the Internet network and the upper airspace is equivalent to the Internet backbones.

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Figure 14: Internet Backbones

Backbone A Backbone B Backbone C

ISP ISP ISP ISP ISP ISP

ISP ISP

End Users (Connection to PC)

In the passenger air transport industry, long haul flights between hubs are the backbones of the network. The backbones of the Internet network are interconnecting the ISPs whereas the long haul flights are connecting hubs. These are the airports where traffic is gathered from smaller airports and redistributed so the possible destinations are multiplied. The hub-and-spoke system allows for efficient connections for passengers from small- and mid-sized cities. It increases the choice of carriers at non-hub cities as well as the frequency of service. Figure 15: Passenger Air Transport Backbones

Airport Airport

Airport Backbone: Long Haul Flights between Hubs

Hub Hub Airport Airport

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In this scenario, a new approach for the ATM market structure is examined where the national ANSPs would be segmented (i.e. vertical unbundling) in independent units and

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upper airspace ATC centres are re-grouped (i.e. horizontal bundling) by creating backbones similar to Internet backbones. Such a re-organisation of the ATM would allow a completely new kind of air traffic control where the airspace design depends on the flow rather than on the geographical shape of the ATC centres.

5.4.1 Introduction of the Scenario

A similar approach to the backbone scenario is presented as part of the EUROCONTROL “Paradigm Shift” project (See, section 5.2.1.1): Although en-route ATC consists of different parts (climbing, descending and cruising in the upper airspace) regarding the density, complexity and required services, the control centres provide a unique ATM service. The controllers share the task of managing air traffic according to the geographical separation of the sectors. Indeed a market re-organisation that considers the different traffic characteristics through task sharing would introduce more efficiency into the ATM market. The upper airspace could be designed independently from the sectorisation of the lower airspace, like a highway (or a number of highways), allowing big aircraft to fly through corridors (i.e. backbones) which connect main European destinations. This concept is named “Dual Airspace” and would result in simplified air traffic and increased capacity for ATM [Ref. 49]. In another project of the EEC Innovative Research Centre, called “TUBE Advanced Lane Control”, the possibility of “building a new airspace area aiming at managing high density traffic between 2 specific areas” is analysed. The idea is comparable with our backbone scenario whereas the TUBE model attempts to design a computer assisted control concept for the tubes (i.e. backbones). The objective is, as in the scenarios “creation of backbones” and “contract of objective”, to increase capacity and punctuality [Ref. 49]. The creation of ATM backbones requires a clearer separation of the upper airspace ATC from lower airspace ATC, and a rethink of airspace organisation in terms of “flows” in the upper airspace. As it is mentioned within the framework of the Dual Airspace, this separation would improve the quality of the ATM since the traffic control would follow the operational categorization (i.e. climbing, flight in the upper airspace and descending). From the economic viewpoint, a prerequisite to operational unbundling of these services is “accounting separation”. All services provided by the ANSPs have strategic importance so any bankrupt risk is not acceptable [Ref. 12]. Therefore, the units must be able to operate in a way that they cover their own costs. To achieve greater efficiency through harmonisation, the unbundling procedure should be guided by a European regulatory authority so that it is formed upon a pattern, because the creation of backbones/tubes should be independent from the national boundaries or the national operating systems. After the vertical unbundling of the upper and lower airspace ATC, backbones could be created via horizontal bundling of the upper ATCs48. In order to achieve maximum capacity, the backbones should be designed by keeping in view the dense areas of the airspace. The aim is to create upper airspace corridors, similar to highways, that allow large number of aircraft to make high-speed connections between destinations. These corridors could be designed dynamically in order to adjust the capacity to the traffic density.

48 See [Ref. 12]. ATM market re-organisation via vertical unbundling/horizontal re-bundling was proposed in 2001 in the EC report “ATM Market Organisation Study”. However, in this report, aspects of the market are discussed such as the impacts on human resources, civil-military co-ordination, regulatory issues, etc. that are not part of our study. 77

5.4.2 Possible Benefits and Risks

The scenario of backbone introduction (as new ATC operational units and new economic units) has not yet been attempted, so it is not possible to make clear assessments about the advantages and disadvantages. Answering questions such as “Is it possible that such a market evolution could answer the needs of the European ATM market?“ could be helpful by estimating the effects of the scenario. The backbone separation in the Internet industry is the result of the geographical constraints. The network of a local ISP covers a limited area so backbones facilitate the interconnection between ISPs. ATM backbones could take the same role; the lower airspace would be used for “local” air transport whereas the backbones in the upper airspace ensure the high speed connectivity between farther destinations. It is assumed that the backbone scenario will have direct impacts on the network design, traffic control and on the pricing/invoicing functions [Table 17]. In the next part, these expected impacts are examined.

5.4.2.1 The Impacts of Airspace Backbone Separation on ATM Network Design The horizontal bundling of the upper airspace by creating backbones would increase the efficiency of the available capacity. In the near future, the national ANSPs would continue to control lower airspace. However, the harmonisation of the upper airspace and the creation of backbones would change the ATM significantly. The current national fragmentation of the European airspace does not allow the optimized use of the scarce airspace capacity. For the airspace users, the quality of the ATM depends on the smooth functioning of the gate to gate flow with minimum delays and efficient flight routes and the proposed market re-organisation could answer the requirements of the airlines. The highways in the airspace would create a possibility for additional capacity and high speed connection of the main destinations with big aircrafts.

5.4.2.2 The Impacts of Airspace Backbone Separation on the ATM Traffic Control If the airspace would be separated into lower and upper area in order to create airspace backbones, the traffic control of the airspace should also be re-organised according to the different attributes and needs of the new fragmentation instead of considering the national borders. Probably, the control of the backbones will require different skills compared to the control of the lower airspace. Since the backbones would probably be controlled by consolidated centres, a training forum for the whole Europe could be necessary to create harmonised skills. Compared to the Europe, the controllers in USA manage the double amount of traffic per day which could also be a result of the harmonised ATM system for the whole country [Ref. 13]. Therefore, consolidation of services regarding the upper airspace might lead to a reduction in the overall number of ATM related jobs. However, since the implementation of the restructuring will take several years, the national human resources should have time to adjust according to the needs of the international backbones.

5.4.2.3 The Impacts of Airspace Backbone Separation on the ATM Pricing and Invoicing For the lower and upper airspace, there could be different en-route charges that would be collected by EUROCONTROL or possibly by other organisations. The cost of the ATC at lower airspace is higher than the upper airspace because the traffic within the lower airspace is denser and it is more complicated to control the lower airspace activities. Therefore, the

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en-route charges for the upper airspace could be cheaper than the charges for the lower airspace. One can expect that the national ANSPs might resist against the unbundling of the control units because they would lose the lucrative part of the business by doing so. However, price differentiation regarding the different airspace levels could be used as an instrument to allow the cost recovery of both service types and facilitate the unbundling.

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6 Conclusion

6.1 Synthesis of Results The overall objective of this study was to explore what similarities could be drawn between ATM at the start of a de-regulation process, and other industrial sectors that have already undergone such a process: mobile telecommunication, passenger air transport and Internet. For this purpose, first the selected sub-markets of the current ATM market were described with a market oriented perspective. Then the liberalisation process of the other network industries were analysed. In the last part of the study, three scenarios for the possible ATM market evolution were introduced. The main findings of the study are listed below: • The analyses of the five ATM sub-markets showed that discrepancies exist between the provided service and the airspace users’ requirements. Generally, the airlines expect the ATM market to become more service-oriented and efficient. • The airlines need a global ATM service but are confronted with fragmented functionality, corresponding to “second best” options. • The level and type of regulation depends on the specific attributes of the industry. The mobile telecommunication industry was liberalised/deregulated by means of licenses so new service providers entered the market. The national independent regulatory bodies, which were set up during the implementation phase of the deregulation process, ensure symmetric access to the local telephone infrastructure and fair competition in the market. The aim of economic regulation of the passenger air transport industry is preventing anti-competitive behaviour of the airlines. Finally, the Internet network is mostly unregulated since the system is based on the mutual agreement of the actors. • The deregulation of the three network industries resulted in fast development of the technology, introduction of new services types and lower prices. This made high penetration rates for these services possible. • The proposed scenarios for the future ATM market evolution aim at decreasing the discrepancies between the supply and the demand side of the market, and improving the capacity management. • Each scenario has impacts on different ATM sub-markets. However, the common point is that all of them would enhance the capacity (e.g. airspace capacity or network access point capacity) and would introduce a market-oriented perspective into the ATM market.

6.2 Comments & Possible Ways Forward This study identified possible scenarios with the aim of providing ideas on the possible evolution for a future ATM market. Three main lines of research are identified: First to link the proposed economic evolutions with the future operational concepts, such as the one investigated in the Innovative Research Area of the EUROCONTROL Experimental Centre (Paradigm Shift, e.g.); second, to investigate whether similarities in the structure of ATM market with other network industries would result in similar consequences after deregulation; and finally to initiate quantitative analyses regarding the financial impacts of the proposed scenarios. Finally, the debate on new organisational structures in the ATM market would also need to be confronted to a sustainability analysis. This study only looked at economic aspects of

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possible ATM market evolution but such radical changes would certainly also impact the social and environmental dimension of ATM and air transport as a whole.

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ACKNOWLEDGEMENTS

The authors wish to thank the following persons for their guidance and assistance during this study: Patricia Cauwenbergh, Dr. Cyril Hariton, Jean-Claude Hustache and Nadine Pilon.

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REFERENCES

Ref. 1 EUROPEAN COMMISSION (2004) Study on the provision of aeronautical information for the European Upper Flight Information Region (EUIR), December 2004 Ref. 2 EUROPEAN COMMISSION (2004) Study on the financing of air traffic management (ATM) to achieve the Single European Sky, October 2004 Ref. 3 EUROPEAN COMMISSION (2003) Study on the implementation rules of economic regulation within the framework of the implementation of the Single Sky, October 2003 Ref. 4 EUROPEAN COMMISSION (2003) Definition of the priorities for Single European Sky implementation rules related to the interoperability of the European Air Traffic Management Ref. 5 EUROPEAN COMMISSION (2001) Study on the Economic Regulation of Air Traffic Management Services, prepared by Logica for the European Commission, 2001. Ref. 6 Convention on International Civil Aviation signed at Chicago on 07 December 1994 (Chicago Convention). Ref. 7 Report on the Operation of the Route Charges System in 2004, CRCO. Ref. 8 An assessment of Air Traffic Management in Europe during the calendar year 2004, prepared by the Performance Review Commission. Ref. 9 Air Traffic Flow & Capacity Management Strategy, EUROCONTROL, 2004. Ref. 10 European Air Traffic Management Performance Enhancement Activities Report, EUROCONTROL, 2004. Ref. 11 EUROCONTROL Airspace Strategy for ECAC States, EUROCONTROL, 2001. Ref. 12 EUROPEAN COMMISSION (2001) ATM Market Organisation Study by Booz Allen & Hamilton, 2001. Ref. 13 Economic Benefits of Competition in European Air Traffic Management - Germany as an Example, Prof. Dr. Hans-Jürgen Ewers, 2002. Ref. 14 Performance Enhancement Activities Report, EUROCONTROL, 2005 Edition. Ref. 15 An assessment of Air Traffic Management in Europe during the calendar year 2001, Performance Review Commission. Ref. 16 Price Effects of Regulatory Reform In Selected Network Industries, European Central Bank, 2001. Ref. 17 Liberalisation of the network industries – Economic implications and main policy issues, European Commission, 1999.

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Ref. 18 Who is in control? – The world’s aircraft operations on the ground and in the air, Swiss Re, 1997. Ref. 19 Internet @ Europe; Overcoming institutional fragmentation and policy failure, R. Werle, European Integration Online Papers, 2001. Ref. 20 Competition and Regulation Issues in Telecommunications, OECD, 2002. Ref. 21 European Telecommunications Services Monitoring European Telecoms Operators, prepared by IDC EMEA for the European Commission, 2002. Ref. 22 Communications Outlook – Telecommunications, OECD, 2001. Ref. 23 Mobile Data in Germany , Volaris Group Company Study, 2004. Ref. 24 Regulatory Reform in the Telecommunications Industry in Germany, OECD Report, 2004. Ref. 25 Regulatory Reform in the Telecommunications Industry in UK, OECD Report,2002. Ref. 26 Mobile UK, Mobile Phones and Everyday Life, Crabtree, J., Nathan, M., Roberts, S., 2003. Ref. 27 Regulatory Reform in the Telecommunications Industry in France, OECD Report, 2003. Ref. 28 Annual Report of the Regulation Authority for Telecommunications (ART) in France, 2003. Ref. 29 Private Peering Among Internet Backbone Providers, Narine Badasyan and Subhadip Chakrabarti, 2003. Ref. 30 Peering, Transit, Interconnection: Internet Access In Central Europe, Terrence P. McGarty, 2002. Ref. 31 Internet – a new potential for European political communication?, Ann Zimmermann and Jessica Erbe, 2002. Ref. 32 Intra-backbone and Inter-backbone Peering Among Internet Service Providers, Narine Badasyan and Subhadip Chakrabarti, 2003 Ref. 33 Reducing Traffic Bunching Through A More Flexible Air Traffic Flow Management, S. Stoltz, P. Ky, 2001. Ref. 34 How do airlines perceive that strategic airline alliances affect their individual branding? K. Kalligiannis, Dr. K. Iatrou, Dr K. Mason, Ref. 35 Causes and Effects of the Deregulation in the Aviation Industry, Prof. W. Schulz, 2005. Ref. 36 Transport Policy Implementation and Industry Characteristics, prepared by TIPP Consortium for European Commission DGTREN, 2005. Ref. 37 Possibilities for the Better Use of Airport Slots in Germany and the EU, J. Ewers, 2001.

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Ref. 38 Economics of Airport Regulation, R. Hardaway, in Transportation Law Journal, vol. 20, no,1, 1991. Ref. 39 Slothandel als marktwirtschaftliches Instrument bei Knappheitsproblemen an Flughäfen, in Schriftenreihe der Deutschen Verkehrswissenschaftlichen Gesellschaft no. 198, 1996, S. 4-16 Ref. 40 Competitive Airlines, Report from the Nordic Authorities, 2002. Ref. 41 Product Distribution, Including Computer Reservation Systems and the Internet, presented by the ICAO Worldwide Air Transport Conference, 2003. Ref. 42 Consultation Document on Consumer Protection in Air Transport, 2000. Ref. 43 Improving Air Traffic Services Performance in Europe, A. Jeunemaitre, H. Dumez, in Regulation of Network Industries, 2001. Ref. 44 Regulating the Internet, J. Cremer, in Regulation of Network Industries, 2001. Ref. 45 Privatisation, Restructuring and Regulation of Network Industries, D. Newbery, 2000. Ref. 46 Limits to the (De-) Regulation of Transport Services, G. Knieps, 2004. Ref. 47 Single European Sky, Report of the High Level Group prepared for the European Commission, 2000. Ref. 48 Single European Sky Regulations, EUROCONTROL Final Report on European Commission’s Mandate, 2005. Ref. 49 Eurocontrol Experimental Centre Innovative Research Activity Report, 2004. Ref. 50 EUROPEAN COMMISSION (2002), Secondary Markets for Runway Capacity. Ref. 51 Economic deregulation of Network Industries: Managing the Traffic to Sustainable Competition, E. Iacobucci, 2003

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APPENDIX: SUMMARY OF ATM SERVICES IN EUROPE

Table 18: Summary of ATM services in Europe

(Source: Study on Air Traffic Management Market Organisation, Booz Allen & Hamilton) Although in most countries of Europe air navigation services are provided by state-owned monopolies whose operations are restricted by the national borders, there are some exceptions. Some examples of supra-national or privatised ANSPs are presented below. Maastricht Upper Area Control Centre Maastricht Upper Area Control Centre (UAC) is operated by EUROCONTROL on behalf of Belgium, the Netherlands, Luxembourg and Germany and is managing the flow of civil aircraft in the upper airspace (above 24,500 feet). This international cooperation project is based on the EUROCONTROL Convention of 13.12.60, amended on 12.2.81, and on the “Agreement relating to the provision and operation of air traffic services and facilities by EUROCONTROL at Maastricht Upper Area Control Centre”, plus the relevant annexes (25.11.86). Although the four participating States have delegated the provision of air navigation services to EUROCONTROL, each retains its regulatory competence and obligations.

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The total size of the airspace controlled by Maastricht UAC is 260 000 km2 and the average number of daily flights is about 3500. The budget of the centre was 132,537 K€ in 2004, where 89,934 K€ was accounted for by staff expenditure. Financial arrangements for the exploitation of Maastricht UAC are decided by the EUROCONTROL Committee of Management. The EUROCONTROL Directorate General provides approval of the budget. [Ref. 15] Deutsche Flugsicherung – Germany Deutsche Flugsicherung (DFS) was founded in 1993 to replace the federal aviation authority in Germany, “Bundesanstalt fuer Flugsicherung”. DFS was established as a Ltd. Company and its sole shareholder is the Federal Republic of Germany. Today, all ATM services in Germany are provided by DFS. It is the exclusive provider of air traffic control services, technical ATM services, air navigation services, aeronautical telecommunication services, flight information services, aeronautical information services and the air traffic flow management service. Between 1993 and 1997, DFS was able to run the business without external help, and regularly refunded charges to the airlines. However, since 1998, the delays and the costs have been increasing. This, together with the significant reduction in the demand after the events of 11 September 2001, caused deficits in 2001 (33.4 M€) and in 2002 (21.5M€). However, in 2003 DFS announced a net profit amounting to 81M€. DFS monitors the German flight information regions (FIR), which coincide approximately with the state territories. For the lower airspace (up to 24,500 feet), Germany currently has five Area Control Centres: East (in Berlin), North (in Bremen), West (in Düsseldorf), Central (in Langen near Frankfurt) and South (in Munich). These control centres monitor the lower airspace with the aid of radar. The control centres Berlin and Rhine (in Karlsruhe/Munich) are responsible for the upper airspace, while the upper information region (UIR) Hanover is controlled by the EUROCONTROL centre in Maastricht. NATS - UK National Air Traffic Services (NATS) provides air traffic control services to aircraft flying in UK airspace, and over the eastern part of the North Atlantic. In the year 2001, NATS was taken out of the hands of the civil aviation authority CAA and transformed into an operative company. As part of a partial privatization, 46% of the company was transferred to private investors and a further 5% to the employees of NATS, which meant that only 49% of the company remains in public hands. As part of the liberalisation process, airport ATC and en-route ATC have been separated. NATS now carries out airport ATC only at the 13 larger airports in the country. The separation of network and services was rejected due to the negative effects experienced in the comparable separation of network and operations at British Rail. NATS is subject– just like all British utility providers – to price cap regulation. In addition to airport services, en-route services and infrastructural services, NATS also provides the so-called oceanic services and some peripheral services (training of air traffic controllers, etc.). The oceanic business contributes only 3.5% to the total revenues of NATS. The shock of 11 September 2001 had negative effects on the plans of NATS and almost drove the company into bankruptcy. After two years of losses, NATS returned to profitability for the year ending March 2004, with a profit before tax of £1.8 million. The route charges, which are collected by the CRCO for the UK airspace, are paid to NATS.

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For more information about the EEC Society, Environment and Economy Research Area please contact:

Ted Elliff SEE Research Area Manager, EUROCONTROL Experimental Centre BP15, Centre de Bois des Bordes 91222 BRETIGNY SUR ORGE CEDEX France

Tel: +33 1 69 88 73 36 Fax: +33 1 69 88 72 11 E-Mail: [email protected] or visit http://www.eurocontrol.fr/