International aeronautical user charges
Author(s)Odoni, Amedeo R.
Massachusetts Institute of Technology. Flight Transportation Laboratory
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Introduction: 1.1 BACKGROUND AND MOTIVATION Very few issues relating to the international air transportation industry are today as divisive as those pertaining to user charges imposed at international airports and enroute air navigation facilities. In recent years, this general subject has led to acrimonious arguments, heated confrontations and even legal proceedings involving airlines (and the entire airport user community), airport authorities and national and local governments. Moreover, the end is nowhere in sight: should the current economic difficulties of many of the world's international airlines persist -- as well they might -- it is possible that disputes related to user charges will intensify further and reach critical proportions at some future time. The general label 'user charges" comprises a variety of fees which are employed by providers of aeronautical facilities and services as a means of recovering (partially, fully, or more-than-fully) the costs that they incur. A listing of the various kinds of user charges in existence is given in Table 1.1. Any given Airport Authority or organization that offers air navigation and aeronautical services may impose some or all of these charges. It is possible to state several facts that help explain why the subject of user charges is such a controversial one. At the same time, these facts provide the motivation for studies such as the one reported here: Fact 1: User charges have gone through a period of rapid increases in absolute and, in many cases, relative terms as well, over the last decade. A confluence of factors have contributed to these increases. Perhaps the foremost among them is that, during the 1970's, the aviation industry Table 1.1 TYPES OF USER CHARGES AIRPORT CHARGES:- Aeronautical Charges: Landing and/or take-off charges, Parking and hangar charges, Passenger service charges, Security charges, Airport noise charges, Ground (ramp and traffic) handling charges, Concession fees for aviation fuel and oil, Rentals of air terminal space, premises and equipment, Non-Aeronautical Charges: Rentals of airport land, premises and equipment (for purposes other than servicing traffic), Concession fees for commercial concerns catering to the public, Fees derived from airport's own operation of shops and services, Fees charged for tours, admission to reserved areas, etc. ENROUTE CHARGES Air navigation charges * The International Civil Aviation Organization (ICAO) recommends that where fuel charges are imposed, they should be recognized by airport authorities as being concession charges of an aeronautical nature and that fuel concessionaires should not add them automatically to the price of fuel to aircraft operator [ICAO, 1981d]. began to be treated as a "mature" one, in most of the world. Until then, many countries were content to subsidize the industry through provision of aeronautical facilities and services at no cost or at much-below cost. (It is a remarkable fact, for instance, that no enroute air navigation charges were collected by someWest European nations until 1971, the year when Eurocontrol began collecting charges designed to recover only 15% of costs.) However, as the industry grew "above critical size" and stabilized during the 1960's and 1970's, government attitudes toward it generally changed and a "users-pay" principle was increasingly being applied to the setting of user charges by the 1970's. (By 1981, Eurocontrol was recovering 100% of enroute air navigation costs on behalf of its 11 member states.) A second factor is that, during this period, some new types of charges, notably security charges and noise charges, have been added for the first time to the array of other charges that airlines traditionally faced. The fact that many aeronautical services are labor-intensive ones -- notably ground handling, enroute and terminal-area air navigation and security -- was a third contributing factor, as labor costs are particularly sensitive to inflationary pressures such as those experienced worldwide during the period in question. Yet another factor is that since the mid-1960's many countries have been investing large amounts of capital toward improving their aeronautical infrastructures (new or improved airports, modernization of ATC systems). As these new or improved facilities came into service, the cost-base on which user charges are computed grew rapidly. While one can expand this list of factors considerably, the point is that airlines and users of aviation facilities have felt the impact of such rapid increases. This, moreover, happened at a time when many of them were experiencing significant economic pressures. For example, IATA contends that, during the period of the dramatic fuel-price increases (1973-1981), the only other component of their costs that grew nearly as rapidly as fuel costs were aeronautical user charges (see Table 1.2). Fact 2: There are large differences from country to country and from location to location in the ways user charges are computed and in the magnitude of user charges. This is amply demonstrated by Table 1.3, which shows the size of typical landing fees and passenger service charges in a number of selected countries for three important aircraft types. Similar or even larger differences exist in the magnitudes of other charges imposed (especially for ground handling and enroute air navigation services), as will be shown in many parts of this report. Such differences - coupled with the unfortunate tendency of many aeronautical authorities to provide inadequate or minimal documentation in explaining their user charges -- have led to accusations of "unfairness", "predatory behavior", or "discrimination" against several specific countries or airports' (e.g., London/Heathrow, Tokyo/Narita, Australia). It is not surprising that such accusations are usually directed toward those that impose the highest charges. However, locations that impose much-lower charges, but have the benefit of a lower cost-base as well, are just as susceptible to adopting such practices. Fact 3: In many cases, user charges may absorb a sizable fraction of an international commercial flight's gross revenues. This is illustrated in Tables 1.4 and 1.5 for the case of flights by a real, but anonymous, Airline X between its home base (XXX) and New York (JFK International), London/Heathrow and Amsterdam. Table 1.4 shows all the charges imposed for each route/equipment combination for load factors of 100%, 1We do not imply here that such accusations are necessarily justified. Landing Fee at destination includes parking charge 4-hour stay-over in NYC; 2-hour in LON, AMS Peak-hour use in summer ... The specific assumptions made are listed at the bottom of Table 1.4. Table 1.5 estimates what percentage of total revenues (true one-way yields on the routes were provided by Airline X) is absorbed by user charges. (For example, for a B747 flight to NYC at 100% load factor, the total user charges of $18,378 -- see Table 1.4 - amount to 5.74% of the round-trip revenues of $320,000). It can be seen that user charges in these examples vary from 6% to 22% of gross revenues, depending on destination, aircraft involved and load factor. It is also important to note that the total user charges (last line of Table 1.4) are largely determined by the type of aircraft flown on any given route and are quite insensitive to the load factor -- a characteristic that is quite vexing to the airlines. While this example is given for illustrative purposes only, the range of percentages it indicates in Table 1.5 is not atypical. IATA estimates that the sum of enroute charges and landing and other airport fees (not including ground handling charges and passenger service costs at airports) amount to approximately 6% of the total (direct and indirect) costs of the international scheduled services of its members. West European airlines contend that these same charges amount to 11.2% of their total costs for intra-European services and an even-higher percentage for airlines specializing in short-haul routes.(cont.) The Association of European Airlines (AEA), in fact, often blames high user charges in Europe as one of the main reasons for the higher European operating costs and therefore higher fares per mile.2 Most of the recent complaints of AEA carriers have centered in particular on enroute air navigation charges collected through the Eurocontrol agency. Pan Am has reported that whereas user charges of various kinds accounted for 4% of its costs on international routes in 1970, they now account for 9%. For domestic trunk carriers in the 2This view is not necessarily endorsed here. United States, user fees account for 4.2% of their costs. However, this percentage does not include the 8% tax on domestic fares, which is collected on behalf of the Aviation Trust Fund and which can be viewed as an aeronautical user charge. Up to a few years ago, U.S. airlines were among those most vocal in protesting the magnitude of and lack of uniformity in international user charges. Partially as a result, the International Air Transportation Fair Competitve Practices Act that became law in the United States on January 3, 1975 directs the Secretary of Transportation to survey foreign user charges and to report to the Secretary of State and the Civil Aeronautics Board any charges that unreasonably exceed comparable U.S. charges or are otherwise discriminatory. The latter are then to negotiate with the foreign country involved to reduce such charges or eliminate such discrimination [Pogue and Davison, 1979]. The Act also gives to the Secretary of Transportation, in consultation with the Secretary of State, the right to impose compensatory charges on foreign carriers, should such negotiations fail. It should be noted that, as a result of the rapid increase of the exchange value of the U.S. dollar during the 1981-1984 period, U.S. international carriers have been protected, to a large extent, from "internalizing" the further increases in international user charges that have taken place during these years. (For example, although the costs, as computed in local currencies, of enroute air navigation in Western Europe (Eurocontrol) nearly doubled between 1980 and 1983, the cost to U.S. carriers when computed in U.S. dollars has not changed appreciably.) Should however, the current trend concerning exchange rates be reversed, it is likely that the international-user-charges issue will receive renewed prominence in the United States. Fact 4: Limited guidance on setting user charges is provided by multilateral or bilateral international agreements and by the International Civil Aviation Organization. The multilateral Convention on International Civil Aviation (Chicago, Decemer 7, 1944) which provides the legal framework for many aspects of international air transportation is vague on the subject of user charges. The relevant provision of the Convention is contained in Article 15 of Chapter II, which calls for non-discriminatory charges for international aviation, without being more specific on what this means. Bilateral agreements, e.g. Bermuda II, are equally non-specific, usually calling for: "just and reasonable" charges; equal treatment for the contracting states' carriers with regard to user charges; user charges that "may reflect, but should not exceed, the full cost" of providing facilities and services "including a reasonable rate of return on assets, after depreciation"; and continuing consultations and exchange of information between "the competent charging authorities" and airline representatives. The ICAO has also struggled repeatedly with the issue of user charges, notably in special conferences on the subject held in 1967, 1973 and 1981, all of which met with limited success. The principles and recommendations endorsed by the ICAO on the assessment and allocation of user charges are contained in ICAO Doc. 9082-C/1015 (Statements by the Council to Contracting States on Charges for Airports and Route Air Navigation Facilities). The ICAO Statements are not binding on member countries, but offer guidelines that charging authorities are encouraged to(cont.) follow. The Statements are reproduced here as Appendix 1A, because they will be repeatedly referred to and discussed in Chapters 2-6. (The reader who is unfamiliar with them is encouraged to review them.) For now, two points need to be made: First, that the ICAO Statements do endorse the concept that, in principle, international users should bear the full and fair share of costs of the aeronautical facilities and services they use. And, second, that, as is natural for a document that attempts to establish a common ground among many conflicting views and interests, the Statements are often ambiguous, subject to conflicting interpretations and, in a number of instances, even self-contradictory, as will be pointed out later in this report. As noted earlier, Facts 1-4 in addition to providing a background on the problem of international user charges, also constitute motivations for this report. Indeed the aim here is to attempt to present a systematic and integrated discussion of relevant issues and to contribute to an improved understanding of the range of options and approaches that exist worldwide with regard to setting user charges. 1.2. OUTLINE OF THIS REPORT We now present an outline of the contents of Chapters 2-6. Chapter 2 contains a brief survey of most types of aeronautical charges: landing fees; parking and hangar charges; passenger service charges; fuel throughput charges; noise and nuisance charges; security charges; and enroute air navigation charges. Discussion of ground handling charges is left to Chapter 6. For each one of the types of charges covered, the following are addressed: (i) Ways in which the charges are specified, as well as typical magnitudes and ranges of the charges (ii) Principal issues concerning the charges, including the positions of users (mostly the airlines) (iii) Summaries of the findings of recent ICAO surveys on the charges, as well as tabulations of charges in individual countries based on information collected by these surveys. Chapter 3 deals with the approach needed to determine whether, in the context of the conditions under which an aeronautical service or facility is provided, the resulting user charges are reasonable and fair. The emphasis in the preceding sentence is intended to underscore the point that comparisons among user charges in different countries or locations should not be undertaken without a full understanding of the particular circumstances and assumptions that underlie each of the systems of charges being compared. In fact, it is believed here that such comparisons should normally be avoided and that user charges at international airports and enroute air navigation facilities should be reviewed individually on a case-by-case basis. Chapter 3 presents what could be described as a normative model* for conducting such a review. Specifically, on the basis of the insights gained during this research, we shall review the steps that must be carried out by a provider of aeronautical services in order to determine and specify a system of user charges. These steps include: (a) Postulating the policy guidelines that should be followed (b) Developing a cost base (c) Allocating costs in the cost base among the various cost and revenue centers of the aeronautical facility (d) Allocating costs associated with each center among the users of that center (e) Arriving at a methodology for computing charges to be paid by each specific user (f) Setting up a framework for interacting with users and soliciting user comments and general inputs. Each of the above steps is discussed in Chapter 3 in some detail, with emphasis on: (i) Identifying the range of(cont.) practices that exist around the world with respect to each of these steps (ii) Discussing some of the principal options available at each step (iii) Highlighting a few important points that the prospective reviewer of user charges should be aware of, including common pitfalls (iv) Identifying certain areas where there may exist some room for improvement in prevailing international practices (v) Illustrating the discussion through a number of brief examples. In Chapter 4, four selected case studies are reviewed. Each of the cases has been selected for two reasons: (1) It helps illustrate one or more of the principal concepts that were discussed in Chapter 3 (2) In itself, the case offers one or more interesting aspects (important airport, innovative approach, controversy, etc.). The first example discussed is Boston's Logan International Airport. We examine in detail the procedure used to determine the unit-rate (charge per thousand pounds) for computing landing fees at this major United States airport. This, in turn, offers an opportunity to explain why airside user charges at U.S. international airports are usually considerably lower than those elsewhere in the world. The controversial case of Tokyo/Narita International Airport is brought up next. It illustrates how a combination of poor site and planning choices and of often-unreasonable cost-allocation practices has led to what seems to be a system of unfair and excessive user charges. A study aimed at helping the Board of Civil Aviation of Sweden ("Swedish CAA") determine an appropriate system of user charges is summarized next. This study is especially important, because of the several innovative concepts that it contains, principally regarding the practical application of shortand long-term marginal-cost approaches to the setting of user charges. Finally, cost allocation in the Commonwealth of Australia is reviewed. User charges in Australia have become a matter of considerable controversy in recent years. Moreover, the Australian cost-allocation approach is quite typical of the "traditional" kind of rationale and methodology generally used in efforts of this type. Chapter 5 deals in its entirety with the Eurocontrol system of user charges. This represents the principal case study reported herein. In its first part, Chapter 5 examines in detail the distribution of Eurocontrol charges among users. The second part concentrates on the cost-base which these charges are designed to cover. Some of the points which are addressed include: (a) The extent to which the Eurocontrol "formula" for computing user charges truly reflects the costs that individual users impose on facilities and services (b) The effects of changes in this formula on the distribution of costs among the various types of users: much quantitative evidence is provided in this respect (c) The composition of the cost-base and differences among memberstates in this respect (d) Possible explanations for the large differences in the unit rates that the eleven individual member-states specify for computing user charges. Chapter 6 represents a first attempt to examine in a systematic way the subject of costs of ground handling services at international airports. It is noted that, due (i) to vast differences among airports as to who the provider of these services is, and (ii) to lack of uniformity in the type and quality of services provided, it is difficult to develop general conclusions in this area. Nevertheless, several preliminary but highly-interesting observations are made on the basis of previously-unpublished data provided to the author by the International Civil Airports Association (ICAA) and by a major U.S. trunk carrier. The data in question deal with ground handling costs at many European and a few U.S. airports. An extensive list of references on the subjects of airport economics and of airport user charges is also provided at the end of this report. Finally, as already indicated in the Foreword, two companion reports, based on the thesis work of D. Lippera and E. Ch'ng, cover much related ground, especially with regard to a more-formal analysis of alternative costallocation methodologies. These two reports also include many additional examples, especially several concerning the British Airports Authority and the setting of user charges at London/Heathrow Airport.
February 1985Includes bibliographical references
[Cambridge, Mass. : Massachusetts Institute of Technology, Flight Transportation Laboratory, 1985]
FTL report (Massachusetts Institute of Technology. Flight Transportation Laboratory) ; R85-9
International airports, User charges, Landing fees, Fees