The National Center of Excellence
Federal Aviation
Administration
Transportation Research Board
For Aviation Operations Research
National Airspace System
Infrastructure Management Conference
Economic Realities of NAS Infrastructure Cost—
Making the Business Case for NAS Modernization:
A Step Beyond Benefit-Cost Analysis
© GRA, Inc. 2005
September 9, 2005
Washington, DC
Rich Golaszewski
GRA, Incorporated
115 West Avenue • Jenkintown, PA 19046 • USA
℡ 215-884-7500 • 215-884-1385
postmaster@gra-inc.com
This presentation reflects the work of GRA, Inc. It does not
necessarily reflect the position of any GRA clients
GRA, Incorporated
September 9, 2005
1
Overview
4 Traditional view of benefit-cost analysis
4 Investing to reduce FAA costs
ƒ Who benefits
ƒ Types of benefits
4 The use of financial projections
ƒ Benefits
ƒ Potential outcomes
4 Wrap up
GRA, Incorporated
September 9, 2005
2
Traditional Benefit-Cost Analysis
4 Used to justify NAS investments
ƒ Most appropriate tool
ƒ Meets OMB investment analysis standards
4 Should consider all benefits
ƒ
ƒ
ƒ
ƒ
Airline (or other user) costs and revenues
FAA investment and operations and maintenance costs
Value of passenger time (not always included but should be)
External effects
• Environment
• Congestion
• Safety
4 Compensation principle
ƒ Pareto improving: benefits exceed costs and winners could
compensate losers
GRA, Incorporated
September 9, 2005
3
Benefit-Cost Analysis Raises Questions
4 Transfers/compensation rarely take place—impact on incentives
and behavior
ƒ Not all benefits and costs are monetized
4 Are financial implications considered?
ƒ Without cost-based fee for service, financial signals weak
ƒ FAA or users may not have resources to make cost-beneficial
investments (capital limitations)
ƒ Congress may not recognize those implicit decisions accompanying
investment and may not fund O&M at appropriate levels
4 Pressures to focus on ATO cost reduction
4 Benefits may be so diffuse or uncertain that users unwilling to pay
for them
4 Examples using FAA Establishment Criteria
GRA, Incorporated
September 9, 2005
4
Establishment Criteria for
Air Traffic Control Towers
4 Based on FAA Air Traffic Control Tower (ATCT)
Establishment Criteria Model
4 The criteria compare the value of ATCT tower benefits at the
site with the level of ATCT Operations costs for 2004 (Total
cost may be used in the comparison, when the data are
available)
4 The FAA ATCT Model includes the following user groups:
ƒ
ƒ
ƒ
ƒ
Scheduled commercial service
Non-scheduled commercial service
General Aviation
Military
GRA, Incorporated
September 9, 2005
5
Results for Air Traffic Control Towers
4 The type and level of activity at the airport determines the
distribution of benefits
4 While scheduled commercial aircraft activity drives most of
the benefits, many of these facilities are well beyond the
minimum threshold for establishment. However, the
remaining activity may not be large enough to support
tower establishment on its own
4 For VFR and contract towers, military and GA activity
comprise the largest share of benefits
GRA, Incorporated
September 9, 2005
6
Establishment Criteria Results:
Radar Towers
Radar Establisment Criteria
Total Benefits and Operation Costs
Scheduled Benefits Less than 20,000,000
Benefits (millions)
25
20
15
10
5
0
Service Delivery Points
Total Benefits
GRA, Incorporated
Linear (Operation Costs)
September 9, 2005
7
Distribution of Benefits by
Type of User and Tower
Average Percent of Benefits by Users
Percent of Benefits
120%
100%
80%
60%
40%
20%
0%
Radar
Tower
B
Limited
Radar
C
Tower
Scheduled Commercial
GRA, Incorporated
Non-Radar
Approach
D
Control
ATCT Towers
Non-Scheduled Comm
FAA
Tower
E
GA Total
Contract
Tower
G
Military Total
September 9, 2005
8
ATCT Benefits by Type
Efficiency
2%
ATCT by Type of Benefits ($million)
EMDF
Radar Tower
Safety
Efficiency
Total
$426.8
$17.0
$443.8
$2,027.7
$6.9
$2,034.7
$0.3
$0.1
$0.4
VFR Tower
$74.1
$10.8
$84.9
Contract Tower
$28.8
$9.7
$38.5
$2,557.7
$44.5
$2,602.3
Limited Radar Tower
Non-Radar Tower
Total
GRA, Incorporated
Safety
98%
September 9, 2005
9
Establishment Criteria for
Airport Surveillance Radar
4 Based on FAA Establishment Criteria Model for Airport
Surveillance Radar (ASR)
4 Compares the value of ASR benefits at the site with the ASR
radar one-time investment and installation cost, plus
operations and maintenance costs for 2004
4 The FAA ASR Model is based on the following user groups:
ƒ Scheduled commercial service
ƒ Non-scheduled commercial service
ƒ General Aviation
ƒ Military
GRA, Incorporated
September 9, 2005 10
Results for Airport Surveillance Radar
4 Major benefits are in efficiency measured as reduced
delays, saving aircraft operating costs and passenger time
costs
4 Scheduled commercial aircraft operations drive most of
the benefits
GRA, Incorporated
September 9, 2005 11
Total Benefits and Costs for ASR
Total Benefits and Total Costs for
Scheduled Traffic Benefits less than $100,000,000
120
100
Millions
80
60
40
20
Cost
0
Total Cost
GRA, Incorporated
ASR Installations
Total Benefits
Linear (Total Cost)
September 9, 2005 12
Distribution of Benefits by Type of User
Average Percent of Benefits by Users
Benefits
100%
80%
60%
40%
20%
0%
100,000 100,000 200,000 200,000 300,000 300,000 400,000400,000+
Instrument Operations
Sch
Commercial
Scheduled
Commercial
GRA, Incorporated
Non-Sch
Commercial
Non-Scheduled
Commercial
GA
GA
Military
Military
September 9, 2005 13
ASR Benefits by Type
Benefits by Types ($millions)
ASR
Safety
Efficiency
Total
$932.5
$3,409.6
$4,342.1
Safety
21%
Efficiency
79%
GRA, Incorporated
September 9, 2005 14
Investing to Reduce ATO and User Costs
4 Cost reductions to passenger and airlines drive many ATO
investments
4 Investments rarely tracked to see what actually happened
4 Transparency dictates disclosure
ƒ Require pro forma projections for each major investment
• With and without investment
• For all actors (ATO, aircraft operators, airports, passengers and
shippers, external parties, etc.)
ƒ Maintain pro forma financial model with all programs to determine
overlapping benefits and duplication of costs
• Build into budgeting
• Regular consultation with users and other stakeholders
• Consider operating costs and financial flows
ƒ Identify complementary investments and costs incurred by airports,
balance of FAA users, etc.
GRA, Incorporated
September 9, 2005 15
Service Delivery to IFR Flights
Tower
Approach/Departure
En Route2
En Route1
En Route3
Tower
ZSE
ZNY Departure
ZMP
ZOA Arrival
Northern
California
TRACON
(NCT)
ZBW
Over
ZLC
ZOA
San Francisco
Over
Over
ZAU
Over
ZNY
ZOB
New York
Over
ZDV
ZKC
ZID
Limited Radar
Tower/Airport
(SFO)
ZDC
ZLA
ZAB
ZFW
ZME
ZTL
ZJX
Dallas
TRACON (D10)
ZHU
Limited Radar
Tower/Airport
(DFW)
New York
TRACON
(N90)
Limited Radar
Tower/Airport
(JFK)
ZMA
*Alaska, Hawaii, Puerto Rico, and Oceanic airspace not shown
GRA, Incorporated
September 9, 2005 16
Budgets Drive Service
Delivery by ATO SDPs
ATO Maintenance Budget
IFR Capacity
ATO Operating Budget
VFR Capacity
Terminal A
Runway(s)
ATCT
Approach Control
En Route(s)
Domestic
and
Oceanic
Investment
F&E and RE&D Budgets
Terminal B
Runway(s)
ATCT
Approach Control
Services Delivered
Service Quality
GRA, Incorporated
September 9, 2005 17
Drive Pro Formas to Produce
Unit Costs of Services
4 Need to determine impacts of investments on ATO and user
productivity
ƒ CAS can support
ƒ Track ATO services and service delivery points
4 Public utility framework for ATO
ƒ Used and useful investment in “rate base”
ƒ Activity projections
ƒ Unit costs of service
4 Revenue, cost and cash flows for airports, users and other
parties
4 Ability to project future demand and financial performance by
users at SDPs, and roll up ATO results by service
GRA, Incorporated
September 9, 2005 18
Developing Pro Forma
Statements for the ATO
Current
Current Aviation
Aviation Activity:
Activity: Services
Services
Delivered
to
Customers
By
Delivered to Customers By Service
Service
(en
route,
oceanic
and
terminal)
(en route, oceanic and terminal) and
and User
User
Staffing Standards
Establishment
Criteria
Labor Agreements
Cost Accounting
System
Current/Quantity
Quality of Service
Current Operations
Cost and Quality
Current
Future
FAA
Forecasts
Future Operating/
Investment Cost
Quality of Service
ATO
ATO Plan
Plan and
and
Pro
Forma
Financials
Pro Forma Financials
by
by Service
Service and
and User
User
Investment
Models
User
Economics
Statements of ATO
and User Operations
and Cash Flow
GRA, Incorporated
September 9, 2005 19
Hypothetical ATO and User Statements
of Revenues and Costs
4 ATO Receipts
ƒ Current taxes apply to flights and not to locus of service delivery—
can only track at ATO level
ƒ User fees would measure revenues for specific ATO services
4 ATO Expenditures
ƒ Capital investment
ƒ Operating and maintenance costs
ƒ SDP, service and ATO levels
4 User Costs and Revenues
ƒ Capital investment
ƒ Operating and maintenance costs
ƒ Fares
GRA, Incorporated
September 9, 2005 20
Cost and Cash Flow ATO Perspective
Hypothetical ATO Investment Example
Cost of Service
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
ATC
$0.00
$0.00
($1.00)
($2.00)
($2.00)
($2.00)
($3.00)
($3.00)
($3.00)
($3.00)
($3.00)
($3.00)
Technical Ops
$0.00
$0.00
($1.00)
($2.00)
($2.00)
($2.00)
($2.00)
($2.00)
($2.00)
($2.00)
($2.00)
($2.00)
Communications
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Utilities
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Flight Inspection
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
$1.50
.
.
.
Depreciation (10 Yr)
$0.00
Administration
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Net Cost (Benefit)
$0.00
$0.00
($0.50)
($2.50)
($2.50)
($2.50)
($3.50)
($3.50)
($3.50)
($3.50)
($3.50)
($3.50)
($5.00)
($5.00)
($5.00)
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Operating Costs
$1.00
$2.00
$2.00
$2.00
$3.00
$3.00
$3.00
$3.00
$3.00
$3.00
Maintenance Costs
$1.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
$2.00
Other
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
($3.00)
$4.00
$4.00
$4.00
$5.00
$5.00
$5.00
$5.00
$5.00
$5.00
Cash Flow
Investment
Net Cash Flow
($5.00)
GRA, Incorporated
($5.00)
September 9, 2005 21
Income and Cash Flow: User Perspective
Hypothetical User Investment Example
User Costs
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Fuel
$0.0
$0.0
-$1.0
-$1.0
-$1.0
-$1.0
-$1.0
-$1.0
-$1.0
-$1.0
-$1.0
-$1.0
Crew
$0.0
$0.0
-$0.5
-$0.5
-$0.5
-$0.5
-$0.5
-$0.5
-$0.5
-$0.5
-$0.5
-$0.5
Maintenance
$0.0
$0.0
$1.00
$0.05
$0.05
$1.00
$0.05
$0.05
$1.00
$0.05
$0.05
Depreciation
$0.0
$0.0
$0.90
$0.90
$0.90
$0.90
$0.90
$0.90
$0.90
$0.90
$0.90
$1.00
$0.90
$0.40
($0.55)
($0.55)
$0.40
($0.55)
($0.55)
$0.40
($0.55)
($0.55)
$0.40
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$0.60
$1.55
$1.55
$1.55
$1.55
$0.60
$1.55
$1.55
$0.60
($3.0)
$0.0
$0.0
$0.0
$0.0
Fuel
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
$0.1
Crew
$0.5
$0.5
$0.5
$0.5
$0.5
$0.5
$0.5
$0.5
$0.5
$0.5
($1.00)
($0.05)
($0.05)
($1.00)
($0.05)
($0.05)
($1.00)
($0.05)
($0.05)
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
$1.00
($1.00)
$1.00
($2.40)
$0.55
$1.55
$0.60
$1.55
$1.55
$0.60
$1.55
$1.55
$0.60
Net costs
User Revenues
Fares
$0.0
$0.0
Net Income
$0.60
User Cash Flow
Investment
($3.0)
($3.0)
Operating Costs
Maintenance
Revenues
Net Cash Flow
($3.00)
GRA, Incorporated
($3.00)
September 9, 2005 22
Cash Flows and Net Present Values
Combined ATO and User Cash Flow
FY01
FY02
FY03
ATO Net Cash Flow
($5.00)
($5.00)
($3.00)
$4.00
$4.00
$4.00
$5.00
$5.00
$5.00
$5.00
$5.00
$5.00
User Net Cash Flow
($3.00)
($3.00)
($2.40)
$0.55
$1.55
$0.60
$1.55
$1.55
$0.60
$1.55
$1.55
$0.60
Societal Net Cash Flow
($8.00)
($8.00)
($5.40)
$4.55
$5.55
$4.60
$6.55
$6.55
$5.60
$6.55
$6.55
$5.60
Social NPV @ 10%
$7.27
ATO NPV @ 10%
$9.72
User NPV @ 10%
($2.45)
GRA, Incorporated
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
September 9, 2005 23
Wrap Up
4 Benefit-cost takes a societal view and is how government makes
investment decisions
ƒ Efficiency benefits to airlines and passengers function of aircraft size
ƒ Safety benefits function of inherent accident and fatality rates
4 Users don’t necessarily reflect willingness to pay in current tax
structure
ƒ Taxes do not vary by type or cost of services provided
ƒ No direct linkage of taxes and benefits
4 Financial analyses of ATO and user perspectives can identify
disparity in incentives
GRA, Incorporated
September 9, 2005 24