Overview
Recent travel restrictions and border closures amidst the novel coronavirus (COVID-19) pandemic have driven the aviation industry into paralysis. Currently, the International Air Transport Association (IATA) is projecting the impact on the global air transport industry to be in the order of a 48% loss in worldwide passenger demand; equating to approximately $314USD billion in aggregate revenue [1]. Airlines and airports have been quick to act through immediate cost reductions. Such moves are already visible with the grounding of entire fleets, empty airport terminals, widespread furloughing and layoff announcements. Likewise, governments around the world have already committed trillions of dollars in fiscal stimulus to bolster distressed firms and curb an impending industry recession.
Despite being somewhat in the background, Air Navigation Services Providers (ANSP) are not immune to current circumstances. As high-reliability organisations, ANSPs are responsible for managing the critical infrastructure and services that are paramount for the safe and efficient expedition of air traffic. Even as regular commercial travel plunges to a trickle, ANSPs continue to play a crucial role in facilitating repatriation operations, freight and trade.
The core revenue streams of ANSPs, however, are intrinsically tied to airspace usage (i.e. aeronautical-based), which poses a substantial financial risk for these organisations at a time of industry-wide decline. The Civil Aviation Navigation Service Organisation (CANSO) – the air traffic management (ATM) sector’s representative body – has already called for governments to consider ANSPs in their recovery plans [2]. In some parts of the world, fiscal assistance is already being provided to ANSPs in the form of air navigation fee dispensations, subsidies, loans or public overdraft facilities. Although media attention has largely focussed on the economic impact of the COVID-19 pandemic on airlines and airports, how does this translate to ANSP finances and their overall business solvency?
Financial Implications for ANSPs
ANSPs generate income from airspace users (e.g. airlines) with fees usually determined by a function of distance, weight and or a locality-based unit cost i.e. revenue is directly proportional to air traffic demand within a designated airspace. With global air traffic now down 70% [3] since the start of the year, ANSPs are fast facing a liquidity shortage. Although some ANSPs may find themselves with moderate monetary reserves to weather the current revenue shortfall, many will not be in this position, especially as most operate strictly on a cost-recovery basis. So what implications will this income shortage have for ANSPs over the short and long-term?
More immediately, ANSPs are going to find themselves in a situation where liquidity will start drying up quickly – much like the rest of the aviation industry – while finding ways to manage a predominantly ‘fixed’ cost base [4]. Much like airlines, most ANSPs only have funding capacity to accommodate cash flow deficits of a few months. Under present circumstances, ANSPs may find themselves unable to finance current capital expenditures and operating costs. Notwithstanding other liability obligations, a large part of operating costs is labour where the average operational workforce represents 30% of total costs [5]. Even if capital expenditure is suspended amidst the COVID-19 pandemic, it is paramount staff wages for operational staff are not compromised, as it is this resource that is essential in sustaining service continuity.
An inability to cover operational staff costs could create a resource deficit that would not only limit service provision now but also in the future when traffic returns to previous levels, due to the protracted ramp-up time to train skilled staff. Because of the archetypal institutional structure of most ANSPs, the ability to access and drawdown on debt instruments is also limited, which only further amplifies the financial predicament ANSPs may find themselves in.
Over the medium to long-term, financial impacts become more prolonged, not only for ANSPs but also for the broader aviation industry. Under current air navigation pricing structures, extended periods of reduced demand eventually results in increased charges as less traffic must cover equivalent costs. This in turn creates a cyclical effect which ultimately imposes greater costs on airspace users, unfortunately during market recovery where airlines seek to improve balance sheet health and profitability. Furthermore, as the financial position of airspace users remains unstable, ANSPs may also be forced to serve airlines who are soon to become insolvent or who default on payments which only escalates the cost burden placed on an already struggling market.
Essentially, the impact over the medium to long-term remains similar regarding the difficulty in sustaining labour costs of essential staff. Nevertheless, over prolonged periods of time, ANSPs may be forced to take more permanent cost reduction actions to optimise operational workforces. This in turn would contribute to a significant slowdown in recovery, even if air travel demand increases, a sufficiently skilled workforce to service traffic may not be available. Similarly, as the inability to generate adequate revenue heightens with time, forward capital expenditures in the order of billions of dollars become threatened. As a highly capital intensive sector, the impairment of future investments to upgrade critical ATM infrastructure and improve service quality outcomes limits the already difficult task to make ATM safer and more efficient.
This spiral has a real ability to plunge ANSPs into financial distress. Generally speaking, ANSPs are not market participating firms, and therefore this may lead to nationalisation or privatisation efforts as the last resort to guarantee critical sovereign infrastructure and services where State-backed bailout is unavailable. Although the merits of either are really another topic of discussion, it can be argued that neither should be premised on a lack of alternatives to insolvency, but rather decision based on delivering improved service outcomes to industry. So how can ANSPs effectively respond to ensure financial stability during the COVID-19 pandemic?
Pragmatic Actions for Effective Response
Already ANSPs globally are taking extraordinary measures to ensure operational continuity in the delivery of ATM. More recently, CANSO published guidance material (see COVID-19: Ensuring continuity of ATS service globally) which centres on how ANSPs can ensure business continuity and enact precautionary steps to manage spread amongst essential staff. But financially, for ANSPs that have not adequately planned for such periods of crisis, it may be a case of too little too late, with options for sufficient fiscal relief being limited; for some, it may even be a question of solvency. In immediate terms, ANSPs should be looking to:
- Be disciplined in cash flow management: maintaining forecasts to monitor and adapt accordingly; assertively call on payments and overdue cash receipts; leverage debt funding (where available) and phase to cash-out cycle
- Prioritise core activities: prioritise cash spending on mission-critical activities; suspend investments and projects that are non-mission-critical; reallocate resources to where it counts
- Right-size the business for uncertainty: renegotiate current liabilities where possible; clean out unnecessary costs to reduce the variable cost base; cull third-party costs, especially for non-essential work; furlough (or trim) human resources for non-essential work
- Actively plan for recovery: constantly review and amend continuity and re-activation plans; review and amend medium and long-term business strategies; redefine the business for resilience against future financial crises
Even when applying the above measures, ANSPs may still find themselves left short on adequate finance. Where debt facilities cannot be drawn on, such times would call for external support whether it be capital from the State, shareholders or private institutions. As governments worldwide draw up financial rescue plans for airlines and airports to protect the infrastructure and services that form the bedrock of global connectivity, due consideration needs to be made to financially protecting ANSPs; unlike airlines, this is a critical business that is not substitutable. That being said, no such economic support should be provided without a premium, especially if being funded from public tax revenue.
Once the market has recovered, the future will continue to be economically uncertain. Therefore ‘new normal’ market conditions, ANSPs should be looking to build fiscal resilience through sound financial strategy, policies and controls. In times of turmoil, we learn to adapt and improve. To better prepare for and weather future financial storms, ANSPs should focus their attention on:
- Disciplined liquidity management: ensure sufficient funds for short and long-term cash requirements; prudently building reserves to counter cash flow variability and unforeseen inflow deficits; establishing tranche-based debt facilities to call on during periods of distress
- Shared risk: seeking to cost risk into service pricing; agreeing and instituting risk-sharing arrangements with customers for price changes with traffic demand fluctuations; negotiating payment flexibility with strategic suppliers
- Market-oriented profitability and top-line diversification: shifting operating focus from cost-recovery to profitability; being ruthless in achieving a return on capital investments; pursuing and building new revenue streams; investing in innovative technologies to bolster service resilience
More simply put, ANSPs should be seeking to manage financial risk more effectively, both together with customers through risk-sharing arrangements, or individually through hedging, insuring and better liquidity management. Likewise, similar policies should be put in place for loss prevention and control should a crisis strike.
That being said, some of these measures are not feasible for some ANSPs due to extant regulatory constraints. Fundamentally, the reason many ANSPs find themselves in the current situation stems from the institutional frameworks they operate within (i.e. Doc 9082), which often leaves little operating margin in more difficult times. This calls for broader structural reform across the sector, in particular pricing, that would drive greater economic autonomy, thereby enabling greater resilience in times of crisis and financial flexibility in times of strong market growth.
In Summary
There are already calls to defer air navigation charge payments, with a notable deferral request already passed through in Europe by EUROCONTROL’s Provisional Council [6]; €1.1 billion in fees were deferred to November 2020. Although this provides a short-term cash relief to airlines, this does not address the issue at heart but merely postpones it. In the interim, the cash flow liquidity burden has shifted across to the ANSP and States. To add further pressure, there is continued pressure from industry to further shift the financial burden to ANSPs all while ensuring service continuity. Airlines For Europe (A4E) for example has called for extended relief in the form of a full year waiver in charges and protection from charge increases due to the traffic reduction, all while maintaining investments in projects that deliver service quality improvements [7].
This tight fiscal squeeze not only threatens the funding of current operations but also has the potential to stall plans to upgrade critical ATM infrastructure and improve service quality outcomes that make ATM safer and more efficient. Now more than ever ANSPs need to take decisive and pragmatic action to actively counter the economic decline during the COVID-19 pandemic and avoid financial distress. Furthermore, ANSPs need also to build fiscal resilience to prepare for times of future economic uncertainty. By adopting a forward-looking approach, a stronger financial posture can be built that will ensure key investments will not be impaired, critical infrastructure and services remain online, and the dependence on State funding in times of crisis can be reduced.
