Equipage funding is a tough sell in Congress, but a public-private approach may be an attractive solution
Bolstered by new forecasts of dramatic economic payoffs from ATM modernization, support is growing in Congress and within the aviation industry for a private-sector answer to airline concerns about the cost of required equipment.
These days nobody disagrees that the NextGen air traffic management (ATM) program is vital for the health of the industry, and the ground infrastructure is already being deployed by the. But there is still uncertainty over how aircraft equipage should be funded and, in particular, how the cost should be divided between the government and the airlines. Because both are a little cash-strapped right now, there is growing consensus that leveraging private capital is the most realistic alternative.
Airlines are still pushing for the government to pay for new avionics required by NextGen, arguing that the airspace system is national infrastructure just as much as highways or bridges. However, it is becoming increasingly obvious that this will be difficult to achieve in the current political and economic environment.
Congress is likely to encourage a public-private approach to equipage funding in the FAA reauthorization bill, and the House version already includes language to that effect. The Senate will probably agree with this approach when the two versions of the bill are reconciled during the conference process, says Senate Commerce Committee majority staff member Gael Sullivan during Aviation Week's NextGen Ahead conference.
This is good news to the stakeholders involved in one such private capital initiative.
Major aerospace companies and Wall Street backers are establishing a $1.5 billion equipage fund that would finance airlines purchasing NextGen avionics. Payments would begin when NextGen efficiencies are realized. Nexa Capital Partners and ITT Corp. are taking the lead in this effort, and the managing partners are Michael Dyment from Nexa and former FAA Chief Operating Officer Russell Chew.
Chew says the proposed NextGen fund does not necessarily require supporting language in the FAA bill, but government backing would allow more capital to be raised. Also, a major component of the plan is for the FAA to commit to a NextGen deployment timetable, and this would happen more readily if there was a directive from Congress.
The current House language is vague as to what sort of support it would provide, although it is likely that something “more tailored” will be in the final bill, Sullivan says.
Chew says the FAA commitments are needed to complete the business case for airlines and Wall Street to invest in NextGen equipage. Under the NextGen fund plan, airline payments would be deferred if the FAA infrastructure commitments are not met. Chew says there is no question that there is enough private capital available to finance equipage, but a compelling business case is needed to unlock it.
Private infrastructure investment funds are burgeoning, and even the airlines themselves are “willing to pay for things that make them money or save them money,” says Chew. The key is removing the uncertainty about returns on the investment.
There has been strong interest from airlines in the equipage fund concept, Chew says. The managing partners are currently drafting agreements with some carriers, although they are also waiting to see what congressional action occurs. Chew says more details about fund participants are likely to emerge in July or August.
A new study by Deloitte LLP should help prove the business case for NextGen, as well as for its European equivalent known as Sesar. The study will also support proponents of accelerated implementation—and help those arguing against proposed cuts to NextGen budgets.
The study finds that the long-term savings from global ATM modernization programs outweigh their costs by a significant margin, and this net benefit would increase if the upgrades were accelerated. The report also highlights that slowing down modernization would trim the net benefits and lengthen the time it would take to recoup the investment.
Under the most likely economic forecast scenario, Deloitte estimates that completing modernization efforts by 2025 as planned would yield a net benefit of $897 billion through 2035. Of this total, $281 billion would come from NextGen in the U.S., $266 billion from the Sesar program in Europe, and $350 billion from projects in the rest of the world.
The benefits would be felt mainly by airlines, the overall economy and travelers, with ATM organizations and airports seeing a lesser share of the gains. Benefits were calculated based on factors such as airline operating cost savings, the economic value of increased capacity, emissions and noise reductions, and the value of passenger hours otherwise lost to flight delays. Costs include equipage spending by airlines, as well as infrastructure spending by ATM organizations and governments.
For the base scenario, Deloitte calculates that the $897 billion net value of global modernization would represent a 39.6% return on investment (ROI). Eight years would be required for savings to pay back the money spent. Even if only the operational benefits are factored in, there would still be a net value of $246 billion.
In another scenario, Deloitte assumed the programs could be completed five years early, by 2020. This would see the net benefit through 2035 increasing by $100 billion. Additionally, the ROI would climb to 53% and the payback period would decrease to seven years.
On the other hand, if the pace of transformation was slowed by five years, it would cut $148 billion from the net benefit in the base scenario. The payback period would stretch to 10 years, and the rate of return would decline to 22.9%.
From an airline point of view, uncertainty around benefits and the amount of time before they are realized are two primary impediments to building a business case for NextGen, says Ed Lohr, director of fleet strategy and analysis at.
A better business case for NextGen can be made if the ROI is realized in the nearer term, even if that return is relatively modest, Lohr says. “Talking about benefits we're going to see in 10 or 15 years is almost irrelevant from an airline point of view,” he says.
The authors of the Deloitte study note that accelerating the NextGen program “would require substantial annual increases by pulling forward funding intended to be spent for the 2021-25 budget years.” This would need an exemption from the White House's proposed five-year spending freeze.
Such an acceleration would run counter to proposals by House Republicans to cut federal budgets across the board. Any move that would slow NextGen deployment by reducing its funding would be a prime example of “penny wise and pound foolish,” says Daniel Elwell, the Aerospace Industries Association's vice president for civil aviation.
Elwell says savings from bringing FAA funding back to 2008 levels—as proposed in the House reauthorization bill—would be dwarfed by the lost economic benefits of NextGen.
Instead, he believes it is more economically responsible to accelerate the program to realize these savings earlier. “There is no other infrastructure project that is a better example of a [significant] return on a modest investment than NextGen,” Elwell says.
•The NextGen program is aimed at overhauling the U.S. air traffic management system through 2025. At the urging of industry groups, more emphasis was placed on delivering mid-term benefits by 2018.
•FAA estimates that NextGen will reduce delays by 35% by 2018, compared with a no-change scenario. Cumulative fuel savings are estimated at 1.4 billion gallons, with a carbon dioxide emission reduction of 14 million tons.
•NextGen comprises a diverse array of programs, but a key plank is transitioning from radar to satellite-based surveillance. Most aircraft will have to equip for Automatic Dependent Surveillance-Broadcast by 2020.