Not too long ago, air traffic flow management delays, airport congestion and  the need for more controllers to match increasing aircraft movements were pressing issues in air traffic control. Now air navigation service providers are streamlining their operations and cutting their workforces.

The COVID-19 pandemic has especially harmed air navigation service providers (ANSP), which generate most of their revenue from the approach, departure and route fees they charge aircraft operators. The airlines they serve have adjusted to diminished air travel demand by lowering their overhead—storing aircraft, suspending routes and dismissing employees. But contraction is not a ready option for ANSPs; they have to manage navigable airways regardless of volume.

“In the absence of government bailouts, airlines could furlough up to half their staff to conserve cash until more passengers return to flying,” says Robert Poole, director of transportation policy with the Reason Foundation. “The same is true of airports. But that simply does not work for ANSPs, which have to ensure that the networks are properly served.”

Still, the expectation is that ANSPs will be significantly downsized, restructured or even reimagined once the pandemic subsides.

During the debate in 2017-18 over spinning off the FAA’s air traffic control function into a separate entity, Nav Canada was discussed as a possible model to emulate. But eight months into the pandemic, the Canadian ANSP—privatized since 1996—was awaiting government assistance for what President and CEO Neil Wilson has called “the toughest moment” in the company’s history.

He expected that Nav Canada would be part of an industrywide government bailout that Transport Minister Marc Garneau previewed on Nov. 8, emphasizing airlines and airports. “I fully anticipate that the government will be assisting the aviation industry,” Wilson says. “Obviously, we would prefer if they get on with it sooner rather than later.”

Nav Canada derived 93% of its revenue from customer service charges in fiscal 2020, which ended on Aug. 31. During that period, half of which was affected by the pandemic, air traffic levels decreased by 34% year over year—versus the 3.7% annual growth the budget had assumed—and revenue from service charges decreased by C$454 million ($347 million).

Overall revenue dropped to C$1 billion from C$1.437 billion; the decrease in service charges was partially offset by a C$17 million increase in other revenue, mainly from the sale of air traffic management software and services.

“Unfavorable variances” from planned results, driven by lower air traffic levels and the decrease in value of Nav Canada’s preferred interests in the Aireon space-based surveillance joint venture, changed the company’s rate stabilization account to a debit balance of C$255 million from a credit balance of C$93 million.

Nav Canada implemented cost-containment measures as soon as the World Health Organization declared COVID-19 a pandemic in March. The ANSP reduced management salaries, deferred retroactive wage increases, temporarily suspended nighttime services at 18 facilities, closed flight information centers in Winnipeg and Halifax and offered a voluntary retirement program. The company had proposed a number of additional service-level adjustments that regulator Transport Canada was evaluating.

During fiscal 2020, the company received C$86 million from the Canada Emergency Wage Subsidy (CEWS) program, which aims to help employers partially offset compensation costs.

The ANSP had sought assistance from Ottawa separate from the CEWS program, which was broadly available to all employers, Wilson says. With no assistance forthcoming, however, Nav Canada drew C$225 million from a syndicated credit facility to cover short-term obligations and served notice in May that it would increase its base service charges by an average of 29.5%, effective in September.

This rate hike was necessary for the company to raise the minimum level of revenue needed to meet financial covenants of its existing loan agreements before seeking additional debt financing.

“We made the request [for assistance], and we had multiple discussions with the government prior to having to take the very regrettable but necessary decision to increase our rates by 29.5%,” Wilson says. “The absence of assistance was one of the reasons why we had no choice but to increase our rates. 

“The rate increase allowed us to ensure we were in compliance with our covenants under lending agreements and allowed us to go to market and raise C$850 million in two bond issues—one with a duration of 30 years and one with a duration of 10 years, all at very attractive rates,” he adds.

Calgary-based WestJet has appealed the rate increases to the quasi-judicial Canadian Transportation Agency (CTA). In advance of a judgment, the airline raised the ticket surcharges it collects from domestic passengers for air traffic services. The CTA has 60 days from the date of the appeal, or until mid-December, to make a decision that will apply to all of Nav Canada’s airline customers, Wilson says.

On Sept. 22, Nav Canada announced it was eliminating 720 employees, representing 14% of its roughly 5,100 workers. The cuts included people who had voluntarily retired and mainly affected the company’s corporate and operational-support groups. Some 2,000 frontline controllers were spared layoffs. But the ANSP borrowed from its future by releasing 160 of its 250 controller trainees.

In October, Nav Canada announced that Wilson will retire on Jan. 30, 2021, after leading the company for five years.

Controller layoffs remained a likelihood. As November arrived with no end of the pandemic in sight, Nav Canada was negotiating with the Canadian Air Traffic Control Association representing controllers to lessen the impact of job cuts. There may be “wage concessions [or] other things we can do to minimize those layoffs,” Wilson says. “But there will have to be some adjustment in the size of that group as well.”

Poole proposes the sale of catastrophe bonds as used in the insurance industry to help ANSPs cover the costs of rare but disastrous events such as a global pandemic. During a typically short term, a high-risk, high-yield “cat” bond pays investors a high interest rate. But if the predefined catastrophe occurs and requires a payout, the obligation to return the principal is either deferred or forgiven.

In a June blog post, Maja Marciniak, a senior consultant at UK aviation consultancy Helios, described actions that typically state-owned European ANSPs could take to improve their “cost-base elasticity,” or the ability to adjust their costs in line with increased or diminished traffic demand.

Topping the list is increasing staffing flexibility. Staffing represents 65% of European ANSP costs, according to Eurocontrol, and unlike other workforces it is “quasi-fixed” because the high level of specialization and qualification of controllers makes the cost savings of releasing them “doubtful,” Marciniak writes. When too much staff is available, ANSPs can introduce the concept of “negative working,” or defer a given number of working hours into the future, she says.

Nonstaff operating costs, including for inventory, external services and business expenditures, represent the second-largest slice (about 16%) of an ANSP’s cost base. Marciniak offers a number of cost-saving suggestions. ANSPs within regional alliances or allied with one another can share inventory and spare parts—for example, by procuring the same communications, navigation and surveillance equipment. They can outsource the maintenance of their technical systems, lease technical infrastructure to other entities and source data externally, such as by using Aireon’s space-based surveillance data feed, she says.

As with Nav Canada, European ANSPs have implemented or been compelled to implement cost-saving measures, including some of the steps Marciniak proposes.

Germany’s state-owned DFS Deutsche Flugsicherung (DFS) derives 91% of its revenue from the fees it charges aircraft operators. With hopes of a travel renaissance in Europe dashed by a second round of lockdowns and restrictions, the ANSP expects air traffic will recover to only 45% of its pre-pandemic level by December; DFS does not anticipate a return to last year’s traffic volume until 2025.

In March, DFS signed a “corona agreement” with the GdF controllers union that allows the company to flexibly manage its workforce during the pandemic. Employees covered by the agreement can work as many as 300 hr. less this year than normal. They have to make up half the hours, however, by working longer over the next five years, beginning in 2021.

DFS also obtained a €500 million ($593 million) loan to close a liquidity gap this year—one it expects to grow to €1 billion by 2025.

In September, the Swiss parliament approved an equity contribution of 150 million Swiss francs ($165 million) to support the ANSP Skyguide, which has experienced a “massive decline” in income because of the pandemic. In return for the contribution, the government-majority-owned company is required to undertake cost-saving measures and raise the retirement age of its controllers to 60 from 56.

Meanwhile, in the UK, NATS, which is 49% government-owned, is selling dormant radar sites and leasing space at other locations. It has pared “several hundred” nonoperational employees through voluntary layoffs and in September notified 122 controller trainees that it was ending their instruction.

Despite the difficulties of the past eight months, Nav Canada as an organization will outlast COVID-19, Wilson says, noting that the company endured through the Sept. 11, 2001 terrorist attacks, the outbreak of Severe Acute Respiratory Syndrome in 2003 and the global financial crisis of 2007-08. Still,  Nav Canada will emerge from the novel coronavirus pandemic as a smaller organization in its physical presence and the number of people it employs.

“The Nav Canada model, we think, is one that is quite resilient,” he says “We think that the model and the governance will be equally resistant through this.

“That said, we will be a different-looking company in terms of our operation, in terms of how we go about providing our service,” Wilson advises. “Our workforce will have been adjusted [by] 18-19%, and some of the ways we provide service in terms of being in lots of physical locations won’t be the same if we proceed with the level-of-service adjustments. But we will continue to be a very strong organization and one of the world’s leading air navigation service providers.”