Squaring the Circle: What the Air Traffic Control Sector Can and Cannot Learn from Other Sectors on WACC

Fri Dec 01 10:59:00 EST 2017
Dominik Huebler and Arjun Dasgupta

The EC’s Aviation Strategy published in December 2015 envisages a reduction in air traffic control (ATC) charges of approximately 50% by 2035 while also envisaging transformative investments in the modernisation of ATC systems to be delivered by operators. In a recently released paper, NERA Principal Dominik Huebler and Consultant Arjun Dasgupta examine how this dual challenge will affect ATC regulators and operators, specifically in the context of setting an allowed rate of return. 

The NERA authors analyse recent trends in how regulators in other sectors have approached the process of setting the cost of capital before identifying three sector-specific factors that make the process more challenging for ATC providers. The three sector-specific factors are as follows: 

  • ATC providers are “capital light” operations that need to cover a high share of costs that do not immediately vary with demand (“fixed costs”), which include labour costs in particular;

  • ATC providers are often closely connected to their respective governments, requiring regulators to disentangle the impact of (perceived) government guarantees and the economic risk of the operations themselves; and

  • ATC providers operating in diverse locations may encounter different local conditions with respect to financing costs and/or the income of their customers and their ability to bear certain charges.  

The authors conclude their analysis by highlighting that ATCs in Europe face enormous investment requirements in the coming years, which in many cases have to be delivered by companies with cash-strapped governments as shareholders. Determining the appropriate rate of return across different European countries requires an understanding of both general market conditions and local risk factors, including country risk and income elasticity of demand for air travel, as well as traffic composition. The authors highlight that there is a wealth of experience from other sectors (e.g., energy, telecoms, airports), both good and bad, that can be combined with an understanding of the specifics of the ATC sector to develop an estimate of the weighted average cost of capital (WACC) that allows for the investment to be delivered.