NAV CANADA – a typical Canadian success story
Let’s go straight to the point – NAV CANADA has been a total success since its inception in 1996. Created after the wave of privatization in the Canadian civil aviation landscape, the non-for-profit private corporation became on November 1 of the same year the owner and operator of Canada’s civil Air Navigation System (ANS) by acquiring assets from the federal government for $1.5 billion. Twenty years later, NAV CANADA manages the movement of 12 million planes each year generating $1.4 billion in revenue and $37 million in net income (FY 2016).
This article’s main objective is to concisely explain the success of NAV CANADA in regards to our national circumstances. Readers may be aware of the current huge and animated debate in the US Congress on the privatization of their civil ANS. NAV CANADA largely inspired the entity that the President of the United States wants to set up. In fact, the Canadian model has been stated to be “the one to follow”. However, as many of my American friends have suggested over the last months, the US aviation market is significantly different than ours in terms of issues, realities, and stakeholders. Indeed, the privatization of the US civil ANS has become a vivid debate based on issues specific to the American system; it is not my intention to comment on them.
Why did we privatize our Civil ANS?
Privatization is sometimes beneficial for the stakeholders involved in a particular industry, and the privatization of the ANS in Canada was the best decision the government could have taken in the 1990s considering the circumstances. However, the government had to adopt a smart modus operandi and make its decisions based on the stakeholders’ findings – and this is precisely what it did. What was the situation prior to November 1, 1996?
Prior to 1996, as a government program, the ANS had largely disappeared into a highly centralized bureaucracy. The ANS was supported mainly through the Air Transportation Tax collected from airline passengers. While the ANS was largely unfunded, it was still sucking $200 million annually from the Treasury. Moreover, it had to compete with other government programs managed by Transport Canada since it needed the latter’s approval for budgeting.
The lack of funding led to serious complications such as an impoverishment of the quality of the infrastructures, a deficit in the implementation of major and innovative system projects, an increase of delays decreasing de facto the service levels for air carriers, an escalation of the cost for the air carriers as well as several human issues such as poor formation in regards to technology.
Experts also condemned the “rigidities of civil service control that tended to produce systems which were unresponsive to customer requirements and in which capital expenditures were tied to political rather than operational goals”.
Air carriers and unions were desperate; a drastic change was needed. In fact, it seemed that the government itself was severely questioning its sleepy ANS. As Otis Redding sang, “A Change is Gonna Come”.
In the 1990s, government, air carriers, and unions proceeded to conduct an extensive consultation process to identify solutions to the issues mentioned above in order to improve the quality and efficiency of our civil ANS. After many hours of consultation, stakeholders concluded that an autonomous air navigation service provider (“ANSP”) would be more likely to be efficient, dynamic, and flexible than its government-run counterpart.
The advantages of privatization
NAV CANADA frequently repeats in its reports and other publications the International Civil Aviation Organization’s (ICAO) findings on the advantages of ANSP privatization.
While reading ICAO reports on Air Traffic Systems, one may notice that the international community has always been a strong advocate for private ANSPs – known as “autonomous entities”. According to ICAO, the “autonomous entities”:
- ensure that the revenues generated through the use of airport and ANS resources are transparently reinvested in operating and developing the facilities;
- ensure that the users of the airport and the ANS contribute directly to the maintenance and development of the infrastructure or facilities that they use (the “user pays” principle);
- reduce the financing burden on governments;
- encourage the growth of a business culture, thereby increasing efficiency and improving the quality of services;
- enable access to private capital markets, which may only become possible with a change in organizational format because of public sector borrowing restrictions;
- establish a clear separation between the regulatory and operational functions.
Given its leadership on the matter, ICAO frequently invites its Member States to meetings and roundtables to promote and explain the benefits in setting up such “autonomous entities”.
Not surprisingly, more and more countries have privatized their ANSPs within the last twenty years.
NAV CANADA’s Secret for Efficiency – Corporate Governance
One of the most innovative features of NAV CANADA lies in its corporate governance. During the consultation process, stakeholders discussed and studied the New Zealand model which adopted the concept of the tripartite corporate board. NAV CANADA’s By-Laws require that the Board of Directors is composed of 15 members, 10 of whom are elected from the four founding groups as follow:
Source: NAV CANADA
The board of directors also elects four independent members. The board’s directors ensured that the different interests (government, national airlines, regional airlines, corporate aviation, general aviation and labour) were all included in the non-share private corporation’s decision-making.
The most illustrative example was the downturn after 9/11. The effects were catastrophic: NAV CANADA’s biggest customer – Air Canada (ADH2) – was bankrupt and owed NAV CANADA more than $45M, traffic decreased, therefore the revenue dropped by more than 10% (representing a $100M shortfall versus budget for fiscal year 2002). To address these issues, management adopted a policy called “Balanced Approach” in which all the stakeholders were asked to work together and make contributions and sacrifices to sustain the financial stability of the corporation. And they succeeded. NAV CANADA maintained during the downturn an AA investment grading rate despite all the economic struggles in the aviation sector. By August 2005, NAV CANADA recovered with revenue increasing by 13% from 2004. In August 2006, the corporation achieved $1.2B of revenue with a surplus of $63M.
NAV CANADA’s smartest decision – investing in innovation
Since its creation, NAV CANADA has massively invested in technology. Management was convinced that adopting an incremental approach with an emphasis on investing and upgrading existing and proven technology was the best decision. They were right. The first step of the capital program was to catch up with the poor infrastructure from the previous era. Once this was achieved, the second step was to massively invest into the development and modernization of the system itself. In other words, NAV CANADA’s main-focused was to use “off the shelf technology” to convert for in-house purposes.
NAV CANADA became a world leader in ANS notably by the implementation of the Canadian Automated Air Traffic System (CAATS) which brought more efficiency with the automation of air operational data, more support for the air traffic controller, and better satellite coverage across the nation. NAV CANADA estimates that the CAATS would save up to $100M per annum in more efficient flight operation.
Another important decision was to invest into ATM software in order to save money. Indeed, some licenses purchased from the corporation’s suppliers could be out of price. NAV CANADA, therefore, opted to develop in-house systems and products. The most noteworthy example is the sale to the UK’s National Air Traffic System of a touchscreen-based flight display systems.
NAV CANADA’s main source of revenue – the user fee principle regulated by law
As mentioned above, the main source of revenue of our former ANS – the Air Transportation Tax charged to airline passengers – was formally abrogated in 1996 with the incorporation of NAV CANADA. Like any corporation, NAV CANADA needs cash flow to function, and, given its special status, the stakeholders opted for the user fee principle to finance the activities of the non-share capital corporation. In reality, NAV CANADA recovers its cost through a system of services charges pursuant to the Civil Air Navigation Services Commercialization Act. The corporation is indeed subject to legislation that regulates the level of its charge in addition to confirming to ICAO’s recommendation.
NAV CANADA obtains its revenue mainly from movement-based charges dependent on the flown distance. The corporation has developed an accessible online calculator to estimate the air carriers’ flight cost.
Given its special non-share-for-profit structure, the corporation is legally mandated to only charge enough to cover its cost and maintain the ANS in a safe and effective way. In 2016, the traffic growth in Canada in addition with cost controls due to efficient and strategic investment in the ANS have commanded savings to NAV CANADA’s main customers – the air carriers. This represents more than $100M in savings for airlines. This is yet again proof that in finance an expensive initial investment can bring excellent savings in long term.
It is certainly not an exaggeration to admit that NAV CANADA has improved safety, reduced service costs and increased efficiency and productivity more than twenty years after its inception.
After reading and re-reading on the subject I personally found that the pillar of this success resides in its corporate governance model. There is nothing as important as a diversified representation on the board of directors to ensure the success of the corporation, and NAV CANADA represents the quintessence of this tripartite harmony. As many experts have mentioned again and again over the last two decades, I absolutely agree with the idea that this interesting legal structure is the primary source of the extraordinary success of Canada’s private ANSP. Some food for thought.
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