1. Policy options for modulation of charges in SES Workshop Workstream A June 2015

2. | Objectives for modulation of charges 2 Incentivise economically efficient decisions Capable of being understood by airlines, ANSPs and other industry stakeholders The scheme should not have the effect of increasing ANSP revenues Scheme administration costs should be proportionate to the benefits Workable from the perspective of all stakeholders, possible to implement without any serious dislocation Economic efficiency Intelligibility No excess revenue Minimal administration costs Credibility

3. | Workstream A – Congestion pricing 3

4. | Congestion pricing – Terms of Reference 4 Analysis of the technical capabilities and of the investment required to implement congestion pricing for en route and terminal services. Task A1 To develop at least three alternative options with detailed scenarios for the introduction of congestion pricing for air navigation services, with a focus on 'hot-spots'. Task A2 To assess the impact of introducing congestion pricing on other policy objectives, key performance areas and/or specific bodies. Task A3

5. | Congestion pricing – study methodology  Investigation of congestion  Extent  Stability  Definition of options  Illustrative calculation of congestion charges  En-route  Terminal  Qualitative consideration of practical issues  Price setting process  Systems implications 5

6. | Congestion pricing – identifying congested airspace 6

7. | 7  Flight volumes in Marseille ACC sectors 8 th June 2013 (NMOC data)

8. | Congestion pricing – identifying congested airspace 8  Cumulative delay during 2013 (NMOC data)

9. | Congestion pricing – identifying congested airspace 9  Share of 2013 summer weeks during which LFMMB3 is regulated (NMOC data)

10. | Congestion pricing - options  Terminal and en-route  Structure of charges  Vary the unit rate  Introduce a congestion supplement  Level of charges  Set to influence airline behaviour  Set to reflect economic and social cost of congestion  Process for setting charges  Posted at a point in time  Modified through time as airspace users react  Static versus dynamic price setting Presentation datePresentation title: Insert > Header & Footer and Apply to All10 Both terminal and en- route options considered:  Increase to unit rate, level determined to incentivise rerouting  Fixed supplement, based on economic and social cost  Fixed supplement, based on level determined to incentivise rerouting Qualitative assessment of dynamic price setting

11. | En-route congestion pricing – influencing flight planning 11 Analysis of routes:  Fuerteventura – Friedrichshafen  Budapest to Madrid  Bucharest to Berlin  Example - avoidance of regulated sector between Bucharest and Berlin

12. | En-route congestion pricing – calculation of charges 12 Fuerteventura to Friedrichshafen Budapest to Madrid Bucharest to Berlin AircraftAirbus A319Boeing 737-800 MTOW (tonnes)6879 Fuel consumption (kg/km) 4.13.0 Fuel price ($/tonne)949 Great circle distance for calculation of charge (km) 2,0351,9511,265 Sample flight characteristics

13. | En-route congestion pricing – estimated congestion charges 13 Fuerteventura - Friedrichshafen Budapest - Madrid Bucharest - Berlin Fixed supplement based on economic and social cost 400367859 Fixed supplement based on operating cost comparison 289882 Additional unit rate based on operating cost comparison 135338 Estimated en-route congestion charges (2013 €s)  First option – cost of flying through Warsaw airspace (Bucharest – Berlin) increases by over 350%  Second option - cost of flying through Marseille airspace (Budapest - Madrid) increases by over 32%

14. | Terminal congestion pricing – calculation of charges 14 RouteDistance (km) Regulated terminal sector Airport served by congested sector London – Amsterdam 360EHAM Amsterdam Schiphol London – Edinburgh 575EGKKLondon Gatwick London – Milan900EGKKLondon Gatwick Routes selected for modelling of operating costs Steer Davies Gleave flight operations model used to calculate operating costs under different business models:  Traditional carrier  Low cost  Ultra low cost Calculation of charges needed to reduce assumed route margin to 25% of previous value

15. | Terminal congestion pricing – estimated congestion charges 15 RouteOptionAirline business model TraditionalLow costUltra low cost London – Amsterdam Fixed supplement economic /social 654 Fixed supplement incentive 244675854 Unit rate incentive 81486711 London – Edinburgh Fixed supplement economic /social 3238701050 Fixed supplement incentive 1,120 Unit rate incentive 242653788 London – Milan Fixed supplement economic /social 1,120 Fixed supplement incentive 3007881,004 Unit rate incentive 100567836 Estimated terminal congestion charges (2013 €s)

16. | Congestion pricing – key findings 16  Potential substantial impact on costs of some flights (although additional revenue redistributed back to airlines)  There are also a number of practical issues to consider:  Getting the price right – if demand is sensitive, pricing could transfer rather than ease congestion  Might require dynamic pricing process – challenging to implement given timescales for en-route planning  System implications of charging at a more granular level – by sector – for airspace users, ANSPs and Eurocontrol (CRCO)  Ensuring no revenue increase while establishing appropriate price differentials – a need for redistribution of revenue  Difficult to take account of environmental impact (carbon emissions) unless carbon price factored into airline route planning decisions  Distinguishing fundamental capacity constraints from those driven by short term resource availability - stronger incentives to invest in capacity and reduce short term delay are needed

17. | Congestion pricing – sensitivity of sector demand 17  Impact of getting price ‘wrong’ depends on sensitivity of demand  The wrong price could simply shift the congestion problem  Price would need to be identified in few hours before finalisation of flight plans

18. | Congestion pricing – recommendations Congestion pricing would be very challenging to implement – long timescales for implementation and best introduced alongside common charging zones  Focus of further development work should be on en-route rather than terminal congestion charging  The structure of a congestion charge should be based on the option of introducing a fixed supplement into the existing charging formula  Review of wording of the Regulations 390/2013 and 391/2013 to identify ways of strengthening incentives for capacity investment  Introduction of performance incentive regime 18

19. DISCLAIMER: This work may only be used within the context and scope of work for which Steer Davies Gleave was commissioned and may not be relied upon in part or whole by any third party or be used for any other purpose. Any person choosing to use any part of this work without the express and written permission of Steer Davies Gleave shall be deemed to confirm their agreement to indemnify Steer Davies Gleave for all loss or damage resulting therefrom. Thank you Clemence.routaboul@sdgworld.net