Many years ago we were enjoying the sun and a sandwich on Schiphol’s observation deck during lunch hour when news came that one of the major airlines there had a new top executive who was neither pilot, nor engineer. He was a bean-counter! I remember the initial feeling of horror and consternation at what back then appeared nothing short of blasphemy. Of course, in the years since we grew used to the idea that for leading an airline or car manufacturer successfully you did not necessarily have to know the difference between a car and an airplane. You had to understand the costs involved in making or operating them.
With the aviation industry, including airlines, ruled more and more by the need to cut costs to survive, having commercial, rather than engineering talent at the top seemed indeed an increasingly good idea. If only they had taught them to understand cost/benefit analyses properly!
What is a cost/benefit analysis?
Cost/benefit analysis or CBA for short is the tool through which managers are given an answer to the question: is there a proper return on investment within a reasonable time and what is the risk (of losing money) involved? On first sight this sounds like a good thing and indeed, used properly a CBA is a big help in making the right decision.
No new project is started these days without a CBA… Why do then some of us cringe when we hear this abbreviation?
CBAs and airspace users
It is well known that airspace users and airlines in particular, have a very short event horizon… Most things beyond three years or so disappear in the fog of the unknown future. If an investment does not provide the desired return within that period, forget it…
You can divide an aircraft into two parts. Everything to the left of the front exit is a cost; everything to the right is potential revenue. This is why airlines (with a few notable exceptions) will spend millions on new seats or passenger entertainment systems while leaving the cockpit (you know, the bit to the left of the front door) to fend for itself and usually get new stuff only when it is truly unavoidable. Unless safety is directly involved but that is another story.
The reason for this is simple and it is not the fault of the airlines as such. While projects for front and rear must have a solid business case (supported by a CBA), it is so much easier to make a business case for the new seats than it is for air/ground digital link or ADS-B.
If competitors are installing new seats or new entertainment systems, so must we… That link thing that will not bring money in the first 4-5 years can wait…
CBA horrors
From the past decade or so, a nice collection of air traffic management CBA related horror stories stand as silent warnings for the future. We must learn from those if we want to avoid the pitfalls in the future.
When the CBA is negative – well this should be simple. No go! But many promising things have been thrown away simply because the CBA results were not put into the proper context. An investment may be needed even if it will not in itself bring benefits but it lays the foundation of something that will be hugely beneficial. The benefit bringing bits were over the event horizon…
When the CBA is not credible – Thou shall have a CBA for everything… Even for things that are so far in the future that the input data are nothing but educated, and often not even educated, guesses. The result is a CBA that lacks credibility and will be laughed at… not a good start for any long term project!
When the CBA is positive – this should be the aim, the nice, comfortable starting shot for a positive decision. No way! Positive results are usually contested by the industry not least because there have been cases in the past where CBA results were cooked to show major benefits… only to be proven way out and without foundation. Defending a positive CBA is as difficult as creating one…
The myth of airspace user reaction to a positive CBA – It has been said often that if a proposed project offers a positive, credible business case, airspace users will equip without a mandate. This is a nice thought and I wish it were true. But it is not. The trouble is, the industry is composed of so many players with so many different business models, equipment, renewal cycles and so on, all vying for the same airspace, airports and services, that there is no such thing as a credible, positive CBA for the whole of the industry. In any given case, some airlines would equip, others would delay, still others would try to wiggle out of the requirement… each according to their temperament and circumstances. A positive CBA is not the silver bullet it is often claimed to be.
The effects of the cyclical airline business – Although airlines are much better now in managing the cyclical nature of their business, the boom and bust cycles continue to affect everyone. When in the boom and delays grow up, almost anything that eases the delays can have a good business case. The trouble is, by the time the money needs to be spent, the bust is on us, delays mostly disappear… with a dead business case as the result.
Vision, strategy and mandate
A fairly senior person at one of the US airlines once said to me when we were talking about the need to introduce something new to support the future air traffic management paradigm: You give us a mandate and it will be done. Otherwise not a chance in hell.
Airlines tend to look on mandates as something of the devil himself. With good reason too, as in the past many things had been mandated that cost the industry millions without any return at all.
But if a positive CBA is not enough and mandates hail from hell, what is the solution?
How can we ensure that the many changes required by the future ATM system, most of which will have an impact on the aircrafts’ “cost” side, can in fact be introduced in time and across the industry?
The key words are VISION, FASTER TO MARKET, INDSUTRY STARTEGY and AGREED MANDATE.
Vision – airline executives must realise that refusing to look beyond their financial models is in fact a disservice to the company. Things not bolted on the aircraft today will come back to bite them in a few years’ time costing a good deal more. They must look beyond the horizon and invest in what is needed. This may sound like heresy to-day but it must become common practice for long term viability.
Faster to market – In aviation we prefer evolution to revolution… But it is not really acceptable to mull over things (like which data link should we have…. remember?) for a decade or more. Nobody will invest in things that become obsolete by the time the choice is made. When the requirement is identified, the solution must be agreed and marketed as soon as possible.
Industry strategy – Many, many air traffic management strategies have been written over the years, most of them ending up on bookshelves with little benefit to the industry as a whole. They were either not shared by everyone or getting the partners to sign up took too long and the thing became obsolete. We must do better and agree a strategy that covers the now as well as the tomorrow and beyond.
Agreed mandate – Once the strategy is there and everyone knows what has to be done (and yes, a credible CBA has been produced) there must be a mandate that is agreed by the majority of the industry. The mandate is needed to ensure that all players act in unison and that the benefits become something one can actually plan on. Voluntary equipage is a nice concept but it does not work yet.
Is SESAR and NextGen the answer?
Those even a little familiar with the US NextGen and the European SESAR programs will recognise that things like faster-to-market and industry strategy are integral parts of those initiatives.
The question is: are they going to handle the issue of cost/benefit analyses better and is the vision thing any different to-day than it was 3 years ago? After all, the problem with CBA’s is not what they are but how they are used. A CBA must help in decision making but not replace decisions…
Is there real support for the required investment or are things going to fall apart when the time comes to spend the money?
Both SESAR and NextGen are bigger than anything ever tried before in air traffic management. But size and complexity alone are no guarantee for success…
Learning the lessons of the past (including the CBA horrors), understanding the reasons for past failures and doing something about them in airline and ANSP boardrooms is what offers the best chance for success.
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