Public-Private Partnerships Among Proposals to Advance NextGen

 - July 27, 2011, 6:15 AM

The vision of the satellite-based, data-centric, network-enabled transformation of the ATC system known as the Next Generation Air Transportation System (NextGen) has entered mainstream discourse in the U.S., but so too has the realization of its formidable cost.

The July 4 issue of The Washington Post led with the headline, “Modernization of air traffic control may be delayed,” bringing into public focus what the airlines and other airspace users have been sweating now for years: NextGen will cost upward of $42 billion by 2025, with government shouldering half of that amount for infrastructure and airspace users paying the remainder for equipment and training.

Private Sector Involvement

That imposing bill and the increasing likelihood that a federal government $14 trillion in debt can’t be counted on for major subsidies have given rise to novel funding proposals, including a provision for “NextGen Public-Private Partnerships” contained in FAA reauthorization legislation the House of Representatives passed in April. One such “PPP,” the NextGen Equipage Fund, pledges to “bring substantial private-sector capital to overcome the investment barriers.”

Reauthorization language in the Senate bill directs the FAA Administrator to provide a financing proposal “that uses innovative methods” to fund NextGen and “takes into consideration opportunities for involvement by public-private partnerships.” The Senate bill also proposes a State ADS-B Equipage Bank pilot program, modeled after a program in Colorado that deployed wide area multilateration (Wam) to support airports in mountainous terrain with radar gaps.

The long-delayed FAA reauthorization bill was still pending before Congress, with a 20th extension due to expire July 22.

Separate from legislation, the FAA has specified a “Data Communications Avionics Equipage Initiative” in a request for offers for the Data Communications Integrated Services acquisition, posted July 8. The “FAA’s goal is to induce into operation the greatest number of Data Comm-compatible equipped aircraft for the funding provided for this initiative,” expected to be $80 million, the solicitation states. The winning contractor will administer the program based on certain aircraft requirements. No more than 10 percent of the funding may be used to equip Part 135 commuter and on-demand aircraft, with the balance used for carriers operating under Part 121, according to FAA.

Former FAA acting administrator Bobby Sturgell, now Rockwell Collins senior vice president of Washington operations, said examples of public-private partnerships involving the FAA already exist, such as contract ATC towers and automated flight service stations. That approach is even more widespread in surface transportation, he said.

“Successful implementation of NextGen does not require public-private financing because certainly the FAA could go the mandate path and eventually get there that way,” Sturgell told AIN. “But if we’re talking about accelerating the benefits and capabilities so we can all start benefitting much earlier, I think you have to have some kind of public-private partnership or financing mechanism to support that.”

The federal government’s fiscal predicament “opens the door even further to public-private partnership types of funding and more creative financing,” Sturgell said. “I think there’s a big opportunity here for people to start thinking out of the box and to do things a little differently.”   

Operators Reluctant To Equip

Although there is consensus about its ultimate benefits, NextGen faces a cost conundrum. Airlines emerging from years of recession and coping now with high fuel prices are reluctant to invest in the necessary suite of airborne equipment–costing an estimated $150,000 to $1 million per aircraft–without proof of a timely return on investment in the form of fuel savings and operational efficiencies made available by the FAA. Some contend government should pay for the equipment. “We have an ATC system today that is largely ground based. All we’re doing when we’re talking about NextGen is we’re taking a known technology, GPS technology, and moving part of the equipment in the air and part of the equipment will be on the ground,” said Will Ris, senior vice president of government affairs for American Airlines, speaking at the FAA Forecast Conference earlier this year. “It is our view that that ATC system should continue to be financed and supported by the federal government because that’s, after all, where all the ticket taxes are going.”

The FAA is advancing on one major pillar of NextGen. The agency awarded a contract to ITT in August 2007 to deploy the ground infrastructure for automatic dependent surveillance-broadcast (ADS-B) nationwide by 2013, and last year mandated that aircraft operators equip for ADS-B out position reporting by 2020. A rulemaking on ADS-B in equipage–the ability to display air traffic in the cockpit–is in the works, with initial recommendations of an Aviation Rulemaking Committee due this fall. The FAA’s investment in ADS-B and other infrastructure will languish, however, until a “tipping point” is reached of properly equipped aircraft that can benefit from NextGen system efficiencies.

The NextGen Equipage Fund aims to kick-start NextGen by assisting airlines in acquiring some of the necessary equipment. The fund would leverage $1.5 billion raised through commercial borrowing and private equity to finance new avionics for an estimated 75 percent of the U.S. airline fleet. It also reportedly is seeking $150 million in federal loan guarantees.

In the works since about 2009, the fund was revealed at an RTCA conference last fall by Steve Loranger, ITT chairman, president and CEO. While “other aerospace companies” are referenced in background material, ITT to date is the only named strategic investor of the fund, which is managed by Nexa Capital Partners, of Washington, D.C. Principals of ITT and Nexa Capital provided an overview of the fund at the Paris Air Show in June.

Russell Chew, managing partner with Nexa Capital Partners and a general partner of the NextGen fund, said the fund would procure “a basic NextGen suite of avionics,” enabling functions such as ADS-B and data communications, which airlines would lease. They would make payments on the equipment based on the FAA’s achieving agreed milestones for supporting infrastructure. In turn, the FAA would be bound by performance guarantees “in a contractual way.”

Participating airlines would realize a return on their investment sooner as a result of airspace system efficiencies such as preferred routings delivered by the FAA on the principle of “best equipped, best served,” closing the equipage “business case” that confronts NextGen. “The NextGen Equipage Fund was founded to bring real money to bear on the problem,” Chew said. “It will allow airlines to afford, in spite of their weakened balance sheets, the actual investment in avionics they need to put together to take advantage of this new system [which] requires that all airplanes be equipped with new avionics. So the airlines in their equipage decisions have become the gatekeepers of this function.” The fund was negotiating “participation agreements” with several airlines, which he declined to identify.

While a loan guarantee from the government technically is not necessary, Chew said, “in a public/private partnership…the loan guarantee is a perfect place for government to say, given the right amount a risk, I could really kick start this by lowering the cost of capital.”

Chew headed JetBlue Airways for two years as president and COO. Before that, he served as the first COO of the FAA’s Air Traffic Organization, and before that as an executive with American Airlines.

In addition to Chew, the fund’s other general partner is Michael Dyment, founder and managing partner of Nexa Capital Partners. Dyment, who served as principal advisor to ITT on the original $1.86 billion ADS-B contract award, formed the investment firm in October 2007. His biography lists senior positions with the aerospace and transportation practices of A.T. Kearney, Booz Allen Hamilton, PricewaterhouseCoopers and Arthur Anderson, and experience as a product manager for GPS programs with Canadian Marconi.