07 December 2008

Nav Canada in the Recession

Despite our PM's assertion just a few weeks ago during the election campaign that Canada would not see a recession, in November the economy lost 70,600 jobs. Apparently the country is in for many more job losses and a recession that may be the worst since the 1930s or even earlier than that.

While the Asia-Pacific Economic Cooperation (APEC) forum, held in Lima in November 2008, indicated that recovery would come in mid-2010. Our PM was not convinced that it will happen anywhere near that early. Other economists are starting to say that ten years would be more realistic.

The problems Nav Canada faces are similar to the last recession in 2001-02, following the 911 attacks, only on a much greater scale. That was the first recession the company had faced since its formation in 1996. Back in that rather minor recession Nav Canada burned through its $80 million "rainy day" fund very quickly as airlines cut schedules. Because Nav Canada gets almost all its income from the fees it charges users, its income is very dependant on airlines schedules. When airlines cut flights Nav Canada loses income right away.

The other side of the problem is that Nav Canada is operating an air navigation system that is very fixed in levels of service. They can't quickly shrink the operation and lay-off staff to save money. If airline flights at any given airport get reduced Nav Canada still needs the same number of air traffic controllers to man the tower and the centre.

On top of that the company has very few customers of any importance fiscally. Yes there are 23,000 private aircraft owners that get billed each year for "provision of services" but the total amount collected is about 0.08% of the company's budget - coffee money essentially. Of the commercial carriers Air Canada and Westjet are paying the vast bulk of the fees that keep the company afloat. The smaller bush airlines and helicopter companies provide a very tiny percentage of Nav Canada's fees. Essentially all the aircraft in the country not operated by the two biggest airlines are more of a nuisance to Nav Canada than a source of serious income. This means that Nav Canada is almost totally dependent on those two carriers, if they cut flights then Nav Canada can't do much to cut expenses and bleeds cash quickly. On top of that while a company like Westjet is able to cut routes with little notice, Nav Canada has a long and protracted aeronautical study process to close a single FSS or tower, even if traffic no longer warrants keeping it open. The process can take years just to get all the "X"s needed to close an obviously under-used facility. The government does not fund Nav Canada.

In good economic times things hum along. The company can slowly add staff and facilities as increased traffic requires. But the same constraints put the company in a very bad position when the economy goes bad. And when it goes very bad, very fast, as it has done in late 2008, then the company has very few options. In 2001-02 they were saved by the fact that it was a short recession. They increased fees, which caused howls of protest from the airlines who were cutting back and had no cash to spare. Air Canada even grieved the increases to the Canadian Transportation Agency indicating that it thought Nav Canada was not running the company in a "reasonable and prudent" manner. Air Canada's problem was that while they were cutting everything their fees were being raised by another company who was claiming they couldn't cut at all. The CTA sided with Nav Canada, of course and denied rolling back the fee increases. Basically Nav Canada got through that recession because it was a short one.

Some of Nav Canada's options today may be:

* burning their "rainy-day fund" again
* slowly starting the process of identifying places to cut services over the next few years
* increasing fees again
* running deficits and borrowing money

There have been aviation writers who have said that the whole privatized air traffic control model only works in good economic times and that in protracted bad times the company can't raise fees enough on the few remaining aircraft left flying in a long recession to make ends meet. It becomes a problem of diminishing returns as the fee increases make flying even less viable and cause fewer aircraft to fly.

Perhaps the end result will be asking for a government bailout, like GM, Ford and Chrysler, or perhaps just handing the keys back to the federal government once and for all?

What do you think? Can Nav Canada survive a long period of very low airline traffic, if so how?


Anonymous said...

Hopefully the Airlines aren't counting on Nav Canada to use its rate stabilization account to continue operations in tough times. Nav has reduced this account to a measly 4 million dollars in 2008..........somehow were able to give over 60 million back to the airlines this year though????

Adam Hunt said...

Mr Anon:

That is an interesting comment. I was working on the assumption that they still had $80M or more in the rate stabilization account.

I found the reference on the Nav Canada website and you are quite correct, they only have $4M left in the account.

I think they are in for a rough time and much more quickly than I had supposed.

Adam Hunt said...

Actually in reading more news from Nav Canada I found out that the company lost $122M on bad investments in asset-backed commercial paper as of the end of their financial year on 31 Aug 08. Given the state of the markets they have probably lost a lot more since August.

Both the asset-backed commercial paper loses and the rate stabilization fund draw-down are publicly available information - funny how it hasn't made even the aviation news yet!

Adam Hunt said...

On 9 January 2009 Nav Canada issued its first quarter results and indicated a total of C$164M in ABCP losses, including the C$122M previously reported.

In addressing the recession as well as the investment losses, CEO John Creighton said:

“The worsening economic environment in the first quarter of fiscal 2009 was reflected in lower air traffic levels compared to the same period in fiscal 2008. While this translated into lower revenues, the performance of our employees in delivering safe air navigation services while controlling costs has been exemplary. We will continue to make the safe and efficient movement of aircraft our number one priority, while working with employees, customers, suppliers, and other stakeholders in managing through this economic downturn."

There should be some sort of award for this amazing use of "Dilbertisms"!!!

Anonymous said...

I wonder if Mr. John Creighton has considered the actions of the CEO's of RBC and Scotia Bank to help resolve NavCan's financial woes. These CEO's have reduced their salaries and refused large amounts of bonus payments.