Iris Operators Study Iris Public Event 10 & 11 October 2011 NH Conference Centre Noordwijkerhout - ESA's ARTES Programmes
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Iris Operators Study Iris Public Event 10 & 11 October 2011 NH Conference Centre Noordwijkerhout
The HERMES Study
Considers the scenario of a Joint Venture operating the ANTARES system
Presents business case findings based on infrastructure costs provided by ESA
Assumes certain milestones are met, in particular the publication of an
implementing rule on Satcom
Results provided in this presentation are neither a formal statement of intent
nor a commitment on behalf of the HERMES consortium
2Regulatory Context
EC 550/2004 Service Provider Conformity EC 552/2004
EC 2096/2005 EC 1070/2009
EC 1070/2009 Certification Assessment
EASA
(pan-European Essential Requirements
service)
Common Requirements Implementing Rules
DoV + TF DoC/DSU
Certified Service
Certification Manufacturers
Provider
SATCOM
Service Provision
3Main Regulatory outcomes
Certification Model is totally open, provided that the service provision chain is under
managerial control of one or more certified service providers who shall perform a
safety oversight over the non-certified subcontractors.
Certified service providers shall have the adequate means to discharge its
responsibilities and cover the potential liabilities according to the applicable
legislation.
Agreements for cooperation between certified service providers should clearly
establish the transfer of liabilities associated to the service provision that is the
subject of the agreement.
The liability model is directly linked to the service and certification models. There is
not a common liability regime for pan-European ATM systems.
If the EU were not the owner of the system, there could be difficulties to ensure that
EC would cover the second part of the two-tier liability concept.
SATCOM Service Provision and associated equipage mandates for end users might
be regulated by an Implementing Rule on SATCOM services. This seems to be a
prerequisite for private investment.
4Responsibilites and Certification Model Proposal
HERMES JV to be certified for SATCOM Service Provision
Proposal for Responsibility and Certification Model in Proposal for Service
ATS SATCOM service provision Model
5System V&V: Iris Programme and SESAR (I) 6
System V&V: Iris Programme and SESAR (II)
Iris Programme Validation E-OCVM level achieved in
Description
Tools SESAR
Simulators and/or
Verification Test Bed (VTB) V2 (Feasibility)
emulators
Based on GS physical
Qualification Test Bed (QTB) elements and a satellite N/A (Intermediate step)
emulator
Based on GS physical
Validation Infrastructure V3 (Pre-Industrial Development
(Subset)
elements and a flying and Integration)
satellite
Proposal for validation of SATCOM in Iris and SESAR
7Service Provision Proposal: Incremental Approach
Today 2020 2026 EoL
SESAR PRELIMINARY NOMINAL
VALIDATION SERVICE PROVISION SERVICE PROVISION
SESAR validation Pre-Operational System Operational system
(Validation infrastructure)
Service Provision Required performances
preparation Reduced availability and capacity
Completely met
Service Provider Required previous agreement
with EASA ATC and AOC services:
certification and DoV
- Primary and Co-primary means
(e.g. COCR Phase 2)
Transfer of ownership ATC and AOC services:
- Alternative means (e.g. EC 29/2009)
- Primary with limitations (e.g. COCR
Phase 1, WG78/SC214)
8Service Validation
Comprises end-to-end validation activities.
In a real ATM scenario (including real air traffic, real voice and data
communications, etc).
Ensure that SATCOM accomplishes its intended user
requirements.
Provides required outcomes to the SSP in order to issue the DoV.
Previous step to put the service into operations.
SSP, ANSPs, airlines and other relevant actors.
9Ways to facilitate preparation of operational service
Deployment and Operations support
• SESAR Deployment Manager, Network Manager, Performance Review Body
Institutional and economical support
• SATCOM adoption mandate.
• Incentives for early equipage.
Certification support
• Preliminary Service Provision: an agreement needs to be made with EASA if
performances are not completely met.
• EASA/EUROCONTROL should advice airlines and ANSPs about the steps
needed to complete in order to obtain the relevant approval when transitioning
from a controlled testing environment to an operational environment.
Avionics development
• In the critical path.
HERMES’ proposed timeline for avionics development
10Transition to operational service from the final users’
perspective
• ANSPs need to agree a contract for ATC SATCOM provision with
the correspondent(s) SSP and PENS Provider.
• Airlines need to agree a contract for AOC SATCOM provision with
the correspondent CSP.
• Airlines to equip their fleets for SATCOM communications.
• ANSPs to implement logic for new services in the ATSU system (if
required).
• Ensure all the ANSPs and airlines staff, procedures, safety cases,
material and equipment comply with, all applicable health,
performance, safety and security regulations pertaining to the
provision and use of ATC services over SATCOM System.
• Publication of the new SATCOM service provision and changes to
the overall Aviation Community.
11The critical question?
What conditions need to be met for a private consortium to invest in
future phases of the Iris programme?
• Validation Phase (pre-PPP negotiation)
• Pre-operational and operational phase (post-PPP negotiation)
We have assumed that:
• A form of joint venture (JV) will be established to manage the deployment
and operational phases
• The JV could be:
º A private company using commercial financing for the assets and operating the
system to repay the capital and make a commercial profit.
º A genuine PPP including using a mixture of public and private financing, with the
public partner maintaining an equity share
º A private company using operating publically funded assets
12What is the Joint Venture?
The Joint Venture will provide the following
services
• Operate the satellites
• Provide the ground infrastructure
• Provide a commercial service to AOC
• Provide a service to ATC through ANSPs/FABs
Satellite ownership
• So far we’ve assumed satellites will be leased by
the Joint Venture to reduce risk of investment
13Cost Summary – Cost Type
Validation phase capex Pre‐operational phase capex
replacement satellite costs Insurance
Opex costs
€200m
€180m
€160m
€140m
€120m
€100m
€80m
€60m
€40m
€20m
€0m
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
14Cost Summary - Source
€200m
ESA Joint Venture
€180m
€160m
€140m
€120m
€100m
€80m
€60m
€40m
€20m €239m €1472m
€0m
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Assumes JV is willing to invest in the validation phase
Excluded financing costs
Sensitivity analysis considers alternate distributions
15Revenues generated
We have assumed that revenue is generated from two
sources
• ATC services through a mandate
• A commercial service to AOC
ATC revenue is based on the cost-recovery principles applied
by ANSPs under the SES legislation
• Including the provisions for over and under recovery of revenue
AOC model is based on commercial judgement on penetration
of IRIS in the existing AOC market
16ATC Revenues
ATC Revenues dependent on
Traffic High Traffic Mid Traffic Low
cost base and risk premium
€300m
Variation in revenue with traffic €250m
is limited:
€200m
• +/- 2% - Operator takes risk
• +/- 2 to 10% - Operator takes €150m
30% of risk
€100m
• > 10% - Airspace User takes
risk €50m
Accounts for ~90% of all €0m
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
revenue
17AOC Revenues - Assumptions
AOC is a commercial service, Iris
will compete with existing AOC
bearers including ACARS, VDL2 FlightsHigh FlightsMid FlightsLow
and SBB €25m
AOC revenue factors: €20m
• Forecast traffic growth up to 2035
using a combination of Eurocontrol €15m
Statfor Medium Term Forecast rates
and Long-Term Forecast rates €10m
• Satcom equipage scenarios
• Rates of satcom usage €5m
• Consider CSP market penetration for
AOC €0m
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
• Charge per flight.
The income from AOC is not large
and accounts for ~10% of all
revenue
18Revenue Model: Combined ATC/AOC
Airspace Users can not be
AOC revenue ATC revenue
charged twice for the same
€250m
service
If ATC recovers full cost of €200m
service, then AOC is an over
recovery and must be returned in €150m
subsequent years
€100m
However, operator must be
incentivised to provide AOC (and
€50m
hence reduce cost of ATC)
The revenue model assumes that €0m
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
a profit element of AOC is
retained
19Types of PPP considered
PPP: Joint Venture (Build own operate using private funds)
• Mix of public and private funding (provided by the joint venture)
• First tranche of capex and opex is funded publicly
• Funding is not repaid by the Joint Venture
PPP: Joint Venture (Build own operate using public loans) –
• Similar to scenario above
• Capex and opex incurred by the JV is covered by loans from the public
sector → lower interest rates
PPP: Operator Concession
• The Joint Venture is only responsible for the operations of the system
• Bears no responsibility for the capital expenditure related to asset
replacement
• The assets are funded publicly and the ownership remains public
20Business Case: Initial Results
Initial results suggest impact on DUR of between €0.62 and €1.10
per SU depending on the level of public funds
• Current DUR is approximately €60 per SU
• Increase would be between 1.0% and 1.8%
• Assuming moderate traffic growth this is considered affordable but this
excludes airspace users acceptability of avionics costs
Concession model is discarded as it is not consistent with
internalisation of costs and current debate on SESAR funding
focuses on avionics.
We undertook a sensitivity analysis focusing on the JV with private
funding and made specific consideration of use of public funds at
different levels
21PPP: Joint Venture (private funding)
Initial Results JV Capex total €1074m
JV Opex total €398m
IRR = 5% IRR = 10% IRR = 15%
JV revenue[1] (2020-
2035) €2201m €2726m €3405m
Average JV fee per
annum (2020-2035) €137.5m €170.4m €212.8m
ATC charge per flight € 8.73 € 10.92 € 13.74
Scenario: PrivateJV, Revenue model: Traffic profile (2021), IRR: 10%
€1000m ATC charge per service
unit € 0.70 € 0.87 € 1.10
€800m
€600m
€400m
€200m
€0m
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2011
-€200m
-€400m
NPV (10% IRR) = €51m
-€600m
22Risk Analysis (from TN5.2: Overall Risk Analysis)
A high level risk analysis was performed to inform the strategic
analysis. Work concentrated on:
• Political Risk
• Design Risks
• High Level Technical Risks, including space risk
• Liability Risks
23Political Risk
Validation phase:
• Delay to political commitment:
º Delays start of phase
º Investment in subset validation by private partner dependent of guarantees prior to
PPP negotiation
Pre-operational Phase
• Significant delay to mandate
• Delay to PPP negotiation
º These two risks are mutually dependent (eg PPP negotiation requires a mandate
which requires evidence of an operator and funding)
º Could create a delay in launching pre-operational phase
º A more expedited deployment (eg launch 2 satellites at same time) could be used
when issue resolved.
Impact of political risks
º 5-year delay would have a -€175m impact on the NPV (reducing it to -€124m)
º If JV doesn’t fund validation the NPV increases by +€128m (to €179m)
24Design Risk
Changes to the overall requirements lead to:
• A system that is not required (eg multi-link concept is not validated)
• A space segment / ground segment / user terminal that does not
support the mission requirements (eg SESAR data link
requirements differ significantly from COCR)
Design risk exists in both sub-set validation and pre-
operational phases; it is considered to be mitigated by political
commitment and resolved by the EU mandate so does not
extend in to the operational phase
SJU inputs in terms of updated COCR and multi-link concept
are required to mitigate this risk prior to sub-set validation
25Technical Risk
Covers issues such as:
• Space Segment Failures
• Space / Ground /User Terminals to not meet their specifications
• Availability of User Terminals
To some extent these are mitigated by:
• Use of largely proven technology
• Sub-set validation phase
• Insurance (particularly for space risks)
In the sensitivity analysis these are considered as:
• Increased CAPEX
• Loss of first satellite
26Liability Risk
Two forms of liability:
• Liability of operating a satellite
º Damage to third parties caused by launch or in-orbit failure
º Requires liability insurance (approx €360k pa for €360m cover)
• Third party liability of providing an ATC service
º Damage caused by a fault in the ATC service
º Requires liability insurance (approx €360k pa for €360m cover)
º Additional cover would need to be carried by the ANSP, and indemnified
by the EC or Member States
Insurance costs are considered in the sensitivity analysis
º Costs are currently at a low
º If costs increase by a multiple of three the NPV reduces to -€78m
º If revenue is increased to meet 10% IRR the DUR increases by 27% to
€1.12 per SU
27Sensitivity Analysis
-€150m -€50m €50m €150m
IRR required -€53m €161m
Delay to revenue and 2nd launch in 2025 -€124m
No validation costs €51m €179m
Capex Costs (+/-20%) -€37m €133m
Increased insurance costs (x3) -€78m
Traffic and AOC revenue -€5m €89m
Level of pre-op capex funded publicly (up to 50%) €51m €130m
Opex costs (+/- 20%) €23m €74m
Failure of first satellite €41m
28What are the main pre-requisites for
financial investment?
The business case is predicated on:
• The need for the system as a core element of SESAR; this needs to be
validated by SJU prior to further funding
• Acceptance of airspace users
• A political commitment to the service prior to the launch of the validation
phase
• A successful PPP negotiation and IR development prior to the pre-
operational phase
• Cost recovery principles apply to the ATC service
The political commitment and the PPP negotiations present the
largest risks in terms of impact on the business case
• Potential discontinuity between phases must be mitigated against
29Acceptance of airspace users
Our analysis suggests that the space and ground segments
would considered affordable by airspace users
• Depends on other SESAR costs and overall DUR trend
BUT we have not considered the impact of avionics in detail:
º These must be suitable for all aircraft on chargeable flights
º The cost must be consistent with terrestrial alternatives
º It is still not clear if general aviation need to equip
º Support should be given the manufacturers through the SJU work
programme to ensure availability of avionics
30Investment in validation phase?
Within the overall business case, the requested level of validation
funding could be considered a reasonable investment for access to
the regulated market.
A number of key issues need to be resolved:
• What level of political commitment will be given to the deployment?
• What guarantees of re-payment are possible if the service is never
deployed? Could the satellite be used to provide alternative revenues if not
used for continental ATM?
• Would the EC negotiate with more than one potential PPP-operator post
sub-set validation?
º If yes, would the successful candidate carry the validation costs?
º If no, will all PPP conditions need to be negotiated prior to the subset validation
phase? This could add a significant delay to the programme.
If the satellite is only suitable for ATM, the political design risks are
potentially too high until the PPP is negotiated.
31Investment in operational service?
The business case and sensitivity analysis is positive on
investment in the operational service, conditional on the
successful completion of a PPP negotiation
• It is not clear who the PPP terms would be negotiated with
PPP Parameters:
• Cost recovery principles / Assessment of regulated cost base
• IRR and risk premium
• Level of public funding
• Operator guarantees of service longevity
• Scope and timeline of the Implementing Rule
• Third Party Liability issues
• Safety (and economic) regulator requirements
32Conclusions
The business opportunity is good if:
• It is a requirement from SESAR and cost recovery principles apply
• Key issue is recovery of costs incurred prior to PPP negotiation
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