Analysis of System-wide Investment
in the National Airspace: A Portfolio Analytical Framework and an Example
The United States' National Airspace System (NAS) contains a
network of air transportation markets linking 485 commercial airports
located in and around 363 metropolitan statistical areas (MSAs). The
total number of origin-destination (O&D) markets in the NAS ranges
somewhere between 36,000-40,000 pairs depending upon seasons
and economic cycles. This expansive network renders an annual commercial
value of around $70-$110 billion for scheduled and around $25-40 billion for unscheduled aviation services. Maintaining this
network is expensive. The Federal Aviation Administration (FAA) spends
over $14 billion annually to fund facilities and equipment (F&E:
approximately $3 billion), operations (approximately $7 billion), airports
(approximately $3 billion), and research and engineering (approximately
$0.200 billion) expenditures. The FAA's NAS modernization program,
the impetus behind F&E funding, consists of three elements: the
NAS Architecture Plan (i.e., the engineering blueprint); the Capital
Investment Plan (CIP); and the Operational Evolution Plan (OEP). The
FAA has six goals which are the primary focus of their CIP investing
strategy: maintain a high level of safety; enhance mobility throughout
the NAS; promote economic growth; promote harmony with human and natural
environment; attain a high degree of national security; and maintain
organizational excellence.1 At present, there are 190 identified programs
in the CIP, rolled up into 90 investment programs, designed to serve
these six broad goals. Most of these programs have been evaluated individually
using cost-benefit ratio, net present value, and internal rate of return,
etc. to determine their effectiveness in meeting the stated goals. The
evaluation framework used by the FAA and many other government agencies
is fairly limited in incorporating program interdependencies. Consequently,
a system-wide comprehensive financial optimization is not possible.
This limitation leads us to look into a broader methodology that ties
programs with potential economies of scope, and benefit from interdependencies.
In this paper, we have reviewed the FAA's current program investments
and laid out a preliminary analytical framework to undertake projects
that may address some of the noted deficiencies. By drawing upon the
well developed theories from corporate finance, we offer an analytical
framework that can be used for choosing FAA's investments taking
into account risk, expected returns and inherent dependencies across
NAS programs. The framework can be expanded into taking multiple assets
and realistic values for parameters in drawing an efficient risk-return
frontier for the entire FAA investment programs.
