Analysis of System-wide Investment in the National Airspace: A Portfolio Analytical Framework and an Example

February 2006
Dr. Dipasis Bhadra, The MITRE Corporation
Frederick R. Morser, The MITRE Corporation
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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.

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