Exploring Privatization

According to Kevin Willis of FAA’s airport compliance division, the FAA airport privatization pilot program came about in 1996, when Congress decided it wanted to explore whether it was possible for the private sector to provide an alternative source of...


“So they were able to come into the program without getting airline approval.”

Poole has worked on airport policy issues since the mid-80s, and his first study was on the then proposed divestiture of Dulles International Airport from the FAA; he proposed it be done by privatization anticipating by one year Margaret Thatcher’s privatization of BAA (British Airports Authority).

Says Poole, “The fundamental concern from the airline community is in regard to their costs getting out of control, particularly in an unpredictable way.

“You look at the volatility of airlines the last ten or 15 years, in the old days they were perfectly happy with residual cost agreements. These days, if you’re in a residual cost agreement and you have down years, the airlines could get stuck with an unpredictably large share of the cost of running the airport. It’s very much in the airlines’ perceived self-interest these days to reduce that uncertainty and create a predictable environment where they can budget for the long term knowing what their costs are going to be to use a particular airport.

“So that’s the lever that airport privatizers have … to be able to work out something that balances the airlines’ needs for a combination of a cost that’s as low as possible, but also as predictable as possible.”

Lessons learned

“One of the things that we’re finding since the program began is the sponsors are becoming more sophisticated in their approach,” relates Willis. “What sponsors are doing that we are seeing more and more of is that they’ll conduct their own feasibility study.

“They’ll say well, what is it we want the private operator to do? … And they will do a study to determine what the advantages and disadvantages of privatizing the airport are.

“Chicago did it, San Juan has done one; my understanding is that with New Orleans Louis Armstrong — it recently completed a study and it was part of the decision not to privatize. Sponsors are not leaving it up to the private operator to say what that operator can do for them — airport sponsors are saying, this is what we want you to do for us.”

Outlook

Remarks Poole, “AIP has been flat for five or six years, and with the last change in the PFC rules, airports that have the $4.50 ceiling give up a big chunk of their AIP entitlements. AIP is becoming less and less of a benefit for the large and medium hubs, at the same time though, they still face all of the grant restrictions that go along with AIP. I think you’re increasingly going to see the airport management profession chaffing under that burden.”

Looking at the international market, Poole says privatized airports overseas are largely considered to be businesses … they don’t have the kind of micro-managed economic rules that are seen as a defacto result of the grant assurances in this country. “We are not learning a whole lot from overseas because the situations are different enough,” says Poole. “We are seeing overseas that investors like airports, and are perfectly willing to invest large sums of capital in airports and in making them more viable businesses.”

On the applicants of the pilot program, Poole comments, “I think we’re going to see some of these deals go through to fruition. I think Puerto Rico San Juan is highly likely; I wouldn’t be surprised to see at least one of the two GA airport deals go through.

“The primary advantage is the ability to take lease payments off the airport; it gets around the revenue diversion issue in a specific and limited form, but a very tangible one.”

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