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 capital for airport development, and also to bring in efficiencies from the private sector to help improve airport management.

The program was set up to provide slots for five airports - one slot is reserved for a large hub airport, at least one slot is reserved for a general aviation airport, and the remaining balance from non-large hub and GA airports. As of now, only GA airports can be either sold or leased, and commercial service airports can only be leased.

“Over the years we’ve had a number of applications that have been submitted by a number of sponsors,” relates Willis. “To date, we have only had one that has been through the entire process — Stewart International Airport in Orange County New York [located some 60 miles north of New York City].”

National Express Group operated the airport from 2000 to 2006, but the lease was then bought by the Port Authority of New York and New Jersey due to a changing company business model that no longer focused on airport operation.

A financial tool

Currently there are four occupied slots in the program. Chicago Midway International is the designated large hub airport; Gwinnett County Briscoe Field and Hendry County Airglades Airport make up the program’s general aviation airport applicants; the remaining applicant is the San Juan, Puerto Rico Luis Munoz Marin International Airport.

Comments Robert Poole, director of transportation policy for the Reason Foundation,”There was a whole wave of interest in this in the early ‘90s; one outgrowth of that wave of interest was passage of the airport privatization pilot program legislation.

“Now we have a new wave of interest which started a few years ago … the spotlight was shone on the issue by Chicago’s mayor Richard Daley, and the proposal to lease Midway. That came on the heels of his very successful leasing of the Chicago Skyway toll road.

“That was an event noticed worldwide by the capital markets, and it put the U.S. on the map for the burgeoning infrastructure investment funds that were being created on a global basis.”

Poole says that airports see this these days probably as more as a financial tool rather than something that would be done primarily to improve the quality of airport management and the adequacy of facilities. “I think that’s the more fundamental reason to do airport privatization … the political reality is many cities are in deep financial trouble and they have an asset that they’re not allowed to make any money off of under the terms of the federal Airport Improvement Program’s (AIP) grant assurances.

“The pilot program does provide a way in which airports can basically cash-out their investment, and legally take lease proceeds into their general fund budgets; that’s a big change historically.”

Carrier buy-in

The pilot program allows airports to still receive federal financial assistance, they can still collect passenger facility charges, and can still collect reasonable rates and charges. However, the program requires commercial service airport sponsors to gain at least 65 percent of airline approval.

Says Willis, “One of the problems that the National Express Group had in privatizing Stewart was that the airlines have to approve the amount of money that is used for non-airport purposes. The airlines at that time were not interested in privatization, and in fact philosophically were opposed to it.

“The Port Authority could not reach an agreement with the carriers there and it reached a point where they came to us and said, we still want to do this and if it means all the money from the lease has to stay on the airport, then so be it.

“National Express gave $35 million, and under some of our existing federal statutes, if a sponsor makes an investment or contribution to the airport out of a general fund, they can recover that.

“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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