TIME TO DEREGULATE In a one on one interview, David Plavin calls for unleashing airports

Jan. 8, 2003
By John F Infanger
David Plavin

In a one on one interview David Plavin calls for unleashing airports

SALT LAKE CITY — In late 2002, some 2,000 representatives of the airport industry met here for the annual convention of the Airports Council International - North America. Their last meeting had been in Montreal on 9/11, and much had changed. ACI-NA president David Plavin, in an interview with AIRPORT BUSINESS, talked about change and, most notably, the need to open up airports to a more deregulated environment.

Plavin is the former director of aviation for the Port Authority of New York & New Jersey, and has headed up ACI-NA since 1996.

AIRPORT BUSINESS: The ACINA incoming chair, Gina Marie Lindsey of Seattle-Tacoma, was talking about one of your favorite topics, the financial reform of airports. Will the association become even more vocal on this issue?

Plavin: Most people, from an airport point of view, are likely to think, let’s don’t bump AIP, let’s do something about a PFC. That’s obviously important and going to continue to be a part of our program. But in the longer term, I don’t think it works.

First of all, we’re in the discretionary budget, even though our money comes out of the Trust Fund. But we now have a situation where the Trust Fund is somewhat diminished by the fact that fares are lower and fewer people are flying.

If you look at what else the Trust Fund funds, it’s almost assuredly the case that Congress is going to say those guys have higher priority. So, we’re going to work our tail off to make sure we don’t get hurt on the AIP side, but that doesn’t mean we’re going to be able to get anything new.

With respect to PFCs, everybody is worried about the airlines. My view is that, not only don’t PFCs do damage to airlines, they help — there are ways for things to be funded without the airlines having to pay for them.

AIP has rules and regulations attached to it; it has priorities attached to it. PFCs have rules and regulations and priorities attached to them. They certainly don’t match the general availability of airport capital funding, which is airports’ own funds.

The whole system would be better off if the first thing you did was eliminate the difference [in projects] that can be funded with those three pots of money. I think you could make more intelligent decisions that way. And I think, frankly, that you’d do things differently.

I had the advantage when I worked for a large airport in that our capital program was so big that we could apply AIP to the things that were simplest to do, and the same thing with a PFC, although we chose to use it for an airport rail connector.

The mix and match philosophy, it seems to me, is one that ought to be the place to start on the overall economic freedom.

AB: As I recall, though, you believe airports need to have even more economic freedom with less oversight.

Plavin: The second issue, which I think in the long term is more important, is that ultimately, given the fragile state of airlines and their cost consciousness and revenue ineptitude, they’re going to have to ask airports to do more without putting it into the rates and charges. I don’t think that’s a bad thing, though some airports might. In fact, all over the world outside North America that’s the norm rather than the exception. Airports do ground handling; they do baggage service; in some cases do lav service and passenger handling, gate hold area maintenance, operate the loading bridges.

I think it makes sense for North American airports to begin to think about going there. In the long term, I think it’s going to be the only way you manage the kind of cost model that airlines are now trying [to achieve], especially at places where there are multiple airlines with no dominant carrier. It would be much easier if the airport could say, ’hey, I’ll manage all this stuff for anybody that wants to come in here.’ Then you only have to pay your share rather than have a whole station.

AB: How does this fit in with the threat of increased capacity in the years ahead?

Plavin: Capacity demand is coming back at some point. It will come back first with lots of little airplanes because any large aircraft that was at the margin has been parked in the desert. They aren’t coming back from the desert in any significant number.

So, we have fewer passengers in the market; we don’t necessarily have fewer airplanes. Tom Walker from Chicago reported the other day that his aircraft movements are actually up 2 percent even though his passengers are down. The reason is they’re downsizing their aircraft.

You have to figure out some way to rationally allocate scarce capacity. The government has never been very good at it; the slot regime that we have now is hopelessly wrecked. The only decent way to do this is to have the government set standards and say to airports, within those standards set your charges to accomplish the public policy goals and not just [create] a subsidy for an airline like your existing rates and charges system does.

AB: Can you elaborate on how that changes how airports operate?

Plavin: I think it is a legitimate public policy goal to say, in a limited congested airspace it makes sense to encourage, indeed force, airlines to have fewer flights in a market with more seats per flight, rather than the way they’ve been going for the past 15 years, which has been continually downsizing the average departure.

We did a study when I was in New York, and I’ve verified this within the past year or so, that given city pair markets out of New York and Chicago, what has typically been the case is that the number of seats in the market have declined and the number of frequencies have increased. They’ll tell you the issue [is] that their competition is there, so they have to add frequency. Well, by the time you get finished adding frequency the market doesn’t sustain it, so the way they deal with it is to downsize the aircraft.

That may be fine as a national pattern, but it doesn’t make any sense in a congested area. We should not allow the airport to be able to be seen as a free good and therefore I can use it any way I want to.

The airport charges to an airline are usually so cheap that they can be perceived as a free good. It doesn’t stop airlines from complaining about airport charges. Of course, the charges rarely exceed 3, 4, 5 percent of the airport’s actual costs.

This is basically saying this is not a free business; there’s a cost to this good. And, by the way, this is certainly not a free market because all of this is slot- controlled; the guys who are in have the unfettered ability to keep out everybody else. They own the slots. If you ask the federal government, they’ll say they don’t own the slots. As a matter of fact, they have the right to buy, sell, and trade them; from my point of view, that’s ownership.

So it sure isn’t a free market now. The only difference is who controls it. It’s not really the federal government, even though they say they do. It’s certainly not the airport. It is clearly the incumbent airlines.

AB: An interesting trend today is that airlines, because of their financial troubles, are at times trying to give back exclusive gates to airports.

Plavin: Remember how we got into the exclusive gate business. From the point of view of an airport, the existing rates and charges policy doesn’t allow you to do anything on spec. So, the only way you can build gates is to have somebody on the other end of a lease agreement. Building a new terminal is the same thing.

I can’t build a gate on spec unless I’ve got an awful lot of money from some other source. Generally speaking, you can’t have a lot of money from another source because anything you earn you have to put back into the airport. So you can’t accumulate it. That’s the reason I see a need to deregulate the economic side of the airports.

If you’re really serious about having the airports play a role in dealing with the capacity problem, you have to give them the tools to do it. The current tools are active disincentives to them being able to play a role.

Now, if an airline says, ’I’ve got a long-term lease to this gate and I want to hand it back to you,’ an airport would say, ’Forget it, you’re on the hook for this lease and if I take it back from you I’m stuck.’ These days, the congested airports are gate hungry and airlines don’t want to be stuck, so more and more exclusive gate hold agreements are disappearing.

AB: As we look at redefining the airport economic model, what are we talking about? Unlimited PFCs?

Plavin: I wouldn’t argue it in the terms of PFCs. I’d start by sunsetting all the economic regulation and replacing it with a couple of key principles. Number one, and one that we all agree on, is that you’ve got to keep all the airport money on the airport.

The second thing is, you shouldn’t be able to discriminate unreasonably. I think if those are the two guidlines, the rest is totally unnecessary.

If I’m going to charge more than $4.50 per passenger, doesn’t it make sense for me to do that without having a conversation with my carrier to figure out what I do with that money?

That’s the kind of thing any business does with any of its customers; from a customer’s point of view, the freedom to make those kinds of choices and tradeoffs, it seems to me, is to the benefit of the whole system — not just the airports but to the airlines, too.

Economic Impact Canadian, U.S. Airports

At its annual convention, the Airports Council International North America released its most recent data on the U.S. Airports ... • Create $507 billion each year in economic activity. • Account for some 1.9 million jobs on-airport; 4.8 million jobs are created in local communities. Total earn i n g s 190 billion. • Domestic passenger rowth is projected to row from 628 million enplanements in 2001 to 915 million in 2013. * * * Canadian Airports ... • Create $34.1 billion CAN) each year in economic activity. • Account for some 304,000 jobs on-airport; 161,000 jobs are created in local communities. Total earnings: $10.1 billion (CAN). • Domestic passenger rowth is projected to grow from 52.9 million in 2000 to 73 million in 2014.