Financial Perspective

Financial Perspective In an argument for privatization, a former FAA economist analyzes current airport business practices By H. Giovanni Carnaroli, Manager, Consulting Services, BACK Aviation Solutions July 2000 The sale of...


Financial Perspective

In an argument for privatization, a former FAA economist analyzes current airport business practices

By H. Giovanni Carnaroli, Manager, Consulting Services, BACK Aviation Solutions

July 2000

The sale of airports throughout the world has been brisk. In the United States, however, it has not been embraced with the same enthusiasm. There are various reasons that have been proposed for this lack of interest, but the underlying feature is that in the United States airports do not have the urgent need for funds that exists in other countries.

In fact, in addition to revenue generated by the airport, local, and state funds, the federal government has spent on average approximately $1.6 billion on airport infrastructure projects in recent years. This figure is larger than the gross national product of many countries.

Municipalities and airport authorities in the U.S. are reluctant to give up control of an airport, even though it has been estimated that the largest U.S. airports could sell for as much as $5-6 billion.

The main reason for privatization is the recognition that government expertise in managing airports may be limited, and others can provide it with reduced costs, increased revenues, and improved and more efficient services. Potential private investors include equity investment funds, pension funds, government-backed export banks, constructors, equipment suppliers, trade and transport companies, public equity holders, and bondholders.

Additional reasons why airport sale/privatization has been slow in certain areas of the world include delays in dealing with political and labor factors; costs to compete and win bids; cumbersome regulations; and, reluctance of airlines to change.

In addition, airlines are afraid of a privatized airport passing on high acquisition costs (operating costs would decrease; revenue from commercial sources would most likely increase), and gaining more control over facilities (such as gates held by incumbent carriers under exclusive long-term leases). Airlines aren't necessarily interested in promoting competition, whereas a private operator would do everything possible to attract more service, utilize gates more efficiently, and create a competitive environment for ground-handling and support services.

Despite the hesitation, it is clear that airport privatization is the way of the future. It is important at this stage for the entire aviation community to be aware of what to expect and be able to adjust to the new form of ownership and/or management.

A History With Bonds
In general, large airports have depended to a greater extent on airport revenue bonds for development; smaller airports have tended to rely more on general obligation bonds.

Airport revenue bonds are secured through the revenue streams generated by airport operations and are typically tax-exempt. The principal source of revenue providing primary collateral is the revenue generated by the carrier use agreements.

On occasion, assignment of the financial risk for a development project is assumed by an airline. This tends to tie a carrier to a given airport, while eroding the airport authority's control over the airport.

For smaller airports, little revenue financing capability exists and, as a result, they are more dependent on state and local general obligation bonds. (General obligation bonds, like revenue bonds, are tax-exempt municipal bonds). Typically, there is no airport revenue stream to collateralize these bonds; it is the credit worthiness, and to some degree faith, of the state or local government which stands behind their issuance.

Although the ultimate responsibility for payment on general obligation bonds rests with the issuing government, on occasion airport revenues must be pledged in order to retire the bonds. This casts the issuing government in the role of guarantor of what amounts to revenue bonds, and typically arises when the airport's credit-worthiness is insufficient to offer revenue bonds.

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