Asset Recycling Could Deliver a New Dawn for U.S. Airport Privatization

Feb. 18, 2019
Study finds that $250 billion to $360 billion of net economic value could be generated from public-private partnership leases of the 61 largest U.S. airports.

Over the past 30 years, more than 100 airports have been privatized around the world. A few have been sold outright, but, in most cases, the airports have been leased under long-term public-private partnership agreements. In recent years, even countries viewed as less market-friendly, like France, Japan and Greece, have been “privatizing” airports.

But not the United States. Under the little-used 1996 Airport Privatization Pilot Program, Congress allowed up to 10 airports to be long-term leased and the proceeds used for non-airport purposes — as long as the airlines agreed and the airport retained all the other FAA grant assurances.

Only one U.S. airport is now operating under a long-term public-private partnership (P3) lease: San Juan International in Puerto Rico. The airport was shabby and poorly run, and the Puerto Rico government was in dire fiscal straits, so the lease made sense for them. But most U.S. airports are reasonably well-run, and they can get cheap long-term financing via tax-exempt municipal bonds. So most airport sponsors have seen no reason to “privatize.” But that may be changing, thanks to two recent developments.

First, in the 2018 FAA reauthorization law, Congress expanded and streamlined the Pilot Program. Gone are the old limits on how many and what kinds of airports can be leased. There is no requirement to repay previous Airport Improvement Program (AIP) grants. And the renamed the Airport Investment Partnership Program is no longer a “pilot program.”

The other new development is the introduction into the United States of an Australian policy called “infrastructure asset recycling.” The idea is for a government that owns revenue-producing infrastructure — e.g., airports, seaports, toll roads and municipal utilities — to lease them under long-term P3 agreements with some or all of the lease payments made up-front. The government uses the proceeds to invest in other needed infrastructure that lacks its own revenue source. Both the Bipartisan Policy Center and Reason Foundation issued reports in 2018 explaining how the policy has been well-used in Australia and suggesting it could help solve America’s shortfall in infrastructure investment.

But if the U.S. airport status quo is not bad, why would airport sponsors use the now-liberalized federal program? Four key reasons a government might consider P3 include:

1. To liberate the airport’s asset value for other important uses.
2. To improve the airport’s quality of service.
3. To increase the airport’s economic productivity.
4. To depoliticize airport management and decision-making.

Airport management professionals might be most interested in number four, depoliticizing management and decision-making. Airports that are run as direct departments of a city, county, or state government have elected officials as their de-facto board of directors. This can often result in the micromanagement of decisions, such as the Houston City Council recently having to vote on a $3 million contract for musicians to play at the airport and also voting to delay $60 million in contracts for terminal renovation.

Far worse is when crony capitalism becomes routine, as alleged in high-profile cases involving retail concessions in Atlanta (ATL) and Miami (MIA). Hartfield-Jackson International’s problems caused the Georgia state legislature to seriously consider creating an airport authority to run the airport instead of the mayor and city council. Airport professionals also cannot be pleased by a system in which airports get a new manager every time political leadership changes.

On issues two and three (quality and productivity), several studies by economists find evidence that “privatized” airports are better than those run directly by the government. An Oxford University study concluded privately-run airports are significantly more passenger-friendly than those run as government departments. That finding is supported by the annual Skytrax “World Airport Survey” of global passengers. While 37 of the world’s 100 best airports in the survey are privately run, only 14 U.S. airports even made it into the top 100.

On economic productivity, a study in the Journal of Urban Economics found that the least-efficient airports were those run by multi-purpose port authorities, while the most-productive were those that were privatized, corporatized, or operated by a single-purpose airport authority.

That brings us to the first reason a government might opt for a long-term P3 lease of the airport: to reclaim its asset value for other uses while ensuring that the airport is in the hands of world-class airport management. Since most airport P3 leasing is done via competitive bids from pre-qualified teams, the competition often hinges on which of those teams offers a deal that yields a high asset value reflected in the up-front payment while also passing muster with the federally-mandated airline approval process. The latter provides an important constraint on the former.

Although U.S. airlines opposed airport privatization in the 1990s when the original Pilot Program was enacted, they appear to have come to terms with it this century. Three separate P3 lease deals have received airline approval under the old Pilot Program: Midway Airport, which did not go through for other reasons; San Juan, which went through; and Westchester County, which was put on indefinite hold by a new county executive. The major airlines agreeing to the terms of these proposed deals included American, JetBlue, Southwest, and United.

What kind of asset values are we talking about for airports? Long-term infrastructure P3 deals are based on a multiple of EBITDA — earnings before interest, taxation, depreciation, and amortization. The Reason Foundation asset recycling study used the range of EBITDA multiples from a database of airport leases over the past decade. The report found that $250 billion to $360 billion of net economic value could be generated from P3 leases of the 61 largest U.S. airports. In this case, “net” means after paying off existing airport bonds — it’s what airport sponsors could receive if all the lease payments were made up-front. As examples, Reason looked at figures for two representative airports: Baltimore Washington International Thurgood Marshall Airport (BWI) and Louisville International Airport (SDF). The mid-range estimates for net proceeds were $1.9 billion for BWI and $538 million for SDF.

These kinds of calculations are being done by potential infrastructure investors for St. Louis Lambert International Airport (STL). Early last year it received a slot in the former Pilot Program. The city hired Moelis & Company as its financial advisor and has a team developing a process to follow — assuming political support continues. As of December 2018, a Request for Qualifications was expected from St. Louis in the first quarter of 2019.

Former St. Louis Mayor Francis Slay first raised the idea of leasing Lambert by using an asset recycling argument, saying the proceeds could be used to expand the city’s transit system. Other cities may also be doing EBITDA calculations to see how much the proceeds from an airport lease could do to shore up their infrastructure needs or underfunded employee pension systems.

Thirty years ago, a city considering “cashing out” the value of its airport might have been accused of risking the airport’s future for some quick bucks. But today, with world-class airport companies backed by infrastructure investment funds and a sound vetting process that carefully negotiates the long-term agreement, a city could end up with a more productive, passenger-friendly, and de-politicized airport. That would be good for airlines, passengers, and taxpayers alike.

Robert W. Poole is director of transportation at Reason Foundation, where he has advised four presidential administrations on aviation issues. He can be reached at [email protected].