Airport Privatization: Cleared for Take Off

The airport industry is undergoing fundamental changes in the way it is financed and operated. Large investment programmes needed to meet the projected high rates of traffic growth, combined with financing deficits among government owned airports have increased the interest in introducing private capital. So far three airport companies have pursued this with the outright sale of equity: British Airport Authority (BAA), Copenhagen Airports and Vienna International Airport. The following article describes the rationale behind the exploding search for private capital. Furthermore, I will explain that privatization has different meanings, depending on the country in which it is used.

This article is the first in a series of three on airport privatization. Pros and Cons of privatisation will be described in more detail in the next issue. BAA, which decided to sell seven airports through a stock offering in July 1987, will serve as a case where the pros outweighs the cons!

The last article can be expected around February/March and explains that, despite several incentives, numerous impediments block the sale or lease of airports in the United States. Contrary to the European situation, delays can be expected in the United States and the implications for various stakeholders (airlines, passengers and government) are briefly outlined.

The growing need for airport infrastructure

Air travel is predicted to double over the next 15 years. Last year approximately 1.5 billion passengers took a flight in an aeroplane. For the world’s airports that meant handling 3.0 billion arrivals and departures. Most forecasts suggest that air travel will continue to grow at a little over 5% a year. So by 2010, airports will have to handle over 5 billion passengers a year. This is equivalent to 90% of the current world population.

That looks like far too much demand for a notoriously inefficient industry, much of it still in the public sector, to handle smoothly. The International Air Transport Association (IATA) says that delays to flights caused by congestion in the air or at airports cost already over $15 billion a year (wouldfree flightbring the solution?). Within the next 15 years more than 50 big airports will be operating above their official capacity. Even when they are only 70% full, airports often have to make flights wait at peak periods. In Europe, airlines are quietly altering timetables to allow up to 30 minutes more for each flight.

In theory, a new generation of superjumbo’s, carrying up to 600 passengers, should bring a relief by reducing the number of flights. But the advent of these monsters will add to costs as well. Big airports, like Heathrow an New York s JFK, were built in the days of small passengers aircraft with propellers. Each of these airports will have to spend at least $320 million for the bigger loading bays that the super jumbo’s will need.

The International Civil Aviation Organization forecasts that some $500 billion will be needed to pay for extra airport capacity. Moreover, we have to remember that the average project life-span of airport infrastructure will necessitate capacity increases greater than demand-forecasts. The enormous amount of over $500 billion also includes the growing spendings for airport security, air traffic control services and possible future taxation by the government for noise- and airpollution.

Private sector financing needs to be explored

Table 1 summarizes the sources of airport funding in over 60 countries. An important conclusion that can be drawn from this table is that the majority of airports (66%) receive some sort of Government assistance for airport infrastructure projects. This percentage is probably somewhat higher as the ICAO survey does not include several developing countries where airports are completely dependent on government funds for airport development. In the long-run, these funds are expected to diminish as spending priorities will be shifted towards improving macroeconomics fundamentals and social-ills. New airport spending may be crowded out as other sectors (like health, social welfare) need more government funds. Furthermore, government spending in Europe is already under pressure as a result of the Maastricht treaty. Countries must decrease their financing deficit in order to join the European Union.

Funding source Number of countries
National Government 44
Internally Generated Funds 40
Commercial Loans 25
Foreign Government Loans or Aid 24
International Development Banks 15
Regional/Municipal Government 10
Other (including private sector) 6

Table 1: Sources of airport funding, ICAO

Note: Airports may utilize more than one source of financing

Debt financing may prove expensive as the cost of financing is already a heavy burden on the operational result and Cash Flow of nearly all airports (take Munich for example, where interest payments are a heavy burden on the operational result). Moreover, the potential elimination of investor tax incentives would have a negative impact on airport financing costs, especially in the United States. Thus, new financing sources, mainly from the private sector, will need to be explored.

Privatization has different meanings

Depending on the country in which it is used, the term privatization may have many meanings. In England, privatisation describes a political policy of the national government. In Japan, privatization takes the form of a government entity which is partially owned by the private sector. In the former eastern bloc countries, privatization is seen as a carrier of global change, a key to a rise in productivity and efficiency. In these countries, privatization is regarded as a necessary condition to recreate the market system, introduce market incentives and free entrepreneurial forces. In the US, privatization denotes the transfer of an entity from the public to the private sector.

However, in general privatization can be defined as the transfer of State Owned Enterprises to private economic agents in order to gain the benefits occurring under private ownership.

Supporters of airport privatization are in favour of transferring responsibility of the system to a for-profit corporation. Airport owners would be free to charge market prices for their services.

Privatization also can take many forms. In Europe airports have been sold directly to private owners to be operated as private businesses. For, we can cite the decision by the British Airport Authority to sell seven airports through stock offerings on the London Stock Exchange in July 1987 for $2 billion.

In the US, almost all of the airports used by commercial air carriers are owned and operated by a mixture of quasi-public, municipal and state entities (e.g. the Port Authority of New York and New Jersey). These airports receive significant amounts of federal funds for improvement and construction. They also receive funds from the participating commercial airlines and private entities as local funds. Because of the drastic increase in airport congestion, large government budget constraints, and the privatization experiences in other countries like England and Australia, the issue of privatization came on the agenda!

Airport size
Capital development needs 1997 – 2002
Large 28,9 billion dollars
Medium 11,6 billion dollars
Small 3,5 billion dollars
Non hub 3,3 billion dollars
Reliever 2,8 billion dollars
General Aviation 4,0 billion dollars
Total Cost (constant dollars) 54,1 billion dollars
Total Cost (current dollars) 60,0 billion dollars
Average annual capital needs 10,0 billion dollars
Table 3: Estimated capital development needs in the United States (ACI, 1996)

The most conventional form currently employed in the United States is the contracting out of service delivery to a private organisation. BAA has run the restaurants at Pittsburgh for some time; October 1996, it took over the running of Indianapolis airport (including fire and police services). A dozen other airports are currently studying this venture.

Another form of privatization is a Build-Operate-Transfer system. The airport will contract a third party to build a particular facility such as a terminal. The contractor will then operate the facility for a period of time before transferring it to the airport. During this period all of the revenues generated by the facility are earned by the contractor. This year, an agreement was signed between JFK airport in New York and Amsterdam Airport Schiphol. As a result, Amsterdam Airport Schiphol will take over exploitation of the International Arrivals Building from the Port Authority until the year 2015.

Pittsburgh, Indianapolis and the BOT-project of JFK tend to be managed far more imaginatively than other US airports, where two-thirds of the revenues come from airline landing fees. At the airports controlled by BAA or Amsterdam Airport Schiphol most revenues come from restaurants, shops and parking. BAA claims that Heathrow and Gatwick terminals sell more books than anywhere else in Britain and 20% of all posh perfumes! Privatized firms like BAA or corporatized firms like AAS are seen as the industry’s pacesetters.

Airports U.S. $ (in billion) Major projects
ADP Paris 3.8 New teminal and runways
AENA Spain 3.0 New terminal and runway
Schiphol 4.1 Schiphol
Athens 2.5 New Airport
BAA UK 6.6 Terminal 5, Heathrow express
Berlin 6.5 New Airport
Frankfurt 2.0 Cargo center
Hamburg 0.6 Terminal facilities
Munich 1.0 Airport center, 2e terminal
Oslo 2.0 New Airport
Rome Fiumicino 2.0 Staged expansion
Vienna 0.9 Extra terminal capacity
SEA Milan 1.6 Malpensa 2000, Cargo city
Copenhagen 1.1 Terminal 2
Subtotal of above airports 37.7
Total of European Airports 65.8
Table 2: Estimated capital expenditure at selected airports in Europe, 1996-2005

Why then, does America still balk at selling of its airports completely? In the next issue, I will state the opinion of proponents and opponents on this matter. This gives you an idea of the numerous possible advantages, but will also highlight a number of serious negative aspects to take into consideration.

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