Impediments blocking the road to US airport privatization

By Astrid van der Wal and Edwin Hengstmengel

This article is the last in a series of three on airport privatization. Pros and cons of privatization are described in the previous article. In this article, Astrid van der Wal, business analyst at Schiphol International B.V. and Edwin Hengstmengel will explain that, despite several incentives, the US follow ‘leader’ Europe rather reluctantly. Contrary to the European situation, delays can be expected in the US and the implications for various stakeholders (government, airlines and passengers) are briefly outlined

Introduction

In 1996 a bill was passed permitting up to 5 US airports to conduct for-profit operations in a FAA Pilot Privatiza-tion Program on the private ownership of airports. Three reasons US airports are suddenly ripe for privatization:
1. Lack of money for infrastructure improve-ments;
2. Sweeping changes in management philoso-phy throughout the service sector of the US economy;
3. Emerging private sector capability to pro-vide first class airport management services.

In the US there have never been laws barring the sale of public airports. However, there are disincentives that have effectively discouraged such sales. The biggest impediments:
– current regulations forbid airport revenue, including that from the sale or lease of an airport, from being used for anything other than the airport;
– private airports are not eligible for federal AIP funds;
– private airports cannot finance projects with tax-exempt debt;
– there may be constraints on the property title, such as the government retaining the right to seize the property during times of emergency.
These measures have up to now effectively prevented the sale of a public airport to a private entity.

The FAA Pilot Privatization Program will relax some of these restrictions in order to explore the possibilities of privatization. But built into the program will be strict constraints over noise generation, rent increases for private airport lessees and environmental damage.

Privatization at any of the 567 public commercial airports in the US will be slow, and no doubt each case will proceed differently. Commercial airports in the US are owned almost entirely by municipalities (cities, counties) and states. An intricate skein of federal, state and local regulations and requirements must be negotiated to arrive at a privatization agreement. Further the private sector already plays a significant role in operating and financing US airports.

– Proponents
Claim that privatization would inject much needed capital into the aviation infrastructure because it would make airports more commercially driven and financially self-sufficient. They also point to the partial privatization successes in the US to show why the effort should press ahead. Some use the private management of Indianapolis International Airport (BAA Plc has signed a pioneering 10-year contract to operate and manage the airport) as an example of improved performance through privatization. Indianapolis moved away from an unimaginatively marketed, production-led and surprisingly Spartan airport to private sector discipline and a sharper focus.

– Opponents:
Critics of privatization, including many of the major airlines, fear increased costs for airlines and passengers (increased landing fees) and wonder whether safety and security will take a back seat to profits.
The current law requires that public airport revenues are used exclusively to pay for capital and operation costs and stipulates that these funds cannot be diverted for non-airport uses. Worries are that municipalities facing budget problems might be tempted to tap airport revenues as a source of fiscal relief if this law was changed permanently. However, nowadays US airports seem to plough back any surpluses and top them up with grants and bond issues to fund expansion. The bond issues are often tax-exempt and therefore potentially taxable revenue is foregone each year.

Response to the Pilot Program

In October 1997 a policy brief was sent to mayors, city councils and other transportation officials overseeing the 100 largest US airports by enplanements. It detailed benefits behind privatizing airports, as well as explaining the FAA privatization process.

The FAA has begun accepting applications for the Pilot Program as of December 1 1997.

The response to the FAA Program has been less than encouraging. So far, the program has not succeeded in bringing forth a major airport or for that matter even a medium-sized airport. People always thought that the reasons airports in the US weren’t being privatized was that the mayors had no incentive to privatize them because they couldn’t take the proceeds from the privatization downtown in any way. Unfortunately, the revenue diversion issue has turned out to be as much a local issue as a national airline issue. For the smaller and medium airports considering privatization, the tenant associations, pilot associations and others, are very wary of revenue being taken off the airport. They think their rents are going to go up. Or they consider it undue political interference from the government in the operation of the airport. That has slowed some of the smaller airports from participating in the Pilot Program.

There is an enormous inertia and airline myopia. Many mayors, who have not hesitated to bid out their garbage collection and sewer systems, simply turn a blind eye to privatizing their airports. Hard to believe, but the first person they tend to ask about airport privatization is their current airport director, and the second is the consultant or banker who depends upon him… Meanwhile the airlines are still hung up on a ‘leveraged buyout’ paranoia that even Prozac couldn’t cure. Indianapolis’ airline costs have been cut nearly in half since privatization, yet not a single carrier has troubled itself to step forward and say: ‘We like this. Do it again’.

Airports in the program

Stewart International Airport (small commercial airport in Newburgh New Jersey):
In April 1998 National Express was named preferred bidder for Stewart. Stewart will be the first airport in the US designated to participate in the Pilot Privatization Program. National Express says it will bid for every of the other pilot airports.
Stewart’s day to day operations have been managed by Airport Group of New York, a subsidiary of Airport Group International (AGI).

Brown Field Municipal Airport (small general aviation airport in San Diego, California):
Second airport to apply for the Pilot Program. It is still to receive approval from the FAA.
The application comes a year after the city of San Diego signed a Memorandum Of Understanding (MOU) with ‘Brown Field Aviation Park LLC’ to develop, maintain, operate and manage the airport. The specific terms are being negotiated and are expected to be drawn up in a long-term master lease agreement.
‘Obtaining the FAA approval for this long-term lease will be easier under the pilot program, than trying it outside the format of the published program guidelines’ says Tracy Williams, director of airports for San Diego. Intentions are to develop Brown Field into a cargo airport. (‘In San Diego developers are attempting to transform a dusty municipal air strip called Brown Field into an all-cargo facility’)

Allegheny County Airport (small general aviation airport – 100,000 mvts/year – near Pittsburgh):
Airport has plans to apply for the Pilot Program.
If all goes as planned, the airport will be leased by ‘Comarco’ an operator of general aviation airports in Los Angeles and Riverside counties in California. Until the formal application to the FAA has been approved, IMG (Infrastructure Management Group) is managing the facility.
‘In an unprofitable, general aviation facility such as Allegheny County Airport, it wasn’t hard to get the users to approve the deal. The odds of privatization happening are pretty low in an airport that is making money,’ says Steven Steckler, Company President of IMG.

Oxnard and Camarillo Airports (small airports in Ventura County, near Los Angeles):
The Board of Supervisors of the Ventura County Airports Authority in October 1997 proposed to apply for the Pilot Program. But the other members of the Airports Authority voted unanimously to reject the application. They said ‘too many’ questions remained.
‘If the pilot project is persued, there then becomes a potential financial incentive for decisions that could hurt the airports’ one of the members said. ‘I am not opposed to a public-private partnership’ said a representative of the Aircraft Owners and Pilots Association, ‘but I do object to the pilot program…. It is for one purpose only, and that is for the county to be able to divert funds from the airport.’

Mr Roger Kitley, managing director of BAA International doesn’t agree: ‘Privatization is an offensive word in some countries, but there is a real momentum. The train has left the station.’

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