Does Airport Privatization Have a Future in the U.S.?

Does Airport Privatization Have a Future in the U.S.?

March 09, 2017  | Robert Poole

Guest op-ed by Bob Poole, Searle Freedom Trust Transportation Fellow and Director of Transportation Policy, Reason Foundation

President Trump included airports in the brief infrastructure portion of his Feb. 28th speech to Congress. He has often referred to U.S. airports as being of Third World character, which is certainly an exaggeration. Yet when Skytrax released its 2016 list of the World’s Top 100 Airports, only 13 U.S. airports were included. And you had to get all the way down to #28 before finding any U.S. airports on that list. Most failed to make the list at all.

It’s no accident that 34 of the top 100 airports are either fully or partly privatized. The Oxford University Airport Study (1998) found empirical evidence that privatized airports have a significantly higher level of passenger-responsiveness than government-run airports. And in 2008 a large-scale academic study of 109 international airports found that the most economically productive airport governance model was full or partial privatization—and the least productive was a multi-purpose port authority.

Why has airport privatization failed to take off in the USA? Congress enacted an Airport Privatization Pilot Program in 1996, but only two airports have actually been privatized under it (and two more have proposals in the review process). One often-cited reason is that in contrast to nearly all other countries, U.S. airports can issue their revenue bonds on a tax-exempt basis, which makes private finance more expensive. There is also little felt need for change, since most U.S. airports operate pretty well, despite not being in the global top 100.

But I think another factor is that U.S. airports evolved an airline-centric governance model, under which anchor tenants that signed long-term leases got exclusive use of gates and veto power over airport expansion that might allow entry by competing airlines. That model is virtually unheard of overseas, and until they got experience using privatized airports overseas, U.S. airlines opposed privatization.

Now that airport privatization is a global phenomenon, would-be airport acquirers (such as Fraport, Aeroports de Paris, and Vantage) view our Airport Privatization Pilot Program not as an invitation but as an obstacle course. Companies like these, as well as U.S. and overseas pension funds, would love to add U.S. airports to their portfolios, but the pilot program is restrictive and very time-consuming, unlike anything they face in Europe, Latin America, or Asia. So reform of that program is something Congress could address in this year’s FAA reauthorization bill.

If the federal government opened a wider door for airport privatization, what would be the low-hanging fruit? One category is airports owned by multi-purpose port authorities, especially ones like LaGuardia, Kennedy, and Newark that are badly in need of major makeovers. The Port Authority of New York & New Jersey diverts large amounts of airport revenue to subsidize numerous money-losing real estate and seaport projects, instead of reinvesting it in the airports. Given how fed up United Airlines is with the very high costs and poor quality of Newark Airport, that airline might back a carefully designed privatization model. The airlines serving recently privatized San Juan International (American and JetBlue in particular) are very pleased with the major improvements made in the three years since its privatization.

Another category is airports that are run as departments of city governments and, as a result, suffer from political micromanagement and bureaucracy. They may have to rely on the city for legal and financial services rather than having their own staff for such purposes. They may have to award contracts to politically favored bidders, provide VIP treatment for city officials when they use the airport, and favor anchor-tenant airlines. Former Atlanta general manager Angela Gittens explained some of these challenges in a 2016 interview: “You have the mayor who makes the decisions. So you know, it all depends on the relationship between that one person and [the general manager],” she said. “Money and politics have a very strong relationship.”

Short of a major change in politics at the city level, what might motivate privatization of city-owned airports? Pension liabilities. A very large number of cities have woefully under-funded public employee pension systems, and in most places this problem is getting worse. Older cities also have aging infrastructure that they need to replace or renovate, but lack the funds to do so. These were among the reasons for Chicago’s two failed efforts to lease Midway Airport last decade.

One recent term for this kind of thing is “asset recycling.” As practiced in Australia and under serious discussion in Canada, the idea is to identify revenue-producing assets owned by a government and lease or sell them, using the proceeds either for balance-sheet repair (e.g., pension fund bailouts) or investing in infrastructure that does not generate its own revenues. A focal point of the Canadian government’s current effort is the eight largest airports, which are owned by the federal government but leased to nonprofit airport authorities. One recent estimate put the value of those airports at C$16.2 billion. In a study I recently completed on the Port Authority of New York & New Jersey, I estimated their three major airports as worth as much as $35 billion, based on airport sales and leases over the past decade.

If the Trump Administration is serious about attracting large-scale private capital to revamp and improve U.S. airports, there are two key things it could do. First, as part of an overall infrastructure and tax bill, expand the current tax-exempt Private Activity Bond (PAB) program to other infrastructure besides just highways and transit—including airport public-private partnerships. And those bonds should be available not only for new (“greenfield”) airport projects but also for the acquisition of airports needing modernization.

Second, as part of FAA reauthorization, liberalize the Airport Privatization Pilot Program. At a minimum, this should include:

  • Remove the 10-airport limit, the only-one-large-hub limit, etc. so that it applies to any airport where there might be a willing buyer and willing seller;
  • Permit sale as well as lease, including (as in Europe) the sale of partial ownership;
  • Replace the current double super-majority airline approval requirement (65% of all airlines and airlines representing 65% of the annual landed weight) with a simple majority of airlines currently serving the airport; and,
  • Streamline the FAA review and approval process, with the goal of this taking no more than six months.

These changes would open the door for converting second-class U.S. airports into world-class airports that would have a greater likelihood of making it onto the Top 100 lists.

The views expressed above are those of the author and do not necessarily reflect the views of the Eno Center for Transportation.

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