Airport Privatization

by on November 29, 2016 at 7:20 am in Current Affairs, Economics, Travel | Permalink

Airports in the United States need investment and improvements in operations efficiency and are thus ripe for privatization. Privatization is not a radical concept, around the world today many airports are run by private corporations or in public-private partnerships. In their latest report, The Ownership of Europe’s Airports, the Airports Council International writes:

Today, over 40% of European airports have at least some private shareholders – and these airports handle the lion’s share of air traffic. This year, about 3 out of every 4 passenger journeys will be through one of these airports…it is only a matter of time before fully publically-owned airports become a minority in the EU.

Moreover, even the public airports are typically structured as corporations that must pay their own way:

[Europe’s] airports – be they public or private – are to be run as businesses in their own right, strongly incentivised to continuously improve and underpinned by the principle that users pay a reasonable price to cover the cost of providing the facilities and services that they benefit from. There is no denying the tangible benefits that this approach has brought the EU – significant volumes of investment in necessary infrastructure, higher service quality levels, and a commercial acumen which allows airport operators to diversify revenue streams and minimise the costs that users have to pay – all of which are fundamental requirements to boost air connectivity.

The biggest restriction on airport privatization is that if a state or local government sells an airport it must use all of the proceeds to fund airport infrastructure–which makes the procedure pointless from their point of view. As I mentioned earlier, there is an Airport Privatization Pilot Program (APPP) which lifts this restriction but only if 65% of the air carriers serving the airport agree to the privatization. The APP is also slow and includes other restrictions. The Congressional Research Service has a good run down.

[Restrictions] include the need for 65% of air carriers serving the airport to approve a lease or sale of the airport; restrictions on increases in airport rates and charges that exceed the rate of increase of the Consumer Price Index (CPI), and a requirement that a private operator comply with grant assurances made by the previous public sector operator to obtain AIP [Federal] grants. In addition, after privatization the airport will be eligible for AIP formula grants to cover only 70% of the cost of improvements, versus the normal 75%- 90% federal share for AIP projects at publicly owned airports. This serves as a disincentive to privatize an airport, because it will receive less federal money after privatization.

The airlines are lukewarm on privatization. Although they would benefit from better operational efficiency, they are big recipients of the explicit and implicit subsidies and they use their effective control over airports to limit competition.

The main danger of privatization is that of monopoly power–it wouldn’t be a good idea to sell all of a city’s airports to the same corporation, for example. Thus, privatization should be accompanied by steps to increase competition. There are over 5000 non-commercial airports in the United States and some of the “National” General Aviation Airports already serve international flights (mainly corporate jets) and could be expanded to allow more commercial traffic.

Privatization should not be thought of as just a transfer of ownership but rather as a changing of the rules of the game to allow for many more private airports.

Addendum: Michael Sargent at Heritage has a useful and detailed plan. Robert Poole and Chris Edwards from Cato offer a good overview.

1 Ray Lopez November 29, 2016 at 7:28 am

I think ATH is privitized, and has it made service any better? Maybe not, since labor always goes on strike there. IAD, would privitization make it better? Old infrastructure. And so forth. Please, use the three digit airport code when replying to this post…shows you have at least 50k miles a year airplane travel under your belt, like the 1% me.

2 tjamesjones November 29, 2016 at 9:43 am

LAX!

3 msgkings November 29, 2016 at 11:46 am

Too bad you never fly into STFU. Your family doesn’t even like you, it’s stupid to claim their money as yours.

4 Ray Lopez November 29, 2016 at 3:00 pm

@msgkings – how’s that food allergy you got watching ice hockey coming along? You probably never been inside a big old jumbo have you, dumbo?

5 Jan November 29, 2016 at 5:36 pm

Crude, but somebody had to say it. Ha.

6 Ray Lopez November 29, 2016 at 6:06 pm

+1 thanks for agreeing with me Jan. Unless you’re as dumb as msgkings, with his gutter one-liners. Trump supporter fer sure.

7 msgkings November 29, 2016 at 9:28 pm

I didn’t want Trump to win but I’m not too unhappy with the market reaction and tax cuts coming.

8 Jan November 30, 2016 at 9:02 am

Thanks for keeping this blog entertaining.

9 Rich Berger November 29, 2016 at 7:36 am

I think Alex is seeing the potential in a Trump presidency.

10 msgkings November 29, 2016 at 11:47 am

Hey, we all gotta live with it now. I for one welcome our new Trumpian overlords.

Speaking of airplanes, I heard a good metaphor for this situation: whether you voted for him or not, Trump is now the pilot of the plane we are all passengers on. Let’s hope he flies it right.

11 Bill November 29, 2016 at 12:30 pm

Let’s hope he has a good co-pilot and crew.

Can you tweet out foreign policy in less than 144 characters?

12 Bill November 29, 2016 at 7:38 am

One should look at privitization of airports, but shares should be sold to the public, not just the carriers who might dominate control and restrict access to new carriers.

When you do privatization, however, you do want to ask yourself one question:

At some point, will the airport request from the legislature or city or county a public subsidy.

Think about whether baseball stadiums or football stadiums are financed and constructed. Is it the team, or public owners who win, and where does the subsidy ultimately go.

13 Bill November 29, 2016 at 7:54 am

I would also place a cap on airline ownership of the airport out of concern that incumbent carriers would own majority control and decide not to expand capacity so as to deny new entry. The same issue arises on whether dominant carriers owing a majority of the airport would want to ever engage in bidding for slots as a way to finance the airport.

If you are interested in the antitrust issues related to joint ownership of an essential facilities joint venture, look up the the USDOJ Antitrust Division antitrust analysis of oil company ownership of deepwater ports. One of the critical features of various models is that users who would have an interest in restricting access or expansion either do not get a vote on those issues or coalitions of shareholders have the right to expand the venture over the objections of other venture holders, so long as they bear the costs and risks (but they also get the benefits without having to share them with the non-participating venture owners). Google oil company ownership of deepwater ports if you want to get more info.

14 Hans November 29, 2016 at 8:46 am

The privatization is why modern European airports are like shopping malls with bigger windows – and I like it.

15 dearieme November 29, 2016 at 8:52 am

“they use their effective control over airports to limit competition”: slots. They talk endlessly of slots.

16 rayward November 29, 2016 at 9:18 am

Much is made in medicine of the importance of what is known as “coordination of care”, but it’s shocking how little effort is made to achieve it. Physicians, hospitals, labs, etc., all going their own way, to the detriment of the patient. I see the same thing in transportation: the absence of coordination of transportation. Airlines, airports, sea ports, rail, rail terminals, cars, etc., all going their own way, to the detriment of the traveler. In some places there’s at least a structure for coordination of transportation, with airports, sea ports, and rail terminals coming under the jurisdiction of a single “port authority”. Unfortunately for the traveler, the different modes engage more in turf protection than coordination. Which brings me to Tabarrok’s preference for privatization of airports. What’s the likelihood of coordination of transportation if airports are operated by for profit companies. Not much. Of course, after deregulation and as ownership in the airline industry has become more concentrated, the passenger has paid a high price, with less convenience, poor service, and higher cost. With few choices, passengers are at the mercy of the airlines. Tabarrok wants to make airports more like the airlines.

17 Bill November 29, 2016 at 9:48 am

The EU competition authority recently required divestiture by an entity which owned airports which competed with each other for traffic. You raise a question, however, about the pricing/quality of service aspects of a privately owned monopoly airport not subject to rate or other regulation relating to minimum standards.

Also remember: As they say, The monopolist enjoys the quiet life….there may be greater inefficiencies with a private unregulated monopolist than a public one with oversight.

18 Cooper November 29, 2016 at 2:44 pm

Deregulation has dramatically reduced costs in the airline industry.

To the degree to which the flying experience has gotten worse, it’s mostly the result of consumers chosing lower cost options and the added inconveniences of enhanced (and nationalized) airport security.

19 Colin November 30, 2016 at 7:26 am

and higher cost

nope: https://www.aei.org/wp-content/uploads/2014/02/airfare1.jpg

With few choices, passengers are at the mercy of the airlines.

Aided and abetted by the US government and its prohibition on foreign airlines flying domestic routes. The only problem with US airline deregulation is that it didn’t go far enough.

20 Art Deco November 29, 2016 at 9:34 am

The main danger of privatization is that of monopoly power–it wouldn’t be a good idea to sell all of a city’s airports to the same corporation, for example.

Most cities do not have more than one airport which can service commercial jets. You’re talking about New York and a few other loci.

One thing that’s been bruited about is breaking up the Port Authority of New York and New Jersey. That seems like a sensible idea, and it’s something Rudolph Giuliani wanted to do. The last article I saw on the subject did have some quotes from a local civil engineer complaining about the pitfalls of an absence of co-ordination leading to duplication of effort in airport services (citing the Bay Area as an example).

21 Rocco November 29, 2016 at 10:54 am

“The main danger of privatization is that of monopoly power..”

…and how then is ‘government’ monopoly of U.S. airports NOT a danger ??

Your NY/NJ Port Authority is a very good example of dangerous government monopoly– it is extremely powerful, self-serving, non-democratic, and oppressive… with a long history of corruption extending right up today. The NY/NJ Mafia is small potatoes compared to the Port Authority.

(see “The Power Broker: Robert Moses and the Fall of New York” [Robert A. Caro])

22 Art Deco November 29, 2016 at 12:20 pm

Mismanagement is mismanagement. It’s not oppression.

23 trs6 November 29, 2016 at 12:33 pm

…ask all those people who lost their homes & businesses to the Eminent Domain power of one unelected guy. also, the outrageous bridge/tunnel tolls imposed on a powerless population

24 Art Deco November 29, 2016 at 1:21 pm

Robert Moses has not held any public office since 1962, when he tried to play chicken with Nelson Rockefeller with pro forma resignation letters and back bounced Gov. Rockefeller’s congenial letters of acceptance. I’m aware he was permitted to run roughshod over people, but that question is not exactly topical.

There is nothing outrageous about bridge and tunnel tolls, per se. What can be an injustice is if the tolls are inflated to cross-subsidize other services (they’re among the revenue sources financing the PATH trains deficits as we speak) or if the tolls are inflated because of sweetheart deals with the public employee unions, or if the tolls are inflated because of mismanagement. Overstaffing is pretty common in public agencies, as are actuarially unsound retirement programs. If they’re not inflated for these reasons, the tolls are just part of the cost of commuting. There’s no use in complaining about that.

25 celestus November 29, 2016 at 10:25 am

“Airports in the United States need investment and improvements in operations efficiency”

This is non obvious to me. I’d rank Heathrow below a lot of the US airports I’ve frequently used (DFW, Detroit, Logan, Miami, McCarran, Midway, even Atlanta), and I think European airports have more problems with lost luggage though I may be misremembering. Sure O’Hare and the NYC/DC airports are awful, US airports are handicapped by security theater, and developing countries tend to have newer and better looking airports that were built from greenfield to handle higher amounts of traffic, but privatization seems more suited to fix cost structure problems and the like than those.

26 (Not That) Bill O'Reilly November 29, 2016 at 11:03 am

Sure O’Hare and the NYC/DC airports are awful

BWI is meh, and DCA is fine. It’s just Dulles that’s awful of the DC airports.

27 Brian Donohue November 29, 2016 at 11:30 am

+1 for ‘security theater.’

28 Luis Pedro Coelho November 29, 2016 at 10:36 am

You bleeding heart liberals, stop trying to make the US more like Europe. It’s not going to happen: you need to understand that Americans like their socialist infrastructure.

29 Mike W November 29, 2016 at 10:44 am

“restrictions on increases in airport rates and charges that exceed the rate of increase of the Consumer Price Index (CPI)”

So how do non-public investors get a return on their investment?

30 mulp November 29, 2016 at 4:26 pm

By replacing middle class paid American workers with illegals that can be exploited by not paying them knowing they can’t go to police because they will be deported.

31 Andrew M November 29, 2016 at 10:53 am

Given that most airports outside the mega-cities resemble monopolies, doesn’t this risk repeating the mistakes of the Chicago parking fiasco? Sell the resource too cheaply, then let the new owner hike the fees. Customers are screwed twice: first because (as taxpayers) they didn’t get a fair-value sale, and again because they now have to pay higher usage fees.

The way to avoid that is not to sell the airports outright, but to lease them for a long period. This allows you to include special clauses in the lease, e.g. mandating growth targets.

32 Shane M November 29, 2016 at 2:14 pm

one of Peter Lynch’s investing principles:

Whatever the Queen is selling, buy it.

33 mulp November 29, 2016 at 5:07 pm

The Chicago parking spaces are leased, just as you propose, as is the Skyway, the Indiana Tollway, “private” Texas toll roads, etc.

Care to restate your claim about how bad privatization is given its done as you propose in every case I know.

Note Penn Station above ground was leased in 1962 so Irving Felt could tear it down and build Madison Square Garden, but when the 50 year lease expired, MSG started arguing the lease term was irrelevant and the city must extend it in perpetuity.

Private corporations have a way of claiming government lease terms have no meaning, and that enforcing the end of the government lease is a public taking they must be compensated for at many times the original lease cost based on the principle lease terms do not apply and that enforcing them is arbitrary.

34 Andrew M November 30, 2016 at 7:57 am

In the case of Chicago, the lease was for 75 years, and they sold it way too cheaply. 75 years is too long: any mistakes made in favor of the buyer are compounded over decades. With a shorter lease, you get a chance to fix your mistakes (and recuperate revenue) sooner.

> MSG started arguing the lease term was irrelevant

Yes, there’s a risk that future judges might rule that long leases are identical to ownership. That’s another good reason to keep the leases short.

> Care to restate your claim about how bad privatization is…

I never stated that privatization is bad. Just that it has to be done well to ensure that both taxpayers and service users get a good deal. Otherwise we’re just selling the proverbial goose that lays golden eggs.

35 Albigensian November 29, 2016 at 10:54 am

I could see the City of Chicago leasing O’Hare (perhaps to some Chinese mega-company?) for 99 years for a lump-sum payment. And then burning through that lump-sum payment in a year or two.

But, although there are long-term incentives for Chicago to want ORD to work well, somehow I’d not be surprised to see an interest in short-term benefits overwhelm long-term interests. After all, in the long term we’re all dead anyway.

Although a long-term lease that didn’t protect the interests of airport users would be unfortunate, the political apparat that run big cities somehow aren’t always all that focused on protecting citizens’ needs 25, 50, or 75 years from now. And why would they be?

36 mulp November 29, 2016 at 5:37 pm

Well, funding for the new airport is scarce, so leasing O’hare for $10 billion would fund a lot of jobs building a new south suburban airport near Peotone. The basic planning has been done on what land to buy, half bought already cheaply, how to reconfigure the existing transportation, how to built high speed public transit into the Loop. All that is missing is money to actually get going. And the faster it’s built, the faster it can expand its scale and buy more land so it doesn’t get hemmed in by people who constantly bitch about noise and traffic like has happened at all other large public airports.

Note, Peotone already has a small private airport that has been there for decades, since the 40s. In 2006, James Bolt bought it and built long runways for corporate jets. But an individual has limited power to get all the other transportation services built to serve a busy airport. He sold to the government for its new unfunded airport, beyond the $100 million to buy land authorized.

37 Steve Sailer November 29, 2016 at 9:37 pm

I remember talking to my late father-in-law about the chances for the Peotone International Airport. He died 19 years ago.

38 McMike December 1, 2016 at 10:06 am

Of course, the first thing any O’Hare buyer will do is insist 99 year protection from competition. There would most definitely be a prohibition on building a new airport anywhere within 300 miles.

This is most certainly the case with parking deals and private toll roads as well.

39 JWatts November 29, 2016 at 6:34 pm

“I could see the City of Chicago leasing O’Hare (perhaps to some Chinese mega-company?) for 99 years for a lump-sum payment.”

If they used the lump-sum payment to prop up their pension fund deficits it would probably be a net plus. But yeah, that seems unlikely.

40 John November 29, 2016 at 11:03 am

I don’t see how you would avoid monopolization. Government-ownership is why the NYC area has TOO MANY airports. In a free market, LaGuardia would be shut down. An airport’s physical footprint isn’t merely on the ground. The required airspace is an upside-down iceberg. Few metro areas can accommodate more than one commercial airport.

41 (Not That) Bill O'Reilly November 29, 2016 at 11:12 am

What’s the case for closing LaGuardia? The terminal itself is a hellhole, but would JFK and Newark really be able to handle the additional traffic?

42 John November 29, 2016 at 11:39 am

Carriers at JFK and Newark would adapt with larger planes. Granted, more runway space would be nice. High-speed rail along the Northeast Corridor would help too and unlike other high-speed rail proposals would actually make economic sense but-for eminent domain compensation.

http://freakonomics.com/2009/05/14/want-to-fix-new-york-air-congestion-shut-down-laguardia/

43 Art Deco November 29, 2016 at 1:31 pm
44 trs6 November 29, 2016 at 12:53 pm

Duh. the case is that a major airport in the center of a huge highly congested city is a nightmare and it’s decaying because it’s uneconomical to maintain properly. there are a dozen better economic uses for that real estate.

JFK airport can easily handle the LaGuardia air traffic, but the FAA arbitrarily limits the number of JFK flights. there are already sound economical plans to add a short, dedicated passenger rail line to JFK from central NYC. LaGuardia is an unnecessary money pit annoyance

45 Art Deco November 29, 2016 at 1:30 pm
46 trs6 November 29, 2016 at 5:21 pm

“LaGuardia is better for passengers from much of Manhattan because it’s close. That’s a major benefit.”

so a primary argument for LaGuardia is that it serves the Manhattan elite population and saves them 20 minutes off a limousine drive to JFK. that is certainly the main reason LaGuardia still exists. very convincing argument….
fuhgetabout the other 4 NYC boroughs and their non-elite citizens

47 Bill November 29, 2016 at 1:01 pm

When I took my corporate securities law school course the professor always asked: “Who’s stealing from Whom” whenever there was a financial restructuring or reorganization.

So, suppose you own some municipal bonds, and the municipality owns, among other assets, the local airport.

The airport is subsequently privatized.

Exam question: Who’s stealing from whom.

48 McMike December 1, 2016 at 10:31 am

Mathematically, privatization is not very complicated. For it to work, the private buyer must conclude that it can do one (or some combination of the following) activities in a way that creates enough additional margin to cover its higher tax and profit requirements.

A. We can get the funding cheaper than the government. (Not likely)
B. We have something (land, physical resources) the government cannot obtain (also not likely).
C. We can run it for a third cheaper (choose your multiple) in costs the government to run it.
D. We can charge the customers a third or more in higher fees.
E. We bought it for a screaming deal.

And they must do so at the same time investing some humongous nine- or ten-digit figure in capital upgrades.

The truth is, they usually start off with #E. A bargain price sweetheart deal, with captive customer guarantees, a ridiculously long term, protection from competition, perhaps even guaranteed profits, continued subsidies including direct grants and public conduit financing, very little in the way of performance requirements (particularly with teeth), very little in the way of ongoing capital maintenance requirements, bespoke tax preferences, no price controls or service guarantees, and an indefensible no-fault buy-out clause.

The debate usually centers around C. We are told private companies have smarter/better employees who by their very virtue can save 30% overnight. We are told that private companies can automatically (almost magically) do it cheaper. So let’s look at the magic: they fire experienced tenured staff, vaporize employee benefits, spin off the underfunded pensions, cancel long-term formal and informal arrangements, tell the neighbors and incumbent vendors to stuff it, and adopt a Walmart employment model of temp/insecure low-level employees in constant turnover and no benefits, doing three jobs at once. Then they slash services, eliminate any sense of “equal access for all” that burdens public entities, and start systematically neglecting the long-term maintenance (IBG-YBG).

Abara-cadabara.

Once the costs have been magically slashed through the genius of capitalism, these venture inevitably shift to #D. The systematically raise user fees. Through straight-up fee increases, unbundling, and implementing service class-structures. Guaranteed. It will cost the users more.

Eventually, these ventures are able to capitalize on the guaranteed buy-outs to get kicked out. Service has sunk so low, fees risen so high, and the impact of systematic neglect of human capital building and reinvestment/maintenance start to become undeniable. So the public demands the government step in and rescue it.

Rinse, repeat.

49 Thomas Sewell December 2, 2016 at 2:51 am

Or F. We can bring in revenue by running an airport in other ways no one in the government has an incentive to attempt, i.e. advertising, shopping, deals with other transportation-related companies, naming rights and probably another half-dozen things I’m not thinking of off the top of my head.

Why don’t we have the government own and run all the malls or the grocery stores? After all, your A-E applies just as well to those. Is that what you’re actually advocating? If not, what distinguishes them from airports?

50 McMike December 2, 2016 at 9:27 am

I don’t know what airports you use, but the ones I’ve visited have pretty well tapped the advertising and travel-related vendor markets. Many have also delved already into the class-tier value-adds, like private frequent flyer lounges. And many have upped their game on food and shopping – even the perennially awful O’Hare. And then there’s Las Vegas, for those travelers who can’t wait to start losing their quarters and nickels… perhaps a brothel is next

But yes, there’s naming rights. This is an interesting example to choose, given that publicly-subsidized but privately-owned sports stadiums, flush from their artificial monopoly markets, are the poster-children for selling naming rights.

In your rush to rebut, you seem to have missed my point. When told that a private entity can run an existing airport cheaper, and better, many people do not ask “how.” The paths I listed are well-worn, which is of course well-documented.

Perhaps a private operator can sell enough naming rights to fill a multi-billion dollar maintenance gap. But I doubt it. Something else has to give.

Your shopping mall example is a good one to prove my point. Because of course many malls have already pursued several of the items on my list in order to achieve the profit targets of the owners. They have gotten public subsidizes and conduit financing help to build. They may even have benefitted from eminent domain to seize the land. Then they use the WalMart model of low pay for insecure part-time workers with no benefits. They ignore many of the services that public entities provide: equal access, connection with public transit, benefits for employees, and on and on. And of course they generally undermined a main street/local economy along the way.

When it comes to buying plastic trash from China, we have accepted that scenario, in exchange for “consumer choice” and “low prices”. The question I am asking is: do we want to do the same thing with our public infrastructure? Bring it also down to the lowest common denominator.

For the record, I am an advocate for balanced economy, with private sectors and public sectors and some public private partnerships. What I resist are the ideologues and privateers who insist there should only be a private sector in all domains of economy and activities, some stopping at the boundary of military, some not.

PS. We’ve not discussed who would pay to connect a private airport to public transport, such as the el at O’Hare or the light rail to DIA, multi-bazillion dollar public projects that no private company would ever undertake. This may be why the privatizers wait for the transport to be connected and highway interchanges added, before they start lobbying to buy the airports. They’re smart that way.

51 jorgensen November 29, 2016 at 8:07 pm

I fly through Vancouver BC regularly. The airport was handed over to a local independent authority years ago. Now it is like a trip to a mall with a lot of shops and food outlets wanting to make a buck off passengers waiting for their flight.

52 a Fred November 30, 2016 at 1:46 am

Not clear whether you prefer the current or previous setup.

53 Steve Sailer November 29, 2016 at 9:41 pm

Why were most airports sold to governments back in the day? When I was a kid, for example, Lockheed, where my dad worked, owned Lockheed Airport in Burbank, CA, but then sold it to an agency owned by the cities of Burbank, Glendale, and Pasadena.

What was the economic logic behind why it made more sense for cities to own this convenient little airport rather than a private company?

54 McMike December 1, 2016 at 10:09 am

Because back in the day, the Fed/State/local governments thought it was a good use of public funds and public power to expand and coordinate the transport, economic development, and public defense infrastructure.

55 carlospln November 30, 2016 at 4:26 am

What in the world is the matter with public goods, Alex?

Does everything have to be privatised?

Or just monopoly rents?

Oh, the Stations of the Cross for GMU Libertarian economists!

56 RJ Miller December 1, 2016 at 12:27 pm

http://nynmedia.com/news/faa-breakup-why-a-government-agency-may-go-nonprofit

If it’s worked out well for fifty countries then it’s hard to see why it wouldn’t work out in the US.

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