Primer: Privatization

 

Unlike many airports in the rest of the developed world, U.S. airports remain largely in the public sector, owned and operated by city, county or state governments. The trend towards privatization gained a toehold in U.S. government policy when a pilot, or trial, program was included in Federal Aviation Administration (FAA) Reauthorization of 1996. The program authorized up to five airports to participate with one slot reserved for a large-hub commercial airport and at least one for a general aviation airport.

 

The program outlined the policy process to be used if an airport wishes to privatize. New York’s Stewart Airport was the first and only to go private under the plan. National Express Group, the operator of East Midlands Airport in the United Kingdom and a number of transit bus lines, won a 99-year lease in 2000 to the Newburgh, N.Y., 7,500-acre facility. However, in early 2006, National Express decided to abandon its budding airport division and sold its lease right at Stewart to the Port Authority of New York and New and New Jersey. The authority will develop Stewart into the New York region’s fourth major airport.

 

On Sept. 16, 2006 the City of Chicago, operator of O’Hare and Midway airports, submitted an application to the FAA to participate in the pilot program by privatizing Midway airport. FAA subsequently approved the application, securing the one large-hub slot in the program for Chicago Midway and the City of Chicago released a Request for Qualifications to solicit interest from investors. On April 1, 2008 the city announced that it had received qualification statements from six teams whom it deemed qualified to submit bids. On Sept. 30, 2008 Chicago announced it had reached a deal the principal carriers at Midway airport and a group of investors to privatize the airport. Once approved by the FAA and TSA, the deal will represent the first major US airport to be privatized.

 

How it works

Outside of the U.S. where airports are privatized, a government entity usually owns the land and other facilities at an airport. Either the entire airport or the operation of the airport is leased to a private operator on a long-term basis, usually 30 years or longer. In general, privately operated airports internationally operate similarly to public utilities, such as electrical power or water systems, and are subject to various forms of regulation, including regulation of rates and charges paid by airport users.

 

Program hurdles

For a variety of reasons, interest in the program in the U.S., to date, has been limited. This lack of activity is unique to airports in the U.S. Privately-operated airports are common in the rest of the world.

 

As part of the stakeholder outreach process, FAA asked a number of parties in a variety of forums why there was surprisingly limited interest in the privatization pilot program. Among the reasons were:

  • Airport classifications eligible for the program were too restrictive.
  • Super majority “approval” procedure in the pilot program amounted to an airline veto of any proposal.
  • FAA approval process was time consuming and presented too many risks to transaction closure.
  • Industry downturn, followed by the events of Sept. 11, 2001, shelved a number of proposals being considered.

 

Unresolved issues

The number of unresolved issues associated with airport privatization seems boundless. These include:

  •  Impact on and regulation of fees paid by airport users, including both airlines and the traveling public.
  •  Appropriate use the financial proceeds of a transaction.
  • Consequences of environmental issues such as aircraft noise associated with increased airport operations.
  •  Regulation of rate of return to reasonable levels for invested capital.
  • Tax status of airport-issued debt.
  • Customer service implications of private operations.
  • The extent to which the airport sponsor may be obligated to repay past federal grants, and the extent to which grant assurances will be effective post-privatization.

If successful, the privatization of Chicago’s Midway airport will likely help to answer many of these questions.

 

Role of airports

ACI-NA has not taken a position in support or against airport privatization. However, ACI-NA supports greater flexibility for airports and their sponsors, increased independence of operations and means of developing investment capital to improve and expand facilities. Since reducing federal restrictions that are barriers to privatization is consistent with these goals, ACI-NA has provided guidance to improve or correct those aspects of the program that seem to prevent it from achieving its defined objectives related to testing the issues arising from privatization proposals.


The Administration’s 2007 FAA reauthorization proposal sought to increase the number of pilot program slots from five to 15 slots. It would also eliminate the restrictions on the classifications or sizes of airports eligible to participate in the program. Among other things, the proposed changes would have eliminated the airline approval requirement originally included in the airport privatization pilot program launched in 1996. While Congress continues to work on a multi-year FAA reauthorization package, ACI-NA will continue to advocate these and other issues important airport operators.

 

Key to success

ACI-NA believes that the future of the program will be dictated largely by the experiences and lessons learned from the Chicago Midway transaction and larger forces shaping the air transportation industry and the economy as a whole.

 

 

Compiled by Debby McElroy (dmcelroy@aci-na.org)

 Executive Vice President, Policy and External Affairs