Primer: Privatization

From time to time, airports or investors have sought the opportunity to privatize U.S. airports. Unlike the bulk of the airports in the rest of the developed world, U.S. airports remain in the public sector. The privatization effort gained a toehold in U.S. government policy when a pilot, or trial, program was included in Federal Aviation Administration (FAA) Reauthorization of 1996. While the program authorized FAA to designate up to five airports, only one airport has been privatized under the program.

The program outlined the policy process to be used if an airport applies privatization. Chicago’s Midway Airport is in the midst of the FAA’s prescribed privatization process. 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.

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 a 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.

Program Revitalization

Currently, there exists a renewed interest in airport privatization in the U.S. In part, this interest is driven by the availability of investment capital seeking stable investment opportunities. Other modes of transportation, particularly highways, are also experiencing an increased interest in private operators.

In parallel with the development of the FAA reauthorization proposal, Chicago has indicated it wants to lease Midway Airport to a private operator and it subsequently secured the pilot program’s one slot for a large-hub airport. While the city has been hoping to seek proposal from prospective operations since late 2006, it has yet to issue a formal solicitation.

A number of well-funded teams have already expressed interest in the Midway airport opportunity. If the opportunity unfolds as expected, public discussion of the policy issues related to airport privatization is expected to increase. Under such a scenario, airport operators are likely to be asked questions about whether or not privatization is worth considering in each local situation.

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.

The original intent of the airport privatization pilot program was to use the five

authorized airport opportunities to develop information to help answer those

questions.

Role of airports

ACI-NA has not taken a position in support or against airport privatization. However, ACI-NA has generally supported 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 would increase the number of pilot program slots from five to an additional 10 slots. It would do so without limiting opportunities to particular classifications or sizes of airports. Among other things, the proposed changes would eliminate the airline approval requirement originally included in the airport privatization pilot program launched in 1996. ACI-NA expects that airlines will not favor expansion of the pilot program while their rights of approval are reduced or eliminated.

Key to success

ACI-NA believes an assessment of where or how the proposed modifications to the airport privatization pilot program will evolve will be influenced, in part, by the progress made and interest in the proposed privatization of Midway Airport by Chicago.

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

 Executive Vice President, Policy and External Affairs