Privatization of airports was pioneered by the United Kingdom in the late 1980s. The privatization experiment of Britain inspired other countries to consider airport privatization for improving airports and removing financial burden of running airports from public money.
United States is one of the exceptions in the developed world when it comes to airport privatization. While private ownership of airports is supported in Europe, almost all airports in United States are owned and operated by the government.
It is not that United States has not entertained the concept of privatizing its airports. The move towards airport privatization in the United States started when Congress launched the Airport Privatization Pilot Program in 1996. The program was termed pilot program because a maximum of 5 airports were permitted to enter the program.
The reason for limiting the number of airports was, as the name suggested, it was a pilot program and United States government first wanted to test the idea before implementing it nationwide.
The objectives of initiating the program were to increase access to sources of private capital for development of airports and make airports more efficient, competitive and financially viable.
The Privatization Process
The process of privatizing an airport included the respective state government applying for privatizing its airport to the Federal Aviation Administration (FAA). The application includes stating objectives of privatization, current financial position of the airport and the proposed plan (with timelines) of the state government for privatization process.
For example, if the City of Atlanta wanted to privatize Atlanta International Airport, it would submit application to Federal Aviation Administration (FAA) by stating why it wants to privatize the airport, what does its financial statements say about its financial position and how would the City carry out the process (in how much time).
Once an application was received, Federal Aviation Administration (FAA) would review it and approve it after which the respective state government would initiate privatization proceedings by engaging potential bidders.
Approval of the application was contingent upon fulfillment of terms and conditions of the program.
What were the terms and conditions of Airport Privatization Pilot Program? Let’s review some of the important ones.
Salient Features of Airport Privatization Pilot Program
- Commercial airports could not be sold to private parties. They could only be leased (refer our article on the three types of airport privatization to better understand this condition).
- The owner of the airport i.e., respective state level government was not allowed to use the earnings of the airport for non-airport purposes. It meant that the revenue generated from airport has to be used on the airport. This limitation was imposed so that the state government is bound to use money generated by the airport on the airport instead of funneling it to some other sector.
- The state government could ask the United States Department of Transportation to wave off the above condition, however, it required consent of airlines bringing 65% traffic (landing weight) to the airport. It meant if the state government wanted to take money generated from the airport out and spend it somewhere else, it required agreement of airlines.
- The private party who finally wins the airport contract was not allowed to increase airport charges for the airlines faster than the inflation rate. This rule was made so that there remains a leash on the private enterprise on what it is charging airlines which in turn has effect on what airlines charge passengers. This limitation could also be relaxed if the airlines agreed.
We can see that the terms and conditions of the privatization program were such that Government had tried to ensure that after privatization, state governments improve airports by spending money on its development instead of using airports as a mean to finance other sectors (maybe due to political objectives).
Secondly, it was ensured that privatization doesn’t result in the cost of air travel rising for passengers because the private party would chase profitability. Moreover, veto power was held by the airlines – one of the four most important stakeholders of airport privatization and customer of the airport business.
Results of the Program – Not Encouraging!
Since the inception of the Airport Privatization Pilot Program in 1996, 12 airports have applied for privatization and only one has resulted in successful completion. Resultantly, privately-owned airports are almost non-existent in the United States.
The earliest applications in the program included Rafael Hernández Airport privatization applied by Puerto Rico Ports Authority and Brown Field Municipal Airport privatization applied by the City of San Diego. Both applications were withdrawn in 2001 and the airports were not privatized.
The earliest experiences with completion of the Airport Privatization Pilot Program included privatization of Stewart International Airport in the year 2000 and Niagara International Airport in the year 2001, both of which did not remain under private ownership for long and were bought back by the respective state governments.
The City of Chicago got agreement of its airlines to privatize Chicago Midway International Airport and also got approval from Federal Aviation Administration in 2006. The state government engaged private enterprises and entered into a deal with one private group.
However, the process took 2-years and the 2007 financial crisis disturbed the finances of the interested private group who did not meet the payment deadlines and the privatization never completed. City of Chicago tried to privatize the airport again in 2013, however, one of the two bidding groups withdrew from the process.
New Orleans state government applied for privatization of two of its airports including Lakefront Airport and Luis Armstrong Airport. However, the application of the former was terminated in 2008 and of the latter was withdrawn in 2010. New Orleans state government gave the reason for withdrawing application of the latter as the current state of capital markets not being favorable for privatizing public infrastructure.
Gwinnett County in Atlanta, Georgia applied for privatization of Gwinnett County Briscoe Field Airport. However, its Board of Commissioners moved to reject the county plans to privatize the airport in its June 2012 business session. Subsequently, county applied for withdrawal of its earlier application.
Luís Muñoz Marín International Airport stands as the only airport successfully privatized under the Airport Privatization Pilot Program. It was privatized in 2013 and has remained under private control ever since.
In 2018, the law was revised, and the program was renamed to Airport Investment Partnership Program. In this revision, the original limit of 5 airports was removed. Now, any number of airports could apply for privatization.
The latest applications include Westchester County Airport (application withdrawn in 2019), Hendry County Airglades Airport (privatization efforts underway by respective state government) and St. Louis Lambert International Airport (application withdrawn in 2019).
Conclusively, the Airport Privatization Pilot Program (or Airport Investment Partnership Program) has remained unable to shift United States airport ownership model from public to private hands.
Why is the Program not working?
It is established that the United States Airport Privatization Pilot Program (or Airport Investment Partnership Program) has so far not worked because it has not been able to successfully privatize any major United States airport. The important question becomes why is it not working?
If you look at the salient features of the program we presented above, you can judge that the conditions for making an airport eligible for privatization are inclined too much towards one stakeholder of airport privatization i.e., the airlines.
Unless the City level government gets agreement of air carriers bringing 65% landing weight on the airport (which can be a single or two airlines for many airports), the airport cannot be privatized. Airline companies are apprehensive of airport privatization because publicly run airports are not oriented towards profit maximization and tend to be cheaper.
On the other hand, any private enterprise that would be interested in buying an airport will participate in the process only after it has developed a good business case for the airport. A good business case can’t be developed without considering all of the sources of income of the airport and how to maximize them.
The primary source of income of any airport in the world is its aeronautical revenues charged from the airline companies. It includes aircraft landing, parking, take-off and other similar fees. Therefore, airlines remained concerned that privatization will result in increase of these charges.
Another contributing factor towards the problem is that the time taken for the privatization process can easily take multiple years. For instance, in case of Luís Muñoz Marín International Airport, it took over three years from preliminary application for airport privatization by the Puerto Rico Ports Authority to final approval by Federal Aviation Administration (FAA).
Similarly, in case of Airglades Airport, it took nearly nine years from the preliminary application for airport privatization by the Hendry County government to final approval by Federal Aviation Administration (FAA).
Long time duration increases chances of withdrawal of bids by prospective private buyers of the airport due to uncertainty in socio-political environment (such as a new government that bans privatization) and change in market conditions. It increases risk in investment commitment for the private enterprise and tends to discourage continued pursuit for buying the airport.
Conclusively, the program has not been able to incentivize private sector for indulging in significant financial commitments associated with being in airport business.
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You may also find this 3-hour online Airport Privatization Course interesting that explains all about airport privatization from its background and history and compares private airports with government-owned airports to develop good understanding of whether airport privatization is good or bad.
References:
- CRS Report “Airport Privatization: Issues and Options for Congress” by Congressional Research Service, 11th March 2021.
- Federal Aviation Administration (FAA) Airport Investment Partnership Program Applications Status