When Chicago's mayor, Richard Daley, strode out this autumn and announced that the city was privatising its Midway Airport in a $2.5 billion deal, few voices of dissatisfaction were heard. The investors - led by Vancouver Airport's YVR Airport Servicesprivatisation unit - capped years of negotiations with a prize that they saw as ripe for development. The city got billions, the airlines were reassured by the agreement they had signed with the new owners, and labour, including organised unions, public employee groups and others, ceased their grumbling. In fact, the deal, coming as the US economy was stumbling into deep recession, sparked interest around the nation in the concept of privatisation. Cities from neighbouring Milwaukee to nearby Gary, Indiana, to Austin, Texas, began talking seriously about selling their airports.
But given the nature of the USA's airport ownership structure, in which cities, states, or public entities outright own and operate most airports, and given the legislative history in Congress, whose assent is needed in any scheme, the trend is hardly one of wildfire.
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| Chicago Midway Airport was privatised earlier this year in a $2.5 billion deal |
| ©JonathanBirdwell |
The objections have been the same for a long time, says Bob Poole, an engineer who has become one of the nation's foremost advocates of airport privatisation. "People do not want to give up turf. Government workers and bureaucrats do not want to risk their jobs, and the public's mistrust is long established." As the founder of and now the director of transportation studies for the Reason Foundation, Poole says that sometimes the objections are simply too great.
Indeed, airports themselves are split. Debbie McElroy, policy chief for the Airports Council International-North America, says: "We have members on both sides of the issue, and our most recent debate in September, when ACI held its world congress in Boston, was to say the least very lively. So we can't take a position as such. The emotions run high on both sides." Other groups are caught in the same bind: the American Association of Airport Executives says its members are on both sides of the issue and so it too has no formal position.
Similarly, airlines have no formal position, but they do have very strong beliefs. IATA director general Giovanni Bisignani says: "I don't care who owns the airport. An airport is important for what it delivers not who owns it. Providing the right incentives is the most critical part of the privatisation process. We have seen too many privatisations fail because governments sold the crown jewels without appropriate guidance to the new owners." Bisignani points to the troubled history of BAA and its London airports as an example of a failed privatisation, saying: "Look at London Heathrow. Failed regulation allowed for a 42% profit margin. The new Spanish owner is happy but Londoners suffer with terminal facilities politely described as a national embarrassment. There is no need to repeat the mistakes of others."
In the US, fiscal desperation as much as ideology is driving privatisation. US States have long struggled with major deficits, and in 1989 the leaders of New York State's capital city, Albany, saw bright prospects, but needed FAA approval because the airport received federal funds. The FAA created a task force, which promptly deadlocked over a number of issues, among them employee protection and the issue of funds diversion: if the airport made a profit, would the funds ultimately make their way to city hall or would they stay at the airport and be reinvested? Albany reverted to local control, and then in 1996 Congress established an FAA airport privatisation pilot programme. However, the result was much political debate and little progress. Many of the applications, such as Brown Field in San Diego, were abandoned after intense political debate.
Catching on
Finally, one airport was privatised in 2000, when a British firm, National Express Group, formed a subsidiary to take over New York State's Stewart Airport. This facility, about 50mi (80.5km) from Times Square, lay in an area of rapid suburban growth, which made its demographics attractive. It could, hypothetically at least, compete with Newark Liberty and indeed with Albany, up the Hudson River. National Express took over under a 99-year lease in April 2000, vowing to invest more than $48 million in Stewart in the first five years. New York State got $35 million as an upfront payment.
Meanwhile, private operation of airport terminals progressed. In Pittsburgh BAA operates a sparkling facility with high-end retail stores. Indianapolis is another example of private operation of a long-public facility. In 1995, BAA took over the operation of the entire facility under a 10-year contract that was intended to save the city some $25 million over the decade. It was the first US airport to be privately operated and the initial contract was extended, but by the summer of 2006, the city and BAA allowed the pact to lapse, and the city set out to build an entirely new terminal. Over the decade of BAA's operation, net profit including fees from concessionaires grew from $17 million in 1995 to $28 million in 2007.
By 2007, National Express was feeling the pain as Stewart failed to win significant new service. National Express decided to exercise the option as soon as it became available to sell out of its lease and sell the airport. The company had sold its UK airports, East Midlands and Bournemouth, to Manchester Airports Group as part of a corporate decision. Stewart was acquired by the Port Authority of New York and New Jersey, which operates the three major New York airports. PANYNJ aviation director Bill DeCota says: "Stewart had some real successes, such as attracting AirTran and JetBlue, but then came the traffic slump and the crisis. No airport is immune."
Then came Midway. It was only after several years of negotiating that the buyers, led by Vancouver Airport's management arm, YVR, gained the assent of Southwest Airlines, Midway's largest carrier. Chicago's City Council says: "We needed to reassure all of the stakeholders. The airlines needed to know that there would be guarantees on the rates they pay."
To that end, the Midway parties hammered out a pact that limited the fee increases that the airlines there would face, freezing them for six years and linking them to inflation rates for the rest of the life of the lease.
The rates that retail and other concessionaires charge are not regulated, but George Casey, chief executive of YVR, says the new owners have a positive incentive not to raise prices beyond what the public will accept. "We have to keep Midway competitive with other airports. Midway is after all a low-fare airport," Casey notes.
Calling the Midway deal important because "it offers an alternative airport model in a system that seems largely broken", Southwest Airlines vice-president properties Bob Montgomery says: "Any perceived delay in negotiating was related to the airlines, and particularly Southwest, becoming educated on privatisation. We had to formulate a solution that addressed the known problems experienced with privatisation in other countries and that also produced an acceptable precedent." The buyers, who include a number of financial institutions, also adopted so-called best practices for labour protection, with the city offering comparable jobs to Midway workers if they are displaced. The city council approved the lease in October and promptly began to debate over which council members would get to spend the windfall in their districts. Final, formal FAA approval is expected by year-end.
Private funding
Privately built and funded US airports can operate without the restrictions of the federal purse strings otherwise known as grant assurances, which require FAA approval of major changes at airports and of any private ownership itself. For instance, in the Ozark Mountains of rural Missouri, private funding is behind plans for a new airport in the country music resort of Branson. When it opens next May, the $140 million facility will have been built entirely with private funds, but will be operated by a local authority. Because it is privately financed, Branson will be able to offer airlines a guarantee that they will face no competition on a given route - something that would not be allowed had the airport accepted federal funds.
So what is next? Poole says he has been contacted by "interested parties in New Orleans and in Milwaukee", and that "quiet discussions have resumed in Austin". Of the new US administration that takes office in January, Poole says: "This administration is going to be listening very closely to big cities and big cities are in the grips of one of the greatest financial crises right now."
Source: Airline Business
