Airport Privatization in the U.S.

With all of the furor in the recent past over airport security, one fact has gotten lost in the shuffle: All 10 of the busiest airports in the U.S. are owned and operated by municipalities.

Public ownership and operation of airports is often taken for granted, but that doesn’t mean it’s best. Public ownership and operation--which brings a political dimension to hiring and operations--may result in increased operating costs and other inefficiencies.

Amid accusations of graft and patronage, and facing a dire cash flow shortfall, the city of Atlanta is being forced to consider privatization of Hartsfield International Airport. A March 4, 2002 article in the Atlanta Journal-Constitution analyzed in great detail the extent of political involvement in every contract for every service at Hartsfield: “In at least 80 of the 100 contracts reviewed, one or more partners had a relationship with one or both former mayors or were political contributors.” Hartsfield’s general manager reports directly to the mayor ... but former general manager Angela Gittens could not even gain access to city budget and personnel information pertinent to Hartsfield’s operations.

Such a politicized governance process can introduce substantial operating costs that would be saved by hiring a private airport operator and requiring them to adhere to transparent contracts. And the city of Atlanta desperately needs the money.

Staving off Bankruptcy?

Atlanta is under a court mandate to upgrade its sewer system, but a recent Bain & Company study indicated the city does not have the future cash flow to do so--unless it cuts spending, raises taxes, or finds some other means of raising revenue. Some observers believe the city could be on the verge of bankruptcy.

Spurred by an initiative from the Fulton County Taxpayers Association, the city is considering a proposal for using the federal Airport Privatization Program (under H.R. 3539) to contract with a private airport operator to run Hartsfield and apply the lease proceeds to city projects other than the airport. The Hartsfield proposal falls short of full privatization, in which the city would sell the airport to a private owner. Instead, the city would retain ownership of the airport and lease it to a private operator, which would make lease payments to Atlanta.

Since the privatization initiative coalesced in August 2002, city officials have moved only slowly toward acceptance of the proposal. Atlanta’s CFO, Rick Anderson, worries that once operating costs and debt service payments are accounted for, there may not be sufficient expected profit to attract a private airport operator. He says he does not “see a bunch of money there waiting for somebody to come along and pluck it out.”

British Example

Anderson’s comments overlook the usual source of value in privatization: increases in productivity and operating efficiency, which translate into reduced operating costs for both the airport operator and the airlines. Such productivity and cost effects have been at the core of the business model for BAA, the private British airport operating company.

In addition to operating seven airports in the U.K., BAA operates several international airports. Its management of the airport in Sydney, Australia has been an unequivocal success, with improved efficiency, reduced costs, and increased employee and customer satisfaction.

In the U.S., BAA manages Indianapolis International Airport. On December 8, 2002, Steve Steckler of Infrastructure Management Group told the Atlanta Journal-Constitution BAA increased the airport’s profitability “not by raising charges to the airlines, but by increasing food, beverage, and retail sales and increasing cargo. They were able to reduce the cost to the airlines while making the airport a stronger economic engine for the community.”

The Fulton County Taxpayers Association and many residents of Atlanta and the southeast recognize that private management of Hartsfield offers great potential for such value creation. An effort is underway to collect enough signatures to put the privatization proposal to a public referendum. If voters agree, and Delta Airlines comes out in favor of the proposal, even an intransigent city government may have to give up its control over Hartsfield’s contracts in the interest of maintaining the city’s solvency.

Now if we could only persuade them to consider charging peak-hour prices for landing slots … but let’s not push things. Private airport operation is a good start toward increased efficiency and improved resource use in air travel.

Lynne Kiesling is Director of Economic Policy at Reason Foundation and Senior Lecturer of Economics at Northwestern University.
http://www.rppi.org

For more information ...

The Public Benefits of Privatizing Logan Airport. The Reason Foundation has been analyzing the benefits of airport privatization for well more than a decade. This classic Policy Study assesses the legal and financial feasibility of selling Boston's municipal airport and offers a projected five-year income and expense statement. (Reason Foundation, 1991, 47pp.)

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