Policy Documents

How to Privatize Airports ... and Why

Ralph Conner –
March 12, 2008

Most Americans are not familiar with the phenomenon of airport privatization, but they may soon be. Chicago's Midway Airport could be the first major hub airport to divest public ownership to a private company through a lease or sale.

Under a decade-old FAA pilot program five airports, but only one large hub airport, can be privatized. To date, only one small airport, Stewart International in Newburgh, New York, has been privatized. It was sold back to public agencies after the management and development plans put together by the airport's private operator proved unsuccessful. No major hub airport has yet made the successful transition to privatization.

Although airport privatization is a concept foreign to Americans, it is quite common in Europe, where more than 50 airports are privately managed. Commercial airports are attempting to reduce their reliance on government support, eliminate inefficient civil service and patronage employees, and cut back on the use of "inside contractors" who run up operating costs.

In 1987, the United Kingdom under Prime Minister Margaret Thatcher sold to private parties the government corporation British Airports Authority (BAA) for $2.5 billion. BAA currently operates seven airports, including London's Heathrow International. The airports remain subject to U.K. regulation with respect to the fees they can charge airport tenants, safety, security, and environmental protection matters. Today, BAA is worth $4.4 billion and has generated a profit every year since 1987. U.K. citizens have benefitted from a much lower tax burden and airline service that is at least as good, and in many cases better, than it was when BAA was government-run.

Among the more compelling reasons for American airports to consider privatization:

 

  • Large commercial airports generate revenues of more than $100 million annually, making them attractive to investors looking for substantial returns.

 

 

  • Well-capitalized investment firms--including foreign firms like the one invested in the lease of the Chicago Skyway--are interested in American markets.

 

 

  • Funding levels for federal airport grants have diminished and funds for infrastructure improvements are lacking.

 

 

  • Eliminating the political dimensions to hiring and management can result in major savings.

 

The following articles provide background on airport privatization, the Midway Airport privatization proposal, and the continuing political debate in Congress on the issue.


Will Midway Lease Re-Start U.S. Airport Privatizations?
http://www.reason.org/commentaries/poole_20070100.shtml
Robert Poole, director of transportation at Reason Foundation, reviews and analyzes Chicago Mayor Richard M. Daley's current efforts to lease Midway Airport. Poole attributes the slow development of airport privatization in America to three factors: 1) the user tax/trust fund system; 2) the availability of low-cost capital via tax-exempt bonds for publicly owned airports; and 3) the joint venture nature of airport governance.

Congestion Pricing for the New York City Airports
http://www.reason.org/ps366.pdf
Benjamin Dachis, policy analyst at the Reason Foundation, collaborated with Poole to prepare this policy study about "congestion pricing" of access to runways of congested airports. Access to airport runways during a given time is known as "slots." The Federal Aviation Administration (FAA) controls and regulates the number of flights per hour by allocation of slots. But the authors provide substantial evidence that a market-clearing airport congestion pricing system would decrease delays ... and privatization of airports would help bring this about.

Using the Revenues from Airport Pricing
http://www.reason.org/pb68_airportpricing.pdf
David Z. Plavin, president of DZP Consult, Inc., an aviation consulting firm in New York, teams with Poole to examine the pros and cons of getting the FAA to accept free-market remedies to congestion and delays--remedies that would also enhance airport revenue receipts. Plavin is the former director of aviation for the Port Authority of New York and New Jersey.

Business Jets and ATC User Fees
http://www.reason.org/ps347_business_jets_atc.pdf
Poole explains the FAA-administered air traffic control (ATC) system and how it could be privatized for greater efficiency and savings. Poole advocates removing the ATC system from the federal budget and switching to a user-oriented governance mechanism called ATC commercialization.

Passenger-Friendly Airports: Another Reason for Airport Privatization
http://www.reason.org/ps254.html
Dr. Sheesh Advani, Commonwealth Scholar at Oxford University, directed the Oxford University Airport Study in 1996. He examines in this article the managerial culture of customer service and how better service may emanate from private-sector incentives. The stakes are high for consumers/travelers in the privatization debate.

Urgent Need to Reform FAA Air Traffic Control
http://www.reason.org/ps358.pdf and
Why Air Traffic Control Corporations Make Sense
http://www.reason.org/ps307.pdf
In these two Reason Foundation reports, Poole reiterates the need for ATC commercialization after FAA's authority to regulate ATC ended effective 9/30/07. The case is reviewed with suggestions for Congressional public policy action. Poole recommends privatization be accomplished through a corporate entity with market-based incentives for efficiency and savings.