Chicago Privatizes Midway Airport in $2.5 Billion Lease Deal

Published December 1, 2008

The city of Chicago will receive $2.5 billion for a 99-year lease of Midway Airport on the city’s South Side, making it the first major commercial airport in the United States to go private.

Despite turmoil in U.S. and overseas stock and credit markets, the bids for the lease “were strong,” said Lisa Schrader, Chicago’s deputy chief financial officer.

“We were very pleased with the bid, particularly considering the turmoil we’ve been seeing in the financial markets,” Schrader said. “We believe it will be a transaction that benefits all stakeholders—the traveling public, the airlines, the city. It will allow us to invest in a substantial infrastructure program.”

Plans for that program are still being developed.

“The mayor [Richard M. Daley] feels strongly that city governments have to be creative in these economic times,” Schrader added. “That’s why the city pursues these deals.”

Chicago’s Done it Before

In 2006 Chicago closed a $550 million lease of underground parking garages to investors led by Morgan Stanley, and in 2005 it completed a $1.8 billion lease of the Chicago Skyway, a nearly eight-mile stretch of highway linking the city’s Dan Ryan Expressway with the Indiana Toll Road.

By a 49-0 margin the Chicago City Council in October approved the airport lease with Midway Investment and Development Corporation (MIDCo), an entity made up of Citi Infrastructure Investors, Vancouver Airport Services (YVRAS), and John Hancock Life Insurance Company.

Approval by the Federal Aviation Administration is also required. Schrader said the city expects FAA approval by the end of the year.

Scores of major airports in Canada, Europe, and Asia already have private ownership or operations. YVRAS has been privatizing airports in Canada and overseas since the 1990s and now operates 18 airports in seven countries.

“This contract marks a milestone in the growth of our company,” Larry Berg, CEO of the Vancouver Airport Authority, said in a press release. “And it is a clear example of how we can leverage our success at home to develop the best airports in the world.”

Will Wipe Out Debt

The city plans to use about $1.2 billion of the lease money to retire debt on the airport, netting the city a gain of more than $1 billion.

Responding to complaints of lease critics who fear prices at the airport will go up, Schrader said some prices may increase, but not all.

“The reality is that a private operator is motivated to increase traffic,” said Schrader. “We believe passengers will see a wider range of services, quality shopping, things people will like.”

Expert Expects Upgrades

Those enhanced services may cost more, agreed Robert Poole, a nationally known transportation expert at the Los Angeles-based Reason Foundation.

“Travelers at Midway can expect facility upgrades and better services—for which they may have to pay more,” Poole said. “Given Midway’s landlocked location and limited ability to expand the number of flights, it will have to figure out ways to generate more revenue per passenger using the airport.

“Simply jacking up prices for parking and food/beverage/gift offerings will tend to drive people away—to O’Hare, to trains, or to driving, depending on the trip. So they need to figure out ways to add value,” Poole said.

Poole said some of those ways could include offering “reserved parking spaces for some portion of parking, better opportunities to spend money on desired food and drink, and other products and services.”

Leis Valentine, vice president of the Civic Federation, a nonpartisan government research organization in Chicago, said the organization supports the Midway lease because “the Civic Federation supports privatization of non-core government assets. Airports, toll roads we consider to be good candidates for privatization.

“It’s important, though, that government exercise oversight over the vendors to ensure operations are done safely and effectively,” Valentine said. “We also believe it’s important there be a competitive marketplace. In this case it appears there was.”

More May Follow

The dominant air carrier at Midway Airport is Southwest Airlines. Company spokesperson Brandy King said the lease “probably will mean lower and more predictable airport charges for us. That helps us keep costs down for customers.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.