August 3, 2018 in Business
Airport Privatization: Situation And Prospects

In the U.S., regular (scheduled) air transportation is served by 378 airports, and only one of them is in private hands. It was opened in May 2009. The airport Branson (Branson) was built entirely with private capital. Currently, it is on the verge of bankruptcy.

However, despite the absence in the United States of this category of private airports, they are considered one of the world’s most privatized. This is explained by the fact that non-aeronautical activities at the airport are carried out by external private firms (outsourcing). Storage areas in airports are leased to business, retail, catering. Contract-based airports also interact with the units of armed guards, police and even the organizations providing information services to the airport.

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There is experimentation with different forms of privatization

However, for example, a contract with a private company that won the tender to manage the airport, Midway (Midway) in Chicago, cannot be called a success. This experiment resulted in the the financial collapse of the airport and the need for the airport to cover a debt of $ 126 millions of dollars from the Chicago city budget.

In content, the privatization of the airport – it is nothing but a shifting of the government’s duties and responsibility for its fate to the private sector. Usually, the total privatization refers to the of the airport’s transfer to the private owner. In practice, most privatization schemes are of hybrid nature which implies the maintaining of a significant share of government ownership of the airport. The most common forms of privatization are managed competition, contracting out, and asset transfer.

The first in the world successful privatization of airports was made in the United Kingdom. For the initial capitalization of the company BAA, which owned several airports of the country, a change in British law was necessary, to get permission to sell its shares on the stock exchange. In the early 90’s capitalization of BAA was 1.225 billion pounds. In July 2006, when BAA received an offer for sale of its controlling stake from a consortium led by Grupo Ferrovial, the price of the company was already 10.1 billion pounds. Of course, for the period of time between these two dates, a lot has changed, but still the growth in the company’s value is impressive.

During the period of its functioning BAA made significant updates

It currently manages the London Heathrow and Stendsted airports, Southampton, Edinburgh, Glasgow and Aberdeen in the UK and the airport of Naples in Italy. Prior to that, BAA owned London airports Gatvig and the airport Glasgow Prestwick. In addition BAA previously ruled in the US airport in Indianapolis and was in the U.S. concessions to the airport BWI, Boston Logan Airport and the airport Pittsburgh (Zhang & Zhang, 2003).

The French Government is preparing for a partial privatization of airports of Lyon, Nice, Toulouse and Bordeaux. In all cases, the state will retain a 60% stake. First the process of partial privatization will take place in Lyon Airport and will be followed by Nice, Toulouse and Bordeaux. Macqarie, Vinci, Veolia Transport, and other large companies are prepared to invest in the joint venture. The model for the partial privatization of the airports in the provincial cities of France may be the partial privatization of the Paris airports, experts say.

Privatization of airports in the world takes on many forms

Airports in Denmark, Austria, Switzerland, Belgium and New Zealand are sold to private investors. Airports in Argentina, Australia, Costa Rica, Peru and Greece are successfully managed by private companies on a long term lease. Separate airlines construction of terminals at airports in New York, Atlanta, Dallas, Houston and other U.S. cities can be considered as an early form of privatization.

Additionally, in the United States there are about 19 thousands small airports, and only 5 thousands of them have paved runways. Four thousands one hundred seventy two out of that number are in state (public) ownership. Most of these airports – are small airports serving light-aircraft. In 2005, 96.5% of the total passenger traffic in the United States was concentrated in one hundred thirty eight airports. Up until the 1996 privatization of airports was prohibited by the law. Further privatization process was hindered by various economic barriers; such as the ban on granting to private airport government subsidies (grants), difficulties with placement of bonds (revenue bonds). (Frost & Sullivan, 2006)

This does not mean that in the US the idea of privatization of airports is completely rejected. Its advocates claim that privatization will attract additional capital to airports, increase the effectiveness of their management, which will ultimately reduce costs of the airport. Their opponents point out the historical importance of the federal financial assistance to the national air transportation system and the benefits of such assistance. Federal law imposes on airports that receive federal financial assistance, certain requirements for the use of these funds. This includes, in particular, the obligation to pay at the first place work of employees involved in the airport financed by the federal grant. The condition of obtaining grants is the responsibility of airports to avoid any discrimination in access to them of small business and the business of national minorities.

Airports receiving government financial assistance may use these resources only to cover their costs, not covered by airport charges to airlines. They also cannot direct revenues from non-aeronautical activities at the airport, to their owners, as they are required to send all of their income just to the needs of the airport (Robert & Poole, 1994).

Impressed by success of privatization of airports in Europe, the US Congress in 1996 legislatively approved a pilot program of privatization of five airports in the country. This program started from the airport Stewart in New York. The failure of this initiative was evident after a brief and unhappy alliance with the National Express Group, and the absence of a need for such a partner anymore. Other private applicants for this role were not found, and organizations Port Authority of New York and New Jersey (PANYNJ), which manage the airports of New York, had to take responsibility for managing the airport. Today PANYNJ successfully manages this airport, giving it help in increasing the volume of international charters. Other airports are looking at this program, but so far have withdrawn their application for participation. This applies to airports Brown Field in San Diego, airport named after Louis Armstrong in New Orleans, Niagara Falls in New York City and the Airport named after Rafael Hernandez in Puerto Rico.

In 2012, the program was expanded and deepened. As for the Midway Airport in Chicago, the initial bidder to purchase the rights to manage the airport withdrew his application due to the additional requirement of the city that exposed to pay the airport’s debt of $ 126 million. Therefore, the city authorities are now preparing for the second tender. They seek to monetize the airport, hoping to use money, derived from such a privatization, to reduce pressure on the pension system and other infrastructure projects. The current mayor of Chicago stands supporter of preservation airport in city property and does not support the initiative to its privatization.

Airport Branson in Missouri, from the outset was constructed as a private and was not included in the pilot program. Despite the debt of $ 114 million in 2011, the airport was not only released from the forced payment of this debt, but got a reprieve from any payments until 2014.

When comparing the privatization of airports in the United States with the international practice, the picture looks quite different. However, research at the Massachusetts Institute of Technology, conducted in 1999, allows to include airports of the U.S. to the list of the most privatized airports in the world. So, in two Washington airports, managed by organization MWWA, work 25 thousands of personnel, but only one thousand three hundreds of them are full-time employees of the organization, with nearly half of the latter perform security functions. Others – are employees of private companies, including airlines. According to the Government Accountability Office over 90% of the staff of the largest airports in the U.S. are employees of private companies.

Public administration of U.S. airports is different from worldwide management practices of managing fully privatized airports in which concession and construction are carried out on the scheme of outsourcing. The regulation of such airports by the government is quite complicated, and requires a contract with the government to ensure public safety in them. The main difference between the US airports, owned by the state (federal, state, county, city), is that their profits are not distributed to the owners, but are invested in the airport and spent on its needs, and in some cases, to reduce the airport charges with airlines. The US airports managers often disagree with the widespread opinion that the management of a private airport is more efficient than the management of the state one. In the public airport to realization of the social interests of both passengers and residents of the surrounding airport area is more realistic (Basso, 2008).

At the US airports of public ownership there is an almost unlimited access to the debt capital market revenue bonds. Upon the sale of their bonds to raise funds to finance a project airport, tax-exempted, appears in the eyes of investors more attractive borrower. Bond buyer is sure that such an airport necessarily will buy its bonds in time, and therefore the term of reversal of this debt may be extended to 30-40 year amortization period. Such access to loan capital is distributed to airports that are not only in the federal property, but are owned by the city, county and state governments, which in turn eliminates the need to monetize the airport on behalf of other infrastructure projects. For the private airport that does not have tax relief, access to loans in the market yield on the bond is difficult. With time, in most of these airports the amount of accumulated debt becomes large. Therefore, any privatization would require them to cover these debts by payments from the proceeds of the sale, which will reduce the monetized profits of the state as the former owner.

The US airlines are concerned about the privatization of airports

In a few cases of full privatization held, the airline demanded from its private owners to maintain or lower airport taxes, limiting growth in the profitability of the airport from the non-aeronautical activities. As airlines in the US usually conclude with the airports long term service agreements, in the case of privatization of the airport there is a necessity to make amendments in its agreement with the airlines providing for the right of the new owner of the airport for assignment of income earned by the airport. This is a concern of airlines in connection with a possible increase in their costs at the airport (Brueckner, 2002).

The above-mentioned pilot project provides for the airport, preparing for privatization, mandatory consent to it at least 60% of serviced at the airport airlines, which also serves as a significant barrier to privatization.

In the article “Market structure, countervailing power and price discrimination: The case of airports”, published in the 74th issue of Journal of Urban Economics, three authors – Haskel, Iozzi and Valletti (2010) examined the ability to create the optimal, from the point of view of society, airlines and airport owners, market structure of airports. Although the integrated market for air services also includes airlines, insurance companies, suppliers of products and associated technical services, the market of airports is always under closest attention of the state.

The authors set for themselves the task to investigate issues related to the new market state of airports. How does the ownership of airports influences prices of using them and, thus, if the privatization process observed in most countries is justified? How do the conditions of overload capacity affect the level of competition in the industry? Should price discrimination be enabled or disabled for airports?

Their proposed model describes the vertical industry, where suppliers of the first stage (airports) provide a benefit (the right to land) to second-stage companies (airlines) under the scheme of taxation of passenger traffic, that is, prices are set according to the number of people crossing the threshold of the airport. The model examines the equilibrium values of prices at different levels of concentration of companies of first and second stage.

Schematic the model of the different conditions is as follows: two airports, belonging to one or two owners, set prices for carriers moving along by four routes, the flight of the first two routes is only possible from the first airport, and of the second two – from the second.

The results of their research show that under different ownership of airports competition arises between them; which is manifested, in particular, in reducing the price to land the aircraft, and a fall in price is higher, the more replacing the route is (i.e., if in the surrounding airports departure in this direction is possible too). On the other hand, this effect does not influence the well-being of the passengers, as the decline in prices for airport services as a result of a price war does not stimulate airlines to lower ticket prices, i.e. airlines assume arising excess to themselves.

The model also shows that in the conditions of a limited capacity airlines compete for the landing place in accordance with the Cournot model (which assumes that in a situation of oligopoly, companies maximize their profits by not competing in the volume of output, output of a competitor is taken as a known constant). Which means that the average cost of services at the airport at equalizing prices is higher than in the case of price discrimination.

Another interesting finding concerns the effect of increasing the capacity on the airports profit. In the case of a single owner of the airport network profit uniquely increases, but at the separate forms of ownership increase of airport capacity can change the conditions of oligopolistic control in general, with changing of Cournot competition in the direction of Bertrand competition (assuming that the oligopolists compete by reducing prices, and the result is setting of prices at marginal cost level). In this case, competition is likely leads to increase of the price struggle and fall of both the cost of services and profits of airports.

Obviously, the US airports will continue to treat privatization as fundamentally related to the concept of ownership options, because their government owners continue to consider the monetization of the airport assets as a profitable one. However, at any form of privatization the federal government would seek to retain significant control over the airport, including the control of airport charges through regulatory mechanisms. Airports, which are now in the possession of local authorities, are likely to retain the existing ownership and control. In this form of ownership there is no need for regulation of airport charges to airlines, as their value is determined by the federal requirement with states that their amount should not exceed the costs that go to cover operating costs of the airport. Airport partnership with airlines will continue to evolve in the direction of the joint management of the airport. Delegating of doing business at the airport to outside organizations will also continue, because it is beneficial for both parties and allows to operate with a profit.


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