Airport Privatization:
Trends and Opportunities

By Charles Sander, Vice President of Airport Operations
Unisys Global Transportation

Editor's Note: This is the first installment of this white paper. You can read Part II and Part III here.

Executive Summary

Around the world, governments are turning to private-sector alternatives for airport management and development. This has resulted in a significant industry trend toward enterprise partnerships between public owners of airports and private management firms. This enterprise approach to airport management and operations offers several benefits to airports:

• Increased operating efficiencies, increased airport revenues and improved airport amenities
• Potential new revenue streams for local, state and international governments
• Reduced risks to airport-related project development

These benefits also accrue to taxpayers, airport users, operators
and providers.

This white paper summarizes the basic elements of this enterprise movement. It defines airport privatization and describes what privatization is taking place and where it is occurring. It discusses the process of privatization and explores the benefits, risks and implications of recent privatization experiences. It pays special attention to the incentives and roadblocks to U.S. privatization. Finally, it examines what these airport privatization efforts mean in practical terms for airport managements, governments, industry users and providers, and other stakeholders.

In the aftermath of 9/11, these findings are more pertinent than ever. Baseline airport revenues as supported by scheduled carriers have yet to recover, even as airports struggle to fund security and other efforts. Thus, the U.S. public sector must seek ways to achieve more productive airport management results, such as those demonstrated by the international community’s experience with privatized airport performance.

Introduction

Historically, the evolution of aviation has influenced the role of airports in their respective communities. In the early days of aviation, it was an economic necessity
for local and national governments to assume the burden of providing the needed funding for the development of aviation facilities. Often the development of an airport was seen as a means of encouraging local and regional growth or building local status or national pride.

Before the late 1980s, airport privatization was mostly a theory¹. Although general aviation had benefited from privatization, airport operators that were approached by private enterprise ultimately yielded to the hurdles imposed by federal and local regulation. In 1987, Prime Minister Margaret Thatcher made history by proposing to sell off the British Airports Authority (BAA) in an initial public offering of stock. The resulting $1.9 billion transaction sparked interest in the United States and elsewhere.

In 1989, the proposed sale of the Albany County, NY, airport tested the privatization waters domestically. An FAA taskforce was formed to address this new approach to airport operation. Ultimately, the taskforce deadlocked over the legal and financial feasibilities of the proposed sale and ultimately vetoed the effort. This put a distinct damper on aviation privatization efforts in the United States.

However, the rest of the world soon took notice. In the early 1990s, Vienna and Copenhagen airports sold part interests in their airports and contracted out several operations services². The trend continued in the United Kingdom, with sales of other U.K. airports. By 1996-97, with Europe well ahead of the rest of the world in privatization efforts, Australia raised more than $2.6 billion through the sale of Melbourne, Brisbane and Perth airports. At about the same time, Bolivia successfully conducted long-term lease concessions for its three main airports, and was rapidly followed by Düsseldorf, Naples and Rome, which joined the trend with sales of proportional ownership.

Since these initial efforts, more than 20 countries have privatized airports by means of equity divestitures, leases and incentive-laden management contracts. In most cases, these processes have resulted in significant increases in profits and lower operating costs. For example, in its first 10 years operating as a private company, BAA increased the number of scheduled air carrier flights, resulting in a 71 percent capture of all passenger traffic in the United Kingdom, while increasing profits and capital investments concurrent with massive capital improvements. At the same time, BAA lowered per-passenger charges in real terms³.

In response to these proven advantages to the public, and recognizing the potential domestic benefits during economic downturns, Congress approved an Airport Privatization Pilot Program in 1996. However, the result was much political debate and little progress. Several of the applications (Brown Field in San Diego, for example) were abandoned after intense political debate and concerted industry lobbying. There is still considerable disbelief and skepticism regarding privatization, coupled with the real-world political concerns of many local officials leery of “losing control” over “their” airports still affecting privatization efforts.

Defining privatization is a complex issue. Privatization approaches ranging
from private ownership to management contracts and long-term leases are the
most popular ways of introducing market-oriented incentives to existing airport owner/operators. These strategies for privatization stimulate and facilitate enterprise market-oriented incentives to airport operation and management. They do this by creating pressures from "contestable markets" arising from the process of competitive contracting and profit incentives through renewal and renegotiation. They also enhance and motivate managerial initiative to reduce government influence. In
some cases, managerial autonomy is relatively high, as in airport redevelopment arrangements in Cambodia and Hungary. In others cases, it's relatively low, as in the privatization approaches applied in France and Canada (60-year agreements with financial targets), which include some degree of public-sector governance. But in all cases, privatized airport operations are subject to pressures of the marketplace⁴. Studies have shown that airports privatized through equity divestiture and leases/management contracts have a significantly higher level of passenger responsiveness and general profitability than government-owned airports.

According to the most recent World Airport Privatization Study survey, “there is now an increasing tendency for U.S. airlines to own and operate airport terminals, and the FAA estimates that 95 percent of all airport workers are actually employed in the private sector [pre-9/11]." For example, air carriers operate nine out of 10 terminals at New York’s JFK International Airport.

With the worldwide slowdown in aviation travel following 9/11, a number of pending airport privatizations were put on hold. But by mid-2002 the momentum had resumed, with new privatizations completed in Australia and Malta, and plans announced in several other nations. Privatization may seem contrary to the new spirit of federal involvement, as evidenced by security measures at U.S. airports. But there are new potentials for commercialization,such as the opportunities for terminal retail franchises that result from longer passenger "dwell" times.

Several countries are preparing for airport divestitures, sometimes in conjunction
with large-scale privatization programs in the industrial sector. More than 20 countries
have completed the sale or lease of airport facilities, including Argentina, Australia,
Austria, Bahamas, Bolivia, Cambodia, Canada, Chile, China, Colombia, Denmark,
Dominican Republic, Germany, Hungary, Italy, Japan, Malaysia, Mexico, New Zealand,
Singapore, South Africa, Switzerland and the United Kingdom. Privatization is
occurring on almost all continents and includes countries at all stages of industrial development and levels of per-capita income. Airport privatization is becoming a worldwide phenomenon.

Development of Commercial Airports

Airports are the backbone of the worldwide commercial transportation system. Air transportation of passengers and goods is a dominant element of the transportation industry. The rate of growth of this sector creates a continuing need to expand airports and provide high-quality services. However, many of today’s modern domestic airports evolved from military or military-related uses, as evidenced by the Chicago, Seattle and Reagan National (Washington, D.C.) airports. After World War II, the military was usually involved in providing – and often controlling – airports as a new strategic asset. There was little interest in the commercial application of these airports. As
the government withdrew from airport control and management, the facilities were considered public works and generally turned over to or acquired by local government.

In many locations, this continued government control (and often military/civilian joint use) has resulted in underdevelopment. Economic downturns, escalating passenger demand, spiraling operations cost, increasing liability exposure and cargo expansion placed tremendous capital demands on municipal airport owners.

As a result, airport owner/operators began to look to the global trend in privatization
of public utilities. With all the other demands on their resources, these local governments are recognizing that private investment capital and commercialized management can meet airport expansion and service needs, in some cases more effectively than government. As a means of promoting local, regional and national economic growth, airport privatization offers governments a new operational paradigm. Enter the private sector.

The movement toward airport privatization is more than simple privatization of a public service. It is a replacement of the old nonprofit, public-service model of infrastructure management with a new commercial model. This trend in commercialization is being applied across the board, to electricity, telecoms, water and wastewater, railroads, seaports and airports⁵. Under the nonprofit, public-service model, the tasks of an airport's management are to get planes on and off the ground, move users and cargo in and out of the airport and, if possible, cover operating costs⁶. Under a commercial model, management is expected to run the enterprise at a profit, generating a return on investment for the owners. The commercial model’s entrepreneurial management style seeks to maximize all possible revenue sources, subject to applicable regulatory constraints; meet the needs of all customers, both public and private; cover all costs, as measured by generally accepted accounting principles (GAAP), as efficiently as possible; pay taxes; and achieve a return on the capital investment.

This commercial airport privatization model is currently employed at privatized airports like Heathrow and Gatwick and also by several government-owned but separately incorporated airports such as Auckland, Frankfurt and Schiphol. All these airports return a profit and pay taxes like any other business enterprise.

A more fully realized enterprise model has been employed in Australia and New Zealand. In these countries, any fee-charging enterprise that remains in government hands must be set up as a corporation, keep its books in accordance with GAAP, earn a return on its capital, pay all normal business taxes and borrow at taxable rates. The commercial privatization model dramatically changes the corporate culture. It makes the entity a different kind of enterprise, one that is entrepreneurial and customer-driven, because it is profit-seeking⁷.

¹ In the 1990s, the privatization movement (exclusive of airports) resulted in more than $800 billion of state-owned enterprises being privatized around the world. Generally, privatization follows a typical pattern. In the first stage, governments generally sell off attractive but less profitable enterprises and nationalized firms such as hotels and cement plants. In the second stage, basic industry elements – steel mills, auto plants, airlines and so on – are offered. Finally, in the third stage, basic infrastructure is privatized. This includes telecom systems, electric utilities, wastewater systems and airports.

² A partial stake in Austria's Vienna Airport was listed on the Vienna Stock Exchange in 1992. Similarly, two Danish airports were incorporated as Copenhagen Airports Ltd. and listed on the Copenhagen Stock Exchange in 1994. In both of these divestitures, the private sector now holds slightly less than 50 percent of the shares of the airport companies.

³ Heathrow dropped from being the 18th highest for airline fees in 1990 to 27th five years later.

⁴ "The World Airport Privatization Study – 2nd Edition." This is essential reading for those considering operating in capital markets and airports.

⁵ “Global Airport Privatization Regains Altitude,” Robert W. Poole. Also see "The Airport Business," Rigas Doganis (London: Routledge, 1992). After completing this book, Doganis went on to head Olympic Airlines and prepare for its privatization.

⁶ Often these real costs are diluted or obscured through combinations with other public-sector operating funds such as maintenance and staffing.

⁷ Poole, ibid.

Coming Up:

In Part II of this white paper, Chuck Sander discusses why airports are being privatized, key strategies, where it's being done and how well it's working.

For additional information, visit Unisys Airports solutions.