Ninety-five years after Orville and Wilbur Wright revolutionized travel at Kitty Hawk
with their "flying machine," a second revolution is taking wing. Airport
privatization has become a hot issue not only in America, but around the world. In fact,
developments in other countries are threatening to leave the United States back in the
clouds.
Governments around the world have come to view airports as potential profit-making
enterprises rather than drains on the public purse. Accordingly, they have followed three
models for the successful privatization of their airports: contracting out selected
airport services such as concessions to the private sector, contracting out overall
management of the airport to the private sector, and the outright sale of airport
facilities to private firms.
An example of this last approach occurred in Great Britain in 1987. The British
government kicked off the airport privatization trend by announcing the public sale of the
British Airports Authority (BAA), a government agency which owned and managed seven of the
country’s largest airports, including London Heathrow, the world’s busiest
international airport. A phenomenal 1.4 billion shares of stock were sold to 2.2 million
citizens in the initial public offering, and the newly privatized BAA remained as manager
of the airports.
A little over ten years later, Britain’s privatization program has been a success
by every measure. As a private company, BAA has increased the number of flights and
passengers (its airports account for 71% of all passenger traffic in Britain), earned
higher profits, increased capital investments, and managed at the same time to lower per
passenger charges in real terms. Heathrow, for example, has dropped from being the 18th
highest charger of airline fees in 1990 to number 27th last year.
Concerns about safety? Roughly one-third of BAA’s staff is dedicated solely to
security. In 1994, when the Irish Republican Army launched a mortar assault on Heathrow,
not only did flight schedules continue with only minor delays, but the damage done was
minimized to the extent that it barely registered a blip on the radar screen of BAA’s
stock trading price.
Across the Atlantic, the U.S. government is taking a more cautious approach to
privatization, but larger changes may be coming soon. In 1996, Congress authorized a
two-year privatization pilot program which allows the Department of Transportation to
grant exemptions from certain federal statutory and regulatory requirements for up to five
airport privatization projects. To date, none of the five projects have been officially
picked. However, Stuart Airport in New York and Brownfield Airport in San Diego have
applied to join the pilot program.
Airport privatization has become a hot issue not only in America, but around
the world. In fact, developments in other countries are threatening to leave the United
States back in the clouds.
But local governments have been moving forward. Allegheny County in Pennsylvania
contracted with BAA in 1992 to have it design, build, lease, and manage a retail complex
for Pittsburgh International Airport. The resulting "air mall" of commercial
businesses—many entering the Pittsburgh market for the first time—has increased
per passenger sales from $2.40 in 1992 to over $7.00 in 1996, generating 900 new jobs and
over $550 million in sales tax revenue for the county, which retains ownership of the
airport.
In 1995, the city of Indianapolis turned over the day-to-day management of Indianapolis
International Airport entirely to BAA. BAA agreed to a performance-based contract in which
certain operations and maintenance cost savings had to be met before it received
compensation. This incentive spurred BAA to work hard in the first year to lower airline
costs $7 million below the previous year’s levels. At the same time, the addition of
22 new retail stores, 1,200 new parking spaces, and a shuttle bus service has helped to
increase non-airline revenue at the airport from $2.98 per passenger to $3.25.
Privatization of these airports, whether whole or in part, has not just been beneficial
for budget-conscious governments and profit-seeking private companies. In some cases,
airport employees have received benefits—such as Indianapolis’s 401(k)
plans—that they did not have before, and surveys show passenger satisfaction with the
privatized airports to be consistently high.
By contrast, a national passenger survey commissioned last year by 36 airports ranked
Wayne County-owned and operated Detroit Metropolitan Airport dead last overall in
passenger satisfaction. Among the complaints passengers voiced were poor baggage handling,
inadequate parking, lack of cleanliness, and poor quality restaurants. A 1988 Mackinac
Center for Public Policy study outlined the case for the privatization of Detroit Metro,
and Pittsburgh and Indianapolis’s experiences strongly suggest that private
management could dramatically improve passenger satisfaction, save taxpayer dollars, and
improve the local community’s economic development.
Forty minutes up the road, Detroit City Airport’s woes do not involve congestion
but rather a lack of it. City Airport, which last year received a $1.9 million subsidy out
of Detroit’s general fund, has a low volume of commercial traffic due to its small
runway size, poor location in a densely populated area, and proximity to Detroit Metro.
This lack of usage led to a 19% drop in airport revenue from 1996 to 1997. At the same
time, operating costs increased 12% and employee salaries and benefits shot up 17.8% and
71% respectively.
In addition, the airport is in a weak cash position. A strong cash position would allow
the airport to meet salary obligations and other operating expenses, expand, and generally
maintain airport. The airport has not bled off its cash overnight. In 1979 the airport
balance sheet showed a cash position of $505,543 dollars. Editor’s Note: Budget
numbers are presented without adjusting for inflation.
The city still had a financially viable airport. Today is a much different story. The
airport’s 1997 balance sheet shows a cash position of only $59,593, which was not
enough to cover the $147,142 in salaries and wages paid to airport employees during the first
month of fiscal year 1997.
Furthermore, despite the $1.9 million subsidy, the airport’s accumulated deficit
has leapt from $1,598,987 to $2,249,452 in one fiscal year. The accumulated deficit is
simply the difference between the airport’s assets and liabilities. Technically
speaking, the airport would be bankrupt if it were not for the city’s cash transfers
(more than $3 million in the last two years). The airport is in trouble. How long will
Detroit’s taxpayers be required to subsidize its existence?
Forty minutes up the road, Detroit City Airport’s woes do not involve
congestion but rather a lack of it.
Sale of this land to industrial park developers could instead save Detroit taxpayers
millions of dollars which could be used for tax cuts or improving some other service.
Privatization was a long time in coming to Midland’s Jack Barstow Airport, one of
the few airports in Michigan that was both city owned and operated. But last year, Midland
taxpayers saved $23,000 when the city for the first time contracted with a private firm to
manage the airport, providing such services as mowing, snow removal, and fueling.
Barstow has been a source of controversy in its community for years. Its relatively low
use (only 6,804 takeoffs and landings in 1996), location near another, busier airport (MBS
International is 12 miles away), and need for subsidies ($61,715 in fiscal year 1996-1997)
have moved many citizens to call for the sale of the land it occupies. Selling the airport
outright to developers could earn the city millions in a one-time windfall while relieving
it of the burden of yearly subsidies.
Though airport privatization is relatively new to the United States, countries like
Great Britain already have a long track record demonstrating privatization’s benefits
to taxpayers and airport users alike. Greater comfort, improved efficiency, and better
service are only a few reasons for governments at all levels to explore privatizing some
or all of their airport operations. The sooner airport privatization clears the runway,
the sooner passengers at Michigan’s—and America’s—airports will be
flying high.
