The British Model

Easily the most important and largest example of airport privatization in the world is the experience in Great Britain. In the elections of 1979, Margaret Thatcher's Conservative Party proposed a number of novel ideas in an effort to lead the nation out of its economic doldrums. Included in the Party's list of ideas was a proposal that the major British airports be sold to the private sector.

The specific goals of airport privatization included:

(a) an increase in competition;

(b) an increase in managerial efficiency;

(c) a wider consumer choice;

(d) a reduction in political interference;

(e) the removal of public sector borrowing requirement constraint on investment programs.[17]

Pursuant to the Airports Act of 1986, [18] a process was established for the sale of seven British airports from the national government to the private sector. Far from small, inconsequential airports, the seven are Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Prestwick, and Aberdeen.

Heathrow is the busiest international airport in the world, surpassing any U.S. airport in international passenger traffic. Gatwick holds second place for international passenger traffic.

A company, British Airports Authority (BAA), was created in 1966 as a national government agency for the purpose of running British airports. BAA earned net revenue for the government in each of the 20 years of its existence. [19]

The government believed the BAA management was the best possible manager of the airport system. Although there was considerable debate over whether to sell the airports as one or seven units, the proponents of selling a11 as one entity won out. Finally, the British government decided to sell all seven airports and their highly regarded management team as a package. [20]

The arguments offered in support of the sale of BAA as a package included:

  1. Competition would not be served by piece-meal sale because the seven airports do not serve the same types of passengers or needs. Additionally, Heathrow would usually be the airlines' first choice duo to its location, facilities and access to other airlines.

  2. Airports don't really compete on price because their primary revenue – landing and passenger fees – account for only about 5% of an airlines costs.

  3. Only a small number of airports can be viable given the economies of scale and the huge capital costs to be amortized.

  4. One complete unit would provide greater simplicity in forecasting the need for capital construction.

  5. Free entry into the market doesn't exist because of the huge amount of planning, political and environmental concerns associated with airport construction.

  6. Separate sale would ultimately lower the total sale price due to the uncertain effect of competition on each entity. [21]

The British government sold the airports, as a single group, to the public through a sale of stock. The sale and the authorizing legislation were crafted to generate public confidence in the new company. A simplified prospectus was prepared to have BAA stock as widely sold as possible. The initial offering provided for the sale of 500 million shares, but public confidence resulted in a sale of 1.4 billion shares to 2.2 million shareholders. Even today, BAA has in excess of one million shareholders. [22]

Since the sale resulted in loss of considerable government control over the airports, the law retained certain regulation of the airports by various government regulatory agencies. For example, British Air Traffic Control still regulates take-offs and landings at the seven privatized airports.

The most important regulatory constraint is a formula enacted called "RPI-X." This is a formula where "RPI" is the retail price index for Great Britain (similar to our Consumer Price Index) and "X" is a factor established by government. !n this formula, maximum annual average revenue per passenger cannot increase each year more than RPI-1%. Thus, if price inflation is 4%, annual revenue from airport operations cannot increase by more than 3%. The law provides that every five years, the RPI factor will be evaluated by a regulatory agency known as the Monopolies and Mergers Commission (MMC). [23] This factor does not apply to BAA's non-airport activities.

The RPI factor for BAA will be reviewed in 1992. At that time, the Monopolies and Mergers Commission may determine that BAA is making too much profit at the expense of the airlines or its customers and order a lower profit factor.

Or, it may decide one or more of the airports needs greater capita! investment and change the factor to RPI+X to increase allowed profitability.

There is a wide range of possibilities and a great deal of uncertainty over the factors to be considered. To date, the MMC has been required to perform one such review under the Airports Act. The review was conducted of the privately owned Manchester Airport and published in November of 1987. [24] The MMC conducted a very thorough investigation of the operations at Manchester and made several recommendations to the government. Included in the recommendations was that RPI-1 be established for Manchester instead of the RPI+2 requested by the company. [25]

The airports are also licensed by the British Civil Aviation Authority (CAA) which has limited regulatory authority over the airports. The Airports Act of 1986 instructs the CAA to perform these functions:

(a) to further the reasonable interests ofusers of airports within the United Kingdom;

(b) to promote efficient, economic and profitable operations of such airports;

(c) to encourage investment in new facilities at airports in time to satisfy anticipated demands by users of such airports, and;

(d) to impose minimum restrictions that are consistent with the performance by the CAA of its functions under those sections; [26]

The British government believes it is necessary to control capacity at airports by restricting the number of take-offs and landings each hour. Because of these restrictions, Gatwick, with only one runway, handles the same amount of traffic as Metro with four runways because take-offs and landings are carefully allocated by the government. During especially busy periods, airlines must pay a premium for use of Heathrow and Gatwick. Although pricing is a better method of allocating limited runway capacity, BAA is not given the flexibility of letting price alone control demand during peak periods.

In Detroit, certain hours of the day also have far greater demand than others – often resulting in large aircraft delays. The British system of allocating landing and takeoff slots is used to an extent at the some congested U.S. airports (Washington-National, New York-LaGuardia, etc.) but not Detroit. However, where the slot system is used in the U.S., there is no price differential at the times of the day with especially heavy demand as there is in Great Britain. Therefore, a resource such as runway capacity is arbitrarily regulated and not subject to pricing pressures.