It would be fair to say that the promise of economic deregulation of the airlines has been compromised by continued government operation and control of the remaining two components of the air service industry: airports and air traffic control. Airports are virtually all owned by state and local governments or their subdivisions. Air traffic control is operated by the Federal Aviation Administration. Knowledgeable people are asking, “Would the system function at a higher service level if these other two branches of the air service system were also to be economically deregulated?”
Airports and Air Traffic Control:
A Brief History
Federal subsidization of airports has a long history, as we have seen earlier in this book. Airports began in the early days of commercial aviation as local, municipal, state, and even private (Burbank Airport in California) operations. Federal financial participation began as part of the Works Projects Administration and other relief organizations in the 1930s (notably at LaGuardia Airport). After World War II, Congress dived into the airport business with the passage of the Federal Airport Act of 1946 and, while that was a relatively small effort, with it began the acceptance of the principle that airports were the primary responsibility of the federal taxpayer.
The federal government also has a long history of levying taxes on the air service industry, beginning with the placing of an excise tax on aviation fuels in 1932 and an excise tax on passenger airline tickets in 1941. These revenues were deposited in the General Fund, but in 1970, on the creation of the Airport and Airway Trust Fund (discussed above), revenues received from various sources by the federal government were dedicated to be used for federal aid to airports and for air traffic control and other FA A purposes.
The Federal Aviation Administration is responsible today for the administration of these revenues, which currently amount to some $12 billion annually. Trust fund revenues paid for almost 80 percent of the FAA’s $16.4 billion 2011 budget. The General Fund is still on the hook for the remaining 20 percent.
Airport authorities and their lobbying organizations have attempted to have Congress raise the PFC amount that airlines can charge each passenger, asserting that inflation has eroded the value of the PFC money received by them for airport upgrades, among other things. They have also offered to forego the AIP funds in return for being able to set their own PFC rates. The Congress passed the 2012 FAA Reauthorization Act, however, without raising the amount that airports may charge under the PFC program and without disturbing the distribution rationale of the AIP program. This may leave a shortfall in airport funding programs for airport improvement projects going forward. Environmental concerns have brought additional pressures on airport management practices and funding requirements.
The international community is well out in front of the United States on this issue. Over 32 of the largest 100 foreign airports are now fully or partly privatized, including Athens, Auckland, Brussels, Buenos Aires, Copenhagen, Dusseldorf, Frankfurt, Johannesburg, London, Melbourne, Naples, Rome, Sydney, and Vienna. Others are in the process of privatization, including Hong Kong and Tokyo. Most of these airports are operated under a lease of the entire airport facility to a private operator on a long-term basis, usually 30 years or more. The governmental owner of the airport normally retains ownership of the land and airport facilities. The privatization process was begun, of all places, in England with the 1987 privatization of the British Airports Authority, which owns Heathrow and other airports.
Government-owned and managed airports are characterized as risk-averse, passive, and non-innovative. Privatized airports are more willing to take new risks, like expansion of facilities and gates. The lack of gates is cited as one of the constraints on new entrant airlines, which is a competitive disincentive. As we have seen, long-term leases with incumbent airlines allow a large degree of control to be lodged with those airlines, another competitive disincentive. Oxford University has conducted recent research into airport management strategies and found that the management approach at privatized airports is significantly more “passenger-friendly” than at government-operated airports.
There are currently some 100 companies worldwide that own or operate airports, finance the privatization of airports, or participate in the design, financing, building, and operation of airports and terminals at airports.
The U. S. federal statutory regimen governing airports is a significant disincentive to privatizing airports. Under federal law, airport authorities that have received them must repay federal grants previously received if the airport is sold and, if it is sold, the FAA has said that all monies received in payment for the airport itself must in turn be used for “airport purposes,” rather than placed into the local government’s general fund to be used for other governmental purposes. The other possibility is to lease the airport grounds and facilities, retain title to the airport, and contract out the use of the airport to a qualified operator. These considerations led to the new statute discussed below.
There has been a quiet movement in the United States to convince Congress that privatization of the airports is in the ultimate interest of travelers and taxpayers. In 1996, Congress passed the 1996 Airport Privatization Pilot Program,8 which created five “pilot program slots” that allow up to five airports (but only one large hub airport) to enter into a privatization test program. This program releases airport owners from the restrictions mentioned above and thus makes feasible the privatization of airports. The law, however, makes mandatory that the airport must secure at least 65 percent approval (by landing weight) from the airlines using the airport.
Progress under this statute has been slow. In fact, the only successful privatization under this program was concluded by Stewart International Airport, located north of New York City, by entering into a 99-year lease with a subsidiary of the British-owned National Express Group. This arrangement lasted only one year when the lease was terminated in 2007 by mutual consent and the operation of the aiiport was taken over by the New York and New Jersey Port Authority, which is not eligible under the privatization statute. This terminated the only successful privatization effort in the U. S. to date.
Applications were made by several other airports. Some of these applications have been withdrawn, while others are going forward, as indicated below. The following airports have made applications: Gwinnett County Briscoe Field in Georgia (application withdrawn June 2012), New Orleans International Airport (application withdrawn October 2012), Luis Munoz Marin International Airport, San Juan, P. R. (application approved December 2009, Aero – star Airport Holdings selected as operator, July 2012, pending FAA approval, docket number FAA-2009-1144), Hendry County Airglades Airport in Clewiston, FL (application approved October 2012, negotiations ongoing with private operator, docket number FAA-2008-1168), and Niagara Falls International Airport (application withdrawn 2001).
By far the largest airport that has begun the privatization process is Midway Airport in Chicago. This effort has been ongoing for many years and at least one arrangement with a private operator collapsed because of the lack of funding by the City of Chicago. As of July 13, 2012, the City has awarded a new five-year $53.6 million contract for the airport’s operation, but that is subject to FAA approval, so the process continues (docket number FAA-2006-25867).
Box 33-1 The Major Components of the Wendell H. Ford Aviation Snvestment and Reform Act
a. Increases FAA facilities and equipment budget by almost 50 percent for АТС system modernization
b. Increases funds for runways and airport equipment
c. Provides funding for FAA hiring and retention of controllers and inspectors
d. Makes runway incursion prevention devices eligible for AIP funding
a. Funding for new terminals, gates, and taxiways
b. Abolishes slots at O’Hare in 2002; modified by FAA in 2004
c. Abolishes slots at LaGuardia and Kennedy in 2007
d. Creates 24 new slots at Reagan National, 12 of which are to be used for flights within the 1,250-mile perimeter and 12 to be used outside of the perimeter
e. Requires certain large and medium hub airports to submit a competition plan
a. Increases funding for noise abatement
b. Establishes guidelines for air tours over national parks
4, Small Communities
a. Increases funding for non-hub airports
b. Guarantees funding for general aviation airports
c. Doubles the small airport fund
d. Creates an incentive program to help airlines buy regional jets to be used to serve small airports
e. Creates a new funding program to assist small airports in promoting their air services
5, Large Airports
a. Doubles the amount of annual passenger funding for primary airports (those with 10,000 or more passengers per year)
b. Raises the cap on annual funding for large airports from $22 million to $26 million
c. Doubles the funding for cargo airports
d. Raises the cap on Passenger Facility Charges (PFC) by $1.50 (to $4.50) to facilitate airport improvements that cannot be funded through the Airport Improvement Plan (AIP). PFCs can only be used to fund airport projects that increase safety and competition or are used for noise abatement
6, FAA Reforms
a. Creates an oversight board (similar to IRS reform legislation)
b. Makes changes in FAA management structure to ensure spending integrity
c. Creates a management board to oversee the АТС modernization program (the DOT is to consult with Congress in board appointments)
Privatization of terminals, as opposed to the entire airport, is a likely continuing trend as Southwest plans its new terminal at Midway and Terminal 4 at JFK continues to be operated by the Dutch Schiphol Group, which also manages Amsterdam’s Schiphol Airport, under contract with the New York and New Jersey Port Authority. Delta is expanding Terminal 4 to accommodate all of its international flights in a new $900 million undertaking.
As a part of the FAA Reauthorization Act of 2012, the Airport Privatization Pilot Act was expanded to allow up to 10 slots for the program, an increase from the original 5 slots. Under the privatization act, commercial service airports may only be leased out to operators, but general aviation airports may be sold. Privatization under this program has been nil to slow.
The only existing privately operated and privately owned commercial service airport in the United States was built in 2009 as Branson Airport by a group of investors known as Branson Airport LLC. The airport is located near Branson, Missouri, with the closest commercial service airport 50 miles away near Springfield, MO. Its largest carrier is Air Tran (Southwest is merging its operations with those of Air Tran and has announced that it will take over operations on March 9, 2013), with additional service being offered by Frontier and ExpressJet. One unusual aspect to the private ownership of the airport is that the airport is free to grant exclusive route authority to just one airline. The operators have said that they do not want “suicide fares,” with two or three airlines bashing each other until one or more gives up and stops service. This should be interesting to watch.