Detroit Metropolitan Airport: A Case for Privatization

The nation's first comprehensive proposal to privatize a commercial airport was inspired by Britain's successful 1987 effort to privatize eight airports, including London's Heathrow. If Detroit Metro were properly privatized, it would benefit county finances, air travelers, and area economic development.

I. Introduction

For many different reasons, government tends to be involved in functions which could be performed by the private sector. If the private sector can perform the function as well as or better than government, the private sector should be allowed to perform the function.

A case in point is airports. All major commercial airports in the United States are owned by local, state or regional units of government. This is more the result of tradition than any proven ability of government to do the job better than private operators.

As public demand for air travel increases, airlines are responding with expanded services. More airline service requires more airport capacity for aircraft to land and load passengers. Unfortunately, a large bottleneck in the expansion of air travel has been the inability of airports to keep up with the demands of the industry.

This report examines the traditions which have resulted in government ownership of airports and challenges those traditions. The report will examine the privatization of the major airports of Great Britain offering this mode! to demonstrate the potential for privatization in the United States. It will describe the operations of Detroit Metropolitan Airport and explain how Metro might be privatized.

The report will list the advantages of privatization to taxpayers, airline passengers and airlines. Finally, potential roadblocks to privatization will be explained and solutions to these problems suggested.

While this report uses Detroit Metropolitan Airport as its case study, many of the arguments raised are applicable to other major U.S. airports.

II. An Abridged History of Airports

Airport Evolution

On December 17, 1903, at 10:35 a.m., at Kitty Hawk, North Carolina, Orville Wright made the first powered, sustained and controlled flight known in the United States. At this point, texts often consider the evolution of air travel from the perspective of flight, dwelling on the change in aircraft technology or airline comfort and safety.

Rarely told is the plight of poor Wilbur Wright, left standing on the ground. Kitty Hawk was cold and windy that day. The conditions for Wilbur must have been physically uncomfortable as he waited for "Orville's flight." During those brief seconds of flight, Wilbur could not take advantage of a comfortable terminal complete with food vendors, newspaper stands, or enclosed passage from one part of the field to another.

When Orville boarded that aircraft, he could not get on board through a loading bridge and he wasn't assured of accurate weather forecasts. Nor could he plan on landing on a smooth paved runway. On the other hand, Orville didn't have to wait while fifteen flights in front of his took-off. His baggage wasn't lost. And he didn't have to change planes once during his twelve-second flight. Wilbur didn't have to contend with throngs of hurried travelers, bad food or insufficient parking and, when Orville landed, didn't have to search for him at scores of different gates.

This story illustrates that while air travel has changed dramatically over the past 85 years, the airport infrastructure necessary to support the airline industry has also changed just as dramatically.

Airports are huge businesses with millions of dollars in annual revenue and in many cases, such as Detroit Metropolitan Airport, many millions of customers (passengers) each year. All major commercial airports in the United States are owned by units of government.

The reason airports are owned by government is largely a function of history. In the mid-1920s, the few existing airfields were either for military use or for the use of a few eccentrics crazy enough to fly. During that period, a few entrepreneurs determined money could be made in transporting mail and people faster than by other modes of transportation.

Initially, the U.S. mail was the most commonly transported product. Fledgling carriers fought for the right to certain routes for delivery of airmail. As use of airplanes became more common, more reliable places for the aircraft to land and to be serviced were needed. Gradually, as more cities became airmail delivery locations, they added the necessary facilities for these "airlines."

During this development period, it was the U.S. government which was heavily subsidizing the mail and much of the infrastructure at the airfields. Few companies or individuals had the capital to risk on something as unpredictable as airmail.

As a novelty for a privileged few, some airmail carriers began carrying an occasional passenger. This segment of the industry grew slowly until safety and comfort were improved. Consequently, as passenger volume increased, facilities at existing airfields expanded to accommodate larger numbers of customers.

These government-owned airfields financed their expansion by charging a variety of fees, leaving the entrepreneurs in the airline business to invest their capital into new and improved aircraft. For a long time, municipal government was able to keep pace with the demands of the business because the demands were modest. Technology did not require large tracts of real estate for long runways to land huge jumbo jets. Terminals were not yet complex because passenger use and the number of aircraft remained relatively modest.

Some airports from this period are still in use – and not surprisingly their space limitations are very noticeable. Facilities such as LaGuardia in New York, National in Washington, Love Field in Dallas, Midway Airport in Chicago, City Airport in Detroit and many others are testimony to an earlier time in the evolutionary process.

As needs grew, cities began to see airports as a key to economic development. Airports were a link to commerce and symbols of glamour which were important to municipal and business leaders. Huge new airports further from the cities were built to meet growing technological and commercial demands. Airports like O'Hare International in Chicago, Idlewild (Kennedy) in New York, Dallas-Fort Worth in Dallas and, of course, Metro in Detroit were some of the products of this era.

All of these, too, were municipal ventures funded through a variety of fees. Unlike their predecessors, however, these airports were complex and expensive. Some believed that only the public sector could afford the expense of such facilities, due to the availability of lower-cost public bonds.

Now the expense of new and expanded airports has begun to exceed the ability of municipalities to meet the challenges of increased demand. In some areas, regional authorities and even a few states have taken over airport ownership. The last major commercial airport constructed in the United States was the Dallas-Fort Worth Regional Airport opened in 1974. In 1988, the people of the city of Denver, Colorado gave their approval to the construction of a new airport and a new airport is likely in Austin, Texas. Some cost estimates for the Denver airport, when completed with 12 runways, run as high as $6 billion. Clearly, airport construction is an enormous and costly enterprise.

Effects of Airline Deregulation

Undoubtedly the Airline Deregulation Act of 1978 was the single most important event affecting airports since 1903. Previously, air routes were established by the Civil Aeronautics Board (CAB), a throw-back from the early air mail era when airlines relied on revenue from the U.S. mail to survive. The federal government decided who carried the mail where and at what price. Later, CAB determined which routes each airline would fly and effectively limited competitive pressures in the new industry. Cities which would be unable to support air service in a purely market driven industry were connected by routes subsidized by the federal government.

In the deregulation act, the federal government loosened its control of the airline industry. Without government controls over airlines and their route structures, the airline business became a more competitive industry. Many airlines dropped unprofitable routes which were no longer subsidized in favor of more heavily travelled, profitable routes. New airlines sprung up, some literally overnight, to take advantage of new markets.

To improve efficiency and cut costs, airlines developed a "hub and spoke system" where some airports are used as a connecting point for passengers from different origins and destinations. Virtually all airlines use this system today.

Large airlines have two to five hubs. Many major cities have hub airports white other municipalities continue to seek airlines willing to develop hubs at their airports. 1n addition to adding thousands of new jobs to an area and an improved tax base due to related economic growth, "hubs bless a community with a unique synergy created by the comings and goings of thousands of people,"[1] as one observer put it.

Another major benefit for hub cities is the huge numbers of flights to choose from to many different destinations. If a passenger needs to travel between two major hubs, such as Detroit and Chicago, there are many flights on five airlines (American, Midway, Northwest, Southwest, and United) to choose from.

The result, however, is that many hub cities, like Detroit and Chicago, have very congested airports. The Federal Aviation Administration reports that while there are currently some 3,200 airports available to the public, the top 50 commercial airports accounted for more than 80 percent of all passenger enplanements in 1986.[2] In essence, airline activity is characterized by "hub to hub competition" in which airlines must be as efficient as possible in building successful hubs. The more people and destinations served through a hub, reflected in a higher percentage of filled airline seats, the greater the ultimate success of an airline in the post-deregulation era.[3]

But the facilities at such airports are often heavily overused. Many airports which were built to handle fewer than 300 flights per day are now handling more than 1,000. These extra flights require more runways, more gates, more parking, more efficient systems for transporting passengers while on the ground, more food and rental car concessions, more sophisticated baggage handling and control of aircraft traffic. The benefits of such activity lead airports to encourage rather than discourage growth. A recent article on air travel in Transportation Journal noted that:

One of the biggest problems facing the [airline industry] today is airport congestion, a condition exacerbated by the hub-and-spoke method of operations that concentrates all aircraft activity into certain narrow time periods during the day. Much of the scheduling problem at major airport hubs is a direct result of airlines' attempts to meet the demands of customers; that is, providing service at the times passengers want to fly. Unfortunately .... people tend to want to fly at the same times, so all the airlines schedule flights around those times. The inevitable result is delayed flights, which hurt everyone: passengers miss connections, airlines lose money as planes burn fuel on the ground, and the government air traffic control system gets saturated. However, the carriers do not feel they can curtail service since satisfying demand is the rule of the day. In other words, unless everyone reduced the number of flights offered, no one will do anything. [4]

At a newer facility such as Hartsfield International Airport in Atlanta, the infrastructure was specifically designed for this hub and spoke concept. Detroit Metropolitan's facilities were not. Yet in 1987, Detroit was the 10th busiest airport in the United States as measured by the number of aircraft take-offs and landings (also known as "movements") which occur each year (see Table 1). As one would expect, this has created an enormous strain on the infrastructure in Detroit.

TABLE 1

COMMERCIAL AIRPORT MOVEMENTS

Source: Federal Aviation Administration, FAA Air Traffic Activity: FY 1987, 1987: Washington. D.C., Table 4, pp. 15-45.

Deregulation has had a direct effect on airports such as Detroit Metropolitan Airport and passengers. Older facilities, not designed for a hub system, have clear physical limitations which affect their users.

Metro Airport, for example, has a relatively decentralized system of terminals and concourses (see Diagram 1). For many years each airline had its own concourse or part of concourse. Passengers at Metro were either arriving at or leaving the Detroit area rather than connecting from one city to another through Metro. When travelers arrived at the airport and parked their cars, they walked first to the ticket counter for their airline of choice. They then moved to the appropriate concourse – within easy walking distance – where that airline parked its aircraft. However, like other large cities, deregulation made Detroit an attractive city in which to locate an airline hub.

At a hub, a substantial number of passengers arrive on one aircraft to depart on another. One airline tends to dominate an airport and uses a large portion of the airport's space. Passengers must determine where the appropriate aircraft is parked and walk to it. Many of the passengers who fly on Northwest Airlines, the largest airline in Detroit with approximately 57% of all passengers, are required to walk very long distances (see Diagram 2).

The current design creates passenger problems because the system was not built to handle the huge numbers or sizes of aircraft currently using the gates in Detroit. Larger wingspans require more space when an aircraft is parked at a terminal. Before deregulation, most of the aircraft using Detroit were relatively small Boeing 737s or 727s or McDonnell-Douglas DC-9s. The wingspan on these aircraft was as short as 93 feet. The newest generation of aircraft more commonly found at hub airports are the Boeing 757, 767, 747 or the DC 10 which boast wingspans ranging to 196 feet. This results in very crowded parking areas and fewer aircraft being able to park.

The physical constraints of airports like Detroit Metropolitan have limited the consumer benefits of the Airline Deregulation Act. The director of Detroit Metropolitan Airport argues that:

Most major airports have finite geographical, political, legal and financial limits. As a consequence, from the national perspective, it is obvious (i) that construction of additional airport facilities has not kept pace with the growth of the airline enplanements and operations, (ii) that delays caused by inadequate airport facilities have become a major component of the overall delay problem and (iii) that the entry of new carriers into major airports, while it has not been blocked, has been confined and modulated to the extent that serious competitive threats to incumbent carriers have seldom been posed. [6]

In effect, the airlines were freed from the burden of government regulation but the airports were not. As facilities must be upgraded and expanded to keep pace with demand, so also must the management and revenue structure of airports further evolve to best meet this demand.

This paper suggests that airports like Detroit Metropolitan Airport establish a new direction in airport operation in the United States.

III. Detroit Metropolitan Airport

Aviation History in Wayne County

Wayne County Airport was first opened in 1929 as a small airport 20 miles from downtown Detroit, at the present site of Detroit Metro. The airport provided general aviation service and hosted a small air national guard base. For many years, it was not the primary airport providing commercial air service to the Detroit area. Detroit City Airport was the primary commercial airport, providing air service until World War II. Following the war, some airlines created an airport management company and started service at Willow Run Airport, which was owned by the University of Michigan.

Beginning in 1955, Wayne County Airport tried to lure commercial air service. Because the airlines operated Willow Run Airport themselves, they were reluctant to move to Wayne County Airport so the county offered the airlines tremendous amounts of authority and operating control to move to the new location. By 1958, a new terminal and a longer runway were built and the airlines began moving to Wayne County Airport which became Detroit Metropolitan Airport.

In 1959, the airlines and the airport signed 50-year (eases and financing agreements which remain in effect today. With airline support, new terminals were built in 1966 and 1974 to create most of the passenger terminal facilities in operation today.

Until the Wayne County charter was adopted by a public referendum in 1982, the airport had been managed by the Wayne County Road Commission. In adopting the charter of 1982, voters were, in part, responding to many of the management problems the county was facing.

One of the most severe of those problems was the Wayne County Road Commission. Its accountability was very limited yet it controlled vast amounts of revenue from several sources, including the airport. Commission management and its decisions were frequently criticized.

When the county was reorganized, management of the airport was given to the Wayne County Office of Public Services, Department of Airports. The director reports to the elected Wayne County Executive. Thus, management of the airport is the responsibility of the Wayne County Executive with oversight by the Wayne County Board of Commissioners. No other unit of government plays a decision-making role in Metro airport management.

In addition to Metro Airport, the Office of Public Services also operates the county parks, roads, public works and Willow Run Airport (which was recently purchased by the county from the University of Michigan). Services provided at the airport by county government such as snow removal, maintenance, security and others, come from many departments. Thus, not all functions at Metro are managed by the airport. [7]

Airport Growth

As recently as 1984, Metro still had a relatively inactive airport with service on a per capita basis far below that of many other cities in the United States. In 1984, Republic Airlines decided to make Metro its major hub. In 1984, Republic alone boarded 1.6 million passengers. By 1987, the merged Republic and Northwest Orient Airlines boarded 5.6 million passengers – a 350% increase in just four years – and the airport handled a total of nearly 9 million passengers. In 1988, nearly 11 million passengers will use Metro. This large increase in passenger explains the huge increase in aircraft operations at Metro.

TABLE 2

AIRCRAFT MOVEMENTS AT METRO
1975-87

Source: Table 10 of Prospectus for sale of Airport Revenue Bonds. Published by Wayne County in 1986, p. B-48.

Between 1975 and 1987, combined airline and commuter airline operations doubted. This increase has far exceeded the physical growth of the airport itself, which has seen relatively little capital expansion since 1974. And, it is likely that airline operations expansion will continue due to growth in the population and general economy of the Airport Service Region [8] and from increased hubbing activity at the airport. [9]

Airport Finances

Metro Airport revenues are derived from two primary sources: airline revenues and non-airline revenues. Non-airline revenues come from airport concessions which pay a fee to the airport (see Table 3).

TABLE 3

METRO AIRPORT REVENUE
1985

Source: Prospectus for Airport Revenue Bond sale issue by Wayne County, 1986, p. B-73.

Non-airline revenue from concessions includes gross receipts from automobile parking at the airport (less a management fee paid to the parking lot management), 10% of gross receipts on rental cars, a percentage of gross revenue on food and beverages from airport restaurant operators (ranging from 5% to 13.81%) and a percentage of gross receipts from other sales including the airport hotel. The airlines also reimburse the airport for security and utilities.

The most complex and unpredictable revenue source is the fees charged to the airlines for landing. These fees, included in a charge called "activity fees" are charged each airline as a rate per thousand pounds of Approved Maximum Landing Weight payable by each airline to airport for such aircraft as have landed at the airport during the year. [10]

Activity fees cover "all rentals, fees and charges for the use of the premises, facilities, rights, licenses, services and privileges" incurred by the airline. [11]

In a non-regulated business environment, the airport would endeavor to change fees and charges to raise sufficient revenue to perform capital construction while earning a profit. However, the Basic Agreement between the airlines and airport, in effect for most airlines since 1959 and not expiring until 2009, has provisions which limit the total revenue to the airport.

The Basic Agreement provides that the "revenue requirement" for the airport is calculated by adding the following items:

1. Airport expenses for maintenance, operation and administration;

2. 133-1/3% of the amount of principal and interest due for outstanding Senior Lien Airport Revenue Bonds;

3. 125% of the amount of principal and interest due on Subordinate Lien Airport Revenue Bonds;

4. Deposits into the Bond Reserve Accounts, the Operation and Maintenance Reserve Fund and the Renewal and Replacement Fund required by the bond ordinances; and then subtracting all other airport revenues received. [12]

In effect, the total costs (including capital costs) of the airport are calculated and the revenue from all sources other than the airlines is subtracted. The remainder is then divided among the airlines based on the landing weight of each airline's aircraft during the year. Thus, airline revenue for the airport equals activity fees multiplied by landed weight.

In a normal business income statement, the basic formula is:

(REVENUE — EXPENSES) = PROFIT

Under the above contract, the income formula would be:

(EXPENSES — NON-AIRLINE REVENUE) = AIRLINE FEES

Importantly, any increase in revenue to the airport from concessions or sources other than the airlines results in an equal reduction in revenue from the airlines. Thus, fee changes under the current contract cannot produce a profit for the airport.

In 1986, the airlines paid activity fees of $0.436 per thousand pounds of landed weight. After the year ended, increased concession revenue and higher than anticipated airport traffic resulted in a reduction in the activity fee to $.29. The difference was refunded to the airlines.

Following are graphic illustrations of the relationships between airline activity fees and non-airline revenue under the current Basic Agreement.

Figure 1 shows the relationship between activity fees and landed weight. If landed weight increases, the activity fee will decrease. Aggregate airline fees cannot change as a result of airline activity.

Total airport revenue must equal expenses. (See Figure 2) When revenue from other sources increases, aggregate airline fees must decrease (C₁ to C₂). The relationship between activity fees and landed weight remains the same, activity fees mmust decrease.

When capital expansion began in 1986 for the new Republic hub, activity fees began increasing dramatically to provide revenue for the new bonded indebtedness. The activity fee rose to $0.46 in 1987 and $0.76 in 1988.

The Basic Agreement also binds the airport in determining the cost of its operations. For example, the Basic Agreement prohibits the airport from paying for "operation, maintenance and administration in excess of the amounts reasonably and necessarily required." [13]

Any excess revenue to the airport for debt retirement can only be used to retire debt and the airport cannot incur additional debt without the concurrence of the airlines. [14] This, in effect, gives the airlines veto power over all airport construction projects.

Under the existing agreement between the airport and airlines, the airport lacks incentives to operate efficiently. The contract simply provides that the airport not incur costs "in excess of amount reasonably and necessarily required."

Meeting Airline Needs

This contract also places restrictions on the ability of the airlines to discontinue service at Metro. Since total Metro revenues are relatively fixed during a year, a decrease in airline operations will not result in any significant savings to the airlines. Costs are divided by the total landed weight during the year. If landed weight decreases, cost per thousand pounds of landed weight increases commensurately.

As of this writing, these provisions have led to a stalemate between the airlines and the airport over what form new construction to expand the airport will take. Northwest, in particular, believes new capacity is needed to accommodate expansion as soon as possible. The county wants added capacity on a grand scale to allow for a huge increase in operations in the long term instead of short term improvements to meet immediate airline needs. Neither the airport nor the airlines' needs can be met nor the facilities improved until all agree on the final plan. Meanwhile, passengers suffer from inadequate facilities. [15]

In general, when a contract expires, negotiation will facilitate changes and modifications to meet the mutual needs of the parties to the contract. In a contract which lasts several generations, such as Metro's Basic Agreement, changes are much harder to make and the airport users must endure greater trauma in meeting new demands. Metro's airport manager calls Metro's Basic Agreement "the worst in the country." [16]

IV. Airport Privatization

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.

Pricing

It is important to understand the fundamental differences between the landing fees of airports in Great Britain versus Detroit Metropolitan. In Great Britain,airlines pay a fixed fee for landing based on the time of day and the number of passengers. Airports also collect rent for terminal space from the airlines, concessions, parking and other activities. The total revenue for the airports is a function of the amount of total activity. Total revenue is not contractually limited, as it is in Detroit, so revenue cannot exceed costs.

At Heathrow Airport, BAA charges the following fees for landing:

(1A) £290 ($493) per aircraft between 7:00 AM and 9:59 AM and between 5:00 PM and 7:59 PM or

(1B) £175 ($297.50) for all other times, plus

(2A) £5.50 ($9.35) for each departing domestic passenger during peak periods,

(2B) £11.05 ($18.79) for each departing international passenger during peak hours and the summer travel season. There is no per passenger charge for international passengers during the less busy winter travel months. [27]

These fees apply to all fixed-wing aircraft. Thus, if a business jet with four people aboard chooses to land during peak hours, it will pay the same landing charge as a fully-loaded Boeing 747 plus charges for each passenger.

BAA has a slightly different fee schedule for Gatwick airport. In general, the fees are slightly lower and sensitive to aircraft weight. With these fee schedules, BAA accomplishes many different goals:

1. Generating more revenue by increasing landing fees during high demand periods when international flights are arriving from the Western hemisphere.

2. Encourage use of Gatwick airport over Heathrow to reflect Gatwick's lower demand and surplus capacity.

3. Encourage winter travel to England through lower passenger charges during off-peak seasons.

4. Discourage airport usage by small aircraft by the very high landing fees. General aviation is encouraged to use other, less congested, airports.[28]

5. Maximizing revenue by encouraging the use of larger aircraft through the airport fee structure. Since small aircraft use approximately the same amount of resources but generate less revenue than aircraft with more passengers, the airport benefits from the use of larger aircraft. [29]

All of these above goals can be achieved with a flexible pricing structure used by British Airports Authority and allowed by the British government. Under the existing agreement, Detroit Metro has no such opportunity for pricing variability. Price is established by landed weight after all other airport revenue is determined.

Using a system such as that employed in Great Britain which shapes and is shaped by market pressures through pricing policy, Metro might be able to accomplish some of the following goals:

1. Discourage airlines from scheduling more departures than the system can handle in peak demand hours by raising the price during those hours.

2. Encourage the use of large jets during peak hours to reduce the number of flights while maintaining the number of available seats.

3. Improve safety by discouraging the use of Metro's facilities by general aviation aircraft by charging a fixed rate for each aircraft rather than a weight-based rate.

4. Encourage or discourage the use of Detroit as a hub airport by making fees either lower or higher to attract a different number of flights.

5. Set the amount existing and prospective airlines using Metro will be charged – regardless of the amount of airport activity.

Political Decisions vs. Business Decisions

The importance of the profit incentive in private sector decision-making is well known. Without such incentive, government agencies do not have the same motivation to operate as efficiently as possible. In Chapter II. we examined the method by which Metro airport revenue is determined. In effect, the airlines must reimburse the airport for all expenses not already covered by charges collected from other airport vendors.

When a function is performed by government, it normally uses public employees to perform those functions – especially when a civil service system exists. Such is the case at Metro, where Wayne County civil service salaries and rules arguably lead to labor costs higher than that of the private sector.

In both environments, employees may be unionized. But business is allowed the opportunity to negotiate with employees while fully understanding that all labor costs will affect the profitability of the business. In a civil service system, those representing management in the negotiations have less incentive and ability to control costs especially since reimbursement for cost is guaranteed.

An airport owned by a unit of government uses public employees and tends not to subcontract activities. In a business setting, management generally has the opportunity to decide who will perform certain services. Management may use its own employees or outside contractors. Such a decision would normally be based on efficiency and profitability.

Incentives to maximize use of a resource also do not exist whore total revenue cannot be increased. Does the airport, owned by government, have incentive to charge market prices for non-airline vendors and garner revenue wherever possible when all shortfalls in revenue are made up by the airlines? For example, would a key location – normally used for revenue producing advertising – be used for non-revenue producing political advertising by a proprietary business? Most likely, the proprietary management would lease the space and not use it for the company's chief executive officer's picture. [30]

Similarly, when establishing lease rates and fees for non-airline concessionaires, does airport management have incentive to maximize revenue from these other sources if it has the contractual guarantee that airlines will cover any revenue shortfall?

The dynamics of efficient operation vary between public and private sector operations. Current management of Metro lacks the legal tools and incentives to operate Metro as efficiently as would be possible in the private sector. Current Wayne County leadership has tried to reduce the cost of government due to budgetary constraints. Such budgetary constraints are not applied at Metro because of guaranteed airport revenue.

Under the control of county government, Detroit Metropolitan Airport is also subjected to political decision-making. Airport issues are often addressed from a political rather than a consumer point of view. As political leaders, the elected officials representing the county are concerned about the county's budget and the overall well-being of the people of the county.

The county's decisions regarding its relationship with airlines and other vendors might be affected by issues such as the number of jobs a vendor brings to the airport. The decision by Republic Airlines to create its largest hub in Detroit was widely hailed because of the number of airport jobs it created. 1f another airline were now to decide to add a hub in Detroit would the county allow that airline use of Metro for the political value of the jobs it brings at the expense of passenger comfort and safety at the airport?

In the early 1970s, the decision was made by the Wayne County Road Commission to construct what is now the Michael Berry International Terminal. In retrospect, the wisdom of that decision might be called into question. While the facility is impressive in appearance, some of the decisions made about the location and design clearly were not in the best interest of the user. The terminal is not connected to the other passenger terminals. The aircraft parking areas are inadequate for the number and size of aircraft using them.

In short, the facility follows form over function in its design. In a political environment, buildings may more often be monuments than functional facilities.

It may be argued that political leaders are not as accountable as business managers. Political leaders are accountable to those who put them in office every four years (in Wayne County). Voters must decide at one time and on many issues whether their elected leadership has been effective. Management of an airport is not likely to be a key issue in the election process. In the private sector, airport management would be accountable to a board of directors and shareholders. If an airport were badly run, decision-makers could react, as needed and when needed, to correct the problems.

Metro's Competition

Arguments supporting privatization include the belief that privatization leads to increased competition and therefore lower prices and better service. It is uncertain how much local competition would exist for a privatized Metro airport. Currently, Detroit City Airport (reopened to commercial air service on July 6, 1988) and Windsor Airport are the only other area airports offering commercial air service and both offer a small fraction of service available at Metro. Both lack sufficient terminal and runway space to accommodate a large increase in traffic. Their locations also preclude significant expansion.

Other airports could be built to offer competition. Selfridge Air National Guard Base could be converted to commercial operation. Additionally, Oakland-Pontiac Airport has an excellent location for commercial service to compete with Metro, although its general aviation traffic of 380,000 annual movements makes it one of the busiest airports in the U.S. and unlikely to accommodate significant commercial passenger traffic. [31]

Prior to the construction of Metro, Willow Run Airport was the primary commercial airport in the Detroit area. Currently, there are no passenger facilities at Willow Run which is a busy cargo airport. Since it was a passenger airport (primarily before the jet era), it is possible commercial passenger service could be added. But facility limitations and distance from Detroit make it an unlikely competitor for all of Metro's service.

However, even with limited service at other local airports, an effective element of competition does exist. Flights leaving Detroit City Airport, for example, go to other major hubs in Chicago, St. Louis and Nashville. At these hubs, like Metro, passengers may connect to many other cities. An over-priced, inefficient hub could be bypassed by passengers departing from Detroit or connecting through Detroit.

If Metro were privatized, it is conceivable the owner of the airport would be compelled to establish landing fees comparable to other hubs. If landing fees were not competitive, and the existing contracts requiring airport revenue to equal airport costs had been nullified, the airlines would have greater opportunity to enter and exit the market.

Airlines would be able to reduce operations at Metro, resulting in an unprofitable operation at the airport for its operator. To the extent that there is an elasticity of demand for airline service at Metro, higher landing fees charged could result in a loss of supply and therefore revenue for the airport operator. Therefore, the airport would need to keep reasonable fees to maintain its hub status.

V. Benefits of Privatization of Detroit Metro

There are many advantages to the sale of Metro airport to the private sector and to its operation as a private business. This chapter will consider the advantages of privatization.

Benefits to Taxpayers

1. Income for Wayne County

Wayne County has had severe budget problems for many years. In spite of repeated efforts by the state legislature to find new revenue for the county's coffers and relieve the county of certain major expenses, the county has had great difficulty in securing adequate revenue to perform needed services.

Unfortunately, the people of Wayne County are deprived of many services available to the people of other counties. This document is not intended to criticize the present county government. However, because the current leaders of the county have an obligation to the people of Wayne County, these elected officials should consider the proceeds that would be generated from the sale of the airport. In late 1987, the county did investigate the sale of certain assets to generate revenue to balance its budget. The complex issues involved in a sale of Metro Airport (discussed in the next chapter) dissuaded county officials from devoting the time or energy to the process at that time. [32]

It is clear that if the airport were sold, it could generate a enormous amount of cash for the county even after paying off airport debt. County leaders might then be able to provide all of the services they believe the people of the county want. The huge amount of cash might be set aside as a public trust for long term projects the county may need.

If privatized, Metro airport would not need all of the civil service employees assigned to the airport although the new owner may wish to retain certain airport personnel for their expertise. But these personnel could be used to provide other county services and paid from the proceeds of the sale. Thus, a sale would not necessarily result in net layoffs of public employees.

2. Eliminate taxpayer subsidy of airlines using Metro

Once sold to the private sector, Metro could become a major taxpayer. Depending on the number of tax abatements made available, the county and city of Romulus, in which the airport is located, might receive considerable income from additional property tax payments.

While all costs at Metro are paid by airport vendors (primarily the airlines and their customers), there is in effect a large subsidy for airport use borne by the taxpayers of Wayne County. As a tax-exempt enterprise, the airport does not pay property taxes on its facilities and 5,000 acres of land. Even at its below market gross book value of $296 million, the airport is exempt from paying $1.1 million in county property taxes, $1.7 million in city property taxes, and$7.6 million in property taxes to the Romulus School District for a total tax exemption of at least $10.4 million per year. [33]

Were these revenues available, property tax millage rates might be lower or other public services available. The direct beneficiaries of this tax-exemption are airport users (airlines and passengers).

Benefits to Consumers

3. Consumer-Oriented Management

The seven private British airports are run as a proprietary business which is sensitive to the needs of its customers. BAA has staff whose role is to survey airport users. These surveys enable BAA to determine who their customers are, where the service problems are, and maximize the quality of service.

An airport such as Metro which handles millions of passengers per year has many expectations placed on it by the people who use it. Different customers look for different things (restaurants, meeting spaces, ease of movement between gates) and an airport which lacks services will not be popular among the people using the facilities or the airlines serving those same customers.

Also, in a situation such as Metro where one airline dominates a large part of the airport and a specific terminal and set of concourses, the airport operator might wish to enter into a lease agreement for the whole terminal complex with that airline. At Metro, for example, the new owner might lease the terminal used exclusively by Northwest to Northwest who could then operate it or sublease the operations to a terminal manager. This would give the airline greater control over the facilities it uses and allow it to integrate all facilities for the benefit of its passengers.

4. Pricing Freedom

Inherent in any decision to sell the airport must be the provision of pricing freedom by the owner/operator. An airport, operated as a business, can only thrive if supply and demand dictate income and profitability rather than the current restrictive Basic Agreement.

Metro needs expansion to meet demand and changes must be made to assure the long-term viability of the airport. The airport must be able to change its fee structure to generate the revenue necessary to provide the services the airport users demand.

Similarly, a modified fee system could efficiently solve same of the airport capacity problems. Higher fees at peak times would reduce the number of marginal flights, spreading those flights into time slots which are not as heavy. With demand for airport space spread more evenly through the day, there would be fewer shortages of capacity during peak times and thus a more efficient airport. As in Great Britain, price could more accurately reflect demand for the resource and therefore potentially reduce capacity problems.

Benefits to Airlines

5. Absence of political decision making

Because Metro Airport is owned by Wayne County, only the county political leadership has responsibility for the airport. However, the Detroit metropolitan area has in excess of four million residents, only half of whom are residents of Wayne County. Many people from counties other than Wayne use the airport.

As a hub airport, residents of other states and countries use Metro as well. If decisions regarding customer service are made at the airport in a political context (theoretically in the best interest of county residents), the interest of the vast majority of the airport's users do not receive equal representation.

Privatization would allow the airport management to focus exclusively on the needs of its customers and avoid the parochial politics of the county. A private airport would not be bound by essentially arbitrary political boundaries. It could better serve the interest of all users.

Free of the political constraints imposed on county leadership, more decisions might be based on economic considerations and business principles. The airlines could deal with the airport on a business to business basis in which the best interests of each business involved (and their customers) is served through negotiation rather than political decision-making.

6. Lower Operating costs

Freed from civil service work rules, Metro might also be operated more efficiently and at lower cost. It might be able to use fewer employees to perform the same tasks. Greater numbers of services might be subcontracted out to more efficient, less costly providers of certain services.

Another problem associated with cost is the accounting system used by the airport. !n effect, all accounting is done by another department of the county and not by the airport management. Consequently, airport accounting is not given precedence over other county accounting functions. Without its own accounting system, the airport management has less ability to monitor costs.

7. Known landing fees

One of the advantages for airlines using British airports is that airlines know when one of their aircraft land how much they will owe the airport. Metro's activity fee system makes this calculation far more complex. The precise cost of landing is not known until the end of the calendar year at which time adjustments are made. In 1986, the airport fees were 50% too high and resulted in fee adjustments in 1987. Had the fees collected been too low, a large cash payment would have been required from the airlines to make up the revenue shortfall. This may create accounting problems for the airlines.

Although not a large portion of their costs, this uncertainty over fee levels makes it difficult for airlines to project costs and adjust revenues accordingly. The entry and exit of carriers from the Detroit market can radically affect the landing fees at any point in time. For new carriers considering the use of Metro, fee projections become an important, but unknowable, variable in determining their cost of doing business at Metro.

Certainly, the airlines and airport incur a significant accounting cost in determining the landed weight, activity fees and airport operating expenses for which the airlines are responsible. To date, the airlines have not taken the time to audit the costs at Metro (perhaps because of the time and expense). A fixed fee system would eliminate the need for much of this accounting. [34]

Additionally, due to long term leases held by a few airlines, some airlines at Metro are forced to sublease space from their competitors. New gates will allow these airlines to lease their own gates and avoid paying fees to competing airlines. This gives the subleasing airlines more control over which gates they use and how they use them.

8. Reduced Airline Charges

While airlines may fear that landing fees will rise as a direct result of privatization, the opposite could occur. If landing fees are based on number of passengers rather than weight, an airport operator could maximize revenue by reducing landing fees to encourage more passengers (primarily from airlines using Metro as a hub). While the lower landing fees would not be significant enough to affect fares charged to passengers, the fees would be more sensitive to the airlines' passenger loads. The relationship between airport revenue and the airline market will provide incentive for the airport to be customer service-oriented.

By reducing the importance of weight in landing fees, an airline would incur lower fixed costs per flight. With a commensurate increase in charges for each passenger, the airport would realize no change in gross revenue. However, the impact on airlines would be lower costs per flight if the airline increased capacity. This would enable the airline to use larger aircraft at lower net cost per passenger thereby increasing profitability and reducing delays due to a larger numbers of departures of smaller aircraft. (For a more detailed explanation, see the Appendix.)

With a lower net charge per passenger, Metro would be establishing price competition with other airports. While perhaps not significant enough to lower the price of airline tickets for its passengers, an airline might receive incentive to expand service at Metro (including increasing hub operations) as an alternative to other airports which charge higher fees.

9. Avoid Capacity Restrictions

With the congestion created by the Airline Deregulation Act, the Federal Aviation Administration (FAA) has been forced to deal with crowding at airports by imposing greater controls over take-offs and landings. While not as severe as the problems at Washington-National, New York-LaGuardia, Atlanta-Hartsfield or others, delays and capacity problems are becoming more acute at Metro as well. The FAA has reacted in the these cities by imposing controls on the number of movements during peak hours.

In 1987, the FAA urged the major carriers at the busiest airports to meet and resolve scheduling problems to avoid lengthy delays in these airports. While the airlines were able to resolve many of these scheduling problems on a "voluntary" basis, it was feared that if they had been unsuccessful, the FAA would have had to impose mandatory restrictions on movements to reduce delays.

In a study published in May, 1988 by the Detroit Metropolitan Wayne County Airport Capacity Enhancement Task Force ofthe Federal Aviation Administration, capacity problems and delays were analyzed in great detail. One of the recommendations of the task force included a suggestion for uniform scheduling of arrivals and departures during peak hours. This suggestion is not a mandate but a recognition that scheduling problems are already contributing to delays at Metro. [35]

The effect of such involuntary controls would be to undermine the Airline Deregulation Act and the benefits the public has received. The airline industry has shown the benefits of deregulation through more competitive and lower prices, resulting in more people being able to afford to fly. The negative results have been the capacity problems at the airports.

In the future, insufficient infrastructure capacity and FAA controls could have the effect of reducing the supply of available seats. With lower supply (potentially insufficient to meet demand at current prices), the airlines will be able to charge higher prices for seats which are available (see Figure 3).

Therefore, insufficient capacity has the potential of making air travel more expensive and less available to people who have been able to travel by air as a result of airline deregulation.

While Metro doesn't currently have capacity problems of the magnitude of Washington-National or New York-LaGuardia, some problems already exist. As described earlier, there are insufficient gates to meet the demand of airlines operating at Metro.

The Airport Capacity Enhancement Plan in large part concluded that additional runways are needed as the majority of airfield delays are runway related. [36] The study acknowledges that over 50% of the total delay is caused due to weather conditions forcing the use of the East/West runway instead of tile airport's more efficient three parallel runways. The study recommends the construction of a new east/west runway to parallel the existing one. The study suggested that a new runway would save $85.3 million per year in the cost of delays at the current level of airport usage. [37] These delay costs are paid by the airlines and their passengers.

The Airport Capacity Enhancement Plan further projects the effect of some of the deficiencies at Metro Airport assuming growth in the demand for air travel. Population growth, economic expansion and increases in disposable income can further lead to increased demand for airport capacity.

Figure 3 illustrates the effect of capacity constraints on supply and demand where demand did not vary over time. If the growth in quantity of demand as a result of factors other than price and capacity are measured, the effect of capacity controls might be drive up costs even further (see Figure 4).

VI. Privatization Problems to Resolve

The Basic Agreement which exists between the Metro Airport and the airlines provides considerable control by the airlines who serve Metro airport. Recent bond sales to the public include covenants which effectively prohibit the sale of the airport. [38] Thus, to be privatized, arguments must be made which demonstrate to the airlines and bondholders that privatization is in their best interest, as well as the best interest of the airport users and taxpayers of Wayne County. The Basic Agreement between the airlines and the airport can be dissolved only if all parties agree.

1. The Hub System

Many of the problems created by the hub system result from the need to bring many aircraft with many people into an airport at one time and then load those people on other aircraft and depart as quickly as possible. Prior to attaining hub status, departure delays at Metro were relatively rare. The airport had fewer gates and rarely were they all in use simultaneously.

Hubs create great demand on all facilities and, because many aircraft are scheduled to depart simultaneously on limited runway space, they also create many of the departure delays. During periods when the departure gates are relatively empty, the airport operates without delays.

However, many business travelers are more sensitive to departure and arrival times when selecting flights than they are to price. When demand is great based on time of day {such as early morning and evening}, premium prices for travel are charged by the airlines.

Just as the airlines generate higher revenues by charging higher prices at these peak hours, the airport should also enjoy some of these benefits by charging premium prices to the airlines. Currently, many of the airport's greatest capacity problems are occurring at these peak timer periods throughout the day. The airlines have a direct financial benefit from these heavy costs which they place on the airport infrastructure.

Expansion can solve many of the hub-related capacity problems at the airport. Through privatization, the expansion and renovation of the airport can proceed in a more timely manner. This expansion needs to be done most appropriately within the framework of resource needs of the airport (serving the customers efficiently) rather than within the political needs of the county.

2. Safety vs. Profit

All known Federal laws and regulations with regard to safety would remain in effect at a privately-owned airport. Most of the safety criteria affecting airports are established by the FAA and are not left to local discretion.

Additionally, as with the airlines, a privately-owned airport must be at least as safe as a public airport; after all, a poor safety record would probably drive passengers and airlines away, drying up profits.

3. Airline Dominance

Another problem not encountered with the British experience is the dominance of one airline at a given airport. While British Airways has the largest market share in Great Britain, the airline does not have a majority of the market. Similarly, British Airways has not historically had as much leverage at British airports as U.S. airlines at U.S. airports in determining which gates it is assigned and other matters of airport management. Because the use of hubs is not as common abroad as in the U.S., airlines have not needed the careful gate assignments U.S. carriers enjoy at the airports they dominate. [39]

In an unrestricted environment, privatization of Metro could result in more serious problems if the dominant airline is given too much leverage in its relationship with the airport. Under such a scenario, it might be conceivable for Northwest (with 57% of Metro's market) to gain a competitive advantage by:

a) Acquiring an equity position in the airport giving it a role in airport decision-making as an owner,

b) Entering into special agreements with the airport to enhance its dominance, or

c) Using its market share to leverage special conditions.

A provision of privatization of BAA prohibited any entity from acquiring more than 15% of the outstanding shares of BAA. Thus, British Airways (or any other airline) could not acquire more than 15% ownership in BAA. (fn fact, British Airways owns none of BAAs outstanding shares.) [40]

BAA has been very careful to avoid any special treatment of British Airways. Representatives of BAA and British Airways independently observed that market demand for landing rights and space at the busiest airports in Great Britain make any special arrangements highly unlikely. Demand is so great that were British Airways to reduce utilization anywhere, other airlines would happily take up the available capacity.

A similar situation exists at Metro. Detroit is such a popular location for an airline hub that were Northwest to relocate elsewhere, another airline would certainly enjoy the benefits of the Detroit area's location and air travel demand.

In the current negotiations for the expansion of Metro, Northwest – the dominant airline – has a strong interest in expansion to increase its hub operations. Other airlines using Metro have no such interest. In fact, it is in the interest of other airlines to stifle the growth of Metro to keep Northwest from expanding capacity. Theoretically, non-dominant airlines could disrupt competition by vetoing any expansion not in their own best interest.

In a privatized system, contractual controls which are not in the best interest of the community might be avoided. The airport could expand without receiving approval of 85% of the airlines (as the Basic Agreement requires).

4. Municipal Bonding

As described earlier, one of the historical reasons municipalities became airport owners was their ability to sell tax-exempt bonds to raise capital for major construction projects. Tax-exempt bonds carry lower interest rates, lowering total cost for construction projects. At Metro, the capital and financing costs are all paid from the activity fees previously described. In effect, the limitation of these benefits to public entities has contributed to the inability of private enterprise to develop airports.

Because private airports would have to compete with publicly-owned airports, it can be argued that a privatized airport should continue to be able to take advantage of these favorable bond provisions. However, since the lower interest costs are subsidizing a private activity (air travel), we would argue that municipal bonds for airport should be eliminated altogether.

In the interim, the inability of privately-owned airports to take advantage of these tax benefits can be resolved through the sale of bonds under provisions of Michigan law. Once the airport sale is complete, the city of Romulus (in which Metro airport is located) could create an Economic Development Corporation (EDC). Under state law, EDCs are allowed to sell tax-exempt bonds for public purposes defined in the act, even if the ultimate beneficiary of the proceeds from those bonds is a privately owned enterprise. [41] The EDC is tax-exempt and would essentially serve as a unit of city government providing capital for the stated public purpose of airport development.

While the federal Tax Reform Act of 1986 limited the amount of such bonds a state could sell in any given year, a privately-owned airport might sell serial bonds for major construction projects. Rather than bonding all construction at one time in the first year of the project, bonds might be sold in phases throughout the construction process so that no single year's allocation of bonds are totally absorbed by a large airport project,

5. Federal Airport Improvement Program Funding

In the United States, all publicly-owned airports are eligible for Federal funds from the Airport and Airway Trust Fund available for construction of airport facilities. These funds are collected from airport users, administered by the Federal Aviation Administration, and distributed as grants by the U.S. Secretary of Transportation.

The law specifies that these funds are only available for airport development at an airport whose land is owned by "a public agency" which is defined as "a state or any agency of a state, a municipality or other political subdivision of a state, a tax-supported organization, or an Indian tribe or pueblo." [42] This provision would seem to preclude the possibility of federal funds being available for development of a privately-owned airport.

However, there are available options to resolve this problem:

a) Eliminate the tax which provides funds to the Trust. Instead of paying the tax, airport user fees could be adjusted (if necessary) to provide this revenue directly from the airport user to the airport being used. This would be a more efficient system of funding airports. Airports depending on federal funds to expand before user fees could be collected would more appropriately rely on regional or state resources since airports are regional economic development tools.

b) Amend the federal law to allow funds for airport development for certain "primary airports" (if privatized, Metro would be the only privately-owned primary airport in the U.S.).

c) Use an Economic Development Corporation created for municipal bonding purposes as the "public agency" which owns the land on which Metro is located. This public agency could then enter into an agreement with the owner of the facilities located on the land to lease back the facilities from the EDC (for perhaps $1 per year on a long term lease).

d) The airport could effectively be sold to the state of Michigan through the creation of a Public Building Corporation. [43] This corporation would be a state entity (and therefore a public agency) which could then lease the land and facilities to a private owner (also for $1 per year over a long period of time).

Options b, c, and d are offered only as alternatives in the event private airports must compete with public airports receiving these funds. Eliminating the tax and the trust fund is the most efficient method of avoiding competitive advantages for airports which remain publicly owned.

An EDC or Public Building Corporation could be adapted to particular circumstances through terms of the lease (amount and length of time), ownership of certain facilities, and provision for certain activities (which may or may not be limited to traditional airport activities).

While no major U.S. airport has ever been privatized, if the conditions are created in which all parties would appear to benefit, the likelihood of persuading the U.S. Congress to amend the statute would improve. In divesting the federal government of Dulles and National Airports in Washington, D.C., the Congress recognized the importance of "timely improvements at both airports to meet the growing demand of interstate air transportation occasioned by the Airline Deregulation Act of 1978." [44] This recognition would seem to indicate the willingness of Congress to meet changing capacity needs, including the use of privatization.

The federal law also provides that federal funds can't be used at a privately-owned airport "unless the Secretary [of Transportation] receives appropriate assurance that such airport will continue to function as a public-use airportduring the economic life (which in no case shall be less than ton years) of any facility at such airport...." [45] This should not be an obstacle because it is unlikely a buyer of Metro would have any desire to use the site for anything other than an airport.

6. Other Regulatory Constraints

Expansion at other Detroit area airports is virtually impossible due to constraints beyond the control of those airports. Problems such as congested airspace (regulated by the FAA through Air Traffic Control) or restrictions on land usage in areas contiguous to airports are virtually insurmountable.

The Airport Capacity Enhancement Plan suggests the addition of two new runways at Metro. Most of the land these runways would be built on is already owned by the airport. There are no physical constraints to constructing these runways such as topography, tall buildings, or residential neighborhoods. Therefore, land usage issues will not prevent the expansion of the infrastructure at Metro.

The plan also contains recommendations for modifications in air traffic control procedures which would eliminate many of the delays which occur at present. Air traffic control delays are relatively small compared to delays resulting from the need for an additional east/west runway. (In fact, some of the air traffic control delay is also caused by the absence of a such a runway.} Other plan recommendations would eliminate air traffic control as a significant factor in capacity constraints even with as much as a 50% increase in operations. [46]

7. General Aviation

Because 16.2% of all aircraft movements at Metro are by general aviation aircraft, [47] small private aircraft create delays at Metro which privatization can help resolve. As at BAA airports, landing fees can more accurately reflect the amount of time an aircraft uses, instead of its relative weight. A two-seat aircraft uses a larger portion of runway time relative to a commercial airliner than it is currently charged for.

Use of Metro by general aviation aircraft could be discouraged by use of a new system of calculating landing fees. Many general aviation airports surrounding Detroit can handle most of these aircraft at a lower real cost for the airport and the airlines. The Airport Capacity Enhancement Plan also recommends a reduction in the number of general aviation operations at Metro. [48]

This recommendation is not intended to preclude the use of Metro by general aviation. However, fees paid by general aviation must more accurately reflect the cost of airport usage, measured by time rather than simply landing weight.

8. The Basic Agreement

Metro cannot be privatized without the approval of the airlines using it. Gaining acceptance of privatization requires that there be benefits from privatization. At face value, the varying charges paid by the airlines at Metro versus the BAA airports suggest a wide difference. [49] However, there are certain factors which must be considered in examining this price variance:

a) Under the current agreement, if a major airport expansion is undertaken at Metro, prices would rise dramatically for airline activity fees to cover the expenses for bonds and interest cost.

b) The services at the airport are, in effect, subsidized by the people of Wayne County. Because the land on which the airport is located is tax-exempt, Wayne County residents are subsidizing the airlines.

c) Just as the British airports, before privatization, generated net earnings for the British government, it is clear that other private airports can be profitable as well. The addition of an airport owner's profit margin should not have a significant impact on airport charges for the airlines.

d) Once expansion at Metro begins, costs will not be inflated by political decision-making. Private airport management would make decisions based on the needs of its customers and avoid unnecessary political trappings.

e) BAA has kept many of the civil servants from the national government who were employed at the airports before privatization. Their wages and other costs that tend to be higher in Great Britain contribute toward making British airports more expensive to operate, all other things being equal.

f) Capacity limitations are even more severe in Great Britain. A resource that is more scarce should cost more.

Privatization has the potential for keeping future cost increases below what they might be in a less-efficient public ownership setting. The private sector can operate less expensively and therefore generate a profit for itself without a significant increase in charges to the airline.

We have also argued that depending on the future pricing structure, landing fees could be lower if the airport operator chooses to maximize revenue by encouraging greater usage.

We have also observed that a different pricing structure has the benefit of making price known and not subject to unknown variables and complex accounting systems. Removing politics from decision-making is another key benefit for the airlines. The orientation towards the customer (airport user) instead of the County's taxpayers offer the airlines the knowledge the airport will better accommodate their passengers.

9. Airline Ownership

It is conceivable that an airline might be interested in purchasing Metro or to be part of a syndicate bidding on the airport. An airline might stand to benefit by being the owner of the entity to whom it is paying rent and landing fees.

It is probably not in the best interest of the success of Metro to allow this to occur. The airport owner's best interest (whether publicly or privately owned) is to have many airlines using it. If an airline were to become an owner, the airline might be in a position to drive out other airlines, thus creating a monopoly for itself in the Detroit area.

However, it would probably also not be in the best interest of an airline to become an airport owner. An airport that was not competitive would lose money and therefore become a liability on the airline's balance sheet.

10. 1986 Bond Covenants

The 1986 Airport Revenue Bonds sold by the airport prohibit the sale or transfer of the airport. This provision can be voided by gaining the approval of all bondholders or paying off these bonds with proceeds from the sale.

Use of these proceeds to pay off existing bonds would reduce the net proceeds for the county. But, without this long term indebtedness, the sale price (reflecting the net value of the airport) would also increase.

11. Setting a Price

The best method to establish a price for an airport is uncertain. The value of an airport might be determined by establishing the insured replacement value of its facilities. However, this isn't an effective method because there is no need to insure runways and other parts of the infrastructure that are not subject to damage from fire or acts of nature. Further, its 5,000 acres have no insured replacement value. The current book value of the airport of $157 million reflects value established many years ago and is probably much less than the current market price.

When BAA was sold to the public by the British government, no predetermined price was set. The government set a price per share and let the market determine the price based on how many shares were purchased. In essence, the British government sold the facilities and the goodwill of existing management and the tremendous market dominance those airports have in international air travel to and from Great Britain. Cash flow and total revenue were important factors.

Investors were allowed to make all necessary decisions in determining whether the price of the stock was appropriate and how many shares to buy. Before the sale of BAA, theorists argued that "potential investors will realistically be able to consider the privatization of [BAA] only after the

Government has decided the nature of the entity that is to be sold and what will be the regulatory framework within which it will operate." [50]

The airports were sold through a sale of stock to the public which generated $1.9 billion. A similar sale of Metro might be arranged where the county would privatize the airport's management and sell stock in the new company.

Metro airport might also be sold to a single investor, consortium of investors or its management (through a leveraged buy-out). By opening up the sale to a bid process, the potential investors would establish the appropriate price through competitive sealed bids. Decisions would be based on the ability of the investors to earn a profit on their investment.

VII. Conclusion

Detroit Metropolitan Airport is one of the largest and busiest airports in the United States. The fact that it is owned by government, like most other airports, is a result of the economic history of the industry.

The Airline Deregulation Act of 1978 freed the airlines to expand in a more competitive environment. Airlines have thrived by using lower fares to create new demand for its services. But to take advantage of new lower fares, passengers must patronize airports which must also meet increased demand.

To keep pace with increased air traffic and consumer demand, Metro must expand. As a resource experiencing increasing demand, airport capacity must be developed where it is physically possible to do so. It is possible in Detroit, and in the best interest of the community, for expansion to occur. If the airport is unable to expand, the benefits of deregulation will be stifled, leading to higher airline ticket prices and lower public accessibility to air travel.

The current ownership and financing of Detroit Metropolitan Airport make it difficult for the airport to adapt to change in the air travel industry. Changes in government and the complexity of government operation make it increasingly difficult for government agencies to manage airports. Airports are big businesses which require sophisticated business decisions and should be run as businesses.

Metro Airport is only one operation of the government of Wayne County. Many county operations are being made more efficient by its current leadership. County agencies, not airport management, control many of the resources necessary to operate the airport and provide services such as maintenance, snow removal, and accounting. County leaders who are pre-occupied with other matters of county government must sign-off on airport decisions.

By their nature, government agencies are accountable in different ways than businesses. Political considerations affect government decision making. Government work rules impose inefficiencies on operations. Government officials are accountable to an electorate who have little interest in airport management. But, airport management must be accountable to its users. This accountability can lead to more efficient operations and lower costs for airport users if freed from government control.

Airlines were given incentives to help create Metro many years ago with basic agreements which gave the airlines tremendous control over their destiny at Metro. The contract, in effect since 1959 and not due to expire until 2009, has made it difficult for airport management to respond to changing market demands. The contracts are unusual even by U.S. standards and need to be replaced with more efficient short term operating agreements.

Although successful in Great Britain, airport privatization has not been tried at any commercial airports in the United States. If it is possible to privatize airports, one must conclude that privatization has not occurred due to the lack of incentive for current owners to do so. Units of government which operate airports have a strong vested interest in those airports due to the needs they meet for the community, the importance of airports for economic development, the patronage and government jobs associated with those airports, and the prestige associated with the industry.

These conditions also existed in Great Britain. Yet, more pressing national problems convinced government leaders and ultimately airport staff that privatization was a viable alternative which helped solve some of the other national problems. Privatization of Heathrow and Gatwick airports, in particular, demonstrate that very large active airports can be successfully privatized.

Some might suggest that airports are not normal businesses. Airports cannot enter and exit markets and airport users have limited alternatives for their needs. Nonetheless, even without normal business conditions and effective competition, the British have shown that with the correct balance of regulatory controls and corporate autonomy, airports can perform their function profitably and meet the needs of users.

Privatizing Metro Airport may result in higher landing fees for users in the future. Because of the need for expansion, future landing fees will be higher. However, the efficiencies of privatization can keep future costs below what they will be under public sector ownership.

With a more efficient operation, Metro would generate profit for its owners through reduced operating expenses. This cannot be expected currently.

Competition with other hub airports will require Metro to keep landing fees competitive with those airports. Hub airports compete with other hub airports all over the U.S. If passengers connecting through Metro are unhappy with Metro, they may use many alternatives to get where they are going. Passengers originating in Detroit who are unhappy with service at Metro may find alternatives becoming available elsewhere (such as the recent reopening of Detroit City Airport). Huge alternative Detroit area airports are unnecessary. So long as a passenger can leave from an alternative airport such as Detroit City Airport and connect to a hub in another city, competition exists.

It is not clear how best to sell Metro Airport. Until it is triad, a market value for hub airports in the U.S. will not be established. However, whatever method of sale is chosen, the taxpayers of Wayne County stand to gain increased services and lower taxes.

A similar case can be made for airports all over the United States. With changes in our nation's economy and government, there is no clear value in having airports owned by the public sector. Government should be limited to perform those functions which the private sector cannot. Government should divest itself of operations where private-sector management can be used and the services improved as a result.

Airport capacity is a scarce resource. Given urban development patterns, it is difficult to build new airports to cope with increasing demand. Therefore, existing airports are going to be called upon to adapt to this demand through expansion and improvements inefficiency. It will take effective leadership and management to make the necessary decisions to accomplish change.

Airlines with lucrative airport contracts must recognize that their own profitability is threatened by poor decision-making at airports and fee structures which prevent growth. As airlines were given freedom to determine their own destiny by deregulation, so must airports be given the opportunity to adapt to changing needs. Privatization provides the most effective vehicle to allow airports to meet the challenges of the future.

VIII. Appendix

The current landing fees at Metro are more sensitive to the weight of aircraft than the number of passengers on board. As a result, an aircraft with very few people on board has charges nearly as high as for a full aircraft. However, the difference in fees between a small aircraft and a large jet is very wide. If a fee system were developed which is more sensitive to number of passengers, the airport and airlines could benefit if demand could be increased as a result.

If cost per passenger is reduced, the airlines save money on each passenger. The savings may not be large enough to pass along to the passenger (or if they are, may not increase demand for airline seats if demand is relatively inelastic). However, the aggregate savings from all passengers may allow the airline to increase demand through new marketing initiatives, improved customer services or special market incentives involving Metro Airport.

As an example, in 1987, activity fees were $.46 per 1,000 pounds of landed weight. This resulted in an effective cost per passenger of $.915. [51] If, instead of an activity fee, the airport charged simply $.915 per passenger, the airport's revenue from airline landings would have been the same.

The following formula shows the effect of weight on cost/passenger:

(((A + (X * Y))/1000) * P)/X = Cost/passenger, where
X = Number of passengers per flight (X=1 through 500)
Y = Weight/passenger (including luggage) = 220 pounds
P = Activity fee/1000 pounds = $.46
A = Aircraft weight (empty) 727: A=100,000 pounds, 757: A=127,050 pounds

Airline cost per passenger on a Boeing 727, for example, reaches $.915 when it has 57 people on board. An airline will not be profitable if it has only 57 people on a typical flight. In fact, airline flights average around 65% of seats being filled (about 115 people on each 727). To earn the same amount of revenue as 57 passengers at $.915 each, the airport would need to charge only $.50 for 115 passengers.

Such a system would also encourage airlines to use larger aircraft. Currently, with 57 people on board a Boeing 757, the cost per passenger equals $1.13 (because a 757 weighs more). Thus, if a per passenger charge of $.915 were applied to all passengers on a 757, the airline would save at least $12.25 per flight ($1.13 less .915 times 57). Therefore, assuming a fixed number of people per flight, an airline's cost per flight would be lower using larger aircraft than it is at present.

Therefore, if demand could be increased, airlines would receive further reductions in cost by using larger aircraft to meet this demand.

If privately-owned, Metro and the airlines could develop a fee system which reflects the profitability of the airlines' aircraft mix. Many possible formulas could be considered, all designed to maximize airport revenue and minimize airline cost per passenger.

IX. Bibliography

Airport and Airway Safety and Capacity Expansion Act.@49-31 U.S.C.@2201 (1987).

Airports Act (Great Britain). Chapter 31 (1986).

Amendatory Agreement to Basic Agreement between Detroit Metropolitan Airport and Northwest Airlines. July 24, 1986.

Barrett, Sean. Airports for Sale: The Case for Competition. London: The Adam Smith Institute, 1984.

British Airports Authority. BAA plc 1987 Annual Report and Accounts. London: British Airports Authority, 1987.

British Airports Authority. Heathrow, Gatwick, Stansted: Conditions of Use. London: British Airports Authority, 1988.

British Airports Authority. Offer for Sale (a prospectus for sale of securities). London: County NatWest Limited, 1987.

Carsberg, Bryan and Lumby, Stephen, ed. Privatising British Airports Authority: Policies, Prospects, Procedures. London: Public Money, 1984.

Charter County of Wayne, Michigan: Airport Revenue Bonds (a prospectus for the sale of airport revenue bonds). Detroit: Wayne County, 1986.

Detroit Free Press editorial, "Airports 88: The needs are clear; expansions don't have to be disasters," The Detroit Free Press, 3 July 1988.

Detroit Metropolitan Wayne County Airport Capacity Enhancement Task Force. Airport Capacity Enhancement Plan. Detroit: U.S. Dept. of Transportation, 1988.

Economic Development Corporations Act.@Michigan Compiled Laws 125.1601 et seq. (1974).

Fixler, Philip E. Jr.; Poole, Robert W. Jr.; Scarlett, Lynn. Privatization 1987: Second Annual Report on Privatization. Santa Monica, California: The Reason Foundation, 1988.

General Corporation Act.@Michigan Compiled Laws 450.186a et seq. (193i).

Gourdin, Kent N., "Bringing Quality Back to Commercial Air Travel," Transportation Journal (Spring, 1988): 23-29.

Horn, John. Testimony to the Transportation Subcommittee of the House Appropriations Committee of the U.S. House of Representatives. October 30, 1987.

Interview with Mr. John Banfield. Monopolies and Mergers Commission of Great Britain. London. July 15, 1988.

Interview with Mr. Martyn Booth. Special Projects Manager, British Airports Authority. London. July 13, 1988.

Interview with Mr. Robert Braun. Deputy Director of Airports, Wayne County. Metro Airport. September 7, 1988.

Interview with Mr. Tom Carter. Head of Airport Policy Planning for British Airways. Heathrow Airport. July 14, 1988.

Interview with Ms. Jane Cotton. Manager of International Aviation Relations for the Department of Transport of Great Britain. London. July 15, 1988.

Interview with Mr. John Douthwaite. Managing Director of Airports UK (subsidiary of British Airport Services Limited). London. July 13, 1988.

Interview with Mr. Michael Duggan. Deputy County Executive for Wayne County. August 23, 1988.

Interview with Mr. Richard Jamison. Director of Airports, Wayne County. Metro Airport. September 7, 1988.

Interview with Mr. Roger Kitley. International Director for British Airport Services Limited. Lansing. May 24, 1988.

Interview with Mr. Nigel Pantling. Assistant Director of Corporate Finance for Schroder's Bank. London. July 15, 1988.

Interview with Mr. C. John Phillips. Manager of Airport Strategy for British Airports Authority. London. July 13, 1988.

Interview with the Right Honorable John Redwood. Member of Parliament of Great Britain. London. July 12, 1988.

Jamison, Richard B. Testimony to the Subcommittee on Transportation of the House Appropriations Committee of the U.S. House of Representatives. October 30, 1987.

Kriz, Martha E., "Getting New Airports off the Ground," National Journal 20 (1988): 1418.

Kyle, Cynthia, "Cities are Making a Pitch to Today's Deregulated Airlines: Fly our Friendly Skies," Governing (April 1988), 48-55.

Monopolies and Mergers Commission. Manchester Airport plc. London; Great Britain, Civil Aviation Authority, 1987.

Poole, Robert W. Jr. "Privatizing Washington's Airports," Citizens for a Sound Economy Issue Analysis No. 2 (1985).

United States, Federal Aviation Administration. Airport Capacity Enhancement Plan. Washington, D.C.: U.S. Department of Transportation, 1987.

United States, Federal Aviation Administration. Aviation Activity Statistics of Certified Route Air Carriers. Washington: U.S. Dept. of Transportation, 1987. United States, Federal Aviation Administration. FAA Air Traffic Activity: FY 1987. Washington, D.C.: U.S. Dept. of Transportation, 1987.

"USA: New Airports Please," Airline Business, April 1988, pp. 36-41.

Endnotes

1. Cynthia Kyle, "Cities are Making a Pitch to Today's Deregulated Airlines: Fly our Friendly Skies," Governing, April 1988, p. 50.

2. United States Department of Transportation, Federal Aviation Administration; Airport Capacity Enhancement Plan – 1987, p. 1-1.

3. Interview with Mr. Richard Jamison, Director of Airports, Wayne County, September 7, 1988.

4. Kent N. Gourdin, "Bringing Quality Back to Commercial Air Service," Transportation Journal, Spring 1988, p. 27.

5. "General aviation" encompasses aircraft other than commercial or military aircraft. Usually, they are small private planes or corporate aircraft.

6. Statement of Richard B. Jamison before the Subcommittee on Transportation of the Appropriations Committee of the United States House of Representatives, October 30, 1987.

7. Interview with Mr. Robert Braun, Deputy Director of Airports, Wayne County, September 7, 1988.

8. "Airport Service Region" is an official term referring to the geographic area the airport is intended to serve. At Metro, this includes 8 counties.

9. Prospectus, p. 9.

10. Language taken from the Basic Agreement between Detroit Metropolitan Airport and Northwest Airlines (applicable to all airlines) establishing activity fees and rent paid by the airline to the airport. Page 7 of the amended agreement dated July 14, 1986.

11. Basic Agreement, p. 5.

12. Basic Agreement, p. 6.

13. Basic Agreement, as amended, p. 8.

14. Concurrence of all of the airlines is not actually required. The contract stipulates that agreement of airlines representing 85% of landed weight or all but one of the airlines serving the airport is required.

15. Detroit Free Press editorial, July 3, 1988.

16. Richard Jamison, September 7, 1988.

17. Professor Sean Barrett, "Airports for Sale", The Adam Smith Institute, 1984, p. 3.

18. An act of Parliament which took effect on July 8, 1986.

19. Interview with Martyn Booth, Special Projects Manager, British Airports Authority, July 13, 1988.

20. Interview with the Right Honorable John Redwood, M.P., July 12, 1988.

21. Christopher Foster, "Privatising British Airports: What's to the gained?", Public Money, March 1984, pp. 5-7.

22. Interview with Nigel Pantling, Assistant Director, Corporate Finance; Schroder's Bank, July 15, 1988.

23. Martyn Booth.

24. Manchester Airport was privatized by the city of Manchester prior to the BAA privatization.

25. Manchester Airport plc, Monopolies and Mergers Commission, November 1987, p. 63.

26. Airports Act of 1986, Part IV, Section 39(2).

27. British Airports Authority, "Conditions of Use; Including Aircraft Charges" for Heathrow, Gatwick and Stansted airports, April 1, 1988.

28. For example, the landing fee at Stansted Airport at any hour may be as low as £20 plus £3.30 per passenger (total of $39.61 for a small private plane with only the pilot aboard). The same aircraft landing at Heathrow Airport in the morning will pay £295.50 ($502.35).

29. Interview with Martyn Booth, July 13, 1988.

30. Not long ago, a picture of the Wayne County executive was posted in conspicuous locations throughout the airport.

31. FAA Air Traffic Activity: FY 1987, p. 30.

32. Michael Duggan, Deputy County Executive, August 23, 1988.

33. Assumes market value of $296 million with State Equalized Value of $148 million with millage rates as follows: Wayne County – 7.30, City of Romulus – 11.42, Romulus School District – 51.06.

34. Richard Jamison, September 7, 1988.

35. Airport Capacity Enhancement Plan, p. 17.

36. Detroit Metropolitan Wayne County Airport Capacity Enhancement Task Force, Airport Capacity Enhancement Plan, May. 1988, p. 7.

37. Airport Capacity Enhancement Plan, p. 13.

38. Amendments to Basic Agreement by the addition of Article XXV(B).

39. Interview with Tom Carter, Head of Airport Policy Planning, British Airways, July 14, 1988.

40. Interview with Tom Carter, July 14, 1988. Mr. Carter pointed out that it would be an unwise decision for British Airways to make an investment in BAA. Since British Airways will have input into the revision of the RPI-X, success in arguing with the Monopolies and Mergers Commission would help the airline's operations, but result in commensurate losses in investment income (due to lower profit; dividends to BAA shareholders).

41. Public Act 338 of 1974; Michigan Compiled Laws 125.1601-125.1636.

42. 49 U.S.C. 2202(15) and 49 U.S.C. 2208(b)(2).

43. Created pursuant to Michigan Compiled Law 450.186a-450.186e.

44. 49 U.S.C. 2451(4).

45. 49 U.S.C. 2204(b)(2).

46. Airport Capacity Enhancement Plan, p. 19.

47. See Table 1.

48. Airport Capacity Enhancement Plan, p. 17.

49. Using the formula in the appendix, in 1988, a DC-10 with 380 passengers will cost an airline $203.24 to land at Metro. A similar domestic flight landing at Gatwick during peak season will cost $2078.80.

50. Alan Kelsey and Antony Nash, "Introducing Private Investment Capital", (1984) London: Public Money, General Series 4, p. 17.

51. Assumes the following for 1987: 17,253,000,000 pounds of landed weight/8,670,000 passengers = 1990 pounds per passenger.
    (1990,/1000) * $.46 = $.915 per passenger.

Acknowledgements

The author wishes to thank the many people who contributed their time and expertise toward this report. The people interviewed by the author gave generously of their time and perspectives.

Several friends and associates with the Mackinac Center were very helpful with editing and providing very useful suggestions.

A very special thanks for Roger Kitley, International Director of British Airport Services Limited and his staff who were so instrumental in arranging meetings with the very best sources in Great Britain. My time in Great Britain was well-spent and a great experience.

About the Author

John Kost is a Senior Policy Analyst with the Mackinac Center for Public Policy.