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