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In a guest article, Samuel Engel discusses how U.S. airport operators—along with passengers, politicians and investors—can profit from private investment when done right.
Improving America’s infrastructure seems to be one consistent thing clamored for by both politicians and voters. Funding it from the tax base, however, arouses less enthusiasm. Yet, even as more socialist countries have embraced privatization, in the United States, where capitalism reigns supreme, we have stood by our municipal approach to financing infrastructure—especially airports. The result has been investment levels that lag both the economy and necessary maintenance.
That's why the time is nigh for American airports to completely change their approach.
Paving the Runway for Airport Privatization in the U.S.
Historical factors make it unlikely that we will see many American airports and their runways fully transferred to private ownership. Full privatization would require untangling a complicated legacy of local ownership, bond financing and federal government grants. Under a Federal Aviation Administration privatization pilot program that is now 20 years old, only two airports have successfully navigated the process; and only one, San Juan Muñoz Marin, survives under private ownership. Multiple failed attempts to privatize Chicago Midway and other airports around the U.S. led to a widespread belief that full-scale airport privatization simply cannot happen here.
The truth is, U.S. airports have not had difficulty attracting sufficient capital. Airports in the U.S. float tax-free municipal bonds, which are backed by long-term leases from airlines to rent terminal space or gates. Most large American airports already hold investment grade credit that allows them to raise capital at rates similar to—or lower than—the cost of capital at many private airports overseas.
Recently, however, a few public-private-partnerships have emerged to finance new airport terminals. In many cases, “PPP” or “P3” is a powerful and proven tool to accelerate projects and drive innovation. With a few adaptations, this overseas-tested model can enable the U.S. to build more airport facilities that passengers actually want.
But first, we need to get past the parking meter problem.
Privatization conjures a negative image for many Americans, occasionally for good reason. In 2008, the city of Chicago sold the rights to 36,000 parking meters and their associated revenue for 75 years to a group of investors. Now, with privatization, you put a quarter in a meter downtown for just over two minutes of parking. The city was even required to reimburse the investor for lost revenue during road closures. Taxpayers weren’t pleased.
In transactions like these, the government’s objective is to raise cash today by giving up future revenues. For the governments of Portugal and Greece, raising revenue was also the driving motivation for airport privatization—$4.2 billion and $1.6 billion, respectively, to help them climb out of the European debt crisis. But just as often, P3 is more about financing new projects than it is about cashing out.
Embracing American Exceptionalism
In a recent report, airport trade group ACI North America estimated that America’s airports will require $100 billion in improvements over the next 5 years—with $38 billion needed just for terminal buildings. I think that’s a low estimate. And I believe the way forward is for airport owners to outsource portions of infrastructure, such as individual terminals and rental car facilities, where upgrades can generate new revenue through retail or services. This is the approach being used to renovate Denver International Airport’s Great Hall and to construct new terminals at LaGuardia in New York City. Several similar projects are under discussion, including a recent request for qualifications by JetBlue to redevelop the former T6 site at JFK, also in New York City.
To succeed more widely in the U.S., airport operators and investors will need to satisfy three constituencies: investors, passengers and politicians. Fortunately, the needs of each group overlap.
Successful P3s will need to generate returns for investors that come in the form of higher airport revenues. Whereas many overseas airports have been able to impose new passenger charges after privatization, U.S. airports are limited by law to a $4.50 Passenger Facility Charge, which must be used directly for improvements on the airport—an issue that remains contentious between airport and airline trade groups.
Instead, airport operators in the U.S. will need to generate more revenue from restaurants, shops and services. Whereas U.S. airports today typically generate $10-$15 per passenger, many privately run airports overseas generate over $25. Getting there may entail extending the retail experience into mobile and web applications that benefit connected consumers.
Born Overseas, Grown in America
To garner support from the public, airport P3s will need to overcome the parking meter problem. It doesn’t have to be hard. When passengers discover that a newly privatized airport terminal actually meets their mental and emotional needs with less anxiety, they won’t care who is profiting. Not many airports today have optimized the physical experience, let alone the social. Millennials expect it all.
For politicians, there is an additional layer. Whereas they all want to raise the bar—Los Angeles Mayor Eric Garcetti calls LAX his city’s “calling card”—they are especially sensitive to the parking meter problem. Voters are suspicious of both government and investors, so P3 deals demand a higher, uniquely American level of transparency.
Within the next five years, partial privatizations—in the form of P3s—will become a regular option for U.S. airports. Terminal privatization, gate privatization (successfully accomplished in Austin) and operating contracts with investment requirements, which has been successful in Orlando Sanford, and is being tendered at Newark, will become the norm.
As Congress and the Trump administration begin to work on a long-promised trillion-dollar infrastructure funding bill, the opportunity is for government to enable and support privatization transactions at airports. This means making grants to develop capital programs, manage concession tenders and implement performance metrics for third party operators. Steps that accelerate transformation of US airports will be welcomed by visitors and voters alike.
Samuel Engel is the global managing director of aviation at Fairfax, Virginia-based ICF.