Conservative/Libertarian Views on how Airport Infrastructure might benefit from Privatization/Deregulation

Airport Infrastructure
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Airport Infrastructure Might Benefit from Privatization

Conservative/Libertarian Remedies

With a newly confirmed Secretary of Transportation and an alumnus of the conservative Heritage Foundation, proposals for improving/changing how the US Government finances airport projects inundating the Washington policy arena. President Trump has declared that his Administration will be addressing our nation’s deteriorating aviation infrastructure (cite: Vice President Biden’s LGA = a 3rd world airport quote).

The Chairman of the House ­Transportation and Infrastructure Subcommittee on Railroads, Pipelines and Hazardous Materials, Rep. Denham, has written an interesting essay on his ideas as how the Congress might tweak the system, while Jillian Lane Wyant, a RARE contributor, writes a piece in which she cites the Reason Foundation’s more comprehensive concept paper. 

NOTE: there is a plethora of recent articles from authors around the world on this subject; here are but a few of these research papers:

•  Airport Infrastructure in the era of privatization

•  ARN Presentation on Privatization

•  Planning & Management, Airport and airport systems: organization and administration

denham Airport InfrastructureThe Chairman from California posits these ideas in his interesting article:

“America’s transportation needs are changing dramatically, and Congress must be proactive in creating a regulatory environment where state and local governments, in association with federally leveraged resources, can solve transportation problems quicker and at reduced costs….

{then in an article about infrastructure Rep. Denham comments on the FAA and UAS; perhaps the non-germane rule is inapplicable to articles?}

America continues to grow and regardless of how we expect our expanding society to commute, the indisputable fact is that we need to increase capacity across all modes and bring the current system into a state of good repair. Achieving this feat will require removing regulatory restraints from state and local governments and leveraging the powers of private dollars and expertise. However, we cannot deny that significant investment from the federal government is a part of the solution.”

Useful thoughts which T&I Chairman Shuster will likely consider.

rare wyant Airport InfrastructureThe RARE article, A Libertarian Plan to Improve Our Airports, addresses, at some length, Ms. Wyant’s critique of the DHS personnel as they “physically and clumsily invade our privacy rights.” She does not odder any real ideas, other than “drain the swamp,” on how to improve airport security; her critique suggests that TSA may not be needed.

She then references the Cato Institute’s libertarian idea of Privatizing U.S. Airports by Robert Poole and Chris Edwards. The comprehensive paper reviews with the precision and depth the history of airport privatization of a knowledgeable engineer. The authors contrast the dismal record of this form of P3 at US airports with the success of the same form of infrastructure improvement around the globe. Their general thesis may be summed up as finding fault/market distortion created by the FAA’s involvement/interference with its distribution of AIP funds. The fact that tcato institute Airport Infrastructurehese dollars come from taxing travelers is the primary sin in this exegesis.

Having defined the problem, Messrs. Poole and Edwards make a specific proposal to remedy the problems which they have identified:

  • “One important step would be to reduce or eliminate the income tax exemption for municipal bonds to put private airport financing on a level playing field with government financing.
  • Another step would be to remove the 65 percent supermajority requirement that lets airlines block privatization.
  • Congress should also phase out the AIP program (at least for medium and large commercial airports) to encourage greater self-funding of airport capital spending.
  • It should also eliminate the cap on PFCs to allow airports to fund operations through user charges on their own passengers. PFCs are a more direct and transparent revenue source than the AIP program. PFCs and other airport-generated revenues can enhance airline competition by providing funding to build new gates and other facilities to attract additional flights and carriers.”

Those concepts, if enacted, would indeed unleash the hounds of competition, but what airport would be able to compete against another? There may be limited battles within regions in which there may be some potential for drawing passengers—like LGA/JFK/EWR, DCA/IAD/BWI, DFW/DAL, SFO/OAK/SJC and a few other proximately located airports.

airport privatization

The private sector, it is asserted, will be more likely to add capacity than the existing managers. There is little doubt that municipal managers and the FAA staff are uncomfortable with the notion of taking risk involved in investing capital in the anticipation of demand. In fact, the NEPA benefit/cost equation deters environmental approvals without a greater degree of certainty that an investment banker is able and competent to take. Risk aversion is an embedded reality financially and philosophically.

Risks in the private sector are accepted because loan failure does not create the absence of an essential service to the public. One of the definitions of a public utility is that its need is important enough to allow it to be a monopoly. Another rationale is that the citizens do not benefit from, for example, competing subways. If the Poole/Edwards proposal moves forward, there will have to be some failsafe mechanism designed; flights must be able to operate within the FAA required level of safety at that airport.

As the Cato paper points out, the AIP grants carry with them restrictions. They are Congressionally mandated “economic” and social rules which were considered needed for the fair and equitable operation of an airport. Terms like “unjust discrimination,” no “exclusive rights,” prohibition of using airport revenues for non-airport purposes/”revenue diversion,” the Davis/Bacon labor rule, programs encouraging minority participation and a long list of other strictures on the management of airports. Your average libertarian might find these requirements to be abhorrent, but they are embedded in the airport enterprise business practices. Deleting these economic/social values may be appropriate, but there needs be careful consideration of the transition from a highly-regulated enterprise to free enterprise.

The libertarian proposal is unclear whether the NEPA requirement would apply to private entities. Without the federal fund nexus, extending an existing runway may not rise to the level of the predicate “federal action.”

One of the benefits of the AIP funding is that the sponsors receiving the federal dollars are obligated to remain part of the National System of Airports. If privatized, could an airport withdraw? Again, as a public utility, this facility is an essential asset of a community; the private entity could exit and harm the local economy. Should there be some protection for the city served?

An airport without a prohibition against exclusive uses could decide to have a proprietary single fuel station. In that it would be a locational monopoly, the private owner could raise prices. The antitrust laws could act as a deterrent but that correction takes time.

Revenue diversion is a minimalistic method of assuring that a proprietary owner reinvests in an asset. Deleting this simple requirement raises the potential that dollars earned at the airport can be exported and that the aviation enterprise does not have adequate capital reserves.

The FAA has used its enforcement powers, civil penalties, to ensure that the public airport is operated safely; it also has the authority to revoke/suspend the operator’s certificate to operate. Post privatization will the FAA retain these compliance powers?

alfred kahn airport deregulationDr. Alfred Kahn, highly regarded Cornell economist (author of Airline Deregulation) and the penultimate Chairman of the CAB, gave a speech in 1979 entitled “Getting from A to B in Airline Deregulation” at the Kellogg School of Management, Northwestern University. Consistent with the discipline of an accomplished economist, Dr. Kahn explored the options of how one might TRANSITION from a regulated to a deregulated aviation industry. Though his expression of his findings was far more erudite, the CAB Chairman’s conclusion was essentially the Nike tag line, “Just do it.” Whether that Dr. Kahn econometric rule applies to the Poole/Edwards transition is unclear, but there must be some designed timetable for deletion of old and implementation of the new (see below list) as the Cato rubric is imposed:

1.   Reduction or elimination of the income tax exemption for municipal bonds.

2.   Phasing out the AIP free money.

3.   Elimination of the PFC cap.

4.   Applicability of NEPA.

5.   Removal of the AIP restrictions.

6.   (other points)

As one aspect of the old regime is eliminated/reduced and free enterprise is allowed to enter, there must be some symmetry to both sides of the theoretical equation. The Kahn “just do it” approach simplistically creates that balance, but might not the shock to the municipal bond market cause problems?

Privatization may be theoretically possible; the practical implementation must be thoughtfully planned. The biggest barrier to this Deregulation may be the political opposition (substantial) of the existing cadre of airport executives, carriers, bankers, lawyers and consultants who have prospered under the old regime.

Privatization is clearly de rigueur in Trump Washington; it will be interesting to see whether this libertarian panacea can be practically implemented.


Time to focus on infrastructure, transportation 

A Libertarian Plan to Improve Our Airports
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1 Comment on "Conservative/Libertarian Views on how Airport Infrastructure might benefit from Privatization/Deregulation"

  1. Not sure I agree.

    There are 5,000 or so NPIAS airports receiving AIP of which only 100 or so have the cash flow to actually attract private investment.

    Additionally, removing the municipal bond exemption would be catastrophic to Cities and Counties because this mechanism is used broadly throughout the nation for infrastructure and much more (every municipal vehicle is likely purchased through a municipal lease). The appropriate solution would encourage airports to use their existing capability to tap municipal bond status to replace AIP – which takes no action – we used municipal leases to build FedEx and the terminal building. I am not a bond attorney but having done two of these bond packages everything I experienced would apply to also apply to runway construction (landing fee is the revenue stream) and it is the preferred type of project normally financed with municipal bonds because all the public stands to benefit. Public Airports already have access to municipal financing as political subdivisions of municipal entities – autonomous airport authorities have access as do airports that are operated by departments of a municipal governments.

    Additionally, while the large hubs appear attractive because of the revenue generated, the cost per passenger is the lowest at a medium hub. Bigger investment in large hubs is not going to change that and it is a poor investment because the capacity return on investment is very low and the cost per passenger is very high. You can only force so many ground ops and airspace ops into that piggy bank. You need more piggy banks.

    High speed rail to regional solutions would tap unused capacity and move more small hubs to medium hub status = more capacity and lower cost per passenger. I know this is blasphemy to the industry because we love to glamorize our oversold large hubs but if this was the private sector – the market dynamic would have already shifted to the lowest cost per passenger.

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