Be cautious about airport privatization, but it should not be precluded

airport-infrastructure
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Be cautious about privatisation of airports, says IATA chief

 airportSustainabilityAirport Privatization?

Where it may be a problem

Where it may make sense

“Flagging infrastructure challenges in the aviation sector, IATA chief Alexandre de Juniac today said governments should be cautious about de Juniac privatising airports as “airport privatisation has not lived up to expectations”.

 

Against the backdrop of many airports worldwide, including in India, grappling with slot issues, he emphasised that airports should be protected with "iron-clad regulation that prioritises the national interest". The International Air Transport Association (IATA) represents around 275 airlines that account for 83 percent of global air traffic.

Speaking at the IATA Global Media Day, Juniac said airport infrastructure is not being built fast enough to cope with growth as a result of which slots at aerodromes are "so important".
‘The scarce supply means that coordination is critical. "About two-thirds of airports needing slot coordination are in Europe. And there are 
bottlenecks around the world -- Sydney, Bangkok, Manila, Jakarta, Mumbai, Mexico City, New York, Sao Paulo -- to name just a few. 
That demonstrates the size of the infrastructure challenge,’ he said.”

The head of the global association of airlines cautioning against “privatization”—not surprising. Historically, the primary tenants of these public utilities have argued that “profit” should never be part of the economics of their landlords [yet, ironically, the carriers all claim that deregulation has made their industry more responsive to consumers, more efficient and economical and a better investment.]

From a US perspective, privatization has been less than a success story. That dismal history may be attributable to the statutory and regulatory (mostly slow process) restraints on the transformation of there-to-for AIP funded facilities to these business units of large land masses to bottom lined enterprises.

Some nuances to Mr. de Juniac’s hard counsel:

airport-privatization1.   Airports are locational monopolies. The ultimate mobility of aircraft limits the ability of the landlord’s ability to extract monopoly rents from its air tenants, but the airport’s economic grip is really exerted on its city/community. A private owner may raise rents on the tenants and those higher charges impact the passengers; for, the added expenses are typically included in consumer prices.

 

2.   The reasons why the governmental owner proposes to sell its property to the private sector maycontrols be inappropriate. Many mayors see the transaction as a way to “monetize” an asset which is prohibited from sharing its revenues with its owner. The market value of the airport increases as the governmental encumbrances, post transfer, decrease. One of the benefits of owning this facility is to be able to control its future growth. The potential sale price will be lower if the deed includes a limit on the buyer to expand its footprint. There is a long continuum between 100% and 0% control; the civic body considering privatization MUST focus on the retained powers to assure that Airport, Inc and the community do not develop adverse interests.

STL3.   Privatization is not necessarily a catalyst for increased traffic. A non-governmental entity may have better marketing talents, but there is a VERY high correlation between your city’s demographics and the number of flights. Airlines devote a lot of research to identify underserves routes. Airline hubbing may accumulate extra operations for the connecting banks, but without the underlying population, no degree of airport rent reduction or other incentives will compensate from weak demographics.

eco development4.   An airport may be considered as a means of economic development, but the LDC airport investment of civic funds in infrastructure intended to attract passengers and/or cargo may be beyond the risk profile of a government. In these cases, reliance on private capital for such a venture may be appropriate. Failure in such a heavy capital outlay may impact essential governmental services, while the private company’s bankruptcy does not impact the community as directly.

Airport Cargo

5.   One of the reasons why privatization has not been as robust in the United States is the availability of funds to finance airport capital projects. AIP and a large number of institutional investors make it easy to place the bonds. If the US tax laws change and in other economies in which there are not adequate reservoirs, the movement of these assets to the private sector makes privatization more attractive.

Yes, Mr. de Juniac privatization is not a panacea. Some of the tests of this transfer of public assets into private control have failed because the motivation for trying this transaction was not aligned with this option. However, there are instances in which privatization should benefit all.

 

 

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