airport privatization

8/8/2019 Airport Privatization

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Airport PrivatizationAuthor(s): Gabriel RothSource: Proceedings of the Academy of Political Science, Vol. 36, No. 3, Prospects forPrivatization (1987), pp. 74-82Published by: The Academy of Political ScienceStable URL: http://www.jstor.org/stable/1174098

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AirportPrivatization

GABRIEL ROTH"Themarketdoes not solve all our problems;but it takes a specialkindof idiocy to refuse to let it do jobs it obviously can do .... The FAA hasconsistentlydemonstratedts manifestpreferenceor thoroughlyregula-tory remedies." Alfred E. Kahn

Washington Post, 18 September 1984

Students of political economy can find in the debates on the fu-ture of National Airport-the local airport of the District of Columbia-a richsource of information about the borderline between the public and privatesectorsof the United States economy and about how it is treated under a Republican ad-ministration that was elected to push back this frontier toward the private sector.The Washington metropolitan area enjoys the services of three airports: Na-tional Airport, which is closest to downtown Washington, D.C., particularly tothe Capitol Hill area that is dominated by Congress;Dulles InternationalAirport,about thirtymiles away from Capitol Hill, to thewest; and Baltimore-WashingtonInternational (BWI), about the same distance to the north. Of the three airports,National is the smallest and the most congested; indeed, it has been "saturated"since the 1960s, in the sense that demand for landing and takeoff "slots" ar ex-ceeds the supply. Exceptto the extent that these slots may be sold by the airlinesto one another, they are allocated by the FederalAviation Administration in ac-cordance with its administrativeprocedures. The operations at National also en-gender complaints about noise, but this issue, though important, will not be con-sidered here. Both Dulles and BWIairports, on the other hand, are uncongestedin the sense that additional landing and takeoff slots can be made available atmost hours. Although commercial trafficat National could be increased by moreThanks are due to Paul Feldman,vice president for transporation of the Services Group, and to RoyPulsifer, of Roy Pulsifer Associates, for their help in the preparation of this essay.


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advanced ground equipment or by cutting down "generalaviation"(aircraftthatdo not carryfare-payingpassengers), the consensus in the Washington, D.C., areais that it would be desirable for the growth in air traffic to take place at Dullesand BWI rather than at National. But there is no agreement on how to decidewho is to use National and who the other airports.BothNational and Dulles airportsare owned and operatedby the Federalgovern-ment through the Federal Aviation Administration (FAA), which is part of theDepartment of Transportation. BWI is owned and operated by the state ofMaryland.The Department of Transportation, which is responsible for no other majorairports, is eagerto divest the Federalgovernment of National and Dulles airportsbecause of the acute problems associated with their administration and the con-gressional budgetary procedures that have to be followed before any funds canbe spent on their improvement. While most people agree that Federalownershipof the airports is undesirable, there is no generalagreement on the preferredalter-native, and at least eight attempts to transfer the airports to local control havefailed. This essay will consider some of the issues that would be involved in atransfer to the private sector.

Preliminary ConsiderationsAirport planners distinguish between "landside" apacity (the capacity to handlepassengers in terminals, automobiles in car parks, and so on) and "airside" a-pacity (the capacity to accommodate aircraft andings and departures).Referencesto "congestion"excess demand at peak periods) and "saturation"excess demandat all permittedperiods) generally refer to "airside,"which is governed by runwaycapacity.Of the some 600 United States airports that received FAAgrants, only four-Kennedy and La Guardia in New York, National in Washington, and O'Hare inChicago- are considered to be saturated. While airport planners predict that, ifpresent trends continue, the busiest twenty airports (which handle some 60 per-cent of passengers)will be saturatedwithin the next ten years unless substantiallyexpanded, there will be hundreds of other airports with capacity to spare. Addi-tionally, at least 4,000 small airports will be used only by generalaviation. Whenall airports are taken into account, the percentage of those suffering from severecongestion is less than 1 percent.The second preliminary point is that airport landing and departurefees are de-termined by administrative rather than commercial criteria and are generallynominal. They bear no relationship to the economic costs involved. A privateair-craftcarryingone or two people might pay $4 to land at National Airport withoutregard to the delays the operation might cause to other users. Charges are gener-ally the same at all times of the year and at all times of the day and do not varymuch from airport to airport. Thus the financial incentives are insufficient to en-


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couragethose in control of aircraftto avoid congestedairportsand patronizethosethat have spare capacity.Transporteconomists have suggestedfor at least twenty years that the economicpricingof congestedairportfacilities would yield substantialbenefitsand revenues.1They stress that remedying the shortage of airport capacity is unwise before ex-isting facilities are priced in accordance with the general principles of allocatingscarce resources, namely, that prices be raised to the point at which the costs ofaccommodating additional traffic are covered by the revenues generatedby thattraffic. Although market-clearingprices (designed to equate demand to supply)are takenfor grantedin most sectors of the economies of private-enterprisesocie-ties, including of course the allocation of aircraft seats, such pricing is not usedfor the allocation of landing capacity at airports where this capacity is in shortsupply. One result of this unwillingness to price the use of landing and takeoff"slots" s that passengers arrive at some airports on time and then have to waitan hour or more for the departure of their planes because of the unavailabilityof runway capacity.A thirdpreliminarypoint is that nothing in the nature of airportsrequiresthemto be operatedor owned by a public authority. BurbankAirport was owned andoperated by Lockheed when it was the main airport for Los Angeles. Lockheedsold the airport to raise money but still operates it. AVCOTextronoperates air-ports in Saudi Arabia, and Pan Am turned WestchesterCounty Airport in NewYorkState from a liability into a profitable asset. Thus a number of substantialfirms-including the United Kingdom'sInternationalAeradio Ltd.- operate air-ports, and there are also many privately owned airports. While most major air-ports worldwide are owned by the public sector (the one at Grand Bahamas isa notable exception), it is not a sufficient reason for assuming that they cannotbe privately owned. After all, most airlines in the world are owned by the publicsector, as are most railroadsand telephone systems, but one cannot conclude fromthis that United States airlines, railroads, and telephones should be nationalized.It may be objected that the externalities associated with airports, both positiveand negative, require them to be subject to public control. But public control ofpermitted noise levels, safety standards, location, and so on is entirely consistentwith private ownership.

Why Privatize Airports?Because of the general perception that airports should be owned and operatedby government agencies, the case for their privatization needs to be stated. Thiscase does not depend on the suggestion that private operators are wiser, kinder,or harderworking than people in government service but on the proposition thatscarce resources are more likely to be allocated to their most urgent uses if oper-atedby profit-seekingowners than if administered "inthe public interest"by polit-ical bodies. How does this proposition apply to airports?It applies most strikingly in the charges levied for aircraftlandings. The public


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sector, which has been known to incur losses, is surprisingly reluctant to makeprofits. Landing fees at National Airport, for example, are 48.17 cents for each1,000 pounds of authorized landing weight (ALW). Thus a Boeing 727 with anALW of 150,000 pounds would be charged about $72, while a Metro 2, with anALW of 12,500 pounds would be charged$6. Aircraft in the generalaviation cate-gory are chargedless, only 30 cents per 1,000 pounds of ALW,though these planesaresubjectto a minimumchargeof $4. Theseratesaredesignedto cover the historicand currentcosts of the landing facilities, such as runways and lighting; they bearno relation to the demand for scarce landing facilities or to the use of prices tobalance demand with the available supply. The result is that similar prices arecharged throughoutthe system, irrespectiveof demand,and pricesare not used- asin marketsystems- to allocate scarceresourcesamong alternative uses or to signalthe need for new investment.Since the use of publicly owned airports is not rationedby price, other methodshave to be used to allocate capacity when airports get "congested" r "saturated."The methods rangefrom waiting in line on the ground until a "slot"becomes avail-able to blanketrestrictions, such as the one at National Airport prohibiting directconnections to points farther than 1,000 miles away (to overcome this restriction,planes to Dallas and Denver stop at Dulles Airport, twenty-five miles away, fromwhich direct flights are permitted). National Airport also has a rule that twenty-seven out of every sixty hourly operations are reservedfor generalaviation. Slotsthat are available to commercial airlines were once allocated by a committee ofexisting users, a restrictive cartel that is generally illegal for the private sector tooperate. Recently, members of the cartels have been allowed to "sell" lots.The absence of pricing mechanisms to balance supply and demand in publicairport facilities leads to another critical advantage of the privatesector: the pres-ence of surplusesor deficits to indicatean excess or shortageof capacity.The citizensof Denver have been told that Stapleton Airport will be saturated in the 1990sand that a new airport has to be built, which will cost $2 billion and could requirea landing fee of $600 for cost recovery. But, as present landing fees are around$40, there is no reliable way of estimating the intensity of the demand, that is,the extent to which users of the airport would be prepared to pay its costs. Sincemost airport users do not belong to the poorest segments of society, it is not atall obvious that airports should be built for their use without a clear willingnessto pay.One important source of revenue for airport improvement is the Airports andAviation Trust Fund, which is financed by a tax amounting to 8 percent of thesale of tickets. But the allocations from that fund to individual airports do notappear to depend on the willingness of the providers or users of airports to meetany proportion of the cost.Some Recent History

In 1984 the HeritageFoundation's"Mandate or LeadershipII"recommended thatNational and Dulles airports be privatized by being "auctioned to the highest


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bidder."A similar recommendation was made by RobertW. Poole, Jr.,presidentof the Reason Foundation, who developed the argument in "PrivatizingWashington'sAirports," a paper published in May 1985 by Citizens for a SoundEconomyof Washington, D.C. Poole attemptedto calculate the approximatevalueof National Airport to a private-sector operator. Assuming that many of the 16million passengers going through National each year would be prepared to pay$20 extra to land there rather than at Dulles or BWI (because of the lower costin time and taxi fares to reach the commercial and governmental centers), Poolecalculated that an operator chargingmarket-clearing anding fees at National Air-port could increase current revenues by $250 million a year. Using an estimateof a capital value equal to ten times annual revenues, Poole calculated the capitalvalue of National to be around $2.5 billion. At about the same time that RobertPoole's paper appeared, the secretary of transportation received a report froma blue-ribbon panel headed by Linwood Holton, a former governor of Virginia,suggesting that both National and Dulles airports be transferredto that state. Aprice of $47 million, based on historic costs, was suggestedas appropriate;marketvalue was not considered to be a proper criterion for pricing the properties. TheHolton report also recommended that a regional commission assume responsi-bility for both airports.The commission would include representativesof the localauthorities concerned.One might have thought that an administration committed to economic effi-ciency in the use of public resources, to reduction of Federaldeficits, and to theencouragementof privateenterprisewould not hesitateto explore the idea of trans-ferring the airports to the private sector. One would have been mistaken. TheReagan administration ignored Robert Poole's paper and drafted a bill in early1986 for Congress to implement the recommendations of the Holton commission.

An Offer from RothschildIn February1986 John Redwood, head of the international privatization opera-tions of the London merchant bank of N. M. Rothschild and Sons, Ltd., arrivedin Washington, D.C., to attend and address the international conference on pri-vatization arrangedby the U.S. Agency for International Development. It is notknown what opportunities for investment in Third World countries were identi-fied by JohnRedwood duringhis stay in Washingtonbut, having developed a sen-sitivity for such matters,and being interested in airports, he noticed the opportu-nity presentedby an asset that had been valued in the billions of dollars and thatthe Federalgovernment was proposing to transferto a local authority for less than$100 million. After his return to London, John Redwood announced that if theUnited States government would accept a bid from the private sector for one orboth airports, N. M. Rothschild would be ready to assist the government, eitherby advising it directly or by attempting to organize a consortium that would bidfor these facilities. Redwood's announcement received considerable attention inthe Washington press and provoked Holton to declare that he would also be pre-


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pared to buy the airports if he were allowed to convert their land use to con-dominium construction. Some of the newspaper reports incorrectly indicated thatthe bank was actually prepared to bid for the airports, and some mentioned figuresof around $1 billion.Some members of Congress were unhappy over the administration's proposaland, on 24 March 1986, Senator Gordon Humphrey (R., New Hampshire) ar-ranged a press conference to publicize the subject and to allow the bank to clarifyits position. The following statement was presented at that conference on the bank'sbehalf:

PRIVATISINGWASHINGTON'S AIRPORTSN. M. Rothschild & Sons, Ltd. (NMR) is encouraged by the recent interest shown inprivatising National and Dulles Airports, but wishes to clarify several points.

1. The airports would be kept as airports.NMR would not be interestedin developing the airports for residential purposes norin seeking major changes in currently permitted land uses. The purposes of a privatisa-tion designed by NMR would be to upgradeboth airports, especially National, and im-prove their financial viability and their contribution to regional economic development.Several opportunities for improvement can already be identified:-improvement of car parking facilities at both airports;-improvement of the connection to the Metro station at National;-expansion of the North Terminal at National; and-development of mid-field terminals at Dulles.If any changes in land use were sought, they would be for purposes complementaryto airport operation.2. NMR will not try to organize or participate in a consortium to purchase the airportsuntil the legislative or executive branch of the U.S. Government indicates that it wouldwelcome offers from private investors. N. M. Rothschild & Sons would be happy to ad-vise the FederalGovernment on regulation and organization of the sale, if that waspreferred,rather than acting for prospective buyers.As clearly stated previously, NMR would work on assembling a group of investorsonly after receiving an indication that the Administration would be willing to considerairport privatisation. The amount of the bid would depend on investor response andon the conditions set down by the U. S. authorities for the use of the airports.3. NMRs interest in Washington'sairports is an outgrowth of its successfulparticipationin other privatisation ventures, both inside and outside the United Kingdom.The experienceof N. M. Rothschild & Sons in privatisation is described in the accom-panying materials. NMR has worked on privatisation in Europeand the FarEast, andis currently retained by the British Government to sell the British Gas Corporation, thelargest privatisation ever attempted anywhere in the world.4. Privatisation of the airports could bring early benefits to the U. S. taxpayer.N. M. Rothschild & Sons understands that, as part of the plan to transferthe airportsto the State of Virginia, the airlines using them would be allowed to sell their landingrights ("slots") o other airlines. Thus, these landing rights would in effect be given tothe airlines without charge. Under an NMR privatisation plan, on the other hand, these


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valuable assets could be bought by the private sector from the FederalGovernment, andthe amounts paid to the Government would accrue to the taxpayers through reductionof the budget deficit. Furthermore,under private ownership, property and other taxeswould be payable by the private sector to the State of Virginia and relevant governmentauthorities.

Giving the Landing Slots to the AirlinesThe final section of the Rothschild statement refers to the FAAs decision that airlinesusing the four airports with imposed service restrictions - Kennedy, La Guardia,National, and O'Hare- would be allowed to sell their landing rights at will afterMarch 1986. These "sales" are not absolute, since those who "buy" landing slotsdo not have total rights to them; the FAA can rescind the rights to land and takeoff at any time. Nevertheless, these rights will have some value, and some havebeen transferred. In September 1986, for example, Pan American Airlines boughtfrom Texas Air a sizable number of slots at National and La Guardia to provideadditional service on the crowded Washington-New York route.

Early in 1986 Thomas Donlan wrote that "the total value of the landing slotsat the four airports could be $680 million."2 While this estimate is considerablylower than Robert Poole's, it is still enormous and represents a gain for the airlinesthat they did not earn. Some members of Congress objected to the gift of thesefacilities to the airlines, and Senator Nancy Kassebaum (R., Kansas) introduceda Senate resolution canceling this arrangement. However, her amendment wasdesigned to restore the allocation of these slots to their previous situation in which"little cartels at each airport, called scheduling committees, worked out landingand departure slot times by consensus, enjoying an exemption from antitrust rules."3The bill to transfer National and Dulles airports to Virginia was presented inthe Senate in April 1986. An amendment by Senator Gordon Humphrey requiringthe airports to be sold to the highest bidder was presented but withdrawn for lackof support. It was strenuously opposed by lobbyists for the FAA, who circulatedthe following document to explain why the airports should not be sold to the pri-vate sector:

WHY A PRIVATESALEOF DULLES AND NATIONAL MAKES NO SENSEUnder present circumstances, a sale of Dulles and National to a private operator wouldraise serious problems:

* A private operator'scosts for running the airports, and charges to the users, wouldbe substantially higher than an independent authority's.* A private operator would have to raise rates to recover its capital investment, aswell as the $530-$700 million costs of capital improvements.* A private operator would not be eligible for formula grants under the Airport andAirway Improvement Program.* A private operator would not be eligible for tax-exempt revenue bond financing(assuming it continues after enactment of the tax bill).* Public airport operators are subject to a comprehensive set of regulations imposed


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to assure qualaccess o all, to guarantee ondiscrimination,ndtoprovide orenviron-mentalconcerns,amongother.They are enforced hroughFAAgrantagreements.Aprivateoperatorwould not be subjectto any of them.* Nothingwouldkeepa privateoperator romexcludinggeneralaviationaircraft,or fromoperatingNational all night.* All inall, it wouldmakeasmuchsense o sell the InterstateHighwaySystem,which,liketheairports,spaidfor with userfees,andpermita privateoperator o charge olls.Theseobjectionsare trivialand mostly incorrect,since theconditions thatgovernthe use of the airports by "regionalcommissions" can also be imposed on privateowners. The reference to the interstatehighways suggests that the FAA does notunderstand that the revenues from road-use charges can be paid to private roadowners as easily as to public ones.The main opposition to the bill in the Senate was mounted by Senator PaulS. Sarbanes (R., Maryland), who thought that the transfer of both airports toVirginia would enable the profits from National to subsidize the costs of Dulles,which could thencompete unfairlywith Maryland'sBWI.The bill eventuallypassedthe Senate but met with further objections in the House of Representatives. Anamendment that would have required the Department of Transportation (DOT)to offer the airports for sale to the private sector was prepared by RepresentativeBeauBoulter(R., Texas)but withdrawn afterthepersonal interventionof ElizabethDole, secretary of transportation. Some members did not like giving up controlof the airports;theiragreement was secured by an amendment that would requirethe RegionalCommission to be subjectto a "CongressionalReview Board."Otherswished to extend the permitted flying distance from National Airport to 1,250miles to allow directflightsfromDallas/Fort Worthand Houston. Yetotherswishedto attach the Kassebaum amendment to the bill to prohibit the sale of slots byairlines.Finally, in the last hectic days of the 1986 session, the bill cleared the house,and a version agreed upon with the Senate was signed by the president. The pricetag was raised to $187 million for a fifty-year lease, to meet the objection thatthe airportswere being disposed of too cheaply.Toplacate the Maryland interests,the DOT promised to expedite the release of funds to increase runway capacityat BWI.The permittedflying distance from National was increased to 1,250 miles;the Kassebaumamendment was lost. Dulles and National Airports will thereforebe transferred o the state of Virginia,which is unlikelyto favor theirprivatization.

ConclusionThe Reagan administration'sdetermination to keep Dulles and National airportsin the public sector raises a number of issues. One issue is the priorities of theFAA, which lobbied against the privatization of the airports on the ground thatprivateownership would result in higher landing charges to aircraft and thereforein higherticketprices.Yet,as shown earlier,the impositionof higherlandingchargesat congested airports is a necessary component of any arrangement that wouldprovide an efficient allocation of air traffic in the United States.


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An outside observer has to wonder whether the FAA receives any economicadvice, because the premise that private ownership of congested airports wouldresult in higher landing fees is a dubious one. Following the deregulation of airfares and schedules, the scarcity of these slots already allows airlines to chargehigher fares to airports that are saturated. People flying from Washington, D.C.,to La Guardia, for example, pay $75 for a weekday flight from National but canfly for $49 from Dulles or BWI. Under deregulation, the absence of economiclanding fees at congested airports does not lead to lower ticket prices but merelytransfers to the airlines the "scarcityrent"that is collectible for the use of thesescarcefacilities.The FAA's ttitude can be comparedto thatof a trusteewho declinesto charge a market rent for land held in trust and used by a hotel, on the groundthat he does not wish the hotel guests to pay high room rates. But the room ratesin a hotel are determined by the supply of and demand for rooms, not by therent that the hotel owner pays for his land. If he is allowed to pay a low landrent, he will make more money from renting out rooms.A second issue concerns the relationship between the FAA, Congress, and theairlines. That the FAAshould choose to give away landing rights worth hundredsof millions of dollars to airline companies seems extraordinary.One can only as-sume that the FAA thinks, as does the writer of this essay, that slot trading byairlines is better than the Kassebaum position of no trading at all. Allowing theairports to sell the slots would be even more beneficial to the public, but thatdoes not seemto havebeen advocatedby the FAA,or evenby the Office of Manage-ment and Budget, which gets the best economic advice and understands the issuesinvolved.One of the curious paradoxes that comes out of this story is that it is throughprivatization - selling the airport landing rights to the highest bidder-that thetaxpayercan get the value of the landing rights that are inherent in congested air-ports. While the airports remain in the public sector, these rights-which maybe worth billions of dollars - are either wasted or given to airline companies thathave done nothing to earn them.

NOTES1. E.g., Paul Feldman, "On the Optimal Use of Airports in Washington, D.C.," Socio-EconomicPlanning Sciences, vol. 1 (Oxford, England:Pergamon Press Ltd., 1967), 43-49; and Ross D. Eckert,Airports and Congestion: A Problem of Misplaced Subsidies (Washington, D.C.:American EnterpriseInstitute for Public Policy Research, 1972), 72.2. Thomas Donlan, "GoldenGates:LandingSlots a Windfall for the Airlines,"Barrons,24 Feb.1986.3. Ibid.

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