Privatization and increased competition would boost the performance of our aviation infrastructure. It would reduce costs and encourage more efficient pricing structures for airport and air traffic control usage.27 Airlines, passengers, private plane owners, and taxpayers would all benefit from a more entrepreneurial and commercial approach to airport operation.

The ACI report concluded that there is “no denying the tangible benefits” of market‐​based reforms in Europe’s airport industry, including “significant volumes of investment in necessary infrastructure, higher service quality levels, and a commercial acumen which allows airport operators to diversify revenue streams and minimize the costs that users have to pay.“28 In Britain, privatization has created a highly dynamic and efficient industry with substantial competition between airports and lots of new entry by low‐​cost airlines.29

The need to privatize airports can be partly traced back to airline deregulation in 1978. President Jimmy Carter signed into law the Airline Deregulation Act, which removed government controls over airline fares, routes, entry, and mergers. Under deregulation, prices fell and the volume of air travel increased dramatically. Airlines reconfigured their routes, updated their equipment, and improved their capacity utilization. New airlines opened for business. Consumers saved tens of billions of dollars a year from the reforms.

However, it is also true that today’s airline service leaves much to be desired because of delays, crowded planes, and other inconveniences. If service by some airlines in some markets is lacking, why haven’t entrepreneurs offered better alternatives? It turns out that many are trying, but they often have difficulty obtaining gates at airports. Airline deregulation is an unfinished reform until it includes airport deregulation and privatization.

Many U.S. airports are still run in a bureaucratic manner typical of the pre‐​deregulation era. Their management is passive and risk‐​averse compared to the leading privatized airports abroad. Research by Oxford University scholars has shown that the managements of privatized airports are more “passenger friendly” than those of traditional airports.30 And a statistical study of airport productivity in 109 airports worldwide looked at whether ownership was correlated with productivity. It found that privatized and corporatized airports are more productive than fully government‐​owned airports.31

Privatization offers a clear advantage when it comes to capital investments. Government transportation investments—whether airports, highways, or air traffic control systems—often experience large cost overruns. In the 1990s, for example, the construction of Denver International Airport more than doubled in cost from the original estimates.32 Such cost overruns are one reason why many nations are partly privatizing infrastructure through public‐​private partnerships (PPPs or P3s). PPPs can shift the financing, management, operations, and risks of projects to the private sector.

A McKinsey & Company report on infrastructure noted that cost overruns were about seven times more likely on traditional government projects than PPP projects.33 And an Australian study that compared 21 PPP infrastructure projects with 33 traditional projects found: “PPPs demonstrate clearly superior cost efficiency over traditional procurement … PPPs provide superior performance in both the cost and time dimensions.“34

Another advantage of airport privatization is that it would enhance competition between airlines. Private airport managers are more willing to take the risks of new investments, including the creation of new gates for additional flights and airlines. Private airports try to attract new carriers to earn added revenues and profits. By contrast, current U.S. airport agreements with major incumbent airlines often give the airlines what amounts to veto power over terminal expansions, called majority‐​in‐​interest clauses.35

Also, major incumbent airlines in current U.S. airports often have exclusive‐​use agreements for gates. From the standpoint of risk‐​averse airport managers, these long‐​term agreements give them a guaranteed revenue stream. But when new‐​entrant airlines want to start service to such airports, there may be no gates available, which reduces competition. Even if there are gates available, Steven Morrison and Clifford Winston note that dominant incumbent airlines can “prevent competitors from having access even to gates that are little used.“36

By contrast, experience has shown that privatized airports generally do not cede de facto control over their facilities to the large airlines. At privatized airports, the gates typically remain under the control of the airport company, and they are allocated to individual airlines as needed, sometimes even hour by hour.

In sum, airline competition would be enhanced if we reformed the current ownership and management structures of U.S. airports. Much of the world is moving to a new paradigm—the airport as a private business enterprise—that is more consistent with today’s dynamic economy and demanding aviation consumers.

Hurdles to U.S. Privatization

Why has the United States resisted the sort of airport restructuring that is occurring abroad?37 One factor has been that state and local governments can issue tax‐​exempt bonds to finance public airports, but private airports would have to rely on taxable bonds. The result is that financing is less costly for establishing and expanding government‐​owned airports than private airports.

The best way to fix this financing bias would be to eliminate the state and local interest exemption under the federal income tax. But short of such a reform, federal policymakers should consider allowing private airport developers to issue tax‐​exempt revenue bonds (private activity bonds), as policymakers have allowed in toll highway projects.

Another hurdle to private airport development is that only government‐​owned airports are eligible for federal airport subsidies (except for airports in the Pilot Program, as discussed below). The combination of federal subsidies and tax‐​exempt financing for government‐​owned airports makes it difficult for entrepreneurs to enter the airport business and compete with existing facilities.

If a state and local government wants to privatize an existing airport, yet another hurdle is that federal law generally requires the repayment of previous federal grants received by an airport. Moreover, all lease or sale proceeds from privatization must be used for airport reinvestment, according to FAA rules. That prevents a state or city from selling its airport and using the proceeds for other infrastructure projects or for the general budget.

If these federal rules were not enough of a hurdle, a final barrier to privatization has been opposition from the airlines. They worry that they might face more competition under privatization and have to pay the full market‐​based costs of airport services. Typically, major airlines are like anchor tenants in shopping malls. They often have lease‐​and‐​use agreements at airports that give them control over terminals or concourses and the right to approve or veto capital spending plans. That gives them the power to oppose airport expansion if it would mean more competition.

Airlines have also resisted eliminating the federal cap on PFCs. Eliminating the cap would allow airports to raise more of their own funding for expansion. PFCs are a useful funding source for airports to increase gate capacity, but airlines tend to disfavor the greater competition that new gates would bring.

State and local governments add their own hurdles to private airport development. Government‐​owned airports do not pay state or federal income taxes, and they are generally exempt from property taxes. By contrast, a private for‐​profit airport would have to pay income and property taxes. Private airports may also face higher tort liability risks than government airports do.38

Privatization Pilot Program

In the 1990s some state and local officials saw what Margaret Thatcher had done in Britain and were inspired to try and sell or lease their own airports. Congress responded by passing the Airport Privatization Pilot Program in 1996.39 The program allows exemptions from onerous provisions of airport grant agreements for up to 10 U.S. airports. Cities whose airports are accepted for the program do not have to repay previous federal grants, and they are allowed to keep airport sale or lease proceeds.

However, the airlines lobbied to include a provision specifying that to keep sale or lease proceeds from a privatization, a city has to get the approval of 65 percent of the airlines serving an airport. So airlines can often block privatization if, for example, they believe it would increase competition. Also, privatized airports in the program are eligible for less generous grants under the AIP, and the process of applying to the FAA for the Pilot Program is costly and time‐​consuming.40

For these and other reasons, the program has had little success. The first airport privatized under the 1996 Pilot Program was Stewart International Airport north of New York City. The airport was operated under a 99‐​year lease by the National Express Group. But that lease was later terminated by mutual consent, and the Port Authority of New York and New Jersey gained control of the airport.

Chicago tried twice to privatize Midway Airport via the Pilot Program. In 2008 it selected a winning bidder, but the deal could not be financed because of the credit market crunch at the time. A second attempt ended up with only a single bidder, apparently due to the restrictive conditions on the proposed lease. Without competing bids, in 2013 the city decided not to proceed.

The only airport currently privatized under the program is Luis Munoz Marin International in San Juan, Puerto Rico. The winning bid was submitted by the Aerostar consortium, and the deal was finalized in 2013. The company paid $615 million up‐​front and agreed to invest $1.2 billion in the airport over the 40‐​year term of the lease. Aerostar will also share airport revenue with the government. So far, the company has made renovations to the airport’s two terminals, including new retail stores and automatic baggage scanners.

Another slot in the Pilot Program is held by Hendry County, Florida. It plans to lease Airglades Airport to a consortium for conversion into a cargo reliever airport for Miami International. The consortium has received an initial contract to manage the airport while its application waits for final approval from the FAA. Some other airports have considered applying for the Pilot Program, but progress has been slow.

One positive development is that a small but growing number of U.S. airports have management contracts with private companies. Indianapolis International Airport, for example, completed a successful management contract with a British airport company. Other contract‐​managed airports include Albany, Burbank, and White Plains/​Westchester.

Conclusions

The Pilot Program has been a step in the right direction, but much larger reforms are needed to spur private investment in U.S. airports. 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.41 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.

Opening up our aviation infrastructure to businesses and entrepreneurs would benefit the traveling public by encouraging additional investment and greater competition. America has a remarkable history of aviation innovation, but we need major policy reforms to ensure that our infrastructure remains at the leading edge in today’s global economy.

Notes:



1 See “Infrastructure” at the Trump campaign website www​.don​ald​jtrump​.com.

2 Studies that discuss early airport history include: National Park Service, “American Aviation Heritage: Identifying and Evaluating National Significant Properties in U.S. Aviation History,” March 2011; Deborah Gwen Douglas, “The Invention of Airports: A Political , Economic and Technological History of Airports in the United States, 1919–1939,” PhD dissertation, University of Pennsylvania, 1996; Janet R. Daly Bednarek, America’s Airports: Airfield Development, 1918–1947 (College Station, TX: Texas A&M University Press, 2001); and Janet R. Daly Bednarek, “Innovation in America’s Aviation Support Infrastructure,” in Innovation and the Development of Flight, ed. Roger D. Launius (College Station, TX: Texas A&M University Press, 1999).

3 The airfield was privately developed before 1920, but was redeveloped in 1929 as the Grand Central Air Terminal. After World War II, it was the Grand Central Airport, and it went into decline as the Los Angeles government‐​owned airport expanded.

4 Bednarek, “Innovation in America’s Aviation Support Infrastructure,” p. 59.

5 By the end of the 1930s, federal funding of airport investment through New Deal programs had surpassed state and local funding. See Douglas, p. 601.

6 Bednarek, “Innovation in America’s Aviation Support Infrastructure,” pp. 69, 70.

7 Douglas, pp. 299, 598.

8 United States Congress, Office of Technology Assessment, “Airport System Development,” August 1984, p. 209.

9 National Park Service, p. 201.

10 Clifford Winston, Last Exit: Privatization and Deregulation of the U.S. Transportation System (Washington: Brookings Institution Press, 2010), p. 9.

11 Bart Elias and Rachel Y. Tang, “Federal Civil Aviation Programs: In Brief,” Congressional Research Service, R42781, September 27, 2016, p. 2.

12 Rachel Y. Tang and Robert S. Kirk, “Financing Airport Improvements,” Congressional Research Service, R43327, March 24, 2016. See also Michael Sargent, “End of the Runway: Rethinking the Airport Improvement Program and the Federal Role in Airport Funding,” Heritage Foundation, November 2016.

13 Tang and Kirk, p. 4.

14 Clifford Winston, “On the Performance of the U.S. Transportation System: Caution Ahead,” Journal of Economic Literature 51, no. 3 (September 2013): 790.

15 The Government Accountability Office notes: “at least 450 airports around the world have been privatized to some degree.” Government Accountability Office, “Airport Privatization: Limited Interest despite FAA’s Pilot Program,” GAO-15–42, November 2014, Executive Summary.

16 Chris Edwards, “Options for Federal Privatization and Reforms Lessons from Abroad,” Cato Institute Policy Analysis no. 794, June 28, 2016.

17 Worldwide privatization proceeds between 1988 and August 2015 were $3.26 trillion. See William L. Megginson, “Privatization Trends and Major Deals in 2014 and Two‐​Thirds 2015,” in The PB Report 2014/2015, Privatization Barometer, www​.pri​va​ti​za​tion​barom​e​ter​.net.

18 Organisation for Economic Co‐​operation and Development (OECD), Privatising State‐​Owned Enterprises (Paris: OECD, 2003), p. 21.

19 There is concern that the Canadian lease payments are too high, which is harming airports and subsidizing the Canadian government. This contrasts with U.S. airports, which receive government subsidies.

20 Douglas, p. 303. And see Bednarek, America’s Airports: Airfield Development, 1918–1947, pp. 83–86.

21 Airports Council International (Europe), “The Ownership of Europe’s Airports, 2016,” 2016.

22 The International Civil Aviation Organization has written case studies on aviation reforms in 26 countries. See International Civil Aviation Organization, “Case Studies on Commercialization, Privatization and Economic Oversight of Airports and Air Navigation Services Providers,” August 2013.

23 Organisation for Economic Co‐​operation and Development, p. 9.

24 William L. Megginson and Jeffry M. Netter, “From State to Market: A Survey of Empirical Studies on Privatization,” Journal of Economic Literature 39, no. 2 (June 2001): 25.

25 American Society of Civil Engineers, “Report Card for America’s Infrastructure,” 2013.

26 Steven A. Morrison and Clifford Winston, “Delayed! U.S. Aviation Infrastructure Policy at a Crossroads,” in Aviation Infrastructure Performance (Washington: Brookings Institution, 2008), p. 9.

27 As one example, current airport landing fees are generally based on weight and not time of day, so pricing is not structured to help reduce congestion. Clifford Winston, “On the Performance of the U.S. Transportation System: Caution Ahead,” p. 788.

28 Airports Council International (Europe), p. 1.

29 David Starkie, “The Airport Industry in a Competitive Environment: A United Kingdom Perspective,” Organisation for Economic Co‐​operation and Development, July 2008.

30 Research described in Asheesh Advani, “Passenger‐​Friendly Airports: Another Reason for Airport Privatization,” Reason Public Policy Institute, March 1, 1999.

31 Tae H. Oum, Jia Yan, and Chunyan Yu, “Ownership Forms Matter for Airport Efficiency: A Stochastic Frontier Investigation of Worldwide Airports,” Journal of Urban Economics 64, no. 2 (March 2008).

32 Chris Edwards and Nicole Kaeding, “Federal Government Cost Overruns,” Down​siz​ing​Gov​ern​ment​.org, Cato Institute, September 1, 2015.

33 McKinsey & Company, “Rethinking Infrastructure: Voices from the Global Infrastructure Initiative,” May 2014, p. 23. The report looked at greenfield projects. See also Frederic Blanc‐​Brude and Dejan Makovsek, “Construction in Infrastructure Project Finance,” EDHEC Business School (France) Working Paper, February 2013.

34 Allen Consulting Group and the University of Melbourne, “Performance of PPPs and Traditional Procurement in Australia,” November 30, 2007.

35 Clifford Winston, “On the Performance of the U.S. Transportation System: Caution Ahead,” p. 806.

36 Morrison and Winston, p. 21.

37 For further background on issues in this section, see Government Accountability Office, “Airport Privatization: Limited Interest despite FAA’s Pilot Program,” GAO-15–42, November 2014.

38 Government Accountability Office, p. 22.

39 For further background on the pilot program, see Government Accountability Office, and see Rachel Y. Tang, “Airport Privatization: Issues and Options for Congress,” Congressional Research Service, R43545, February 3, 2016.

40 Government Accountability Office, p. 23.

41 Marc Scribner, “Obama FY2015 Budget: Aviation Funding Recommendation Not Great, But a Step in the Right Direction,” Competitive Enterprise Institute, March 4, 2014.