National Academies Press: OpenBook

Innovative Finance and Alternative Sources of Revenue for Airports (2007)

Chapter: Chapter Four - Alternative Ways of Doing Business

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Suggested Citation:"Chapter Four - Alternative Ways of Doing Business." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Four - Alternative Ways of Doing Business." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Page 36
Suggested Citation:"Chapter Four - Alternative Ways of Doing Business." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Page 36

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35 As discussed in chapter one, most airports in the United States are operated as independent, not-for-profit entities with over- sight by a politically appointed authority, or as self-sustaining enterprise funds of a governmental entity such as a city, county, or state government. U.S. airports have been char- acterized as being among the most privatized in the world (e.g., see de Neufville 1999, pp. 2, 8); although they are oper- ated by local or state governments, the airlines often have a role in capital investment decision making and other private entities are involved in operating and providing services at airports. The term “privatization” can refer to a broad range of activ- ities that entail varying levels of private involvement. A report by the Government Accountability Office in 1995 stated that “the privatization spectrum can include contracting out, public–private partnerships, vouchers, and franchising, as well as the actual sale—divestiture—of government assets and operations” (Issues: Privatization/Divestiture Practices in Other Nations 1995, p. 1). Figure 28 shows the continuum of private involvement at airports. This chapter addresses the spectrum of privatization, par- ticularly as it applies in the United States, by discussing: • Partial privatization—ways of doing business that involve varying degrees of private-sector involvement in the management, capital investment decision making, financing, and pricing of airport facilities and services. • Full privatization—outright sale of airport assets. PARTIAL PRIVATIZATION Private involvement in the management and operation of U.S. airports, starting with the most typical practices to the more innovative, includes: • Airline capital decision-making involvement—Airlines often have a role in capital investment decision making through majority-in-interest provisions of airport–airline agreements. • Private capital—In the United States, the majority of financing comes from private sources. An estimated 58% of U.S. airport capital investments in 2000 through 2004 were funded by bonds and other forms of debt through the private financial markets, according to ACI–NA, based on information from FAA, U.S. Treasury, and Thompson Financial Data. In the unlikely event that there are discrepancies between airport bond ordinances (in effect, agreements with bondholders) on the one hand and airline agreements on the other, bond ordinances take precedence (see Figure 29). • Contracting of services—Airport operators routinely contract with private companies to assist with the finan- cial and physical planning of airports, design and con- struct facilities, provide terminal cleaning or other routine services, operate parking facilities, and per- form other functions related to managing and operating airports. • Private companies operating on-airport—Airport opera- tors typically employ only 10% to 20% of the total num- ber of employees at an airport (de Neufville 1999, p. 9). Airlines, rental car companies, concessionaires, ground transportation companies (taxis, limousine operators, etc.), cleaning companies, etc., constitute the majority of personnel at an airport. • Master concessionaires—Some airport operators have negotiated master concessionaire agreements with pri- vate companies to oversee the development of terminal concessions. Examples include Boston–Logan, Chicago O’Hare, Pittsburgh, Washington National, and New York’s LaGuardia airports. • Private terminal development—Airlines have built and operate(d) terminals at numerous airports around the country, including Terminals A, C, and E at Dallas/Fort Worth International Airport, Terminal A at Boston– Logan International Airport, and Terminal 4 at Los Angeles International Airport. In other cases, third par- ties have built terminals for use by multiple airlines, including Terminal B at Boston–Logan, and the Inter- national Arrivals Building at John F. Kennedy Interna- tional Airport. • Private airport operators—The Indianapolis Airport Authority and Susquehanna Area Regional Airport Authority each entered into 10-year agreements with BAA plc (formerly the British Airport Authority) to manage and operate Indianapolis International Airport and Harrisburg International and Capital City airports on a day-to-day basis, and to upgrade and/or develop major new facilities. Ownership of the airports did not change under the agreements, only responsibility for managing and operating the airports. BAA is no longer managing the Harrisburg airports, but is still operating in that capacity at Indianapolis International Airport. CHAPTER FOUR ALTERNATIVE WAYS OF DOING BUSINESS

36 • Revenue diversion prohibition—Federal policy and the grant assurances prohibit airport operators from divert- ing revenue to nonairport uses. A small number of airport operators are grandfathered from this provision, but the nonairport uses for which they can use airport revenues are generally other governmental or transportation pur- poses. The prohibition on revenue diversion makes it dif- ficult for a private airport operator to direct any airport profits to the company owners or shareholders. • Access to tax-exempt and alternative minimum tax debt—Airport operators in the United States, as public entities, also have access to tax-exempt debt and AMT debt for eligible airport facilities, as discussed in chapter two. Private operators cannot access tax-exempt or AMT debt and must rely on taxable debt or sources of private equity, and therefore have higher costs of capital than air- port operators that are part of a governmental entity. Overview of the U.S. Airport Privatization Pilot Program Full privatization of U.S. airports; that is, the transfer of own- ership from a local government to a private entity, has been possible for a limited number of airports for 10 years. As part of the Reauthorization Act of 1996, as codified under 49 USC Section 47134, Congress established an airport privatization pilot program to explore privatization as a means of generat- ing access to sources of private capital for airport improve- ment and development. The act authorized U.S.DOT to grant exemptions from certain federal statutory and regulatory requirements, thereby allowing private companies to own, manage, and develop up to five public airports. Under the pilot program: • At least one of the airports must be a general aviation airport, and no more than one large-hub airport may participate. • The secretary of U.S.DOT may exempt the airport spon- sor (i.e., seller) from the requirement: – To use airport revenues for airport-related purposes, particularly proceeds of the sale or transfer; – To repay all or a portion of federal grants upon trans- fer of the airport ownership; and – To return airport property deeded by the federal gov- ernment upon transfer of airport ownership. • The private operator assumes the responsibility of upholding AIP grant assurances and may continue to receive AIP grants, although at a reduced share PFCs may continue to be collected for the airport. • A minimum of 65% of the airlines at the airport repre- senting 65% of total landed weight at the airport in the preceding year must approve the deal. This requirement has, in the past, created a major challenge for airport sponsors interested in privatizing their airports. • FAA reserves the right to ensure that the private opera- tor is earning no more than a reasonable rate of return. FIGURE 28 Continuum of private involvement at airports. FIGURE 29 Los Angeles International Airport—Special facility bond terminal financing. FULL PRIVATIZATION Since the 1980s, when the Thatcher government began sell- ing government-owned assets in Britain, privatization of all or some airports has occurred in (see de Neufville 1999 p. 4, augmented with more recent examples): Argentina, Australia, Austria, Bolivia, Canada, Chile, Great Britain, Hungary, Italy, Macao, Mexico, The Netherlands, New Zealand, Philippines, and South Africa. Some airports in the United States have been developed, financed, and operated privately throughout their entire exis- tence, including Alliance Airport in Dallas, as well as various general aviation airports around the country. However, fully privatized commercial service airports are the exception in this country. Barriers to privatization in the United States include: • Access to federal grants—Airports in the United States have access to AIP grants from the federal government, unlike airports in many other parts of the world. Airport operators must agree to a series of grant assurances that, among other things, require all airport revenues to be expended for costs of the airport.

37 • Any collective bargaining agreement that covers airport employees will remain intact after the transfer of airport ownership. • The private operator must submit a 5-year Capital Improvement Program to FAA with its application. Status of Applications Under the Pilot Program FAA has received applications from six airports under the pilot program; however, three were withdrawn for various reasons. Stewart Airport, Newburgh, New York—The only airport that has received approval to date is Stewart Airport (see Fig- ure 30). New Orleans Lakefront Airport, New Orleans, Louisiana— A final application filed in April 2002 by the Orleans Levee District, which operates the airport, to privatize New Orleans Lakefront Airport was still pending as of January 31, 2007. American Airports Lakefront LLC would operate the airport under a 50-year lease and pay the Orleans Levee District $300,000 in annual rental payments for the first 3 years. In the fourth year, American Airports Lakefront would pay $300,000 in rental payments or 11% of the airport’s gross income, not to exceed $3 million, plus 30% of the airport’s gross income over $3 million (Carvlin 2006). Midway Airport, Chicago, Illinois—The city of Chicago is the first airport sponsor to submit a privatization proposal for a large-hub airport. Background and status are as follows: • Chicago Skyway toll bridge precedent—The city’s inter- est stems in part from the successful privatization of the Chicago Skyway toll bridge in January 2005, in which Macquarie Infrastructure Group and Cintra signed a 99- year agreement to operate the Skyway and paid the city $1.83 billion. • State enabling legislation—The Illinois legislature passed a bill in the spring of 2006 that preserves the property tax exemption for the airport in the event that it is privately operated. The legislation requires the city to spend the majority of sale proceeds on infrastructure projects or to strengthen its pension funds, which have an average funding level of 61%. • The city’s objectives—The city’s initiative to privatize Midway Airport is seen as a way to (Privatization of Chicago Midway International Airport 2006): – Generate a new rate-setting methodology that can give certainty and stability to the airlines; – Increase operating efficiencies; – Improve customer amenities and satisfaction; – Create economic benefits for the city; – Ensure adequate upkeep of capital equipment and investment in capital improvements; and – Continue to provide a service to the public by main- taining strict guidelines for noise and environmental mitigation, safety and security requirements, and employee protection. • Bond defeasance—Approximately $1.3 billion of Mid- way Airport revenue bonds would have to be defeased as part of the privatization deal. • Status—The city has assembled a team to provide finan- cial advisory services throughout the process, and sub- mitted its proposal to FAA in September 2006. As of January 31, 2007, the application was pending. FIGURE 30 Stewart International Airport—Airport privatization.

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TRB’s Airport Cooperative Research Program (ACRP) Synthesis 1: Innovative Finance and Alternative Sources of Revenue for Airports explores alternative financing options and revenue sources currently available or that could be available in the future to airport operators, stakeholders, and policymakers in the United States. The report examines common capital funding sources used by airport operators, a reviews capital financing mechanisms used by airports, describes various revenue sources developed by airport operators, and a reviews privatization options available to U.S. airport operators.

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