National Academies Press: OpenBook

Considering and Evaluating Airport Privatization (2012)

Chapter: Chapter 4 - Management Contracts

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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
×
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Suggested Citation:"Chapter 4 - Management Contracts." National Academies of Sciences, Engineering, and Medicine. 2012. Considering and Evaluating Airport Privatization. Washington, DC: The National Academies Press. doi: 10.17226/22786.
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21 4.1 Specific Strategies Numerous airports have contracted out the management and operation of parking facilities, concession operations, or entire terminals where the operator manages the facility on behalf of the airport owner for a specified period of time and in return receives a management fee. A number of airport owners in the United States have con- tracted the day-to-day operation of their entire airport to pri- vate operators. Under an airport-wide management contract, an operator manages the airport (or airport system) under pol- icies and direction from the airport owner for a specified period of time. The operator’s objective is to improve the financial and operational efficiency of the airport, and the operator is typically paid an annual fixed management fee. Sometimes the operator is paid a variable fee based on performance.11 The airport owner retains a considerable degree of control over the quality of service provided by the contractor by setting policy and also retains the obligation, control over, and risks for making capital investments. (The contractor does not bear any of the risks for capital improvements.) The operating bud- get is usually set and managed by the operator, but approved by the airport owner. Frequently, these types of arrangements are introduced when the airport owner feels the transition can introduce a more efficient operation of the airport where the objective of the operator would be to reduce costs and increase revenues. Another reason might be to improve customer ser- vice. This type of arrangement has also been used when an air- port transitions from a municipal or state-run operation to an independent airport authority (e.g., Albany, Harrisburg). Sometimes the airport owner contracts separately for (1) general airport management, operation, and mainte- nance, (2) ARFF services, and (3) parking services. Even in cases where the airport owner contracts out most of the day-to-day operation of its airport, it may retain control over certain functions. For example, the Burbank-Glendale Pasadena Airport Authority maintains its own police depart- ment. Sometimes the airport owner retains the responsibil- ity for supervising and providing airport police services (e.g., Harrisburg International Airport). Functions that the airport owner typically retains under its control include: • Airline use agreement compliance • Rates and charges policy • Air service development policy • Assurances and compliance for federal and state grant programs • Long-range planning • Capital expenditure policy and implementation • Debt issuance policy • Land acquisition and development policy and planning • Airport industrial and economic development policy (and sometimes management) • Environmental policy Often the management fee is fixed with little or no incen- tive component, which effectively means the arrangement is one large service contract. By comparison, in Indianapolis the initial fee structure was based almost entirely on incen- tive compensation where the airport authority’s main objec- tive in contracting with BAA was to reduce airline payments per enplaned passenger. The community felt that this would induce the airlines to provide more air service, which in turn was expected to stimulate regional economic development. 4.2 Examples of Management Contracts There has been a wide variety of management contracting employed in the United States as illustrated by the following examples. C h a p t e r 4 Management Contracts 11See for example the Indianapolis case study where BAA was paid on the basis of savings generated.

22 4.2.1 Terminal Management Contracts Some airports have contracted out the management and operation of entire terminals. Atlanta Hartsfield International Airport. At Atlanta Hartsfield International Airport, the central passenger terminal complex (CPTC) is operated and maintained on behalf of the airlines by the Atlanta Airlines Terminal Corporation (AATC), a corporation established by the airlines for that purpose. The City of Atlanta (the airport owner and operator) has also con- tracted management, operation, and maintenance of the inter- national terminal facilities to TBI Airport Management, Inc. The city recovers from TBI its allocable operating and mainte- nance expenses according to the guidelines of the CPTC leases. TBI pays all other operating and maintenance expenses and, in turn, recovers all the costs and expenses, plus a management fee, from the airlines through quarterly use charges. Orlando Sanford International Airport. The Sanford Airport Authority contracts with TBI Airport Management, Inc. to manage the international and domestic terminals, develop additional air service, and provide ground handling and cargo services at Orlando Sanford International Airport. The airport authority manages and operates the rest of the airport with a staff of 50, which provide ARFF, police, administration, and other services. 4.2.2 Parking Management Contract or Concession Agreement Although some airports continue to operate their parking facilities using airport employees (e.g., Dallas/Fort Worth, Norfolk, and Seattle), most U.S. airports retain private companies to operate their parking facilities and shuttle buses using either concession agreements or management contracts. Management contracts are the more frequently used model. Under the terms of a concession agreement, the private operator is typically responsible for all aspects of day- to-day parking operations, including facility maintenance and fee collections. As payment for their services, the concession- aires receive a percentage of the gross revenues from park- ing operations but are required to pay the airport owner the greater of this percentage amount or a minimum annual guar- anteed amount. In this manner, the concessionaire assumes most of the risk for potential downturns in parking revenues, but also receives greater rewards if there is an unexpected increase in airline passenger traffic. Examples include the airports serving Baltimore/Washington, Dayton, Cleveland, Erie, Honolulu, and Houston (Intercontinental). With a parking management contract, the airport provides the parking facilities (including the revenue control equipment and buses), establishes minimum customer service standards, reserves the rights to adjust parking rates, and then retains a private operator to manage the operation under a budget that is approved by the airport. The private operator is reimbursed for their authorized expenses and is also paid a management fee. With a management contract, the airport operator assumes most of the risk for a downturn in parking revenues, receives most of the reward for increased parking business, and, com- pared to a concession contract, has greater latitude to control and modify customer service standards. Examples include air- ports serving Burbank, Orange County (California), Nashville, Orlando, Pittsburgh, San Francisco, and Tulsa. Some airports use combinations of concession contracts and management agreements. For example, they may use concession contracts for economy parking and management agreements for valet parking or shuttle bus operations. 4.2.3 Master Terminal Concessionaire or Developer Agreement Airport owners have entered into master concessionaire agreements for their terminal food, beverage, and retail oper- ations at numerous airports. BAA USA was retained as the master developer and manager of the retail, food, and beverage operations at the AIRMALL® at Pittsburgh International Airport in 1992.12 When the Midfield Terminal opened in 1992, Pittsburgh became the first airport in the United States to offer a shop- ping mall-type approach for retail activities for its passengers. According to the Allegheny County Airport Authority, as of June 1, 2010, there were 40 operators in 70 locations in the Midfield Terminal, including 23 food and beverage locations, 34 retail locations, four service locations and nine news and gift locations. AIRMALL® USA manages the food, beverage, and retail activities in the Midfield Terminal under a Master Lease Development and Concession Agreement with the airport authority. AIRMALL® USA acts as the authority’s master lessee and is responsible for developing concession and retail activi- ties at the Midfield Terminal for the authority. AIRMALL® USA has the exclusive rights to manage all terminal conces- sions (except public pay telephones), including retail, food and beverage, and advertising services. The authority receives 100% of revenues from electronic media, such as the Internet, flight information systems, and the wireless airport system. AIRMALL® USA is not authorized to operate terminal con- cessions except in the case of a vacancy. The authority receives 59% of the revenues received by AIRMALL® USA from the various concessionaires, and AIRMALL® USA receives 41%. 12BAA USA was acquired by the Prospect Capital Corporation, an investment company based in New York City, from its previous owners, BAA Ltd., in a transaction that was completed on July 30, 2010. As part of the transaction, BAA USA is now known as AIRMALL® USA, Inc.

23 AIRMALL® USA also contributes to a repair and replacement fund to cover certain repair and replacement costs.13 Westfield Concession Management (Westfield) manages the food and beverage programs at Reagan National and Dulles International on behalf of the Metropolitan Washington Airports Authority. Under these agreements, Westfield develops and manages the food and beverage programs at the airports, but does not operate any of the concession facili- ties. Westfield negotiates contracts with each concessionaire using a standard lease that has been approved by the Airports Authority. These contracts generally obligate the concession- aire to pay the higher of a minimum annual guarantee or a percentage of gross revenues. Westfield collects all rents and fees from the concessionaires and retains a portion of gross rental payments as its fee for the management services. Other examples of master developers and managers of retail, food, and beverage operations include: • AIRMALL® USA at Boston Logan International Airport (Terminals B and E) in July 2000 • AIRMALL® USA at Baltimore/Washington International Thurgood Marshall Airport in March 2004 • AIRMALL® USA at Cleveland Hopkins International Airport in February 2008 • Marketplace Development at Philadelphia International Airport • Marketplace Development at LaGuardia Airport 4.2.4 Airport-wide Management Contracts As shown in Table 4.1, a number of airport owners in the United States have contracted for the operation of their entire airports by private operators. These types of agreements are more commonly found at general aviation airports. A description of some of these arrangements and others follows. Bob Hope Airport. Bob Hope Airport is owned by the Burbank-Glendale-Pasadena Airport Authority, which con- tracts with TBI Airport Management, Inc. for general airport management, operation, and maintenance; Pro-tech Fire Services, Limited for ARFF services; a joint venture of Central Parking Systems and Valet Parking Services for parking 13Allegheny County Airport Authority, Official Statement, Airport Revenue Refunding Bonds, Series 2010A, August 3, 2010. Airport Owner Operator Commercial Service Airports Albany International Airport (ALB) Albany County Airport Authority AvPorts and Go-Albany, Inc. Atlantic City International Airport (ACY) South Jersey Transportation Authority AvPorts Bob Hope Airport (BUR) Burbank-Glendale-Pasadena Airport Authority TBI Airport Management, Inc. Lehigh Valley Airport (ABE) Lehigh-Northampton Airport Authority AvPorts Rochester Airport, Minnesota (RST) City of Rochester, MN Rochester Airport Company Stewart International Airport (SWF), Newburgh, New York Port Authority of New York and New Jersey AvPorts Westchester County Airport (HPN), White Plains, New York Westchester County, NY AvPorts General Aviation Airports Addison Airport, TX Town of Addison, TX Washington Infrastructure Services, Inc. and Staubach Airport Management, Inc. Brackett Field Airport Los Angeles County, CA American Airports Compton/Woodley Airport Los Angeles County, CA American Airports El Monte Airport Los Angeles County, CA American Airports Republic Airport (FRG), Farmingdale, New York New York Department of Transportation AvPorts Rhode Island – Providence (PVD) and 5 GA airports (PVD, UUU, WST, BID, SFZ, OQU) Airports owned by State of RI, but RI Airport Corp (a subsidiary public corp. of the RI Economic Dev. Corp.) is airport sponsor RIAC operates TF Green, but leases out operation and day-to- day management of 5 GA airports to Landmark Aviation (formerly Hawthorne Aviation) Teterboro Airport (TEB), New Jersey Port Authority of New York and New Jersey AvPorts Tweed New Haven Regional Airport, New Haven, Connecticut City of New Haven, CT AvPorts Whiteman Airport Los Angeles County, CA American Airports W illiam J Fox Airfield Los Angeles County, CA American Airports Table 4.1. Examples of airport-wide management contracts.

24 services; and Wyle Laboratories for services in connection with noise abatement. The airport maintains its own police department (Burbank-Glendale-Pasadena Airport Authority Police) that is separate from the Burbank Police Department. This airport has been under private operation its entire exis- tence having been developed in 1928 by Boeing Aircraft and Transport (BA&T), which was a holding company that included Boeing Aircraft and United Air Lines. The airport was initially named United Airport. Lockheed Air Terminal, Inc. owned and operated the airport from 1940 until it was sold to the Authority in 1978. Albany International Airport. The Albany County Air- port Authority was created by the State of New York in 1993 with a 40-year lease to operate the airport. The Authority has contracted with AvPorts, Inc., a subsidiary of AFCO, to man- age the daily operations of the airport and with Go-Albany, Inc., d/b/a Million Air—Albany, a subsidiary of Million Air Interlink, to manage the daily operations of the airport’s fixed-based operations. AvPorts has the daily responsibility, under policies and direction from the authority, for airport operations, airside security, ARFF, terminal and vehicle maintenance, and the parking facilities. TBI Airport Management, Inc. operated the airport on behalf of the Authority from 1993 through September 2005. Go-Albany has the daily responsibility, under policies and direction from the authority, for the fixed-based operations, including commercial into plane fueling, fuel farm manage- ment, and general aviation handling and fueling. In 2005, the authority purchased the fixed assets and fuel inventory located on the airport from Aircraft Services International Group (ASIG) with the goal to enhance fueling services for the general and corporate aviation community by offering com- petitive rates and charges for users of the airport and to pro- vide the airlines at the airport with efficient and quality plane fueling services and fuel inventory management. Go-Albany is reimbursed for its actual expenditures based on an employ- ment level approved by the Authority plus a fixed fee with added incentives based on the growth of fixed-based opera- tion revenues. All expenditures incurred by AvPorts and Go-Albany are subject to the approval of the authority. Indianapolis International Airport. In 1994, the India- napolis Airport Authority solicited bids to manage its airport system that included Indianapolis International Airport and five general aviation airports. The winning bidder, BAA Indi- anapolis LLC, won a 10-year management contract extend- ing from October 1, 1995 through September 30, 2005. The contract was extended to the end of 2008 but was later ter- minated (effective July 16, 2007) under mutual agreement by both parties to provide for (1) an early transition of person- nel and operations back to the Authority and (2) a smooth transition in advance of the opening of the new $1.07 billion Midfield Terminal in late 2008. There was no significant change in the operation and management of the airport facilities in connection with the transition. BAA was paid a performance fee, monthly fixed fee, and transition incentive fee under the terms of the June 14, 2007 amendment. The airlines felt that while there were benefits at the front end of the contract, toward the end of the lease the airport and airlines were questioning the value of the payments to BAA relative to the benefits derived. Harrisburg International Airport. In January 1998, the Commonwealth of Pennsylvania transferred the ownership and operation of Harrisburg International and Capital City Airports to the Susquehanna Area Regional Airport Authority (SARAA), which is a joint municipal authority created to own, develop, and operate the two airports. Simultaneously, SARAA entered into a 10-year management agreement with BAA Harrisburg, Inc. (BAAH) for the operation and main- tenance of the airport system. The scope of BAAH’s services included the operation, maintenance, and development of the terminal, airfield, landside, water, and sewer facilities of the airport system, as well as administrative management. SARAA retained responsibility for supervising and provid- ing airport police services and for managing the industrial park at Harrisburg International Airport. SARAA attempted to renegotiate the terms of BAAH’s management contract in November 2000 due to concerns about declines in passenger traffic and BAAH’s administration of the airport system. The authority was unsuccessful in renegotiating the terms of the contract to allow it to have more day-to-day responsibilities in the management of the system. Therefore, SARAA termi- nated the contract in July 2001. The airport system is now managed and operated by SARAA.14 Los Angeles County Airports. American Airports man- ages and operates the five general aviation airports owned by Los Angeles County. In 1991, Comarco was awarded a 20-year management contract (with two 5-year renewal options at the county’s option) to effectively operate as airport manage- ment: collecting rents, conducting day-to-day operations, and running the airport’s capital program. Comarco subsequently sold the contract to American Airports in 2000. American Airports also acts as leasing manager for the airports, nego- tiating and setting rates with tenants. When Comarco was awarded the management contract for the airports, the system 14Official Statement, Susquehanna Area Regional Airport Authority, Airport System Revenue Bonds, Series 2004, July 30, 2004.

25 generated a $1 million annual loss, but subsequently turned the enterprise around to generate a $2 million annual profit. As leases expired, American Airports was able to re-set to market rates and escalated them at the CPI. Los Angeles County retains staff for contract administration (the county still reviews and approves leases of more than one month’s duration), capital planning, grants administration, master planning, strategic planning, construction, and inspec- tion, but reduced airport staff from 90 to 9. In addition, American Airports assumed all liability as airport opera- tor and is responsible for carrying out airport maintenance to a set standard. Based on the revenue share approach, American Airports bears the risk of managing airport costs. The first 5-year option was exercised in 2011, extending the contract through April 2016. 4.2.5 Expressions of Interest for Ontario International Airport In January 2011, Los Angeles World Airports (LAWA) released a request for expressions of interest from the pri- vate sector and other interested parties to possibly contract out the operation of LA/Ontario International Airport. The airport is owned by LAWA, which also owns Los Angeles International Airport and Van Nuys Airport, a general avia- tion facility. The expressions of interest packets ask parties how they might be able to (1) return the airport to pre-2008 passenger traffic trends and increase its share of air traffic in the Los Angeles region, (2) effectively market the airport to airlines, passengers, and air cargo companies, (3) operate the airport more efficiently, and (4) balance the short-term improvement initiatives currently underway at the air- port while maintaining its long-term capacity for growth. LAWA received 10 responses to the expressions of inter- est, including private operators of local and national GA airports, international airport operators, and infrastructure investors. LAWA operates Ontario International Airport under a long-term joint powers agreement with the city of Ontario. Officials from the city of Ontario have been in negotiations with the city of Los Angeles and LAWA to return control to Ontario. City officials in Ontario believe local control would better address the steep decline in passenger traffic experi- enced at the airport since 2007 and mitigate LAWA’s high costs of operating the airport, which contribute to relatively high airline charges. (The main factor in increasing airline charges was the 30% decline in passengers between 2007 and 2009). As of December 2011, no action has been taken on the expressions of interest and there has been no movement on the city of Ontario’s request to take back control of the airport. 4.3 Legal and Regulatory Considerations The FAA has provided guidance on management con- tracts. Grant Assurance 5(f) provides as follows: If an arrangement is made for management and operation of the airport by any agency or person other than the sponsor or an employee of the sponsor, the sponsor will reserve sufficient rights and authority to ensure that the airport will be operated and maintained in accordance with Title 49, United States Code, the regulations and the terms, conditions and assurances in the grant agreement and shall ensure that such arrangement also requires compliance therewith. The FAA’s Airport Compliance Manual contains the fol- lowing additional details on management contracts.15 1. A public airport owner may contract with an agent to perform airport management or other administrative and supervisory functions. This arrangement may be defined in a management contract, lease or both. 2. The public airport owner remains the airport sponsor, and therefore is responsible for compliance with all grant assurances and other federal obligations. (Note that the difference between full and partial privatization in the instance of a lease of an entire airport is whether the public airport owner continues to be the airport sponsor.) 3. The public airport owner can permit the private airport manager to conduct aeronautical activities, such as serv- ing as a FBO, in addition to providing management func- tions. The airport owner will have different obligations and requirements, pursuant to the grant assurances, in its treatment of the private entity acting as an FBO than act- ing as the airport manager. FAA encourages public airport owners to execute separate agreements for airport man- agement functions and aeronautical activities to reflect these different requirements. 4. Consistent with Grant Assurance 5(f), the FAA recom- mends that a management agreement include particular terms requiring that the private entity conduct its activi- ties consistent with the grant assurances and other federal obligations imposed on the public airport operator and that the management agreement itself be subordinate to the grant assurances. Management contracts must also follow standard local, state, and federal procurement rules. Another consideration is the impact of the management contract on the tax status of outstanding debt. • Under management contracts of facilities financed with tax-exempt bonds, it must be determined if the contract 15FAA Order 5190.6B, § 6.13 (Airport Management Agreements).

26 meets the “qualified management contract” test under Internal Revenue Service (IRS) regulations. Failure to meet the requirements of a qualified management con- tract could result in a judgment that a “private business use” is being made of the facilities financed with tax- exempt bonds. • At the same time, the term of the management contract needs to be long enough for a private company to realize savings from operational efficiencies. IRS regulations gov- erning qualified management contracts establish compen- sation requirements and limit the term to 10 or 15 years depending on the nature of the compensation arrange- ment. Only certain “public utility properties” (i.e., electric energy, water, or sewage disposal services) can qualify for a term as long as 20 years. As a result, management contracts of entire airports tend to be no longer than 10 years. 4.4 Evaluation of Management Contracts 4.4.1 Opportunities The main opportunities provided by management con- tracts include: • May reduce operating expenses due to lower private sec- tor employment and overhead costs, and thereby reduces costs to tenants • May or may not release contractor from local procurement regulations • Can streamline and improve certain processes, especially with regard to renegotiating nonairline contracts • Accesses private sector expertise for specialized functions and commercial development • Provides potential for new revenue/economic develop- ment initiatives on airport • Furnishes potential to impose contractual obligation for contractor to achieve performance targets • Provides opportunity for staff to gain management expertise For example, in Indianapolis, BAA’s operation was bene- ficial for staff as a whole because employees gained broader airport management expertise and had the opportunity to interact with colleagues in the United Kingdom. This inter- action was valuable, as it brought to staff the private sector airport management perspective. Typically, under an airport-wide management contract, the airport owner’s objective is to improve the financial and operational efficiency of the airport. The operator’s objec- tive is to fulfill the desires of the airport owner as expressed in the management contract in order to get paid a fee. The operating budget is usually set and managed by the operator and approved by the airport owner. Frequently, these types of arrangements are introduced when the airport is unprofit- able, and the objective of the operator would be to reduce costs and increase revenues. As an example of cost savings, in December 2010 the Kent County Aeronautics Board, which oversees Gerald R. Ford International Airport in Grand Rapids, Michigan, decided to enter into a management contract for its parking opera- tions at the airport to save the airport between $1.5 million and $1.9 million over five years.16 The savings were attribut- able to the fact that pay and benefits for county employees were higher than market costs and the employees’ union negotiated contracts on behalf of general employees based on seniority and not specific job descriptions. Some policy makers have considered privatizing the day- to-day management of their airports due to an ideological conviction and belief that the private sector can do a bet- ter job of managing airports by improving the efficiency of operations, establishing new retail and restaurant opera- tions, introducing creativity and innovation, and realizing lower construction costs. However, others argue that air- port owners and their tenants would be better served if cost and quality were the criteria used in deciding to privatize, rather than ideology. Regarding procurement regulations, in some cases the contractor must follow the airport owner’s procedures. For example, in Indianapolis, BAA was not released from the requirements of the Authority’s procurement ordinances when acquiring services on behalf of the airport authority. Release from these procurement regulations is often a large motiva- tion in privatization efforts. In contrast, BAA’s procurement of goods with their own operating funds was not considered ‘public’ dollars in the same way as the authority’s funds. 4.4.2 Advantages The main advantages provided by management contracts include: • Provides opportunity for airport to be managed and oper- ated as a business • Streamlines day-to-day operational decision making • Affords potentially lower operating expenses from private sector employment practices and efficiency initiatives • Brings increased emphasis on revenue enhancement, com- mercial, and economic development • Reduces ongoing municipal employee compensation, including post retirement expenses (pension, medical, etc.) 16Kyla King, The Grand Rapids Press Board votes to outsource parking operations at Grand Rapids airport, Grand Rapids Press, December 15, 2010.

27 • Provides greater incentives for management and employ- ees to perform better • Provides more commercial and operational freedom for contractor 4.4.3 Disadvantages The main disadvantages provided by management con- tracts include: • Involves considerable time and effort for the bidding process • Could involve buyouts and compensation for existing public workers • Could involve organizational disruption (i.e., reassignment or termination of existing employees) • Difficult to truly measure efficiencies for the purpose of justifying compensation • Can discriminate against government departments com- peting in managed competition efforts, as regulations generally prevent them from partnering with private firms or guaranteeing performance • Requires careful tracking of contract compliance, which can be a time consuming and substantial undertaking for the airport owner • Becomes increasingly difficult to attain further improve- ments and realize the full value of the management fee once initial efficiencies are attained Regarding the Indianapolis management contract, the air- lines felt that while there were benefits at the front end of the contract, toward the end of the lease, the airport and airlines were questioning the significant payments to the contractor with diminishing or no additional benefits. 4.4.4 Complexity, Risk, and Implementation Issues Implementing airport-wide management contracts for the first time can be complicated endeavors, but if structured properly, they usually entail relatively low risk. For airports that have operated under management contracts for many years (e.g., Burbank, Albany), the renewal and rebidding of the service is not very complicated, but for airports that con- sider this form of privatization for the first time, the level of effort can be quite significant, as described in the Indianapolis case study. Among other things, the airport owner needs to: • Identify what functions it wants to retain and control • Identify the service quality and performance standards it wants to achieve • Determine whether a concession or management agree- ment best advances the airport owner’s goals for risk allo- cation and compensation • Develop a strong, performance-based contract that holds the contractor accountable for meeting the quality and performance standards • Address labor issues (i.e., develop strategies to help pub- lic employees find other jobs or make the transition to a private-sector environment) • Develop and issue a request for proposals • Evaluate proposals and select the winning operator • Negotiate the terms of the contract • Secure FAA approvals for the contract, if required • Oversee the transition from public to private operation • Monitor the contractor’s performance • Negotiate the annual fee (if the fee is performance-based) The metrics used to gauge performance need to be trans- parent and easily measurable. For example, as found in the Indianapolis case study (Chapter 9), improvements made by the contractor (BAA) as measured by airline payments per enplaned passenger were difficult to track because they required estimates of a hypothetical baseline comparison. The baseline became increasingly difficult to measure, espe- cially after the operational changes due to increased security measures following the September 11, 2001 terrorist attacks. As a result, the annual management fee became an annual negotiation between the airport authority and BAA, which was frequently contentious. In addition, tracking contract compliance became a substantial undertaking for the airport authority, which eventually hired professionals with airport and public management expertise to oversee the contract. Also, the compensation needs to be tied to each goal the airport owner is trying to achieve (e.g., lower costs, enhanced nonairline revenues, improved customer service, new air service). For example, in Indianapolis, the structure of the initial compensation calculation dis-incentivized BAA from implementing any customer service initiative that resulted in increased operating expenses, even though improved customer service was cited as a goal during the competitive bidding process and was supported by the spirit of the management contract. Therefore, there needs to be reliable and accurate cost data to assess the overall performance of the activities and the owner needs to monitor and evaluate performance of the operator to ensure that its expectations are met. As found in Indianapolis and implemented in Albany and Burbank, to achieve the full benefits of privatization, it may be more effective and economical to contract with multiple firms specializing in each area in which improvement is tar- geted (e.g., ARFF, parking, fueling, fixed-based operations).

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TRB’s Airport Cooperative Research Program (ACRP) Report 66: Considering and Evaluating Airport Privatization addresses the potential advantages and disadvantages of implementing various approaches to airport privatization.

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