Our air transit system is overloaded — is privatization the answer?

Our air transit system is overloaded — is privatization the answer?
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With the summer travel season in full swing, many Americans are heading to our nation's airports. Today, over 3,330 publicly owned airports are part of a national system that moves more than 2.5 million passengers each day safely and effectively and contributes $76 billion in total output to the American economy.

But there are also considerable challenges. The runway and terminal capacity at the nation's major airports will not be able to accommodate the projected growth in passengers over the next 20 years.

The perception of major airport infrastructure deficiencies was famously buoyed by both President Trump and former Vice President Biden, who each referred to airports in metropolitan New York as “third-world.” In response, some have called for American airports to be "privatized" — that is, for them to be leased to a private company.

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It's not fanciful. Over 41 percent of all European airports have some share of private ownership and many cities and states in this country are exploring new kinds of partnerships with private firms on other transportation assets like highways and public transit. But unlike those modes, airports regularly cover their costs with revenue generated on the airport property like taxes on aviation fuel, landing fees, parking revenue, and concessions. These sources mean that, on average, airports in North America have net revenues that exceed their capital and operating expenses. That is naturally attractive to an investor.

 

However, several barriers limit the usefulness of private capital on public airports.

For one, federal law requires all revenues generated by a public airport to be reinvested back into airport assets. While this does not apply to service, management, and construction contracts, it makes long-term leases unappealing because a private partner cannot use that revenue to generate financial return for its investors.

In order to grant exemptions for the use of revenues, as well as other regulatory hurdles, Congress created the Airport Privatization Pilot Program(APPP) in 1996. However, 65 percent of all airlines using the airport would have to approve the program, along with any fee increases charged to airlines at a higher rate than inflation, which they are not keen to do. 

Publicly owned airports can also take advantage of tax-exempt public bonds, which the federal government offers to states and localities, as well as transportation departments and school districts. This makes the cost of borrowing for infrastructure improvements extremely cost effective for the public sector.

In this way, the current rules make privatization very difficult to approve and not particularly attractive to private-sector bidders. In fact, in more than two decades since the inception of the program, only two airports have actually been privatized: Stewart International Airport in New Windsor, New York; and Luis Muñoz Marin Airport in San Juan, Puerto Rico.

As part of its infrastructure plan, the Trump administration called for fixes in certain bond instruments in order to make long-term leases of existing airports less costly to finance by private investors. The administration also proposed changes to the APPP that streamlines the process for obtaining the exemptions for the restrictions on how revenue is used and the requirement that federal grants are repaid. These were incorporated into the Federal Aviation Administration Reauthorization Act of 2018 that passed the House by a wide margin in April. The Senate bill awaits action and is expected sometime in August. 

Airports face a host of challenges, yet full privatization and long-term leases are likely not going to solve them. Several calls for privatization — like Lambert International Airport in St. Louis and Westchester Country Airport north of New York City — are intended to generate a one-time infusion of cash for governments to use for other priorities. That can be a positive net gain, but does not solve any specific airport problem, nor does it give airport owners flexibility and control in the long term.

If an airport has an intractable problem with poor management or is so heavily debt laden that it is unable to invest, privatization might directly address those problems as it did in San Juan. Today, no American airport is in such dire straits.

To increase competition, decrease costs, and improve management, airports already have a host of tools at their disposal. Airports regularly engage the private sector through service and management contracts as well as private financing and construction of terminals and runways. Instead of opening the discussion as whether an airport should be privatized or not, policymakers and regional leaders need to evaluate the problem they are trying to solve and look at all potential solutions.

Robert Puentes is president and CEO of the nonprofit Eno Center for Transportation, and serves on a variety of state and federal advisory boards. Previously, he was senior fellow at the Brookings Institution’s Metropolitan Policy Program, where he directed the program’s Metropolitan Infrastructure Initiative. Find him on Twitter @rpuentes