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Renewed Interest in Midway Airport Lease?

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 11 Nov 2009 15:17:00 EST

As Crain's Chicago Business reports, Midway Airport's strong economic performance of late is rekindling interest in a long-term lease:

Midway Airport is pulling out of the recession faster than O'Hare International Airport, as shifts in the air travel market boost Midway's fortunes and breathe new life into Mayor Richard M. Daley's plan to privatize the city's No. 2 airport.

Passenger traffic at Midway climbed 9% in September on a year-on-year basis, following smaller gains in July and August. O'Hare, meanwhile, saw monthly declines of 7% to 8% during the same period. [...]

Midway remains about one-fourth the size of O'Hare, the nation's second-busiest airport and a hub for United and American. That's not going to change significantly, but Midway's quick recovery will make it more attractive to private investors. "There is an active discussion around trying to get ready to do it (again)," says John Schmidt, a partner at Chicago-based Mayer Brown LLP who is advising the city on privatizing Midway.

A $2.5-billion privatization led by New York-based Citigroup Inc. and Vancouver-based YVR Airport Services collapsed in April. But a new deal could happen next year. "A combination of things has to happen for privatization: The airport has to come back, and credit has to be available," Mr. Schmidt says. "To be able to say 'Here's an airport that's doing well,' it's a great strength."

In a sign the privatization market is reopening, New York-based Global Infrastructure Partners paid $2.5 billion last month for Gatwick Airport, London's secondary airport. And in September, the Federal Aviation Administration gave preliminary approval to New Orleans to privatize Louis Armstrong International Airport.

Meanwhile, increased traffic at Midway will boost passenger facility charges — the $4.50 fee the airport collects from travelers — which are used to pay off bonds that financed an expansion five years ago. More passengers also means more revenue from parking, food and other concessions, a key component of any privatization.

This, plus the recent Gatwick purchase and the approval to move forward with a lease of New Orleans' Louis Armstrong International Airport, offer some encouraging signs on the U.S. airport privatization front.

For the latest on international airport privatization, check out colleague Robert Poole's comprehensive review in Reason Foundation's Annual Privatization Report 2009, as well as Reason's airports research and commentary here.

Bob Poole (Quoted by Steve Forbes) Has It Right: Airline Deregulation is not to Blame

shirley.ybarra@reason.org (Shirley Ybarra) — Wed, 11 Nov 2009 11:00:00 EST

In a book by Steve Forbes and Elizabeth Ames, How Capitalism Will Save Us, Why Free Markets and Free People Are the Best Answer, the question was asked: Didn’t deregulation wreck the airline industry? The resounding answer is NO! It actually greatly benefitted consumers. As the a short version in an article concludes: Airline deregulation actually has made service cheaper and more abundant. Adjusted for inflation, fares today are 25 percent to 44.9 percent lower than they were before deregulation three decades ago. Carriers offer far more service to more cities. And studies show travel is safer, too.

In the course of describing the situation (accurately) the authors use an article in 'Regulation Magazine" by (Reason’s own) Bob Poole, Jr. and Viggo Butler where they explain:

… government management of our airports and air-traffic-control systems has produced an antiquated, inefficient infrastructure unequipped to handle the explosion of air travel resulting from deregulation.
Government-run airports, for example, are unable to use market-based methods to reduce airport congestion--such as using peak pricing to direct some usage by carriers into off-hours. This would not only cut down on overcrowded terminals, it would generate much-needed fees to finance expansion and technological improvements both in air traffic control and in airport facilities
…the misery of today's air travel is largely caused by an air-traffic-control system that relies on outdated 1950s technology. Only recently did the FAA announce that it would phase in more sophisticated NextGen air-traffic-control systems that use the kind of GPS satellite navigation technology consumers have had for years in passenger cars. The new systems would enable airports to handle at least twice as much traffic.
NextGen technology has existed for years. But the system has been bogged down in political debate. Not having to account to consumers, bureaucrats, as always, take their time at taxpayer expense. NextGen isn't expected to be fully in use until about 2025, at a total cost of some $35 billion.
Other countries already have more efficient, up-to-date air-traffic-control systems than the United States because they have given the management of airports and air-traffic-control systems to nonprofit corporations under industry control--and out of the hands of politically interested government bureaucrats.

Hence the accurate concluding comment which Bob Poole has written about many times over: "The real problem in the United States isn't our airline traffic jam. It's the bureaucratic bottleneck in Washington."

See other articles by Bob Poole, Jr. at http://reason.org/areas/topic/air-traffic-control

Airport Security (Lack Thereof) or the Right Methods?

shirley.ybarra@reason.org (Shirley Ybarra) — Mon, 09 Nov 2009 10:46:00 EST

My colleague Bob Poole, in his most recent Airport Policy and Security Newsletter( # 51) highlighted the General Accounting Office report looking at airport security (or lack there of).

About the same day, the Washington Times also had a critical editorial citing many of the same problems.

As the Times pointed out “Despite this massive expenditure and the passage of seven years, the agency has not deployed the technology and isn't even sure any of the 10 new systems can address the greatest threats. According to a recent investigation by the Government Accountability Office (GAO), there may not be any benefit from any of this any time soon.”

Bob said: "One key finding is that after years and years of rhetoric about risk-based policy from both TSA (Transportation Security Agency) and its parent agency, the Department of Homeland Security (DHS), "TSA's strategy does not incorporate some key risk management principles-a risk assessment, cost-benefit analysis, and performance measures."

The Times echoed a similar thought with “GAO auditors found that TSA has not applied any risk analysis or cost-benefit analysis to ensure the effectiveness or need of the new technologies. GAO said that TSA doesn't even have "reasonable assurance that technologies will perform as intended."

One of Bob’s final comments “A section toward the end of the report also makes dismaying reading. It summarizes DHS's response to the report's eight recommendations, all of which the agency said it agrees with. In most cases, however, the GAO states its concerns that the agency either doesn't really mean it or that the actions it says it will take will not (or not fully) address the intent of the recommendation. In two cases, GAO cannot provide a detailed explanation of its concerns, because "TSA determined our evaluation to be sensitive security information."

Now comes an article today in the Washington Post entitled “TSA screening more than just carry-on bags” with subhead 'Behavior detection' officers covertly watch travelers' conduct”

The article tells us that the TSA has stationed specially trained behavior-detection officers at 161 U.S airports to identify potentially dangerous individuals. The officers may be positioned anywhere, from the parking garage to the gate.

"We're not looking for a type of person, but at behaviors." We are trying to spot passengers that show an unusual level of nervousness or stress. It is not easy to identify these offices as they “blend in” with other TSA screeners. The behavioral officer is specially selected for their intelligence, maturity and ability to work with people. These jobs do not require a background in behavior analysis
Koshetz said the TSA has established specific criteria for what is considered normal behavior "in an airport environment." She said officers react only if a passenger strays from those guidelines, which the TSA declines to reveal for security purposes.
The observation of passengers does not end at the airport.
On an undisclosed number of domestic and international flights, federal air marshals pick up where the behavior detection officers leave off.
The article cites many successes most of which are drug related however at least is one is threat of a bomb in the back pack. The statistics for last year indicate that officers nationwide required 98,805 passengers to undergo additional screenings. Police questioned 9,854 of them and arrested 813.

It is not an easy job to ensure the public safety but is TSA using the right methods?

Airport Policy and Security Newsletter #51

bob.poole@reason.org (Robert Poole) — Thu, 05 Nov 2009 00:00:00 EST

In this issue:

GAO on TSA Screening Technology
Hub Airlines and Congestion Delays
Bogus Arguments on Private Screening
Gatwick Airport Sale and Other Privatizations
Porter Airlines Breaks the Mold
News Notes
Quotable Quote

GAO Rips TSA Screening Technology Development

We all want to believe that better technology holds the key to easing our way through passenger screening checkpoints. But the way the Transportation Security Administration is going about doing the R&D, testing, and deployment of better technologies leaves a great deal to be desired. That's the message of the latest report on aviation security by the Government Accountability Office, released last month (GAO-10-128, October 2009).

One key finding is that after years and years of rhetoric about risk-based policy from both TSA and its parent agency, the Department of Homeland Security (DHS), "TSA's strategy does not incorporate some key risk management principles-a risk assessment, cost-benefit analysis, and performance measures." Those principles are required by DHS's National Infrastructure Protection Plan (NIPP). TSA responds blithely that it takes risks into account by analyzing threat information, but GAO points out that the NIPP requires a systematic process of doing risk analysis based on threat, vulnerability, and consequence assessments. TSA admits that it has not yet conducted cost-benefit analysis to set priorities for checkpoint screening or established performance measures for deployed technologies. But as the GAO report points out, without doing these things, "TSA cannot ensure that it is targeting the highest priority security needs at checkpoints, measure the extent to which deployed technologies reduce the risk of terrorist attacks, or make needed adjustments to its [checkpoint] strategy."

At the request of the senior members of Congress who called for this report, GAO used the infamous "puffer machines" as a case study in poor decision-making. TSA deployed 101 of these Explosive Trace Portals (ETPs) to airports in 2006, despite the fact that it had done no testing outside of laboratory conditions. They broke down frequently due to dirt and humidity in the airport environment (not to mention that they slowed down throughput compared with walk-through metal detectors). Most are no longer being used, some have been removed, and another 116 that were bought but never deployed remain in storage.

Going forward, GAO acknowledges that TSA, after repeated prodding, has completed a strategic plan for passenger checkpoints that includes goals and objectives-but it has not conducted a risk assessment as part of that process. It has not assessed the vulnerabilities of the checkpoint technologies currently in place, nor the tactics terrorists could use to bypass or spoof them. "TSA lacks a method to systematically test and identify vulnerabilities in its passenger and baggage screening equipment in an operational airport setting." It has not completed a cost-benefit analysis to help set risk-based priorities and guidelines for developing and selecting among new technologies. And it lacks measures to evaluate the extent to which its checkpoints reduce the risk of terrorist attacks.

A section toward the end of the report also makes dismaying reading. It summarizes DHS's response to the report's eight recommendations, all of which the agency said it agrees with. In most cases, however, the GAO states its concerns that the agency either doesn't really mean it or that the actions it says it will take will not (or not fully) address the intent of the recommendation. In two cases, GAO cannot provide a detailed explanation of its concerns, because "TSA determined our evaluation to be sensitive security information."

These are still early days of the Obama administration. I hope DHS Secretary Janet Napolitano and new TSA Administrator Erroll Southers will take this report seriously.

Do Hub Airlines "Internalize" Congestion Delays?

Although most economists who have studied delays at congested airports recommend some form of pricing to bring peak demands into conformity with runway capacity, the past decade has seen several studies claiming that airlines with a dominant position at hubs (e.g., American at DFW or Delta at Atlanta) "internalize" the resulting delays-i.e., accept them as a cost of doing business at the hub (while appreciating that the congestion also deters new entrants from competing there during peak periods). The most cited of these studies was by Jan Brueckner in 2002, who ended up proposing that airport congestion prices should therefore be lower for the dominant hub carrier than for others.

I only recently came across a 2005 paper by economists Katherine Harback and Joseph Daniel which provides a new empirical test of the internalization argument: "(When) Do Hub Airlines Internalize Their Self-Imposed Congestion Delays?" (University of Delaware Department of Economics, Working Paper No. 2005-08) They developed a model of airport congestion and used flight data from 27 major U.S. airports to test whether dominant airlines internalize such self-imposed congestion-- or ignore it. Most of their statistical tests reject the internalization hypothesis. Another test showed that "flights operating during typical large interchange banks at nearly all the highly congested airports do not internalize delays." These results apply to Atlanta, Charlotte, Washington National, Denver, Dallas, Detroit, Newark, Houston, JFK, Minneapolis/St. Paul, Chicago O'Hare, Pittsburgh, San Francisco, and St. Louis. Two notable omissions from this list are LaGuardia and Los Angeles, neither of which has a large dominant carrier, and both of which have high traffic in relation to capacity essentially all day long.

Harback and Daniel conclude with policy recommendations. They argue that any policy to reduce airport congestion should focus on both increased efficiency and increased competition. "Properly implemented, congestion pricing would improve flight connection times for airlines at their own hub airport, while imposing only minor scheduling delays (often less than 15 minutes) from their most preferred operating times at their non hub airports." Moreover, they write, "Hub airlines should support congestion pricing as a means of reducing self-imposed congestion while pricing other airlines out of their periods of peak bank operations." This approach, they maintain, should be considered pro-competitive because, "while it strengthens the local hub, it means that other airlines will be able to provide moe rapid connections at competing hubs. By improving connecting service, there would be more viable competition or potential competition in many origin-destination markets, putting downward pressure on fares."

If You Outsource Airport Screening, Watch Out for Bogus Arguments

Last month the airport board of Glacier Park International Airport in Montana voted to shift from TSA-provided passenger and bag screening to contract screening, under TSA's Screening Partnership Program (SPP). Airport director Cindi Martin had been complaining for years about inadequate screener staffing, especially during the tourist season. TSA has repeatedly reduced the airport's allocation of screeners, which it re-calculates once a year, based on passenger numbers in October (a quiet month at Glacier Park). Although TSA supplements the screener workforce in the summer as best it can via its National Deployment Officers (a kind of flying squad of screeners), that has not been enough to prevent long lines and passenger complaints.

Unfortunately, much of the news coverage of the airport's decision has focused on fears and complaints from the current TSA workforce. In particular, they cite a "GAO report" that found that screening by TSA-approved contractors costs 17% more than screening done by TSA itself. For example, screener Eric Wood was quoted as saying, "To try to increase and add an extra layer of bureaucracy, it seems ludicrous in this economy. Dollar for dollar, it's going to cost you [the taxpayer] more money, and you're not going to get a better product." Even airport director Martin accepts the alleged GAO finding of 17% higher cost, but thinks the reduced lines will be worth it.

The study they both are referring to says nothing of the sort. I reviewed the report (GAO-09-27R) back in February 2009 (Issue No. 42). What GAO did was to review two reports on the costs and performance of screening under the SPP versus TSA-provided screening, one by Catapult Consultants (hired by TSA to do an independent assessment) and the other by the TSA itself. The Catapult report (which has not been made public but is well-summarized by GAO) appears to have been well done. First, Catapult compared six SPP airports with a matched set of TSA airports. The reported costs were, indeed, 17.4% higher, on average, for the six SPP airports. To get a broader picture, Catapult created a regression model using data from all 450 airports with screening, and four years worth of data. That exercise showed 9% higher costs at SPP airports.

But that's not the end of the story. TSA evidently didn't like the Catapult report, because it found (as had previous outside studies) that "SPP airports' overall performance results are equal to or better than those delivered by non-SPP airports." It also noted that TSA assigns administrative and overhead costs at SPP airport that artificially inflate the reported cost of screening there. So TSA did not release the Catapult study; instead, it produced its own quick & dirty "study" using only one year of data (rather than Catapult's four).

What GAO did, in so many words, was to blow the whistle on this skullduggery, by summarizing and contrasting the Catapult and TSA reports. GAO noted that TSA's recorded costs of screening (used in both of those reports) omit such key items as workers comp, general liability insurance, and some retirement costs for TSA screeners that are not in TSA's own budget. And the cost comparison also neglects the revenue the federal government gets in income taxes from the SPP companies. And because TSA did not compare cost with performance, GAO said that "We believe that TSA should not use [their] study as sole support for major policy decisions regarding the SPP."

In short, the arguments being raised in opposition to Glacier Park's decision are bogus, and it's absurd to cite the well-done GAO report to argue against an airport's decision to go with the SPP option. Frankly, I think the airport trade groups-AAAE and ACI-NA-should have done a better job informing their members about the Security Partnership Program. Small-town airport directors like Cindi Martin should not have to rely on this newsletter to learn the facts about this useful program.

P.S.: Seven smaller Montana airports have already joined SPP this past summer, and both Butte and West Yellowstone have applications pending, in addition to Glacier Park.

Gatwick Sale Revives Airport Privatization

Early in 2009, when Chicago's attempt to lease Midway Airport failed for lack of financing, many observers pronounced the end of a short-lived era of infrastructure privatization, that had begun in 2005 with the lease of the Chicago Skyway. In fact, only last week a poorly researched article in USA Today was headlined "Privately Run Infrastructure Deals Dry Up." Only days before, the financial news media announced that Global Infrastructure Partners had purchased London Gatwick Airport from BAA for $2.47 billion. Doesn't sound very dried up to me!

GIP is a $5.64 billion infrastructure fund, one of nearly a hundred worldwide that have raised substantial sums (in excess of $100 billion) to purchase or long-term lease key infrastructure enterprises. GIP is backed by Credit Suisse and General Electric. It already owns the small but growing London City Airport, a U.S. natural gas pipeline, a British port, and a British waste-management company. It is also considering a bid for one of BAA's Scottish airports.

The fact that the Gatwick deal got done, and at a reasonable price, in today's financial markets is a good sign for other planned infrastructure deals-including other airport privatizations. I've reported in recent issues on announced plans for privatization of New Orleans' Louis Armstrong International and Rio de Janeiro's Galeao International Airport. Both of those planned deals look more credible today than they did a month ago, thanks to Gatwick.

And then there's Sheremetyevo, Russia's second-largest airport (in Moscow). Since the collapse of the USSR, it has lost ground to privately managed Domodedovo, the other main Moscow airport. But last month Russia's Transport Ministry announced plans to privatize Sheremetyevo in 2010, in a deal estimated to be worth €1.5 billion. The winning bidder will be expected to pay for building a third runway as well as terminal modernization projects. Even Kosovo has its principal airport on the market.

To be sure, some of these airports will be easier to finance than others-and some may not attract serious bids, depending in part on how fast credit markets recover. But it's good to see that investor interest in the airport sector is picking up again.

Porter Creates Important Niche Market

For several months I've been following with great interest start-up airline Porter Airlines. It began service just three years ago (October 2006), operating out of Toronto City Center Airport, a small airport adjacent to the Toronto central business district. Today it provides regional service to Montreal, Ottawa, Quebec City, Chicago, Boston, New York (Newark), Halifax, Thunder Bay, and St. Johns, using Bombardier Q400 twin turboprop aircraft. By next spring, its fleet will consist of 20 of these quiet, fuel-efficient planes. As a low-cost but high-service airline (free beer, wine, and snacks on board; coffee and newspapers at the airport), it has led to dramatic fare reductions on routes it has entered these past three years.

Porter is a wholly owned subsidiary of Porter Aviation Holdings, Inc., backed by Edgestone Capital Partners, Borealis Infrastructure, GE Asset Management, and Dancap Private Equity. The company has a 50-year history operating other regional airlines in Canada. It also provides the Fixed Base Operator service at Toronto City Center Airport.

The airport is owned by the Toronto Port Authority, and its continued existence as an airport was in question only a few years ago. Apparently, the city government had considered taking over the property and converting it to other uses, a move that would have been popular with a nearby residents' group called Community Air. That group has opposed-to no avail-Porter's currently-under-way project to expand the terminal to a 10-gate configuration with jet-bridges (which passengers will certainly appreciate during Toronto winters). The first phase is to open this fall, with completion of the $45 million project by next summer.

Porter CEO Robert Deluce told Airport Business (August 2009, p. 16) that the company has identified 17 additional destinations, all within a 500-mile range of Toronto City Center Airport, as possible service additions. Deluce better move fast, in my view, since Air Canada Jazz is considering moving into City Center. The airport's small size limits its capacity, and Porter reportedly already uses a large majority of all available slots.

Porter's success in identifying and serving regional markets-and from a downtown airport close to a huge concentration of business people-causes me to once again reflect on the hubris of those who want to take untold billions from general taxpayers to displace self-supporting short-haul airline service with heavily-subsidized inter-city rail. Other cities could do as Toronto has done, providing airport capacity tailored to short-haul, turboprop (perhaps STOL?) service, with entrepreneurial airlines paying for terminal space and runway access. And because of the flexibility of air service, decisions about which cities to serve would be made by individual carriers, responding to the market demands their efforts would discover. Contrast that with the hugely politicized process of deciding which cities will be on the route of a tax-funded rail service-and the "sunk" nature of the cost of the rail infrastructure if those decisions turn out to be flawed.

My hat's off to Porter-and to the enlightened Toronto Port Authority.

News Notes

Should AIP Help Implement NextGen?

At the Air Traffic Control Association annual conference last month, the Colorado Dept. of Transportation (which funded a wide-area multilateration surveillance system that will dramatically increase runway throughput at airports in the mountains) argued that the federal Airport Improvement Program should fund such projects. And the Aviation Week Airports weekly for Oct. 27th quoted FAA associate administrator for airports Catherine Lang as agreeing. "What Colorado paid for was not AIP-eligible, but it's a fair question to ask, why not?" she told the newsletter. I agree; a lot of critical NextGen technology can increase runway throughput, and that seems likely to offer many project opportunities with higher ratios of benefits to costs than many current AIP grants.

Delta to Up-Gauge at LaGuardia

How times change! Two years ago as I was drafting Reason Foundation's proposal for congestion pricing at the congested New York airports, Delta was among the carriers denouncing the idea, and one of its arguments was that "up-gauging won't happen" because airlines needed numerous commuter planes to feed traffic to their longer-haul flights. But now that Delta has acquired 125 LGA slots from US Airways, "Delta plans to accomplish its expansion through larger jets," replacing turboprops operated by US Airways Express.

Use-It-or-Lose-It Exemptions

While I'm not a fan of airport slot controls (much preferring runway pricing to deal with congestion), when such controls exist, I support use-it-or-lose-it regulations to prevent incumbent carriers from hoarding unused slots in order to keep out competitors. Hence, I hope the EU Council of Transport Ministers continues to ignore pleas from the Association of European Airlines to extend the summer 2009 waiver of the 80% rule into the winter season and summer 2010. On the other hand, I can see the logic of the FAA agreeing last month to waive its use-it-or-lose-it rule at New York's JFK airport from March through November, while a major runway is taken out of service for a resurfacing and widening project. This will permit carriers at JFK to reduce their schedules during this period so as to prevent much worse delays and congestion.

Manchester Airport Exempts Kids from Body Scanning

Last month the UK's Manchester began a year-long trial of a checkpoint body scanning machine. A group called Action on Rights for Children objected, claiming that using the device on children would violate the Protection of Children Act of 1978, which makes it illegal to "make" or "show" in indecent image of a child. Two days later, the airport caved, announcing that children will be exempted from going through the RapiScan machine. Since UK law defines children as anyone under the age of 18, terrorist groups now have received what amounts to an invitation to use 16 and 17-year-olds as suicide bombers on planes departing Manchester.

Quotable Quote

"Each item confiscated [at passenger checkpoints] is presumed to have potential explosive, highly flammable, or other characteristics that could endanger life and property. As I understand it, federal health and public safety regulations require that any such suspicious item be isolated until it can be handled by experts, properly attired in protective gear, who would then transport it in an explosion-proof container to a protected laboratory test cell where it would be photographed, x-rayed, measured, weighed, and documented prior to being opened up and examined by remote means to avoid injury to personnel. . . . Why is it that the public safety bureaucrats haven't raised a single eyebrow at the way the TSA folks blithely toss these potential weapons of mass destruction around inside airport terminals full of people? Could it be that they, too, are in on the little secret that this is all just security theater?"

--Aviation reporter (name withheld by request), on an aviation list-serve, Oct. 16, 2009.

Airport Policy and Security Newsletter #50

bob.poole@reason.org (Robert Poole) — Sat, 31 Oct 2009 00:00:00 EDT

Brookings on Air Travel Delays
Will Registered Traveler Rise Again?
Increasing Runway Throughput
Unionizing TSA Screeners
LAX vs. Airlines, Again
GAO on Flawed Access Control
News Notes
Quotable Quote

Brookings on Air Travel Delays: Two-Thirds Right

The Brookings Institution has released a well-done report on the looming problem of increased air travel delays. "Expect Delays: An Analysis of Air Travel Trends in the United States," provides a well-timed warning of the likely return of serious airline delays once economic growth resumes and makes three major policy recommendations. (www.brookings.edu/reports/2009/1008_air_travel_tomer_puentes.aspx).

As a product of the think tank's Metropolitan Policy Program, the report focuses on America's urban areas, which are the source of most air travel. Nearly 99% of all passengers arrive at or depart from one of the 100 largest metro areas, with 73% concentrated in just 26 major metro areas (the largest of which are served by multiple airports with scheduled air service). It's those 26 urban regions that account for most of the seriously delayed flights. Also, nearly half of all airline flights (but just 30% of all passengers) are routes of less than 500 miles, a fact which leads to one of the report's recommendations.

The authors contend that current aviation policy is not focusing resources adequately on those 26 congested regions. For example, only 21.8% of Airport Improvement Program grants (and just 19.9% of airport-related stimulus funds) went to airports in those 26 major metro areas in FY 2009, according to the report's analysis. So one of the three recommendations is to "empower the most congested metropolitan areas to enact congestion mitigation policies" such as runway congestion pricing, which would generate additional revenue while providing incentives to economize on runway use. For the longer term, the authors suggest revising the way the FAA's Future Airport Capacity Task (FACT) process works, to put more emphasis on congestion reduction in the 26 major areas. So far, so good.

A second recommendation is to accelerate the deployment of NextGen technologies and investments to the major airports so as to expand their operational capacities in the medium term, beginning with the kinds of "now-Gen" approaches proposed by the RTCA's recent task force on this subject. It's hard to think of anyone who would oppose this one.

More troubling is the report's third recommendation: to prioritize high-speed rail project selection to focus on short-haul corridors (400 miles or less) where rail could substitute for airline service, thereby easing congestion at the airports at one or both ends of those routes. The 10 busiest corridors of this type, ranging from 185 miles to 358 miles, are Los Angeles-San Francisco, Los Angeles-Las Vegas, Los Angeles-Phoenix, Dallas-Houston, Boston-New York, New York-Washington, Los Angeles-San Jose, Dallas-San Antonio, Chicago-Minneapolis, and Dallas-Austin. Thus, we have four routes from LA, the two principal NE corridor shuttle routes, three in Texas, and one in the Midwest.

True high-speed rail service has in fact captured significant market share from airlines in selected cases: London-Paris, Paris-Lyon, Barcelona-Madrid, Frankfurt-Cologne, Tokyo-Osaka, in particular. And even moderate-speed Amtrak service in the Northeast Corridor has significant market share in competition with the airline shuttle services. But these experiences do not support the report's assertion that such corridors offer opportunities to "begin making returns on investment as soon as possible." Based on the best available public information, while rail service in these high-demand corridors covers its operating costs, none covers its capital investment costs, which are paid for largely or entirely by general taxpayers. So what proponents of replacing short-haul air service with rail are actually calling for is heavy taxpayer subsidies for a new mode to compete with self-supporting (user-paid) airline service. It's as if air fares were set to cover only the operating and maintenance costs of that service-letting general taxpayers cover the costs of buying the planes, building the airports, and creating the air traffic control system.

The OECD's Joint Transport Research Center held an expert round table on the subject of airports, airlines, and high-speed rail last October in Paris. The discussion paper summarizing this meeting concluded that, "The benefits from high-speed rail mainly take the form of time savings compared to other modes, and possibly of congestion relief in other modes. Environmental benefits are minor. In fact, the benefits are outweighed by the costs (in particular the high fixed costs), except in cases where there is high density of demand and there are pressing capacity problems in air and road alternatives." (See JTRC Discussion Paper 2009-7 at www.internationaltransportforum.org). It also points out that low-cost carriers (LCCs) can provide services between regions instead of cities, which is what has happened not only in Europe but in short-haul markets in this country.

Consider the greater Los Angeles area, where five airports are linked to three in the San Francisco Bay Area, all with frequent non-stop service, mostly by LCCs. Now compare that with the route map of the proposed $40-60 billion California High Speed Rail system. It shows 10 stations in the Los Angeles metro area and nine in the Bay Area-but only one main line connecting the two regions. While there will presumably be a number of nonstop express trains from, say, Union Station in LA to the huge new station planned for San Francisco, service from most or all of the other metro-area stations will include numerous stops, making it difficult to compete with nonstop air service, say, from Anaheim to Oakland.

So I cannot agree with the Brookings report on this one. And given the likely politics that will govern the actual selection of federally funded passenger rail corridors, they are unlikely to be located where the Brookings researchers suggest.

New Life for Registered Traveler Program

On September 30th, the House Homeland Security Committee's subcommittee on transportation security and infrastructure protection held a hearing on the future of the Registered Traveler program. Testifying in favor of reviving the program as a risk-based security program-the original intent of Congress in 2001-were two of three companies interested in reviving the service, two business travel groups, and a major airport organization. Subcommittee chair Rep. Sheila Jackson Lee endorsed revival of the program as a risk-based program, a specified in HR 2200, the House-passed Transportation Security Administration reauthorization bill.

The TSA's John Sammon replied that the agency is awaiting the confirmation of its new Administrator, Erroll Southers, to decide how it will proceed on RT. That requires Senate action, as does enactment of a counterpart to the House bill. Thus far, I have not seen any draft Senate provisions on RT, but this could presumably be addressed at the conference committee stage, even if the Senate bill ends up without addressing the issue.

Three companies have expressed interest in buying the membership records of former Clear provider Verified Identity Pass from creditor Morgan Stanley: FLO Corporation, Henry, Inc., and a third that has not been publicly identified. FLO's Fred Fischer and Henry's Alison Townley both testified at the hearing, and both said they would offer special deals to former Clear members. Townley said her firm would enroll former members at no charge for the balance of their terms with Clear. Fischer said that FLO will partner with a service provider that has 1,000 enrollment locations across the country, making it easier for prospective members to sign up.

Both the Business Travel Coalition and the National Business Travel Association strongly endorsed revival of RT as a risk-based security program that would also offer passengers and airports much speedier checkpoint processing of vetted members. BTC's Kevin Mitchell noted the importance of subjecting applicants to a serious criminal history background check, as well as integrating the program with the ongoing Global Entry program (sometimes referred to as International RT) of Customs & Border Protection, TSA's sister agency. And Fischer noted that under the old TSA program, "not a single RT member was ever vetted using a criminal history records check," a point I have independently verified.

AAAE's Carter Morris noted that a risk-based trusted-traveler program was recommended by the October 2001 Rapid Response Team set up by then-DOT Secretary Norm Mineta, which led to the idea's inclusion in the landmark Aviation & Transportation Security Act of 2001, enacted the following month. This type of RT program was also endorsed by the 9/11 Commission, Morris reminded subcommittee members.

I'm encouraged by the strong level of interest in re-starting Registered Traveler as the kind of security program it was intended to be. I hope the Senate does its part to move the issue along, and I'm looking forward to a positive decision by the new TSA Administrator.

Using Technology to Increase Runway Throughput

Of the large airports on the FAA's list of those needing additional runway capacity, 18 have what are defined as "closely spaced" parallel runways. In clear weather, FAA safety regulations permit simultaneous approaches on those runways, on the basis that pilots can see each other and take action to avoid a collision if one drifts toward the other. But under reduced-visibility conditions, such simultaneous approaches are not permitted, which means runway throughput is dramatically reduced.

In the 1990s, the FAA approved a technology improvement called an e-scan Precision Runway Monitor (PRM) that would permit simultaneous approaches on runways 3,000 feet apart, instead of the usual 4,300 feet. Basically, this was an electronically scanned radar whose update rate was 4 to 5 times faster than old-fashioned rotating radar; hence, it could keep more accurate track of both planes' locations as they made simultaneous approaches. PRMs were installed at only a handful of airports. It's not that they didn't work, but that they were costly to buy and costly to operate.

But a new generation of technology is now here, providing a lower-cost alternative to e-scan PRM. Early this month, the first such system went live at Detroit Metropolitan Wayne County Airport. Developed by Sensis Corp., it's designed to work with the company's runway incursion prevention system ASDE-X, which is operational so far at 20 of the 35 major airports targeted by the FAA to get this system. Called PRM-A (for alternative), it builds on the detection capability of ASDE-X (which uses both airport surveillance radar and transponder data) by adding wide-area multilateration (WAM), which can keep track of aircraft within 30 nautical miles of the airport, with once-per-second updates. (Multilateration is a kind of triangulation, using an array of sensors over a geographical area.) Although it still requires a separate display (a modified Raytheon STARS platform) and controller in the TRACON, like conventional PRM, the PRM-A costs about half as much to acquire.

That's doubly good news, because the old PRM is no longer in production. Hence, for the 18 airports with closely spaced parallel runways, the cost of adding this capacity is now significantly less than it used to be. And those few airports with aging PRMs and very limited availability of spare parts now have an option for replacing them with new and better technology.

Thus far, the FAA has approved PRM-A only for runways as closely spaced as 3,000 feet, but some of the 18 airports on FAA's list have runways closer together than that. A 2005 paper presented at the24th Digital Avionics Conference in 2005 argued that for aircraft equipped with ADS-B/In, spacing could be reduced to as little as 750 feet. (This is reference 14 in Viggo Butler, "Increasing Airport Capacity without Increasing Airport Size," http://reason.org/news/show/1002975.html.) It should be a priority for FAA and companies like Sensis to figure out what it would take to permit safe simultaneous approaches to all the remaining runways-and to start planning to do so.

Unionization and TSA Screeners

One of the original provisions of the 2001 Aviation & Transportation Security Act was that due to the critical nature of their work, the newly created federal airport screening workforce would not be allowed to form unions or go on strike. That provision was not popular with unions or their supporters in Congress, but with a Republican in the White House until this year, the odds of changing the law (i.e., of being able to override a presidential veto) looked slim.

That was then; this is now. Two House committees-Oversight & Government Reform and Homeland Security-have recently approved legislation by Rep. Nita Lowey (D, NY) to grant collective bargaining power to most TSA employees. The move is strongly supported by the American Federation of Government Employees and the National Treasury Employees Union. While I have nothing against unions in general, I think it would be a mistake to change the status quo in the field of airport security. Here's why.

Thanks to various audits and reports from both the Government Accountability Office and the Department of Homeland Security Inspector General's Office, we know that there are ongoing performance problems in airport screening. Red-team efforts to sneak prohibited items through airport screening succeed more often than not. Failure rates on TSA's skills test for screeners have exceeded 50% this year, and go as high as 80% at some airports, but in response, both unions urged TSA to suspend use of those tests! AFGE is also seeking to have TSA clear the records of those who fail the tests, because screener compensation is tied in part to performance. In addition, employees who seriously fail can be (and are being) fired, and under current rules cannot be rehired. But wiping those failures from employee records could permit those who were fired to be rehired.

These union pressures are being exerted today from the outside; they would be a lot more effective if the unions officially represented TSA screeners from the inside. It seems to me that airport screening is already a weak link in the chain (as demonstrated by the red team results and the skills test failures). The last thing we need is institutional arrangements that would further weaken screener performance and accountability.

New Developments in Los Angeles Airport Leases Struggle

I last reported on the ongoing struggle between Los Angeles World Airports (LAWA), proprietor of LAX, and various airline tenants back in Issue No. 25, in April 2007. Recent months have seen two important developments in this saga, both of which move LAX further toward a market-based model for airport fees and charges and away from the once-standard residual-cost approach under which the larger airlines (those who signed up to long-term lease and use agreements) gained control over their facilities and only paid the "residual" costs of using the airport (what was left to be paid for after all non-airline revenue were taken into account). This approach was dropped for airside charges in the 1990s under Mayor Richard Riordan (though not without big-time litigation). Recent battles have concerned the landside charges-essentially space rentals.

In August the U.S. Court of Appeals for the DC Circuit ruled in favor of LAWA in a case brought by the mostly low-cost-carriers using Terminals 1 and 3 (Alaska, AirTran, Frontier, Midwest, Southwest, and USAirways). They had argued that LAWA's decision to increase their rental rates was discriminatory, because signatory airlines under long-term lease agreements were not getting their rates increased. The court tossed that silly argument, upholding a prior decision by U.S. DOT that the fees were not discriminatory, since LAWA plans to do likewise for the other airlines once their current leases expire.

But the court also ordered DOT to consider the Terminal 1 and 3 airlines' argument that LAX has monopoly power. That's a pretty amazing claim for those domestic, relatively short-haul carriers to make, since there are four other airports in the greater LA area, all of which serve LCCs providing similar types of service. But that loose end remains until DOT responds.

Another big decision was announced October 6th, concerning Terminals 7 and 8. The airport had sold bonds to pay for rebuilding those terminals in time for the 1984 Olympics, but bankrupt United Airlines had not made all the required debt service payments. LAWA has now reached a settlement with United and UMB Bank (as indenture trustee for the bondholders) over paying off $94 million in bondholder claims. LAWA and United settled on $75 million, with LAWA on the hook for the larger share. Under the deal, United will gradually shift to new market-based rental rates by 2014, while LAWA will regain full control of Terminals 7 and 8 and be able to implement a unified capital charge for all terminal facilities in the future. The deal is subject to approval by the U.S. Bankruptcy Court, and also by the LAWA board and the LA City Council.

Changing from an old paradigm to a new one is never easy or painless, but it looks as if LAX is nearing the end of this long struggle to gain control of its future.

GAO Rips TSA Over Flawed Access Control Pilot Program

I don't enjoy dumping on the TSA, but when the Government Accountability Office says, in very diplomatic language, "You blew it," I feel obligated to summarize their findings in plain language. In Issue No. 36 (June 2008), I reported that TSA had persuaded Congress to hold off on imposing a costly mandate that all airport employees undergo physical screening (like airline passengers) every time they moved between an airport's public areas and its secure areas, whether in the terminal or on the ramp. TSA promised a pilot program that would test various alternatives to 100% screening to see whether equivalent results could be achieved via less-costly methods.

Well, last month GAO issued its report, innocuously titled "Aviation Security: A National Strategy and Other Actions Would Strengthen TSA's Efforts to Secure Commercial Airport Perimeters and Access Controls." (GAO-09-399 at www.gao.gov) But don't let the title dissuade you: the meat of the report is GAO analysts ripping to shreds this so-called pilot program. The one-page summary is bad enough, with statements like this: "[C]lear conclusions could not be drawn because of significant design limitations, and TSA did not document key aspects of the pilot. . . . Because of severe limitations in the design and evaluation of the pilot, . . . it is unclear which method is more cost-effective."

You have to plow through 15 or 20 pages until you get to the heart of the critique. First, GAO reminds us that TSA itself in its 2008 Civil Aviation Threat Assessment cited the threat from airport insiders (i.e., "airport workers with access to secured areas")as "one of the greatest threats to aviation." Then, starting on p. 26, it describes four actions TSA has taken on this issue. In addition to the pilot program on employee screening, it began a separate program of random employee screening called ADASP, put in place more-stringent requirements for employee background checks, and began work on biometric credentialing.

The pilot program to compare 100% screening with random screening was flawed in that (1) it included only seven airports, (2) it lasted only 90 days, (3) it used a variety of techniques, making it hard to compare airports, (4) it had no baseline, and (5) there was limited evaluation of enhanced methods. In addition, there were "significant limitations on the estimated costs and effects of implementing either 100% or random screening nationwide." Thus, while the contractor that did the evaluation reported that random screening was more cost-effective, GAO says no such conclusion can be drawn from such limited and inconsistent results.

The Aviation Direct Access Screening Program (ASASP) is even more of a mess. Here GAO cites an October 2008 report by the DHS Office of the Inspector General (OIG) on how supposedly random screening was actually being carried out in the field. "[A]t most of the seven airports the DHS OIG visited, ADASP screening stations were set up in front of worker access points, which allowed workers to identify that ADASP was being implemented and potentially choose another entry and avoid being screened." Supposedly that defect is in the process of being corrected.

It's hard to know whether to laugh at this obvious incompetence or to cry, in light of the seriousness of airport vulnerability to rogue employees (such as those at Orlando in 2007 who smuggled guns and drugs onto planes at night so they could be transported to Puerto Rico the next morning-but who could instead have been planting bombs).

Two things are clear to me, eight years after the ATSA legislation creating the TSA. First, the agency is devoting a disproportionate share of its resources to passenger and baggage screening, at the expense of lobby security, employee access control, and perimeter security. Second, divided responsibility for airport security (with TSA directly providing screening but a variety of other parties doing the other tasks) is far from optimal. Since TSA is the nation's aviation security policy-maker and regulator, it would be far better for it to do that job full-time, with each airport having undivided responsibility for implementing all airport security tasks (including screening), under TSA's regulatory oversight. But until Congress is willing to make that kind of major change, we're going to remain stuck with the dysfunctional status quo.

News Notes

New Report on Airport Cross-Subsidies

Hard on the heels of last month's USA Today investigation of Airport Improvement Program (AIP) grants comes a new report from the SubsidyScope project of the Pew Charitable Trusts. Overall, it confirms the large degree of cross-subsidy built into AIP, whose funding (entirely from the Aviation Trust Fund) comes 64% from airline passengers but whose grants to large and medium hubs (which serve the large majority of all passengers) account for only 33% of AIP spending. The report includes a searchable database on AIP expenditures from FY2005 through FY2008, including data on $/enplanement and each grant project's National Priority Rating. Go to: http://subsidyscope.com/projects/transportation/aip.

Going Beyond Current Airport Noise Programs

U.S. airports are required to mitigate noise that falls within a contour defined by the Day-Night Average Noise Level (DNL) 65, but some airports have gone beyond that in order to get expansion projects approved. The Airport Cooperative Research Program's Synthesis 16 provides an overview of U.S. airport noise practice in areas outside DNL 65. The researchers surveyed airport staff regarding such cases; in addition to presenting the survey results, the report provides two case studies. (http://onlinepubs.trb.org/onlinepubs/acrp/acrp_syn_016.pdf)

Atlanta Deploys Aerobahn System

Another airport that is equipped with the Sensis Corp. ASDE-X system for monitoring aircraft and vehicles on the ground to prevent runway incursions, has implemented the company's Aerobahn software that permits airlines and airport managers to collaborate on airport operational decisions, with common, real-time data on where all aircraft and ground vehicles are. Atlanta's Hartsfield-Jackson International Airport is the world's busiest airport. Aerobahn is also in use by JFK and Seattle-Tacoma airports, and by selected airlines at Newark Liberty, Houston Intercontinental, Detroit Metro, and Minneapolis/St. Paul. Overseas airport deployments include Orly and DeGaulle in Paris and Hong Kong International.

Shoe Removals Not Required at Checkpoints

It's true-that annoying requirement that you take off your shoes and put them on the belt does not apply . . . in Canada. (Actually, on my two trips to Europe earlier this year, I noticed people not removing their shoes in Germany and Sweden, either.) In fact, the recent Canadian Air Transport Security Authority (CATSA) bulletin on this subject, obtained last month by The Canadian Press under a freedom of information request, did not represent a change of policy. "It sounds new but it's not. It's always been the case since 2001," said Mathieu Larocque of CATSA. "We sent that reminder to make sure we're consistent." There is one exception, however. Air travelers heading for the United States must remove their shoes, to comply with U.S. security regulations.

Rio Airport to be Privatized Before Olympics

The main airport in Rio de Janeiro, the city which was just awarded the 2016 Summer Olympic Games, will be privatized before then, the government announced on October 6th. It turns out that the weakest factor in Rio's selection was the poor quality of Galeao International Airport, the country's largest. The Center for Asia Pacific Aviation reports that the government's privatization council said the terms of the privatization and a schedule are still being developed. The issue was raised last year by state governor Sergio Cabral, citing the need to correct the problems of "unsatisfactory infrastructure, poor airport services, and ineffective management."

Quotable Quote

"The imperative to move forward with some sort of 'trusted traveler' program will only increase as traffic begins to return to the aviation system, which most analysts agree will happen in the near future. Prior to the economic downturn, the situation at many airports was approaching unbearable, with growing lines at screening checkpoints frustrating passengers and creating a dangerous safety and security situation. While the temporary downturn in traffic has pushed many of these problems to the back burner, there is little doubt that they will soon return-making it all the more important that we are here today discussing a concept that holds tremendous promise in enhancing security while improving efficiency in the airport environment."

--Carter Morris, Senior Vice President, Transportation Security Policy, American Association of Airport Executives, testifying before the House Homeland Security Subcommittee on Transportation Security and Infrastructure Protection, Sept. 30, 2009.

Airport Policy and Security Newsletter #49

bob.poole@reason.org (Robert Poole) — Wed, 30 Sep 2009 00:00:00 EDT

In this issue:

Where AIP Grants Actually Go
Body Cavities and Suicide Bombers
New Orleans Revives Privatization Program
TSA's Belly-Cargo Screening Rule
Airports: Competition vs. Monopoly
News Notes
Quotable Quotes

Where Airport Grants Actually Go

USA Today's recent story by reporter Thomas Frank was described as "the first full accounting of the 28-year-old Airport Improvement Program." According to their analysis, over the years the program has put $15 billion into general aviation (GA) airports that have no scheduled passenger service. And those sums have grown dramatically during the past decade. From $470 million in 1999, the annual amount grew to a record $1.2 billion this year, far outpacing inflation. The story was featured on MSNBC and the Today show, stirring up a firestorm of protest in the GA community, which charged that it was based on a handful of anecdotes (ignoring the interactive national map, on which you can click on any of 3,155 airports and read its number of annual flight operations, number of AIP grants, and cumulative AIP funding: www.usatoday.com/travel/flights/2009-09-16-airport-map_N.htm).

I looked briefly into this issue last winter, finding that there is a large degree of cross-subsidy involved. AIP gets its funding from aviation excise taxes, the largest source of which is airline passengers, via the 7.5% tax on the ticket price plus the $3.60/segment tax. In 2006, for example, 97% of all airline passengers used large, medium, or small hub airports for their travel. But only 46.5% of AIP funding went to those three categories. Another 18.8% went to non-hub airports and a full 34.7% went to "other"-GA and reliever airports.

So it's quite legitimate for airline passengers and taxpayer groups to question the value proposition involved in the taxes they pay on airline tickets. To be sure, as Chip Barclay of the American Association of Airport Executives pointed out in response to the USA Today story, reliever airports in urban areas reduce the extent of congestion that might otherwise exist at hub airports. And certainly airports in small, rural areas can be important for businesses and tourism in those areas. But why should airline passengers-as opposed to local business groups, local taxpayers, and GA airport users-pay the bulk of those small airports' capital costs?

Congress loves AIP, and especially the cross-subsidy nature of it, which allows members to bring home the bacon to their districts, regardless of the benefit/cost ratio of the airport projects. So if data like that gathered by USA Today does not lead to AIP reforms, what hope is there for air travelers whose large and medium hubs have inadequate terminal space and out-of-date runways? Fortunately, Congress allows hub airports to charge per-passenger fees for specific improvement projects. Currently the ceiling on Passenger Facility Charges (PFCs) is $4.50 per enplanement, an amount that has been unchanged since 2000, while construction costs have escalated. The FAA reauthorization bill passed earlier this year by the House would increase that ceiling to $7.00, but there is thus far no comparable provision in the Senate, which is still drafting its bill.

Unlike AIP, which does some good despite being heavily politicized and earmarked, the PFC program is local self-help and a true user fee, in which those who pay are the ones who benefit. The PFC money they pay stays right there at the airport that levies it, and can be used only for specific, FAA-approved improvements to that airport. I'd love to see AIP reformed, but I'm not holding my breath. But the least Congress can do is to give large, medium, and small hub airports permission to raise more funds for much-needed improvements on their own.

Body Cavities and Suicide Bombers

Earlier this month, the Australian Associated Press reported that in a suicide bombing attempt to assassinate the Saudi Deputy Interior Minister Prince Mohammed bin Nayef, an al-Qaeda terrorist hid the bomb in his anal cavity and detonated himself while standing near the official. Fortunately for the latter, only the terrorist was killed in the explosion. But the use of body cavities to bring explosives aboard aircraft is an issue for airport security, worldwide.

A discussion in the Sept. 16^th issue of the STRATFOR Global Security & Intelligence Report ("Convergence: The Challenge of Aviation Security,") highlighted this episode as part of an ominous trend in airliner-related terrorism. First came hijackings for ransom, followed by hijackings leading to destroyed planes and sometimes passenger casualties. Then came bombs smuggled aboard in someone else's suitcase (Pan Am over Lockerbie). Only with the 9/11 attacks came suicide bombers taking over planes to use them as guided missiles. But since that tactic is increasingly unlikely to succeed, more recent plots have involved suicide bombers bringing the materials on board to assemble improvised explosive devices (IEDs) during flight. That was the scenario for which several people were just convicted in the U.K. liquid explosives plot; it was also the M.O. of the thwarted Bojinka plot, which intended to destroy multiple flights over the Pacific.

STRATFOR analyst Scott Stewart notes that body cavities are commonly used by people to smuggle drugs and weapons into prisons. And while exploding a small bomb that is still within the terrorist's body cavity seems unlikely to accomplish his intent of bringing down the plane, it does seem like a workable way to bring aboard components for an IED. So the obvious question becomes: what will the TSA and other aviation security organizations do about this threat?

One course would be to ignore the issue as impossibly gross and privacy-invading. But that would be entirely inconsistent with the global campaign to keep liquids (in any serious quantity) off planes, and all the other passenger and carry-on screening mandates. The other course would be to make greater use of body scanning machines-at the very least for everyone selected for "secondary screening." The STRATFOR report claims that "Even advanced body-imaging systems like the newer backscatter and millimeter wave systems being used to screen travelers for weapons are not capable of picking up explosives hidden inside a person's body." However, that's not what I've heard from a former TSA official who says such devices can be modified to do this job.

Sooner or later, this country is going to have to face up to the fact that putting every single air traveler through the third degree every time she takes an airline trip is a foolish policy. When we come to our senses, we will adopt a risk-based policy that does the best it can to separate the sheep from the goats, applying only nominal precautions to regular travelers who pass a voluntary background check and using intelligence data to identify high-risk travelers who need truly thorough screening. Meanwhile, welcome to body scanning, very possibly for everyone.

New Orleans Filing Revives Airport Privatization Program

When the impending privatization of Chicago's Midway Airport fell through earlier this year, some rushed to declare U.S. airport privatization dead. However, the application filed with the FAA by the New Orleans Aviation Board in August-and its approval in September-puts privatization back on the U.S. policy agenda.

The FAA's approval of the 320-page submission sets in motion what is expected to be a year-long process. The airport board expects to issue a request for qualifications (RFQ) before the end of the year, aiming to solicit bids and select a winner by next spring. If they can keep to that timetable, FAA approval could occur by late 2010.

There are several "ifs" involved in this process. The first is whether the New Orleans Aviation Board can duplicate Chicago's success in reaching an agreement with its air carriers on the terms and conditions of a new master lease agreement defining how rates and charges will be assessed. The largest carrier at New Orleans (MSY) is Southwest, the lead carrier that negotiated the agreement accepted by the other airlines at Midway. But Southwest's share at MSY is smaller than Midway, with a pretty good mix of other airlines (including American, Delta/Northwest, United, and USAirways). So the negotiations might be more complex.

Second, of course, is whether-by the time the final application needs to be approved by the FAA-the deal can be financed. The timing for this deal looks better than the unfortunate timing that killed the Midway deal; credit markets are gradually recovering, and should be in better shape than today by the first half of 2010.

But then there is also Congress to contend with. The much-delayed FAA reauthorization process-already two years late as of September 30^th-- still has a ways to go. The House has passed its version, and it includes anti-privatization provisions inserted by Rep. Jerry Costello (D, IL). They would increase the airline approval requirement from the current 65% to 75% and would also make privatized airports ineligible for AIP grants (though not exempting their passengers from the ticket tax which funds AIP). No comparable provisions are in the draft Senate bill, which has yet to reach the Senate floor. Ideally, the Senate bill would reduce the airline approval to 50%-plus-one and at least double the number of airports allowed to make use of the Pilot Program (from the current five slots).

TSA Belly-Cargo Rule Accepts Reality

In general, the approaches taken to cargo security in the United States differ in principle from those applying to airport passenger security. In the cargo arena-whether air, land, or seaborne-the general approach is risk-based. Instead of very costly and time-consuming mandates to examine 100% of all cargo, the general practice is to vet those in the supply chain handling cargo from origin to destination (e.g., "known shipper" programs), to use intelligence information to inspect specific cargo items, and to rely on random checks of other cargo as a backup. One presumes that the same legislative bodies that went overboard on passenger/baggage screening following 9/11 had the sense to realize the economic consequences of bringing commerce nearly to a halt, had they insisted on 100% physical inspection of all cargo, all the time.

But a crack in that sensible, risk-based approach to cargo was opened up by the 9/11 Commission several years ago, which recommended that 100% of all cargo carried aboard passenger planes (in the "belly," along with checked luggage) be physically screened. And Congress agreed to close this "loophole," not by relaxing the overkill checked-luggage mandate but by imposing the same mandate on belly cargo. The deadline they set was 50% of all such cargo by February 2009 and 100% by August 2010.

Fortunately, somewhat cooler heads have prevailed in the implementation of this congressional mandate. The TSA's "interim final rule," announced in mid-September, permits the widespread use of supply-chain partners to do the cargo screening. Freight forwarders, distribution centers, and other such firms can apply to become part of the Certified Cargo Screening Program (CCSP), under which they must comply with TSA background checks on employees, use TSA-approved screening technologies, and secure the supply chain from their screening location to the airline that will actually carry the cargo. By thus outsourcing the cargo screening function, the CCSP will avoid huge backlogs at airports, where space is at a premium.

An article in Airports International's July 2009 issue profiled the operations of CCSP participant Commercial Freight Services in Romulus, MI. That company is using two TSA-approved technologies, a desktop-size explosive trace detection system for small packages and a 35-foot long two-dimensional X-ray system for palletized cargo, including the industry-standard LD-3 containers. The trace detection system permits fairly rapid and relatively low-cost checking of parcels. And for cargo that arrives on pallets or containers, it's welcome news that TSA has approved technology that can inspect entire pallets or containers, instead of requiring them to be taken apart for individual-item inspection. (As of the time of the article, the huge Smith's Detection HISCAN unit was the only approved cargo screening system large enough for LD-3s.)

I doubt that a quantitative assessment of the cost-effectiveness of this 100% screening mandate would pass muster as a sound investment. But at least it has not served as an excuse for a huge expansion of TSA's own workforce. Instead, however, it is forcing a large unfunded mandate on segments of the goods-movement industry.

Airports: Competition vs. Monopoly

This past summer European low-cost carrier (LCC) Ryanair demanded that a number of UK airports reduce the fees they charge Ryanair to zero-or it would leave. While some complied, Manchester did not, and Ryanair is making good on its threat. In the September 2009 issue of Aviation Intelligence Reporter, Andrew Charlton cites this as an example of the growing market power of airlines vis-a-vis airports in the deregulated European airline market. Charlton argues that while a few airports that serve as major hubs for legacy airlines do have significant market power, most do not-and that airport policy should face up to this fact.

In a more academic form, that is the substance of the argument put forth in a discussion paper from the OECD/International Transport Forum's Joint Transport Research Centre last year. (www.internationaltransportform.org) Noted aviation economist David Starkie used the UK airport market to examine the degree of airport competition in that country-and found it to be generally robust, stimulated by the rapid growth of LCCs over the past decade. The paper includes useful tables indicating the extent of LCC operating bases at UK airports, the driving times between adjacent airports, and the general profitability of UK airports, despite (or perhaps because of) the ongoing competition. One key factor leading to greater competitiveness is the market for corporate control of UK airports, the large majority of which have been privatized, generally via outright sale.

Starkie concludes by noting that countries where airport privatization is pending, such as Spain and Portugal, are proceeding as if airports are inherently monopolies which therefore must undergo economic regulation. He laments that "the alternative approach, of restructuring ownership to provide a less concentrated, more competitive industry structure and then allowing competition to drive the industry forward, does not appear on the radar screen." Price controls could discourage investment and lead to airports skimping on quality of service, problems which have materialized at the BAA airports in London and Scotland, which were kept under common ownership (and hence regulation) when they were privatized. Far better, Starkie says, for government airports policy to foster competition wherever possible.

News Notes

Update re Registered Traveler

Last issue I wrote about the possibility that the database of members of the Clear and other Registered Traveler programs might be erased, which would preclude the sale of such data to any companies that want to offer a similar service (and which is likely the only tangible asset the bankrupt operator has, to satisfy creditors). I wrote that the TSA was proposing to delete the data but got several emails telling me that this was not the case, and that Aviation Daily had relied on a mistaken claim to that effect in a letter sent to TSA by two House members. I've done some further checking and now have copies of TSA's instructions to the AAAE clearinghouse that manages the database ordering them to delete the data. Fortunately, that action has not taken place-due to the timely intervention of Reps. Bennie Thompson (D, MS) and Peter King (R, NY).

CrewPass Expanding

The TSA has approved standards for fingerprint ID checking of airline crew members, enabling them to bypass the passenger checkpoints at airports. The CrewPass system (which was developed in 2007 by the Air Line Pilots Association) began as a TSA pilot program in 2008 at Baltimore, Columbus (GA), and Pittsburgh. ARINC developed the technology platform, and TSA and ARINC will be rolling the program out to airports nationwide.

New Newsletter and Consulting Firm

Aviation consultants David Bentley (U.K.) and Martti Raito (Canada) have launched Big Pond Aviation as a research, analysis and consulting firm based on both sides of the Atlantic. In addition to research and consulting, Big Pond has launched a quarterly newsletter. Details on both are available at: www.bigpondaviation.com

World's Best Airport Cell-Phone Lot?

Many U.S. airports, attempting to stop numerous cars illegally parked along airport entrance roads waiting for an arriving passenger to call, have set up cell-phone lots. Unfortunately, many are small, hard to get to, and fairly remote from the terminal. Tampa International has a 350-space lot, on airport property about a mile before you reach the terminal. Two giant message boards provide up-to-date information on arriving flights, and while you wait, there are rest rooms and free wi-fi service. The lot has been open since November 2005.

Who Writes these Headlines?

A few years ago in this newsletter I wrote about several companies that are helping general aviation airports balance their budgets by automating the process of billing pilots for landing fees. Last month, the weekly "Airports" section of Aviation Daily carried a feature on two of these companies, Passur Aerospace (Landing Fee Management System) and Era (RevenueVue). It was a good story, by veteran Aviation Week reporter Jim Ott. But who on earth penned the headline: "Automated Systems Spy on Operations and Fully Account for Landing Fees"? Meaning GA airports should just wink at people who use their services and refuse to pay? Like shoplifters?

Runway Incursion Systems More Widespread

The high-tech ASDE-X airport surface detection system has recently gone into operation at the 18^th and 19^th U.S. airports, with the addition of Newark Liberty in August and Boston Logan in September. The system uses a combination of surface movement radar, multilateration, and ADS-B to keep track of all aircraft and vehicles on the airport surface, in all kinds of weather. The FAA's goal is to get ASDE-X into operation at 35 airports by 2011. In addition, the agency has selected four companies to test lower-cost ground surveillance systems (LCGS) at four airports: Long Beach (Sensis Corp.), Manchester, NH (Thales), San Jose (SRA International), and Reno (Northrop Grumman).

Quotable Quotes

"I do think if more U.S. airports were privatized and you had a truly private company looking at the bottom line, then a lot of things that are happening in Europe would happen in American airports. There's no way you can say a city-driven airport has quite the same incentive as a truly privatized airport to drive profit to the bottom line."

--Frank Gray, Concession Planning International, in "International Aspirations: U.S. Airports Lag Far Behind in Concessions Revenue," by Carol Ward, Airport Revenue News, September 2009.

"In the end, it is impossible to keep all contraband off aircraft. Even in prison systems . . . corrections officials have not been able to prevent contraband from being smuggled into the system. . . .Obviously, efforts to improve technical methods to locate IED components must not be abandoned, but the existing vulnerabilities in airport screening systems demonstrate that emphasis also needs to be placed on finding the bomber and not merely finding the bomb. Finding the bomber will require placing a greater reliance on other methods such as checking names, conducting interviews, and assigning trained security officers to watch for abnormal behavior and suspicious demeanor. It also means that the often overlooked human elements of airport security, including situational awareness, observation, and intuition, need to be emphasized now more than ever."

--Scott Stewart, "Convergence: The Challenge of Aviation Security," STRATFOR Global Intelligence, Sept. 16, 2009 (www.stratfor.com)

"On the basis of the foregoing evidence, I would argue that a competitive framework is an achievable objective or a national airports policy. It is by no means evident that the industry is inherently a natural monopoly industry and thus requires regulation of prices or financial returns. On the contrary, the UK illustrates the ability of an airports industry to evolve a competitive structure whereby competition is an effective regulator of what the airport can charge the airline. Where there have been problems it is because of the failure to break up the state enterprise, the British Airports Authority, when it was privatized in the mid-1980s so that proximate airports in two UK regions, London and Scotland, continue in common ownership. The lesson to be drawn is clearly apparent."

--David Starkie, in "The Airport Industry in a Competitive Environment: A United Kingdom Perspective," Discussion Paper No. 2008-15, OECD/ITF Joint Transport Research Centre, July 2008.

Surface and Aviation Funding on a Three Month Fix?

shirley.ybarra@reason.org (Shirley Ybarra) — Mon, 21 Sep 2009 12:49:00 EDT

It seems both surface transportation and aviation funding may be on the path for three month “fixes” if Chairman of the House Transportation and Infrastructure Committee, James Oberstar has his way.

SURFACE TRANSPORTATION FUNDING
With only two weeks left until the authority for federal surface transportation programs expires, Chairman James Oberstar is reported that he will move a three-month temporary extension of federal surface transportation programs this week. The bill will extend the current programs and funding levels which are set to expire on September 30 until the end of the calendar year.
Until last week, Oberstar repeatedly said there would not be a temporary extension for any length of time, insisting Congress must move a six-year bill. The Obama administration has requested an 18-month extension, however, and key Senate committees have endorsed that idea. We have written before supporting the 18-month extension.

In the meantime, the Senate is expected to consider a bill that would extend federal surface transportation programs through March 2011 at current funding levels. The Senate bill would transfer $19.8 billion from the government's General Fund into the Highway Trust Fund to cover the short fall in the highway trust fund. The money represents reimbursements to the trust fund of $12.5 billion in interest payments not made since 1999 and $7.3 billion for emergency spending taken out of the trust fund in recent years and not replenished. No specific timetable is available yet on the Senate bill.

At the same time rescissions of highway funds are looming on September 30 also and the Governors have asked for relief of the $8.7 billion. I have written here about the rescissions before.

AVIATON FUNDING

Today, CQ Politics reports that Chairman Oberstar is also preparing a “clean” three-month extension of the Federal Aviation Administration programs. The FAA has been operating on numerous short-term authorizations, the most recent of which will expire at the end of September. The Senate Finance Committee is also working on a three-month extension, which would give the Senate until the end of the year to finish its full reauthorization bill.

The House passed Chairman Oberstar’s multi-year reauthorization measure May 21, 2009 and the Senate Commerce, Science and Transportation panel has approved its portion of the Senate bill. However, the Finance panel has yet to report out the revenue titles.

It will be interesting to see if what the three month extension buys us.

FAA Gives New Orleans Go-Ahead on Airport Privatization

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 16 Sep 2009 21:45:00 EDT

I'm sure my colleagues Bob Poole and Shirley Ybarra will have more to say on this, but there's been a significant development on the airport privatization front in New Orleans. According to AviationNews.com:

FAA has accepted the New Orleans Aviation Board's (NOAB) preliminary application to privatize Louis Armstrong New Orleans International Airport, according to a statement issued Wednesday by the board.

As part of the privatization process, FAA completed its 30-day review of the preliminary application on Sept. 8 and accepted it, paving the way for the airport to begin the bidding process to select a private operator to manage the airport. After the private operator is selected, the airport will prepare a final privatization application for submittal to FAA.

The board now will issue a request for qualifications to determine a list of technically and financially qualified firms with the necessary and appropriate experience and resources to manage the airport. Once the qualified bidders are identified, the board will issue a request for bids. The bidder with the highest and best bid will be selected and included in the final application to FAA, NOAB said.

NOAB will continue discussions about privatization with the airlines, including the negotiation of a new airport-airline master lease agreement that establishes certain limits on air carrier rates and charges. It also will seek public input on privatization of the airport, as well as establish a data room for use by qualified bidders. Additionally, it will draft a private operator concession agreement/lease document.

The New Orleans Aviation Board, the City Council and the mayor must approve a concession agreement/lease with the winning bidder.

It is anticipated that the request for qualifications will be issued late in 2009 with a request for bids issued in the spring 2010. The final application should be presented to FAA in fall 2010.

For context, as Bob wrote in Reason Foundation's Annual Privatization Report 2009:

At least eight medium hub airports have been proposed by public officials as candidates for long-term leases under the [federal Airport Privatization] Pilot Program: Austin, Bradley (Hartford), Jacksonville (FL), Kansas City, Long Beach, Milwaukee, New Orleans and Ontario (California). Of these, New Orleans appears to have the strongest political support as of this writing. As part of a series of local and state reform efforts, a new Regional Airport Authority was created in 2008 to manage the Louis Armstrong International Airport (which is owned by the city of New Orleans but whose land includes portions of two other jurisdictions). That body is considering two options, either a takeover by the state government or privatization under the Pilot Program. Privatization appears to have the support of Mayor Ray Nagin, several council members and key business leaders.

More to come as this develops. As a former New Orleanian, I will say that it's very encouraging to see local leaders moving down this path. It offers yet another piece of supporting evidence for my strong conviction that Louisiana should be viewed as the epicenter of government reform right now, with Gov. Jindal's aggressive reform agenda, the current work of the Commission on Streamlining Government, the massive charter school revolution in New Orleans, the new privatized city of Central (Louisiana's version of Sandy Springs), and much more.

» Reason Foundation's Privatization Research and Commentary

Airport Policy and Security Newsletter #48

bob.poole@reason.org (Robert Poole) — Mon, 31 Aug 2009 08:15:00 EDT

In this issue:

Can Registered Traveler Be Revived?
New Data on High-Speed Rail vs. Air Service
A New Pricing Proposal for LaGuardia
Airport Fire/Rescue Proposal Not Cost-Effective
Alternatives to Higher Small-Town Subsidies
News Notes

Can Registered Traveler Program Be Revived?

For reasons that have never been disclosed, the Transportation Security Administration refused to implement Registered Traveler as the kind of risk-based aviation security program that Congress intended. The cost-effectiveness of such an approach-focusing limited aviation security resources away from lower-risk travelers and toward higher-risk travelers-was documented early on in studies by RAND Corporation and Carnegie-Mellon University. More recently, operations researchers at Virginia Commonwealth University and the University of Illinois at Urbana-Champaign released a study offering further support. As published in the June 2009 issue of IIE Transactions, it reported their development of a risk-based security screening methodology. The research was supported by the National Science Foundation, the Air Force Office of Scientific Research, and the Department of Homeland Security. (www.scienceblog.com/cms/research-details-mathematical-model-effectively-screening-airline-passengers-21887.html)

But despite the strong support in Congress and academia for risk-based airport screening, the TSA seems determined to drive a stake through the heart of what remains of the RT program following the demise of leading provider Clear. TSA is now proposing to delete all the RT member data from the program's central database. This despite the fact that at least one other RT provider-FLO Corporation-is potentially in the market to acquire the data on Clear's 250,000 members and restart the program. And despite the fact that the sale of the membership data is the only hope for Clear's creditors to be paid some or all of what they are owed.

The TSA's plan is being challenged by two members of the House Homeland Security Committee, Rep. Bennie Thompson (D, MS) and Rep. Peter King (R, NY). In their August 20, 2009 letter to DHS Secretary Janet Napolitano, they wrote that "We believe the plan to sweep all of the information from this database is shortsighted and could potentially undermine restoration of the program." Thompson and King were among those reaffirming support for a risk-based RT program via language in the TSA Act of 2009, passed by the House several months ago. So far, the Senate has not yet acted on TSA reauthorization, and whether the eventual Senate bill will include a comparable RT provision is uncertain.

TSA's continuing hostility to a risk-based RT program is supremely ironic, given that its sister agency within the Department of Homeland Security continues to expand the risk-based international RT program. Earlier this month, Customs & Border Protection announced that its Global Entry program has been expanded to 13 more airports, bringing the total to 20. Under Global Entry, pre-screened low-risk air travelers get expedited re-entry into the United States from abroad, using kiosks to bypass the often-lengthy passport control lines.

When the Senate holds confirmation hearings for the nominee for TSA Administrator next month, they should grill him on ending the agency's hostility to a risk-based domestic Registered Traveler program. And the Senate should enact RT language comparable to what the House has already done requiring TSA to implement such a program, as Congress mandated in the original Aviation & Transportation Security Act of 2001.

New Data Undermine Case for Rail vs. Short-Haul Air Service

"For reasons of carbon reduction and wider environmental benefits, it is manifestly in the public interest that we systematically replace short-haul aviation with high-speed rail." That was the pronouncement August 5^th by UK Transport Secretary Andrew Adonis. The Reuters report that included this statement says the current Labor government plans to develop a national network of high-speed rail (HSR) lines, beginning with a new line from London to Birmingham.

As the U.S. government gears up to do likewise, we are seeing a growing number of reports that question whether these huge commitments of tax dollars actually make sense. A UK report by Booz Allen Hamilton, released in August (though completed in 2007) concluded that construction and operation of the planned north-south HSR network would emit more CO₂ than continued short-haul air travel over the next 60 years. HSR would only produce net carbon savings if it captured 62% of market share from airlines. But if train service is doubled from current levels (as some propose), HSR would need a market share of 73-85% to achieve net carbon savings.

The Swedish daily Dagens Nyheter published (August 21, 2009) a summary of a report on proposed HSR in Sweden, prepared by the Expert Group for Environmental Studies, for the Ministry of Finance. It is based on an analysis by consulting firm WSP for the National Railways Administration. Basically a social benefit/cost analysis, it concluded that the net social benefit (including environmental benefits) was only 80% of the project cost. The HSR system would eliminate only one percent of the transport sector's carbon emissions, at a very high cost per ton.

The Swedish study did not include the carbon emissions due to the construction of the HSR system, only that from its operations, unlike the UK study. The most comprehensive study on the total carbon footprint of different transport modes remains the one released in June by UC Berkeley analysts Mikhail Chester and Arpad Horvath. They found that leaving out carbon emissions due to the very energy-intensive construction of HSR lines and stations can make HSR appear far more carbon-friendly than it actually is. Including construction CO₂ in the assessment increases the carbon footprint of an airline trip by 31% (compared with only including emissions from operations). But for rail systems, the impact is vastly greater: the lifecycle carbon footprint of rail is increased by 155%.

Finally, you might also want to read an excellent overview of HSR's costs and benefits compared with short-haul air travel. "The Economic Effects of High Speed Rail Investment" by Gines de Rus of the University of Las Palmas in Spain is Discussion Paper No. 2008-16 from the Joint Transport Research Centre of the OECD and its International Transport Forum. One of its most interesting components is three tables comparing total costs (including environmental) and total revenues for the highway, rail, and air transport sectors of France, Germany, Netherlands, and Spain. As you might anticipate, the air transport systems are generally self-supporting, the roadway systems close to self-supporting (except Germany's), but the rail systems cost far more than they take in. Excluding from revenues explicit subsidies for certain "concessionary fares," the rail systems cover 55% of their costs in France, 41% in Germany, 39% in Netherlands, and 26% in Spain.

As de Rus concludes, "The case for HSR investment can rarely be justified on the benefits provided by the diversion of traffic from air transport."

A New Pricing Proposal for LaGuardia (and other Congested Airports)

In 2007, the Reason Foundation published a policy brief by Michael Levine, asking whether the politics surrounding runway congestion pricing could be overcome. (http://reason.org/news/show/congestion-pricing-at-new-york) In a recent online aviation discussion group, airline consultant Hubert Horan took up the Levine challenge. Rather than paraphrase what he wrote, I invited him to present that case here, as a guest article. I hope you find it as thought-provoking as I did.

We have a congestion/capacity problem, because for decades there has been political gridlock preventing even modest changes to aviation funding systems which, combined with obstacles to major infrastructure construction, has made it impossible to add major capacity in and around high traffic areas with congested airports.

Key to understanding the gridlock problem is recognizing that all of the key interest groups are either opposed to building more capacity where it is economically justified, or in paying their share of what that new capacity would cost. While each interest group has some legitimate concerns, most of their public pronouncements are just political posturing designed to ensure gridlock and protect the status quo. No incumbent airline wants the capacity that would support new competition, and they'll fight any new "user fees" that raise their costs. Many airports care much more about political prerogatives and blocking any restrictions on how fee revenues can be used than they do about supporting local economic growth or minimizing delays. No local politicians or members of Congress have the motivation to fight the opposition to new capacity based on noise and NIMBY considerations.

Any kind of longer term solution requires two things: a quasi-market mechanism that sets prices for the use of scarce runway capacity at the levels needed to eliminate "excess demand", and a "capacity-supplying" entity with incentives to maximize the social return on air capacity investments (i.e., expenditures justified by eliminating congestion/delay and creating economically productive new capacity).

What difficult but plausibly achievable intermediate steps should Congress/DOT take to move us in that direction? The near-term focus should be reducing bad incentives and political roadblocks. These proposals should be considered in the context of Mike Levine's question, "Is it possible to fashion remedies, perhaps "impure,"that if adopted will produce a result better than the current situation?"

1. Flat-Rate Landing Fees at Highly Congested Airports. Within today's residual-cost system, all airports at (or approaching) capacity would be required to structure landing fees so that every plane pays the same rate; hence, 757 rates would go down while regional jet (RJ) rates would go up. At LaGuardia (LGA), every existing slot holder would retain its current slots, but with structural incentives for airlines to maximize airport throughput given today's capacity. The assumption here is that airlines "overschedule" RJs since this is the cheapest way to protect slot "assets" and keep out low-cost carrier (LCC) competition. Airlines now doing this will face higher costs, but will be free to cover those costs with revenues from a bigger plane or sell the slot to someone else. This is a "market solution" in the sense of using incentives to let market participants reallocate resources, instead of letting DOT/FAA staff assign slots or make scheduling decisions. Slot values might change, but no slots get confiscated, and airlines never had a "right" to this week's slot values anyway. If throughput increases, the public has just achieved an increase in LGA capacity at a tiny fraction of the cost of building new runways.

This first step doesn't "solve" the capacity problem, but (if I'm right about the RJ issue) it would significantly reduce the external costs that the capacity problem imposes on consumers, airports and local economies. Legacy airlines argue that they fly all those RJs because their New York customers demand that type of high frequency/high fare service, and they are only motivated by the strong profitability of these flights; asset hoarding and LCC competitive threats have nothing to do with it. But the recent Delta/USAirways LGA/DCA slot swap suggests that past scheduling practices did not optimize short-term route profitability, and these carriers are strongly focused on longer-term slot asset values.

2. "Small City" Funding Mechanism for Congested Airports. Any future slot optimization system will have serious problems if there are big chunks of slots excluded from the system and handled "politically". But a rigid demand for no exceptions whatsoever isn't realistic given how the political process actually works. I don't think those "small city" claims would survive serious scrutiny, but they are still a political obstacle. So I propose a system where concerned cities/states could acquire and control some of the slots, based on the system they've used in France for many years. (The Orly slots used by most little planes are controlled by regional governments, not the operating airline). Congress would establish a funding pool linked to the EAS (Essential Air Service) program, and an EAS-like bidding process for cities/states that wanted federal subsidies to buy slots. The controlling city/state could contract with any airline to operate the flight at whatever rates the airlines would accept. These "public" slots could be transferred to other local governments but couldn't be sold back to the airlines. In a more perfect world I wouldn't want taxpayer money spent on these kinds of local airline routes, but I think this is a small price to pay for eliminating the "small cities" political barrier to more efficient use of LGA capacity, just as the original EAS program eliminated a political obstacle to deregulation.

3. Future Slot Sales on Blind Auction Basis. Slot sales would have to follow the "Blind Auction" approach outlined in Mike Levine's recent paper, whereby the selling airline wouldn't know the identity of the purchaser in advance, and with subsequent public disclosure of both the high and second-highest bid. This would provide greater transparency about the opportunity cost when airlines retain slots supporting unprofitable flights, and would reduce one barrier to LCC entry. I'd place a non-punitive excise tax on all slot sales (10%?) to recapture a bit of the scarcity rents, and to help fund the "small city" and other administrative programs.

4. Zero-tolerance Use or Lose. I would tighten rules that allow airlines to retain slots without actually using them, including specific prohibition on bankruptcy estates retaining slots that weren't being operated.

I think it makes more sense to let the dust settle from these initial steps before trying to tackle the more difficult slot pricing and capacity supply questions. If flat-rate fees at LGA have a notable impact, it makes it much easier to structure the next phase of capacity programs. It would also make it possible to reduce hourly slot caps without reducing airport throughput or airport revenues. If flat fees have little impact on scheduling or throughput at LGA, the next phase of capacity becomes much more expensive, but there will be clear evidence that cheaper approaches hadn't worked.-Hubert Horan.

New Airport Fire Requirements Not Cost-Effective

Early in my career, I worked for a consulting firm called Public Safety Systems, Inc. Among other things, we applied minicomputer systems to police and fire dispatching, and that is where I learned about the National Fire Protection Association (NFPA), as well as the power of the firefighters unions.

NFPA has standards for airport rescue and fire fighting (ARFF), and so does the International Civil Aviation Organization (ICAO), both of which are voluntary unless made mandatory by action of the relevant governments. Current FAA standards for ARFF are not as stringent as those of NFPA or ICAO-but that could be about to change. Section 311 of the House bill to reauthorize the FAA (HR 915) would require the FAA to adopt these more-stringent (and hence more-costly) standards. In response to concerns expressed by airport groups, the Transportation Research Board's Airport Cooperative Research Program (ACRP) commissioned a study. It's a web-only document, "How Proposed ARFF Standards Would Impact Airports," by Richard Golaszewski, Benedict Castellano, and Robert E. David. (http://onlinepubs.trb.org/acrp/acrp_webdoc_007.pdf)

The study compares current FAA ARFF standards under Part 139 of the Federal Air Regulations with what would be required under either ICAO or NFPA standards. It uses 11 years worth of data on accidents at 476 U.S. airports governed by Part 139 defined by FAA as Class I, II, and III. (The smallest airports, Class IV, were excluded because of very little passenger service.) The research task was estimate whether the additional fire-fighting staff and equipment under ICAO or NFPA would have made a significant difference to the outcome of the response to each incident. The standards impose more stringent requirements for ARFF response times, which affects the number and location of fire/rescue stations. They also prescribe minimum numbers of vehicles and rules for the number of firefighters to be on duty.

The study analyzed fatal air carrier accidents over the 1997-2007 period for airlines (both scheduled and non-scheduled) as well as air taxi and commuter operations. Eleven of the 23 fatal accidents for Part 121 airlines occurred far from airport property and so were not relevant for ARFF response. Nine others involved cases where fire/rescue response would not have made a difference (e.g., someone killed by walking into a propeller or by a collision between a plane and ground equipment). The other three-a runway overrun with fire, a crash into a maintenance hangar with fire, and a takeoff from a too-short runway with crash and fire-were analyzed and the conclusion in all three cases was that quicker response time would not have prevented any of the fatalities.

The summary of this safety analysis noted the relatively small number of fatal accidents during 11 years, and estimated that at best one life might have been saved due to faster response time.

What about the costs? Using a sample of airports from each size category, the researchers surveyed airport operators to determine the current and projected numbers of vehicles and firefighters under either NFPA or ICAO standards. Those numbers were then extrapolated to all the airports in each category. For the most stringent version-the NFPA two-minute response time standard-the total number of firefighters would more than double for the 476 airports included in the study. Smaller increases would be needed for the NFPA three-minute standard or the ICAO three-minute standard. Vehicle numbers would increase by similar amounts. The annualized operating and depreciation costs of the NFPA two-minute standard would be approximately $1 billion, the majority of which would be payroll costs for the additional firefighters. In general, the cost impacts would be greater the larger the airport, though the increased cost per enplaned passenger would be greater for the smaller airports (ranging from 28 cents/passenger at the largest to nearly $28/passenger at the Class III airports, for the NFPA two-minute standard). Even the least stringent NFPA standard would increase the Class III cost/passenger by nearly $14 (but only 3 cents/passenger at the largest Class I airports).

What I recall from my early exposure to NFPA is that, like most safety-oriented organizations, they want increased fire safety without much concern for cost or cost-effectiveness. And organizations like the International Association of Fire Fighters (the largest U.S. fire union) clearly want-and lobby for-standards that create more union jobs. Based on the ACRP's careful analysis, it's hard to see much of a case for what the House bill seeks to impose, especially on smaller airports.

Alternatives to Rural Air Subsidies

As the Senate Appropriations Committee discussed (and then approved) a 29% increase in funding to subsidize rural airline service, a flurry of newspaper articles appeared around the country. Many focused on Ely, NV as the poster child for the program's excesses. Joe Sharkey's syndicated New York Times column noted that Ely tops the list of subsidy per passenger, at $4,500. Only 414 people flew out of Ely in 2008, with an average load of 0.7 passengers per flight. Many of the other 150 towns and cities receiving subsidized air service cost taxpayers several hundred dollars per passenger.

The Essential Air Services (EAS) program began life in 1978 as a 10-year effort to ease the transition from the regulated-cartel approach that prevailed prior to passage of the Airline Deregulation Act of 1978. In the old days, airlines cross-subsidized service to rural cities with profits from their more-lucrative routes, but that no longer worked once every airline was free to fly anywhere. And since rural areas exist in most states, and every state has two Senators, EAS took on a life of its own, gradually expanding in size and becoming permanent.

Last month the Government Accountability Office released its latest study of EAS ("Options and Analytical Tools to Strengthen DOT's Approach to Supporting Communities' Access to the System"-GAO-09-753, available at www.gao.gov). In the course of looking into ways of reducing the EAS burden on taxpayers, GAO provides many insights into how the program operates. For one thing, about a third of its budget comes from foreigners! EAS receives about $50 million per year in overflight fees paid by aircraft owners (airlines and business jets) who use the U.S. air traffic control system while flying over U.S. territory. The balance comes from the Aviation Trust Fund (which means that you and I, as airline passengers, pay for most of EAS via our ticket taxes.)

GAO also points out that even as the number of small towns participating in EAS has grown over time, the number of participating airlines has shrunk from 34 in 1987 to just 10 as of 2009 (of which four serve 85% of the routes). Also, some of the requirements Congress has imposed-such as planes with at least 15 seats and at least twice-daily service-have contributed to very low load factors and high costs per passenger. The average load factor for EAS flights was 37% in 2008-compared with about 80% for regular air service.

Fundamentally, EAS appears to me to be a vain attempt to preserve an America that no longer exists. As GAO's report points out, many EAS communities have lost population over the last 30 years, meaning there is less demand for such service. The whole phenomenon of low-cost carriers (LCCs) has emerged during these three decades, leading many people in rural areas to drive 70 or 100 miles to an airport offering low-fare LCC service, rather than flying on a high-fare (despite subsidy) local EAS flight. And intercity bus service is enjoying a renaissance, offering new options to those "stranded" in rural America. So it's not at all clear why U.S. air travelers (and foreigners) should be taxed $175 million per year to provide a few small-plane flights to 100+ rural towns.

In an effort to reduce the tax burden, GAO reviews the pros and cons of a number of possible reform measures, including allowing smaller (e.g., nine-seat) planes and less-frequent service, consolidating EAS flights from nearby towns at a single airport, and limiting eligibility to the most remote towns. Those would help a bit, but I think we need to think further outside the box.

GAO does note that on-demand air taxi service and intercity bus service offer additional options that might cost less and provide better service than EAS in its current incarnation. And its report provides a fascinating appendix showing how the use of geographical information system (GIS) tools can identify small community transportation options.

But here are two additional ideas. Instead of having airline passengers on regular routes subsidizing small-town air service, why not take at face value the claims of small-town boosters that airline service makes them more viable places to live, work, and do business? In other words, let those communities put their money where their mouth is and come up with funding to assist one or more airlines with some level of air service. Some small and medium-size cities have been doing this for years, with varying degrees of success-for example, Wichita (KS), Myrtle Beach (SC), and Roswell (NM). These efforts generally involve local tax money and/or waivers of (city-owned) airport landing fees and other charges. Another way of approaching the problem is for the business community, typically the chamber of commerce, to come up with funding, as is done in France, where their chambers operate most of the smaller airports.

As the GAO report concludes, "Changes in the aviation industry and the nation's financial situation over the past 30 years may make this an opportune time to revisit [EAS] program objectives and evaluate design options for the program." I agree.

News Notes

Shoe Scanner on the Market

Although General Electric developed a prototype shoe scanner for use by defunct Registered Traveler provider Clear, it was never able to win TSA approval. Now comes IDO Security, with a $6,000 magnetic shoe scanner. Though not yet approved for U.S. use, the New York-based company has sold its MagShoe device to Israel's Ben-Gurion, Spain's Madrid Barajas International, Rome's Fiumicino, and Hong Kong International. CEO Michael Goldberg told Aviation Daily (Aug. 21, 2008) that he is "unable to discuss prospects for its use at airports in the United States," presumably because testing at TSA is under way.

Airport Privatization Recap

Each year my colleagues at the Reason Foundation produce an Annual Privatization Report, covering a wide range of fields in which governments have sold, leased, or outsourced the operation of traditionally government-run functions. In the 2009 edition, released last month, I wrote the chapter on air transportation, most of which is devoted to airport privatization. You will find the report at http://reason.org/apr2009.

Last Gatwick Bidder Withdraws

In mid-July, the third of three bidders for BAA's proposed sale of London Gatwick airport-Manchester Airports Group-withdrew from the bidding. The MAG team consisted of Manchester Airport, Canada's Borealis pension fund, and the Greater Manchester Pension Fund. BAA had hoped to raise £2 billion ($3.28 billion) from the sale, but due to both the current reduced levels of passenger traffic and credit market conditions, all three bids were far below that level. In withdrawing, MAG said it would not raise its £1.38 billion offer to BAA's new minimum requirement of £1.5 billion. BAA is still appealing a Competition Commission order that it sell Gatwick and two other airports within two years.

Risk-Based Security Paper Available

The policy paper I wrote last fall for the OECD's International Transport Forum has now been published. It compares the aviation security approaches taken by Canada, the European Union countries, and the United States and argues for a more risk-based approach. I presented it at a round-table discussion in Paris last December and again, slightly revised, at the ITF's annual Leipzig conference on transportation policy in May. The paper appears in the OECD/ITF report, Terrorism and International Transport: Towards Risk-Based Security Policy, Round Table #144. Go to: www.internationaltransportforum.org/Pub/new.html.

St. Petersburg, Russia Airport to Be Privatized

At the end of June, the city government of St. Petersburg announced the winning bidder for a 30-year concession to expand and operate Pulkovo Airport, the city's main commercial airport. Fraport, Horizon Air Investments, and Russian state bank VTB comprise the winning team. They will invest an estimated $1.5 billion to build a new terminal and make other improvements. The city will receive 11.5% of the airport's revenues. Whether this deal will increase the odds that Kosovo will attract bidders for its proposed privatization of Kosovo International Airport remains to be seen.

Guards Flunk GAO Covert Testing at Federal Buildings

There is no better test of the ability of a security system than covert testing, in which "red team" members simulate terrorist attempts to get through without being found out. The Federal Protective Service is responsible for protecting about 9,000 federal facilities (and, like TSA, is part of the Department of Homeland Security). Recently, the Government Accountability Office sent covert testers "carrying the components for an improvised explosive device" through security checkpoints at 10 federal facilities. At all 10, they got through without question, assembled the explosive device, and walked freely around the facility with the device in a briefcase. Read the report and weep. (GAO-09-859T, at www.gao.gov.)

Third Chicago Airport Gets New Funding

The proposed public-private project to develop a new south-suburban airport at Peotone, IL received a shot in the arm last month, when Gov. Pat Quinn signed a budget bill that includes $100 million to help the state DOT acquire the remaining 2,000 acres needed for the airport. The current plan calls for the state to acquire the land and manage the airside, while a private consortium develops and operates the landside (terminal, parking, etc.).

New Airport Screening Contracts in Roswell and Montana

Roswell (NM) International Air Center is getting a new airport screening contractor, under the TSA's Screening Partnership Program. The new provider is BOS Security of Athens, GA. BOS is replacing a previous contractor that provided airport screening there from 2007 to 2009. The new contract will run until 2014. And TSA has announced that Trinity Technology Group of Fairfax, VA has been selected to provide screening at seven small airports in Montana.

Airport Projects Funded by Stimulus Package Questioned

shirley.ybarra@reason.org (Shirley Ybarra) — Wed, 12 Aug 2009 13:20:00 EDT

The Inspector General of US Department of Transportation (DOT) questioned some of the projects selected by FAA as part of the $1.1 billion of airport improvement grants in the American Recovery and Reinvestment Act (ARRA) signed into law in February. In an ARRA Advisory, dated August 6, 2009, the IG question the FAA’s decisions on funding certain projects as having lower scores that what would other wise qualify for funding. (The FAA scored projects on a 100-point scale. A score of 62 qualified for money. The projects cited by the IG scored between 40 and 50 points.)

Two of the airport grants the inspector general cited were in Alaska. The first being a $14.7 million grant to an airport in Ouzinkie, a village of about 170 people. The second was for a grant of $13.9 million for an airport in Akiachak, a village of about 660 people.

The inspector general also questioned awards to four airports in Delaware, Missouri, Ohio and Washington that did not provide commercial passenger service and had limited flight operations. Recommendations included that the aviation administration should either show that the projects had economic merit or consider withdrawing the grants.

This is probably not the final word on these ARRA funding issues.

Policymakers Turn to Privatization Amid Prolonged Government Fiscal Crises

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 00:00:00 EDT

Governments at all levels are facing severe budget deficits and prolonged fiscal crises amid the national economic recession. With the federal government facing a record $1 trillion deficit and at least 44 states facing a cumulative $281 billion in budget deficits through 2011, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates and will remain so over the coming year as policymakers attempt to reduce the price of government in response to ongoing budget woes.

Now in its 23rd year of publication, Reason Foundation's Annual Privatization Report is the world's longest-running and most comprehensive examination of privatization news, developments and trends. The 2009 report finds politicians looking for solutions to growing deficits. Even seemingly privatization-resistant states like California, New York, Massachusetts and New Jersey are now turning to the private sector to help solve major fiscal and capital investment challenges.

The report's federal government section forecasts a bleak outlook for privatization and competitive sourcing under the Obama administration because the current Congress, controlled by Democrats, has been openly hostile to many competition-based initiatives. There are some highlights at the federal level, such as NASA's planned partial privatization of the manned space program, which will use private companies to design, build, and launch manned spacecraft while NASA finishes its own fleet to replace the Space Shuttle. Also, the highly successful military housing privatization initiative—which is modernizing and improving the quality of hundreds of thousands of military housing units nationwide—has spawned a new initiative to privatize on-post lodging for soldiers at Army installations.

In the state government section of the Annual Privatization Report, we profile the increasingly dire fiscal conditions in the states and offer a comprehensive review of the latest state privatization action. Due to deficits and falling tax revenues, policymakers’ interest in state privatization and government efficiency boards is demonstrably on the rise, and advisory commissions on privately-financed infrastructure have been established in California and other states. In Louisiana, the new Commission on Streamlining Government (CSG) is exploring ways to reduce the cost of state government through downsizing, streamlining and privatization to address a looming budget crisis. In other highlights, New Jersey enacted a law with overwhelming bipartisan support that privatizes the cleanup of nearly 20,000 contaminated properties in the state, while Illinois policymakers passed a partial privatization of the Illinois Lottery to help fund a massive public works bill.

At the local level, we profile Chicago's groundbreaking—but controversial—$1.15 billion parking meter system lease. Los Angeles, Pittsburgh and other cities are closely monitoring Chicago's situation as they contemplate similar parking meter initiatives to generate municipal revenues in the economic downturn. We also review Georgia's fifth new contract city, Dunwoody, which followed the lead of neighboring Sandy Springs by incorporating under a privatized city government model in which contractors provide nearly all non-safety-related services. There are also a number of privatization initiatives proposed or announced in Los Angeles, Indianapolis and numerous other cities.

The Annual Privatization Report also provides a comprehensive overview of domestic and international developments in air and surface transportation, including a wide-ranging overview of the current state of the infrastructure finance market, a review of the latest in highway and airport privatization, and a review of the latest in air traffic control reform and aviation security.

The report also examines four emerging issues attracting significant attention in policy circles. First, we offer a summary of the federal bailouts and stimulus spending to date, which currently totals a staggering $12.9 trillion spent since early 2008. We also review efforts that expand and modernize port infrastructure through public-private partnerships.

The report also reviews the latest developments in the fields of private corrections and mental health services. We review Arizona's groundbreaking prison lease proposals, a new Vanderbilt University study finding private prisons reduce state corrections costs, the looming battle to protect private prison operators' proprietary rights, and numerous other privatization developments in domestic and international corrections.

This week, the Associated Press reported: "Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion."

The federal deficit is astronomical. But states are also swimming in red ink and local governments are out of cash. Taxpayers have been hit hard by the recession and cannot be expected to bail out big spending politicians. To deal with today's economic realities, political leaders need to seek out innovative public-private partnerships and tap the efficiencies in the private sector. The Annual Privatization Report details hundreds of ways to move towards better, cheaper government.

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary

Annual Privatization Report 2009

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 06 Aug 2009 00:00:00 EDT

With governments at all levels facing severe budget deficits and prolonged fiscal crises amid the national economic recession, privatization and public-private partnerships have become increasingly prominent in fiscal policy debates, according to Reason Foundation's Annual Privatization Report 2009.

"Governments are swimming in red ink and realizing the effects of the recession will be felt long after the economy recovers," said Leonard Gilroy, editor of the report and director of government reform at Reason Foundation. "Interest in privatization is sky-high and rightly so. Now more than ever, policymakers need to study their priorities, re-examine what are really core government functions, and then tap the private sector's expertise in all of the areas where they can save taxpayer money and improve the delivery of services."

The Annual Privatization Report details the latest trends and examples of how public officials at the federal, state and local level are reducing costs and improving service delivery through public-private partnerships, outsourcing and performance-based government. It also examines privatization's progress in transportation, education, corrections, water and wastewater services and telecommunications.

Reason on Airport Privatization, Post-Midway

leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 03 Aug 2009 17:29:00 EDT

Reason Foundation colleague Robert Poole and I have a new column in Heartland Institute's Budget & Tax News on the prospects for airport privatization in the wake of the collapse of the $2.5 billion privatization of Chicago's Midway Airport. As we write, the deal's collapse was a speed bump, but doesn't represent a shift in the investor appetite for airport privatization projects:

Because the Midway deal was a high-profile transaction, its collapse received much attention, but it should not be misconstrued as a major setback for privatization. The underlying dynamics of infrastructure privatization haven't changed.

» Reason Foundation's Airports Research and Commentary

Airport Privatization Can Fly Despite Midway Collapse

bob.poole@reason.org (Robert Poole) leonard.gilroy@reason.org (Leonard Gilroy) — Mon, 03 Aug 2009 17:14:00 EDT

Budget & Tax News

The failure of the proposed $2.5 billion lease of Chicago's Midway Airport to reach a financial close this past April may be a setback for U.S. airport privatization, but it certainly doesn't spell doom for private-sector infrastructure investment as some critics have suggested.

Like anything else involving significant capital, infrastructure privatization deals are proving to be more difficult to finalize in the current credit crunch and recession than they were a year ago, but they are still happening. For Midway, many analysts blamed the size of the consortium's $2.5 billion bid, considering it excessive (given the airport's limited growth prospects) and difficult to finance at a time when debt markets are still very risk-averse.

A deal that would have required, say, 30 percent equity and 70 percent debt a year ago may well require 50 to 60 percent equity in today's debt markets. That was likely more equity than Citi Infrastructure Investors—the primary investor for the project—was ultimately willing to put into this one deal, especially as it considers a bid for London's Gatwick Airport, which has much better growth prospects than Midway.

Positives, Negatives

The collapse of the Midway deal suggests both positives and negatives for the future of U.S. airport privatization.

On the negative side, the inability to sustain Midway's $2.5 billion valuation means other cities contemplating privatization may have to scale back their assessments of how much a lease of their airport could bring in. That may dampen enthusiasm in some places.

On the other hand, the failed Midway deal opens a critical slot for other airport privatizations. Federal law allows only one “large hub” airport to be privatized, and Midway had taken that position. Other hub cities may now have a shot at privatizing their airports.

For the other areas and airports that have privatization proponents—such as Austin, Hartford, Kansas City, Milwaukee, and New Orleans—there are still three slots in the Pilot Program for small and medium hub airports, so their prospects are unchanged.

Next, Chicago was able to pocket the $126 million it received as an earnest payment for the deal. This is conceptually no different from the earnest money prospective homebuyers put in escrow to demonstrate their commitment to follow through with financing. If the deal fails to close, the seller gets compensated for time and resources spent along the way.

Not only does Chicago get to keep the $126 million, but it can still revive the Midway lease when market conditions improve. City officials are reportedly considering a variety of strategies to bring Midway back to the market, with one involving the city issuing tax-exempt debt to make the deal more feasible.

Airlines on Board

Finally, a critical aspect of the Midway deal was that the City of Chicago figured out terms the airlines serving that airport were comfortable with. That is hugely important because prior to the Midway deal U.S. airlines had always opposed airport privatization. Those terms now remain as a template for others hoping to gain airline support for privatization plans.

Because the Midway deal was a high-profile transaction, its collapse received much attention, but it should not be misconstrued as a major setback for privatization. The underlying dynamics of infrastructure privatization haven't changed.

State and local government budgets are going to be strained into the future, and policymakers will increasingly view privatization initiatives along the lines of Midway as a critical strategy for doing more with less.

Robert Poole (bob.poole@reason.org) is the Searle Freedom Trust Transportation Fellow and director of transportation studies at the Reason Foundation. Leonard Gilroy (leonard.gilroy@reason.org) is director of government reform at the Reason Foundation. This article was originally published in the September 2009 issue of Heartland Institute's Budget & Tax News.

Good News for Taxpayers: Lower Than Expected Bids Continue for Stimulus Projects

shirley.ybarra@reason.org (Shirley Ybarra) — Wed, 22 Jul 2009 11:29:00 EDT

According to an article in the Boston Business Journal the bidders for stimulus projects continue to bid 15 percent below expected costs for projects. In the beginning of the stimulus activity, the bids were 20-40 percent lower than expected as companies simply wanted to get mobilized after a difficult time.

At the Federal Aviation Administration the low bids meant 347 projects were funded instead of the expected 301 with $1.1 billion according to Joel Szabat, US Department of Transportation, deputy assistant secretary for transportation policy.

I have written before about the “good deals” and I have also cautioned about change orders that can drive up costs of a project, here and here respectively.

While some increase is to be expected thus far the tax payers are the winners.

Airport Policy and Security Newsletter #47

bob.poole@reason.org (Robert Poole) — Sat, 11 Jul 2009 00:00:00 EDT

In this issue:

Mission Creep at TSA
Branson’s Radical Rethink of Airport Business Model
The Collapse of Clear
Follow-Up on Gatwick Airport Privatization
GA Airport Lease
News Notes
Quotable Quote

Mission Creep at the TSA

Two recent court cases have shined a spotlight on very troubling mission creep at the Transportation Security Administration, as pointed out in an excellent Wall Street Journal piece by Scott McCartney (July 2, 2009). Before discussing them, let me provide some context.

In general, law enforcement people cannot search you or your car or your house because you just might be doing something illegal. They either need a warrant or some kind of probable cause during an interaction with you. In responding to the attacks of Sept. 11, 2001, Congress decided that the threat of terrorism to aviation was sufficiently high to justify a narrow exception to that long-established principle. Because the threat was judged (correctly or not) sufficiently great, the newly created TSA was authorized to inspect the luggage of every single air traveler on commercial planes and to require every one of them to pass through a metal detector, as a condition of being allowed to reach the boarding area for flights. That’s a major departure from over 200 years of constitutional principle and legal practice.

But recently the TSA has begun moving beyond those limits. In one case, a passenger at Columbus, Ohio was selected for secondary screening because he’d purchased his ticket just before departure. He had a valid ID, had no weapons or other prohibited items in his luggage, and did not set off the metal detector. Despite the trace-detection swabbing of his carry-on turning up nothing, the officer opened his bag and found envelopes with cash and other envelopes with fake passports. On that basis, he was arrested. On appeal, U.S. District Court Judge Algenon Marbley ruled that TSA’s action violated the passenger’s Fourth Amendment right against unreasonable search and seizure. Prior cases, he said, clearly established that airport security searches are limited to detecting weapons and explosives.

The other case has not yet gone to trial. In this one, an officer of a political organization that evolved from the Ron Paul presidential campaign was detained by TSA at the St. Louis airport because he was carrying a lockbox with $4,700 in cash from the sale of T-shirts, bumper strips, and other political materials. Instead of answering their questions about the cash, he asked them the grounds on which they thought they could require him to answer such questions. He recorded the encounter on his iPhone, and on the basis of that recording, the ACLU has filed suit against Homeland Security Secretary Janet Napolitano. “Whether as a matter of formal policy or widespread practice, TSA now operates on the belief that airport security screening provides a convenient opportunity to fish for evidence of criminal conduct far removed from the agency’s mandate of ensuring flight safety,” says the ACLU.

It looks very much as if this is not a matter of rogue agents, but instead reflects genuine mission creep at TSA. The agency’s recent emphasis on “physical and behavioral screening” was defended by acting TSA Administrator Gale Rossides in congressional testimony just a few weeks ago. And the U.S. Attorney’s Office in Columbus has announced that it will appeal Judge Marbley’s decision.

Congress created the TSA to protect passengers and planes “against an act of criminal violence or aircraft piracy,” and it prohibited passengers from carrying a “weapon, explosive, or incendiary” onto a plane. It said nothing about cash or fake passports, nor did it give TSA the authority to act as police officers. It’s time for Congress to rein in its creation, before it does permanent damage to American liberty.

Branson, Missouri’s New Private Airport

In issue No. 36 (June 2008) I wrote about the successful financing and construction of a brand new airport to serve the country music tourist destination of Branson, MO. The airport opened on schedule this May, with two initial airline customers (AirTran and Sun Country). Because the airport was developed with private capital and no federal grants, it has far more commercial freedom than other airports, since it is not constrained by federal airport grant assurances. (It obviously must comply with all FAA and TSA safety and security requirements.)

So how different is Branson Airport LLC’s business model? An article in the June 2009 issue of Airport Business provides an in-depth look. As has already been fairly widely reported, in the absence of grant agreements, the airport can offer time-limited exclusives to the first airline that establishes service on a route to and from Branson. Instead of charging landing fees, it charges airlines a per-passenger fee that applies to all services—including ground handling. Hence, the airport company is has a financial incentive to expand the number of passengers, and to make sure they have a positive experience. So even though the airport has given an exclusive to Enterprise Rent-a-Car, it has an interest in making sure Enterprise does not charge monopoly rates.

Branson Airport LLC may be the first and only airport in America that paid for its own runway, control tower, instrument landing system, and everything else normally provided either by the FAA or funded largely with Airport Improvement Program grants. The tower is operated by Midwest ATC. The airport company has also created and operates its own fixed-base operator, Branson Jet Center FBO, offering fuel service, deicing, a GA terminal, and hangar space for private plane operators.

How did Branson Airport LLC put the funding together? The company raised a total of $155 million to build the airport. Of that sum, $115 million came from tax-exempt revenue bonds and $40 billion is equity put in by the founders. In order to issue tax-exempt bonds, the company needed a governmental issuer. So it made a deal with Taney County, giving it title to the airport’s land. The county created a transportation development district which issued the bonds and leased the property to the airport company for 50 years. (Had U.S. tax laws been more favorable to private infrastructure, the company would not have had to make this trade-off in order to get lower-cost financing.) One factor that makes the bonds more attractive to investors is an additional revenue stream besides what the company takes in from airlines, passenger retail sales, and its FBO: it has a 30-year deal with the city (which lives on tourism) under which the city pays the airport company $8.24 for every passenger it brings in. To the extent that the airport expands the tourism market, the city will benefit from increased sales tax revenue.

Creating a new airport from scratch is never easy, and places where the Branson model could be adapted may not be plentiful. But Branson Airport LLC is pioneering a dramatic new model of airport development.

Collapse of Clear: What Future for Registered Traveler?

Last month, shortly after the June issue of this newsletter reported passage of a House measure to turn the Registered Traveler program into the risk-based security program that Congress intended it to be, I was shocked to get an email announcing the shut-down of its business. (And this was only a few weeks after I’d renewed my membership for two years!). Evidently, the House action (not yet matched by the Senate) came too late to alter the economics of the business for Clear parent Verified Identity Pass. As the provider of RT services at 18 airports, it had large staffing expenses spread over not enough paying customers. Both new members and renewals were suffering, due to (1) the inability of Clear and other RT providers to offer hassle-free passage through screening checkpoints, and (2) the near-doubling of its membership fee level. For most potential customers, the value proposition just wasn’t there.

I’ve written at length over the last several years about how RT was intended to be a way of permitting the TSA to focus its screening resources on travelers who might actually be a threat to aviation security. As a recent report from the Congressional Research Service explained,
“Within weeks of the 9/11 attacks, the DOT’s Airport Security Rapid Response Team included among its recommendations the urgent need to establish a nationwide program for voluntarily submitting information for vetting passengers who would be issued ‘smart’ credentials, to expedite processing of the vast majority of travelers, thus allowing aviation security resources to be focused most effectively, an idea that became known as the ‘trusted traveler’ concept. The recommendation was reflected in statutory language and was included in the Aviation and Transportation Security Act.” (“Airport Passenger Screening: Background and Issues for Congress,” Congressional Research Service, April 23, 2009.)

But as we know, although the TSA initially performed a perfunctory background check on RT applicants, it never submitted their fingerprints to the FBI for the standard criminal history background check used to grant airport employees access to secure areas at airports. It eventually dropped even its perfunctory check, arbitrarily redefining Registered Traveler as an identification program, not a security program.

So what happens now? Most of the recent media coverage has been a lot of hand-waving about protecting the personal data on about 250,000 Clear members until it can be safely deleted from Lockheed Martin’s central data system. But deleting the data would be hugely premature. If the Senate concurs with the House language in requiring TSA to convert RT to its original purpose as a risk-based security program, that customer database will be a highly valuable asset. Aviation Daily reported on July 1st that Verified Identity Pass was working with secured creditors to assess whether any other companies might be interested in taking over the business. As long as the data are secure in Lockheed Martin’s hands, there is no need for haste. Let’s see if Congress can get RT back on track before deciding the fate of the data.

Reading the Tea Leaves on Gatwick Privatization

When I last reported on the pending sale of BAA’s London Gatwick Airport, BAA had received three bids, the amounts of which were not disclosed but which were rumored to be lower than the airport’s Regulated Asset Base of £1.6 billion ($2.4 billion). What follows comes from several published sources, but much of what they report is informed speculation and/or from unnamed sources.

The Financial Times on May 13th reported that the Lysander consortium, led by Citi Infrastructure Investors (and including Vancouver Airport Services, which had bid with Citi for Chicago Midway Airport) had been dropped, reportedly because its bid (generally estimated at £1.2 billion) was too low. A Citi spokesperson was quoted as objecting because their bid was the only one that was fully funded. A second bidder was later rejected, as well.

A May 25 report from TheDeal.com said that the word on the street was that Citi wanted a second shot, contending that BAA had been biased against it because of two previous deal failures—Midway and the Pennsylvania Turnpike. While the latter was purely political (the legislature failed to approve the needed enabling legislation to permit the Turnpike to be leased, and the Abertis/Citi consortium eventually withdrew their offer), the former was “an unfortunate combination of bad timing and miscalculation on Citi’s part,” said TheDeal.com. Citing unnamed sources, it claimed that the $2.5 billion deal structure for Midway included 40% equity (from Citi, John Hancock, and Vancouver Airport), $700-800 million in debt, and the balance from co-investors that included a Dutch pension fund, an Australian pension fund, and the Alaska State Pension Fund. It was the failure to secure these co-investors that led to the deal’s collapse, according to this report. The pension funds balked at the likely fall in value of the airport between summer 2008 when the bid was prepared and the early-2009 date for financial closing.

The most recent speculations are in a July 3rd article by David Bentley in Airport Business Daily . It cites a number of recent setbacks for the current Labor government—the failure on July 1st of the East Coast rail line, the postponement due to market conditions of a part-privatization of the Royal Mail, and the “survival mode” of the government after a recent drubbing in the elections for the European Parliament. The Royal Mail postponement, Bentley points out, strengthens BAA’s argument that now is not a good time to sell Gatwick, which BAA claims is worth less than half as much as two years ago. As it is, BAA has appealed to the Competition Commission, and the hearing on its appeal is set for October 19th. If it can prevail, on market-conditions grounds, then the remaining bid could be thrown out and a new auction held, perhaps in 2010.

So Citi Infrastructure Investors (which has yet to find a good investment for the estimated $4 billion that it has raised since 2007) and the others may get another shot at Gatwick.

FAA Approves Oceanside Airport Lease

On June 11th, 2009, the FAA approved a 50-year lease of the 50-acre general aviation airport in coastal Oceanside, California. The lessee is Airport Property Ventures, a startup company founded by several former airport managers. APV sees a great future in revamping money-losing GA airports, in effect turning sow’s ears into silk purses.

Under the deal APV reached with the City of Oceanside, the company will pay a flat monthly lease payment plus 40% of net income on all new development. The lease almost came unstuck, when the FAA viewed it as “privatization,” meaning the city would have to apply under the provisions of the Airport Privatization Pilot Program. But according to an article in North County Times, “The parties tweaked the language to get the agency’s consent” for treating it as a simple lease.

The principals of Airport Property Ventures are Jack Driscoll and Lydia Kennard, both former directors of Los Angeles World Airports, and Robert Clifford, a co-founder of American Airports Corporation, an operator of GA airports. In an interview in the January 2009 issue of Airport Business, Driscoll explained APV’s business approach. GA airports are typically a kind of stepchild to the city or county government that owns and runs them. “They are losing propositions for many of these cities.” But because they have received federal grants for many years, they have to remain in service as airports.

APV and its investors see potential in more-intensive development of often-underutilized GA airport land. “We want to maximize the aviation piece of it,” Driscoll said, and if there is excess property, work with the FAA to get permission to develop the rest commercially. And in those cases, rather than leasing that land to an outside developer, APV will develop it themselves.

While contract management of GA airports is not a new idea, it has not caught on as much as I’d thought it would when I first came across it 20+ years ago. I still think it has a lot of potential, and I’m glad to see another promising firm enter the field.

News Notes

Airport Privatization Update
Last December, in Issue No. 40, I wrote about World Airport Privatisation 2008 by David Bentley, the most comprehensive report on this subject in a long time. With the troubled credit market conditions of the last six months (including the collapse of the Midway Airport lease), Bentley decided it was time for an update. His new report, Airport Privatisation Update 2009 has just been released, offering 48 pages on a field that “is not yet down and out.” It’s available for US$100 from DJB Associates (www.djbassociates.webs.com).

MANPADS Defense in Israel
The Israeli government has decided to equip all commercial airliners based in that country with anti-missile defense systems of the directed infrared countermeasures (DIRCM) variety. The Ministry of Transport awarded a $76 million contract to Elbit Systems for a commercial version of the Elbit system used on military helicopters. Similar systems, made by Northrop Grumman and BAE Systems, have been tested on U.S. airliners. This might well be a prudent measure in Israel, considering the threats faced by that country. I don’t see it as setting a precedent for such equipage in this country.

Follow-up on Costs of New York Air Congestion
In the June issue I wrote about the excellent study from the Partnership for New York City, quantifying the cost of airport and airspace congestion and delays. In 2008 the cost to travelers, airlines, and shipping companies was estimated at $2.6 billion. Not included in the report was information on the size of the regional economy, to provide some context for this number. In response to my query, Merrill Pond of PFNYC tells me that the most recent figure they could find is $1.12 trillion, for 2006. So the congestion cost amounts to 0.2% of the regional economy--not as big an impact as you might expect, despite it being in the billions. The report also estimated the cost to users and to the regional economy from 2008 through 2025; that total is $95.6 billion, or an average of $5.6 billion per year or 0.43%. That’s hardly a trivial impact.

Low-Cost Carrier (LCC) Airport Near Paris?
AP reported (June 27, 2009) that low-cost carriers Ryanair and Wizz Air have expressed interest in plans to turn Airport Vatry, 100 miles east of Paris, into a hub serving LCCs. The airport, currently focused on air cargo, is near Reims, which is served by a TGV rail line offering 39-minute trips to Paris. Now dubbing itself “Paris Vatry,” the airport hopes to turn itself into a French analog of London Stansted, which primarily serves LCCs.

Aerobahn Serving Airlines at JFK
The Sensis Corp. Aerobahn system that I reported on last October after it was installed at JFK International in New York is now serving passenger and cargo airlines, as well as the airport operator, the Port Authority of New York and New Jersey. Aerobahn combines airline flight schedule information with real-time data from the airport’s ASDE-X ground surveillance system (which keeps track of aircraft location on the airfield). The aim is to reduce taxi times and surface delays, in addition to the usual ASDE-X function of increasing safety by preventing “runway incursions.”

Quotable Quotes

“[We have] decided to build everything, own everything, and operate like a business, without the restrictions and limitations that exist at other airports. I certainly believe there are things that can be learned from this project that can be applied to other airports. When this project proves itself, many municipalities will have to look at this model; and airlines will be interested in it as well. We strongly believe in the success of this model, and believe we are going to prove to the world that a private entity can run an airport, run it well, and be profitable at the same time.”
--Jeff Bourk, Executive Director, Branson Airport LLC, in Brad McAllister, “A Different Airport Model,” Airport Business, June 2009.

“Despite various efforts to improve checkpoint efficiency and reduce passenger wait times, checkpoint lines remain vulnerable terrorist targets for bombings, shootings, or the potential release of chemical or biological agents because they often consist of large congregations of individuals in the ‘non-sterile’ portion of the airport terminal, that is prior to screening for possible threat items. Inefficiencies at screening checkpoints that result in long screening queues and congestion in airport terminals introduce unique vulnerabilities.”
--Bart Elias, “Airport Passenger Screening: Background and Issues for Congress,” Congressional Research Service, April 23, 2009.

Airport Congestion Costs New York Billions

bob.poole@reason.org (Robert Poole) — Thu, 18 Jun 2009 14:01:00 EDT

How bad is congestion at the major New York-area airports? That’s the question the Partnership for New York City set out to answer, in a follow-up to the 2006-07 debates over congestion, delays, runway pricing, and slot auctions. It commissioned HDR Decision Economics to research the question, and the result was released in February 2009 as “Grounded: The High Cost of Air Traffic Congestion.”

The report, which appears to be competently done, is something of an eye-opener. New York airport congestion has a number of costs, the principal ones of which are estimated as follows:

Lost time to air travelers was $1.7 billion in 2008, and over the period 2008-2025 will likely total more than $50 billion.
Airline costs (wasted fuel and excessive crew time) were $834 million in 2008 and will total $25 billion between now and 2025.
Freight shippers lost $136 million in 2008, and will lose a total of $4 billion by 2025.
Productivity losses to the regional economy were estimated at $21.5 billion over the 2008-2025 period.
And additional emissions generated by planes in long lines waiting to take off are estimated to cause harm estimated at $1.7 billion of this time period.

That’s a huge price tag, in anybody’s book. So now that we know how bad the impact is, how should those affected deal with this costly congestion?

The introduction of the report created big expectations for me, saying the Partnership “wanted to determine whether investing in expansion of regional airport capacity and upgrading the air traffic control system to reduce flight delays would pay off for the region and the nation.” It follows this by saying that, “The findings of this study clearly show that such investment is more than justified by the cost burdens resulting from inefficient and unpredictable passenger and air freight service due to congestion.”

I read on eagerly, hoping to find conclusions and recommendations calling for bold expansion plans—perhaps terminal expansion at LaGuardia to permit larger passenger volumes that would be consistent with “up-gauging” the average passenger capacity of planes using that airport or possibly the 2008 Reason Foundation proposal for adding a closely spaced parallel runway at JFK.

Alas, what I got was a set of very modest incremental improvements: improve ground traffic management, speed up the use of RNAV (area navigation) departures, redesign the region’s airspace (already under way by the FAA), implement NextGen capabilities in the air traffic control system and on airliners, and (a direct result of the previous measure) reduce excess spacing between aircraft on approaches to the airports.

The report also includes a provocative statement: “All travelers, other things being equal, would prefer to arrive at their destinations more quickly, and almost all would be willing to pay something more to make that happen.” Indeed, the cost of passenger delays in the report was estimated using FAA air-traveler value of time figures. But instead of taking this point to its logical conclusion—runway congestion pricing—the report just drops it.

There is good reason to expect the same to be true of JFK and Newark. Runway pricing would not only reduce delays without reducing passenger throughput; it would also generate additional airport revenue that could help pay for terminal and runway expansions in the Port Authority’s airport system.

Looking Into Airport Parking Privatization in Pittsburgh

bob.poole@reason.org (Robert Poole) — Thu, 18 Jun 2009 13:50:00 EDT

Pittsburgh International Airport (PIT) has a problem. It put close to $500 million into building a new midfield terminal in the 1990s, mostly to serve US Airways, which maintained a large hub there. But after the 9/11 attacks, the airline downsized that hub, and dropped it as a hub altogether by 2004. That has reduced PIT’s enplanements from a peak of 20.7 million in 1997 to just 8.7 million in 2008. But with most of the bonded indebtedness still to pay off, PIT’s airline cost per enplanement last year was $15.80 (compared with only $5.98 in 2000). That makes it one of the most expensive U.S. airports for airlines to serve.

To get PIT out of this trap, Allegheny County executive Dan Onorato is proposing a long-term lease of the airport’s parking facilities to a private operator—13,200 spaces between garages and lots. His aim is to raise $500 million or more, all of it up-front (as in the City of Chicago’s recent leases of parking garages and parking meters). That would enable the Airport Authority to retire its entire $499 million worth of bonds. Debt service on those bonds is running $62 million per year, compared with about $22 million in annual parking revenue. Thus, the Airport Authority would for many years be saving a lot more in debt service expense than it would be losing in parking revenue.

Whether this would be a genuinely good deal depends on several factors. First is how much the lease would actually generate. An article in the Pittsburgh Post-Gazette quotes Merrill Stabile, president of parking operator Grant Oliver Corp., as saying that investment groups have recently paid 15 to 20 times earnings for parking facilities; he estimated parking at PIT could be worth $440 million. Two factors that would influence that value are (1) the length of the lease, and (2) what controls on parking rate increases would be included in the deal. From the airport’s standpoint, a lease term significantly longer than the term of its existing bonds might not be such a good deal.

Globally, there are well-established procedures for assessing the value of long-term privatization deals. Australia, Britain, and Canada all use a process called the Public Sector Comparator (PSC) to compare, quantitatively, the best-case public-sector model with potential private-sector deals. Chicago’s recent 75-year lease of its parking meter system for $1.2 billion was criticized in a report released this month by the city’s Inspector General Office for not having been analyzed via such a procedure. But the IGO report’s alternative calculation (which suggested that the city could have done better) failed to take into account the value of risk transfer to the private operator. In the case of parking facilities, the longer the lease term the greater the risk assumed by the lessee (e.g. that people will still be using cars and needing to park them in 50 or 75 years). And in the case of PIT, there is an obvious trade-off to be made in terms of making th e airport more attractive to airlines by getting its cost per enplanement way down versus giving up parking revenue for N years.

It’s also interesting to note that at the same time that Allegheny County is trying to lease its airport parking, the City of Los Angeles’s airport department is seeking to buy a 21-acre private parking operation directly east of LAX’s Terminal 1. The Park One property is for sale by AMB Properties Corp., and a Los Angeles Times story quotes one realtor as estimating the price could be in excess of $100 million. The facility has 2,720 spaces and is reportedly highly profitable.

Airport Policy and Security Newsletter #46

bob.poole@reason.org (Robert Poole) — Mon, 15 Jun 2009 00:00:00 EDT

In this issue:

Registered Traveler Breakthrough
Airport Parking Privatization
New York Airport Congestion
TSA Backs Off on Private Pilots
New Frontier for U.S. Airports?
News Notes
Quotable Quote

Breakthrough for Registered Traveler Program

The bill the House passed earlier this month to reauthorize the Transportation Security Administration contains big news for the Registered Traveler program. If the Senate follows suit, RT could be turned into what it was originally intended to be—a risk-based program that enables TSA to re-focus its screening resources away from lower-risk travelers. That would mean a faster and less-hassle trip through airport security for potentially millions of RT members like me.

As you may remember, in 2001 when Congress enacted the Aviation & Transportation Security Act creating the TSA, it explicitly called for the new agency to establish a “trusted traveler” program to expedite the screening of those passengers who pass a background check and enroll in such a program. As pointed out in the report on the current bill from the House Committee on Homeland Security, “Congress had intended for such trusted traveler programs to be utilized as a risk-management tool.”

When TSA created the Registered Traveler (RT) program, it initially used the information on people’s application forms to do a “security threat assessment” consisting of checking the applicant’s name against a wants & warrants database, an immigration database, and its own terrorism watch list. It never submitted the applicant’s fingerprints to the FBI, however, for a criminal history background check, which is done routinely for those airport employees who must be cleared via this check in order to have unescorted access to secure portions of the airport at which they work. I pointed out this double standard in Issue No. 40 (Nov./Dec. 2008). TSA actually stopped doing even the wants & warrants and immigration checks in 2007, arguing that RT is merely an identity verification program, not a security program, and rescinding the charge it had levied on RT service providers for that minimal background check. Consequently, RT members must still go t hrough the identical checkpoint screening process as ordinary travelers—which saves TSA no resources that it could apply to beefed-up security elsewhere.

What the House measure does is require the TSA, within 120 days, to convert RT into a risk-management tool by reinstating a threat-assessment program for RT applicants, to be supplemented by private-sector background checks carried out by RT providers. But it also gives the TSA an out, if the Assistant Secretary of DHS determines that the revamped RT program cannot be integrated into risk-based security screening operations. A separate provision of the bill requires TSA to develop alternative screening procedures for those RT members who hold Top Secret security clearances, regardless of the agency’s decision regarding general revamping of the program.

One knowledgeable source tells me that the Senate Commerce Committee has in the past been supportive of RT as a risk-based program, so there is a reasonable likelihood of favorable action in the Senate, now that the House bill including the RT provisions has passed the full House. The only change I would recommend the Senate make is to include submitting RT applicants’ fingerprints to the FBI for the same criminal history background check that applies to airport employees.

As of now, RT is in operation at 21 U.S. airports, and the largest operator—Verified Identity Pass--has 260,000 members in its Clear program. Those numbers could soar if RT members could bypass much of the rigamarole at the security checkpoint.

Airport Parking: Next Up for Privatization?

To get PIT out of this trap, Allegheny County executive Dan Onorato is proposing a long-term lease of the airport’s parking facilities to a private operator—13,200 spaces between garages and lots. His aim is to raise $500 million or more, all of it up-front (as in the City of Chicago’s recent leases of parking garages and parking meters). That would enable the Airport Authority to retire its entire $499 million worth of bonds. Debt service on those bonds is running $62 million per year, compared with about $22 million in annual parking revenue. Thus, the Airport Authority would for many years be saving a lot more in debt service expense than it would be losing in parking revenue.

Whether this would be a genuinely good deal depends on several factors. First is how much the lease would actually generate. An article in the Pittsburgh Post-Gazette quotes Merrill Stabile, president of parking operator Grant Oliver Corp., as saying that investment groups have recently paid 15 to 20 times earnings for parking facilities; he estimated parking at PIT could be worth $440 million. Two factors that would influence that value are (1) the length of the lease, and (2) what controls on parking rate increases would be included in the deal. From the airport’s standpoint, a lease term significantly longer than the term of its existing bonds might not be such a good deal.

Globally, there are well-established procedures for assessing the value of long-term privatization deals. Australia, Britain, and Canada all use a process called the Public Sector Comparator (PSC) to compare, quantitatively, the best-case public-sector model with potential private-sector deals. Chicago’s recent 75-year lease of its parking meter system for $1.2 billion was criticized in a report released this month by the city’s Inspector General Office for not having been analyzed via such a procedure. But the IGO report’s alternative calculation (which suggested that the city could have done better) failed to take into account the value of risk transfer to the private operator. In the case of parking facilities, the longer the lease term the greater the risk assumed by the lessee (e.g. that people will still be using cars and needing to park them in 50 or 75 years). And in the case of PIT, there is an obvious trade-off to be made in terms of making th e airport more attractive to airlines by getting its cost per enplanement way down versus giving up parking revenue for N years.

It’s also interesting to note that at the same time that Allegheny County is trying to lease its airport parking, the City of Los Angeles’s airport department is seeking to buy a 21-acre private parking operation directly east of LAX’s Terminal 1. The Park One property is for sale by AMB Properties Corp., and a Los Angeles Times story quotes one realtor as estimating the price could be in excess of $100 million. The facility has 2,720 spaces and is reportedly highly profitable.

New York Airport Congestion

The report, which appears to be competently done, is something of an eye-opener. New York airport congestion has a number of costs, the principal ones of which are estimated as follows:

Lost time to air travelers was $1.7 billion in 2008, and over the period 2008-2025 will likely total more than $50 billion. Airline costs (wasted fuel and excessive crew time) were $834 million in 2008 and will total $25 billion between now and 2025. Freight shippers lost $136 million in 2008, and will lose a total of $4 billion by 2025. Productivity losses to the regional economy were estimated at $21.5 billion over the 2008-2025 period. And additional emissions generated by planes in long lines waiting to take off are estimated to cause harm estimated at $1.7 billion of this time period. That’s a huge price tag, in anybody’s book. So now that we know how bad the impact is, how should those affected deal with this costly congestion?

The introduction of the report created big expectations for me, saying the Partnership “wanted to determine whether investing in expansion of regional airport capacity and upgrading the air traffic control system to reduce flight delays would pay off for the region and the nation.” It follows this by saying that “The findings of this study clearly show that such investment is more than justified by the cost burdens resulting from inefficient and unpredictable passenger and air freight service due to congestion.”

Alas, what I got was a set of very modest incremental improvements: improve ground traffic management, speed up the use of RNAV (area navigation) departures, redesign the region’s airspace (already under way by the FAA), implement NextGen capabilities in the ATC system and on airliners, and (a direct result of the previous measure) reduce excess spacing between aircraft on approaches to the airports.

The report also includes a provocative statement that “All travelers, other things being equal, would prefer to arrive at their destinations more quickly, and almost all would be willing to pay something more to make that happen.” Indeed, the cost of passenger delays in the report was estimated using FAA air-traveler value of time figures. But instead of taking this point to its logical conclusion—runway congestion pricing—the report just drops it.

In fact, as George Donohue and Karla Hoffman found when they ran a strategic simulation game in cooperation with the FAA, airlines, and the Port Authority of New York and New Jersey, runway congestion pricing at LaGuardia would lead to significant up-gauging of aircraft there, making better use of its scarce and valuable runway capacity (www.reason.org/news/show/1002846.html). There is good reason to expect the same to be true of JFK and Newark. Runway pricing would not only reduce delays without reducing passenger throughput; it would also generate additional airport revenue that could help pay for terminal and runway expansions in the Port Authority’s airport system.

TSA Backs Off on Private Pilots

For months, the general aviation (GA) community has been complaining, with some justification, about a TSA security directive (SD-8F) that was going to impose burdensome requirements on private pilots using any of 400-odd commercial airports. In order to have unescorted access to the airfield at such airports, they would have to undergo a background check and obtain and wear an ID badge, just like airport employees. And if those badges were airport-specific (as many feared there would be) this would play havoc with the typically unscheduled nature of most GA activity.

In addition to objecting to the burdensome nature of the proposed requirements, the GA organizations also complained that TSA was issuing a new regulation simply by decree, rather than going through the typical federal procedure of publishing a notice of proposed rulemaking (NPRM) in the Federal Register and inviting comments from interested parties.

Recent weeks have brought two important changes, generally welcomed by the GA community. First, TSA issued a revised directive (SD-8G) easing the burden. As long as a private pilot stays near his/her plane or goes to and from the fixed base operator (FBO) office or the airport exit, no badge or background check is required. This will ease the burden on those flying into airports they are not based at. Those who are based at a commercial airport and lease space there (whether in a hangar or simply a tie-down) will need to get a badge for that airport, but this requirement can be waived if the airport provides an alternative acceptable to the TSA, such as an escort program.

The second change is included in the TSA reauthorization bill passed by the House June 4th. One provision of the bill tells TSA that security directives (like SD-8) should be used only in response to emergencies or immediate threats. New regulations on aircraft operators should be introduced using the normal federal rule-making process.

Controlling access to the airfield has generally been one of the weakest links in TSA’s aviation security program. So while I’m glad that they are taking access control more seriously, I think they’ve made some sensible trade-offs in revising these new regulations.

Houston Pursues A New Frontier for U.S. Airport Operators

Few people were surprised when YVR Airport Services Ltd. turned up as part of the consortium that won the bidding for Chicago’s Midway Airport—or that it was part of a consortium bidding for London Gatwick Airport. Vancouver Airport Authority’s airport consulting and privatization division has become fairly well-known in aviation circles.

Much less visible, until recently, has been a similar U.S. company. Houston Airport System Development Corporation (HASDC) is a nonprofit corporation controlled by the city of Houston’s Houston Airport System, operator of the two commercial airports and one GA airport in Houston. It was set up in 1998 in response to a request from Bechtel for advice on a possible airport privatization deal in Mexico. HAS director Rick Vacar was made its managing director, with two outside directors, one appointed by the Port of Houston and the other by the Greater Houston Partnership. Over the years HASDC has done considerable airport consulting and been involved in consortia managing airports under contract, mostly in Latin America.

Last year, with overseas airport privatization opportunities proliferating, HASDC formed a joint venture with Airport Development Corporation, a for-profit company based in Toronto. HASDC has 51% and ADC has 49% of the new entity, ADC&HAS, Inc. The joint venture evolved out of the two having teamed several years earlier to win a long-term (35-year) concession in Quito, Ecuador. Under that deal, the company has been operating the existing Quito airport since 2002, while it builds the $600 million replacement airport at a lower elevation; the new airport is scheduled to open in 2010. The financing of the project has been provided primarily via loans from the Overseas Private Investment Corporation, though ADC put in $80 million in equity. HASDC gets a 25% stake in the concession as “carried interest,” representing its sweat equity in the deal. ADC&HAS has also joined forces with Canadian pension fund OMERS, which has about a decade of experience i n global infrastructure investing. OMERS has committed to provide up to $150 million in equity as the venture’s funding partner for various airport privatization projects.

In a long article in the January 2009 issue of Airport Business, Vacar discussed how the opportunity for Houston airport employees to be detailed to work on HASDC projects enriches their career experience. “People do it for the experience. They get an opportunity to get involved and show their stuff. It makes a big difference in what you get out of people. We’ve had some wonderful successes here.” HASDC president Gary Lantner added, “In the U.S., Denver is the last new airport built; before that, DFW in 1973. Quito is maybe the first time in this generation of airport people for them to be actually involved in a complete new start-up airport. If you’re an airport junkie, Quito is a heck of an opportunity.” (HASDC reimburses the city at 1.8 times an employee’s salary for time spent on HASDC business.)

Rick Vacar stepped down, unexpectedly, as CEO of Houston Airport System on May 15th. Airportbusiness.com reported (May 19th) City Hall sources as saying there had been friction between Mayor Bill White and Vacar. Whatever the reasons, I doubt we’ve seen the last of Vacar, and we can expect great things from ADC&HAS, Inc.

News Notes

Mechanics Who Can’t Read English
That was the headline on a story on the website of WFAA, Channel 8 in Dallas/Ft. Worth. Byron Harris reported on his investigation of some of the 236 FAA-certified aircraft repair stations in Texas. The May 16, 2009 story claims that “hundreds of the mechanics working in those shops do not speak English and are unable to read repair manuals.” Supervisors, who must be FAA-licensed Airframe and Powerplant (A&P) mechanics, must sign off on the work of non-licensed mechanics. English is the internationally accepted language of aviation, and the story raises serious questions about FAA oversight of repair stations. It also quoted insiders as saying inspectors warn repair stations in advance about inspections, and also cited mechanics being given tests in Spanish, at a facility that the FAA eventually shut down.

Correction re Amtrak Subsidy
In last month’s lead story on potential replacement of short-haul airline service with high-speed rail, I misquoted the net federal subsidy figure for Amtrak service. The correct number, from the 2004 US DOT study, is $186 per thousand passenger-miles. The DOT’s Bureau of Transportation Statistics has not updated its federal subsidy numbers, but a new report from the Heritage Foundation has re-done the analysis, using consistent data for all passenger transport modes covering years from 1990 through 2006. The latest available figure for Amtrak (inter-city passenger rail) is $238 per thousand passenger-miles. That compares with $4.23 for commercial airline service. (www.heritage.org/Research/SmartGrowth/bg2283.cfm)

Airport Privatization in Sweden
As in some other countries, until recently Swedish air traffic control and airports were run by a single government agency, LFV. Now that Sweden has commercialized LFV as the country’s air navigation service provider, it is selling off its airports. First to go was Jonkoping Airport, purchased by the city of Jonkoping. The five other regional airports—Angelholm Helsingborg, Karlstad, Omskoldsvik, Skelleftea, and Sundsvall Haomsand—are to be sold by the end of 2009. The six regional airports combined handled 1.3 million passengers in 2008.

House Bill Would Ban Body Scanning
The TSA reauthorization bill passed by the House in early June would restrict the usage of whole-body image equipment as a replacement for walk-though metal detectors. Responding to privacy complaints, the House voted 310-118 to require the TSA to use the devices only for secondary screening. Therefore, passengers with things like ceramic knives and plastic explosives under their clothing would not be detected when passing through screening checkpoints, unless they had been singled out for secondary screening.

Follow-up on MANPADS
An industry official (who requested that I not use his name) responded to my May issue article on MANPADS making several points. One was that many security officials acknowledge that these shoulder-launched missiles are so small that they cannot realistically be prevented from being smuggled into the country. And if one of those missiles is ever used to attack a U.S. airliner, the political response could be chaotic. He suggested that it would be prudent for the government, therefore, to at least equip several hundred airline aircraft that are enrolled in the Civil Reserve Air Fleet (CRAF) program and are used to ferry troops and cargo to overseas locations. That probably is a prudent measure, and at a cost of about $1 million per plane, would be a trivial addition to the defense budget.

Quotable Quote

“When we began to think of passengers as our customers too, it had a radical impact on our airports in terms of terminal design, investment strategies, our approach to our business partners, colleague engagement, and innovation. It is undoubtedly the key to our future success and that of our partners.”
--Geoff Muirhead, CEO of Manchester Airports Group, quoted in “Terminal Illness,” by Victoria Moores, Airline Business, June 2009.

Airport Policy and Security Newsletter #45

bob.poole@reason.org (Robert Poole) — Thu, 21 May 2009 14:10:00 EDT

In this issue:

Short-haul flights vs. rail
Airport privatization after Midway
MANPADS defenses—not needed?
Airport landing slots in Europe
The Maginot Line of airport screening
Feedback on FAMs vs. FFDOs
News Notes
Quotable Quote

Replacing Short-Haul Air Travel?

"Let's end air travel of less than 500 miles," proclaimed Pennsylvania Gov. Ed Rendell, speaking at the America 2050 conference in New York City on April 17th. That was just one day after President Barack Obama announced his vision for high speed rail. "Imagine whisking through towns at speeds over 100 miles an hour, walking only a few steps to public transportation, and ending up just blocks from your destination." Such a system, he said would reduce travel times, increase mobility, reduce congestion, boost productivity, reduce destructive emissions, and create jobs. Whew!

Because I research and write about surface transportation policy in addition to aviation policy, I know quite a bit about inter-city rail, high-speed and otherwise. For this brief article, let me confine my comments to two questions. First, could inter-city passenger rail do what Gov. Rendell and President Obama say it could? Second, should we make the attempt?

Let's address the second question first, as a question of broad public policy. Once you dig down into the details of what transportation infrastructure costs and who pays for what, you find a fundamental difference between the currently dominant modes of inter-city travel—driving and air travel—and passenger rail. The infrastructure of the former are paid for almost entirely by their users, via federal and state gasoline taxes (and some other motor vehicle taxes) in the case of highways, and via airline ticket taxes and passenger facility fees in the case of air travel (airports and the air traffic control system). By contrast, for passenger rail, the entire cost of creating the infrastructure is paid for by non-users (general taxpayers), and the rail passengers pay only a portion of the operating costs via their ticket prices.

Therefore, proponents of replacing short-haul airline service with inter-city rail are calling upon general taxpayers to create and continually subsidize a transportation mode that is aimed at taking business away from unsubsidized airlines (and motorists driving their own cars on highways that their user taxes are paying for). As one example of the difference in general taxpayer support for these inter-city passenger modes, consider the following statistics. These come from a report produced by the U.S. DOT's Bureau of Transportation Statistics.

"Federal Subsidies for Passenger Transportation" computed net federal subsidy as total federal outlays for a mode minus federal receipts from transportation taxes and user fees paid by users of that mode. For Amtrak, the subsidy turned out to be $186 per thousand passenger miles. For highways that are part of the federal highways system, the comparable figure was minus $2 (i.e., federal highway user tax receipts totaled slightly more than total federal highway outlays). For airlines, the net subsidy was $6 per thousand passenger miles. So the federal subsidy per passenger mile for inter-city rail was found to be 31 times as much as the subsidy per airline passenger mile.

I think that puts a very heavy burden of proof on passenger rail proponents to justify massively subsidizing a mode of transportation designed to take business away from essentially self-supporting, tax-paying airlines. Now let's briefly address the question of whether new inter-city rail of the kind the new Administration plans to subsidize can do the kinds of things Rendell and Obama implied it would do.

A viable alternative to air travel for 300-500-mile trips? Certainly, in the dense Northeast Corridor for trips that are mostly downtown to downtown. But the geographic reality of most of urban America today is that most jobs are not in traditional central business districts; over the past 40 years jobs have followed residences to the suburbs, in Edge Cities and Edgeless Cities. But rail lines serve stations in central business districts, which is not where most people need to go. That also calls into question the potential travel time savings.

As for emissions, most of the actual rail lines to be aided by the new federal program use (and will continue to use) diesel locomotives, not exactly a low-emission power source. The only current plan for truly high-speed rail—California's—would be electric powered. Yet contrary to early claims of its proponents about huge reductions in greenhouse gases, the actual impact of the proposed system (if it achieves the unbelievably high traffic projections put forth by its proponents) would be to provide just 1.5% of the total GHG reductions in California's ambitious GHG reduction plan (and at a cost/ton of between $2,000 and $10,000, versus the generally accepted ceiling of $50/ton).

I understand that some directors of congested major airports would be happy to see short-haul and commuter flights replaced by more lucrative long-haul flights. But that's unlikely to happen. And it's also worth remembering that for airports that operate as connecting hubs, many short-haul flights feed long-haul flights. So unless the new-rail plans bring high-speed rail directly to airports (which is not in the plans, leaving travelers to take expensive cab rides), that vital feeder function would be lost, to the extent that rail did substitute for air service in 300-500-mile markets.

If you're interested in reading more about the proposed California rail system, take a look at the detailed "due diligence" report Reason Foundation had two rail experts prepare last year. Go to www.reason.org/news/show/1003044.html.

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After Midway Deal Collapse, Whither Airport Privatization?

In the month since the $2.5 billion lease of Midway Airport collapsed, due to the winning bidder's inability to put together the financing package, I've been asked repeatedly what this may portend for the future of U.S. airport privatization. To answer this question, it's important to try to understand what happened between the time the MIDCo team submitted its winning bid last September and mid-April when the plug got pulled. What happened was the credit market collapse.

At the time of MIDCo's bid, I was hardly alone in thinking that $2.5 billion was a very aggressive valuation for an airport with no room to add capacity, albeit classed by the FAA as a "large hub" in a still-growing metro area. In 2007-08, leases of existing transportation infrastructure assets were being financed largely by debt (e.g., the Chicago Skyway and Indiana Toll Road). Deal structures of 15% equity and 85% debt were not uncommon. But when credit suddenly got hard to get, banks and revenue bond providers started requiring a lot more equity. (This is akin to home lenders requiring much larger down payments.) Example: late last year a Spanish company acquired several existing toll roads in Chile, and needed 41% equity to close the deal. MIDCo's dominant member was Citi Infrastructure Investors, an infrastructure equity fund. If it had based its calculations last summer on 15% or 20% equity, with the rest coming from various lenders, it may have b een reluctant to put in 50% or more, if that's what lenders were demanding by this spring.

My suspicions were confirmed when the same MIDCo players (Citi, John Hancock Life Insurance, and Vancouver Airport Services), operating as Lysander Gatwick Investment Group, put in a $1.8 billion bid for London Gatwick Airport this spring. That would have been a better use of a good-sized chunk of the equity in Citi's infrastructure fund, given Gatwick's potential for a second runway and new service thanks to the break-up of BAA's near-monopoly on air service to Southeast England. But alas for the Lysander Group, their bid was rejected earlier this month.

Getting back to what happens post-Midway, there are several implications. First, the other governments contemplating leasing airports under the federal Pilot Program (in Austin, Hartford, Jacksonville, Kansas City, Long Beach, Milwaukee, Minneapolis, New Orleans, Ontario) will now have to consider more realistic valuations as they weigh the trade-offs. Second, unless Chicago comes back to the FAA with a new proposal, it will vacate the one slot in the Pilot Program reserved for large hub airports, potentially opening the door for other large cities. And as long as the fiscal crunch for state and local governments continues, we can expect elected officials to continue eyeing asset sales and leases as potential balance-sheet strengtheners.

I have just completed writing a global wrap-up on airport privatization, for Reason Foundation's annual privatization report for 2009. It is due out by mid-July. When you read that, you will see that the global shift toward commercializing and privatizing airports that began in 1987 continues unabated, in Europe, Asia, and Latin America. That means there are even more qualified global airport companies and no shortage of would-be airport investors, despite tightened credit markets. I can't imagine the United States remaining aloof from this megatrend much longer.

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Defense Against MANPADs Not Needed?

Regular readers of this newsletter know that I've been a skeptic, from the outset, of there being a serious threat to U.S. passenger aircraft from Man-Portable Air Defense Systems (MANPADS)—those nifty shoulder-launched anti-aircraft missiles like the Stingers the CIA gave to the mujahedin fighting to drive the Soviets out of Afghanistan in the 1980s. There has still been no release of the results of DHS's 15-month test of Northrop Grumman's Guardian system on 11 FedEx MD-11s in 2007-08. And congressional advocates of multi-billion-dollar programs to equip every U.S. airliner with something like Guardian have been pretty quiet, of late.

So perhaps I shouldn't have been so surprised by a little item in Aviation Daily last week. Buried in a story headlined "FedEx CEO Says Defense Dept. Should Consider Smaller Cargo Jets" was this very provocative comment. USAF Gen. Duncan McNabb, head of the U.S. Transportation Command, was reported by correspondent John Doyle as telling a House Aviation Subcommittee hearing on CRAF (the Civil Reserve Air Fleet) that "commercial aircraft carrying DOD personnel and cargo into danger zones like Iraq do not need onboard defenses against surface to air missiles." He told them that threat assessment and various other DOD tactics and techniques make it unnecessary for such planes to be equipped with anti-missile defenses. And besides, if they were to be so equipped, that would require a lot of very costly training. There is no significant missile threat to CRAF aircraft, he told the Congress members.

At this point, my only question is this: How do we get General McNabb to testify before the committees dealing not just with aviation but with homeland security? If airborne missile defenses are not justified for airliners going into war zones, how on earth could they be cost-effective here in the United States?

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More Squabbles Over Airport Landing Slots

Last month I reported that legacy airlines in Europe had prevailed on the European Commission to suspend for two seasons the "use it or lose it" rule governing airport slots at major EU airports. Under that rule, airlines must surrender slots if they aren't using them at least 80% of the time. Airports and low-cost carriers protested, but the EC prevailed.

But it turns out there has been a significant backlash. Andrew Charlton of Aviation Advocacy reports in his May newsletter that the European Parliament, which was not consulted about the suspension, has struck back. While consenting to the 2009 suspension, the Parliament has demanded that the slot regulation system come up for a full review, and that future changes be decided jointly by the Parliament and the Commission. There will now be a full study of the issue, with a proposal for a revamped system due by the end of the year. Representatives of airports and low-cost carriers are cautiously optimistic, given that the larger airports have long waiting lists for slots, mostly from LCCs that are eager to expand service. The airports need the revenue, airlines and passengers want more low-fare services, so why on earth is the Commission standing in the way of willing buyers and sellers?

That question has relevance for the congested-airports debate here in the United States. In arguing against any kind of pricing approach for the New York airports, the legacy carriers (represented by the International Air Transport Association—IATA) repeatedly proferred as an alternative to slot auctions the IATA Worldwide Scheduling Guidelines (WSG) for slot allocation. Under this system, widely used in Europe, slots are held in perpetuity by those who got there first (meaning mostly legacy carriers), but any new slots that become available (e.g., if a carrier goes out of business or cuts way back at a particular airport) can be traded or sold on a secondary market. It's a great system for keeping the Ins in and the Outs out. But rest assured, IATA tells us, the "use-it-or-lose-it" rule will prevent slot hoarding.

Uh-huh. We are now getting an object lesson in how that works. When push comes to shove in WSG Europe, out the window goes "use-it-or-lose it." So when Transportation Secretary Ray LaHood announced last week, as expected, that he was terminating the Bush administration's plan to auction off a small portion of the slots at the congested New York-area airports, we can at least breathe a sigh of relief that IATA did not succeed in foisting the Worldwide Scheduling Guidelines on us.

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The Maginot Line of Airport Screening

In a paper I will be presenting later this month at the OECD International Transport Forum's "Transport for a Global Economy" conference in Leipzig, I discuss the creation of static, inflexible "Maginot Line"-like defenses against aviation terrorism, such as large, centralized government airport screening organizations. In comparing the U.S. approach with that of Canada and Europe, I discovered that all of Canada's screening services (and much of Europe's) are provided by private security firms. Unlike the minimum-wage rent-a-cops that staffed screening checkpoints at U.S. airports prior to 9/11, the screening contractors in Europe and Canada must meet tough certification standards and ongoing performance standards. Such a system provides considerable flexibility, as threat levels change or, more commonly, as airline activity increases or decreases at particular airports. RAND Corporation and others have cautioned against building Maginot Line fortresse s at particular target sites—but that is what we've done at U.S. airports.

Some of us urged the performance-contracting approach in autumn 2001, as Congress rushed to enact the Aviation & Transportation Security Act (ATSA), which mandated the "federalization" of airport security. For our troubles, we got a five-airport pilot program to test the idea, and the promise that several years after TSA screening was in place at all 400+ airports, those airports would be free to ask TSA for permission to kick out its screeners and replace them with TSA-certified contractors. Oh, and by the way, TSA is also the aviation security regulator of every airport.

Not surprisingly, not a single airport with TSA screeners has asked to opt out (though likewise, none of the five pilot program airports has asked to kick out its private screeners, either). Instead, the modest growth of the TSA's Screening Partnership Program (SPP) has been at airports reaching the threshold of scheduled airline service, and thereby requiring screening. Thus, as of the first of this month, besides the five original pilot program airports (San Francisco, Kansas City, Rochester, Tupelo, and Jackson Hole), the airports that have been added to SPP are Sioux Falls (SD), Key West (FL), Roswell (NM), Sonoma City (CA), and the 34th Street Heliport (NY). The TSA is in the process of selecting a contractor to serve seven small Montana EAS (Essential Air Services) airports, and Butte (MT) has submitted an application to join the SPP.

One other impending development is likely to further strengthen the Maginot Line nature of TSA-provided airport screening. The Obama administration is widely expected to permit TSA screeners to unionize, as Obama promised on the campaign trail. The legislation (ATSA) creating the TSA left this question to be decided by the agency's Administrator, and as of this writing, no one has been nominated for that position. Unionization will not be the end of the world, but it will make it even harder to downsize airport screening workforces when and where it makes sense to do that.

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Feedback on FAMs vs. FFDOs

My article last month on the very poor cost-effectiveness of Federal Air Marshals (FAMs) compared with armed pilots (under the TSA's Federal Flight Deck Officers [FFDO] program) brought several responses. The most detailed was from Billie Vincent, former director of FAA's Office of Civil Aviation Security. In the 1980s, he tells me, the FAM program was part of his organization, and he beefed it up to several hundred members in response to a Presidential order following the 1985 TWA Flight 847 hijacking out of Athens. But now that FFDO has been implemented, he's become a big fan.

"Since 9/11," he writes, "I have published several articles on the FAM versus the FFDO program and advocated a significant addition to the overall structure in response to an FAA NPRM [Notice of Proposed Rule Making]. My proposals were to go almost exclusively with the FFDO program," as well as adding ballistics protection inside the cockpit and covert CCTV cameras in the cabin, able to be monitored from the cockpit and the ground. He also tells me that to put two FAMs on all US commercial aircraft would require in the neighborhood of 56,000 FAMs at a cost of $5.6 billion per year, which "makes absolutely no sense"—and I heartily agree.

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News Notes

Registered Traveler's Growth Continues. Despite offering only head-of-the-line privileges and an increased annual fee of $199, Verified Identity Pass's Clear program keeps setting records. At the end of April, it recorded the one millionth passenger passing through the Clear lanes at Orlando International Airport, its first installation (since 2005). As of now, there are more than 260,000 members in Registered Traveler programs, with specialized lanes at 22 U.S. airports.

Risk-Based "Global Entry" Expands. In previous issues I have contrasted the TSA's Registered Traveler program with the Customs & Border Protection's Global Entry program. Both are open to people who submit data for a background check, and if passed, receive a biometrically encoded ID card allowing them speedier passage at airports. However, the TSA does not actually do a background check on RT applicants, which is why members must go through exactly the same passenger and baggage screening at airports as non-members. By contrast, CBP's Global Entry is a risk-based program, and those accepted can re-enter the United States from airline trips abroad (at participating airports) via quick-service kiosks, rather than waiting in long lines to show their passports to an Immigration official. And last month the U.S. government signed an agreement with The Netherlands to allow reciprocal privileges between Global Entry and the Dutch equivalent, called Privium. Since TSA and CBP are both under th e new leadership of the Department of Homeland Security, perhaps there's still hope to turn Registered Traveler into the kind of risk-based program it was originally intended to be.

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Quotable Quote

"By mutually recognizing these two programs [Global Entry and Privium], the governments of the United States and the Netherlands will be making travel between our nations more convenient and secure." (emphasis added)
--Janet Napolitano, Secretary, Department of Homeland Security, Aviation Daily, April 27, 2009.

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LaHood: Government Better at Managing Air Congestion?

sam.staley@reason.org (Samuel Staley) — Sat, 16 May 2009 09:30:00 EDT

By now, many aviation policy watchers have noted the decision by the Federal Aviation Administration (FAA) to scrap the proposed auction of landing slots at New York City area airports on May 13th. U.S. Department of Transportation Secretary Ray LaHood cited the controversial nature of the auctions as one of the reason's he reversed the FAA decision made under former U.S. DOT Secretary Mary Peters.

Secretary LaHood reviews his decision in an interview with the online news channel NY1.

What caught my eye (ear), however, were the following comments reported by NY1:

He [Secretary LaHood] said that the plan made by former President George Bush's administration plan to auction off takeoff and landing slots at John F. Kennedy, LaGuardia and Newark Airports did not make sense.

"I think it's a little contradictory to say on one hand we are going to limit the number of slots and actually take them back, and then say all of a sudden we are going to auction them off. I think it's a contradiction in the kind of activity people here are looking for," said LaHood.

The Bush administration created the plan to help alleviate air traffic congestion and create competition among the airlines.

LaHood said the best way to relieve flight congestion is through new technology, and said that New York is three to five years away from making the upgrades.

Hmmm. The point of the auction was to allow the marketplace to decide which airlines valued the New York slots the most, allowing market prices to sort out priorities. The current system allocates slots based on airline legacy at the airports, not the value added these slots provide to consumers. Indeed, many of the flights going into LaGuardia and JFK airports are transfers to other domestic flights, so they, in principle, could be moved to less expensive (and even nearby) airports.

Mr. LaHood's faith that these congestion problems can be handled through a technology fix, without involving consumers and suppliers in decisions to prioritize and determine the relative value of this scarce commodity, is another indication that U.S. transportation policy continues to be wedded to out-of-date thinking about reform.

Reason Foundation has published extensively on the benefits of auctioning landing slots in New York and elsewhere. A complete index of our most recent work can be found here. We also published a "Frequently Asked Questions" on airport pricing at New York airports.

Chicago Exploring Alternative Privatization Models for Midway Airport

leonard.gilroy@reason.org (Leonard Gilroy) — Fri, 08 May 2009 19:37:00 EDT

Per The Wall Street Journal, Chicago is exploring some alternative privatization approaches for Midway Airport, following the collapse of the city's $2.5 billion deal with a Citi-led consortium two weeks ago:

Chicago is considering a variety of strategies to revive its collapsed $2.52 billion Midway airport privatization, including the possibility of issuing tax-exempt debt to make the deal more tenable, according to a city adviser.

Under the tentative plan, Chicago would issue debt to fund part of the large upfront payment that it was to receive in the deal, which then would be paid back over time through lease fees from the airport's private operator.

John Schmidt, a partner at law firm Mayer, Brown LLP and the city of Chicago's lead counsel on the high-profile Midway deal, said such a move could be a way to substantially lower the amount of financing needed by private investors to make the deal go through. [...]

He said Chicago city officials are considering other potential mechanisms as well to revive the privatization. The city has had talks with a number of investors since the deal fell through two weeks ago, including with some of the unsuccessful bidders, although Schmidt said there haven't been any more "substantial discussions" with the investment group that won the project but ultimately couldn't pull it off.

For more, see Reason's recent blog posts on Midway privatization here, here, and here.

» Reason's Airports Research and Commentary

Collapse of Midway Deal "Not a Setback for Privatization"

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 30 Apr 2009 17:44:00 EDT

MuniNetGuide.com

The City of Chicago and Midway Airport made headlines when Mayor Richard Daley proposed a $2.5 billion deal to lease the airport to a consortium of investors from the private sector back in 2007. But in mid-April, city officials announced that the proposed transaction had met its demise.

Many fingers are pointed at the troubled economy as the reason the Midway deal fell through. But Leonard Gilroy, Director of Government Reform at the Reason Foundation and editor of the foundation's Annual Privatization Report, cautions against rushing to judgment. “Deals can fall apart even in better economic times,” he says. In the interview that follows, Mr. Gilroy shares his thoughts on the Midway transaction, as well as current trends in public-private partnerships.

MuniNet: In your opinion, does the collapse of the Midway deal foreshadow a declining trend for public- private partnerships?

Gilroy: Because the Midway deal was a high profile transaction, it received a lot of attention, but I don't believe it should be misconstrued as a major setback for privatization. It is the "nature of the business" that deals tend to fall apart from time to time. Not all proposed transactions are completed as planned; sometimes the terms change and sometimes the deals break down completely. In many instances, a transaction that looks plausible today may face unforeseen obstacles six months from now.

In the case of Midway Airport, the consortium's inability to raise the capital blocked the successful completion of this transaction, but that’s not to say that other privatization deals will face the same fate.

Like anything else that involves significant capital, public-private partnerships are proving to be more difficult to finalize in the current credit crunch and recession than they were six months ago, but we're still seeing infrastructure deals come to financial close. As the credit crunch continues, we could expect things like lower bids for infrastructure assets, higher debt costs, or lower debt-to-equity ratios (i.e., a higher cash contribution from the private sector relative to the debt they incur in each deal), but I don’t see this as a serious setback for the partnership concept or the potential of the asset class in the market.

MuniNet: Was the $2.5 billion price tag too high in light of today’s recessionary economy?

Gilroy: That's difficult to answer. There are certainly some market analysts out there who felt that $2.5 billion was an excessive bid given the airport’s limited development potential, but at the same time, many others expected the deal to reach financial close.

What we're hearing from the finance community is that during these tough economic times, it's a lot easier to see smaller-scale deals (i.e., less than $1 billion) through to completion. However, if all the pieces fall into place, including securing sufficient capital, then even bigger ticket deals can still come to the market.

Though the analogy isn't one hundred percent parallel, the privatization of a public infrastructure project (like a bridge, toll road or airport, for example) is somewhat akin to buying a home. The mortgage crisis plaguing today’s market may make it harder - although certainly not impossible - for potential homebuyers to secure credit. But while the rules have tightened, the door hasn’t closed. In fact, current economic conditions have, in many cases, provided great opportunities.

MuniNet: You mentioned that public-private partnership infrastructure deals are still coming to the market today. Can you offer some examples?

Gilroy: In March, the $1.8 billion I-595 expressway reached financial close, and this vital project in Fort Lauderdale can now proceed. In February, Texas announced two new large-scale road concessions in the North Tarrant Express and the New LBJ Freeway projects, two congestion-busting megaprojects in the Metroplex region. In these two projects, the private partner is bringing roughly $5 billion to the table to facilitate $6 billion worth in road improvements. Interestingly, the Dallas Police and Fire Pension Fund is a 10 percent equity partner in the deals, further illustrating how pension fund investors are taking an increasing interest - and in this case, a direct stake - in similar partnership opportunities. (Note: these deals have not yet reached financial close.)

You also have a number of states and localities pursuing public-private partnership initiatives to modernize and improve the operation of seaports. The Commonwealth of Virginia recently received an unsolicited $8.9 billion bid from an Illinois firm to take over operations of the state's ports authority. Portland is currently tapping private dollars to expand its port, and Maryland and Alabama are considering similar initiatives, among others.

Last, a number of cities are currently developing partnership proposals on the social infrastructure and "quasi"-infrastructure front (i.e., parking meters, convention centers, and the like). Los Angeles is perhaps the most prominent, and it’s currently exploring privatization of parking meters, its convention center, and its zoo.

MuniNet: Is there a silver lining to the Midway deal falling apart?

Gilroy: There are a few silver linings. First, the City of Chicago was able to keep the $126 million that it had received in earnest money, and it can still take Midway back to the market in the future and try again. Another positive outcome is that it opens a critical slot for other airport privatization deals. The federal Airport Privatization Pilot Program only allows privatization of one “large hub” airport, a slot that Midway had taken until the procurement was cancelled. With that slot now open again, many large city airports are likely revisiting the prospect of airport privatization.

Last, the Midway experience offers a valuable blueprint on how to structure a deal to get the airlines' buy-in, a necessary precursor to privatization under the federal rules.

MuniNet: Do you believe that the privatization of public infrastructure projects is still a viable option for states and municipalities?

Gilroy: Two very significant indicators are pointing in the direction of more partnerships on the horizon. First, global capital and public pension funds are still moving into the infrastructure space - $180 billion have been raised worldwide in infrastructure equity funds over the last several years - so infrastructure continues to be viewed positively by the investor community. Second, policymakers in a number of states (e.g., California, Arizona, Nevada, etc.) and cities (e.g., Los Angeles, New Orleans, Pittsburgh, etc.) are either developing specific privatization projects or are busy modernizing their statutes to facilitate more of these partnerships.

The underlying dynamics of public-private partnerships haven'’t changed. State and local government budgets are going to be strained into the future, and public-private partnerships are going to be increasingly viewed as a critical strategy for doing more with less.

This interview was originally published on MuniNetGuide.com.

Chicago Keeps $126 Million from Canceled Midway Airport Privatization

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 22 Apr 2009 07:08:00 EDT

Following up on my colleague Bob Poole's post yesterday on the cancellation of the Midway Airport privatization, I think it's worth highlighting one other notable aspect. As the Chicago Tribune notes, the city gets to keep the whopping $126 million earnest payment from the winning bidder:

Gene Saffold, [Mayor Daley's] chief financial officer, said the city will be able to keep $126 million in earnest money put down by the winning bidder to secure the transaction, so "it wasn't a total loss." [...]

Meanwhile, the city will set to work formulating a definitive plan to spend the $126 million down payment. Saffold said $40 million would go toward shoring up the budget this year and in 2010, and some will go to unspecified public works projects in the city's neighborhoods.

This is conceptually no different than the earnest money prospective homebuyers put in escrow to demonstrate to sellers their commitment to follow through with the financing of the deal. By demanding some upfront "skin in the game," sellers are simply adopting a risk mitigation strategy to incentivize the buyer to: (a) put in a serious, viable offer, and (b) follow through to the financial close. This way, the seller transfers an important risk to the buyer—if the buyer can't ultimately close the deal, the seller gets compensated for their time and resources expended along the way. Time is money, after all, and by choosing to go with Bidder A's offer, the seller has now foregone the opportunity to pursue other potentially viable bids.

So now Chicago gets $126 million, despite the deal not going through. And on top of that, it still has an airport that it can bid out when market conditions improve. This is yet another real strength of the public-private infrastructure partnership approach—even when a deal falls apart before closing, the public partner still gets to tap the benefits of risk transfer.

» Reason's Transportation Research and Commentary

Chicago's Midway Airport Privatization Deal Collapses

bob.poole@reason.org (Robert Poole) — Tue, 21 Apr 2009 11:20:00 EDT

The deal to privatize Chicago's Midway Airport has been canceled. Gene Saffold, Chicago's chief financial officer, told The Wall Street Journal, "We will consider competitively offering the transaction again when market conditions improve."

The failure of the Midway deal to get financed is a setback for U.S. airport privatization, but is hardly the end of the world.

A number of analysts were surprised at the size of the consortium’s $2.5 billion bid, considering it excessive given the airport’s limited growth prospects. That high price-tag made the deal harder to finance, at a time when debt markets are still very risk-averse. A deal that would have required, say, 30% equity and 70% debt 12 to 18 months ago may well have required 50 to 60% equity in today’s debt markets and that was very likely more equity than Citi Infrastructure Investors was willing to put into this one deal, especially when it’s considering a bid for the London Gatwick Airport, which has much better growth prospects than Midway.

In terms of the future of US airport privatization, there are positives and negatives from this event. On the negative side, the fact that Midway’s $2.5 billion valuation could not be sustained means other cities contemplating privatization may have to scale back their assessments of how much a lease of their airport could bring in—and that may dampen enthusiasm in some places.

On the other hand, under the federal Airport Privatization Pilot Program, there is only one slot for a “large hub” airport, and Midway had taken that position. Freeing that spot up means that other large cities may now have a shot at privatizing their airports.

For the other areas and airports that have privatization proponents—Austin, Hartford, Kansas City, Milwaukee, New Orleans, etc—there are still three slots in the Pilot Program for small and medium hub airports, so their prospects are unchanged.

The real importance of Midway was that the City of Chicago figured out deal terms that the airlines serving that airport were comfortable with. Hence, those terms remain as a template for others hoping to gain airline support for their own privatization plans.

Reason Foundation's Airport-Related Research