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Reason Foundation

Airport Policy and Security Newsletter #38

Topics include: TSA faulted on covert testing; breaking up BAA; Secure Flight and watch list problems; New York airport pricing battle update; airport privatization continues, despite Fitch's negativity; Phoenix-Gateway tries new funding approach; and oth

Robert Poole
September 1, 2008

In this issue:


TSA Faulted on Covert Testing

Last month the Government Accountability Office issued a detailed assessment of the covert testing of airport security carried out by the Transportation Security Administration. ("Transportation Security: TSA Has Developed a Risk-Based Covert Testing Program, but Could Better Mitigate Aviation Security Vulnerabilities Identified Through Covert Tests," GAO-08-958) Most of the media coverage has focused on the main conclusion represented by the report's title: although TSA has a pretty serious (and risk-based) national program of covert testing of airport passenger and baggage screening as well as access and perimeter control, it is not systematically using the results to address identified problems. Rep. Bennie Thompson (D, MS), who chairs the House Homeland Security Committee, has called a hearing for this month to discuss GAO's findings.

In a USA Today article about the report (Aug. 14th), TSA's Ellen Howe responded that the covert testing has led to the development of new technologies, such as body-scanning equipment and two-dimensional X-ray systems at passenger checkpoints. This basically admits what other critics and I have been saying about TSA's first-generation passenger and bag screening. It was mostly window-dressing that could stop most amateurs but not anyone seriously committed to bringing weapons or some types of explosives onto planes.

But the GAO report also raises a broader point. Covert testing is supposed to be being used in all modes of transportation, but as of now it isn't. The legislation creating TSA (the Aviation & Transportation Security Act of 2001) called for TSA to protect all modes of transportation. The 2002 National Strategy for Homeland Security called for covert "red team" testing of all critical infrastructure, including all modes of transportation. In 2004, the 9/11 Commission said the government should identify transportation assets that need protection, set risk-based priorities for defending them, and select the most cost-effective ways of doing so. The "Implementing Recommendations of the 9/11 Commission Act of 2007"specifically requires DHS (TSA's parent agency) to develop and implement a railroad security strategy. And the explanatory statement for the DHS appropriations act of 2008 "directs TSA to be more proactive [in] red teaming for all modes o f transportation," reports GAO.

If you go to the TSA website, you can download a Transportation Systems Sector Specific Plan (TS-SSP) that outlines a framework for coordinating security efforts in six major modes of transportation (aviation, freight rail, highway, maritime, mass transit, and pipeline). You can click on a sector-specific plan for each mode, but they look to me to be mostly bureaucratese. Beyond some nice rhetoric in the TS-SSP Base Plan about risk assessment, which would imply making priority decisions across modes, everything seems to devolve quickly to the individual modes. There doesn't seem to be any place to ask and answer such questions as:

As for covert testing in the other transportation modes, all that GAO could identify were three one-time TSA pilot programs-in mass transit, passenger rail, and maritime ferry operations.

I continue to be a big advocate of risk-based approaches to all aspects of security. There will always be limited dollars, and it makes sense to continually assess the threats and decide where we will get the most bang for the buck. But we are still suffering from Congress's over-reaction to 9/11, by embedding in the law the current huge over-emphasis on airport passenger and bag screening. Until that mandate can be rethought, a seriously risk-based approach to transportation security will not be possible.

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Breaking Up BAA

Last month the U.K. Competition Commission issued its preliminary report on BAA, the privatized operator of the major airports serving London and Scotland. It recommended that BAA be required to sell two of the three London airports and one of its two Scottish ones. The rationale is that competition would work better than regulation in improving service to airlines and passengers.

BAA, formerly the British Airports Authority, was the world's first significant airport privatization. In 1987, the Thatcher government sold 100% of the company on the stock market, for $2.5 billion. It was widely believed that the government chose to sell BAA as a single entity because the sale of a near-monopoly airport system would be worth more than what it could get by selling the airports individually. Also, nobody really knew what airports were worth, since nobody had privatized airports before that. BAA's publicly traded market value zoomed to $4 billion by 1990, and by 2006, when Ferrovial bought up BAA, it paid nearly $19 billion.

BAA's Heathrow, Gatwick, and Stansted handle 90% of the air passengers in London, and its Edinburgh and Glasgow airports handle 84% of Scotland's. Passengers and many airlines (especially low-cost carriers) have complained for years about overcrowded terminals and lack of sufficient runway capacity, and the Competition Commission seconded those complaints. In its defense, BAA cites factors largely beyond its control-such as the long, convoluted planning process required to get permission for any major terminal or runway additions, as well as costly airport security requirements imposed on short notice by the government. Still, it's easy to imagine that three major London airports under separate ownership might be more creative and aggressive in figuring out how to mitigate externalities associated with expansion projects. The Economist, for example, points out that adding another runway should be far less problematic at Gatwick than at Heathrow, and a two-runway Gatwick could position itself as a second hub for the region (much as both Newark and JFK both serve as hubs for greater New York).

I'm inclined to agree with the arguments for competition. Indeed, at the time the Thatcher government made the decision to privatize BAA, I agreed with the three think tank reports (from the Adam Smith Institute, the Centre for Policy Studies, and the Institute for Fiscal Studies), all of which argued for competitive divestiture of BAA's airports. After 20 years, it's somewhat late to be correcting this mistake, but since there would likely be important benefits to doing so, better late than never.

The Economist last spring (March 29, 2008) also suggested that, with real competition among London airports, the government's current price-cap regulation might be done away with. In that case, since business-oriented airlines much prefer Heathrow, landing charges there would rise "to reflect the value and scarcity of its capacity." That would shift more leisure travelers to Gatwick, Stansted, and Luton, increasing their market share. Should demand at Heathrow still remain high enough to justify an additional runway, the increased revenue might permit greater scope to buy out impacted neighborhoods.

A number of global airport companies have expressed interest in buying whichever BAA airports may be offered for sale. But this is all still preliminary. The Competition Commission's final report will be released in March or April, after which BAA may appeal. Meanwhile, BAA completed a $25 billion debt refinancing in August, secured by the assets of the three London airports and its Heathrow Express train. That huge financing, in today's markets, is a vote of confidence in the value of the airports, whoever ends up owning them.

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More Watch List Troubles: Where Is Secure Flight?

We're seeing yet another spate of news stories bemoaning the fate of people whose name is similar to a name on the watch list provided by TSA to the airlines. The airlines use these lists to identify passengers who require secondary screening or who are on the no-fly list. People thus flagged have to stand in line at the ticket counter, so an airline person can see and talk to them, to ascertain whether their name really matches a name on the list, and even then, sometimes they can't be sure.This is a problem that should have been resolved years ago, but persistent objections by various interest groups have kept the solution in a perpetual state of redesign. That solution is called Secure Flight, and it would relieve the airlines of this chore, which would be done for them, more accurately, by the TSA itself.

The problem dates back to before 9/11. In those days, airlines had all adopted, at FAA urging, an anti-bomb measure called CAPPS (Computer Assisted Passenger Prescreening Sysem). It was applied only to passengers who checked luggage, and identified those whose checked luggage would be screened, based on various criteria. After 9/11, CAPPS was modified and applied to all passengers, with some selected for secondary screening based on certain parameters (like paying cash, buying a one-way ticket, etc.) and others selected at random for secondary screening. In addition, any passenger who was found to be on the "no-fly" list was to be prevented from boarding the plane, and his/her luggage prevented from being loaded.

The problems with CAPPS were widely understood. In addition to the selectee parameters becoming known, it put a burden on the airlines to match every passenger name record to names on lists provided to them by the TSA-and those lists were often not up-to-date and contained many possible version of suspicious people's names. TSA originally proposed a CAPPS II that would have used data mining to sort travelers and assign them risk scores, but that raised huge privacy and civil liberties objections. That sent the whole project back to the drawing board, to emerge in concept as Secure Flight. Yet all this time, the old CAPPS has remained in place, with all its shortcomings. It is the source of all the "false positives" where innocent people are flagged either for secondary screening or to be denied boarding.

The simplified Secure Flight replacement would not do data mining, but it would take the burden of name-matching off the airlines and greatly reduce the chances of people erroneously being flagged for secondary screening. How? By using gender and date of birth to weed out nearly all of the false positives. But how would TSA get that additional information? Airlines and travel agents would have to ask for it, as part of the reservations process. Yet this, too, raised privacy concerns with some groups-as if this information were not already required for credit card applications, drivers' licenses, and countless other minutiae of daily life! But even the airline and travel agent trade groups, ATA and ASTA, last year filed written objections to being required to ask passengers for this information.

According to a recent post (Aug. 6, 2008) on pajamasmedia.com by DHS Assistant Secretary for Policy Stewart Baker, a few of the airlines don't want to modify their legacy software to include new information like date of birth (though he points out that Southwest has done so, and "has one of the industry's best systems for minimizing false positives"). Meanwhile, many passengers continue to be mis-identified by these obsolete systems.

A year ago TSA issued a Notice of Proposed Rule Making for the final version of Secure Flight, and in April of this year Administrator Kip Hawley said the program will start being implemented next January. But in July Hawley told Aviation Week that while they still hope to begin the roll-out in January, "How fast you implement it is up to the airlines." He said he hopes the new system will be a competitive advantage and marketing tool for airlines that are early adopters.

I, for one, think it's high time airlines and travel agents got with the program.

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New York Airport Pricing Battle Continues

In our last episode, the US DOT had announced its plan to gradually auction off a modest number of slots currently used by airlines the three major New York area airports (JFK, LGA, and EWR); the Air Transport Association had threatened to file suit; and Sen. Charles Schumer (D, NY) had introduced legislation to prevent the DOT from imposing any form of pricing or auction at any airport.

Since then, a number of shoes have dropped. In early August, DOT followed up with what should have been a less-controversial plan: to auction off a pair of surplus slots at Newark that became available when Eos went bankrupt earlier this year. ATA made good on its anti-auction-authority lawsuit, which it filed four days later. Two weeks after that, the FAA posted procedures for the Sept. 3 Eos slot auction on its web site, but the next day announced that the effort was on hold due to the ATA litigation (which might well have led to nobody submitting bids). The Port Authority meanwhile mobilized its troops, leading to an announcement August 20th that both New York Gov. David Paterson and New Jersey Gov. Jon Corzine were opposed to the auction plan. New York Mayor Bloomberg, however, had endorsed the plan the week before. Also favoring the auction proposals were editorials in the Wall Street Journal and USA Today.

But what I thought was the most outrageous action was the Port Authority's announcement on August 4th that it would deny permission to operate at JFK, LGA, or EWR to any flight operating pursuant to a federal slot auction. DOT general counsel D.J. Gribbin responded that an airport cannot legally discriminate against flights, just because it disagrees with a federal policy. And DOT followed up, correctly, by threatening to withhold federal Airport Improvement Program (AIP) funding. Airports receiving such funding sign 20-year grant agreements for each new batch of money, under which they commit to a whole raft of provisions about how they will operate their airports-including that they will serve all airlines on a non-discriminatory basis. In response to that, the Port Authority joined the ATA lawsuit against the auctions.

Only one ray of hope appeared in all this battling. In a story that I saw only in the New York Sun (Aug. 15, 2008), Port Authority chairman Anthony Coscia suggested that if the DOT were to give priority in NextGen type capacity enhancements to the highly congested New York region, the PA would be more cooperative. "To the extent that the FAA and the DOT begin to turn their policy drive more toward expanding capacity and, yes, making significant investments in a next-generation air traffic control system and changes of that nature, it would show a great deal more flexibility in terms of what we think our appropriate operational measures are in the interim," he said at a board meeting. The paper quoted DOT's Gribbin as being pleased by Coscia's comments. "It is very encouraging. We have worked closely with the Port Authority in the past, and I can't see why we can't agree on a common approach." He said the whole point of auctions was to generate proceeds to build an upgraded infrastructure at the participating airports.

Let me suggest a win-win opportunity here. While DOT's legal ability to impose auctions is unclear, the Port Authority's legal ability to adopt runway congestion pricing has recently been bolstered by DOT's revised airport rates and charges policy. If the PA would agree to adopt runway pricing, to reduce congestion in the near-term, with all proceeds dedicated to airport capacity expansion, the FAA could agree to make self-help congested airports like the PA airports first in line for NextGen upgrades. For details on how such a plan might work, go to www.reason.org/ps366.pdf.

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Airport Privatization Continues, Fitch Notwithstanding

I've fielded several media calls regarding a Fitch Ratings report earlier this month revising its outlook for U.S. airports from stable to negative. The report focused mostly on the near-term, citing higher fuel prices and a sagging economy as causes of reduced enplanements. "While many [U.S.] airports have seen reductions of as much as 8% in the first and second quarters of 2008, many could well see further declines." Longer term, if the underlying pressures continue for several years, there may be more fundamental changes in airline pricing that could lead to larger reductions, especially in low-fare passengers.

Despite this gloominess, the airport privatization trend shows no sign of flagging. In Reason's Annual Privatization Report 2008 (a major report produced every year), I wrote the section on airports and air traffic control, and as you will see if you read it, the past year has been very active in airport privatization. (www.reason.org/apr2008/air_transportation.pdf)

That chapter was written in April and May. Since then, there has been no let-up. Last month Spain's government announced that it will sell an initial 30% stake in state-owned airport operator AENA, which operates most of the country's important airports. A cabinet minister estimated the economic value of AENA at $46.7 billion. A week later South Korea's government said it would offer a 49% stake in Incheon International Airport. The government hopes to secure a strategic tie-up with a global airport operator.

Several existing airport companies have restructured some of their holdings recently. Macquarie Airports last month announced the sale of nearly a billion dollars worth of assets, including a 27% stake in Copenhagen Airports and 26% of Brussels Airport. In addition to a share buyback, Macquarie Airports is using the proceeds to purchase a 5.6% stake in ASUR, one of three privatized Mexican airport operators. And Spain's Ferrovial, parent company of BAA, sold Belfast City Airport to Amro Global Infrastructure Fund. The point here is not just that some companies are selling but that others are eagerly buying.

Germany's privatized Fraport, after initial success as part of the team that is modernizing New Delhi's Indira Gandhi Airport, announced the opening of a permanent office in India, to pursue additional business opportunities. And in Russia, companies are queuing up to bid on a $1.3 billion, 30-year concession to develop and operate St. Petersburg's Pulkovo International Airport.

Back in the USA, this summer the City of Chicago eliminated two of the six teams that had submitted qualifications to lease Midway Airport-Abertis/Babcock & Brown and Carlyle Infrastructure Partners. With Macquarie's subsequent decision to withdraw, that leaves three teams still in the running for Midway: Hochtief/Goldman Sachs, YVR/Citi Infrastructure, and Morgan Stanley/Aeroports de Paris. My sources tell me of interest in several other cities in being the next participants in the Airport Privatization Pilot Program, including Austin, Milwaukee, and New Orleans.

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Another New Approach to Small Airport Funding

In issue No. 36, I described an agreement between Branson, MO and the private company developing a new airport to serve that tourist city. For the next 30 years, the city will pay the airport company $8.24 for each arriving passenger, with an annual cap of $2 million. Now comes Phoenix-Mesa Gateway Airport with an equally innovative idea.

In this case, successful low-cost-carrier Allegiant Air is lending the city-owned airport $3 million to expand its terminal from two gates to four, and its space from 24,000 to 34,000 square feet. Under the 10-year deal, the airport will repay the loan at the rate of $4 for every passenger Allegiant brings in. The loan is unsecured, so if Allegiant goes belly-up, they won't get repaid.

Gateway is a former military base that used to be known as Williams Gateway. As of now, Allegiant provides its only scheduled service, with up to 40 flights a week to 15 destinations. (www.phxmesagateway.org)

And although some scoff at Allegiant, with its fuel-guzzling MD-80s and a business model providing point-to-point service to neglected cities, it is operating in the black-unlike most other U.S. airlines these days. And in Aviation Week's August 11th rankings of LCC and regional carriers worldwide, Allegiant scored third-best (after Ryanair and EasyJet), beating 5th-ranked Southwest and 19th-ranked JetBlue. As Mike Levine pointed out in his July 29th speech to International Aviation Club, we have no idea which business models will prove viable in an era of much-higher fuel prices. As I see it, Allegiant may have found a model that works.

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News Notes

Airport Terminal Naming Rights. If cities and counties can sell naming rights to arenas and convention centers, why not airport terminals? The Wayne County Airport Authority is hoping to do just that, with the new North Terminal at Detroit Metro Airport. The Detroit Free Press reports that about 20 companies have expressed interest in having their names attached to the $431 million new terminal, which is set to open Sept. 17th.

New Report on Common Use Facilities. The TRB's Airport Cooperative Research Program has released a new synthesis report, "Common Use Facilities and Equipment at Airports." It consists of nine chapters plus useful appendices on current practices at both U.S. and non-U.S. airports. The report is ACRP Synthesis 8. (http://onlinepubs.trb.org/onlinepubs/acrp/acrp_syn_008.pdf)

Reason Anniversary Celebration. Reason magazine, the flagship publication of Reason Foundation, celebrates its 40th anniversary this year, with a gala event in Los Angeles, Nov. 14-15. "Reason Goes Hollywood" takes place at the historic and glamorous Hollywood Roosevelt Hotel and includes both a conference and a black tie banquet. Details are at www.reason.org/events. Hope to see you there!

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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