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Airport Policy and Security News Issue #80

ACRP issues report on U.S. airport privatization, TSA wants more flyers in PreCheck

Robert Poole
June 6, 2012

In this Issue:

ACRP Issues Definitive Report on U.S. Airport Privatization

With a number of analysts predicting that airport privatization is on the verge of becoming a serious phenomenon in the United States, the Airport Cooperative Research Program (of the Transportation Research Board) has released a comprehensive report on the subject. “Considering and Evaluating Airport Privatization” is ACRP Report 66. The body of the report, 105 pages, can be downloaded at no charge from the TRB website. If you purchase the hard copy, you will also receive a CD containing six appendices, including more detailed versions of six case studies that are summarized in Chapter 9. (The TRB project panel that supervised this study was chaired by my Reason colleague, Shirley Ybarra, who tells me the appendices on the CD are the best part of the report.)

I’ve been researching and writing about airport privatization since before Margaret Thatcher privatized the British Airports Authority in 1987, so I pride myself on knowing a lot about the subject. But I learned a great deal from this very comprehensive report that focuses specifically on the U.S. airport scene, where privatization has been very slow to gain a foothold. The report provides good explanations of how the U.S. airport situation differs from that of most other countries, and also how changes in recent decades (such as the gradual shift from residual-cost airline agreements to more market-based compensatory agreements, the growth of common-use facilities, etc.) have made U.S. airports somewhat more commercial and therefore more like those that have been privatized elsewhere.

Taking a comprehensive approach, the report devotes individual chapters to the modest ways in which the private sector has gotten involved in the U.S. airport business, short of full privatization: service contracts, management contracts, and what it calls “developer financing and operation,” known globally as “finance-build-operate-transfer” for specific facilities (such as Terminal 4 at JFK, one of the report’s case studies).

The report also provides more detail than I’ve seen elsewhere about the federal Airport Privatization Pilot Program and about the potential of privatizing airports outside the scope of the Pilot Program. It also briefly discusses the much greater freedom available for those who would venture to develop a green-field airport without using federal Airport Improvement Program (AIP) grants—in which case the airport would not be constrained by the large array of legally binding grant assurances required of all AIP-assisted airports. The only example of such an airport is the start-up in Branson, MO, whose viability is still being tested.

For all the partial and full privatization alternatives, the report’s Chapter 8 draws on material on the pros and cons of each from previous chapters, organized into decision trees and evaluation criteria to help an airport owner analyze which, if any, of the alternatives it might want to pursue.

I was disappointed that the report did not explore the option of “corporatization” of U.S. airports, which could be either a step short of privatization or an intermediate step on the way to privatization. Under this approach, which preceded privatization in much of Europe, the municipal owner of an airport would incorporate it under normal commercial corporate law, with the city being the sole shareholder. This would free the airport management from many of the constraints of being part of a city or county government, while also subjecting the airport company to various forms of taxation and possibly to antitrust scrutiny. As time went on, the city as 100% shareholder would be able to decide if and when it wanted to diversify the airport’s capital structure by offering partial shareholding to outside parties, raising capital for expansion/modernization in the process. Much of what we’ve seen in Europe over the past two decades has been along these lines, rather than Thatcher-type sales of 100% of the airport company. Exploring how this model might work in the United States would be a worthy topic for a subsequent ACRP project.

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Should 75 Percent of Flyers Be in PreCheck?

The headline of a May 22nd Bloomberg news story read “TSA Wants Up to 75% of Flyers Shifted to Faster Screening.” The body of the article was based on comments by TSA Associate Administrator Doug Hofsass the previous day, at a meeting of TSA’s Aviation Security Advisory Committee. As reporter Jeff Plugis put it, “The agency would like to have 50 percent to 75 percent of the flying public use PreCheck, with the rest going through traditional, more intensive screening lanes, Hofsass said.”

The article went on to announce that TSA is working with “many, if not most” of the 500 largest U.S. corporations to identify employees eligible for PreCheck, according to Administrator John Pistole, also speaking at the Advisory Committee meeting. And it is looking at including members of the military, federal judges, and “possibly” members of Congress.

I’m a big fan (and early member) of PreCheck, and I’ve praised Pistole for leading the TSA toward a more risk-based approach to passenger screening, rather than treating every passenger as a potential threat to aviation. I’ve also urged that PreCheck be expanded beyond just airlines’ premium frequent-flyer members. But a goal of having 50 to 75% of the entire flying public strikes me as absurd, if meaningful security is to be maintained. It’s hard for me to imagine that this is actually what Hofsass and Pistole mean, so let’s take a closer look at who constitutes the flying public.

I have yet to see definitive figures on the composition of daily air travel, but back in Issue No. 58 in June 2010 (http://reason.org/news/show/airport-policy-security-june-2010), I did some calculations to assess how much an effective Trusted Traveler program could reduce the burden on airport checkpoints. I started with the assumption that on an average day, about half of those who show up at airports are frequent business travelers while the other half are infrequent leisure travelers. I assumed that the first group members average 20 airline trips a year, while the latter average two. With a total of 550 million passenger trips/year passing through airport checkpoints, simple math found that the total number of people in the business group is 13.7 million while the number in the leisure group is 136.8 million.


The principal market for a Trusted Traveler program is the first group, and if they all signed up and passed the background check, then half of those showing up each day at checkpoints would be members eligible to use the express lanes. But that would not be half of the flying public! Rather, it would be 13.7 million divided by 150.5 million (the total of 13.7 plus 136.8)—that is, 9.1% of the total.  

That is great news for TSA and great news for airports. You don’t need to sign up and manage 50% of the flying public (which would be a huge administrative and security challenge) to have a huge impact on checkpoint space requirements and long waiting lines. Instead, because frequent business travelers show up again and again, you need recruit only 9% of the total flying public to remove half of the daily air travelers from the regular checkpoint lines and lanes. To be sure, that kind of expansion of PreCheck will require multiple PreCheck lanes, even at their much faster processing speeds, to handle 50% of the daily checkpoint users.

It’s highly likely, in my opinion, that this is what Hofsass and Pistole have in mind—expanding PreCheck extensively among frequent flyers to achieve as much as a 50% reduction in the daily load on regular checkpoint lanes. But that is a vastly different thing than signing up 50% of the flying public!

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Airport Competition in Houston and Atlanta

The Houston City Council defied massive lobbying by United Continental Airlines and voted to proceed with Southwest Airlines’ request to add international service from Hobby Airport (HOU). United Continental had argued that having international service from both of Houston’s airports would undermine the economics of its own massive international operation at Bush Intercontinental Airport and should therefore be denied. By taking the action that it did, the City Council voted in favor of increased competition in the Houston aviation market, which should serve air travelers well.

In the several months leading up to the decision, both airlines released consulting studies supporting the economic and air service benefits of their positions, but in the final analysis those studies were not decisive. Southwest strengthened its position at the 11th hour by announcing late in May that it would pay 100% of the cost of the five new gates and the new Customs facility at Hobby, rather than proceeding with the previous plan to pay for the $100 million project via an increase in the passenger facility charge (PFC). Although Southwest currently provides the vast majority of service at the airport, passengers on all carriers would have been helping to pay for the international facilities, whether they used them or not. One of the five new gates will be offered to other airlines, on a normal rental basis, despite having been paid for by Southwest.

But what ultimately sealed the argument in Southwest’s favor was a legal analysis, commissioned by the City Attorney David Feldman from aviation law firm Kaplan Kirsch & Rockwell. Its review of FAA grant assurances, which legally bind the Houston Airport System based on its acceptance of federal airport (AIP) grants, found that the city had no choice but to accede to Southwest’s request. As attorney Peter Kirsch summarized the case, “the City, as the proprietor of HOU, is legally obligated to provide access to the airport on reasonable terms and conditions without unjust discrimination.” The city had no policies in place “that provide a legally defensible legal basis upon which to prohibit Southwest from providing international service at HOU.” The memorandum also noted that HOU “is already classified by the U.S. Customs and Border Protection (CPB) as an airport authorized to accept international traffic.”

So residents of Houston will continue to have the benefits of competing airports, with that competition now expanded to international service. Atlanta residents, by contrast, remain stuck with a monopoly airport, located on the far south side of a sprawling metro area of 4.5 million people and plagued by some of the nation’s worst traffic congestion. You would think that many metro Atlanta air travelers, especially those in the more affluent northern suburbs, would welcome the opportunity to have a second airport, even one (like Hobby) that serves mostly short/medium haul routes.

That prospect is what affluent Gwinnett County has before it, in the proposal from New York-based Propeller Investments to buy Briscoe Field and attract scheduled airline service. As is usual in cases of airport expansion (in this case potential service expansion, from GA-only to GA plus airline service), airport neighbors have organized in hopes of persuading the County Board of Commissioners to turn down the proposal (which was Propellor’s response to the County’s RFP).

As in the Houston case, the dominant airline in Atlanta—Delta—vigorously opposes the proposal. The Atlanta Journal Constitution reported on May 23rd, “Delta, which is reluctant to split its operations between Hartsfield-Jackson International Airport and Briscoe, has quietly lobbied against the plan.” Supporters of the Briscoe privatization plan believe that Delta is funding at least some of the opposition, which includes robo-calls to the County Commissioners who have not decided which way to vote.

Propeller Investments recently announced that if its plan is accepted, it will partner with Aeroports de Paris (AdP) to operate Briscoe. It wants to add a 10-gate terminal to the airport and improve the main runway to handle planes as large as Boeing 737s. Atlanta Hartsfield-Jackson is served by nearly all major US airlines (and a whole raft of non-US carriers), with the notable exception of Allegiant, JetBlue, and Virgin America. In addition to those as prime candidates to serve Atlanta’s affluent suburbs, it appears that if the Briscoe plan goes forward, Delta would “reluctantly” add service there, too.

The Gwinnett County Citizens Committee asked Kinton Aviation Consulting, headed by former Massport chief Thomas Kinton, a series of questions about the Briscoe proposal, and especially about the viability of competition between Briscoe and Hartsfield-Jackson.  Among Kinton’s findings were the following:

Kinton also noted that when secondary airports near Boston offered viable alternatives to capacity-constrained Logan Airport, “economic development increase[d] across the whole region.” And, “With more airlines flying in and out of Providence and Manchester, the greater Boston area saw more destinations served with direct flights, competitive pricing, and an ease in congestion. We believe the same thing would happen in Atlanta, which would be great for area residents.”

Eleven large U.S. metro areas have populations in excess of 4 million. The only two that lack competing airports today are Atlanta (4.5 million) and Philadelphia (5.4M). Others that are close in size to Atlanta with two or more air-carrier airports include Boston (4.2M), Houston (4.9M), San Francisco/San Jose (4.9 million), and Washington, DC (4.6M). How much longer will metro Atlanta residents put up with being a second-class metro area?

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European Airport Privatization News

Copenhagen Airports A/s seeks to sell its 49% share in the UK’s Newcastle International Airport in order to focus on its World Class Hub strategy at the core Copenhagen Kastrup airport. When it sells the holding it will have disposed of all its overseas airport interests. Copenhagen Airports was a big foreign investor and operator following its privatization in the 1990s, with a particular affection for Central and Latin America, although it did once invest in a Chinese airport (Hainan Meilan) and dabbled in Eastern Europe. It stopped investing in its own right after Australia’s Macquarie Airports bought a large slice of its equity (as it also did with Brussels Airport). But MAp Airports, as it subsequently became, backed out of airport investment altogether late last year, apart from Sydney Airport, swapping equity in these two European Airports with Canada’s Ontario Teachers’ Pension Plan. OTPP is a serious investor in its own right (five airports), so there is no way back for Copenhagen.

In any case, Copenhagen is right to concentrate on the core product. Just about all the major gateway Scandinavian airports are doing very well just now. Copenhagen Airports’ EBITDA and net profit went up by 9.6% and 22.2% respectively in 1Q2012. Avinor, which operates Oslo’s Gardemoen Airport and 45 others in Norway reports +11.2% and +18.3% respectively while Swedavia, which operates Stockholm Arlanda airport and ten others saw its operating profit jump by 84.3% in the same period.

Getting back to Newcastle Airport, the seven local authorities that own the other 51% of its equity were also looking to offload it last year but might have changed their minds now, although they have a major loan repayment (£320 million) to contend with next year. The UK is the most privatized country in the world in the airport sector, but lately (partial) public-sector ownership seems to be drifting back into fashion. This is at least partly the result of Manchester Airport Group’s sudden aggression in the market, which I mentioned last month. MAG is wholly owned by local authorities but has offered 51% of its own equity to a strategic investor in order to generate finance to bid for the (private sector) London Stansted Airport. PPPs have become popular.  

Now Newcastle City Council has a task ahead to find another strategic investor of its own. Regional airports are supposed to be a plank of the Coalition government’s policy of “re-balancing” the UK economy, though there isn’t much in the way of government action on that, just words. A lot of investor names are being bandied around but few fit Newcastle’s bill precisely, including private equity fund 3i (too big for this airport), possibly some of the pension funds (again they tend to prefer something larger than 4.3 million annual passengers) and infrastructure funds like the US-based Global Infrastructure Partners, which owns London Gatwick and City airports and is about to acquire Edinburgh. But I suspect that is quite enough for now for GIP. My money, if I had any, would be on a mid-sized European airport. There are some very ambitious ones, often well capitalized. They can bring additional management expertise and they have forged strong links with investors, garnering mutual trust.

This information (which is believed to be correct at the time of writing) and comment is by David J Bentley of Big Pond Aviation, Manchester, UK. www.bigpondaviation.com

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TSA Not Reporting or Tracking All Security Breaches

Early last year, following a string of early-2011 security breaches at Newark Airport, Sen. Frank Lautenberg (D, NJ) asked the Department of Homeland Security’s Office of Inspector General to investigate what factors contributed to these and similar breaches, whether the high incidence of breaches at Newark is typical of other large airports, and what actions were taken at Newark in response to the breaches.

The OIG’s report was released last month, and it does not paint a reassuring picture. (The redacted version is on the agency’s website (www.oig.dhs.gov); it is “Transportation Security Administration’s Efforts to Identify and Track Security Breaches at Our Nation’s Airports,” OIG-12-80.

The OIG team visited and collected 17 months’ worth of data from Newark and five other large airports. Though most of the tables of comparative data are blanked out, the text states that the number of security breaches at Newark was only “slightly higher” than at some of the other airports. At all six airports, the team found that not all security breaches were reported, as they are supposed to be, to TSA headquarters. (One reason for that is that two different TSA Operating Directives define security breaches differently.) At all six airports, only a fraction—ranging from a low of 42% at Newark to a high of 88% at a redacted airport—had corrective actions noted or reported; the average of the six airports was only 54%. And because of all these shortcomings, TSA headquarters “cannot use [security breach] information to monitor trends or make general improvements to security.”

As is often the case with OIG reports, the agency in this case agreed with both of the report’s recommendations: to come up with and implement a single, comprehensive definition of “security breach” and to develop a comprehensive oversight strategy so that patterns and trends can be analyzed at TSA headquarters.

But the OIG team did not ask a more fundamental question. How can it be that the agency charged with making transportation security policy and regulating all aspects of aviation security did (or does) such a sloppy job of riding herd on its own screening workforce? And I think the underlying reason is simply that, consciously or otherwise, the TSA doesn’t want to make its workforce look bad. And that stems from the agency’s built-in conflict of interest in which it is both the aviation security policymaker/regulator and the operator of the largest single component (in staff and budget) of airport security. No other major developed country does things this way. In Canada, the corresponding agency does policy-making and regulating—but hires licensed security firms to carry out all airport screening functions. In most of Europe, a national agency sets security policy and oversees its implementation by airports and airlines—but it is each airport’s responsibility to provide the screening functions.

Congress created this mistake in the hastily enacted Aviation & Transportation Security Act of 2001, which “federalized” airport security in this dysfunctional manner. Until and unless Congress reforms TSA, to eliminate its dual roles, we will remain stuck with the consequences of this unfortunate conflict of interest.

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Fixing the Passenger Security Fee

As of late May, the Appropriations Committees of both the House and the Senate approved funding levels for the TSA’s FY 2013 budgets. While the amounts were pretty similar in the two versions, one important difference is that the Senate bill would change the way the passenger security fee is structured.

As set forth in the 2001 ATSA legislation, this fee is currently $2.50 per passenger per flight segment. That means passengers flying from city A to city B nonstop pay $2.50 but those making the same trip via a hub pay $5.00. This has never made sense to me, since what the fee is supposed to be paying for is airport screening, and a passenger’s screening takes place only at the airport of origin. The Senate bill would change this to a flat $5.00 per one-way trip, regardless of whether that trip is nonstop or via a change of planes at a hub.

Last year, and again early this year, major airlines objected to an Obama Administration budget proposal that would have sharply increased the passenger security fee over a period of years, not only to offset the budgetary cost of airport security but to help reduce the federal government’s budget deficit. That kind of mixture of “luxury tax” on flying and user tax is the kind of thing that gives user taxes and user fees a bad name—and rightly so.

That is not what the Senate bill does. To be sure, the shift to a single $5.00 one-way security fee would increase the revenues from aviation security fees modestly—from $2.03 billion in FY 2012 (under the old fee structure) to $2.385 billion in FY 2013, an increase of 17.5%. (Airlines also pay a security fee, whose proceeds are included in both totals, and would not be changed by the Senate measure.) The net effect of the fee change is to reduce the general taxpayer support for aviation security (i.e., total aviation security budget minus security fee revenues from airlines and passengers) from $2.889 billion in FT 2012 to $2.702 billion in FY 2013. And that strikes me as a small step in the direction of greater fairness to taxpayers in general and among air travelers in particular.

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News Notes

Sacramento Applies to Opt Out of TSA Screening. On April 5th, Sacramento International Airport submitted its application to the TSA to opt out of TSA-provided screening, as permitted under the agency’s Screening Partnership Program (SPP). If TSA approves the airport’s request, Sacramento will become the largest airport to have switched from TSA screening to TSA-approved private-sector screening. Two larger airports, San Francisco International and Kansas City, were part of the original five-airport pilot program that led to SPP. All five of those airports have retained private screening ever since.

Milan to Sell Majority Control of Airports. The city of Milan plans to sell 50% of its shares in SEA, the airports authority that operates Linate and Malpensa airports. Last year, the fiscally stressed city sold 29.7% of SEA to an Italian investment fund, F2I. That fund is expected to bid for the new offering, with Fraport and Macquarie also rumored to be contenders. The 50% stake is expected to go for $927 million, which would value SEA at $1.8 billion. Milan would retain a 20% interest in SEA.

FAA Redefines G.A. Airport Categories. In a new report dated May 2012, “General Aviation Airports: A National Asset,” the FAA has introduced a new way to categorize G.A. airports. The new categories, and the number of airports in each, are as follows:

Gone from the categories is the former category of “Reliever” airport, which appears to have outlived its usefulness.

Aeroports de Paris Invests in Turkish Airport Operator. Partially privatized French airport owner/operator AdP has made a major investment in Turkey’s TAV Airports and airport construction firm TAV Construction, Air Transport World reported last month. AdP now owns 38% of TAV Airports and 49% of the parent company of TAV Construction.

CLEAR Opens at SFO. Alclear, the company that has reintroduced the CLEAR service to bypass long waiting lines at TSA screening checkpoints, last month announced the start of service at San Francisco International, with locations in all four terminals. With the addition of SFO, CLEAR is now in operation at three airports, the other two being Denver and Orlando.

El Salvador Considering Private Airport Investment. Online infrastructure investment news service Inspiratia reported on April 16th that El Salvador’s state-owned airport operator, Cepa, is considering seeking a private partner to develop its planned new terminal and airfield enhancements. The estimated cost of the improvements is $800 million.

WSJ Cites Reason-Rupe Survey on TSA. Scott McCartney’s May 24th Wall Street Journal “Middle Seat” column on TSA’s recent troubles cited data from a Reason-Rupe Public Opinion survey of 1,200 respondents nationwide about U.S. aviation security. The survey found that 43% had a negative view of the agency overall, compared with 38% with a positive view, 11% don’t know, and 8% neutral. Those with a negative view typically mentioned a perception of TSA incompetence and overstepping authority.

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Quotable Quotes

“Call it the Miracle on the Potomac. Washington may finally consider allowing birds to die so that airline passengers may live. More than three years after a collision with Canada geese forced US Airways pilot Sully Sullenberger to make an emergency landing on the Hudson River, and mere days after two more bird strikes forced emergency landings at New York airports, Empire State Senator Kirsten Gillibrand is leading a campaign to save the humans. Her new bill would force the U.S. Department of Agriculture to clear out the geese from their nests near New York’s John F. Kennedy Airport. Amazingly, because federal geniuses have been maintaining a “wildlife refuge” not far from JFK’s runways, the National Park Service has been demanding an almost endless environmental impact review. Now that officials have finished that paperwork chore, the Gillibrand bill requires the feds to get rid of the birds this summer.”
—Editorial, “Cook These Geese,” The Wall Street Journal, May 5, 2012

“Only State-owned airports [in Europe] are subject to State Aid rules, but the issue is much broader than that. If the issue is a single market, with no distortions, which it should be, then looking only at the State Aid rules is not likely to solve the ‘patchwork quilt’ approach. There is a real interest in this from Europe’s regulators. After all, 77% of Europe’s airports remain in public ownership, but the 77% of airports generate only 52% of European traffic. In other words, the State-owned airports are the small ones. The 9% wholly privately owned generate 14% of the traffic, and the remaining 13% in joint public-private ownership the remaining 34% of the traffic.”
—Andrew Charlton, “State Aid and Marketing Support: Theirs Bad, Ours Good,” Aviation Intelligence Reporter, May 2012

“Europe’s political leaders need to get serious about the growth agenda and provide fertile soil for its key industries to develop. For the airline sector, this means a global solution on emissions trading, a Single European Sky which actually delivers, and an end to economically illiterate regulation. . . . There is a fundamental disconnect between the vital economic role of European airlines and the burdens that we face. We are sick and tired of European fragmentation and misguided regulation hampering our ability to support growth and jobs. This needs to change, and we are ready to work with the Commission and Member States on solutions.”
—Bernard Gustin, Chairman, Association of European Airlines, quoted in David Bentley, “European Enente Dis-Cordiale,” Big Pond Aviation Newsletter, Spring 2012

“I had an ex-[airline] friend give me a good analogy about the TSA today. He said the takeover of checkpoint security was like the FAA taking over engine maintenance after a crash related to an engine issue.”
—Airport official (name withheld by request), email to Robert Poole, May 4, 2012

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


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