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Reason Foundation

Airport Policy and Security News #88

Saving air travel from the sequester, San Juan privatization opens new era, trusted traveler

Robert Poole
March 7, 2013

In this issue:

Saving Air Travel from the Sequester

After all the hype about shutting down control towers and furloughing air traffic controllers, airlines and airports have good cause to be concerned about what air travel will be like starting April 1st, when those cuts are supposed to take effect. But instead of joining with every other affected group in pleading for an exemption to the sequester, I think the aviation community should speak up for a more responsible approach to dealing with 5% budget cuts.

Yes—it’s just five percent of the budget that must be cut from all FAA accounts except AIP grants (exempted due to dedicated funding from the Aviation Trust Fund). But what exactly does the 5% apply to? Current federal law (dating back to the Gramm-Rudman sequesters of the 1980s) calls for any “across-the-board cuts” to be applied at the level of “program, project, and activity” (PPA). The FAA Operations account has just seven PPAs, one of which is the Air Traffic Organization, which accounts for $7.4 billion of the agency’s $9.6 billion Operations budget. So it is the entire ATO (and each of the six smaller PPAs within Operations) that must make a 5.0% cut. For the ATO, that amount is $371.8 million—and the ATO legally has complete discretion in how to accomplish that overall cut.

What the FAA has announced is mostly across the board—furloughing nearly all employees for two days every month, April through September (the end of FY 2013). That is expected to cause serious air traffic delays due to under-staffing of towers, TRACONs, and centers. In addition, ATO plans to use its discretion to shut down 168 contract towers, leaving those lower-activity airports to operate without towers--or shut down. This plan is a classic example of the “Washington Monument” ploy, in which a government agency tries to stave off budget cuts by imposing the most pain that it can on taxpayers, hoping they will raise such an outcry that the budget cut will be overturned.

But if the object is to achieve a 5% ($371.8 million) reduction in the ATO’s budget for this fiscal year, there is a far less-destructive way to do it. Reduce the ATO’s payroll by 5% not by furloughing employees and shutting down towers but by reducing the size of paychecks. From the standpoint of employees, including controllers, they are going to be out the same amount of money in either case. But with a 5% all-hands pay cut, the ATO would preserve all current services (including all contract towers) and prevent the layoffs of those staffing the towers planned for shut-down for the entire second half of FY 2013.

Yes, I know that most ATO employees have union contracts, and there might be a legal question about whether the FAA or even Congress could impose a change in contract terms. But if that’s the case, what a wonderful expression of public-spiritedness (as well as solidarity with their brethren facing not furloughs but layoffs) it would be for NATCA, PASS, and any other ATO unions to voluntarily agree to a 5% pay reduction in order to maintain the level of air traffic services on which this country depends. It’s not as if they haven’t received nice annual increases over the past four years, while numerous taxpayer households faced reduced disposable income, and in some cases layoffs, furloughs, and bankruptcies.

My advice to aviation groups seeking to stave off disruptions to air travel is to forget about trying to undo the sequester. Instead, let’s focus on getting through this very modest budget cut with the least possible harm to air travel.

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San Juan Privatization Opens New Era for US Airports

On February 25th, the FAA approved the 40-year lease agreement for Luis Munoz Marin International Airport in San Juan, and on February 27th, Gov. Alejandro Garcia Padilla signed off on the deal. With 8-9 million passengers a year, the San Juan airport is the first major U.S. airport privatized under the federal Airport Privatization Pilot Program.

The airport is being leased by Aerostar Airport Holdings, a joint venture of New York-based Highstar Capital and Mexico’s Grupo Aeroportuario del Sureste (ASUR), the owner-operator of nine airports including Cancun and Cozumel. Terms of the lease required Aerostar to make an up-front payment of $615 million to the Puerto Rico Port Authority (PRPA) and invest $1.4 billion in the airport over the 40-year term of the lease, including $250 million in the first four years to expand retail space by 35,000 sq. ft., upgrade check-in areas (including new kiosks), and add an in-line checked baggage X-ray system. In addition, Aerostar will share revenue with PRPA over the life of the agreement, with an estimated total of $552 million. As a recent user of the San Juan Airport, I can best describe its condition as shabby and woefully behind the times in retail outlets. These improvements will be terrific for passengers.

And the deal is of great benefit to the PRPA. Moody’s Investors Service dubbed the deal credit positive, given that the up-front payment will enable the heavily indebted Port Authority to pay down loans and loan guarantees from the Government Development Bank. That will improve GDB’s financial position as well as that of the Commonwealth of Puerto Rico itself.

The airport lease is a major accomplishment of Puerto Rico’s Public-Private Partnerships Authority and its director, David Alvarez, with the strong support over several years from former Gov. Luis Fortuno, who made PPPs one if his signature issues. That the deal got completed is also a tribute to the political courage of Fortuno’s successor, elected last November after a tight race with Fortuno. New Gov. Garcia Padillo came under heavy political pressure from legislators in his party and airport employee unions to cancel the deal at the 11th hour. In going ahead with it, Garcia stressed that reneging on the deal would have discouraged future investment in Puerto Rico. He also cited fiscal necessity: “Right now, the Port Authority has zero dollars to invest in this airport. As everyone who has visited the airport knows, its infrastructure has to be improved greatly and quickly.” And responding directly to protesting employees, Garcia told them, “If this deal had not gone through, it’s important for you to know that there would be no money to pay your salary. There would be no money to honor your retirement.”

Airlines strongly supported the lease, in sharp contrast to the 1980s and 1990s when airlines fought any and all proposed U.S. airport privatizations. The first breakthrough was the draft agreement the City of Chicago reached with Southwest and the other airlines serving Midway during Mayor Richard Daley’s original effort to lease that airport in 2007. That agreement provided the starting point for the shorter (40 years instead of 99) lease agreement for San Juan. When discussions there began, American was the largest carrier, but as of last year, that position was taken by JetBlue. Both major carriers approved the deal structure as being the best way to increase investment in modernizing the airport. And a week after the privatization decision was announced, JetBlue reaffirmed its commitment to San Juan by announcing the 17th city it will serve nonstop from there, as of next fall: Chicago.

With San Juan privatized, and a very similar process now well under way (under Mayor Rahm Emanuel) to lease Midway, the stage is set for other cities needing investment in their airports to go forth and do likewise.

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Expanding Trusted Traveler Could Help TSA and Air Travelers

Air travelers originating their trips in Austin, Cleveland, Memphis, Nashville, and Raleigh-Durham should face less of an impact from TSA screener furloughs thanks to the inauguration of PreCheck screening at those five airports as of April 1st. Adding those five will bring the number of airports with PreCheck to 40, including most of the nation’s busiest airports.

TSA is facing 5% across-the-board budget cuts in all 31 of its defined program, project, and activity (PPA) categories. The largest single PPA, accounting for $3.04 billion of the agency’s $7.84 billion budget is “Screener Compensation & Benefits.” So the solution I proposed for the FAA’s Air Traffic Organization—5% across the board paycheck reductions rather than two days per month of employee furloughs—would achieve the same budget reduction but with no decrease in screening and hence no increase in checkpoint lines.

If that approach to coping with the sequester is rejected, the best alternative for air travelers and airports is the rapid expansion of PreCheck participation, which TSA has been working on. One change that might be ramped up quickly is making acceptance of a traveler into PreCheck by one airline apply to that traveler’s flights on all U.S. airlines. This is supposed to be a security program, enabling TSA to focus its screening efforts on those it does not have enough information about to “trust” with expedited screening. It is not supposed to be an airline perk for their best passengers.

TSA seems to be moving in this direction, in response to huge numbers of frequent flyers applying to Customs & Border Protection’s trusted traveler program, Global Entry. Once you pass Global Entry’s background check and personal interview, and get a biometric ID card, you can use that card at any PreCheck lane, regardless of which airline you are flying. However, nearly half of those applying for Global Entry recently were turned dow because they lack passports, which is a requirement for that program. So TSA Administrator John Pistole last month said that TSA wants to provide a way for frequent flyers to apply directly to TSA for PreCheck membership that would be good on all U.S. domestic flights.

It’s in pursuit of that goal that the agency held an industry day on January 28th to discuss with interested companies their possible role in using various commercial data sources (“big data”) to prescreen travelers wishing to apply to TSA for the expanded PreCheck membership. The agency invited interested firms to submit white papers through April 1st suggesting their proposed approaches, as well as proposing demonstrations that could be held during the second half of the year.

This approach has raised concerns among civil liberties groups about privacy, and in particular about problems such as incorrect or outdated information in various databanks that might unfairly disqualify someone from being selected to apply for PreCheck. Earlier this week, I was interviewed by a knowledgeable reporter who’s written a lot about aviation security; she told me of cases in which people have been denied a Global Entry card based on what they believe to be incorrect or misleading data (e.g., an ancient arrest for a minor matter that failed to lead to a conviction). It’s not clear is there is any process available today to provide redress for those denied membership in Global Entry or PreCheck, as there is for correcting errors in TSA’s Secure Flight program. This will become a larger issue as PreCheck is expanded, especially if it starts using various commercial databases.

I still maintain that a true Trusted Traveler program should include two key features which Global Entry has but PreCheck does not: a criminal history background check (the same as used for airport workers with access to secure areas) and a biometric ID card to prove that the person showing up at the airport is the same person who was pre-cleared.

And in the short term, my advice to frequent travelers (assuming you hold a passport) is to not wait a year or two for TSA to expand PreCheck. Instead, enroll in Global Entry as soon as possible, so you can bypass most of the regular checkpoint lines.

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How to Collect Passenger Facility Charges (PFCs)

Ever since Congress allowed airports to levy local per-passenger charges to pay for improved airport facilities back in 1990, they have been a source of controversy between airlines and airports. Airlines don’t like it that the PFC shows up on travel documents as part of the cost of the trip, and they also gripe about having to collect it and pass it on to the airports that levy the PFCs (even though they are allowed to charge an 11-cent administrative fee for every PFC they collect). So airlines have from time to time asked if there were some alternative way for PFCs to be collected that would avoid one or both of those airline problems.

The 2012 FAA reauthorization law called upon the Government Accountability Office to study “alternative means of collecting passenger facility charges (PFCs) that would allow such charges to be excluded from the ticket price.” GAO was also asked to consider options for arriving, connecting, and departing passengers; to look at cost-sharing or allocation methods to deal with connecting passengers; and to research examples in which airport charges are collected by the airport and not included in the ticket price.

The results were released on February 14th, in a letter and briefing slides titled “Alternative Methods for Collecting Airport Passenger Facility Charges,” GAO-13-262R. The briefing begins with a useful overview of the current PFC program, with data showing that nearly all airports now collect PFCs at the maximum rate allowed ($4.50); that the vast majority of PFC dollars are collected by large hub airports; and that most of the revenue (74%) is used for projects to expand capacity or reduce congestion. Also, that airlines collect $69-78 million per year in administrative fees for collecting PFCs on behalf of airports.

The GAO study examined three basic alternatives to the current method of collection via the ticket: (1) an airport kiosk or counter, (2) online payment, or (3) emerging technologies. There are very few airports that collect passenger charges directly from passengers; the only two they found were Blackpool (UK) and Cartagena (Columbia), and there are some serious enforcement problems, especially for connecting passengers. No airports currently use online payment methods, and there would be costs and complexities in setting up such a system, especially for multi-airport trips. Likewise, no airports use such technologies as smartphones or transponders to collect passenger charges, and there would be similar enforcement and multi-airport trip complexities.

GAO weighed the three alternatives against five criteria: passenger experience, customer transparency, administrative costs, technology readiness, and legal impacts. All three methods scored “negative” on nearly all the criteria, and all would require legal changes to implement.

The bottom line is that paying airlines to collect PFCs as part of the ticketing process is the least troublesome and probably least-costly way to go. And since it seems highly likely that PFCs will play an even larger role in US airport finance in the future than they do today, it’s useful that GAO has cleared the air on how to collect them.

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Europe’s Airport Iron Triangle

Three major changes have affected commercial aviation in Europe in the last two decades or so. One was airline deregulation, producing results similar to those of deregulation in the United States: lower fares due to the steady rise of low-cost carriers and financial difficulties for legacy airlines. The second major change was privatization, both of state-owned airlines and of many large and medium airports. And the third, less-noticed change was in airport regulation.

Some U.S. readers may not be familiar with the idea of airport economic regulation (although we have it in the form of FAA grant assurances as well as DOT’s policies on airport rates and charges). In Europe prior to airport privatization, airports were state-owned enterprises generally assumed to be operating in the public interest, by virtue of being part of the government. To the extent that a civil aviation agency exercised oversight, it was generally on a cost-plus basis—the state’s larger airports were expected to become self-supporting based on fees and charges, but not too profitable at the expense of their airline customers.

Philippe Villard of Concordia University in Montreal has written a fascinating paper exploring the impact of these changes in France (with some brief comparisons to Britain and Germany). “The Economic Regulation of a European Hub Airport: An Iron Triangle?” appeared in Public Works Management & Policy, Vol. 6, No. 4, in 2011. It is basically a case study of economic regulation of Aeroports de Paris (AdP), before and after these changes. Villard suggests that AdP, Air France, and the French government formed a kind of iron triangle working together for mutual benefit prior to deregulation and privatization—and that a revised triangle formed thereafter.

A key point about French aviation, in contrast to British, is that France only part-privatized Air France and AdP, retaining two-thirds ownership of the latter and 20% of the merged AirFrance/KLM. Given the government’s significant shareholdings in formerly wholly state-owned enterprises, a new agency was created about a decade ago, the French Government Shareholding Agency. It aims to influence the governance of companies which the government partially owns “and to foster the creation of values and assets.”

When AdP was partially privatized in 2005-06, the government adopted British-style price-cap regulation, which the U.K. applies to all the former government-owned utilities,  including major airports. The price cap (RPI minus X) form of regulation was introduced by AdP’s traditional overseer, the General Directorate for Civil Aviation (GDCA), with a process under which AdP was to periodically propose its operational and investment plans and the airline fees and charges it needed to fund them, followed by consultation with airport users, and a then report by a Consultative Committee (assisted by GDCA) submitted to the Ministers of Transport and Finance for a decision.

As Villard relates, however, the former iron triangle of AdP, Air France, and GDCA has effectively been replaced by a revised iron triangle of AdP, Air France, and the Government Shareholding Agency. The old iron triangle gave relatively short shrift to AdP’s other airline customers, especially at Air France’s major hub, Charles de Gaulle. And as I read his narrative, the new iron triangle is made of even stronger iron, since the Shareholding Agency is more favorable to higher airport charges to pay for larger investments than was the old iron triangle. Thus, he maintains, a not very effective regulatory oversight has been replaced by government investment promotion, subverting the regulatory process.

I have two concerns about this thesis. First, since there is increasing evidence that European hub airports compete for airline business, the natural monopoly assumptions on which price-cap regulation is based are at least open to some question. Second, Villard presents AdP’s expansion of capacity at Charles de Gaulle as serving only Air France’s interests. But it seems to me that the best hope for competing airlines to gain greater access to a premiere airport like de Gaulle is capacity expansion, even though this obviously costs money that must be recovered in fees and charges. Nonetheless, Villard has given us a fascinating look at the changing landscape of airports in Europe.

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Upcoming Conference

Global Airports PPP Conference, the 3rd Annual AAAE/LeighFisher Airport PPP Conference, June 2-4, Westin Georgetown, Washington, DC. (Robert Poole speaking) Details at: www.events.aaae.org/sites/130604/index.cfm

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News Notes

Moody’s U.S. Airport Outlook Upgraded. Late last month, Moody’s Investors Service released its 2013 U.S. Airport Outlook. After having been considered “negative” since August 2008, the new outlook has been changed to “stable.” The improved outlook is due to better than expected operating results in 2011 and 2012, as well as stronger airline financials heading into 2013. But credit risks remain, including potential federal budget cuts affecting aviation. Moody’s expects average enplanement growth of about 2% this year, approximately the same as GDP growth.

PPP Considered for Gary/Chicago Airport. The would-be third airport for metro Chicago last month announced the creation of an expert committee to advise the City of Gary (Indiana) and its airport authority on the possible use of a public-private partnership mechanism to further develop the airport. Both the mayor and the airport authority president back the effort. The committee is to make recommendations within 60 to 90 days.

TSA Mulling Third-Party Equipment Testing. Government Security News reported late in December that TSA is considering a plan under which original equipment manufacturers (OEMs) of security devices would be able to have their equipment tested by third-party testing organizations before submitting them to TSA for evaluation. TSA hopes the plan would facilitate competition among OEMs while speeding up the introduction of new security technologies.

Brazil Moving on Two More Privatizations. Brazil’s civil aviation agency ANAC has appointed Estruturadora Brasileira de Projetos (EBP) as technical advisor for the forthcoming privatizations of Rio’s Galeao International Airport and Minas Gerais’ Tancredo Neves International Airport. IATA Director General Tony Tyler recently criticized the very high bids accepted for the previous round of airport privatizations, but ANAC says that in this round, a greater emphasis will be placed on increased levels of service rather than the highest up-front payment.

New Life for Old Regional Jets. Aeronautical Engineers Inc. (AEI) announced early this month that it will proceed with its plan of converting used Bombardier CRJ100 and 200 regional jets to freighters. The conversion will include installation of a large cargo door; the initially converted RJs are expected to have a maximum payload of 6.7 tons and a range of between 800 and 1,735 nm, depending on payload. Fifty-seat RJs like these are being retired from airline fleets as too costly to operate based on fuel consumption, but AEI is betting that they can fill an air cargo market niche. AEI is also looking ahead to possible larger conversions, such as the CRJ700.

Bolivia Nationalizes Three Privatized Airports. The socialist government of Bolivia last month announced the nationalization of the three airports that were expanded under long-term build-operate-transfer (BOT) concessions during the 1990s, originally by Lockheed Air Terminal. Those concessions were subsequently acquired by Abertis Airports, which (separately) has hired Citigroup and AZ Capital to assess its options for its global airports business.

Good Reading on Airline Deregulation. The Atlantic has just published “How Airline Ticket Prices Fell 50% in 30 Years (and Why Nobody Noticed),” by Derek Thompson. I have not seen it in the print edition, but you can find it online by Googling the title.

Jamaica Pursuing Kingston PPP. The Norman Manley International Airport in Jamaica’s capital Kingston is being groomed for a long-term PPP aimed at upgrading both its terminal and the main runway. A team of advisors (including Arup and Ernst & Young) began work in December to structure the concession, for which the procurement process is planned to begin this year. It will be the second such privatization in Jamaica, following the successful long-term concession for Sangster International Airport in Montego Bay in 2003.

Second Airport Planned for Melbourne. Australia’s second largest city, Melbourne, is in line to get a second international airport, according to the February issue of Jane’s Airport Review. The Victoria state government has approved a plan to allow the construction of a new terminal at Avalon Airport, 50 km. southwest of downtown Melbourne via a six-lane highway. The existing international airport, Tullamarine, is considered to be nearing capacity to handle international passengers.

Body-Scanning at a Distance. Apstec Systems is developing what it calls the AMW stand-off detection system, which uses millimeter wave technology to scan passengers walking past for weapons and explosives. An automated threat recognition algorithm categorizes items detected beneath clothing and assesses their hazard potential. When the system alarms, it displays a video picture of the passenger with a red rectangle superimposed on the suspect area (and green circles on non-threat items). The system is being tested in Apstec’s labs in St. Petersburg, Russia.

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Quotable Quotes

“While Mr. Obama may choose to make the cuts ordered in the sequester in the most painful way possible, the best alternative—which is practiced every year to some extent—is allowing federal agencies to transfer funds among individual programs with congressional approval, or by rearranging priorities as part of the March 27 resolution to fund the government for the rest of the fiscal year."
—Phil Gramm (co-author of the Gramm-Rudman law), “Obama and the Sequester Scare,” The Wall Street Journal, Feb. 27, 20133

“If 2012 signaled the resurgence of privatized parking in America, then 2013 could go down as the year airport privatization was brought back from the dead and restored to its rightful place at the head of the U.S. public-private partnership (P3) market. . . . Last year, the Ohio State University (OSU) concession set a high-water mark for parking, demonstrating how a timely, transparent bidding process could let an entity unload a high-maintenance asset for fair value. . . . Needless to say, if [Chicago’s Midway] procurement is successful, Midway could be to U.S. airports what OSU was to parking. The U.S. has 500 commercial airports. With Midway Airport as the flashpoint, America could undergo a transformation in airport operation, bolstering both municipalities and the industry.”
—Editorial, “US Airports: New Bull Market?” Week in Review, Infrastructure Investor, Feb. 7, 2013

“Airlines should think carefully about how they can best protect [FAA] facility and equipment allocations [for NextGen]. One way to do so would be to recognize that AIP grants to the major airports are inadequate and are likely to shrink in the future as contributions [to FAA’s budget] from the general fund decrease. In recognition of these realities, a growing number of larger airports are moving towards support of a proposal that they give up AIP funding in exchange for removal of the federal cap on local PFCs (or Passenger Facility Charges). Back in the day, the Simpson-Bowles Commission recommended exactly that for the 65 large and medium hub airports, calculating that it would save approximately $1.1 billion per year. While airlines have historically opposed PFCs, it seems to me they ought to think the issue through carefully before opposing this trade-off. If AIP savings can be redirected to support the Facilities and Equipment account—thus sustaining NextGen progress—and if the alternative to larger PFCs is higher landing fees and space rentals, the airlines may well find the trade-off to be the best choice of a bad lot.”
—Robert Crandall, former Chairman and CEO, American Airlines, “Future Horizons for the Airline Industry,” speech before the Global Business Travel Association, Feb. 20, 2013

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


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