Privatizing Los Angeles International Airport

Analyzing the Alternatives

Executive Summary

Over two dozen countries, ranging from Britain to Vietnam, are privatizing their airports. Some are selling 100 percent, others a part-interest. Some are leasing out existing airports; others are using long-term leases to permit private development and operation of new terminals or entire new airports. The worldwide privatization movement aims to improve the efficiency and increase the value of formerly state-owned enterprises.

Los Angeles International (LAX) would be more valuable if it were privatized. Britain's privatized airport company, BAA, increased in value from $2.5 billion to $4.3 billion in its first five years in the private sector—an annual increase of approximately 11.5 percent. Yet the City of Los Angeles's recent airport privatization study by Babcock & Brown assumed that privatization would make no difference in airport revenues, expenses, or efficiency compared with City ownership.

This report revisits the Babcock & Brown analysis, making conservative assumptions about the differences that privatization would make in the operations of LAX over the next 30 years. It then recalculates the net present value (NPV) to the City of selling or leasing LAX, compared with hypothetical City for-profit operation. This calculation uses a more theoretically supportable and empirically proven discount rate and takes into account all revenue flows, including incremental sales and property tax revenues. The result is that the NPV of a 30-year lease would be $3.7 billion, the NPV of a sale would be $2.2 billion, compared with a NPV of $2.13 billion for City operation for profit.

Legal analysis reveals that the lease and sale options are clearly feasible, thanks in part to the recent federal Executive Order on Infrastructure Privatization. But for-profit operation by the City faces formidable legal barriers. Federal law forbids cities to take profits off public airports, and under California's Prop. 13 and 62, fee increases at LAX could be construed as tax increases requiring a two-thirds vote of the electorate. Hence, leasing LAX is both more attractive financially and more feasible to bring about than for-profit operation by the City.

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

This Study's Materials





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