Airport Policy and Security Newsletter #25

Topics include: proposed airport funding changes: sensible or not?; TSA's "regulation vs. service provision" conflict; LAX vs. airlines, again; clerics vs. airport security; whither U.S. airport privatization?; and other news.

In this issue:


Reforming Airport Funding: Sensible Changes or Not?

The United States has a rather Byzantine system of funding airports. Commercial-service airports are clearly businesses. They provide services to aircraft operators and their passengers, and they charge airlines, passengers, and vendors. They can fund large-scale projects (like runways or terminals) via the capital markets, using long-term revenue bonds. Small airports serving corporate and private planes (general aviation) are a different story, since it's not clear that very many private pilots would be willing to pay fees anywhere near high enough to fund the capital costs of most such airports. So communities that wanted the access benefits of such airports might have to pay for them out of general revenues, like parks, if Santa Claus were not available to provide airport grants.

But of course there is a Santa, and he lives in Washington. Just as with the highway system, Congress decades ago put in place a set of aviation user taxes, dedicating a portion of the revenues to the Aviation Trust Fund, part of whose purpose is to make airport grants. And as with highways, Congress has developed ever more detailed rules for parceling out those Airport Improvement Program (AIP) grants. "Entitlement" grants go, by formula, to 2,575 GA airports, 274 reliever airports (larger GA fields near commercial-service airports), 135 non-primary commercial-service airports (large GA airports with a modest amount of scheduled service (like Altoona, Bryce Canyon, and Imperial County), and finally 382 primary commercial-service airports (large, medium, small, and non-hub). And about half the annual grant money is reserved for "discretionary" grants, for which airports must compete.

The only significant change to this system took place in 1990, when Congress allowed commercial-service airports to institute a passenger facility charge (PFC) to fund specific capacity-improvement projects. Originally capped at $3/passenger, the limit was increased to $4.50 some years ago. Airports (mostly large and medium hubs) that opted to institute a PFC had their annual entitlements reduced, but were still better off, financially, by doing so. As of now, out of 67 large and medium hubs, only four (Houston Intercontinental, Memphis, Dallas-Love, and Omaha) do not have a PFC in place.

From the standpoint of airports as businesses, the move to PFCs and away from AIP grants was a step in the right direction—towards financial self-support. That perspective was reinforced once the bond markets got comfortable with PFC revenues as the basis for debt service on airport revenue bonds. This change also moves U.S. airports closer to the financing model used in other OECD countries, where commercial-service airports are not only self-supporting but generally pay taxes like any other business, whether or not they have been privatized.

Thus, I'm generally supportive of the FAA's proposed reform of AIP, which amounts to further steps toward self-support for larger airports. If enacted by Congress, the new approach would permit an increase in PFC levels to $6, while phasing out entitlement grants altogether for large and medium hubs. The airport trade associations have been generally supportive, but argue that to counter the impact of construction cost inflation and cope with large upcoming capital needs, the PFC cap should go to $7.50. But they have also complained that FAA has proposed only $2.75 billion for AIP next year (down from $3.5 billion this year), despite the fact that with a PFC as high as $7.50, the airports could easily make up the difference.

The FAA has also proposed that instead of today's grab-bag of AIP funding sources, AIP should be funded exclusively from an across-the-board fuel tax on all of aviation (except international flights, which don't pay U.S. fuel taxes and would continue to pay an arrival/departure fee instead). That's an important step toward transparency, making it very clear who is paying for how much of AIP. That increased clarity has already caused the airlines to complain (correctly) that they would be paying about a billion dollars a year for AIP grants for GA and reliever airports that airlines do not use. They're right that this is unfair, but that's no real change from the way AIP has always been—it's just easier to see what's going on now.

I'd much prefer to see the cap on PFCs removed altogether, as part of a more sweeping reform that would also end the long-standing cross-subsidy of non-commercial airports by airline passengers. But given how attached Congress is to airport grants (as it is to highway and transit grants), that's a battle for another time.

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TSA's Regulation-vs.-Service-Provision Conflict, Continued

The fact that there is a very real conflict between being the aviation security policy maker & regulator, on the one hand, and a major airport security service provider, on the other hand, continues to dog the Transportation Security Administration. In the now-notorious case of two airline employees at Orlando slipping through a door to the secure area after hours, an airport spokeswoman told the Orlando Sentinel, "It was their [TSA's] decision to stop staffing the doors. There is no requirement for us to staff the doors. We were not asked to take up that responsibility." This is clearly not the kind of integrated security that would prevail if TSA were serving strictly as the security regulator at Orlando, with the airport itself responsible for carrying out all security activities.

Another example: Just last week three airport groups protested to TSA about a proposed new policy that would prohibit airport police from closing security checkpoints in emergencies. "Police shut down streets, they shut down buildings. You don't have time to wait around" for the TSA, Tim Kimsey of the Airport Law Enforcement Agencies Network told USA Today. That group joined with Airports Council International and the American Association of Airport Executives in a four-page letter of protest to the TSA.

The alternative to this divided responsibility for airport security is devolution of all such security operations to the airport level, under the regulatory supervision of the TSA's Federal Security Director for that airport. But this change would have to be made by Congress, amending the 2001 law that created TSA and defined its role as both regulation and service provision.

In last month's issue I noted a criticism of my previous suggestion that the United States might be in violation of a policy of the International Civil Aviation Organization (to which this country is a signatory, along with 188 other countries) calling for the separation of aviation security oversight from the provision of aviation security services. A knowledgeable reader pointed out that the DHS Inspector General has oversight of TSA service quality, and that this separation probably suffices to meet the ICAO requirement.

My original informant, who was part of the FAA's Red Team checking the performance of airport screening pre-9/11, was not satisfied with this response. He notes that the TSA's Red Team reports, directly or indirectly, to TSA director Kip Hawley. Thus, the real quality control entity is not independent of the service provider but is part of the same organization, reporting to the same boss. Thus, he contends, the argument that the Inspector General provides the independent quality control is "a thinly veiled subterfuge." And, he notes, it will be recognized as such by many of the 189 ICAO states, many of which are making serious efforts to comply with ICAO Annex 17 Standard 3.4.7 (the policy in question). Under Article 38 of the ICAO Convention, "contracting states are required to notify [ICAO] of any differences between their national regulations and practices" and ICAO's international standards. The United States has not done so, hoping its "subterfuge" goes unchallenged.

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LAX vs. Airlines, Again

For several months now, I've followed with interest the charges and counter-charges between airlines serving Los Angeles International (LAX) and Los Angeles World Airports, the city department that operates LAX and several other airports in the metro area. LAWA says it is raising to market levels the rates it charges airlines for space in its terminals. Two groups of airlines have taken legal action to prevent the changes, arguing that they are both unwarranted and discriminatory.

I started off biased against LAWA, after watching the politicization of its numerous attempts to adopt a new airport master plan over the past 15 years, starting back when Dick Riordan was mayor. The original versions of the plan would have added both runway and terminal capacity to cope with large projected growth of America's third-largest airport. But two mayors later, the city caved in to opponents living in Manhattan Beach and Inglewood, which border the airport, adopting a "compromise" master plan that adds no capacity but would still spend a fortune modernizing the terminals and slightly moving one runway, for safety reasons. One version even called for reducing the total number of airport gates, primarily on the north side where most of the low-cost carriers operate. LAWA is also promoting a regional approach to airport capacity, with some suspecting it of trying to force out low-cost, short-haul airlines.

But I needed to find out what was really going on with the revised rates and charges, so last week I waded through nearly a hundred pages of legal briefs—and discovered a whole different story. This battle is a chapter in LAX's transition from the pre-deregulation model of airport lease agreements (called "residual cost" agreements) to the modern model, used by airports worldwide (called "compensatory" agreements). The old model originated when airports were infant industries with uncertain access to the capital markets. To ensure that they could issue long-term bonds for runways and terminals, they sought to lock in airline anchor tenants to long-term lease agreements. The deal they made was that each year, the airport would total up its revenues from all sources except airlines (retail stores, parking, car rentals, etc.) and total up all its expenses. The difference—the residual—would then be paid by the airlines in the following year in the form of landing fees and space rentals.

These days, self-supporting airports don't need the security of long-term leases, especially when they tend to yield far less than the airport could get via modern compensatory agreements, in which (typically), landing fees are set to recover the costs of the airside and space rentals recover the terminal costs. LAX officially switched from residual to compensatory in the early 1990s (under Riordan), fighting an epic battle with airlines over the basis for computing its landing fees. The current battle concerns the same issue, this time as regards paying for terminal space.

What's happened is that airlines in about half the terminals had their old leases expire within the last year or two, but LAWA has been unable to negotiate new, compensatory lease agreements with any except (low-fare) Spirit and Westjet. So in January it put the others on notice—if you don't agree to a new lease by April 1st, you will pay our new rates on a month-to-month basis. Two groups of those airlines appealed to the U.S. DOT, arguing that LAWA's actions were unwarranted.

I won't bore you with all the legal arguments, but the one I found most amusing was the claim that the new lease or tariff (same rates in both) would unjustly discriminate between these airlines and those still operating under old residual leases, some of which still have up to 20 years to go. Not only law but common sense argues against that position. Since leases get signed at different times, if a landlord could not develop new terms when individual leases expire, it would be locked in forever to an obsolete lease structure.

And in fact, LAWA is taking steps to end the disparity. Since the leases are good for N years or until the bonds are paid off, it is taking steps to defease the bonds for the terminals that still have the old leases. Once it does that, it will be able to negotiate new compensatory leases with those airlines, as well, putting everybody back on a level playing field.

To be sure, nobody wants to pay more for something when they might be able to continue getting it for less. So I understand the airlines' wish to preserve the good old days. But those days are numbered. Airports are no longer infant industries; they are businesses, whether owned by cities or by investors. And there's no reason they shouldn't be run as businesses, in either case.

The DOT has assigned an administrative law judge to the case, consolidating the complaints of both airline groups, and promises a decision by June.

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Clerics vs. Airport Security

You probably recall the story from last fall: a group of Muslim clerics was removed from a plane at the Minneapolis/St. Paul airport after passengers and crew reported suspicious behavior. I was not there, but from every account I've read, their behavior was sufficiently suspicious that I judged the passengers' concerns to be justified. And likewise, the judgment of the pilot, who ordered them removed from the plane.

It's no surprise that the clerics filed suit against both USAirways and the airport authority; that's to be expected in the land of political correctness. But what I find chilling is the clerics' threat to also sue the unnamed "John Doe" passengers and individual airline employees who made the complaints. This directly undercuts the eyes-and-ears-of-everyone approach that's arisen spontaneously since the events of 9/11, and which is also sensibly encouraged by everyone professionally involved in homeland security.

Fortunately, this attempt to intimidate is not going unnoticed. Attorneys have stepped forward to defend these passengers and crew members without charge. The moderate Muslim group American Islamic Forum will raise funds for their defense. Rep. Steve Pearce (R, NM) has introduced legislation to shield from legal liability people who report suspicious behavior. At the same time, however, the Muslim American Society and the Council on American-Islamic Relations are supporting legislation to prohibit airport security people from disproportionately questioning Muslims or people of Middle Eastern descent. House Speaker Nancy Pelosi (D, CA) cosponsored this bill in 2004. Had this law been in effect last fall, it's quite possible that no action would have been taken with respect to that USAirways flight.

That case might well have been a false alarm. The next one might not be.

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A False Dawn for Airport Privatization?

The pending privatization, via long-term lease, of Chicago's Midway Airport has hit some bumps in the road, it appears. An article last week in Crain's Chicago Business reports that Southwest, which has the lion's share of service at the airport, is thus far not persuaded that the deal would give it any significant benefits. After the city shared with the airlines an outline of the financial details of a possible lease—basically offering operating cost savings and controls on rate increases—Southwest hired Citibank to analyze the plan. After that, the airline sent a letter to the city in February stating that "While new information could change our minds, presently we believe that privatization is threatening to the interests of [Midway] and the airlines and passengers who rely upon it."

This matters, because under the terms of the federal Airport Privatization Pilot Program, in order for the city to take and make use of lease revenues from such a deal, for general city purposes, the lease must receive the approval of both 65% of the airlines operating at Midway and airlines representing 65% of the annual landed weight. That gives all Midway carriers, and especially Southwest, considerable bargaining power.

My guess all along was that since Midway is still a residual-cost airport, its airlines might welcome the certainty of a switch to a compensatory system, under which their fees and charges would be capped by some kind of inflation index and therefore be predictable on a fairly long-term basis. With the old-fashioned residual-cost system, the residual can be unpredictably large in recession years, when fewer people fly or spend money in airport terminals. Yet that's precisely when the airlines can least afford to pay more than they expected for using the airport. There ought to be room for a win-win solution—assuming the city doesn't insist on too high an amount from the transaction.

If the Midway privatization succeeds, it will certainly stimulate interest at other airports. Officials in Milwaukee and Austin have raised the issue in their communities, as has a candidate for mayor in Philadelphia. Just as Mayor Daley set off an earthquake in the toll road field by leasing the Chicago Skyway for $1.86 billion, so would a win-win deal for Midway Airport.

Yet the current Airport Privatization Pilot Program would restrict other cities' options. There are only five "slots" in the program, and only one can be a large hub, as defined by the FAA. Since Midway meets this definition, none of the other 29 large hubs would be eligible (though both Austin and Milwaukee, as medium hubs, would be). The FAA's reauthorization proposal would remove that restriction, while expanding the number of slots to 15. It would also remove the 65% airline approval requirement, which some have dubbed the airlines' poison pill.

There is also a chance Midway will be leased without the airlines' OK. That would not be as good a precedent (unless Congress removes the poison pill), but what some people forget is that the 65% approval is only needed for the city to use the lease proceeds for general-fund purposes. When New York State leased Stewart Airport in 2000, it did not win airline approval. So it was required to use all the lease proceeds for airport-related purposes—at Stewart and other state-owned airports. Chicago just happens to own a second airport, O'Hare. And O'Hare just happens to have a $15 billion expansion under way, not all of it funded. That should give Mayor Daley an excellent fallback position in negotiating with Southwest (which has no presence at O'Hare).

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News Notes

Registered Traveler Progress. Unisys has become the second Registered Traveler provider to be certified by the TSA, it announced in mid-March. Its first airport operation, at Reno, was supposed to be starting up early this month. The Unisys RT Go program will go head-to-head with Verified Identity Pass's Clear program in upcoming competitions at Atlanta, Denver, Washington, DC, and elsewhere. Clear, meanwhile, announced last month that it had been selected as the RT provider by Albany airport, and the month before that it would be partnering with Virgin Atlantic at both JFK and Newark. As of early March, Clear had over 40,000 RT customers.

Another Airport Joining Screening Opt-Out. Following the recent trend of airports with their first commercial service going with private screening companies rather than TSA screeners, Sonoma County, California is joining the Screening Partnership Program as it re-introduces commercial air service this spring. Sonoma joins Florida Keys Marathon and New York's 34th Street Heliport as recent additions.

Correction from Last Issue. Jack Riley of RAND Corp. emailed to tell me I'd gotten the name wrong on an important new report of theirs, on dealing with terrorist threats. The correct title is "Breaching the Fortress Wall: Understanding Terrorist Efforts to Overcome Defensive Technologies," by Brian Jackson, et al. Here's an excerpt: "The most important point we found is that terrorist organizations keep changing their strategies in order to remain effective, and we have to design our defense capabilities to adapt. If we don't we risk spending our resources building the equivalent of a fortress wall that won't actually provide much protection once terrorists have found a way over, under, through, or around it."

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





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