Airport Policy and Security Newsletter #29

Topics include: Midway privatization deal seems imminent; new questions about TSA screeners' performance; progress and setbacks for Registered Traveler; airport vs. airlines in New Zealand; America's first "common-use" airport; and other news.

In this issue:


Midway Lease Reported Close to Reality

A story in Crain's Chicago Business (Oct. 11, 2007) was headlined, "Midway Privatization 'Going to Happen,' Daley Says." Reporter Paul Merrion quoted the mayor as stating this at a Crain's editorial board meeting the previous day. Merrion checked with Southwest Airlines, the anchor tenant at Midway, and was told that "We are close to a number of preliminary terms," though there is "still a lot of work to do." Chicago filed a preliminary application with the FAA in September 2006, reserving one of five slots in the Airport Privatization Pilot Program. The agency is waiting for the city to file its formal application, which needs to include the required airline approvals. Hence, the intense, ongoing negotiations with Southwest.

I spoke last month and again this month with an attorney close to these negotiations. He told me they are "very close" to agreeing on basic terms—meaning a structure of rates and charges and other key provisions that would govern airport-airline relations under a lease structure. The idea is that the city will do the legwork of developing this basic deal, removing the large uncertainty over airline approval. Then the various airport companies will be able to bid on a known deal structure.

Given the long history of U.S. airlines opposing airport privatization, why is there now a good chance this deal will go through? As I wrote back in February (Issue No. 23), the airline environment has changed dramatically over the last decade. With sky-high fuel costs and more fare competition than ever, airlines want not only to control costs but to be able to predict them as much as possible. The traditional "residual cost" lease agreement, like that in place at Midway, requires airlines to take the risk of being stuck with unpredictable ups and downs in what they must pay to use the airport over the life of the agreement. So the deal that a privatized airport can offer is a stable, predictable rates-and-charges regime in exchange for greater airport-company control of the airport.

The required airline approval under the Pilot Program is two-part. First, airlines representing 65% of the annual landed weight must approve the deal; in the Midway case, that is just Southwest, which accounts for 75%. Second, 65% of the number of airlines serving the airport must also approve. In this case, that means four of the other six airlines must sign on. I'm told the negotiations have been with Southwest, but the others have all been kept informed, and if Southwest endorses the deal, it will certainly encourage the others to agree.

My personal view is that Midway is hardly the most attractive candidate for privatization among U.S. airports. It is land-locked and pretty well built-out, so I think the opportunities for a lessee to dramatically reduce costs and increase revenues are limited. If, despite those limitations, the private sector jumps at the chance to lease Midway, then this transaction could be the same kind of bellwether that Mayor Daley's 2005 lease of the Chicago Skyway was for toll road privatization.

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New Questions about Screeners' Performance

The story had just appeared in USA Today (Oct. 18th) when the first media call reached my desk. How could it possibly be, the editorial writer for another major paper asked, that checkpoint screeners missed 60% of hidden bomb materials at Chicago O'Hare and 75% at Los Angeles International—but only 20% at San Francisco International, where the screening is done by a TSA-certified private security firm?

We don't know the details, I told her, but it's probably not some inherent superiority of private enterprise over government agency. After all, checkpoint screening is a mind-numbingly boring job, and the screeners have to meet the same hiring, training, and testing criteria in either case. Instead, we have to ask whether the two different institutional arrangements lead to a difference in incentives and accountability that could account for such a large difference in outcomes.

And that, I suggest, is the lesson we should draw from this new information. As I told the editorial writer, the security company had to compete to get selected in the first place. And if they screw up, they can be fired—and they know it. The penalty for getting fired is not just the loss of that particular contract, but the damage to their reputation and thus to their prospects of getting more such contracts. If the TSA screws up, they just get admonished to try harder, and they stay in place. I don't begin to know all the subtle ways in which that difference in incentives and accountability translates into different styles of supervision, different motivations, and other factors that may lead to three times better performance at detecting bomb parts in carry-on luggage. But the differences seem to be real.

There is also the slightly different matter of the tendency of any large organization to be defensive about its own poor performance. When Congress created the TSA, it gave the organization two conflicting roles. On one hand, it is the transportation security policy-maker/regulator. On the other hand, it is also the provider of one of the key security functions at over 400 airports: passenger and baggage screening. It's only human nature for a regulatory agency to be harder on those it regulates at arm's length than those who are part of its own family.

Since Congress created this conflict of interest in the 2001 legislation that created the TSA, only Congress can fix the problem. I'm not the only one who has been making this point for the past five years. But so far, no one in Congress has taken it seriously.

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Registered Traveler: Some Good News and Bad

The Registered Traveler program keeps expanding and gaining advocates among frequent flyers. For example, in August the Business Travel Coalition released the results of a national survey of frequent business travelers. It found that 82% would like their preferred airline to embrace the program. Nearly that number (80%) would pay $99 a year if RT offered them just "consistently expeditious security checkpoint processing, without any other benefits." When offered the hypothetical choice of a high-end version adding perks such as reserved airport parking and remote baggage check-in from hotels, nearly 40% said they would pay up to $199 for such a package. And the National Business Travel Association is urging more airports to implement RT in the interest of their business travelers.

The good news continues with the expansion of airports offering RT service. As of this month, it is available at four New York airports (JFK, LaGuardia, Newark, and Westchester), two in the Bay Area (SFO and San Jose), plus Albany, Cincinnati, Indianapolis, Jacksonville, Little Rock, Orlando, and Reno. Soon to be added will be Atlanta, Denver, and both Washington, DC airports.

But that's where the good news stops. The bad news comes from the Transportation Security Administration. First, it rejected for the second time the General Electric shoe-scanner, which was supposed to permit RT members to have their shoes checked for metals and explosive residues while having their iris scanned at the RT kiosk. Shoe removal is one of the most-hated aspects of passenger checkpoints, and avoiding that would be an additional reason for people to join an RT program. (I found it interesting that when I cleared security recently at Brussels and Vienna, there was no requirement to remove my shoes; what does TSA claim to know that E.U. officials don't?)

Even worse is the TSA's FY2008 budget proposal for RT—about which I've seen nothing in either the aviation or general media. Last year the agency's RT budget was $3 million; for FY2008 (which began Oct. 1st) it's more than 10 times higher, at $35 million. Taxpayer money is not supposed to be used for this program; Congress has mandated that it be supported by user fees. In a November 2006 Federal Register notice, TSA defined the two fees it will use: a one-time $43/employee fee for it to check the background of key RT service provider employees and a $28/member annual fee for people like me who have signed up.

Now a little simple math makes the $35 million budget something of a puzzle. Since the $43/employee fee is one-time and probably will apply to only a few hundred people in FY08, the vast majority of the user-fee revenue must come from the individual member fees. But to yield $35 million at $28 a pop requires something like 1.25 million RT members in FY08. As of now, the first month of FY08, market leader Verified Identity Pass (Clear) has about 70,000 members, and the other firms probably total under 10,000. Let's assume that this 80,000 triples during the coming 11 months to 240,000. At $28 per head, that's only $6.72 million, not $35 million.

And that $35 million looks very high to me. The sketchy budget narrative TSA submitted to Congress shows hardly any increase in TSA staff or expenses for RT. Instead, the bulk of the huge increase is for "advisory & assistance services," and "other services." Sounds to me like Beltway Bandits at work, doing God knows what. TSA should be required by Congress to explain just what they need all this consulting assistance for, to help them run a self-supporting program requiring minimal TSA staff.

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Airports vs. Airlines in New Zealand

Earlier this year I wrote about the battle between airlines and Los Angeles World Airports occasioned by the ongoing transition at LAX from the old residual-cost model for airport charges to the newer compensatory model. (Under the former, unique to the United States, airlines that sign long-term lease agreements are in effect risk-sharing partners with the airports, sharing in both the upside and the downside; under the latter, airlines pay commercial rates under negotiated formulas.) Nearly all air-carrier airports worldwide operate on something like the compensatory model, especially airports that have been privatized or corporatized.

But many airlines are stuck in the old paradigm, under which airports are seen as government departments not entitled to a return on their investment in providing facilities and services. They react with outrage when an airport proposes to increase rates to keep pace with inflation and/or to pay for needed expansion. Just such a drama is playing itself out in New Zealand this year. Air New Zealand, the 800-lb. gorilla of New Zealand aviation, is legally protesting planned rate increases at Auckland and Wellington airports, both of which were privatized in the 1990s.

Both airports have proposed modest increases in landing fees, which have been unchanged since 2001 (Auckland) or 2002 (Wellington). The former wants a 2.5% a year increase for the next five years, while the latter has proposed 2.85% per year. In addition to filing legal action to prevent the increases, ANZ is exploring shifting some of its domestic service to alternative airports—Whenuapai Airbase in West Auckland and Paraparaumu Airport in Wellington. That's a perfectly acceptable competitive response, though neither airport could substitute for the full range of ANZ service at Auckland and Wellington.

What underlies both disputes is the "light-handed regulation" adopted by the New Zealand government at the time the airports were privatized. Under this approach (a similar version of which operates in Australia), the airports are required to consult with airlines at some length on proposed fee changes, but may put them into effect despite airline opposition. The airlines' alternative in that case is to appeal to competition authorities (the equivalent of our antitrust agencies) if they can demonstrate monopolistic exploitation. ANZ doesn't like this approach, and wants more explicit regulation to be put in place.

It seems to me that ANZ has a weak case. Auckland International Airport Ltd. (AIAL) is in the final phase of a four-year, $500 million program to expand and modernize its terminals, and is about to begin construction of a second runway, initially 3,900 feet but ultimately 7,000 feet in length. This hardly sounds like the behavior of a monopolist exploiting its captive customers, but more like a commercial enterprise expanding to meet the needs of its customers.

Interestingly, AIAL is currently the subject of possible takeover bids. While a July bid from Dubai Aerospace Enterprise appears to have fallen apart, others including Australia Pacific Airports and Macquarie Airports have expressed interest in buying a controlling stake.

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America's First Common-Use Airport

One aspect of the ongoing trend of airports becoming real businesses (whether privatized or not) is the shift from airline-specific gates and other infrastructure to airport-owned facilities. It's consistent with the shift from residual-cost to compensatory lease agreements that I've written about elsewhere. Both changes shift more control (as well as more risk) to the airport enterprise—and these days commercial airports are economically more robust than airlines.

Common-use infrastructure is economically more efficient, in that fixed costs get shared among more users than when each airline develops customized facilities for its own use. This is especially the case with gates and hold rooms, and the infrastructure that supports them (such as display screens). With common-use facilities, the airport can operate with a smaller total number of gates, because they can be dynamically assigned throughout the day to whichever airline needs them. (I remember late one night being stuck on the ramp at FLL for about 45 minutes because no American gate was available—but there were numerous other gates sitting empty.) Likewise, common-use check-in kiosks will be fewer if they are shared among all the airport's airlines, as Las Vegas has been doing in recent years.

The common-use trend is widespread in Europe, and is virtually standard practice at privatized airports. And even though we don't have much in the way of airport privatization in the USA, common use continues to increase. The latest manifestation is Raleigh-Durham International Airport's new Terminal C, which is currently under construction. It's been designed top-to-bottom as a common-use facility. RDU director of major capital improvements David Powell told Engineering News-Record (Oct. 1st) that "We wanted something flexible for the future—hold rooms designed to accommodate a number of aircraft, not specifically for any one carrier." Each of the 32 gates is designed to handle a range of aircraft sizes. And the terminal will have centralized communications and cabling rooms, and airport-run facilities such as flight displays, wireless Internet, cable TV, and phone service.

The International Air Transport Association is considering a standard on Common Use Passenger Processing Systems. Its content is pretty well defined, and RDU deputy director Mark Posner says only minor changes to Terminal C would be needed for it to fully comply. The fact that the major global airline trade group is considering such a standard is an indication of how times are changing in airport/airline relations.

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News Notes

Correction re Belly Cargo. Last issue I cited without checking a statement in a news article that passenger planes carry about 6 billion tons of belly cargo per year. I quickly heard from readers whose math sense made them question that figure, as I should have done. One cited BTS data that all air cargo (most of which goes on all-cargo planes) totals 20.1 million tons/year, making 6 million tons of belly cargo the more likely number. Another cited T-100 reports indicating 1.35 million tons of mail and freight handled on passenger airliners. So I stand corrected, and red-facedly so. This is the kind of innumeracy that I like to chide reporters for, so it's doubly embarrassing.

Another Airport Chooses Private Screeners. I know it's a tiny airport, but the Sonoma County airport in California is the newest member of TSA's Screening Partnership Program. As provided for by the legislation setting up TSA, airports since 2004 have been free to opt out of TSA-provided screening, choosing a TSA-certified contractor instead. Besides the original five airports that were part of a pilot program, the others that have opted out are Sioux Falls, SD; Key West and Marathon, FL; and New York's 34th Street Heliport.

UK's Tories Now Anti-Airline? Under its new leader David Cameron, the UK's Conservative Party is trying to establish a new "green" image. In a consultation document last spring called "Greener Skies," Cameron proposed restricting Britons to one round-trip air flight per year, with any subsequent trips facing a high tax rate. Though that proposal was rejected by the party's policy review group, the Tories still aim to make it prohibitively expensive for ordinary people to make within-UK and cross-Channel trips by air, via differential taxation for short-haul flights. It is argued that this would not only reduce CO2 emissions but also reduce or eliminate the need for airport expansion. So much for the democratization of air travel!

Reserving Checkpoint Screening Times? In September the TSA released a draft proposal under which air travelers could reserve off-peak time slots for getting through security checkpoints. By going through at non-peak times, there would be only minimal waiting time. The only problem is that instead of showing up an hour before flight time like they do now, participants would have to show up 30 or 40 minutes earlier than that. Frequent business travelers would happily show up earlier, TSA chief Kip Hawley told USA Today, if they "had a specific time at the checkpoint and weren't going to have to waste time standing in line." What planet is he living on? The reason frequent business travelers are signing up for Registered Traveler is because their time is valuable—the last thing they want to do is to have to go to the airport even earlier. This idea deserves a speedy burial.

Metal Knives on Board—But Not at the Airport. Twice this year I've spoken at conferences in Europe, and managed to get upgraded both times. In both cases the meal service on board included metal dinner knives—yet at airport food establishments in the departure cities (Miami and Atlanta) only plastic knives (but metal forks!) were available. I also had metal tableware on an upgraded domestic (AA) flight in September—yet only plastic knives (and metal forks) in the eating establishments at DFW. What kind of sense does that make?

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Quotable Quote

"The question ‘How much risk can we live with?' cuts to the heart of homeland security because the answer should guide the way government spends money, the primary tool for fighting terrorism. We simply cannot protect everything, and because budget resources are limited, spending money protecting one asset means leaving another vulnerable. We must spend effectively and strategically. That means employing sound cost-benefit analyses to reduce risk to manageable levels is the only reasonable goal. Industry has a word for this kind of strategic thinking: risk management."

--Zack Phillips, "Security Theater," Government Executive, August 2007.

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





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