Airport Policy and Security Newsletter #33

Topics include: expanding airports via technology; Midway privatization a "go"; Registered Traveler keeps expanding; hypocrisy on airport grants; going beyond weight-based landing charges; more outsourced airport screening; and other news.

In this issue:


Increasing Airport Capacity via Technology

Epic battles have been fought over airport expansion in recent years. Airport operators eventually won long, drawn-out, costly battles with adjacent property owners in Seattle and St. Louis, but lost to airport neighbors and environmentalists over expanding SFO into San Francisco Bay. Since opportunities to create whole new airports in the major metro areas where more capacity is needed most are very few, wouldn't it be great if there were a way to expand the capacity of existing airports—without having to buy up large swathes of costly, occupied adjacent real estate?

About 18 months ago, as I got deeper into the Joint Planning & Development Office's planning for NextGen, the portions relating to airports made quite an impression. I discussed this with long-time colleague Viggo Butler, former president of Lockheed Air Terminal and its successor company, Airport Group International. Thanks to a grant from the Walker Foundation, we commissioned Viggo to look into this idea in more detail. He visited with the relevant agencies in Washington, DC as well as several airports where runway capacity is a big problem—SFO, the Port Authority of New York and New Jersey, and SEA-TAC, as well as some of the leading-edge companies pioneering NextGen capabilities. The resulting policy study, "Increasing Airport Capacity without Increasing Airport Size," has just been published. (www.reason.org/ps368.pdf)

In this report, Viggo reviews an array of NextGen technologies and capabilities—RNP, ADS-B, WAAS, CDAs, etc., as well as various recent technical studies, by the JPDO and others. The encouraging results are that alone and in combination, these tools can significantly increase the capacity of key airports. One of the study's most dramatic proposals is to add a closely spaced parallel runway at JFK. Full implementation of ADS-B and cockpit synthetic vision would permit safe operation of closely spaced parallel runways—even those 750 feet apart like those at SFO—in low-visibility conditions. Just RNP alone could provide capacity increases of between 16% and 54% at 12 key airports.

Our point in putting out this study is that since airport capacity expansion projects (especially runway additions) can take 10 to 20 years at large airports, airport planners should start factoring NextGen capabilities into their planning studies now. This is the time horizon over which—if all goes well—NextGen capabilities will be making their way into the ATC system and into the aviation fleet. And the impact of NextGen on airport capacity is a good reason for the airport community to get more involved as stakeholders, pressing for policy changes needed to ensure timely implementation decisions and institutional changes needed to get this crucial job done.

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Midway Privatization Now Looks Likely

The other shoe dropped regarding Midway Airport privatization in mid-February. The city of Chicago announced on Feb. 13th that it had reached agreement with four more airlines to support its competition to lease the airport to a private operator. Signing on were Delta, AirTran, ATA, and Frontier. Together with original signer Southwest, the five represent 70% of the carriers and 95% of the airport's traffic. That meets the requirements of the federal Airport Privatization Pilot Program that at least 65% of the carriers, and also carriers representing at least 65% of the annual landed weight, support the plan.

Having met this test, the city released its request for qualifications (RFQ) for companies or teams interested in competing for the long-term lease under the terms agreed to by the airlines. Responses to the RFQ are due by March 31, 2008. Media reports have already indicated that the parent company of BAA—Grupo Ferrovial—will be leading one team, and another will be led by Macquarie Airports. Aviation Daily reports that the Canada Pension Plan Investment Board is also interested in Midway.

The general outline of the deal offers the airlines predictable rates and charges for at least the initial 25 years of the lease (which is expected to be 50 years or more); the lease terms would thus change from the current residual-cost basis to the more commercial approach called "compensatory." Airlines would have veto power over capital projects that would be funded by airline charges, but not others funded by commercial revenues. The city is also requiring a no-layoff guarantee for all current airport employees, all of whom will be offered city jobs at comparable levels of pay and benefits or comparable jobs, pay, and benefits working for the new airport operator. What is not clear from the RFQ is who will control the airport's 43 gates. Currently, only eight are common-use, with the majority controlled under exclusive-use leases by Southwest. Often (but not always) when an airport is privatized, the airport company shifts gates to common-use so th at it can maximize their utilization. That could make a difference in the operator's revenue—and hence in the amount bidders will offer.

On that question, I'm still skeptical that the city will realize anything like the widely mentioned $3 billion figure for a 50-year lease. Why? Because Midway appears to have little potential for growth, either in passenger throughput or more intensive land usage. Perhaps there's a lot of fat that can be cut out of operating costs. And there is the interesting point that the city plans to use a portion of its proceeds to pay off the airport's current $1.2 billion in outstanding bonds. That eliminates $50 million per year in debt service—though presumably the winning bidder will borrow a large portion of its up-front lease payment and therefore have new debt-service obligations.

Still, my view is that if airport companies and infrastructure funds are willing to pay $2-3 billion to lease Midway for 50 years, we should see significantly larger valuations for airports with much better growth prospects. So a successful privatization of Midway would be a bellwether transaction, analogous to Mayor Daley's January 2005 lease of the Chicago Skyway. That deal signaled to the global capital markets that U.S. toll roads were an attractive investment opportunity—and highway finance has been dramatically different ever since.

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Registered Traveler Keeps Expanding

The good news is that as of this month, 17 large and medium-size airports offer the Registered Traveler option, whereby members of any of the three TSA-approved programs (market leader Clear, Unisys/FLO, and Vigilant) can bypass long security lines upon presenting their biometric card at a kiosk adjacent to the checkpoint. The most recent additions include Denver, Oakland, and both Reagan National and Dulles Airports in Washington, DC. But I will caution you that not all checkpoints at participating airports are equipped. Earlier this month I arrived at LaGuardia's Central Terminal hoping to catch an earlier American flight, only to encounter one of the longest checkpoint lines I've ever seen. It turns out that concourse does not yet have a Clear kiosk, and the Clear staffers at the adjacent concourse suggested that I pester the airport authority to speed its installation.

In the current competition between FLO and Clear to become Atlanta's RT provider, Clear has offered to finance and install an entire new lane for RT members if it wins the bid—and to pay for the cost of any additional TSA screeners needed to staff it. CEO Steven Brill says the company is willing to do the same at any airport where demand is high enough to warrant a separate lane.

Clear has also announced a $500K Innovation Prize for airport security technology that could speed RT members through security lanes—e.g., by getting TSA approval to not have to remove shoes, coats, or laptops. Because GE is an equity investor in Clear, and its shoe scanner is already in TSA testing for deployment, GE will not be eligible for the prize.

For several years there has been a tenuous relationship between RT providers and the TSA, ever since the agency decided that RT—contrary to the original concept—is not a security measure (separating out lower-risk travelers) but merely a passenger convenience for those willing to pay for it. But in a January 7th interview with Aviation Week, TSA head Kip Hawley suggested that the private sector might step forward with "a private sector background check, such as you use in the financial services industry. That would give us the basis for changing our security measures for people with a Registered Traveler card." Which suggests that the original concept still has adherents within TSA.

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Hypocrisy on Airport Grant Program

There was an old joke in the Soviet Union along the lines of "We pretend to work and they pretend to pay us." Everyone knew that many of the USSR's factories were actually value-subtracting enterprises (i.e., the value of what came out the door was less than the value of the inputs used to create it). But it was convenient to maintain the fiction that these were actual businesses, like those in the West.

I'm reminded of this by some of the recent rhetoric in support of ever-larger sums for the federal airport grant program, AIP. It's beloved by members of Congress for obvious reasons. As with the highway and transit program, members love the opportunity to issue press releases telling the grateful aviators and chamber of commerce members in Podunk about the wonderful $100K they have secured for the local airport. Like an ever-rising fraction of the highway and transit program, a large portion of AIP is essentially an old-fashioned public works program, in which Congress pretends to make strategic investments in vital infrastructure and the airport community goes along with the charade. After all, it's free federal money, isn't it?

Let me hasten to add that I'm not talking here about large, medium, and small hub airports. Remember that the lion's share of the funding for AIP comes from ticket taxes paid by airline passengers using those airports. In one of my earliest Reason Foundation airport studies, back in 1990, I crunched the numbers for the 10 largest air carrier airports, comparing the estimated ticket tax revenues generated at each with the amount of AIP entitlement grants it received. The average "return" was 14.8%, with the lowest being SFO (9.5%) and the highest JFK (20.8%). My point was simply that as a mechanism for strategic investment, the system "allocates airport grant funds according to a politically negotiated formula which redistributes large sums from the major airports (where most of the ticket tax collections originate) to hundreds of smaller commercial airports and thousands of GA airports. Thus, the system reallocates capital funds from those places where the needs are most pressing to other locations whose needs are nowhere near as great." That description still applies, 18 years later.

Yet listen to the rhetoric used to support an ever larger AIP budget. Aviation Daily (Feb. 8, 2008) cited Rep. Jerry Costello (D, IL) saying that "AIP funds are crucial to combat congestion and delays . . . . In order to combat congestion and delays, the country needs to add more capacity at airports, particularly by building new runways, he said. ‘The only way to do that is through the AIP program.'"

What a hoot! The problem of congestion and delays is confined to a few dozen large and medium hub airports—precisely the ones that get the worst deal out of AIP. About $1 billion in AIP funding goes to GA airports that have no commercial service, most of which don't even bother to charge landing fees (so don't tell me they have no alternative to AIP). Yes, a few of these are reliever airports that do play a key role in offering GA planes an attractive alternative to congested hub airports. But the large majority of those airports have no role whatsoever in helping reduce congestion and delays.

I've been around politics and public policy long enough to expect politicians to play these games. They can't very well announce that they need a $4 billion AIP in order that every member gets to announce airport grants in his district. But why do aviation professionals go along with this hypocrisy? And why should working families be taxed on their airline trips so that Congress members can continue to play these games? We need more investment in airport capacity—not as public works handouts but as strategic investments. But a common pool with 535 drinking straws is not a rational way to go about making strategic investments.

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Going Beyond Weight-Based Landing Fees

Debate continues between airport and airline trade groups, over the U.S. DOT's proposed changes to its airport rates and charges policy that would make clear that airports can charge for runway use per operation, in addition to or instead of by aircraft weight. While both IATA and ATA have criticized the proposal, it's being defended by the leading airport trade group, Airports Council International–North America. Deborah McElroy, ACI-NA's executive vice president for policy and external affairs, told Aviation Week (Jan. 21, 2008) that "Peak pricing is a legal instrument that some airports have employed to neutralize congestion." She pointed out that basing a landing fee on a per-operation basis does not violate standards set by the International Civil Aviation Organization (ICAO) and will not change the negotiations that take place between airlines and airport that set actual fee structures at airports.

While comments are being submitted to the DOT docket, the privatized operator of London Heathrow, BAA, last month announced that it was replacing weight-based landing charges with flat per-operation charges. That move was quickly denounced by airlines that complained it would hit hard at feeder flights to LHR international flights. While it would raise the relative cost per passenger for such flights, it would also create incentives for feeder operators to up-gauge those flights, trading off larger seating capacity for frequency of service, thereby reducing congestion. The U.K. Civil Aviation Authority said it has no jurisdiction over the details of airport runway charging structures.

Incidentally, the comment period for the U.S. DOT's proposed policy changes has been extended to April 3rd.

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More Outsourced Airport Screening

Although it has just about disappeared from major media radar screens, the opt-out program for airport passenger and baggage screening is alive and well—though still very small. Last month the 10th and 11th opt-out airports were announced by TSA. FirstLine Transportation Security won an initial one-year contract to provide passenger and baggage screening at the Gallup and Roswell airports in New Mexico. The contract is valued at $1.2 million.

Under the 2001 Aviation and Transportation Security Act, following an initial five-airport pilot program for opt-out security screening, all air carrier airports were given the option to do likewise. The opt-out program is called the Screening Partnership Program (SPP) by TSA. Besides the original five pilot program airports (SFO, Kansas City, Rochester, Jackson Hole, and Tupelo), the other current SPP participants include Sioux Falls, Key West, Sonoma County (CA), and the E. 34th Street Heliport in Manhattan.

I had predicted that many airports would shift from TSA to private contractors, based on the good results achieved at airports of all sizes under the pilot program. Obviously, I was wrong about that. What seems to be the case is that once a way of providing screening services has been established at an airport, nobody is eager to change it. Thus, while airports have not been dumping TSA in favor of private contractors (Key West was a special case), neither have any of the opt-out airports decided to shift over to TSA. And at all but Key West, the new SPP airports have been ones where scheduled passenger service has been newly established. Given TSA's congressionally imposed cap on its screener head-count, it serves its own interests that new airports get their screening from TSA-approved contractors.

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News Notes

Destroying Shoulder-Fired Missiles. It's encouraging to learn that since 2003, more than 24,000 shoulder-fired anti-aircraft missiles (known as MANPADS) have been acquired and destroyed. At least that is the claim made by the State Department, which has an active program to do this, working with 22 countries, from Afghanistan to Nicaragua. (Aviation Daily, Jan. 28, 2008). I haven't seen any cost figures on this program, but my guess is that this is a lot more cost-effective than spending tens of billions to equip all U.S. commercial airliners with anti-MANPADS systems.

More Low-Cost Airline Terminals. Last issue I reported on the controversy over Austin-Bergstrom Airport's plan to develop a no-frills terminal specifically for low-cost carriers who opt to use it. As context, I noted that this is a global trend, citing a number of examples, some of which have already gone into operation. Since then, word has reached me of two more such projects. Brussels Airport this month announced plans to refit a currently unused terminal building as a no-frills terminal, at a cost of E20 million, due to open by April 2009. And a UK company, Meinl Airports International, announced plans to build an entire low-cost airport near Warsaw, Poland, at a cost of $307 million. Target date for opening is 2011.

New Zealand Sale Back On? Last issue I reported that the previously announced offer by the Canada Pension Plan Investment Board for 40% of Auckland International Airport (AIA) had been rejected. But the airport company in late February advised investors to sell their shares to CPPIB, since the deal looks much better following a recent sharp decline in the price of AIA shares to 20% below what CPPIB has offered. Macquarie Equities was quoted in the local media as saying "This is the only offer they've got on the table, and the value gap between the share price and the offer price has opened up very, very significantly." For the partial takeover to succeed, CPPB must acquire the full 40% held by retail investors and also get a majority approval of shareholders who vote. Institutional investors hold 30% of AIA, with the remaining 23% held by two local councils.

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





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