Airport Policy and Security Newsletter #76

Trusted Traveler expansion, Australia's light-handed airport regulation, Spain's ghost airports

In this issue:

Trusted Traveler Programs Expanding

The idea of using risk-based principles to allocate airport screening resources—still considered radical a year ago—continues to gain traction. TSA is expanding its PreCheck program, two private services are making progress, and the use of this principle for foreign visitors is also evolving.

As of February 1st, TSA’s PreCheck program now includes four airlines—American, Delta, United, and US Airways—and has expanded from the original airports (Atlanta, DFW,  Detroit, and Miami), adding Boston, Las Vegas, Los Angeles, Minneapolis/St. Paul, New York’s JFK, and Salt Lake City. As of now, flyers eligible to participate include premium-level frequent fliers of the four participating airlines and members of Customs & Border Protection’s international Trusted Traveler programs: Global Entry, SENTRI, and NEXUS. Members currently do not get a separate line at the checkpoint, and only learn whether they qualify for expedited screening for that specific flight when they reach the TSA document checker, who checks the boarding pass’s coding to determine if the member has been cleared for that particular flight. If so, the member is directed to a separate screening lane. (Thus far in my experience flying American out of MIA, I am 4 for 5 in getting expedited screening, breezing through the separate lane with shoes and jacket on, not having to go through a body-scanner, and not having to remove laptop or liquids from my bag.)

From the passenger standpoint, the big drawback of PreCheck is the potentially long waiting time in line, followed by the possibility of then having to go through regular screening. Hence, “members” must still allow significant buffer time in getting to the airport, to allow for worst-case checkpoint waiting time. In testimony before the Senate Homeland Security Committee on Nov. 2, 2011, Roger Dow, CEO of the U.S. Travel Association, urged TSA to provide dedicated lines for PreCheck members so as to reduce this buffer time. In addition, he urged TSA to expand membership to include those who have already passed other background checks, including those with Top Secret clearances, Secure Identification Display Area (SIDA) badges for airport work, and Transportation Worker Identification Credentials (TWIC). Expanded membership would also help justify having dedicated lines for PreCheck. 

An alternative for those seeking to avoid long waits in line is provided by two “head of the line” private-sector firms. CLEAR, which acquired the membership list of a predecessor company that liquidated several years ago, now offers this service to paid members at Denver and Orlando, and expects to offer it soon at San Francisco. Competitor Flex began operations Dec. 30, 2011 at Jacksonville, and is discussing its service with 23 other U.S. airports, while also seeking an inter-operability agreement with CLEAR. Both charge an annual membership fee for allowing passengers to bypass the long waiting lines prior to the checkpoint, but do not offer expedited screening (unless the member is also enrolled in PreCheck).

For those traveling by air to the United States, two other developments are worth noting. Canada’s counterpart of TSA—CATSA—announced in December that NEXUS members flying to the United States from Canada’s eight largest airports with U.S. pre-clearance facilities, will be able to complete border formalities at kiosks using their NEXUS card. In addition, their bags will no longer have to be re-screened at the connecting U.S. airport (which has always struck me as a ridiculous waste of time and resources).

In addition, President Obama last month announced what could be a risk-based program for visa approvals. In an op-ed in the Wall Street Journal (Jan. 25, 2012), Edward Alden and Liam Schwartz suggested this be done via computerized risk sorting to separate visa applicants into lower-risk and higher-risk categories, with only the latter needing time-consuming personal interviews and other current rigamarole. As they point out, “Computerized risk-sorting is already used for identifying potentially risky goods imported into the U.S. Similar computerized systems—using intelligence and criminal information as well as air travel and immigration records—can be used for sorting individuals who wish to enter the U.S. into lower-risk and higher-risk categories.”

I agree. DHS and its TSA division still have a long way to go in revamping transportation security along risk-based lines.

Australia’s Light-Handed Airport Regulation Under Fire

Should airports be subject to economic regulation? The question has received little attention in the United States, for two reasons. First, since essentially all commercial-service airports are government-owned, their behavior is naively assumed to be, per se, in the public interest, despite most commercial airports being monopoly providers. Second, aviation experts realize that there already is economic regulation, via U.S. DOT’s policies on landing charges and FAA’s numerous grant assurances (which regulate what airports can do with their revenue, as a condition of accepting federal airport grants).

The past 25 years of airport privatization forced policy-makers in other countries to look more closely at this issue. Numerous economic studies find that commercial airports possess varying degrees of market power. Accordingly, most privatized airports function under some kind of external economic regulation.  Some countries have applied traditional public-utility regulation, which caps the allowable rate of return on assets that an airport can achieve during a given time period. The well-known drawback of that approach is that it provides incentives for poorly justified capital projects that, from an airport company’s perspective, give it a larger regulatory asset base on which to measure its rate of return (e.g., it would rather seek a 10% return on a $2 billion asset base than on a $1 billion asset base). 

The other principal alternative is price-cap regulation, under which aeronautical charges may increase only in relation to an annual cap based on an inflation index (often abbreviated as “RPI minus X”). Price-cap regulation has many distorting effects, in addition to making runway congestion pricing impossible.

Australia is known worldwide for taking a different approach to its privatized airports. After trying price-cap regulation for the first several years, it rejected it for distorting service decisions and chilling airport investment, by “sending poor price signals both to airport operators and to users about the costs of providing aeronautical services.” Since 2003, Australia has relied instead on what it calls “light-handed regulation” of airports. This approach means that airports are subject to the normal competition laws affecting all other businesses, with mandated disclosures of various prices and costs, so that airlines and passengers can see what is going on. 

Until recently, the regulator—the Australian Competition and Consumer Commission—supported this approach. But in its 2010 annual airport monitoring report, it raised concerns about Sydney Airport’s profits and suggested that more explicit regulation might be needed. In response, the government ordered a report on the situation by the its Productivity Commission, an independent body reporting to the Treasurer. The PC’s draft report was released last August, and is well worth reading. (“Economic Regulation of Airport Services,” Productivity Commission Draft Report, August 2011; www.pc.gov.au/projects/inquiry/airport-regulation/draft)

To summarize this fairly detailed report, the Productivity Commission found that light-handed regulation is working well. There has been a marked increase in aeronautical investment since removal of the price caps, with another $9.6 billion projected over the coming decade. Aeronautical charges “do not indicate misuse of market power, and quality outcomes are generally satisfactory.” The aeronautical charges, revenues, costs, profits, and investment of Australian airports all “look reasonable compared with outcomes at overseas airports.” And despite a number of airline complaints about high charges, “no party sought a return to regulatory price setting.”

Interestingly, in setting forth its framework for the analysis, the PC noted that because airports are subjected to greater exposure to demand shocks than other network utilities such as energy, the case for specific (traditional) regulation of airports would need to show (1) that an airport is using its market power in ways that diminish community welfare, (2) that a regulatory response beyond normal competition law is the most appropriate means to deal with this, and (3) that “it is feasible to devise a regulatory response that can address the problem without imposing a net cost.” The PC concluded that those conditions cannot be satisfied.

Since the draft report was released and has been open for comments, the ACCC has continued to argue that light-handed regulation has failed and argues that it should impose arbitration on airline-airport pricing disputes. Airline trade group IATA has joined the call for more explicit regulatory intervention. The Productivity Commission has until May to make any revisions to its draft report.

Reviewing this controversy led me to revisit something I wrote on this subject in the early 1990s when airport privatization was first being debated in the United States. It is part of my chapter in Airport Finance by Norman Ashford and Clifton A. Moore (Van Nostrand Reinhold, 1992). I called it “indirect regulation” aimed at promoting competitive conditions. I suggested that subjecting airports to normal competition laws (in U.S. parlance, antitrust laws) would subject them to the “essential facilities” doctrine (under which they would be required to provide access for new entrants on a non-discriminatory basis). Airports would also no longer be able to grant incumbent airlines veto power over expansion projects (as happens under “majority-in-interest” clauses). In addition, I suggested three structural pro-competition policies:

  • Prohibit airline ownership of airports, in part or whole;
  • Prohibit multiple ownership of commercial airports within a single metro area; and,
  • Pre-empt state regulation of airports (in favor of this kind of light-handed approach at the federal level).

I presented this regulatory concept as part of a webinar last month on future financing of U.S. airports, for the Airport Consultants Council. If you missed the webinar, I’d be happy to send you my presentation, on request.

Outsourcing Airport Screening Gains New Attention

A year after TSA Administrator John Pistole abruptly rejected all pending applications from airports seeking to replace TSA screeners with TSA-certified security companies, the agency has continued to stonewall the issue. Ignoring the provision in the 2001 enabling legislation that created TSA, under which all U.S. airports are supposed to have the right to opt out of TSA-provided security, the agency now requires airports to demonstrate a “clear or substantial advantage” to outsourcing their screening, rather than continuing with TSA screeners. Despite this new hurdle, last month Orlando Sanford Airport re-applied to the program.

Well-done articles about this issue have appeared recently in major media. Both Bart Jansen’s USA Today article (Nov. 30, 2011) and Susan Stellin’s New York Times piece (Jan. 30, 2012) highlight the detailed study released last June by the House Transportation & Infrastructure Committee (which I wrote about in this newsletter’s July 2011 issue). In that detailed comparison of TSA screening at LAX and contract screening at SFO, the researchers found that screeners at SFO are far more productive, screening 65% more passengers per screener than those at LAX. Screener attrition at LAX is 50% higher than at SFO, leading to much higher recruitment and training costs at LAX and the need to bring in costly fill-in screeners from TSA’s National Deployment Force. Altogether, the study estimated that if the SFO contract screening model were applied to LAX, costs would be cut from the current $90.6 million to $52 million per year—a 42% savings. (And yes, several other studies have found that screening performance at SFO is as good as or better than TSA screening at LAX.)

Both reporters interviewed airport directors to get their views. A common response is that with screening contractors, there is much greater flexibility in matching the workforce to the ups and downs of passenger flow (which minimizes paying extra people to stand around with nothing to do much of the time). The screening companies use a significant number of part-time screeners, to help them cope with peaks and valleys. At SFO, about 20% of the screeners are part-time. Contractor Covenant Aviation Security can also offer financial incentives to ensure peak staffing needs are met—something TSA cannot do. (Note: the law requires security contractors to offer the same hourly wage as TSA pays.)

Both articles also explain the critically important point, articulated by T&I Chairman Rep. John Mica (R, FL), that there is a conflict of interest built into TSA, since it is both the security regulator and the provider of a major component of airport security operations. Self-regulation is bad policy, which is why security regulation is separate from airport screening in Canada and most of Europe, where either the airports themselves or approved security contractors provide screening. As Mica told USA Today, “You need the federal government setting the standards,” not producing the service.

In the face of this impressive evidence, the head of TSA’s union, John Gage, told USA Today it would be impossible to monitor different security companies at 400 airports. That statement creates an impression of 400 different companies, ignoring the requirement already in the law that only TSA-certified companies could get screening contracts, and that the agency could limit the number to a manageable level. That’s what CATSA, the TSA’s counterpart in Canada, does, in using half a dozen security companies nationwide for Canada’s airports. Yet TSA Administrator John Pistole told a Senate hearing on Nov. 9th that he is still trying to answer the question: “Is there a clear, substantial advantage to the taxpayer and to the traveling public, obviously, in terms of security and efficiency?” Judging by the evidence, the answer is clearly yes. 

Spain’s “Ghost Airports” Offer Object Lesson

You may have seen recent news articles on the ghost airports in Spain—boondoggle projects developed (during Spain’s now-burst real-estate bubble) not to meet any real air travel needs but rather to foster “economic development.” One case in point is Castellon Airport in the Valencia region, built at a cost of €150 million (about $195 million). It opened in March 2011, but had not handled a single commercial flight as of mid-January 2012. The hope was that it would encourage tourism in Valencia, but Spain’s east coast is already well-supplied with commercial airports, so the airlines ignored Castellon.

An even more spectacular flop is the aptly named Don Quixote Airport in Ciudad Real, a distant suburb of Madrid. This one cost €1.1 billion ($1.43 billion). Open for a year, it was supposed to serve as a satellite airport for Madrid Barajas, but thus far has only a handful of weekly flights. As an AP story reported last year, “Its vast and empty terminal, built to handle 2.5 million passengers a year, echoes every sound.”

These projects are not aberrations. Rather, they are reflective of a long tradition of infrastructure development in Spain. As respected transport economist Germa Bel of the University of Barcelona put it in a 2010 paper, “Spain’s transport infrastructures are the result of a long-term policy that has used infrastructure for nation-building rather than as a tool for creating a transportation system able to foster productivity and economic growth.” In the paper, he traces the development of roads and railroads in the 18th and 19th centuries, which he characterizes as “the birth of the radial State” in which all roads and railways focused on Madrid. Only in the late 20th century, with the legalization of investor-financed toll motorways, did highways get built in response to actual travel demand.  The process continues today in Spain’s relentless development, at taxpayer expense, of a high-speed rail network, again centered on Madrid. The paper is “Infrastructure and Nation Building: The Regulation and Financing of Network Transportation Infrastructures in Spain, 1720-2010.” (www.ub.edu/irea/working_papers/2010/201016.pdf)

A recent report showed that only 11 of Spain’s 48 airports, all owned by government aviation agency AENA, are profitable. That may be why Spain’s new center-right government has called a temporary halt to the privatization of AENA, under which a competition had already begun to sell off Madrid’s Barajas and Barcelona’s El Prat, leaving the fate of the others up in the air. In a Jan. 24th decision, public works minister Ana Pastor announced that the current procurement was being terminated, so that the government could review all its airport privatization options, including possibly selling a stake in all AENA airports as a package.

The United States has had its share of ghost airports, such as the John Murtha Airport in Johnstown, PA and the MidAmerica airport in Illinois, neither of which would exist in their present form without large federal capital grants. Fortunately, neither is as large a boondoggle as Spain’s ghost airports.

Fixing TSA's Broken Technology Procurements

Last month I attempted to summarize the GAO’s dismaying July 2011 report on what I called TSA’s “checked luggage screening fiasco.” Basically, the agency is stuck with obsolete explosive detection system (EDS) machines, and can’t seem to figure out a way to fix the problem in a timely and cost-effective manner. But these problems are not intractable, former DHS Deputy Secretary told the House Homeland Security Committee’s subcommittee on transportation security on Sept. 22, 2011. The key to better solutions is to adopt ideas and methods from elsewhere.

Take the problem of replacing manually loaded, lobby-based EDS machines with inline baggage screening systems, in which bags travel on conveyor belts from check-in locations and are automatically fed through EDS machines in the baggage area. These systems are far less labor-intensive than lobby-based installations, meaning large annual operating budget savings for the TSA. But nearly 100 of the largest 286 airports still lack these cost-effective systems, due to limitations on TSA’s capital budget. Well, duh! Jackson recounted that his firm, working with two airports and supported by two major airlines, proposed lease financing deals to TSA in 2010. Under those deals, the private team would finance, install, and maintain the in-line systems in exchange for annual lease payments, beginning only after the systems were in place and operating to TSA specifications. The agency turned down the proposals, interpreting them as capital leases rather than operating leases, and the former apparently are frowned on by OMB. Yet this kind of arrangement is becoming routine for the Federal Aviation Administration, which is procuring a national network of ground stations for its ADS-B system in this manner, and has just launched a similar procurement for its huge Data Comm acquisition.

Another obstacle to better technology, as GAO noted, is DHS’s labyrinthine equipment certification testing program. Jackson pointed out that the European Union has essentially privatized this function, with approved private-sector labs for this purpose in France, Germany, the Netherlands, and the U.K. DHS, he suggested, should engage in a competitive procurement to select two such vendors. DHS would continue to set the performance standards, and equipment developers would pay for certification testing on a fee-for-service basis.

Jackson also presented two other promising ideas: an X-Prize type competition for breakthrough security technology and a shift to open-source data and image standards for explosive detection equipment (all of which now uses proprietary standards, making upgrades costly and difficult). GAO also endorsed the open-source idea in its July 2011 report.

Some may dismiss these suggestions because they come from a former DHS official now in the private sector seeking government contracts. But sometimes it takes having been on the inside of a large bureaucracy to understand how intractable its problems are. With these suggestions, I think Jackson has performed a genuine public service.

Upcoming Conferences

84th Annual AAAE Conference, April 29-May 2, Phoenix, AZ; Sheraton Phoenix Downtown. Details at: http://events.aaae.org/sites/120501 (Shirley Ybarra speaking)

News Notes

Airport Privatization Pilot Program to Expand

The conference committee bill to reauthorize the FAA for four years includes doubling the size of the Airport Privatization Pilot Program from five airports to ten. It makes no change to the 60% airline approval requirements.

Edinburgh Bids Due by End-February

BNP Paribas and Citigroup are handling the sale of Edinburgh Airport for BAA, and Dow Jones reports that bids are due by the end of this month. Estimates of the sale price range from £400 million to £600 million (between $628 million and $942 million as this is written). Expected to bid are consortia headed by Carlyle Group, Global Infrastructure Partners, and Macquarie Group.

Saab Sensis Expands Airport Surveillance

The FAA last month announced a contract under which Saab Sensis Corp. will install a version of its ASDE-X surface surveillance system at additional airports (beyond the initial 35 where deployment was completed last year). The first nine new locations include Anchorage, Cincinnati, Cleveland, New Orleans, and Pittsburgh. The new version is called Airport Surface Surveillance Capability, and like ASDE-X, it will fuse data from various sources, including ADS-B and multilateration, to track vehicles on the airport surface and warn of potential conflicts.

Porter Airlines to Serve Washington Dulles

Fast-growing Canadian short-haul flyer Porter Airlines will begin serving Washington Dulles Airport from its downtown Toronto island airport on April 16th. Initial service will be three daily round trips on weekdays, two on Sundays, and one on Saturdays. Washington will be Porter’s sixth U.S. destination (in addition to a dozen in eastern Canada).

Follow-Up on Secondary Cockpit Barriers

Last month I wrote about the cost-effectiveness of installed physical secondary barriers, which airlines can use to guard the forward cabin area when the cockpit door itself must be opened in flight. Thus far, only United Airlines has equipped its fleet with them, but the Wall Street Journal reported several months ago that Delta Air Lines is considering doing likewise. A government-industry group released technical guidelines for such barriers last fall.

Follow-up on TSA’s Flawed Baggage-Screening Upgrades

I wrote at some length last issue about the TSA’s lack of progress upgrading its explosive detection systems to its own, intelligence-based standards, based on a devastating GAO report that appeared last July. My closing comment expressed dismay that nobody in Congress appeared to have read the report or taken it seriously. I quickly heard from the office of House Transportation & Infrastructure Committee Chairman Rep. John Mica (R, FL), enclosing a hard-hitting news release he issued on July 12, 2011, taking the TSA to task. My apologies for having missed this at the time. Mica’s concerns were also noted in an article in Aviation Daily, July 13, 2011.

Possible Bid for Moscow’s Domodedovo Airport

Reuters broke the news last month that Russian tycoon Viktor Vekselberg is considering making a bid to purchase Domodedovo Airport, which has been put on the market by current owner, billionaire Dmitry Kamenshchik, via Goldman Sachs. The latter has estimated the airport’s market value at between $3.5 billion and $7.5 billion, while Citigroup puts its value at between $4.2 billion and $5.3 billion. Vekselberg’s company, Renova Group, owns Koltsovo Airport in Yekaterinburg.

Port Authority Plans $3.6 Billion Replacement of LGA Terminal

The aging and obsolescent Central Terminal building at New York’s LaGuardia Airport will be replaced with a larger, modern structure under a plan announced by the Port Authority of New York & New Jersey. The agency is seeking proposals from teams that would finance, design, and build the replacement terminal, with construction to begin by 2014 and be completed by 2021. The schedule will be complicated, due to the need to keep large portions of the existing terminal in operation as the new one is being built in more or less the same location. The terminal needs more space for passengers and concessions, in addition to larger ramp areas to accommodate today’s larger airliners.

Independent Study of Body Scanner Health Risks Proposed in Senate

Sen. Susan Collins (R, ME) has announced legislation to require an independent health study of full-body X-ray (backscatter) scanners installed at numerous U.S. airports. TSA Administrator John Pistole had agreed to such a study during testimony on Nov. 2, 2011, but changed his mind on Nov. 9, saying that independent studies had already documented the scanners’ safety. Hence, Collins decided to proceed with the legislation.

Milan Sells One-Third of Airport Operator

The municipality of Milan in December selected the bid of Fondi Italiani per le infrastrutture (F2i) as the winning bidder for a 29.75% stake in its airport company, operator of Malpensa and Linate Airports. F2i acquired Naples airport in 2010.

Quotable Quotes

“I think just about every airport director in the country would agree with me – we would rather be in charge of security. That’s because we could do it better, we could do it cheaper, and we could be more effective—that is, more secure. But not many people want to stand up and say, ‘We’re going down the wrong road.’”

--T.J. Orr, Director, Charlotte Douglas International Airport, quoted in “Gatekeepers Under Scrutiny,” by Susan Stellin, New York Times, Jan. 30, 2012 

“TSA’s financial model is badly broken. The feds do a poor job at acquiring technology, they pay too much for what they get, and once purchased they own it until it falls apart. Acquisition rules are ponderous and quirky. With few exceptions, the feds just don’t understand how to create adequate incentives for private sector innovation. Or even focus on that fact as a problem.” 

--Michael P. Jackson, Firebreak Partners LLC, email to Robert Poole, Nov. 30, 2011 (quoted with permission)

“Over the years, [DFW] has gone from an operational exercise to more of a business operation. It’s a complex environment with a lot of different stakeholders. Twenty years ago airlines made all the decisions; today, it’s more of an equal partnership. The airlines have off-loaded a lot of their operational responsibilities to airports, and we have embraced them. . . . The other thing you will find is that we’ve created an environment that is probably different than most other [U.S.] airports in that we are very independent. We have a lot of our own policies—personnel issues, how we compensate. Most of the people that we have hired have come from the private sector. Very few have come from another airport. That private sector focus continues to drive our desire to run the airport like a business.”

--Jeff Fegan, CEO, DFW International Airport, in “It’s All About Business,” by John F. Infanger, Airport Business, January 2012 

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





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