Airport Policy and Security News #98

LaGuardia and Reagan slots: picking winners and losers, PreCheck becoming more risk-based, Could privatization rescue Cleveland and Ontario airports?

In this issue:

LaGuardia and Reagan Slots: Picking Winners and Losers

There has been understandable dismay from airport officials and business and civic leaders in a number of smaller cities over the results of the Justice Department's forced sale of American Airlines Group slots at LaGuardia (LGA) and Reagan National (DCA) airports. The winning bidders for the slots will focus on serving large and medium-size metro areas, leaving a number of communities with no scheduled airline service from one or both of those airports, and others with only monopoly service.

This bizarre outcome stems from two factors. The first is the fact that both DCA and LGA are "slot-controlled" airports. Because demand for air service exceeds the FAA-defined capacity of those airports, the FAA's long-standing solution has been a limit on the number of hourly flight operations (landings and take-offs). A numerical limit makes sense—otherwise there would be massive delays at the most popular hours of the day. But the key question is how those slots are allocated. The two options are either administrative allocation or market allocation—and FAA has always chosen the former.

The second factor is the Department of Justice (DOJ) notion of promoting competition. Instead of deregulating slot-controlled airports by pushing for marketplace allocation of their capacity, the folks at DOJ insisted on a central-planning approach. In their worldview, there are only two relevant categories of airline: legacy carriers (the now-merged American, Delta, and United) and low-cost carriers (which DOJ defined as JetBlue, Southwest, and Virgin America). That, of course, ignores altogether true low-cost airlines such as Allegiant, Spirit, and the soon-to-be-revamped Frontier. And it also seems to ignore Southwest's evolution in the past decade into an ordinary-cost-carrier, with fares not that different from the three legacy carriers.

Since all the forced slot sales had to be approved by DOJ, it was pretty obvious whose bids would be deemed acceptable, though this was never stated publicly. So at LGA Southwest got 11 slot pairs (22 daily take-offs and landings) and Virgin America got six. And at DCA Southwest got a whopping 27 slot pairs, JetBlue got 20, and Virgin America got four. While the winners had not announced their planned uses of their new slots at the time I wrote this, it is pretty clear to airline analysts that they will use as many as half to add frequencies on routes they already serve from DCA and LGA and use the rest to add new destinations from there. Given the point-to-point model used by these three airlines, the new cities are expected to be large and medium ones, such as Chicago (Midway), Columbus (OH) and Knoxville (TN). Losers will be places that American or US Airways previously served with smaller planes: military base communities such as Augusta (GA), Fort Walton Beach (FL), and Fayetteville (NC), and smaller "spoke" cities such as Islip (NY), Providence (RI), and Wilmington (NC).

There is no objective way to say that DOJ's central plan for these slots is "better" or "worse" than an alternative that would have focused on maintaining LGA and DCA nonstop access to smaller cities. Any such central plan is inherently an arbitrary selection of winners and losers, even though DOJ itself did not select the winning and losing cities. All it had to do was to define which kinds of carriers it would approve. The rest follows directly from their well-known business models.

It's not as if there were no alternative to administrative allocation of these slots. The alternative is market allocation, and the best form of market allocation is runway pricing. Under the approach Ben Dachis and I outlined in a 2007 Reason Foundation policy study "Congestion Pricing for the New York Airports," in advance of each major schedule-change season, the airport's analysts would review the current runway pricing structure (for both landings and takeoffs, mind you) and release a draft of the next period's pricing. Airline schedulers would review their planned schedules and propose modifications to lower their runway charges. Several rounds of this process would lead to a finalized price schedule and revised airline schedules (such as some flights shifted to lower-priced times, other flights switched to larger planes) by the time the schedule changes went into effect.

In the study, Dachis and I addressed all the regularly stated airline concerns about runway pricing, showing (we believe) that this approach not only would work but would be far more effective in both allocating capacity and reducing runway congestion than a slot-trading or slot-market system. I don't have space for that here, but you can read the whole study and supporting materials at http://reason.org/news/show/congestion-pricing-for-the-new.

Under the runway pricing approach, both incumbent and new-entrant airlines would seek to maximize the value of serving high-demand airports such as DCA and LGA, in accordance with each carrier's business model. It's not as if runway capacity were the only scarce resource in our economy. In just about all other cases, we let competitors figure out how best to allocate that capacity. That is what Alfred Kahn and the other deregulators surely had in mind when they began the process that led to the Airline Deregulation Act of 1978. It's tragic that our policymakers still haven't fully implemented airline deregulation three and a half decades later.

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PreCheck Becoming More Risk-Based

The Transportation Security Administration's PreCheck program had its ups and downs in 2013, with the downs due mostly to an ill-advised policy of letting uninformed, infrequent travelers into PreCheck lanes, gumming things up because those people generally insisted on removing their shoes and jackets, and taking their laptops and cosmetics out of their carry-on bags. But this policy was a key to achieving TSA's overly ambitious goal for last year of moving 25% of daily passengers through the PreCheck lanes, whether they'd been previously vetted or not.

While TSA has made no announcement that it is abandoning that policy, a number of signs point in that direction. The privacy impact assessment that TSA posted last fall explained the rules of the game for the new PreCheck Application Program now being rolled out, under which individuals are invited to apply for the program by paying an $85 fee and passing a background check. Page 2 of this document states in black and white that applicants will provide fingerprints and those prints will be submitted to the FBI for a criminal history background check. This is the first public acknowledgement that this kind of actual background check will be made on applicants, just as has been routine for the past decade for airport workers with access to the secure areas of airports.

Assuming that the expected large numbers of people apply for and get accepted under this program, TSA will no longer have a bureaucratic reason to move un-vetted amateurs into PreCheck lanes to make its numbers look good. And they will also have a positive reason not to do that, since the more word gets around that PreCheck lanes are no longer fast and reliable, the fewer people will fork out $85 and submit to an FBI background check in order to stand in a slightly shorter line for screening.

It also helps that all the major airlines now offer PreCheck membership to their premium frequent flyer members, and that PreCheck is now in place at 115 airports (as of February). Another recent development will also assist frequent air travelers. On Februry 19th, the governments of Canada, Mexico, and the United States announced plans for a North American Trusted Traveler program. It will be based on mutual recognition of their respective Viajero Confiable, Sentri, Global Entry, and Nexus programs.

Even so, one has to wonder whether TSA can possibly meet its announced 2014 goal of having 50% of daily air travelers screened via PreCheck. The number of its enrollment centers sounds impressive, but many are located at sites for the Transportation Worker Identification Credential (TWIC) which tend to be at non-passenger-friendly locations such as seaports. The agency would clearly benefit if it can get the promised Third Party Commercial Enrollment effort up and running. RFPs went out to potential private-sector providers well over a year ago. Yet TSA still has not reported either the status of this promising program or the selection of one or more winning vendors. What is keeping this important program grounded?

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Could Privatization Rescue Cleveland and Ontario's Airports?

Two mid-sized U.S. airports have been hit pretty hard by cuts in airline service in recent years. Ontario (ONT) California has seen its passenger volume shrink from 7.2 million in 2007 to less than 3.9 million in 2013, primarily due to airlines cutting back on less-profitable routes. And now Cleveland (CLE), formerly an important Continental hub, is being de-hubbed by the merged United-Continental, as I predicted back in 2010. The airline announced in early February that it would cut its average daily departures 64% by this June, which translates into 51% fewer passengers (since many of the flights being eliminated are on regional jets). In response, Moody's Investors Service said the change is "credit negative" for the airport, but did not (yet) reduce its bond rating

Both airports face a difficult task in attracting replacement service, because their costs are higher than those of comparable airports. In the case of CLE, its cost per enplaned passenger last year—before the new cuts—was $15.37, which Moody's says is nearly twice the average of the U.S. airports that they rate. And with the smaller volume that's in store, Moody's estimates it will soar to as high as $25. Ontario's CPE is also in the double-digit range, and is considered by airport consultant Oliver Wyman to be one of the highest for medium-hub airports. (CPE is calculated by adding up all the airport's charges to airlines, such as landing fees and space rentals, and dividing by the number of passengers.)

Given their high costs, both airports need rather drastic change in their cost structures to become competitive—what Bob Hazel of Oliver Wyman terms a "game-changer" in the case of ONT. And that is likely to be more difficult within the scope of normal government management. ONT is owned by Los Angeles World Airports (operator also of LAX and Van Nuys), which although operated as an enterprise fund, is still essentially a department of the city government, which likes to micro-manage its business decisions. In discussions with Ontario officials about fixing the airport's problems, LAWA has noted that any solution must provide protections for airport workers, a number of whom are City of Los Angeles employees. Yet if the situation is analogous to a bankruptcy, protecting existing jobs is not the number one priority—survival is. CLE, too, operates as part of its city government.

In recent months when transportation reporters have asked me where I think the most likely near-term opportunities are for U.S. airport privatization, my reply has mostly focused on airports that are in dire straits and in need of a serious turn-around. Owners of such airports must realize that for assets of this kind, their previous investments in the airport constitute "sunk costs," which may never be recoverable. That's directly relevant to the current legal battle over ONT, which LAWA has said it would be willing to sell back to the city of Ontario (from which it purchased ONT decades ago) but only for a price of $474 million, to recover most of the $560 million LAWA says it has put into the airport since 1967. The City of Ontario has offered just $250 million.

What an airport company might offer for ONT would depend on its assessment of the airport's growth potential in the multi-airport market of southern California. Of the airports that currently have scheduled service (LAX, SNA, LGB, BUR, and ONT), only ONT has no political constraints on growth, so as a long-term proposition, it would appear to have good prospects. But its attractiveness would also depend on how much political control would remain. Under current federal law, no airport company could buy the airport from LAWA; the only option would be a long-term lease. And from the City of Ontario's standpoint, having LAWA overseeing the lease would not meet its goals of resuming oversight of the airport's future. The only potential win/win/win deal would be a three-way privatization deal, under which LAWA would sell the airport back to Ontario at something like Ontario's current offer, and the latter would lease the airport to the bidder submitting the most credible proposal for turning the airport around, sharing with LAWA any up-front concession fee it might get from the winning bidder. Negotiating such a three-way deal, and getting FAA to bless it under the terms of the Airport Privatization Pilot Program, would take some fancy legal and political work.

Those complexities would make a Pilot Program lease of CLE a model of simplicity. And if the private sector saw the run-down and somewhat struggling San Juan airport as a diamond in the rough, perhaps it would view CLE as a similar turn-around opportunity. The City of Cleveland will never know, unless they test the waters by issuing a request for expressions of interest.

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Santa Monica Airport Dodges Another Bullet

Reason Foundation's first office in Los Angeles was located in a business park on the north edge of Santa Monica Municipal Airport (SMO). Among the staff, I was the only one who appreciated the historic significance of this airport. It is the site where the fledgling Douglas Aircraft set up shop in 1922, and later produced all of the company's piston-powered airliners, including the DC-3s, DC-4s, and DC-7s that I flew on as a child in an Eastern Airlines family. A short walk from our office was a very nice restaurant in the same building that housed a small but well-done aviation museum.

Even then, in the late 1980s, SMO was unpopular with city officials, mainly due to the noise from business jets, few of which are based there but many of which use SMO to bring people to and from the area. The City of Santa Monica owns the airport, and as its owner, has tried any number of ways to reduce jet noise, including a night-time curfew, a huge increase in landing fees, and outright bans on noisier jets, only some of which have survived legal scrutiny. But its latest ploy—rejected last month by federal District Court Judge John F. Walters—was the claim that the federal government's oversight of the airport had lapsed, so the City could shut it down altogether.

That case rested on a very non-standard review of the airport's legal history. During World War II (when Douglas turned out thousands of military aircraft there), the feds leased the airport for the duration of the war, and made significant capital improvements (as it did with many other civilian airports it leased during the war). In 1948, Congress enacted legislation on de-mobilization of these airports. In consideration of the improvements made during the war, the airport would be handed back, but only if the municipal government agreed to keep the airport in operation in perpetuity, unless the feds agreed to a request to close it. Like most other cities, Santa Monica accepted these terms.

But in its suit filed last October, the City claimed that somehow the transfer agreement had lapsed in 1953 when the last portion of the federal lease expired. It also argued that, in any case, a settlement it had reached with FAA in 1984 (over several SMO anti-business jet policies), with an expiration date of July 1, 2015, basically allowed the City to cease operating the airport as mid-2015. Judge Walters rejected these claims, to cheers from the general aviation community and from many other GA airport operators whose airports might have been at risk of shutdown had Santa Monica's arguments prevailed.

Santa Monica may well have been unwise to sign the hand-back agreement in 1948, and there's room for debate over whether the requirement to operate such airports "in perpetuity" was justified by the government's previous capital investments in the airport. And of course, nobody in 1948 knew that business jets would become an important factor in aviation 40 years later. I still think the airport community needs to do some hard thinking about better compensating airport neighbors for noise, in the long-term interest of aviation's role in transportation. But that is a subject for another time.

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Vulnerability of Checkpoint X-Ray Systems?

Could airport checkpoint carry-on baggage scanners be hacked to let through weapons or bombs in such luggage? That is the claim of two security researchers, as reported last month by Wired magazine. The alleged vulnerability is the ability of hackers to subvert the Threat Image Projection (TIP) system built into all such scanners, as used not only at airport checkpoints but also at courthouses, embassies, and other government buildings.

Billy Rios and Terry McCorkle of security firm Qualys presented their findings at the Kaspersky Security Analyst Summit in Punt Cana, Dominican Republic, in early February. They purchased a used Rapiscan 522B system and played with its software. First, they found a way to bypass the supervisor's log-in credentials (exposing what should be an easy-to-fix vulnerability). Once into the system, they could access the system the supervisor uses to cause images of weapons and other contraband to pop up on the display screens at screeners' stations. That would enable them to input images of harmless clothing or other items that could be super-imposed over what would otherwise appear on the screen as an actual dangerous item. TIP is a feature of all such X-ray scanners, regardless of manufacturer, and regardless of whether the device is used at an airport or elsewhere.

Rapiscan had several responses to these claims, also reported by Wired. First, they say that the version of TIP used on TSA airport machines is different from the "commercial" version, but it's unclear if it is different from that used in other government facilities. Second, Rapiscan says that systems like the one Rios and McCorkle acquired "are not currently networked," and that prior to an airport scanner being decommissioned the proprietary TSA software is removed.

Rios and McCorkle responded that the system they bought has a library of weapons images and instructions of how to use each, which could be subverted by a knowledgeable hacker. They also said that all the operator credentials were stored in the system in an unencrypted text file. Rios also told Wired that the Rapiscan software they examined is based on Windows 98, though more recent models use Windows XP; neither is currently supported by Microsoft. And while it is true that TSA airport scanners are not connected to the internet, they are all connected to TSANet, which links all the machines at an airport and networks them to central TSA servers. If hackers could get into TSANet, the kind of attack Rios and McCorkle outlined would appear to be possible.

It's not clear how vulnerable checkpoint baggage scanners are to this kind of hacking. But it's disturbing that, according to Wired, "airport security devices are generally not accessible to white-hat hackers who regularly analyze and test the security of commercial and open-source products . . . to uncover vulnerabilities in them."

This sounds like another case for the DHS Inspector General.

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News Notes

Ferrovial, Others Bidding for Heathrow's Non-London Airports. Aberdeen, Glasgow, and Southampton airports are the remaining airports owned by Heathrow Airport Holdings (HAH), after it was required to sell off Gatwick and Stansted. HAH has proposed selling those three airports, too, estimated to be worth $1.3 billion. Spanish infrastructure firm Ferrovial has submitted a proposal to buy them, and Industry Funds Management and Macquarie are also thought to be interested. Ferrovial currently owns 25% of the holding company for HAH.

Gary Closes Privatization Deal. Gary/Chicago International Airport in January closed the 40-year deal with Aviation Facilities Company (AVCO) in January, under which the company must make significant improvements to the airport as well as attracting new business. Its subsidiary, AvPorts, has a 10-year contract to manage the airport, with up to six possible five-year renewals. One near-term challenge will be completing the runway extension project, which includes persuading several railroads to shift to new tracks, already built by the airport, that avoid the extended runway.

Google Wins Contract to Manage Moffett Federal Airfield. Google's Planetary Ventures division beat out another firm for a 23-year contract to manage the airport adjacent to NASA Ames Research Center in Mountain View, CA. Included in its provisions is that Planetary Ventures must renovate the three hangars on the field, including the historic giant 200-ft. high airship hangar known as Hangar One.

Supreme Court Clears Airlines from Security Suits. Late in January the U.S. Supreme Court ruled 6 to 3 that airlines that report suspicious behavior affecting aviation security to the TSA may not be sued for such reports. This was the first test of a post 9/11 law encouraging airlines to report such behavior. "Congress meant to give air carriers the 'breathing space' to report potential threats to security officials without fear of civil liability for a few inaptly chosen words,"  wrote Justice Sotomayor for the majority.

New Concession Will Triple Santiago Airport Capacity. Chile's Ministry of Public Works has reached agreement with the Civil Aviation General Directorate on the terms for a 15-year concession to expand the Santiago International Airport. The new $700 million project will add a new international terminal and expand the existing terminal for domestic flights, while also expanding parking structures, taxiways, and aircraft parking. The winning bidder is expected to be the one offering the government the highest fraction of airport tax revenue.

Senators Still Concerned Over Searches of Private Planes. Sens. Pat Roberts (R, KS) and Jim Risch (R, ID) are not satisfied with the response they have received from Customs & Border Protection over warrantless searches of general aviation planes and pilots. The two have sent a follow-up letter (Feb. 12th) to CPB requesting a briefing and written answers to questions about the legal basis for a growing number of surprise inspections of planes and pilots.

New Istanbul Airport on Hold for 10 Months. Construction of the planned $30 billion third airport for Istanbul, the concession for which was awarded last year, will be delayed at least 10 months due to a court ruling challenging the environmental analysis supporting the project. The State Airports Authority was quoted by Reuters as saying the court decision will not halt planning work.

India to Privatize 14 More Airports. The government announced on Feb. 19th that it will offer concessions to upgrade and operate 14 additional airports, in addition to the six that are already under way via concessions awarded by the Airports Authority of India: Ahmedabad, Chennai, Guwahati, Jaipur, Kolkata, and Lucknow.

Munich's Third Runway OK'd by Court. A landmark decision by an administrative court in Munich has removed the last legal obstacle to the addition of a third runway to Germany's second-largest airport. It would be 4,000 meters (13,120 ft.) in length and could operate independent of the other two runways. However, political hurdles remain, since all three owners (the city, the state, and the federal government) of Flughafen Muenchen Gesellschaft must agree on the project, and considerable local opposition exists.

Airport Research Program Launching NextGen Projects. The Airport Cooperative Research Program of the Transportation Research Board will select contractors March 12th for four linked studies of airports and the NextGen air traffic control modernization program. The four reports will cover guidance for airport stakeholders on NextGen, how NextGen relates to airport planning, the airport's role in Performance-Based Navigation, and leveraging NextGen spatial data to benefit airports.

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Quotable Quote

"Those [FAA] regulations require pilots to provide certain documents to law enforcement officials who request it, but they don't give officers the authority to stop pilots in the first place. For that they need independent authority, such as probable cause or reasonable suspicion that illegal activity is taking place."
—Jim Coon, AOPA Senior Vice President, Government Affairs, in Elizabeth Tennyson, "Senators Ask DHS for More Complete Answers About CBP Stops," AOPA News, Feb. 13, 2014

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





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