More Airline Competition

Yet Another Reason for Airport Privatization

The specter of reregulation of the airlines raised its head in 1999 in several forms. A number of bills in Congress aimed at increasing access by smaller airlines into major hub airports like O'Hare by giving such airlines (or service from smaller cities) legal preference over other new service. And several other bills would have created a "passenger's bill of rights" imposing new federal controls on the terms and conditions of airline service.

Fortunately, none of these measures was enacted, leaving intact the enormous consumer benefits of the Airline Deregulation Act of 1978. Thanks to the hands-off policy created by this measure, air travelers save on the order of $19 billion per year, compared to what they would have paid had old-style federal control of routes and fares remained in effect. While the measures considered by Congress would not have brought back total government control, they would have put us on a slippery slope toward the government—rather than the market—making basic decisions about who can fly when, where, and at what price.

That said, however, it is clear to most frequent flyers that today's airline service leaves much to be desired. Record-high levels of delay, overcrowded planes, less meal service, new restrictions on carry-on baggage . . . flying in many ways is not what it used to be. But if government regulation is a cure worse than the disease, what hope is there for beleaguered air travelers?

The answer is supposed to be competition. If you don't like the quality and price of Airline A, take your business to Airline B instead. Surely some profit-seeking entrepreneurs will attempt to offer a better combination of price and performance to appeal to those frustrated by today's typical airline service. And indeed, there are some such alternatives. For millions of people, the low-fare, no-frills, but highly reliable service of Southwest is a viable alternative. For others, Midwest Express offers a much more luxurious form of service, albeit at a somewhat higher fare. But for millions of other air travelers, innovative airline service offerings are very hard to find. This is especially true at many cities with a single large airport where the vast majority of service is provided by a single airline's major hub—e.g., Atlanta (Delta), Minneapolis (Northwest), and Pittsburgh (U.S. Air).

Why haven't airline entrepreneurs broken into such markets, offering clearly different alternatives for air travelers? It turns out that many have tried, but have had great difficulty obtaining gates at such airports. And that leads us to one of the key respects in which airline deregulation is an "unfinished revolution." While airline service itself has been freed of economic regulation and allowed to become a dynamic industry, U.S. airports are still run in the old-fashioned, static, bureaucratic manner typical of the pre-deregulation era. Among other things, this means that their management style is more passive and risk-averse than that of the world's growing body of privatized airports, now numbering more than 100 (and including the main airports in such cities as Auckland, Buenos Aires, Dusseldorf, Johannesburg, London, Melbourne, and Rome).

Privatized airports (and also leading "corporatized" airports such as Amsterdam and Frankfurt) are run as businesses, intended to make a profit by aggressively developing various profit centers, tailoring their services to many different groups of customers (airlines, originating passengers, transfer passengers, meeters-and-greeters, employees, etc.). Recent research at Oxford University has shown that the management approach of privatized airports is—not surprisingly—significantly more "passenger-friendly" than that of traditionally managed airports.

Privatized airport managements are also more willing to take on the risk of new investments—such as the creation of new terminal space to provide gates for new-entrant airlines. And this brings us back to the question of increased competition by such airlines, especially in "fortress hub" cities where air travelers today have very limited options. Under typical U.S. airport management practice, the major incumbent airlines have signed long-term gate-lease agreements (making them "signatory" airlines). From the standpoint of risk-averse airport management, these long-term agreements give them a more-or-less guaranteed revenue stream to pay off the bonds they issue to build the terminal facilities. But in exchange for this security, they give up substantial control to the signatory airlines. Usually, the long-term agreements give these airlines what amounts to a veto power over any terminal expansions. That means when new-entrant airlines want to start service at such an airport, there are often no gates available at all—or there is only "remnant" space available at odd hours at gates leased by the signatory airlines . . . which they might make available to the newcomer, at two to three times as much as what the incumbent is paying under its long-term lease agreement!

These barriers to entry are well-known within aviation circles. In October 1999, the U.S. Department of Transportation released an important report, "Airport Business Practices and Their Impact on Airline Competition," explaining how all this works and concluding that, indeed, "Airport business practices play a critical role in shaping airline competition. Access at many of the nation's airports is limited . . . because of long-established airport business practices."

What the report did not do was to contrast these business practices with those of corporatized and privatized airports around the world. Had DOT's researchers done so, they would have found that an airport run as a for-profit business does not cede de-facto control over its facilities to its largest customers. At most such airports the gates remain under the control of the airport company, and are allocated hour by hour to individual airlines, as needed. (That is why at many European airports, and at the privately run Terminal 3 in Toronto, you will observe that the airline signage at each gate is electronic, so that it can be changed in moments from one airline's name to another.) And that is how gates will be managed at the new International Arrivals Terminal at JFK in New York—a $1 billion project being developed and operated by a private consortium including the for-profit company that owns and operates Amsterdam's Schiphol Airport. The IAT consortium is taking the entire risk of keeping the gates occupied, because it wants the management flexibility to get the most value out of each and every gate.

In short, the answer to today's serious limitations on new airline entry at U.S. airports is not simply the new set of guidelines and best-practices set forth in the DOT report. Rather, it is to shift to a new management philosophy for U.S. airports. One way to implement this new approach is outright privatization, in which existing airport owners (cities, counties, and states) sell or long-term lease these facilities to professional airport firms.

An important step in that direction would be for federal airport law to recognize that 21st-century airports are no longer the infant industry that airports were in the 1950s, when most of today's policies were crafted, during the era of airline regulation. Existing airports should be corporatized—i.e., turned into corporate entities charged with making a profit and paying ordinary business taxes on those profits. The existing government owner would be the sole shareholder at the outset, but would be free to sell some or all of its shares (i.e., to privatize) if and when it decided that it made sense to do so. And, as for-profit businesses, corporatized airports would be subject—like all other businesses—to the antitrust laws. Gate-leasing practices that created artificial barriers to entry would be subject to legal challenge (which is generally not possible today, given airports' status as municipal agencies).

In short, real airline competition is being impeded by the outmoded management approach of U.S. airports. Much of the world is moving to a new paradigm—the airport as a for-profit enterprise—that is far more consistent with a dynamic, competitive airline market. It is high time the United States did likewise.

Robert Poole, Jr. is president of the Reason Foundation and a long-time transportation policy researcher. A former aerospace engineer, he received his B.S. and M.S. from MIT.



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