In this issue:
- Airports as deregulation victims?
- TSA PreCheck still needs work
- Should Canadian airports purchase their freedom?
- Air war in Houston
- More critics assail body scanners
- Airport privatization in Europe
- Upcoming Conferences
- News Notes
- Quotable Quotes
Airports as Victims of Airline Deregulation?
About every five years or so, America is treated to another attack on airline deregulation, usually offering nostalgic pleas for the good old days when 40% of the seats were empty, fares were affordable only to the affluent, and plane trips were a rare occurrence for average Americans. The Airline Deregulation Act of 1978, enacted under the Carter Administration thanks largely to CAB chairman Alfred Kahn and Sen. Ted Kennedy, transformed a relatively static cartel into a dynamic, competitive industry that democratized air travel in this country and inspired a subsequent transformation of the airline sector in Europe.
The latest deregulation critique appears in the March/April issue of Washington Monthly. In “Terminal Sickness,” Phillip Longman and Lina Khan of the New America Foundation advance the thesis that the real victims of deregulation are medium and small airports and the cities they serve. They tell sad tales of the dismantling of fortress hubs at Cincinnati (Delta), St. Louis (TWA), Memphis (Northwest), and Pittsburgh (US Airways). With significantly fewer non-stop flights (including international flights), all four cities are now less attractive as a business headquarters location and as a convention destination.
There is no doubt truth to that claim, but the underlying premise seems to be that those airports, once having attained fortress hub status, were entitled to retain it indefinitely, regardless of what else was happening in the larger U.S. or global economy. But the fact is that hubs at those four medium-size airports were an artifact of the over-exuberant second decade of deregulation, when airlines built up far more hubs than were economically viable. The major, successful hubs are in large urbanized areas that have ample origin-and-destination (O&D) business on which to add a large amount of transfer traffic. Consider the eminently successful (and sustainable) hubs in such urbanized areas as Atlanta (4.5 million pop.), Chicago (8.6 million), Dallas/Ft. Worth (5.1 million), Houston (4.9 million), Miami (5.5 million), and New York/Newark (18.4 million). By contrast, the base generating O&D traffic at the medium-size airports is much smaller: St. Louis (2.2 million pop.), Pittsburgh (1.7 million), Cincinnati (1.6 million), and Memphis (1.1 million). Essentially, those four airports that have lost their artificial hub status are now back to a level of airline service consistent with the size of their O&D market. Their attempt to turn themselves into “wayports”-supported largely by transfer traffic-was, not surprisingly, unsuccessful.
Longman and Khan even drag in the “outrage” of state capitals like Olympia, WA; Dover, DE; and Salem, OR losing all scheduled airline service in recent years. I testified at the Capitol in Olympia last year, and I can tell you it’s less than an hour’s drive from SEA-TAC, not exactly inaccessible. Salem is just 47 miles from Portland (though Dover is kind of isolated, but then again, so is most of Delaware). I guess in Longman and Khan’s centrally planned airline world, all state capitals would have mandated airline service.
And a centrally planned airline world is apparently what they do have in mind. Though woefully short on specifics, their closing paragraphs tout the legal monopoly of the Postal Service and the provision of a single system of water and sewer works in each municipality, after which they state that “transportation in all its forms is not much different.” Competition, apparently, is the fatal flaw in today’s commercial aviation world.
As one who grew up in the pre-deregulation era, I must disagree. Sure, it was nice (as a child who didn’t have to pay the high fares) having free meals, empty seats, and room to stretch out. But the cost of that cartelized system was very high-especially in making air travel unaffordable to the majority of families. (My family and I flew on Eastern employee passes.) I’m not surprised that the legacy carriers are still, 34 years after deregulation, figuring out viable business models for competitive markets. Many start-ups have tried and failed, but the survivors seem to have figured out models that work. With the last of the legacy carriers now being restructured in Chapter 11 proceedings, we may finally be finishing up this painful learning process.
TSA’s PreCheck Still a Work in Progress
As an early member of the PreCheck program, under which selected premium frequent flyers can usually bypass the normal screening hassles and get essentially pre-9/11 screening, I was pleased to see TSA’s announcement last month that the program will be expanded this year from the current 11 airports to 35, including most of the ones I frequent. It will also expand from just American and Delta frequent flyers to those of four additional airlines. These changes mean the program should grow rapidly from the current 400,000 or so members. Also growing by leaps and bounds is Global Entry, the trusted traveler program operated by Customs & Border Protection for U.S. citizens returning to the United States from overseas. Once TSA announced that Global Entry members are also eligible for PreCheck treatment, enrollment in Global Entry soared to over 300,000 as of last month.
But PreCheck still suffers from two serious flaws. First, from a customer-appeal perspective, you don’t find out if you get to use the expedited PreCheck lane until you’ve stood in what can still be an unpredictably long premium-flyer line (most of whom are not PreCheck members) to reach the TSA document checker. Therefore, you still have to build in buffer time and arrive at the airport earlier than otherwise, since there is no way to know how long that line will be (and whether you will be denied the PreCheck lane based on random selection-so far I’ve made it at MIA six out of seven times).
The other flaw is a pair of security weaknesses. TSA does not do a criminal history background check as part of PreCheck eligibility, which is standard procedure for the CPB trusted traveler programs like Global Entry. TSA only checks the airline’s travel records on the applicant and runs his/her name past its SecureFlight database (which it does for all travelers anyway). And it does not provide a biometric ID card to prove that you are the same person who was accepted into the program, rather than someone using a fake ID in the name of the PreCheck member. Global Entry does provide a biometric ID.
Both flaws would be remedied if TSA were to partner with the travel industry and security companies (like Clear and Flex) to provide background checks and biometric ID cards, like the old Clear did in the days of the former Registered Traveler program. The new Clear is so far in place at only two airports (Orlando and Denver) but is negotiating with DFW and SFO; Priva Technologies’ FlexPass is in operation at Jacksonville. Clear, along with the American Association of Airport Executives and the U.S. Travel Association, recently sent TSA an unsolicited proposal that would link Clear’s head-of-the-line processing with PreCheck’s expedited screening.
Partnerships of that sort, with qualified travel industry providers, would answer TSA’s expressed concern about the cost of background checks and biometric ID cards. Unlike PreCheck, Clear and Flex charge annual membership fees. That can pay for enrollment costs, such as an FBI criminal history background check (offered via AAAE’s clearinghouse that provides the same service for airports needing background checks for numerous employees) and creating the biometric ID card, as well as sharing revenue with airports for the space needed for separate member lines. In fact, CPB could even consider outsourcing some or all of the Global Entry application process to such partnerships (which would enable signups in many more locations than just the 24 airports offering Global Entry membership as of this year).
Those changes would finally bring about the original Trusted Traveler concept which Congress intended TSA to offer when it included the idea in the 2001 Aviation & Transportation Security Act. We’re more than 10 years past enactment of that legislation-but better late than never.
Should Canadian Airports Purchase Their Freedom?
The aviation trade press has had a number of articles in recent months in which major Canadian airports near the border with the United States are complaining of “leakage”-i.e., passengers who would otherwise be flying from their closest Canadian airport crossing the border to embark from a U.S. airport-such as Bellingham, WA instead of Vancouver, Detroit instead of Windsor, or Niagara Falls instead of Toronto. Leisure travelers, especially, are attracted by significantly lower cost of U.S. air travel. A recent Aviation Daily story cited the case of a family of four near Vancouver being able to fly to Honolulu for $1,800 out of Bellingham, compared with $3,190 out of Vancouver.
The difference is due primarily to two things. One is the growing air service to leisure destinations by low-fare U.S. airlines such as Allegiant and others that operate out of secondary airports like Bellingham and Niagara Falls. The other is the difference in fees and taxes between Canadian and U.S. airline service. For the Vancouver-Hawaii example, the per-ticket fees and taxes would be $110 using Vancouver versus $38 for Bellingham. These figures were compiled by the Canadian Airports Council, which also reports that 10 years ago, only 8% of the cars parked at Buffalo Niagara Airport had Canadian license plates; today that fraction is 38%.
One key factor in those fees and taxes is the rent Canadian airports pay to their federal government. That stems from the commercialization of the country’s major airports, which began in 1992. Under a new National Airports Policy, the 26 largest airports were transferred from the federal government to newly created local airport authorities between 1992 and 2003. But the feds retained ownership of the airports and requires the authorities to make annual lease payments. CAC reports that these payments total $282 million a year, an expense recovered from landing fees. Canadian airports have been complaining about those “rent” payments almost since the creation of the local airport authorities, but since the lease agreements run for 60 years, they have made no headway in being relieved of that obligation.
It occurs to me that Canada is one of the very few OECD countries that has not embraced airport privatization. What if some or all of those 26 major airports offered to buy their freedom from the federal government? If the average starting lease year for those airports was 1997, on average they have 45 years still to go on the leases. The present value of 45 years of lease payments of $282 million per year is $4.4 billion (using a 6% discount rate) – for all 26 airports. So even Vancouver or Toronto would probably not exceed $1 billion as the price of its freedom.
With several hundred infrastructure investment funds having raised an aggregate $200 billion or so over the past decade, and many looking for airport investments, there might well be buyers if Canada wanted to emulate Europe in divesting partial or complete ownership of its major airports. Just a thought.
Southwest Airlines is once again challenging the legacy airlines. This time the nation’s largest low-cost carrier has proposed its first international air service, linking Houston to vacation spots such as the Mexican Riviera and the Caribbean. And since Southwest serves Houston from Hobby Airport (HOU), it naturally is proposing to launch its international services from there. That way it can connect domestic flights to these overseas flights, and can make dual use of much of its airport infrastructure. Because international flights will require customs and immigration facilities, which Hobby does not have, Southwest plans to spend $75-100 million on an international terminal at Hobby, including the requisite customs and immigration space.
That proposal has triggered an all-out rhetorical attack from recently merged United-Continental, which operates one of its major hubs at Houston Intercontinental (IAH). It has recently broken ground on a $700 million international terminal there, which it is threatening to terminate if the Houston Airport System (which operates both HOU and IAH) approves Southwest’s plan. It has sent letters to airport officials arguing that international operations at HOU would damage the Houston area’s economy by “diluting” international travel at IAH.
It is certainly the case that IAH boasts an impressive array of international flights-including to Amsterdam, Buenos Aires, Calgary, Caracas, New Delhi, Frankfurt, Mexico City, Montreal, Moscow, Paris, Rio de Janeiro, Sao Paulo, Singapore, Tokyo, and Toronto among the 44 overseas destinations in the current Official Airlines Guide. And United/Continental dominates international service from IAH.
The mega-carrier also argues that if Customs & Border Protection has to serve both airports, it might reduce the number of staff serving IAH, a premise rejected as unrealistic by airport director Mario Diaz.
Since both airports are owned by the City of Houston, the decision on whether to allow Southwest to proceed with its new terminal at HOU will ultimately be made by the City Council. Mayor Annise Parker and HAS Director Diaz have not taken a public position on the issue, though both airlines are lobbying, and some Council members have taken sides. Diaz could send the plan to the Council as early as May 9th.
If the City Council turns down Southwest’s proposal, it will be a dark day for airline competition. Airports exist to serve their customers, and there is no good reason for Hobby’s anchor tenant to be denied the ability to expand its business there. Houston is a large enough metro area that it can support more than one international airport (as do five of the 10 largest U.S. metro areas).
If airports were commercial businesses, denial of Southwest’s request could well be challenged on competition grounds (as was the near-monopoly on London-area airports when Heathrow, Gatwick, and Stansted were all owned by BAA). Even under current governance arrangements, a decision to prevent expanded competition between IAH and HOU would raise the question of whether it is wise public policy to have both major airports in a megalopolis owned and operated by the same party. In general, consumers are better served by competition rather than by regulation. Only a handful of large metro areas in this country are blessed with multiple airports. Operating those airports as a cartel should be viewed as profoundly anti-consumer.
More Critics Assail Body-Scanners
The TSA came in for considerable grilling at a joint House hearing last month, called by the committees on Oversight & Government Reform and Transportation & Infrastructure. While the topics discussed included the agency’s behavior detection officers program (SPOT) and the continuing growth in its airport work force, a major focus of the hearing was full-body scanners. With 640 of them currently in service (250 backscatter X-ray and 264 millimeter wave) at 165 airports (at an aggregate cost of $1.6 billion thus far), the program came under much critical scrutiny. A recent GAO report had found that a considerable number of the machines are not being used extensively, the agency’s Stephen Lord testified. In addition to the cost of acquiring the machines, there is the large and growing cost of the extra screener staff required to operate them (which seemed to concern the members more than the initial cost).
Two subjects did not get much attention at the hearing: radiation exposure and body scanners’ effectiveness. On the former, this may be the result of a recent report from the Department of Homeland Security’s Inspector General: “Transportation Security Administration’s Use of Backscatter Units,” OIG-12-38, February 2012. I’ve been skeptical of repeated TSA statements that the radiation exposure from the backscatter machines is tiny and well within defined radiation exposure standards, even for very frequent travelers and the staff who operate the machines. But this report has persuaded me that independent testing has been done and is repeated periodically, and finds no deviation from what TSA maintains is the case. My only concern is that while the TSA says it concurred with all five OIG recommendations for tighter procedures going forward, OIG considers TSA’s responses to be perfunctory and unsatisfactory; all five recommendations therefore remain “unresolved and open.”
The other subject is whether either type of body scanner is certain to detect dangerous objects. Engineer Jonathan Corbett, the week before the hearing, released a video showing that he took a metal box through both types of body scanners undetected. The key factor was carrying the box in a special side pocket so that it would show up black against the black backdrop surrounding the body-scanned image. TSA immediately criticized Corbett’s blog post, but did not dispute that he’d done what he claimed he’d done. This finding raises the question of what extra protection that $1.6 billion in body-scanner spending has actually bought.
Even if the body scanner displays can be tweaked in some fashion to overcome Corbett’s technique, there remains the huge question of whether millions of ordinary travelers should be subjected to body scans as primary checkpoint screening. (And I will remind you that to complete the TSA’s goal of replacing walk-through magnetometers at all 450-odd airports will require large additional purchases of the machines, and further expansion of TSA’s screener workforce.) Since TSA is moving to a risk-based approach to airport screening, a far more cost-effective approach would be to reserve the limited number of body scanners already in its inventory for secondary screening only, as recommended by a number of experts including Jack Riley, vice president for national security research at RAND Corporation (“Three Ways to Improve Airport Screening,” USA Today, March 6, 2012: www.usatoday.com/news/opinion/forum/story/2012-03-06/tsa-airport-security-screening/53388320/1)
Airport Privatization News from Europe
Copenhagen Mayor Frank Jensen is seeking to regain control of Copenhagen Airport (CPH). The City Council strongly supports having a more active role in the operations of the airport rather than adopting a passive stance to the airport, as is the case since it sold the majority of its shares. The majority ownership of Copenhagen Airports has changed in the last 12 months following a share swap between MAp Airports (under which it gained control over Sydney Airport) and Canada’s Ontario Teachers’ Pension Plan, which now has a 39% stake in Copenhagen Airports and a 38% stake in Brussels Airport. Copenhagen Airport’s earnings before interest, taxation, depreciation & amortization (EBITDA) was down by 9.6% and net profit by 16.8% in FY2011 (ending 31 December 2011) on revenues that increased by 3.2%. LCC airline traffic grew by 6.2% and those airlines had a 17.9% market share. CPH opened a low-cost airlines terminal (the most recent in Europe) in October 2010.
Croatia awarded a concession to operate and expand Zagreb Airport to a French-based consortium led by Aeroports de Paris, which was the only accepted bidder in the final round. It is a 30-year concession which includes construction of a new terminal and operating both terminals. The value of this investment is around €236 million. A bid received from Zurich Airport and Austria’s Strabag was rejected as incomplete. At one time ADC/HAS, based in Houston, was in the running and regarded as the favorite by local Croatian media. There were 10 bidders in the preliminary round held in June 2011.
Bulgaria’s Transport Minister Ivaylo Moskovski said the analysis which will determine whether Sofia Airport will be expanded via a concession or will be developed through some other form of public-private partnership should be completed in six months. Mr Moskovski also said a concession procedure for the cargo terminal in Plovdiv (the second city) will be terminated and replaced by a procedure for the entire airport.
There is considerable activity right now in Scotland where New Zealand’s Infratil, one of the first infrastructure funds operating in the airport sector, has been reviewing its ownership of Glasgow Prestwick Airport and also that of Manston Airport (Kent) in England, which have a combined book value of approximately NZD100 million ($81.6 million) because of the “challenging market” in the UK. Infratil has appointed PwC to assist in the sale of Manston Airport and will also sell Glasgow Prestwick, assuming it can find buyers for both or either.
Meanwhile, private equity funds 3i and Carlyle Group appear to have dropped out of the running for BAA’s Edinburgh Airport, leaving JP Morgan Asset Management and Global Infrastructure Partners (which operates London Gatwick and City airports) to fight it out, and joined late in the day by a consortium including Korea’s Incheon Airport, which has come to this bidding out of left field and has been busy bidding or preparing to bid to operate airports in Russia and the United States (Ontario, CA and San Juan, PR) during the last 12 months. The U.K. Competition Commission, which forced the sale, is known to prefer bidders with appropriate operational experience. The final stage of the procedure should be completed in April.
This information (which is believed to be correct at the time of writing) and comment is by David J Bentley of Big Pond Aviation, Manchester, UK. www.bigpondaviation.com.
2nd Annual AAAE/LeighFisher Airport Privatization Conference: What’s An Airport Worth?” April 15-17, Miami, FL: Hyatt Regency Miami. Details at: http://events.aaae.org/sites/120308/index.cfm. (Robert Poole speaking)
84th Annual AAAE Conference, April 29-May 2, Phoenix, AZ; Sheraton Phoenix Downtown. Details at: http://events.aaae.org/sites/120501 (Shirley Ybarra speaking)
Orlando Sanford Re-Applies for Screening Opt-Out. Taking advantage of a provision in the recently enacted FAA reauthorization law, Orlando Sanford International Airport has asked the TSA to reconsider its previously rejected application for the Screening Partnership Program, under which TSA screeners would be replaced by a TSA-selected private security company. Congress included a provision requiring the TSA to consider opt-out requests, in response to last year’s unilateral TSA decision to stop accepting such requests. House Transportation & Infrastructure Committee chair John Mica (R, FL) has sent letters to some 200 U.S. airports advising of them of their newly strengthened legal right to opt out.
New Hitch for Ft. Lauderdale Noise Settlement. The landmark noise settlement between Fort Lauderdale International Airport and property owners adjacent to its to-be-lengthened south runway has encountered a last-minute obstacle. A Feb. 16, 2012 letter from the FAA to airport director Kent George says the airport is not allowed to use federal grant money to sound-proof the agreed-upon 1,700 homes or to fund settlements to 857 eligible homeowners. Unless the airport comes up with another funding source for those payments, the City of Dania Beach (on behalf of the property owners) may back out of the deal. The $790 million lengthened runway is scheduled to be completed by 2014.
TSA Abandons Shoe Scanner Effort. After a number of efforts to entice vendors to develop an effective method of scanning the shoes of air travelers, the TSA has pulled the plug on the effort. Its 2011 solicitation did not produce any proposed machines that could meet the radiation exposure limit while not slowing down throughput at the checkpoint. That leaves travelers with getting accepted in one of DHS’s several trusted traveler programs as the only way to avoid having to take their shoes off to get through security.
Aeroports de Paris Expands Overseas. France’s part-privatized airport company ADP last month purchased a 38% stake in Turkish airport developer/operator TAV, paying $874 million. ADP also bought 49% of TAV’s construction arm. Via its part-ownership of TAV, ADP now has a stake in TAV’s airport operations in Georgia, Macedonia, Saudi Arabia, and Tunisia.
Luton’s Private Operator Fights to Keep Concession. Several months ago the local council in Luton, a distant suburb of London, began to discuss early termination of the 30-year concession it granted in 1998 to London Luton Airport Operator, Ltd., a 90/10 joint venture of Abertis Infrastructuras and AENA. Because the council’s motivation is faster growth of the airport, LLAOL has put forth a new development plan aimed at increasing annual passenger numbers by 5 to 6 million over the next 10 years. The plan would expand the terminal buildings, extend a taxiway to create more aircraft stands, and improve road access.
Gary Airport Agreement on Runway Expansion. Gary/Chicago International Airport has reached agreement with Canadian National Railway on a deal that will relocate the railroad’s trackage near the airport to permit the planned $162 million lengthening of the airport’s runway to accommodate larger aircraft. This was the third and last railroad-relocation agreement; the airport had previously reached agreements with CSX and EJ&E. The move required for the CN track is the longest and most costly of the three.
Known Crewmember Program Expanding. The TSA announced in February that it is expanding a program under which uniformed cockpit crew can bypass regular screening, using special crew-only checkpoints instead. After being tested for nearly a year at seven major airports, the program will be expanded to “a lot” of airports, according to Airlines for America, the airline trade group that has backed the program. ARINC, which had developed a similar service called CrewPASS at BWI Airport, Pittsburgh, and Columbia, SC, will operate the expanded program. Although TSA still says there will be a biometric feature, at present this program uses only the crew member’s airline badge number and photo.
New Report Weighs Alternatives to Baggage Recheck for International Flyers. International passengers arriving at U.S. airports and connecting to another destination must reclaim their bags and go through another screening. A new report from TRB’s Airport Cooperative Research Program analyzes seven possible alternatives that would reduce or eliminate this requirement, two of which looked to be the most feasible. The report is ACRP Report 61, “Elimination or Reduction of Baggage Recheck for Arriving International Passengers” and is available on the TRB.org website.
“[The Washington Monthly article] is a great embarrassment to the New America Foundation. Set aside the evidence that deregulation has led to lower fares, more frequent flights, and greater airline efficiency. The main takeaway from the article is that airports-which are in the public sector-seem to lack any incentive or ability to attract a carrier when another carrier leaves. Businesses lose customers and clients all the time. Good businesses make changes to their operations and become more innovative to attract new customers. Perhaps Cincinnati, Pittsburgh, and Memphis airports should get some new managers-but then why would they if they still get government funding to pay off their deficits.”
-Clifford Winston, Brookings Institution, email to Robert Poole (March 16, 2012), quoted with permission
“I was supposed to testify today about the TSA in front of the House Committee on Oversight and Government Reform. I was informally invited a couple of weeks ago, and formally invited last Tuesday. . . . On Friday, at the request of the TSA, I was removed from the witness list. The excuse was that I am involved in a lawsuit against the TSA, trying to get them to suspend their full-body scanner program. But it’s pretty clear that the TSA is afraid of public testimony on the topic, and especially of being challenged in front of Congress. They want to control the story, and it’s easier for them to do that if I’m not sitting next to them pointing out all the holes in their position.”
-Bruce Schneier, Schneier on Security, March 26, 2012 (www.schneier.com/blog/archives/2012/03/congressional_t.html)